EC, December 22, 2005, No M.3905

Dear Sir/Madam,

Subject: Case No COMP/M. 3905 – TESCO/CARREFOUR (Czech Republic and Slovakia)

1. On 04.11.2005, the Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No 139/2004 (“Merger Regulation”) by which the undertaking Tesco plc (“Tesco”, UK) acquires within the meaning of Article 3(1)(b) of the Merger Regulation control of the Czech and Slovak businesses of the undertaking Carrefour (France) by way of purchase of shares.

2.  After examination of the notification, the Commission has concluded that the operation falls within the scope of Merger Regulation and does not raise serious doubts as to its compatibility with the common market and the EEA agreement.

I.THE PARTIES

3. Tesco is active in food and non-food retailing and has over 2,300 stores worldwide including a wide variety of formats. Since entering the Czech and Slovak markets in 1996, Tesco has developed large format stores (net floorspace in excess of 7,000 sqm) in the larger towns and smaller format stores in the smaller towns. The company owns and operates 31 stores in Slovakia (including 5 department stores and 8 stores of less than 3,000 sqm) and 27 stores in the Czech Republic (including 6 department stores and 3 smaller format stores).

4. Carrefour is also active in food and non-food retailing and operates more than 11,000 stores worldwide. In the Czech Republic and Slovakia Carrefour has only targeted large towns and has only developed large formats. It operates 11 large-format stores in the Czech Republic and 4 large-format stores in Slovakia.

II.THE OPERATION AND CONCENTRATION 

5. Tesco and Carrefour signed a sales and purchase agreement on 30 September 2005 by which Tesco will acquire ownership of Carrefour´s 11 retail stores in the Czech Republic and its 4 stores in Slovakia. In addition Tesco will also acquire Carrefour´s interest in a shopping centre in Prague. Pursuant to the transaction Tesco will have sole control of Carrefour´s businesses in Slovakia and the Czech Republic (“Carrefour´s business”). The transaction therefore constitutes a concentration within the meaning of Art. 3(1)(b) of the Merger Regulation.

III. COMMUNITY DIMENSION

6. The undertakings concerned have a combined aggregate world-wide turnover of more than EUR 5 billion2 (€ 50.0 billion for Tesco and € […] million for Carrefour´s business). Each of Tesco and Carrefour´s business have a Community-wide turnover in excess of EUR 250 million (€ […] billion for Tesco and € […] million for Carrefour´s business), but they do not achieve more than two-thirds of their aggregate Community- wide turnover within one and the same Member State. The notified operation therefore has a Community dimension.

IV. PROCEDURE

7. By letter dated 30 November 2005, Slovakia requested the referral to its competent authorities of the part of the proposed concentration relating to Slovakia with a view to assessing it under Slovak national competition law, pursuant to Art. 9(2)(b) of the Merger Regulation. The Slovak Antimonopoly Office considers that the notified transaction affects competition in three separate local markets for retail sale of food and non-food products in supermarkets and hypermarkets in Slovakia in the cities of Bratislava, Žilina and Košice. By Commission decision of today the concentration was referred to the competent authorities of Slovakia pursuant to Art. 9(3) of the Merger Regulation to the extent it concerns the markets for retail sale of daily consumer goods in Slovakia. The following part of the decision will therefore only address the part which relates to the market for retail sale of daily consumer goods in the Czech Republic.

V. COMPETITIVE ASSESSMENT

8. Both Tesco and Carrefour are active in the retail sale of daily consumer goods in the Czech Republic.

The retail sale market for daily consumer goods

1. Product market

9. The parties are of the view that all retailers of grocery products including, e.g. hypermarkets, supermarkets, discount stores, local/traditional stores, specialist outlets (such as butchers, bakers, chemists), service stations and indoor and outdoor markets compete within a single combined grocery retailing market. This would be due to the fact that in the Czech Republic the retailing of daily consumer goods is organised in a more traditional manner than in those EU Member States with more mature market economies. The parties also argue that wholesalers with their cash & carry stores as e.g. Metro/Makro would be competitors in the retailing market.

10. The Commission has, however, in previous cases considered that there is a separate product market in the retail of daily consumer goods mainly carried out by retail  outlets such as supermarkets, hypermarkets and discount chains3. Previous decisions argue that these retailers are active in different markets than other retailers such as specialised outlets, service stations and others4. As regards cash & carry stores the Commission has stated in its previous decisions that those form part of a distinct product market for cash & carry sales of daily consumer goods5.

11. The market investigation in the present case confirmed that the product market definition applied by the Commission in previous cases is also relevant for the Czech Republic.

12. According to the market investigation, the current range (food, non-food products) and variety (branded products, non-branded products) of products sold would be narrower in discount stores and neighbourhood stores than in hypermarkets and supermarkets. On the other hand, in the Czech Republic the prices charged in hypermarkets and discounters are generally cheaper than the prices charged in supermarkets. In other words, it seems that with regard to the pricing policy hypermarkets seem to be closer to discount stores than supermarkets. The market investigation revealed that customers in the Czech Republic are generally considered as very price sensitive and it appears that pricing policy of hypermarkets is thus rather close to discounters.

13. Furthermore, currently about 50-60 % of the money spent by consumers on daily consumer goods in the Czech Republic is spent in hypermarkets, supermarkets and discounters and it is expected that the percentage of money spent in hypermarkets and discounters in relation to other outlets will increase in the next 3-5 years. This increase will be at least partly at the expense of smaller outlets as neighbourhood stores.

14. As regards cash & carry stores the market investigation did not confirm the parties´ statement according to which the cash & carry stores operated by Metro/Makro are in direct competition with the formats operated by the parties. Only those customers who can prove that they are running a business are issued a Makro/Metro card that grants access to the cash & carry stores. All Makro/Metro customers are bound to make purchases in these stores for their professional needs only6.

15. Therefore, for the purpose of the present case a product market for daily consumer goods including hypermarkets, supermarkets and discounters but excluding other formats as e.g. neighbourhood stores, specialized stores and cash&carry stores may be defined.

16. The parties consider that the basket of daily consumer goods contains only those consumable food and non-food products which are frequently purchased by consumers and meet their recurrent household needs. This would include all food products and non-food products such as toiletries, cleaning products and disposable hygienic paper products. According to the parties, non-consumable products which are bought less frequently such as domestic electrical appliances, clothing and footwear, sports equipment, electrical audio-visual equipment and furniture do not form part of the basket of daily consumer goods. The parties therefore argue that revenues from sales of these products should not be taken into account in the daily consumer goods retail market despite the fact that they are sold in these stores.

17. According to the market investigation hypermarkets seem to offer a non-food product range which is wider than the non-food product range offered by supermarkets and discounters. Despite this difference in the product range all three formats are  considered as directly competing with each other and being part of the same product market (see above). Therefore, hypermarkets seem to compete with their full product range and not only to the extent that they sell products which are also available in supermarkets and discounters. It should be mentioned that even the latter do sell occasionally non-food products as sports equipment and domestic electrical appliances. Furthermore, the market investigation confirmed that customers expect to find such wider product range in particular in hypermarkets. However, the exact definition of the product basket may be left open, as the transaction does not give rise to competition concerns even if an all store sales product basket was assumed.

2. Geographic market

18. In previous Commission cases the geographic market for the retail sale of daily consumer goods has been delineated, according to demand side arguments, by the boundaries of a territory where the outlets can be reached easily by consumers (radius of approximately 20 to 30 minutes driving time)7. This territory may also be larger  (e.g. regional or national) if different local areas are connected in such a way that they result in overlapping circles8. The delineation of each local area can only be  undertaken on a case by case basis by taking into account specific local circumstances.

19. The parties maintain that a number of factors point to the existence of national markets. The parties use national supply chains. Furthermore, location planning, capital investment, recruitment and pricing all take place at the national level.

20. The market investigation confirmed that most grocery retailers (hypermarkets, supermarkets, discounters) are active on a national level and make decisions on the product range, the assortment and advertising campaigns on a national level. However, market participants also mentioned that a regional/local approach as regards these decisions has been started in a limited way and that this approach will be important   in the future. Furthermore, Tesco’s pricing policy includes a significant local aspect. For  a basket of the most popular grocery items the prices of the important local competitors of each Tesco store are checked on a daily basis and subsequently lowered in the relevant store in case any of the local competitors has a lower price for any of these items. In addition most of the market participants estimated that the average driving time of customers to reach one of the outlets to buy daily consumer goods in the Czech Republic would be rather 20 minutes than 30 minutes.

21.  However, the exact delineation of the market may be left open as the transaction to the extent that it affects a substantial part of the common market does not raise  competition concerns even under the narrowest geographic market definition considered, i.e. a radius of 20 minutes driving time.

3. Competitive Analysis

22. Tesco operates in the Czech Republic with 27 stores which are mainly hypermarkets with a net floorspace in excess of 7,000 sqm whereas Carrefour has 11 large format- stores. The combined market shares for the retail of daily consumer goods in the Czech Republic on the basis of all store sales in 2004 are shown in the table below. Whatever the product market, the combined market share would be below 15%. Furthermore, there are other strong international retailers active in the Czech Republic and three of them (Lidl&Schwarz, Ahold and Rewe) would still have a higher market share than the combined entity.

23.  Moreover, although both parties operate hypermarkets they do not seem to be each other´s closest competitor in the Czech Republic. The parties do not benchmark themselves on competing with hypermarkets only. Tesco instead monitors a variety of stores across different store types. Independent market research also shows that as regards prices, sales and discounts Tesco competes strongly with Globus and particularly with Kaufland (Lidl). Carrefour, on the other hand, ranks lowest on this, even behind Interspar and Hypernova (Ahold)9. In addition the customer profile of Tesco shoppers is different from those that favour Carrefour. Carrefour has the youngest customer profile of all the retailers and appeals to the most affluent customers whereas Tesco is more attractive to shoppers from middle-income households. In this regard, the retailers that attract the most similar customers to Tesco hypermarkets is not Carrefour, but are instead Billa, Coop and Kaufland10. Also the market investigation largely confirmed that Carrefour is not the closest competitor to Tesco.

24. Therefore, the transaction does not lead to non-coordinated effects resulting in a significant impediment of effective competition in the Czech Republic, in particular through creation or strengthening of a dominant position.

25. On the basis of local markets (20 minutes drive) affected markets can be identified in Brno, Hradec Králové, Ostrava, Olomouc, Plzeň and Praha.

26. In Ostrava the parties would have a combined market share of [30-40%]. The major competitors are Lidl&Schwarz ([20-30%]), Ahold ([20-30%]) and Rewe ([5-10%]). In Brno the combined market share of the parties would be [25-35%] facing Ahold ([20- 30%]), Globus ([10-15%]) and Lidl&Schwarz ([10-15%]). In Praha the parties would have a combined market share of [20-30%] facing competition of Ahold ([20-30%]), Globus ([10-15%]), Delvita ([10-15%]) and Lidl&Schwarz ([5-15%]). In Olomouc the parties would only have a combined market share of [15-20%]. Lidl&Schwarz ([15- 20%]) and Ahold ([15-20%]) are as strong as the parties on this local market.

27. It can be seen that in all of these local markets (Brno, Ostrava, Olomouc and Praha) major European retail competitors are active. In addition to the parties´ stores, consumers in these catchment areas are able to choose from a wide range of competing stores including Hypernova, Albert (both Ahold), Interspar (Spar), Kaufland,  Lidl (both Lidl&Schwarz), Penny, Julius Meinl (both Rewe) and other stores.

28. In addition, there are no significant barriers to entry or expansion in any of the affected markets. According to the market investigation this is in particular true with regard to the so called Master Plan which stipulates the local zoning requirements. A number of competitors have confirmed that they plan to open one or more new outlets in the next three to five years in the regions mentioned above.

29. Finally the grocery market in the Czech Republic has been growing at an average year- on-year rate of approximately 5% since the year 2000 and even higher if all goods sold in food retail outlets are taken into account (including e.g. clothing, electrical appliances). The market investigation confirmed that consumer demand is increasing and the markets continue to expand, while the most significant growth is expected for the modern types of retail outlets such as hypermarkets and discount stores.

30. For the reasons stated above, the concentration does not lead to competition concerns  in any of the local markets in Brno, Ostrava, Olomouc and Praha.

31. As regards the local markets in Hradec Králové and Plzeň the market shares in 2004 would be in excess of 40%:

32. Plzeň is a city in the West Bohemia region of the Czech Republic with a population of approximately 175,000 people. Hradec Králové is a city in the East Bohemia region of the Czech Republic with a population of approximately 100,000. Even if a nearby city of Pardubice is taken into account (as it falls within the 30 minute drive radius), the total population of the Hradec Králové/Pardubice local area would be around 200,000 inhabitants. Thus the population of these two local areas represents less than 0.05% of the total EU population. As regards the total volume of retail sales of daily consumer goods realised in these two local markets, they would represent less than 0.05% of the retail sales of daily consumer goods within the common market. Therefore, the local markets of Plzeň and Hradec Králové cannot be considered as a substantial part of the common market.

VI. CONCLUSION

33. For the above reasons, the Commission has decided not to oppose the notified  operation and to declare it compatible with the common market and with the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of Council Regulation (EC) No 139/2004.

1 OJ L 24, 29.1.2004 p. 1. Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2) 299 11 11.

2  Turnover calculated in accordance with Article 5(1) of the Merger Regulation and the Commission Notice on the calculation of turnover (OJ C66, 2.3.1998, p25).

3 Whether discounters are to be included in the product market was left open in COMP/M.1684-Carrefour/Promodes  par. 12 and COMP/M.1221-Rewe/Meinl par. 17.

4  E.g. Commission's decisions in cases IV/M.784 Kesko/Tuko par. 19, 20; COMP/M.1221-Rewe/Meinl par. 12, 16; COMP/M.1684-Carrefour/Promodes par. 9 and M.3646 Kesko/ICA/JV par.10 et seq in which the product market definition was left open. However, it should be noted that the national competition authority had a different approach  to market definition in a recent merger case. The Czech National Competition Authority defined in a decision of 2 September 2005 (Ahold/Julius Meinl) the product market for retail sale of daily consumer goods to include also  smaller formats including neighbourhood stores (but excluding specialised shops, kiosks, petrol stations and open markets) and to be national in scope.

5 e.g. Commission's decisions in cases IV/M.784 Kesko/Tuko par. 24 et seq ; COMP/M.1221-Rewe/Meinl par.15, 16.

6 The Czech National Competition Authorities explicitly excluded cash & carry stores such as Metro/Makro from the relevant product market in the recent merger decision mentioned above.

7 E.g. decision in cases IV/M.1085-Promodes/Catteau par. 14, COMP/M.1221-Rewe/Meinl par. 18 and COMP/M.1684-Carrefour/Promodes par. 24.

8 E.g. see COMP/M.1221-Rewe/Meinl par. 18 and COMP/M.1684-Carrefour/Promodes par. 25.

9 See INCOMA Research, Shopping Monitor 2004/05 and AC Nielsen, Shopper Trends 2004 – Czech Republic.

10 See INCOMA Research, Shopping Monitor 2004/05 and AC Nielsen, Shopper Trends 2004 – Czech Republic.