Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Canada grocery chain to divest 23 stores to resolve Competition Bureau concerns over acquisition of competitor, (Oct 23, 2013)

By Tobias J. Gillett, J.D., LL.M.

Grocery store chain Sobeys Inc. has agreed to divest 23 stores in four Canadian provinces to resolve Canada Competition Bureau concerns that its acquisition of Canada Safeway Limited could lead to substantial lessening of competition in the market for full-line grocery stores in certain areas of Western Canada, the Competition Bureau announced yesterday.

Under the terms of the consent agreement, the parties to the transaction must divest 10 current Sobeys stores and 13 current Safeway stores, as listed in the agreement, including stores in Alberta, British Columbia, Manitoba, and Saskatchewan. The transaction involves the purchase of 213 grocery retail locations, including 199 in-store pharmacies and 62 co-located fuel stations; 10 liquor stores; 4 primary distribution centers and related wholesale businesses; and 12 food manufacturing facilities, according to the Competition Bureau’s position statement.

According to the position statement, sufficient competition would remain with respect to ancillary services offered by the grocery chains, such as pharmacies, gas stations, and liquor stores. In reviewing the acquisition of the grocery business, the Bureau concluded that most discount stores, such as Loblaw No Frills or Wal-Mart Supercentre, could act as efficient competitors and be included in the relevant market, as long as they offered a full line of grocery products and had at least 10,000 square feet dedicated to those products. However, stores below 10,000 square feet would generally not offer the breadth and volume of products necessary to be considered a full-line grocery store.

The Bureau concluded that the relevant geographic market was local, since consumers tended to consider convenience and proximity when determining where to shop, and the geographic boundaries of each local market were based on a variety of factors, such as whether the market was urban, suburban, or rural; the existence of natural barriers; and traffic patterns. Based on this analysis, the Bureau found that effective competitors would remain post-transaction in most local markets. However, in certain markets, the parties had significant market share, the extent of other competition was limited, and barriers to entry were relatively high. The Bureau took into account that stores offering less than a full line of grocery products could offer effective competition for certain products, but found that the proposed transaction would likely lead to a substantial lessening or prevention of competition in certain markets.

With respect to the wholesale supply of grocery products, the Bureau determined that the relevant product market was the wholesale supply of a full-line of grocery products to independent retailers, while the relevant geographic market was regional. The Bureau determined that the parties generally were not close competitors with respect to full-line wholesale in the relevant regions of Western Canada. While Safeway, through its Macdonalds Consolidated division, had a significant presence in Western Canada, Sobeys concentrated primarily on supply to its franchisees and had a limited number of independent wholesale customers. Even in regions where the parties competed more directly, existing wholesalers generally provided sufficient effective remaining competition to prevent the exercise of market power arising from the proposed transaction, and certain wholesalers were well-positioned to expand their operations in the event of an exercise of market power by the merged entity. Moreover, independent retailers would continue to have other wholesale options following the proposed transaction, and therefore effective remaining competitors would constrainan exercise of market power arising from the proposed transaction.

The Bureau believes the divestitures required by the consent agreement will resolve the competition concerns posed by the transaction.

“I am confident this agreement will ensure that Canadian consumers continue to benefit from competitive prices for a wide selection of grocery products,” said John Pecman, Commissioner of Competition. “I commend the parties for their stellar cooperation with the Bureau throughout our review of the proposed transaction.”

Sobeys response. In a press release, Sobeys expressed its approval of the settlement agreement, and stated that “[b]oth the number of stores to be divested and the expected overall economics of all asset dispositions are reasonably consistent with the company’s expectations.”

“We are delighted to have received regulatory clearance from the Competition Bureau,” said Marc Poulin, President and CEO of Sobeys. “Our focus now turns to closing the deal, which we expect to do in early November, and beginning to serve our customers in Western Canada as one company.”

Companies: Sobeys Inc.; Canada Safeway Limited

News: Antitrust