Analysis: Is the CMA killing retail?

It is supposed to be the government department scrutinising merger and acquisition activity and holding businesses to account on behalf of consumers.

But, over the past two years, the tables have turned – the Competition and Markets Authority (CMA) is increasingly coming under the microscope.

A combination of blocked deals and a swathe of phase-two investigations since last spring, in particular, have stoked concerns.

Last April, the watchdog blocked the £13bn mega-merger between Sainsbury’s and Asda over fears the combination would lead to “increased prices, reduced quality and choice of products, or a poorer shopping experience” for shoppers.

In October, the CMA cited similar reservations when launching an in-depth phase-two probe into JD Sports’ planned £90m acquisition of rival Footasylum – something JD Sports boss Peter Cowgill fervently dismissed.

Just last week it made an eleventh-hour intervention into online food delivery specialist Just Eat’s £6bn merger with Dutch rival Takeaway.com and received a defiant rebuttal from Amazon and Deliveroo over its probe into their proposed tie-up.

The businesses say the CMA’s investigation into Amazon’s acquisition of a minority stake in Deliveroo is “speculative and not supported by evidence”.

Fears are rising that the CMA’s seemingly hard-line stance could deter others from launching similar M&A activity, effectively stifling consolidation and ultimately killing retail – an industry that, arguably, needs consolidation more than any other in the UK right now.

Profile building

Perhaps unsurprisingly, few people were willing to tackle that prospect on the record when contacted by Retail Week. But one common theme emerges: industry experts point to the CMA’s appointment of Lord Andrew Tyrie as chair as a defining moment in shaping the regulator’s public perception.

Tyrie, a former Treasury committee chair, took on the role in June 2018, just months after Sainsbury’s and Asda unveiled their ambitious merger plans.

He set out his stall from the outset, saying on day one: “Competition can and should be put even closer to the centre of British economic life, reaching to every sector, rooting out monopoly and unfair trading practices.”

“The CMA took out its shotgun and it wanted the Sainsbury’s-Asda deal dead”

Lawyer

Some feel he has taken that approach too far. One lawyer says the CMA wants to establish a reputation as “a tough regulator with teeth” and that Tyrie was sent in “to shake it up and establish a higher profile”.

The proposed combination of the UK’s second- and third-largest supermarkets presented an early opportunity to do that, some believe. “Sainsbury’s-Asda felt like the sort of deal where the CMA said: ‘If we can’t take action on this, what can we take action on?’” one lawyer says. “The CMA took out its shotgun and it wanted that deal dead.”

Another industry source suggests Tyrie’s personal philosophy – that if a business is making a lot of money it is ripping the customer off – has permeated across his senior leadership team, and has even started to influence the thinking of the independent panels who carry out phase-two investigations.

The CMA declined the opportunity to speak to Retail Week on the record, but vehemently dismissed such suggestions.

The way it makes its decisions in both the phase-one and phase-two stages has not dramatically changed under Tyrie.

The bar is set relatively low in a phase-one probe. Should the CMA have any concerns whatsoever that a merger could lead to a substantial lessening of competition for consumers in local markets, it is likely to be referred to a more detailed investigation.

Despite the low bar, some observers feel that neither the JD Sports-Footasylum merger nor Amazon’s swoop on a stake in Deliveroo should have warranted a phase-two probe.

But it is that second, more detailed phase of investigations – where the CMA uses a combination of consumer surveys, evidence provided by businesses, historical information and the views of interested third parties to make its decisions – which is raising the most questions.

Flawed investigations?

One retail boss says the independent panels running the rule over deals often have “a lack of real-world experience” within the markets they are analysing. On the CMA’s Sainsbury’s-Asda and JD Sports-Footasylum panels, for instance, there has been no space for former retailers.

Another industry insider claims the CMA is erroneously segmenting the market, creating a divide between online and offline channels that is out of kilter with the multichannel methods the modern consumer uses to shop.

A senior lawyer suggests there is an over-reliance on consumer surveys and questions the manner in which the CMA conducts them.

“There are biases built-in, in terms of the way it asks questions to people,” the source explains. “Grabbing people on the hop outside a Sainsbury’s and asking where else they would shop if prices went up isn’t the best way to understand consumer behaviour.”

One retail non-executive insists customers “have more choice than a local area analysis would imply” because of the presence of online rivals. He believes the CMA relies too heavily on a combination of the surveys and boardroom documentation from the parties in question during any M&A investigation.

However, the non-exec dismisses suggestions the CMA is failing to move with the times and properly understand how consumers are shopping.

Conversely, he says the fact the CMA is investigating the Amazon deal demonstrates its awareness of how big the etail titan is becoming and the scale of influence it could have on smaller rivals now and in the future.

Instead, he says the CMA is “slightly backwards-looking” because it “has to make its decisions stick against well-resourced legal appeals”. He explains: “Like much of the English legal system, competition law is, by nature, a bit backwards-looking – it looks at precedent previous cases.

“I don’t think the people who work at the CMA have an outdated vision of the way consumers shop, but, by nature, legal precedent is going to have an outdated view”

Retail non-executive director

“I don’t think the people who work at the CMA have an outdated vision of the way consumers shop, but, by nature, legal precedent is going to have an outdated view. For that reason, it has to be slightly backwards-looking.”

Therein lies one of the key problems – retailers cannot afford to look backwards in the way the CMA has to. They must constantly think about the future. The need to consolidate to build buying power and scale to set themselves up for the future was at the heart of the Sainsbury’s-Asda and JD-Footasylum deals.

One lawyer believes there is a “juxtaposition” between the way the CMA “looks into a crystal ball” in the tech sector – coming up with what Amazon and Deliveroo slammed as “speculative” scenarios – and the way they are “not willing to look ahead” to what retail’s future might hold.

Hurting retail

What if such future-proofing mergers and acquisitions aren’t allowed to happen?

One former chief executive warns: “Retail has always been about revolution and trying to get enough scale to deal with the changes in the marketplace and changing customer behaviour. That isn’t going to be allowed.

“In the past, you would have seen consolidation as a way of protecting brands and giving businesses a chance to compete against new and emerging rivals. What will happen is that the process of traditional businesses closing down will just accelerate and we are already seeing that.”

Another source goes as far as to suggest that if the CMA does not allow consolidation in non-food, Amazon will control the entire general merchandise market in the UK within the next five years.

“No one can accurately predict the outcome of a CMA merger process in retail – which means they don’t get launched at all given the uncertainty”

Retail non-executive director

“There is a question as to whether the CMA can cope with all the changes that are happening in the retail sector and whether there needs to be further thinking around modernising and changing its processes,” says Dimitris Sinaniotis, a director at law firm DWF.

Until it does, retailers are seemingly being put off launching M&A bids because the CMA’s “unpredictability” makes it “harder and harder for people to have the certainty they need to go ahead with a deal”.

One non-executive admits that in one retail boardroom he sits in: “We get approaches from a lot of businesses who are in trouble. Right now, we’re just saying ‘no’. 

“No one can accurately predict the outcome of a CMA merger process in retail – which means they don’t get launched at all given the uncertainty.”

Sinaniotis admits he has become more cautious in the advice he offers to clients looking at M&A activity. “I think my advice has become much more focused on engagement with the CMA and not taking anything for granted.

“There are situations where you feel quite confident that the risk is minimal and that you can complete a deal without notifying the CMA, but we can see examples where prior engagement might have been the way to go for specific transactions.”

Some retailers have privately called on the government or the BRC to intervene in a bid to soften the CMA’s stance. But, at a time when Brexit is taking precedence for politicians, retailers cannot bank on such support and must instead think about how they can help themselves when approaching such deals.

“I think it is perfectly possible that, if consolidation is justifiable and if you put together a well-advised, well-argued case, that competition will remain intact and you’ll get it through. The CMA isn’t there to block mergers,” one non-executive says.

“I’d be insisting on high-quality, experienced legal and economic advice. A lot of this depends on setting out the arguments in a way that recognises and understands how the CMA makes its decisions. A lot of people who are partners at law and economics firms used to work at the CMA and, equally, a lot of the key decision-makers at the CMA used to work for those firms.

“If you’ve got people talking to peers who understand how the system works and present the evidence in the right way, that gives you the best chance of getting consolidation through.”

The CMA’s position is making the case for retail M&A a much tougher sell. The business justification will need to be bulletproof for it to avoid getting shot down.