Completed acquisition by Sports Direct International plc of a number of stores from JJB Sports plc

Completed acquisition by Sports Direct International plc of a number

of stores from JJB Sports plc

ME/3986/08

The OFT's decision on reference under section 22 given on 01 May 2009. Full

text of decision published 21 May 2009

Please note that the square brackets indicate figures or text which have been

deleted or replaced at the request of the parties for reasons of commercial

confidentiality.

PARTIES

1. Sports Direct International plc ('SDI') is the UK's leading sports retailer by

revenue and operating profit, and the owner of a significant number of

internationally recognised sports and leisure brands, operating

approximately 375 retail outlets in Great Britain. The majority of retail

outlets trade under the Sports Direct or Sports World fascias. SDI has

acquired a number of retail businesses over the last few years, and some

retail outlets still trade under their previous names, such as Lillywhites,

McGurk, Exsports, Gilesports, Sports Soccer, Field and Trek, and

Hargreaves.

2. In addition, SDI currently holds a 29.4 per cent stake in Blacks and a 25

per cent holding in each of Sweatshop and SheRunsHeRuns. The OFT

considers that, in accordance with the OFT's Guidance

and the

established practice of the OFT and CC in relation to determining material

influence for the purposes of section 26 of the Enterprise Act 2002 ('the

Act'), absent any evidence to the contrary, it is or may be the case that

SDI has material influence in relation to all three retailers (Blacks

Sweatshop and SheRunsHeRuns), as the level of SDI's shareholding in each

would be very likely to provide it with the ability to block special

resolutions at shareholder meetings.

Paragraph 2.10 of the OFT's Guidance 'Mergers – substantive assessment'.

Blacks includes a number of retailer brands including Millets and the Outdoor Group.

SDI did not contest this. Indeed, the OFT understands that SDI has already used its voting

rights to block the sale by Blacks of its winter sports subsidiary, Free Spirit:

http://www.financeweek.co.uk/item/5265.

3. JJB Sports plc ('JJB') is one of the UK's leading high street sports retailers.

As of 27 January 2008, JJB operated approximately 400 retail outlets in

the UK

– although the OFT is conscious that this reduced through

2008/09.

JJB also operates a chain of combined fitness clubs with

attached retail store space. However, the OFT understand that

arrangements are in place to dispose these to Dave Whelan Sports

Limited.

JJB reported a pre-tax loss of £9.7 million for the first half of

2008.

TRANSACTION, PROCESS AND TIMING

4. The transaction concerns the completed acquisition by SDI of 31 retail

outlets from JJB which took place between 5 November 2007 and 1

December 2008 ('Acquired Stores' or, individually, 'Acquired Store').

5. The OFT became aware of the transaction through an own-initiative

investigation by the Mergers Intelligence Unit in December 2008. The

extended statutory deadline under section 24 of the Act is Monday 4 May

2009.

JURISDICTION

6. The OFT considers that the acquisition by SDI of 31 retail outlets from JJB

constitutes enterprises ceasing to be distinct for the purposes of section

23(1) of the Act.

7. Section 27(5) of the Act provides that the OFT may treat successive

events as having occurred simultaneously on the date in which the latest of

them occurred. Section 27(6)(a) of the Act adds that a 'successive event'

can occur within a two year period under consequence of the same

arrangement or transaction, or successive arrangements or transactions

between the same parties. In this case, the date of the latest retail outlet

acquisition was 1 December 2008.

8. SDI submitted that the retail outlet transactions were entirely separate and

should not be aggregated on the basis of section 27(5) of the Act.

JJB's 2008 Annual Report.

See http://www.jjbcorporate.co.uk/pdf/26%20March%202009.pdf.

See above.

The retail outlets are located in the following locations: Barnsley, Basildon, Bedford, Bradford,

Bristol, Cardiff, Ealing, Eltham, Farnborough, Harrogate, Huddersfield, Ilford, Isleworth,

Inverness, Lancaster, Llanelli, Newcastle-under-Lyme, Newcastle-upon-Tyne, Newport,

Orpington, Poole, Truro, Salisbury, Sutton, Uxbridge, Walthamstow, Washington,

Wolverhampton, Wood Green, Worthing and York.

9. However, in this case, the OFT considers it appropriate to exercise its

margin of appreciation under section 27(5) to treat as taken together all of

the 31 Acquired Stores, notwithstanding that there have been other

circumstances in which the factual context was such that the OFT

considered that it would not be appropriate to do so.

Although there was

no evidence to suggest that the acquisition of the Acquired Stores were

structured so as to avoid scrutiny under the merger control provisions of

the Act, the OFT believes that it should take into account in choosing

whether to exercise its ability under section 27(5) that such a large number

of retail outlet acquisitions may, on a cumulative basis, have a significant

effect even if each one might not do so individually. Accordingly, the OFT

considers that these transactions fall squarely within the scope of section

27(5) of the Act and are therefore appropriate to be subject to merger

review scrutiny under the Act.

10. Given that the Acquired Stores had UK turnover in its last financial year of

approximately £[ ], the turnover test in section 23(1)(b) of the Act is not

met.

11. However, the OFT believes that it is or may be the case that the share of

supply test in section 23(2)(b) of the Act is met and, therefore, that a

relevant merger situation has been created. This is because SDI's share of

supply of goods by national sports retailers ('Sports Multiples', that is, SDI,

JJB and JD Sports) in the UK, by number of outlets, in 2007 was 33 per

cent.

In this case, the acquisition of 31 retail outlets from JJB

represents an increment of approximately 2.5 per cent.

12. In addition, the OFT believes that the share of supply test may also be met

through the combination of SDI and the Acquired Stores' share of supply in

the UK of sports clothing retail, which is also estimated to be greater than

25 per cent. SDI alone has a share of supply of all sports clothing retail in

the UK

of 24.9 per cent measured by sales

and the OFT estimates that

Completed acquisition by Tesco plc of the Co-operatives Group's stores in Uxbridge Road,

Slough as well as Stapleford Lane, Toton, Nottingham and Towers Place, South Shields

(Tesco/Slough), 2 February 2004.

Verdict, UK Sports Retail 2008, pages 103, 117, and 133. SDI had 414 outlets out of a total

of 1242 from the national generalist sports retailers (SDI, JJB and JD Sports – the Sports

Multiples) in 2007. In 2008, SDI's share of outlets was 30.7 per cent.

The Act is clear that the OFT, in determining whether the share of supply test is met, may

apply such criterion (whether value, cost, price, quantity, capacity, number of workers employed

or some other criterion, of whatever nature), or such combination of criteria, as it considers

appropriate (section 23(5) of the Act).

The OFT considers that it is reasonable for it to assert jurisdiction on the basis of the SDI and

the Acquired Stores' share of supply of sports clothing retailing in the UK. As this segmentation

has been used in specialist market reports (such as Verdict) such a description of goods or

services supplied in the UK appears to the OFT to be reasonable, and an appropriate basis on

which to apply its jurisdictional test.

Verdict: UK Sports Retailing 2008, page 68.

the increment arising from this transaction is approximately 1 per cent on

the same basis.

13. For all of these reasons, the OFT therefore believes that it is or may be the

case that a relevant merger situation has been created.

BACKGROUND

14. SDI and JJB are the two largest high street specialist retailers of sports

clothing and fashion wear, sports footwear and sports equipment in the

UK.

15. Total sales of sports retailing in the UK were worth £8,488 million in

2008.

Sports clothing and fashion wear represented the majority of sales

with £2,791 million (32 per cent), followed by sports equipment with

£2,487 million (29 per cent) and sports footwear with £1,744 million (21

per cent).

Sports retailing has increased by 12 per cent for the period

2003 to 2008. Sports clothing and fashion wear, sports equipment and

sports footwear can be purchased from a variety of retail outlets including

those belonging to Sports Multiples as well as other retailers such as

independent local sports retailers, and catalogue showroom retailers (that

is, Argos).

MARKET DEFINITION

16. At the outset the OFT considers that it is worth noting that market

definition is not an end in itself, rather it is a framework for analysing the

direct competitive pressures faced by SDI. In the context of differentiated

goods markets, as in the present case, the analytical discipline of market

definition helps identify the extent of immediate competitive interaction

between SDI and other sports retailers' value propositions to their

JJB operates 409 retail outlets and has a share of supply of 13.8 per cent on the basis of

total sales. Apportioning this share equally across these retail outlets gives an average retail

outlet level share of 0.03 per cent. Multiplying this by the number of retail outlets purchased

(31) gives a total increment of the order of 1 per cent.

Moreover, the OFT notes that if the share of supply attributable to those retailers over which

SDI has material influence over (Blacks, Sweatshop and SheRunsHeRuns) were included in SDI's

share of supply, then this figure would be well over 25 per cent. For example, the OFT

understands from the Verdict report that the Blacks chain (in which SDI has over a 29.4 per cent

stake) has a share of supply in the region of 3 to 4 per cent for sports clothing retail.

Verdict, UK Sports Retail 2008. The 2008 figures are estimated figures. In 2007, total sales

of sports retailing in the UK were worth £8,429 million. Sports clothing and fashion wear

represented the majority of sales with £2,857 million (34 per cent), followed by sports

equipment with £2,396 million (28 per cent) and sports footwear with £1,754 million (21 per

cent).

The remainder relates to cycling.

customers, which in this case are consumers.

However, in differentiated

goods markets, market definition creates a risk of drawing bright lines that

either overstate or understate the degree of competitive constraints posed

by suppliers.

Product scope

17. The OFT has not considered previously the product scope for sports

retailing in the UK. However, the OFT has, in some previous retail

mergers,

considered whether there are separate markets on the basis of

store size or distribution channels, or whether it is appropriate to assess

the degree of competitive constraint at the product level or on the basis of

individual products or product areas.

18. In considering the latter of these issues, it is important for the OFT not only

to consider the degree of competition within individual product categories

(for example replica sports shirts, cleated sports footwear) but also to

consider that retail outlets may compete to provide an overall retail

proposition to consumers across these categories (for example, in the way

that supermarkets compete to provide an overall grocery retailing

proposition to shoppers (often referred to as a 'basket' of goods), in

addition to competing within individual grocery product lines). The

importance of a supplier's retail proposition as a whole will depend in part

on consumers' perceptions and habits and will be greater in situations

when the consumer sees the outlet as a 'retail destination' in itself, actively

purchasing a basket of goods in the outlet across a range of categories.

Conversely, in circumstances where customers travel to retail outlets in

order to purchase a single specific product, it is less likely that the retail

proposition as a whole will be as important.

19. With regard to sports retailers, the OFT's investigation did not indicate that

all bricks and mortar providers will generally offer a full range of products

to their customers, as some retailers concentrate on one particular sub

category of products product (for example, in the case of Footlocker,

sports footwear) or a specific sport (for example, cricket). Moreover, as

stated by SDI, there was no evidence suggesting that a consumer would

purchase a 'basket' of goods across the categories of products available in

sports retailers. The OFT, therefore, considers that, in this case it is more

appropriate to consider the market for sports retailing by product category.

OFT Guidance 'Mergers – Substantive Assessment Guidance', paragraphs 3.11 and 3.22.

OFT decision of 6 December 2005 on the anticipated acquisition by HMV Group plc of

Ottaker's plc; OFT decision of 23 March 2005 on the anticipated acquisition by Somerfield plc

of 114 Safeway stores from WM Morrison Supermarkets plc; OFT decision of 15 April 2008 on

the completed acquisition by Home Retail Group plc of 27 leasehold properties from Focus (DIY)

Ltd ('Homebase/Focus'); OFT decision of 20 March 2009 on the completed acquisition by NBTY

Europe Limited of Julian Graves Limited.

20. With respect to the exact segmentation of the market, SDI was unable to

provide any conclusive evidence in this regard. It submitted that there was

little to be gained from assessing competition at the individual product

level, and that the OFT should instead focus on the total retail proposition,

which it described as multi-category sports retailing (that is, the Sports

Multiples). However, the OFT notes that industry market reports

tend to

sub-divide sports retailing into three distinct categories, namely (1) sports

clothing (including both sports specific clothing and sports fashion wear),

(2) sports equipment, and (3) sports footwear.

21. In light of the above, and having reviewed the key product lines sold by

sports retailers, the OFT considers the above categories to be a reasonable

product frame of reference.

Effective competitor set

22. At the national level, 3 Sports Multiples currently operate in the UK. These

include SDI, JJB and JD Sports. The OFT was able to confirm from

multiple independent resources that the degree of competition between

these three retailers is sufficient to conclude that they are effective

competitors to each other.

The question therefore for the OFT has been

to consider which other retailers should be considered within the relevant

effective competitor set.

23. SDI suggested that the product ranges of specific Sports Multiples can

vary

and that Sports Multiples are constrained in each product area by

category specialists (such as Footlocker, Blacks, and Millets), independent

sports specialists and, even, fashion retailers and supermarkets (such as,

Asda), as consumers are willing to switch to these retailers for specific

products.

24. The OFT did not receive any compelling evidence from SDI that category

specialists, independent sports specialists, fashion retailers and

supermarkets are all in the same market as Sports Multiples. Such evidence

can take many forms and in recent cases, parties have, for example,

presented survey evidence or market research to the OFT detailing how

and why consumers make their shopping decisions and who they see as

credible alternatives. In other instances, the OFT has been provided with

internal documentation (including reports and emails) showing how they

Sports Goods Retailing, Mintel (2008) and UK Sports Retail, Verdict (2008).

For example, Sports Goods Retailing, Mintel (2008) and UK Sports Retail, Verdict (2008) both

refer to the extent of competition between the 'big three' sports multiple retailers.

For example, it would appear to be the case that JD Sports is more focussed on sports

clothing and fashion wear, whilst JJB offers a wider range of sports equipment.

For example, SDI stated that it views Argos as a competitor in the supply of sports

equipment.

track and match the prices of key rivals, or how they have reacted more

generally to new strategies by rivals and/or responded to new entry. Save

for some limited information on local price monitoring, the OFT did not

receive any such evidence from SDI during the course of its investigation.

25. The OFT considers that category specialists,

local independent sport

retailers and clothing retailers

may impose a competitive constraint (of

varying strength) upon Sports Multiples and in those categories in which

they overlap. The exact nature of any competitive constraint imposed on

Sports Multiples by such other retailers will depend to a large extent on

consumers' shopping habits and perceptions, on which the OFT received

little information from the parties and third parties. In general, where the

principal aspects of a retailer's offer—that is, price, quality, range and

service ('PQRS')—are closely aligned with the Sports Multiples, the OFT

considers that it is more likely that such category specialists will be able to

exert a competitive constraint. Conversely, retailers whose PQRS differs

quite significantly from that of Sports Multiples (such as Blacks, Millets,

Brown Trout or Great Outdoors) are less likely to be considered to exert a

competitive constraint on them. The OFT notes that this view was

supported by an independent industry report.

Local independent sports retailers

26. The exact nature of the competitive constraint placed on SDI and the

Acquired Stores by local independent sports retailers may vary significantly

between locations depending on the PQRS offering of the independent.

Where the PQRS offering of the independent is closely aligned with that of

SDI and the Acquired Stores, the OFT considered that the independent

would be (subject to being geographically close enough) capable of exerting

a significant competitive constraint.

27. As a general point, the OFT had some concerns regarding the inability of

local independent retailers to achieve the same scale discounts on stock as

national retailers which may limit their ability to offer a constraint on the

SDI gave limited examples of price monitoring; however, it did not clearly demonstrate when

any price change was implemented as a result of that monitoring.

Category specialist retailers include those who offer an extensive range of products in one sub

segment of the Sports Multiples' retail sector or specialise in a single sport/activity. Category

specialists can range in scope and scale dramatically from Footlocker, who specialise in

footwear, to Argos with a stronger portfolio in sports equipment.

Examples include TK Maxx and Debenhams.

Verdict Report, UK Sports retailing 2008: 'Each of the players profiled in this section of the

report is clearly differentiated from the larger specialists, with a keener service approach and a

less price-driven offer. Many smaller players focus exclusively on branded product and add value

through service. Indeed, there are no smaller players profiled in this report that aim to compete

directly with the likes of SDI and JJB Sports. Only Foot Locker, part of the eponymous US giant,

competes with the big players, though its offer is largely footwear focused with a bias towards

American sports.'

Sports Multiples from a pricing perspective. Moreover, the OFT's previous

experience of local retail mergers suggests that local generalists usually

operate from smaller 'secondary' sites than those of larger national

multiples, meaning the 'range' (R) in their PQRS may not be as wide. These

are issues which the OFT has sought to take into account in the analysis

that follows.

Category specialists

28. The OFT considers that it is plausible that category specialists may be able

to constrain the Sports Multiples in those product categories in which they

overlap. For example, Footlocker may constrain SDI in relation to sports

footwear and Argos in relation to sports equipment by virtue of their

significant product offerings in those categories relative to that of SDI.

29. However, where the retail proposition (even in the notionally overlap

category) is significantly different from that offered by the Sports

Multiples, the OFT considers that they should be excluded from the

effective competitor set. For example, in the case of Blacks and Millets,

the OFT considers that they should be excluded on the basis that their

retail proposition (that is, predominantly camping and outdoor wear) is

significantly different from that of the Sports Multiples.

Clothing retailers

30. With respect to broader clothing specialists such as TK Maxx and

Debenhams, the OFT understands that the retail propositions are quite

different from those of Sports Multiples. Debenhams, for example, sells a

relatively limited range of sports clothing, in spite of being very active

across the wider 'fashion' segment along with a wide range of other high

street retailers. Overall, and given the lack of any consumer survey or other

information in support of this contention, the OFT has taken the cautious

view that these retail outlets, at best, provide a relatively weak constraint.

Conclusion on product scope and effective competitor set

31. In relation to product scope, the OFT has assessed the transaction on the

basis of supply of (1) sports clothing, (2) sports equipment, and (3) sports

footwear in the UK.

The OFT notes that the fact that SDI has the ability materially to influence the policy of these

companies due to its shareholding in them raises doubt as to whether they should be considered

to be independent competitors to SDI. SDI argued that any holding of material influence at a

national level did not impact on competition at a local level. However, there was no need for the

OFT to conclude on this point given that these companies were, in any event, excluded from the

effective competitor set.

There were 24 areas where there was an overlap between an Acquired Store and Blacks

and/or Millets. However, due to their different retail propositions, they were not considered to be

overlapping retail outlets, and accordingly excluded from the analysis.

32. In relation to the effective competitor set, the OFT considers it plausible

that other Sports Multiples and certain category specialists (such as

Footlocker and Argos) sufficiently constrain SDI and the Acquired Stores in

some or all of the three identified product categories. However, the OFT

has adopted a cautious approach and does not consider other retailers put

forward by SDI (such as Debenhams, Blacks, Millets and smaller specialised

retail outlets and market stalls) as providing an effective competitive

constraint on any of the product categories due to their different retail

propositions.

Geographic scope

National and/or local competition

33. SDI submitted that the geographic market is national. SDI submitted that it

has a national pricing strategy, which means that [ ].

SDI also submitted

to the OFT that its product range is determined completely at the national

level, so that any differences to the range of products at any particular

retail outlet are determined by the size of the retail outlet alone and not by

local competition. SDI accepted that the 'depth of range' of a particular

product (that is, the level of stock of an SKU) may vary locally, but that

this is determined purely by local demand factors (so, for example, more

stock of Newcastle United shirts will be held in Newcastle than in London).

SDI also submitted that other key competitive variables such as retail outlet

layout are determined at a national level, and provided examples of

centrally distributed 'guidance' documents. In addition, SDI submitted that

the OFT should place relatively low weight on local 'service' variables,

given that SDI focused on a low price/low service product offering.

34. However, the OFT considers that such a national (or centralised) pricing,

range and layout strategy need not necessarily preclude some elements of

local competition. Indeed, although prices may be set at the national level

to ensure that they are the lowest available, it may be the case that higher

priced products may be re-stocked more frequently in areas where there is

less competition. Other elements of the PQRS offering may also be 'flexed'

at the local level to increase the margin achieved at retail outlets which

face relatively less local competitive pressure. Accordingly, the mere fact

that SDI prices aggressively, does not preclude it from wider (that is, QRS)

competition concerns at a local level.

35. As discussed above, the OFT considers that although pricing decisions may

be made nationally (or centrally), the geographic ambit of sports retailing

from the demand-side is local as consumers carry out their shopping

locally. Consequently, the OFT's starting assumption for geographic market

[ ].

definition in retail goods and services markets has therefore been—and

continues to be, absent compelling evidence to the contrary —that there

will be material local competition across each relevant local area to attract

and retain customers, even if not on every parameter of PQRS.

Therefore,

in practice, as in previous cases, our starting point is that retail mergers of

this type will feature both national and local elements of competition.

36. As noted above, SDI submitted (together with some supporting evidence)

that it employs a national pricing and national ranging policy, [ ]. However,

it is worth noting that even if the OFT were to accept SDI's proposition

that [ ], the OFT was presented with no evidence on which to base an

assessment of the extent of JJB's local competitive activity. Prior to the

acquisition, in those areas where retail outlets of both SDI and JJB were

present, consumers would have the choice of, and access to, the combined

range of products that they both offered. The OFT would therefore be

unable to discount the possibility that, pre-merger, the acquired JJB retail

outlets were providing some level of local competition and choice in

response to SDI, which would be removed as a result of the acquisition.

Accordingly, the OFT does not accept that pre-merger SDI and the JJB

Acquired Stores did not compete to some extent in their retail offering at

the local (and by implication, national) level.

37. In addition, SDI argued that a significant period of time had elapsed since

the acquisition of the retail outlets and that during that time, no harm had

actually materialised at the local level. Whilst the OFT acknowledges that

this is a potentially powerful argument, the OFT notes that, save for this

statement, SDI did not provide any evidence (for example, pre and post

retail outlet gross margins or mystery shopper data) to support its

assertion. Accordingly, the OFT was unable to consider this claim any

further.

38. In examining any local unilateral effects from the acquisition of the

Acquired Stores, the OFT will consider the competitive constraints imposed

by the parties on each other. This may be 'symmetric' (two-way, that is

each party constrains the other) or 'asymmetric' (one-way, one constrains

the other but not vice versa). The basis for an asymmetric theory is that

the competitive threat posed by one party on the other incentivises the

threatened party to offer lower prices or a better overall non-price offer to

attract and retain customers, and that the loss of asymmetric rivalry may

be itself sufficient to constitute a realistic prospect of a substantial

lessening of competition, because that rivalry will be internalised in respect

of the proposition offered by one of the parties.

See Homebase/Focus.

Local dimension

39. The OFT has not considered previously the geographic market for the

supply of sports clothing, sport equipment and sports footwear in the UK.

40. SDI submitted that an initial 'filtering' methodology should be used to

screen out local areas that appear competitively unproblematic, based on

the filters employed in the DIY case, Homebase/Focus. In that case – and

based upon the customer information provided by the parties in that case –

the OFT applied three preliminary filters to assess whether the DIY shed

acquisitions had led to any fascia reduction within radii of five miles and

ten miles, or within a 20-minute drive time isochrone, all centred on the

target store.

41. However, having considered the evidence, the OFT does not consider such

an approach to be appropriate in this case. DIY sheds and Sports Multiples

are different retail propositions from the perspective of consumers, in

particular with respect to the location of retail outlets. Sports retailers

operate in both 'town centre' and 'out of town' locations (which is not

generally the case for DIY sheds). This means that customers may be more

likely to purchase on impulse and may not see retail outlets in 'out of town'

locations as a viable alternative. Consequently, in the absence of evidence

to the contrary, in such circumstances a narrower geographic market

definition (that is, taking account of the 'town centre' or 'high street'

dimension) may be appropriate.

Conclusion on geographic scope

42. In view of the above, and the lack of any evidence provided by SDI (such

as data on the distances travelled by customers to retail outlets), the OFT

has analysed the geographic nature of competitive constraints on an

overlap-by-overlap basis and has distinguished between 'town centre' and

'out of town' locations, where appropriate.

HORIZONTAL ISSUES

Closeness of competition

43. SDI and JJB are two of the only three national Sports Multiples in the UK.

On the basis of the similarities between the pricing, product range,

geographic scope and number of outlets of SDI and JJB, OFT considers

that these two parties should be regarded, in general, to be each others'

This analysis is consistent with previous OFT decisions. For example, see the OFT's

Ottakars/Waterstone's decision.

closest competitor. This view is also supported by independent market

research reports.

44. Therefore, the OFT notes that the constraint placed on JJB retail outlets by

SDI, and vice versa, might be expected to be particularly strong.

National competition

45. The OFT has concluded that the acquisition of the Acquired Stores does

not give rise to any concerns at the national level given the relatively

limited increment in market share and the fact that JJB continues to

operate as a national retail competitor.

Local competition

46. SDI stated that the retail outlet acquisitions formed part of a larger pattern

within the sport retail industry of store openings and closures and that

these relatively small number of retail outlet acquisitions would be unlikely

to be of any material significance. However, the OFT is unable to dismiss

competition concerns on the basis that store openings or closures are a

feature of a particular industry.

47. SDI also stated that, by virtue of the fact that many of the transactions

happened some time in the past, to the extent that there would be any

anti-competitive effects, they should have become apparent. Accordingly,

SDI argued that the lack of any visible anti-competitive effects should

alleviate the OFT's concerns. However, in the absence of information from

SDI on the competitive position, pre and post merger, of the relevant local

markets discussed below, the OFT has been unable to confirm that no anti-

competitive effects could arise (or have already arisen).

Initial filtering

48. With regard to local competition, the OFT initially considered whether a

substantial lessening of competition might be expected to occur on any

plausible candidate local geographic market. The OFT initially filtered out

those locations where the nearest remaining JJB was substantially closer

to the Acquired Store than the nearest SDI, on the basis that competition

would not be lessened substantially whatever the geographic market

taken.

On this basis 11 locations were excluded from further analysis.

'The group's [JD Sport] primary focus is major sports brand and fashion brand clothing, in

particular footwear, with a keen focus on designer labels such as Nike, Adidas and Converse. Its

stores are more fashion focused compared to its high street rivals – SDI and JJB Sports – with

collections extending beyond sports to fashionable casual wear. Stores reflect this positioning

with prominent branding and contemporary store environments' (Verdict).

Distances to closest remaining JJB retail outlet were taken from SDI's submissions. Distances

to nearest SDI retail outlet were taken from SDI's submissions and SDI's online store-finder.

49. In a further eight instances, the OFT considered that, given the distance

between the Acquired Store and existing SDI locations, and given the

presence of other JJB retail outlets in the area, there would either be no

loss of competition or any loss of competition was expected to be

marginal. In these locations the OFT considered that any prospect of a

substantial lessening of competition could be confidently ruled out under

any plausible geographic market definition. On this basis these eight

locations were excluded from further analysis.

50. In a further six instances, the OFT considered that given the distance

between the retail outlet locations (the Acquired Store and the nearest

SDI), the retail outlets would not have exerted a significant constraint on

each other and therefore the loss of competition, if any, arising in these

cases would be small and so these could be excluded from further

analysis.

51. Accordingly, the OFT considered the competitive effect of the transaction

on a case-by-case basis for the remaining six areas, namely Basildon,

Llanelli, Newport, Harrogate, Isleworth and Newcastle-upon-Tyne.

Unilateral effects (SDI and JJB overlap areas)

52. The OFT examined whether there was a realistic prospect that, as a result

of the acquisition, SDI would be able to raise prices, reduce service

standards, reduce the range or quality of goods offered, reduce investment

levels or otherwise harm consumers in the following local areas (unilateral

effects theory of harm).

53. As mentioned above (paragraph 43) the OFT considers that the evidence

suggests that SDI and JJB are each other's closest competitor.

Accordingly, where the acquisition would result in the removal of that close

competition within any local market for a particular product categorisation

(sports clothing, sports equipment or sports footwear) and the remaining

outside constraints are insufficient to prevent an internalisation of the lost

competition between the parties, then the OFT considers that this would

give rise to a realistic prospect of a substantial lessening of competition.

Without specifically seeking to identify local concerns by reference to

fascia reduction alone, in this case, competition concerns (as described

further below) have tended to be found in those areas where the reduction

in fascia was three to two or less. This is, perhaps, not surprising given the

presence of three Sports Multiples (SDI, JJB and SD Sports) in relation to

the broad category of sports retailing.

Barnsley, Bradford, Bristol, Cardiff, Huddersfield, Inverness, Lancaster, Newcastle-under-

Lyme, Truro, Wolverhampton and York.

Bedford, Farnborough, Ealing, Poole, Worthing, Salisbury, Sutton and Uxbridge.

Eltham, Ilford, Orpington, Walthamstow, Washington and Wood Green.

Basildon (concern in sports clothing)

54. In Basildon, in relation to sports clothing the acquisition has given rise to a

reduction from three to two in Sports Multiples fascia (JD Sports is

present) within the Basildon town centre. Although the OFT notes the

presence of a small independent sports retailer (LAB sports) in view of

limited supporting evidence from SDI and due to its small size, the OFT

was not persuaded that it would offer a sufficient competitive constraint on

SDI in Basildon.

55. The OFT considers that DA Sports, located 'out of town' is unlikely to

provide a significant competitive constraint on SDI and has, in the absence

of evidence to the contrary, therefore been excluded from the competitive

analysis.

56. In terms of sports footwear, Footlocker is present in the town centre close

by the Acquired Store and for sports equipment, there is an Argos present.

Accordingly, the OFT accepts that they will both continue to be a sufficient

constraint on SDI post merger.

57. Therefore, the closeness of the Acquired Store to SDI, both geographically

and in terms of price and product range, together with the lack of

compelling evidence showing that a sufficient number of other retailers will

provide a sufficient competitive constraint on SDI, has led the OFT to

believe that SDI's acquisition of the JJB retail outlet in Basildon gives rise

to a realistic prospect of a substantial lessening of competition in relation

to sports clothing.

Llanelli (concern in sports clothing, sports equipment and sports footwear)

58. In Llanelli, the acquisition has removed competition between the only

Sports Multiples fascia in relation to sports clothing, sports equipment and

sports footwear within the Llanelli town centre.

59. The OFT considers that the remaining JJB retail outlet (located in a retail

park) and Picton Sports located 'out of town' are unlikely to provide a

significant competitive constraint on SDI. Accordingly, in the absence of

evidence to the contrary, both of these retail outlets have been excluded

from the competitive analysis.

60. In terms of sports equipment, Argos is present within the town centre, but

even if it were considered to be a constraint, there would still only be two

competing fascia post merger.

61. The closeness of the Acquired Store to SDI, both geographically and in

terms of price and product range, together with the lack of compelling

evidence showing that a sufficient number of other retailers will provide a

sufficient competitive constraint on SDI, has led the OFT to believe that

SDI's acquisition of the JJB retail outlet in Llanelli gives rise to a realistic

prospect of a substantial lessening of competition in relation to sports

clothing, sports equipment and sports footwear.

Newport (concern in sports clothing and sports footwear)

62. In Newport, in relation to sports clothing the acquisition has given rise to a

reduction in Sports Multiples fascia from three to two (JD Sports present)

within the Newport town centre.

63. Although the OFT also notes the presence of both Pure Rugby and Gwent

Camping in close proximity to the Acquired Store in Newport town centre,

both of these retail outlets are specialist sports retailers whose retail

proposition differs significantly from the Sports Multiples. Accordingly, in

the absence of evidence to the contrary, the OFT considers that they are

unlikely to provide a competitive constraint on SDI and therefore both of

these retail outlets have been excluded from the competitive analysis.

There is another JJB outlet on an edge-of-town retail park and an

independent (Macey Sports) present on the outskirts of the town. The OFT

believes that both retail outlets may be too far from the town centre to act

as effective constraints on SDI.

64. In terms of sports equipment, Argos is present within the town centre and

the OFT accepts it will continue to be a sufficient constraint on SDI post

merger.

65. The closeness of Acquired Store to SDI, both geographically and in terms

of price and product range, together with the lack of compelling evidence

showing that a sufficient number of other retailers will provide a sufficient

competitive constraint on SDI, has led the OFT to believe that SDI's

acquisition of the JJB retail outlet in Newport gives rise to a realistic

prospect of a substantial lessening of competition in relation to sports

clothing and sports footwear.

Harrogate (concern in sports clothing and sports footwear)

66. In Harrogate, SDI and the Acquired Store are the only two Sports Multiples

fascia, although there is an independent sports retailer present in the town

centre (Monkhouse Intersport) with a similar retail offering to the Sports

Multiples. This suggests a three to two reduction in fascia in relation to

sports clothing and sports footwear within the Harrogate town centre.

67. In terms of sports equipment, Argos is present within the town centre and

the OFT accepts it will continue to be a sufficient constraint on SDI post

merger.

68. The OFT also notes the presence of Cotswold Outdoors, Euro Golf, Brown

Trout, The Ski Shop, Harrogate Hydro, Dive Time, Up and Running, Out

and About, Linsley Brothers and Yeomans Outdoors in close proximity to

the Acquired Store in Harrogate town centre. However, these retail outlets

are specialist retailers whose retail proposition differs significantly from the

Sports Multiples and, in the absence of evidence to the contrary, the OFT

considers that they are unlikely to provide a competitive constraint on SDI.

Accordingly, these retail outlets have been excluded from the competitive

analysis.

69. The closeness of the Acquired Store to SDI, both geographically and in

terms of price and product range, together with the lack of compelling

evidence showing that a sufficient number of other retailers will provide a

sufficient competitive constraint on SDI, has led the OFT to believe that

SDI's acquisition of the JJB retail outlet in Harrogate gives rise to a realistic

prospect of a substantial lessening of competition in relation to sports

clothing and sports footwear.

Isleworth/Hounslow (concern in sports clothing)

70. SDI submitted that competition within the London area operates materially

differently from other locations. The OFT considers that, in general, this

argument is plausible. For example, where retail outlets are located near

underground stations, it may be that locations on the same underground

line are in fact closer substitutes than other retail outlets which may appear

closer (as the crow flies), but which may take longer to travel to.

Moreover, it may be the case that customers see central London to be a

competing location to those areas of overlap, and may be willing to travel

somewhat further or switch between competing shopping destinations

relatively willingly.

71. In Isleworth, the Acquired Store, an out of town store, is 2.3 miles from a

current SDI site, in Hounslow. The OFT considers it to be plausible that

customers, particularly those living between the two locations, view these

two centres as close alternatives to one another relative to central London

given the relative travel distances.

Accordingly, the acquisition has

reduced the Sports Multiples fascia from three to two (JD Sports present)

in relation to sports clothing within the Isleworth area.

72. In terms of sports equipment, Argos is present within Hounslow town

centre and the OFT accepts it will continue to be a sufficient constraint on

SDI post merger.

TFL estimates the two centres are 3 minutes apart by train, but customers would have to

travel for around 30 to 40 minutes to get into central London.

73. In relation to sports equipment and sports footwear, an independent sports

retailer, Max Sport, is located in Twickenham. The OFT accepts it will

continue to be a sufficient constraint on SDI post merger.

74. The OFT notes the presence of Len Smith (uniforms and sports team kits),

Funky Leisure, The Rugby Store, Bike Hut, Moorse Cycles, Duellist Int,

Champmans Fishing and Isleworth Recreation centre in close proximity to

the Acquired Store in Isleworth. However, these retail outlets are specialist

retailers whose retail proposition differs significantly from the Sports

Multiples and the OFT considers that, in the absence of evidence to the

contrary, they are unlikely to provide a competitive constraint on SDI.

Accordingly, these retail outlets have been excluded from the competitive

analysis.

75. The closeness of the Acquired Store to SDI, both geographically and in

terms of price and product range, together with the lack of compelling

evidence showing that a sufficient number of other retailers will provide a

sufficient competitive constraint on SDI, has led the OFT to believe that

SDI's acquisition of the JJB retail outlet in Isleworth gives rise to a realistic

prospect of a substantial lessening of competition in relation to sports

clothing.

Newcastle upon Tyne

76. In Newcastle, in relation to sports clothing the acquisition has given rise to

a reduction from three to two in Sports Multiples fascia (JD Sports is

present) within the Newcastle town centre. The OFT however notes the

presence of Start Fitness, who provide a range of sports clothing and

sports footwear. The OFT accepts that this independent player will

continue to be a sufficient constraint on SDI post merger.

77. In terms of sports footwear, Footlocker is present in the town centre close

by the Acquired Store, and for sports equipment, there is an Argos present.

Accordingly, the OFT accepts that they will both continue to be a sufficient

constraint on SDI post merger.

78. Therefore, given the number of competitors in sports clothing, sports

footwear and sports equipment, the OFT does not believe that SDI's

acquisition of the JJB retail outlet in Newcastle gives rise to a realistic

prospect of a substantial lessening of competition in relation to any product

area.

Barriers to entry and expansion

79. In making its decision on the transaction in question the OFT must consider

whether entry is likely to occur in a timely manner and be of a sufficient

scale so as to remedy the substantial lessening of competition postulated.

In making a decision on these issues the OFT will necessarily be mindful of

the nature of the substantial lessening of competition in question. In this

instance therefore, the correct question for the OFT is whether timely,

likely and sufficient entry or expansion will occur in all of the local overlaps

of concern identified above in order to mitigate the competition concerns

articulated.

80. SDI did not submit any evidence relating to potential entry in this case. At

the national level, the OFT is not aware of any retailers that have entered

the market in the last five years, although OFT does note the recent

purchase of JJB's fitness centres (all but one of which have sports retail

outlets linked to them) by Dave Whelan (the former owner of JJB). In fact,

the market has been more characterised by exits from the market, most of

which have been bought by SDI and JD Sports.

81. With respect to entry of local competitors within the overlap areas, the

OFT does not consider that barriers to entry are high per se but has some

concerns that local independents may not benefit from the same economies

of scale and scope as national chains, thereby limiting their ability to

constrain SDI. Moreover the OFT has no evidence of the prevalence of

entry among this category of supplier and considers that it may be the case

that the presence of SDI may itself act as a disincentive to entry given its

aggressive pricing policy. The OFT is aware of no instances of entry in any

of the overlap areas on which competition concerns have been found,

despite the fact that, in some instances, over a year has elapsed since the

transactions took place.

82. More generally, the OFT is aware that the industry as a whole has been

subject to significant difficulties as a result of the current prevailing

economic conditions. The OFT understands that adverse trading conditions

represent the primary rationale for the sale of the relevant retail outlets in

this case. The OFT understands that, whilst sales have continued to rise

for SDI, there has been considerable pressure on margins as a result of

external factors such as the weakening of sterling.

The OFT is minded

therefore to be conclude that, in the short to medium term at least, entry is

unlikely to occur in such a way as to mitigate the competition concerns

raised by the OFT.

Buyer power

83. Given that SDI is a sports retailer and that its customers are individual

consumers, no significant countervailing buyer power can realistically be

attributed to the demand side.

See Mintel Sports Goods (2008), pages 83 to 86.

http://uk.biz.yahoo.com/18022009/399/sports-direct-sales-ahead-forecasts.html.

Coordinated effects

84. Coordination may arise when a market meets certain conditions.

The

relevant question in a merger control context is not whether a market is

susceptible to coordination in general, but whether the merger may be

expected to increase the probability that post-merger, firms in the same

market might tacitly or explicitly coordinate their behaviour to raise prices,

reduce quality or curtail output.

85. In this case the OFT received a number of comments from third parties

suggesting the presence of coordination between SDI and JJB. However,

the OFT does not believe that the acquisition by SDI of 31 retail outlets

from JJB would, in itself, increase the probability that they will collude

(tacitly or explicitly) by reducing competition in the markets for the supply

of sports clothing, sports equipment and sports footwear through Sports

Multiples in the 31 locations.

VERTICAL ISSUES

86. The OFT does not consider that vertical concerns arise in this case.

COUNTERFACTUAL

87. Section 22 of the Act imposes a duty to refer upon the OFT if the OFT

believes it is or may be the case that the completed acquisition by SDI of a

number of retail outlets from JJB has resulted or may be expected to result

in a substantial lessening of competition within any market or markets in

the UK for goods or services.

88. In order to decide whether the duty to refer applies, the OFT considers the

merger's impact relative to the situation expected to prevail absent the

merger (that is, the counterfactual). Generally speaking, this will be the

current (pre-merger) conditions of competition.

89. In this case, during discussions with the OFT, SDI has submitted that the

retail outlets in question [ ].

90. In order to treat this as the appropriate counterfactual for the assessment

of the merger, the OFT considers that sufficient compelling evidence is

required, [ ]. In effect, SDI is arguing that, to the extent competitive harm

See for example, the OFT's Mergers Substantive Assessment Guidance, paragraph 4.11 to

4.16, and the OFT decisions of 12 December 2007 regarding the anticipated mergers between

First Milk Limited and Milk Link Limited, and 11 December 2006 regarding the anticipated

acquisition by Wienerberger Finance Services BV of Baggeridge Brick plc).

[ ].

may arise, the merger is not the cause of the harm as it would occur in any

event. Where this type of absence of causation between the merger and

the lessening of competition is argued, the OFT will as a matter of policy

seek a high level of supporting evidence (within the parameters of its belief

relevant to the reference test of the Act, which entails a comparison of the

outcomes with and without the merger). This approach to evidentiary

burden is appropriate given the asymmetry of information on such a key

point: such claims are easily made but often difficult to verify

independently, not least within the constraints of first-phase merger

control. Accordingly, the following analysis is consistent with that adopted

in previous OFT decisional practice under the Act.

91. The OFT has recently published a 'Restatement of OFT's position regarding

acquisitions of failing firms'.

This provides for two conditions that must

be satisfied in order to benefit from the failing firm defence (summarised

below):

• inevitability of market exit of the firm in question absent the merger

with no serious prospect of re-organisation, and

• no less substantially anti-competitive alternative to the merger (that is

no realistic acquisition by a substantially less anti-competitive purchaser

and no substantially better competitive outcome following failure of the

firm in question).

92. To date, other than referring to [ ], SDI has provided no substantiated

evidence to support its claim regarding [ ]. Accordingly, the OFT contacted

JJB, who provided a list of the operating profits of the Acquired Stores.

According to that list, out of the five retail outlets concerned, [ ].

93. Moreover, the OFT did not receive any information regarding the realistic

prospect of re-organisation of any of the retail outlets, [ ]. Nor did it receive

any information regarding whether, [ ], there were other realistic buyers

whose acquisition of the retail outlets would produce a better outcome for

competition.

94. Accordingly, the OFT considers that the information and evidence provided

by the SDI does not satisfy the required evidentiary standard for the

purpose of the failing firm defence. In view of this, the OFT has taken as

To date, the OFT has applied the 'failing firm' defence five times under the Enterprise Act

2002: (i) Anticipated acquisition by First West Yorkshire Limited of Black Prince Buses Limited

26 May 2005; (ii) Anticipated acquisition by Tesco Stores Limited of five former Kwik Save

stores (Handforth, Coventry,Liverpool, Barrow-in-Furness and Nelson) 11 December 2007; (iii)

Completed acquisition by the CdMG group of companies of Ferryways NV and Searoad

Stevedores NV 24 January 2008; (iv) Homesbase/Focus; and (v) Anticipated acquisition by HMV

of 15 Zavvi stores 28 April 2009.

Published on 18 December 2008.

the counterfactual the pre-acquisition status quo market position, where

these JJB retail outlets were active as a competitor to SDI.

ASSESSMENT

95. SDI and the 31 JJB Acquired Stores overlapped in the supply of sports

clothing, sports equipment and sports footwear.

96. At the national level, the acquisition has not resulted in a reduction in the

number of national sports retailers, or Sports Multiples. Based on the

minimal increment of SDI's turnover (approximately 4 per cent) or the

number of its retail outlets, the OFT does not believe that the acquisition

by SDI of 31 JJB retail outlets raises any national competition issues.

97. The OFT considers that local competition could be lost by the acquisition.

At the local level, in order to concentrate its assessment on areas raising

potential competition issues, the OFT applied a filter to identify those areas

where the acquisition would lead to fascia reduction. The application of

that filter removed 11 non-overlap locations that did not raise any

competition concerns. In addition, the OFT was able to remove an

additional 14 areas on the basis of the distance between the Acquired

Store and existing SDI locations (and therefore the limited constraint

exerted by the retail outlets on each other).

98. In respect of the six locations where the acquisition did give rise to a

reduction in the number of 'national' fascia at the local level, the OFT

considers that the reference test is met in relation to five areas, namely,

Basildon, Llanelli, Newport, Harrogate and Isleworth on the basis of a lack

of geographically close alternative (non-national) retailers in each area.

99. New entry and threat of entry can also represent important competitive

constraints on the behaviour of the SDI. However, entry must be timely,

likely and sufficient in scale or character to replicate the competition lost in

relation to the five local areas where the reference test is met. Based on

the evidence before it, the OFT does not believe that entry in Basildon,

Llanelli, Newport, Harrogate and Isleworth is timely, likely or sufficient.

100. Consequently, the OFT believes that it is or may be the case that the

merger has resulted or may be expected to result in a substantial lessening

of competition within a market or markets in the United Kingdom.

UNDERTAKINGS IN LIEU OF A REFERENCE

101. Where the duty to make a reference under section 22(1) of the Act applies,

pursuant to section 73(2) of the Act the OFT may, instead of making such

a reference, and for the purpose of remedying, mitigating or preventing the

substantial lessening of competition concerned or any adverse effect which

has or may have resulted from it or may be expected to result from it,

accept from such of the parties concerned undertakings as it considers

appropriate.

102. The OFT's Mergers Substantive Assessment Guidance states that,

'undertakings in lieu of reference are appropriate only where the

competition concerns raised by the merger and the remedies proposed to

address them are clear cut, and those remedies are capable of ready

implementation.'

103. SDI indicated that in order to remedy any competition concerns identified

by the OFT, and to avoid a reference to the CC, it would be prepared to

offer undertakings in lieu. SDI offered a divestment package covering each

of the retail outlets where the OFT found that the merger gave rise to

competition concerns.

The OFT considered that such divestments would

be capable of addressing the competition concerns identified above in a

clear cut manner, in accordance with the scheme of the Act as well as the

OFT's Guidance and decisional practice.

104. The OFT considers that the undertakings offered in respect of the retail

outlets are clearly capable of addressing the competition concerns arising in

those local markets.

Up-front buyer

105. The OFT considered whether it was appropriate in the circumstances of

this case to require that the relevant divestments be made in whole or in

part to an up-front buyer or buyers.

106. An up-front buyer requirement means that the proposed divestment

purchasers will have committed contractually, subject to formal approval of

the undertaking in lieu, to acquire the relevant divestment retail outlet(s)

before the OFT accepts the undertakings in lieu and loses its duty to refer.

This means that the OFT will consult publicly on the suitability of the

proposed divestment purchasers, as well as any other aspects of the draft

undertakings, during the public consultation period.

107. The OFT will seek an up-front buyer where the risk profile of the remedy

requires it, for example where the OFT has reasonable doubts with regard

Paragraph 8.3.

SDI offered (at the same time) two sets of undertakings, the second of which was only to be

considered in the event that the first set was deemed insufficient. Given that SDI's first set of

undertakings covered all the local areas in which the OFT had found concerns, the OFT did not

need to consider the second set of undertakings offered by SDI.

to the ongoing viability of the divestment package and/or there exists only

a small number of candidate purchasers.

108. In this case, it is not clear to the OFT that [ ]. Furthermore, [ ] if there were

purchasers that might be interested in acquiring some or all of the

divestment retail outlets, it is not clear that they would be able to do so

without giving rise to potential competition concerns (such that they would

not be regarded as suitable purchasers).

109. In conclusion, the OFT has decided that, on a cautious basis, its decision to

seek undertakings in lieu from SDI should be on the basis of an up-front

buyer provision for the retail outlets to be divested. [ ]. Should SDI be

unable to swiftly find a suitable purchaser, and therefore divest the retail

outlets in an expeditious and timely manner, then the OFT would reactivate

its duty to refer to the CC.

DECISION

110. The OFT has therefore decided to refer the completed acquisition by SDI of

a number of retail outlets from JJB to the Competition Commission

pursuant to section 22 of the Act. However, the OFT's duty to refer is

suspended because the OFT is considering whether to accept undertakings

in lieu of reference from SDI pursuant to section 73 of the Act.

See Homebase/Focus and Anticipated acquisition by SRCL Limited of Cliniserve Holdings

Limited, 21 November 2008.