Thinking about an acquisition in the retail sector?

The recent decision from the Commerce Commission on Whitcoulls’ application for clearance to acquire Borders provides us with some insights into how the Commission might look at other mergers and acquisitions in the retail sector.

Of particular interest is the Commission’s rejection of Whitcoulls’ market definition in favour of its own much narrower market.   Whitcoulls proposed the following:

The retail book market (including mail order and online sales) – either national or localised based on a 7km radius from each Borders store.

The Commerce Commission responded with:

The retail of books by bricks-and-mortar retailers in the Auckland CDB, Albany, Wellington CBD and Riccarton shopping precincts.

This article notes some interesting ‘sound bites’ from the Commission’s written decision which will have resonance for other retail transactions. 

“Bricks-and-mortar” v online sales

“… the relatively small percentage of books purchased in New Zealand from online retailers suggests these consumers may not yet be sufficiently large in number for online retailers to, by themselves, constrain prices charged by bricks-and-mortar retailers.”

Every retail market will have its own set of relevant facts and the extent of online purchasing will vary.  In this instance, Internet book sales were estimated at around 5%.

Other pertinent points about online sales from this decision:

  • The Commission noted that, in other fact circumstances, it may be desirable to revisit this market definition.  (One example we can think of is a merger of a bricks-and-mortar retailer with an online retailer.)
  • The Commission did recognise some degree of constraint from online book retailers.
  • The Commission noted that, if the growth in Internet book sales of 25% per annum (as suggested by Whitcoulls) continues, Internet book retailers could become an important constraint on bricks-and–mortar retailers in the near future.

Department stores v specialist retailers

“Whilst there are varying product and service offerings provided by book retailers, the Commission considers the extent of differentiation is not such that different types of book retailers comprise discrete markets.”
Again, each retail market will be different.  Here the Commission took the view that department stores, generalist bookshops and specialist bookshops should not be thought of as discrete categories, but as points on a continuum within the one retail book market.  This is in contrast to the supermarket scenario where specialty retailers such as high street butchers and local bakeries were considered by the Commission to be in a separate market from the retailing of these products through supermarkets.

Narrow geographic boundaries

“[The relevant geographic markets were]… the Auckland CBD, Albany, Wellington CBD and Riccarton shopping precincts.”

This is considerably narrower than the 5km radius adopted by the Commission in relation to supermarket mergers.  The Commission’s approach reminds us that the geographic boundaries of a particular retail market will be assessed by reference to buyer behaviour. 

New v second-hand

“..there will be some consumers who may consider a second–hand book as a substitute for a new book.  In addition, retailers of second-hand books may find it reasonably straight-forward to switch to selling new books, should they have sufficient incentive…  However, the Commission does not consider this degree of substitutability to be sufficient to warrant placing them within a single product market.”
The second-hand element exists in many retail markets.  The Commission may be prepared to put more weight on the second-hand element in other markets – perhaps, for example, where the average sales value of a product is significantly greater than that of a book.     

How many competitors will be left?

As always, it is interesting to see how the Commission views the remaining competitors.  In Whitcoulls/Borders the Commission identified some competitors as providing price competition and others as representing a constraint in terms of “non-price attributes”.  The Commission’s conclusions on competitors in the four geographic markets are summarised below.


Sources of price competition

Key sources of non-price competition

Lesser sources of non-price competition

Auckland CBD


Dymocks Unity

Real Groovy


Wellington CBD


Paper Plus (to a lesser extent)


Dymocks Unity



Paper Plus


Albany Riccarton

The Warehouse

Paper Plus

K Mart


Paper Plus

Ease of entry into retail markets

“Taking into consideration the availability of retail space, ease of access to books, experienced staff and IT systems, the Commission considers that entry conditions are not such as to constitute barriers that would hinder new entry…” 

In terms of the four pre-requisites for entry (retail space, product, staff and IT systems):

  • The Commission noted that franchise chain stores such as Dymocks and Paper Plus, have overcome the hurdle of securing prime retail locations (which can be expensive and potentially uneconomic for an owner-operator) by opening group-owned stores and forming a joint venture with a franchisee.
  • Established chain stores would appear to have the advantage of being able to use their larger scale to negotiate favourable terms and discounts.  Some smaller retailers said they would parallel import where they were unable to negotiate favourable discounts.
  •  Experienced staff and IT systems were not considered to be problematic as requirements for entry.  Off-the-shelf IT systems are readily available and used by book retailers and publishers.

Is new entry likely to occur on a reasonable scale within two years?

“The Commission considers that new entry is more likely to occur by a book retailer with an existing network of stores in New Zealand….Furthermore, once established in a market, it is likely that a retailer would not face significant barriers to expansion, as it could source additional stock through existing supplier relationships.  The Commission considers new entry is feasible with a two–year timeframe.” 

When considering whether new entry will be considered a sufficient constraint on a merged entity if it seeks to increase prices or otherwise manifest market power, the Commission applies its usual “LET” test – i.e. is new entry:

  • Likely in commercial terms
  • Sufficient in extent to cause market participants to react in a significant manner, and
  • Timely – feasible within two years from the point at which market power is first exercised.

Here, the Commission concluded that the LET test would be satisfied. 

Would Whitcoulls gain market power as a purchaser?

“Although [Whitcoulls] would become a larger retailer, the Commission does not consider that it would have undue market power in the retail market.”

The Commission examined whether the proposed acquisition would result in the combined entity gaining market power as a purchaser in this market – that is, would it be able to force publishers to behave in a way that they would not be able to in a competitive market.   The Commission considered there was clearly an interdependent relationship between publishers and retailers i.e. a mutual reliance on each other, which would not change post-acquisition. 

What does this decision mean for other retail transactions?

Ultimately, the Commerce Commission’s decision to grant clearance for Whitcoulls to buy Borders in New Zealand was based on a combination of existing competition and the likelihood of new entry.

For other retail mergers, each market must be assessed for its own facts –  but consider:

  • How far have Internet sales really penetrated the market in question?
  • What evidence can you provide of how far buyers travel to shop?
  • Are there different types of retailers – and how different are they?
  • How important, if at all, are second-hand sales?
  • What are the pre-requisites for new entry?  For example, how available is retail space, stock, staff etc.  And, importantly, are there likely new entrants to the geographic markets in question (e.g. retailers already established in other areas)?
  • How will the increased purchase volumes of the larger merged entity impact on suppliers?

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Related topics: Competition, regulatory & antitrust; Commerce Commission; Mergers & acquisitions

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