A recent merger decision by the ACCC gives an insight into the regulator's changing view of the degree of competition between online stores and traditional “bricks and mortar” outlets in the retail sector.

Background

On 21 April 2011, the ACCC announced its decision not to oppose the proposed acquisition by Woolworths Limited of The Cellarmasters Group.

Woolworths' existing liquor interests included Dan Murphy's stores, BWS stores, Woolworths/Safeway Liquor outlets and Langton's Fine Wine Auctions.  Woolworths primarily sold liquor through bricks and mortar outlets although Dan Murphy's had begun selling liquor online on 8 March 2011.  Cellarmasters' key business is the sale of wine through "direct to customer" channels, including online, via inbound calls in response to catalogues and letters, as well as winemaking and the provision of ancillary wine services such as bottling, packaging, storage, filtration and testing.  It does not sell wine through any bricks and mortar outlets.

Were Woolworths and Cellarmasters in the same market?

In reviewing a proposed merger, the ACCC's task is to determine whether the merger is likely to substantially lessen competition in a market.  The first step in this process is generally to define the markets that are likely to be affected by the merger. 

In defining the markets relevant to this acquisition, one of the relevant factors was the degree of substitutability between online and bricks and mortar retailers.  That is, the ACCC considered the extent to which customers of bricks and mortar stores view online stores as an alternative source of supply (and vice versa) and therefore how closely the two types of stores could be said to compete with one another.

The ACCC undertook market inquiries in order to obtain further information about the relevant markets and potential effects of the acquisition from interested parties.  The information the ACCC obtained, including the fact that there are common customers and common products for both types of retailers, suggested that there was some substitution between the different types of retailers.  However, the information also suggested to the ACCC that online/direct retailers were not close substitutes for bricks and mortar retailers, for reasons including that:

  • customers of bricks and mortar retailers tend to make purchases on impulse whereas online purchases are better-planned and generally purchase larger quantities of alcohol; and
  • purchases from bricks and mortar outlets are instant whereas online purchases usually take a number of days to be delivered to the customer.

In the end, the ACCC looked at possible competitive effects on competition in both a potential market for liquor for off-premises consumption through all sales channels and a potential market that included just direct (eg. catalogue) and online sales (either as an all-liquor market or a wine-only market).  In some merger cases, the way the ACCC defines the market will be critical to its decision on whether the merger is likely to substantially lessen competition, but in this case, for the reasons set out below, the precise market definition was not critical to the ACCC's decision.

What effect would the acquisition have on competition?

Market concentration

One of the key factors the ACCC considers when reviewing a merger is the extent to which the merger will increase market concentration.  The measure of market concentration depends on the market definition adopted.  However, in this case:

  • if the market was defined as a general liquor or wine market (through all channels), Woolworths' share of that market would be between 25% and 40% but Cellarmasters would be only 1% to 3%; or
  • if the market was defined as an online/direct wine sales market, Cellarmasters would have more than 20% market share, but Woolworths' share would be less than 1%.  

Therefore, because of the limited overlap between the activities of the mergers parties, the increase in market share as a result of the acquisition would be very small, regardless of the market definition adopted.

Other factors

Other factors that led to the ACCC’s finding that the acquisition was not likely to substantially lessen competition were that:

  • barriers to entry and expansion for online wine retailing were not insurmountable and therefore there would be sufficient competition (or threatened competition) to restrain attempted price increases or reductions in quality by Woolworths.  The ACCC accepted that it may take time and significant investment for new entrants to grow to a significant size but noted the large number of existing online wine retailers and evidence of recent new entry, proposed new entry and likely expansion by existing online wine retailers as evidence that barriers to entry were not high;
  • neither Cellarmasters’ large customer database (Cellarmasters claims to have 330,000 active members as at June 2010) nor any other aspect of its business made Cellarmasters a particularly vigorous and effective competitor in any of the possible retail markets; and
  • to the extent they operated in the same market, the level of competition between Woolworths and Cellarmasters was not substantial.  For Woolworths, Wesfarmers and Metcash were probably its closest competitors whereas Cellarmasters competed most closely with other online/direct liquor retailers.  

Implications of the ACCC's decision

While it did not reach a concluded view on market definition, in approving the acquisition by Woolworths the ACCC acknowledged a degree of competition between online and bricks and mortar retailers of liquor.  In September 2010, the ACCC relied on a high level of competition from online distribution of leisure travel services to approve Jetset Travelworld's proposed acquisition of Stella Travel, the parties being two of the largest bricks and mortar travel retail outlets in Australia.

These recent decisions can be contrasted with the ACCC's findings in its 2008 review of A&R Whitcoulls Group's proposed acquisition of Borders Australia that:

  • the internet was not comparable to bricks and mortar retailers in terms of competitive constraint; and
  • the internet was unlikely to provide a strong competitive constraint in the short to medium term.

The ACCC did not block the Borders acquisition.  However, in light of the recently insolvency of the Red Group (which owned both the Borders and Angus & Robertson chains), attributed in large part to the growth in online book purchases by Australian consumers, it appears that the ACCC significantly underestimated the growing threat from internet retailing.  In this context, it will be interesting to see how the ACCC assesses the recently proposed acquisition of online bookseller The Book Depository by Amazon.

These decisions by the ACCC indicate that it is important for merger parties, particularly those in rapidly changing industries like retail, to gather solid evidence of competitive trends in their industries to provide to the ACCC, to ensure that the ACCC does not block a merger because it has underestimated the importance of emerging sources of competition.