Commission, May 10, 2017, No M.8406

Dear Sir or Madam,

1.  INTRODUCTION

(1) On 31 March 2017, the Commission received by means of a Reasoned Submission a referral request pursuant to Article 4(4) of the Merger Regulation with respect to the transaction cited above. The Parties request the operation to be examined in its entirety by the competent authorities of Finland.

(2) According to Article 4(4) of the Merger Regulation, before a formal notification has been made to the Commission, the Parties to the transaction may request that their transaction be referred in whole or in part from the Commission to the Member State(s) where the concentration may significantly affect competition and which present all the characteristics of a distinct market.

(3) A copy of this Reasoned Submission was transmitted to all Member States on 31 March 2017. In the case at hand, Finland is the only Member State to which the case could be referred to.

(4) By letter of 18 April 2017, the Finnish Competition and Consumer Authority  (FCCA) as the competent authority of Finland informed the Commission that Finland agrees with the proposed referral.

2. THE PARTIES AND THE TRANSACTION

(5) Kesko OYJ ("Kesko") is a publicly listed Finnish retailing company with operations focused on three main business segments, namely (i) grocery trade, (ii) building and technical trade and (iii) car trade. Kesko has subsidiaries in Sweden, Norway, Estonia, Latvia, Lithuania, Poland, Russia and Belarus.

(6) Oriola-KD OYJ ("Oriola") is a publicly listed Finnish limited liability company active mainly in pre-wholesale, distribution and services business in the pharmaceutical markets in Sweden, Finland, Estonia, Latvia and Lithuania. Oriola provides pharmaceutical companies access to markets delivering pharmaceuticals and related services. Oriola also operates pharmacies in Sweden and Latvia.

(7) On 13 March 2017, Kesko and Oriola signed a Joint Venture Agreement for the creation of a full-function joint venture (the "JV") within the meaning of Article 3(4) of the Merger Regulation.

3. EU DIMENSION

(8) The undertakings concerned have a combined aggregate world-wide turnover of  more than EUR 5 000 million (Kesko: EUR 10 180 million, Oriola: EUR 1 642 million). Each of them has an EU-wide turnover in excess of EUR 250 million (Kesko: EUR 9 334 million, Oriola: EUR 1 642 million). While Kesko achieves  more than two-thirds of its aggregate EU-wide turnover in Finland, Oriola achieves more than two-thirds of its aggregate EU-wide turnover in Sweden. The notified operation therefore has an EU dimension within Article 1(2) of the Merger Regulation.

4. ASSESSMENT

(9) On the basis of a preliminary assessment of the information provided by the Parties in the Reasoned Submission, the proposed Transaction could be an appropriate candidate for pre-filing referral from the Commission to the FCCA in accordance with Article 4(4) of the Merger Regulation.

A Relevant markets

(10) The JV will operate on the parapharmacy retail market in Finland and, subject to potential regulation changes in Finland, on the pharmacy retail market in Finland. The JV's activities will not be limited to selling goods but will also relate to the provision   of   additional   product-related   services  to  customers, in   form of individualized advice, blood pressure measurement and completion of other basic medical checks by healthcare professionals.

(11) The Parties submit that the relevant product markets for the JV's activities in Finland are (i) the retail sale of beauty, health and well-being products; (ii) the wholesale of beauty, health and well-being products; (iii) the procurement of beauty, health and well-being products; (iv) the retail sale of pharmaceuticals; (v) the wholesale of pharmaceuticals; (vi) the procurement of pharmaceuticals; and (vii) the provision of beauty, health and well-being services to consumers.

(12) The product markets mainly affected by the proposed Transaction are in the markets (i), (ii) and (iii), exclusively in Finland.

A.1 Relevant product markets

 (i) The retail sale of beauty, health and well-being products

(13) In previous decisions involving daily consumer goods, including beauty, health and well-being products, the Commission considered that market participants compete  by offering a basket of goods.3 The Parties agree with this approach and claim that the market (i) consists in the offering a diversified range of beauty, health and well- being products to consumers.

(14) The Commission also considered the relevant product markets concerning daily consumer goods as per the size of the sales outlets.4 However, the Parties note that such an approach would not be suited for the assessment of the present case, since Kesko does not operate specialty stores of similar sizes than those of the JV and Oriola owns one single brick-and-mortar showroom store for professionals’ buyers with limited selection of products.

(15) The Commission previously considered it generally meaningful to break the market down by product category.5 With this respect and in view of the intended product portfolio of the JV, the Parties consider that the following product categories are best suited to describe the relevant product markets:

1. Cosmetics6

2. Body care and body cleansing products7

3. Intimate hygiene products8

4. Food supplements9

5. Health foods10

6. Products to help quit smoking11

7. Baby hygiene products12

8. Baby food13

9. Snacks, dry fruits and nuts14

10. Dry groceries15

11. Sweets16

12. Soft drinks17

(16) The Parties sell products of most of the above listed categories (1-12).18 The Parties' activities give however only rise to marginal overlaps. Furthermore, these product categories are intended to be included into the JV’s product portfolio only to the extent that they are suitable for the targeted customer group and for the image of the JV’s stores. (ii) The wholesale of beauty, health and well-being products

 (17) In previous decisions, the Commission considered the wholesale market for daily consumer goods to consist in the sale and distribution of daily consumer goods to third parties such as retailers and other clients for daily consumer goods.19 Three different types of wholesalers have been identified in this respect, namely whole- range wholesalers, specialized wholesalers (with a product offer limited to certain specific categories) and producers who supply particular products directly to retailers. The Commission has, however, left open the question whether these three different types of wholesalers operate in the same or in different markets.

(18) According to the Parties the wholesale market of beauty, health and well-being products should be assessed by using the same product categories (1 – 12) suggested above, rather than dividing the markets according to the types of wholesalers. The Parties submit that such approach is best suited to assess the overlaps between the Parties' activities. (iii) The procurement of beauty, health and well-being products

 (19) In previous decisions, the Commission considered that for daily consumer goods, the procurement markets comprise the sale of daily consumer goods by producers to customers such as wholesalers, retailers and other firms. The Commission also acknowledged the fact that the procurement market should be further subdivided according to several product categories to define the market primarily from the view point of the consumer.

(20) The Commission has also indicated that, in case of food retailing, the procurement market could be sub-divided according to sales channels (including, in addition to food retailers, for example, specialized stores, cash-and-carry stores, other wholesalers and drugstores).21 In the retail trade of consumer goods, the Commission has also considered that there is a close interdependence between the distribution and the procurement market, and concluded that retailers’ shares of the distribution market determine their procurement volume.22

(21) According to the Parties, the product variety for beauty, health and well-being products is extensive and no single producer could possibly offer the complete range of such products. Therefore, the Parties submit that it is most appropriate to assess the procurement market for beauty, health and well-being products based on the product categories (1 – 12) suggested above. The Parties acknowledge that a certain interdependence may exist between the distribution and procurement of beauty, health and well-being products.

A.2 Relevant geographic market

 (i) The retail sale of beauty, health and well-being products

 (22) In previous decisions, the Commission considered that the geographic scope of the retail market of daily consumer goods including beauty, health and well-being products, is local or regional because it is likely that local market conditions are taken into account for pricing purposes and are relevant for individual consumers. However there are some indications to conclude that the relevant geographic market could also be national in scope.

(23) As regards the local markets, the Commission defined in previous cases a catchment area of a retail outlet, which can be based on the distance a consumer is willing to travel to reach it (radius of approximately 10 to 30 minutes driving time).24 The Commission has, however, also pointed out that, although the catchment area of a retail outlet is of local or regional scale, the catchment area does not necessarily determine the geographic market. If several retail chains operate networks of stores on a national scale it has to be examined whether important parameters of competition are determined on a national scope.

(24) With regard to beauty, health and well-being products the indications to support the national  market  include  factors  such  as  range  of  products,  image,  store  layout, service level, marketing and prices when they are decided and advertised by the market players on a national level.

(25) According to the Parties, an analysis based on catchment area would not be appropriate for the purpose of the present case since Oriola only has one single store. The Parties consider that it is sufficient to provide information and assess the relevant geographic markets on an overall national level for Finland. (ii)   The wholesale of beauty, health and well-being products

 (26) In previous decisions, the Commission considered the markets for wholesale and procurement of daily consumer goods to be national.

(27) According to the Parties, the market for wholesale of health, beauty and well-being products can be considered to be national in scope and limited to Finland for the purpose of the present case. (iii) The procurement of beauty, health and well-being products

 (28) In previous decisions, the Commission considered the markets for procurement of daily consumer goods to be national in scope due to several factors such as consumer preferences for national products and the existence of separate distribution channels. Furthermore, the Commission has noted that many European manufacturers and wholesalers negotiate with their customers on a national level, basically via subsidiaries and branches. In several cases, the Commission considered the relevant geographic market for the procurement of daily consumer goods to be predominantly national in scope.

(29) According to the Parties, the market for the procurement of health, beauty and well- being products can be considered to be national in scope and limited to Finland for the purpose of the present case.

B Assessment

 (30) Following a preliminary assessment, the proposed Transaction meets the legal requirements set out in Article 4(4) of the Merger Regulation. The proposed Transaction is a concentration within the meaning of Article 3 of the Merger Regulation, it has an EU dimension and it may significantly affect competition in Finland, since the JV will be only active in Finland and since the geographic scope of all of the affected markets under consideration is national or even narrower.

(31) According to the Parties, affected markets exclusively arise, in Finland, in relation to the national or even local markets for (i) the retail sale of beauty, health and well- being products, (ii) the wholesale of beauty, health and well-being products and (iii) the procurement of beauty, health and well-being products and their hypothetical sub-segments into product categories. Combined market shares could be as high as [40-50]%, with an increment of [5-10]%, for the market of wholesale of intimate hygiene products for 2016 in Finland.

(32) In view of the foregoing, the preliminary assessment suggests that the principal effects of the proposed Transaction would be restricted to Finland and that these may significantly affect competition in Finland. Further the markets in question present  all the characteristics of distinct markets since none of the markets affected by the transaction is broader than national in scope.

(33) On top of the fact that potential effects on competition of the proposed Transaction are confined to Finland, the FCCA appears to be particularly well placed to examine the present case since it has experience in assessing markets in the daily consumer goods, has already dealt with several, including recent, decisions related to Kesko29 and has published several studies about groceries trade in Finland and the provision of pharmaceutical products in Finland30.

(34) With regard to retail, wholesale and procurement of pharmaceuticals, which are not affected markets, the Parties note that the pharmacy and pharmaceutical sectors in Finland are heavily regulated. According to the Parties, the possible deregulation of the Finnish pharmaceutical market would have a significant change on the national and local competition landscape in Finland since, next to the JV, other new players would also enter the retail market for pharmaceutical products, leading to further competition to pre-existing pharmacies.

(35) In its previous decisions related to the market for retail, wholesale and procurement of daily consumer goods, the Commission took the step of referring the matters to national competition authorities of Belgium, the UK, and Romania. Similarly, in its previous decisions related to the market for retail, wholesale and procurement of pharmaceuticals, the Commission took the step of referring the matters to the national competition authorities of the UK and the Netherlands.

(36) By letter of 18 April 2017, the FCCA informed the Commission that Finland agrees with the proposed referral.

5. REFERRAL

(37) On the basis of the information provided by the Parties in the Reasoned Submission, the case meets the legal requirements set out in Article 4(4) of the Merger  Regulation in that the concentration may significantly affect competition in a market within a Member State which presents all the characteristics of a distinct market. The Commission notice on case referral in respect of concentrations31 (point 17) indicates that, in seeking a referral under Article 4(4), “the requesting Parties are … required to demonstrate that the transaction is liable to have a potential impact on competition in a distinct market within a Member State, which may prove to be significant, thus deserving close scrutiny”, and that “such indications may be no more than preliminary in nature…”. The Commission considers, on the basis of the information submitted in the Reasoned Submission, that the principal impact on competition  of  the  concentration  is  liable  to  take  place  on  distinct  markets   in Finland, and that the requested referral would be consistent with point 20 of the notice.

6. CONCLUSION

(38) For the above reasons, and given that Finland has expressed its agreement, the Commission has decided to refer the proposed Transaction in its entirety to be examined by the Finnish Competition and Consumer Authority. This decision is adopted in application of Article 4(4) of the Merger Regulation and Article 57 of the EEA Agreement.

 1. In the most recent of these cases, the FCCA cleared in April 2016 Kesko’s acquisition of Suomen Lähikauppa Oy. Decision of 11.4.2016, (KKV/1575/14.00.10/2015) Kesko Food Ltd.’s acquisition of Suomen Lähikauppa.

2. Participation to the study of the Nordic competition authorities on "Pharmacy and pharmaceutical sector  in the Nordic countries" (See Study on Trade in Groceries, FCA Reports 1/2012. FCA Report 2/2012: From the provision of pharmaceutical products to pharmaceutical markets – Value chain and regulation.). OJ C 56, 5.3.2005, p. 2.

3. See case M.2951 - A.S. Watson / Kruidvat.

4. See cases M.1832 - Ahold / ICA Förbundet / Canica and M.2604 - ICA Ahold / Dansk Supermarked.

5. See cases M.1832 - Ahold / ICA Förbundet / Canica and M.2604 - ICA Ahold / Dansk Supermarked.

 6.  See case M.1221 – Rewe / Meinl, para. 76.

7. See cases M.1221 – Rewe / Meinl, paras. 79 and 81; M.3464 – Kesko / ICA / JV, para. 19; M.2951 – A.S. Watson / Kruidvat.

8. Case M.1221 – Rewe / Meinl, para. 72.

9. See cases M.1221 – Rewe / Meinl; M.1684 – Carrefour / Promodes.

10. See case M.1684 – Carrefour / Promodes.

11. See case M.1612 - Wal-Mart / ASDA.

 12. Product category of health foods includes food products for specific dietary needs such as gluten free products, weight loss and control products, dry protein foods and food ingredients such as protein powders and, for example, energy and protein bars and various types of seeds.

13. Product category of products to help quit smoking includes, for example nicotine gums, tablets, plasters, other products for the same purpose.

14. Product category of baby hygiene products includes diapers, baby wipes, skin care and cleansing products for babies.

15. Product category of baby food includes all types of baby food and drink.

16. Product category of snacks, dry fruits and nuts include crisps, bread sticks, packaged dry fruits and fruit mixes, packaged natural and seasoned nuts.

17. Product category of dry groceries includes teas, meal solutions, pasta (excluding fresh pasta), sweet biscuits, stock-cubes, sweeteners, condiments and seasonings.

18. Product category of sweets include packaged candies and chocolate.

19. Product category of soft drinks include soft drinks and mineral waters.

20. Oriola does not sell consumers products belonging to the following product groups: 6. Products to help quit smoking, 8. Baby food and 12. Soft drinks.

21. See cases M.1832 – Ahold / ICA Förbundet / Canica and M.2604 – ICA Ahold / Dansk Supermarked.

 22. See cases M.784 – Kesko / Tuko, M.1221 Rewe / Meinl, M.7933 – Carrefour / Billa Romania and Billa Invest Construct; see also case M.2951 – A.S. Watson / Kruidvat relating to the retail sale of health and beauty products.

23. See cases M.1221 – Rewe / Meinl and M.7345 – Carrefour / 53 Magasins de Billa en Italie.

24. See cases M.1221 – Rewe / Meinl, M.3464 – Kesko / ICA / JV and M.7336 – Carrefour France / Dia France.

25. Product category of cosmetics includes make-up and perfumes/fragrances (for women and men).

26. Product category of body care and body cleansing products includes a large variety creams, lotions, etc. purpose of which is primarily preventive, hair care products (shampoos, conditions, hair sprays, foams and waxes and coloring products), soaps, shower gels and bath products, sun-tan lotions, hair removal products, tooth pastes, etc.).

27. Product category of intimate hygiene products includes paper or cotton hygiene/sanitary products and tissues, adhesive bandages, contraceptives and pregnancy tests.

28. Product category of food supplements includes vitamins, minerals, fatty acids, special products intended for health of a.i. heart, blood circulation, joints, muscles, stomach and skin.

 29. OJ L 24, 29.1.2004, p. 1 (the 'Merger Regulation'). With effect from 1 December 2009, the Treaty on the Functioning of the European Union ('TFEU') has introduced certain changes, such as the replacement of 'Community' by 'Union' and 'common market' by 'internal market'. The terminology of the TFEU will be used throughout this decision.

30. OJ L 1, 3.1.1994, p. 3 (the 'EEA Agreement').