2.
The Transaction
This transaction involves the acquisition of control of Ellerines Holdings (EH) by the JD Group Limited (JD). This will entail JD
acquiring the entire issued share capital in, and loan accounts of, all the underlying subsidiary companies of Ellerine Holdings
including trademarks. The parties have agreed on an exchange ratio of 1 JD share for every 1,5 EH shares. This exchange will immediately
make EH the largest shareholder – approximately 30,6% - in the newly constituted JD. However EH has undertaken to immediately
unbundle its shareholding in JD, that is to distribute its interest in JD to its large range of underlying shareholders. Subsequent
to this unbundling JD’s shares will be held by a diversified range of shareholders – there will be no single controlling
bloc of shareholders.
This is no ordinary transaction. It is the merging of two of South Africa’s best known firms whose various trading brands are,
it is no exaggeration to claim, household names. Literally millions of South Africans will, at one time or another, have entered
an Ellerines or a Bradlows or a Russels or a Joshua Doore store. Few can have failed to notice the ubiquitous advertising campaigns
of the two groups whether on film, television, radio or in the printed media. And, certainly a more important and lasting experience
than any of the aforementioned, a vast number of South Africans first received credit when purchasing furniture or household appliances
from one of the stores in these two groups.
Nor, despite their vast size, are Ellerines and the JD Group faceless corporations led by professional managers on behalf of passive
shareholders. Both are, to this day, led by their respective founders, who number as two of the country’s more innovative entrepreneurs.
Mr. Eric Ellerine entered the furniture business in 1950 when, at 16 years of age, he opened his first store in Cyrildene, Johannesburg.
Legend has it that his first sale was a credit sale. From these small beginnings, Ellerines has developed into a major force in South
African retailing. Remarkable to record in these days of growth by acquisition, Ellerines’ growth is almost entirely organic.
The group comprises some 489 stores grouped into five store brands, of which the Ellerines brand itself, comprising some 218 stores,
is the largest. Although several stores are based in neighbouring countries, Ellerines remains, overwhelmingly, a South African company.
It is also a major source of credit with a debtors’ book of little under R2 billion comprising the accounts of some of South
Africa’s poorest consumers, many of whom do not even have access to a bank account.
Mr. David Sussman began his working life as an assistant accountant in Eric Ellerine’s head office. He left Ellerines in 1983.
The rise of Sussman’s JD Group is even more meteoric than that of his mentor. A mere 15 years ago Sussman controlled two Price
‘n Pride outlets in Johannesburg. At present the JD Group comprises 678 stores organized into 5 different brands. The JD Group,
in contrast with Ellerines, has relied for its growth on mergers and acquisitions. However, the JD Group’s success is deeply
rooted in its innovative trading practices, many adapted from the role model provided by the Ellerines’ experience, but also
characterized by the introduction of sophisticated technology and state of the art business practices. The JD Group has recently
spread its wings into Europe with the acquisition of a chain of Polish furniture and appliance stores.
The significance of this transaction from a competition perspective should not be underestimated. In contrast with many transactions
that come before this Tribunal this is not simply a case of the market leader taking over its fading opposition. What we rather have
here are two dynamic firms more than capable of withstanding the competitive challenges that face them. Mr. Sussman himself is at
pains to distinguish this transaction from previous deals in which he bought up and rescued ailing companies – Ellerines is
anything but an ailing company.
However the real competition significance of this transaction is to be found in the direct links between the parties and South African
consumers. An anti-trust merger evaluation is always primarily concerned with an assessment of the impact of the transaction in question
on consumers. However, many mergers involve firms producing arcane intermediate products with the final consumer located several
links lower in the production chain. In these instances the consumers directly affected is often themselves well resourced downstream
producers capable of mounting a sophisticated response to a merger that it deems threatening to their commercial interests.
In this case however the parties to the transaction are the final link with the consumers, and, at that, the poorest, least powerful
of South African consumers. In other words, the interests directly affected by this merger are represented by millions of atomized,
disorganized individuals incapable of defending their economic interests except to the extent that they are able to exercise a preference
for one retail outlet over another. This evaluation will seek to assess whether the transaction has the potential to increase the
power of the parties over the consumers that they serve and who are the source of their prosperity.
3.
The Retail Furniture Trade: pertinent trends and features
3.1 Mergers and Acquisitions
There is a recent history of mergers and consolidation in the retail furniture industry and the consequent emergence of several large
groups. In particular the growth of the JD Group, Profurn and Relyant has been driven by acquisition of existing chains. Ellerines’ growth, on the other hand, is almost entirely organic. The composition and strategic direction of each of the large
groups is briefly profiled.
The JD Group
Today’s JD group has modest origins. Founder David Sussman commenced in 1983 with two Price ’n Pride stores. In 1986 he
purchased the larger, then troubled, Joshua Doore chain from the Russell’s grouping. In 1988 the firm acquired World and Bradlows
from W&A, and the Score Furnishers chain. Then in 1993 JD acquired the Rusfurn Group.
The current composition of the JD Group is as follows:
Name of Store Number of Stores Age of Brand Target Market
Bradlows
87(89)*
est 1900
LSM 5-8
Russels
173(183)
est 1943
LSM 4-7
Joshua Doore
125(133)
est 1973
LSM 4-7
Giddy’s Electrical
90(95)
est 1958
LSM 4-7
Express
Price’n Pride
203(159)**
est 1983
LSM 3-5
Score
est 1977
LSM 3-5
Total number of Stores: 678(659)
Notes
•
* These figures are based on the totals in the 1999 Annual Report. The figures in brackets are those given to the Commission in May
2000 and reflect the changes since 1999.
•
** The store figures for Score and Price ‘n Pride brands are combined.
Relyant Retail
The Relyant Group was formed in 1998 as a result of a merger between the former Beares and Amrel groups. In March this year it acquired
Appliance City. It is currently composed as follows:
Name of Store Number Stores Age of Brand Target Market
Geen and
Richards
60(58) **
63
LSM(Upper 6 –lower8
Beares
169(203)
70
LSM 6
Furniture City
17(13)
20*
LSM(Middle 5-Upper 7)
Lubners
98(93)
36
LSM(5)
Fairdeal
93(75)
40
LSM(Lower 3 - middle5)
Savells
87(156)
40
LSM( Upper 3 – middle 4)
The total number of stores 524 (598)
* Furniture City was Amsterdam Furniture Store, which was started in 1963 and was then changed to its current name in 1980
**The first figure is from the Groups 1999 Annual Report. The figures in brackets are the 1998 figures provided for comparison.
The Relyant group’s 1999 Annual Report specifically indicates that it has introduced strict credit granting criteria because
at the time of the Amrel/ Beares merger the debtors’ book was “significantly in arrear”. The emphasis placed on
credit management and new systems and the fact that staff performance will be measured against collection management indicates that
Relyant's stores are likely to be less likely to grant credit to low income consumers than they were in the past. A 1999 report on
the furniture retail trade by a stockbroking firm, Fleming Martin, says Beares and Savells (the latter being in the LSM3-4 category)
have been deliberately contracting sales growth in order to improve the quality of their debtors’ book. The closure of stores
in these brands since 1998 is evidence of this. In addition the group has a higher debt equity ratio, 0.7 than analysts consider
the desirable norm for this industry between 0.3 - 0.5. (This ratio is significantly higher than that of JD and Ellerines.)
Relyant has also been positioning its brands within their chosen markets reducing the number of their brands from 12 to 6.Each brand
is being partnered by a top advertising agency. Relyant segments the markets at the lower end to a greater extent than the merging
parties do. For instance the Annual Financial statements reflect that Savells is upper 3 middle 4, whilst Fairdeal is lower 4 and
middle 5.
Profurn
The Profurn Group originates in a turnaround of the then Supreme Holdings which in 1992 had been in provisional liquidation. In 1997
the firm acquired Cape based Freedom Furniture which at the time had 12 stores. In 1998 it acquired the Morkels chain and, in 1999,
the cash retailer, Hi Fi Corp.
Name of Store Number of Stores Age of Brand Target Market
Morkels
150
50 years
LSM 5-8
Barnett’s
71
103 years
LSM 3-5
Protea Furnishers
105
40 years
LSM 3-5
Freedom
33
5 years
LSM 3-5
The total of number of stores in South Africa at the end of 1999 was 359.
Profurn is engaged in aggressive expansion outside of South Africa. It has expanded into North Africa and Australia and intends opening
up 43 stores outside of South Africa this year (Business Report 28/7/2000). The Financial Mail points out that although 2/3rds of
its turnover is from SA it accounts for only 53% of its operating profits (Financial Mail Fox Column 12 May 2000). For this reason,
overseas investment is said to be a major element of this group’s expansion strategy.
The Fleming Martin report observes that “ Profurn is growing from a much smaller SA store base (309) than its competitors…..”
The competitors mentioned are JD and Ellerines.
Profurn, like Relyant, also makes a point of how its debtors’ book is improving due to strict credit granting and bad debt write
off policies. According to the 1999 Annual report, “deposit rates now average 20% on credit deals” and they go onto state
that they are “improving the quality of debtors whilst also enhancing cash flow.”
Ellerine Holdings
Ellerine’s, currently celebrating its 50th anniversary, owes its current size to organic growth rather than acquisition which distinguishes it from the three other listed chains
referred to above.
Name of Store Number of Stores Age of Brand Target Market
FurnCity
53(52)*
20 years
LSM 4-7
Ellerines
218(254)
50 years
LSM 3-5
Oxford
52(62)
30 year
LSM 3-5
Town Talk
114(116)
28 years
LSM 3-5
Royal
52(56)
25 years
LSM 3-5
Total number of stores 489
Notes
* The figures supplied by the parties to the Commission in May 2000. The figures in brackets are taken from the 1999 Annual Report.
Great Universal Stores
This U.K based group owns Lewis stores in South Africa and appliance group, Best Electric, which it formed in 1998. It also acquired
furniture retailer Dan Hands but has since re-branded this small chain.
Name of Store Number of Stores Age of Brand * Target Market
Lewis
430
approx.50-60 years
LSM4-6
Best Electric
30
2 years
LSM4-6
Total number of stores 460
An analysis of the groups profiled above reveals the following trends-
•
Most have already diversified across LSM categories ranging from LSM 3 – 8.
•
In diversifying across these LSM categories they have developed different brands for each category rather than aiming a brand across
all categories
•
There is a trend towards specialized appliance discounters in each group. Typically these brands cut across LSM segments. They are
further distinguished from the traditional furniture and appliance stores serving the lower LSM categories in their larger cash to
credit sales ratio. Profurn says its acquisition of HI FI Corp would increase its cash sales to credit from 25% to 40 %. ( Financial
Mail Top Companies 2000) These specialized appliance brands appear to operate primarily as discounters and tend to be based in the
larger metropolitan areas. The establishment of specialized bedding stores is also a discernible recent trend.
•
The brands in the furniture stores are all well established, some over 100 years old. Possibly because of the importance of brand
recognition, the national chains tend to prefer (admittedly with some exceptions like Ellerine's FurnCity ) acquiring established
brands rather than starting new ones. Interestingly those businesses which tend to have the highest proportion of credit to cash
as part of their sales mix tend to be long established brands. FurnCity’s lack of success is thought to be due to lack of brand
awareness. The due diligence reflects that the Ellerine’s brand, the older brand, is better known in the market place than JD’s
Score and Price’n Pride brands.
•
The groups have portfolios of several hundred stores and are nationally dispersed. The annual statements reveal that the opening and
closing of stores is a continual process and seems pivotal to the proper management and competitive strategies of the groups.
•
Innovations by one competitor are matched particularly quickly by the others. Observe how all have moved into cell phone distribution,
financial services and insurance packages.
•
There is an observed tendency for the groups to contract with manufacturers for the production of exclusive products. See, by way
of example, the Relyant Annual Report which refers to time spent with top suppliers to focus on “better value … exclusivity…”. Both JD and Ellerines have similar arrangements with certain suppliers. This makes intra-brand pricing comparison
more difficult for the consumer as we discuss elsewhere.
•
The major groups are all expanding offshore either elsewhere in Africa or further afield (in Poland as with JD, or Australia as with
Profurn)
•
There is evidence of an increasing centralization of strategy and operations in the group or divisional head offices. Branch mangers
are given less discretion and are more rule-bound particularly in decisions to grant credit and set prices. Advertising (and hence
pricing) is centrally conducted.
•
Increasingly sophisticated IT systems to control costs, inventory and to manage debtors are being installed. This naturally leads
to centralized management referred to above.
•
The ability to squeeze suppliers for discounts, volume rebates and extension of payment terms. Correspondence with suppliers given
to us by the parties indicates that JD with its size and volumes is considerably more successful at this than has been Ellerines.
Since manufacturers are presumably less tied to LSM segments for their products than are their retailer clients a group with brands
across a manufacture ranges has more negotiating leverage than a retailer confined to a smaller extent of the LSM spectrum.
•
The groups tend to warehouse stock regionally so that individual stores do not have to be too large but nevertheless ensuring that
the stores do not run short of stock. To quote Profurn MD Gavin Walker: “ It is a mistake to have too much stock - funding
is expensive – but no less problematic to be under stocked.”(Financial Mail Top Companies 2000)
•
The groups are listed on the stock exchange (Lewis‘ parent is listed in the UK) and for this reason can fund acquisitions more
easily (the proposed merger in this case involves a share swop with no cash component) and can raise capital more cheaply through
rights issues.
•
The groups appear generally concerned at too great an exposure at the lowest end of the market. Some like Relyant and Profurn are,
as already observed, tightening up their credit granting policies. All the groups, as is borne out by comments in their annual financial
statements, are concerned about the spending potential of consumers in this market as the retail spend on furniture and appliances
is being eroded by competing claims from gambling and lottery, and cell phones. Furthermore the aids pandemic is likely to have a
disproportionately large impact on these consumers and both JD and Ellerines have undertaken studies into its impact on their business.
3.2 Brand Diversity
The large chains are, as already noted, characterized by the diverse market segments occupied by their various brands. The precise
significance of this segmentation for the purposes of this anti-trust evaluation is the source of significant difference between
the parties and the Commission, the implications of which are examined below. Suffice for now to note that the various brands are
commonly identified by their positioning within the market. A feature of JD, Profurn and Relyant is that they have brands positioned
across the range of the mass market. Hence JD’s Score and Price ‘n Price brands are positioned at the lower end of the market, whereas Russell’s is
directed at the lower to middle and Bradlows' serves a higher income clientele. In Profurn and Relyant we see the same positoning
of brand across the LSM range. The Lewis brand is positioned across a broader number of segments than that commonly occupied by a
single brand.
The Ellerine’s Group is, once again, something of an exception to this rule. It is comprised of five brands – however
four of these, Ellerine’s, its largest brand, Town Talk, Oxford and Royal are all directed at the lowest segment of the market
while only Furn City, a small and reputedly unsuccessful chain, is directed at a higher segment. The Ellerines group is, then, to
a far greater extent than its counterparts, focused on a single segment. It is suggested that the pedestrian performance of Ellerines
Holdings in the recent past is attributable to this lack of brand diversity.
From a competitiveness perspective the key impetus underlying brand diversity seems to be the ability to exploit brand loyalty by
moving customers upward through the groups stores. This is discussed in greater detail below.
In the past the racial identity of the customer base was the simple feature that distinguished one store brand from another. This
was largely synonymous with income bands – hence low income stores were ‘black stores’ while those further up the
income ladder were ‘white stores’. While income and race are still, by and large, accurate markers of the positioning
of the various store brands, in fact the methodology used nowadays to measure this diversity is considerably more complex and nuanced
than simply race and income. The measure commonly employed is the Living Standards Measurement or LSM.
Living Standard Measures or LSM’s refer to a method of segmenting consumers into profiles so that marketers can accurately identify
their target markets. This is done by dividing the population into eight groups of approximately equal size. The LSM categories are
divided according to living standards criteria such as education, residence, degree of urbanization, access to household electricity,
motor vehicle ownership, preferences for appliances etc. The information is calculated from 20 variables and weighted for each respondent.
Retailers use this information to form a picture of their target customers and so to provide for them accordingly. A retailer in
the furniture industry who wants to target customers in the LSM 3-5 would study this data to get a picture of how much potential
customers in this category spend, on what they spend their disposable income, which appliances they prefer, where they prefer to
shop, etc. By way of example we are told in documentation submitted to us that LSM 5’s are more likely to decorate their homes
internally than LSM 1-4. All the chains we have referred to classify their stores along these lines and determine prices, product
mix, advertising and store location accordingly.
The distinction informs advertising strategy in very subtle ways as an amusing example alluded to during our proceedings shows. Ellerines
in the LSM 3-5 market offer a free sheep worth R300 if goods above a specified amount are purchased. A graphic of a sheep is depicted
in the advert. Bradlow’s, the high end JD brand, also offers a free gift for customers purchasing above a specific amount.
The gift, however, underlines the difference in social status of the LSM categories- Bradlow’s offers not a free sheep, but
a coffee table book on 101 ways to cook lamb!
4.
The Evaluation
4.1 The Panel’s Approach
The Competition Commission initially recommended outright rejection of the transaction. It has since recommended that the transaction
be approved subject to certain conditions. While the parties naturally disagree and do not admit that the proposed transaction will
impact negatively on competition, they have indicated that they are nevertheless willing to accept the conditions proposed by the
Commission.
The panel of the Tribunal has approached the evaluation of the transaction in the following way:
We evaluate the transaction as notified to the Commission. Had we concluded that the transaction was unlikely to substantially prevent
or lessen competition it would have been approved unconditionally. Under these circumstances the parties may nevertheless have elected
to implement voluntarily the conditions agreed with the Commission.
However, given that we have found that the transaction as notified is likely to substantially prevent or lessen competition, and that
there are no countervailing efficiency or public interest implications, we then proceeded to examine the proposed conditions.
4.2 The Relevant Market
As is frequently the case in merger evaluation, conflicting views on the impact of the transaction on competition begin with a disagreement
on the precise definition of the relevant market.
The Commission holds that the relevant product market comprises furniture and appliances retailers serving the LSM 3-5 category and which provide credit to consumers. Furthermore the Commission holds that there are a large number of local relevant geographic markets corresponding to the geographic area to which consumers can practically turn for alternative sources of product.
The parties, on the other hand, argue that there are six distinguishable product markets at issue. These are furniture, bedding, white
goods, brown goods, cellular telephones and financial services. Our reading of the Commission’s understanding of ‘furniture
and appliances’ is that it incorporates the first four markets identified by the parties, namely, furniture, bedding, white
goods and brown goods. What is at contention is whether these be grouped as a composite product within a single product market (the
Commission’s view) or whether they be evaluated in relation to distinct product categories thereby including all stores which
compete with the parties for the sale of one, more or all of the products (the parties’ view).
Furthermore the parties insist that there is one mass market for each of the products identified. In other words they reject the Commission’s
argument that the market, or, in their view, the markets are segmented into LSM categories.
It is common cause between the parties and the Commission that the vast majority of furniture and appliance sales to consumers in
the LSM 3-5 category are on credit – approximately 99% of Ellerines sales are credit sales, and the equivalent figure for JD’s
LSM 3-5 purchasers is only marginally lower. For purposes of defining the relevant market we accept the segmentation into credit and cash markets and agree that our concern is
with sales of product on credit.
There is deep disagreement between the parties and the Commission with respect to the identification of the relevant geographic market.
In contrast with the Commission’s identification of a large number of local markets, the parties insist that the market is
a national market.
Turning first to the product market(s), we examine the Commission’s contention that these are stores operating in the market
for ‘furniture and appliances’, as opposed to the parties’ argument that holds that they are firms operating in
four distinct product markets, furniture, bedding, white goods and brown goods. From the arguments presented, it is clear that the
parties effectively identify two separate markets, namely furniture and appliances – certainly the competitors identified by
the parties in their various submission are easily recognized as sellers of furniture or appliances or both. Are we dealing with
two distinct product markets for furniture and appliances or a composite furniture and appliances market?
The significance of the argument is clear: accepting the parties’ argument implies, in their view, that account be taken of
‘..the innumerable other stores which compete with the parties in one, more or all of the aforesaid categories….there
are 4961 retail stores which compete in the same market for the sale of one, more or all of the products’. In the evidence submitted by the parties they attach particular significance to competition from the large appliance discounters,
Game and Dion’s, and then from the variety of stores selling a mix of furniture and appliances similar to that sold by the
parties themselves. The Commission effectively argues that only the latter, stores selling household furniture and household appliances
– stores colloquially referred to as ‘furniture shops’ – be included in the relevant market. This would not
only exclude appliance specialists like Game but it may also exclude high end furniture retailers that do not include the traditional
‘furniture shop’ mix of audio equipment, television sets, washing machines, refrigerators and other household appliances
in their product mix.
An intuitive answer to what a judgment in a US District Court termed the ‘general question’ to be answered in relevant
market enquiries – “whether two products can be used for the same purpose, and if so, whether and to what extent purchasers
are willing to substitute one for the other?” – would almost certainly favour the parties’ interpretation. After all a television set purchased from one of the parties’
stores is functionally interchangeable with one purchased through any other store; a dining-room table is a dining-room table by
another name – its functional characteristics are not altered by the fact that it is sold in a store that also deals in micro-wave
ovens. And yet a number of important recent US and EU judgments have found that this apparently common-sense conclusion must be tempered
by evidence suggesting that, despite the functional interchangability between the product offerings of the stores in question, different
‘store types’ frequently compete in distinct product markets.
The oft-cited case of Federal Trade Commission v Staples Inc. relied upon econometric evidence that found that large format super stationery stores set their prices in relation to each other,
effectively ignoring other retailers of identical stationery products. In explaining this counter-intuitive, but statistically robust,
outcome the court in Staples relied upon the earlier Supreme Court decision in Brown Shoe Co. v United States which held that within a broad market “well-defined sub-markets may exist which, in themselves, constitute product markets
for antitrust purposes”. The court in Brown Shoe identified a number of ‘practical indicia’ for determining whether a sub-market exists including “industry or public
recognition of the sub-market as a separate economic entity, the product’s peculiar characteristics and uses, unique production
facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.”
While sympathizing with the Staples judge’s inability ‘to fully articulate and explain all the ways in which superstores are unique’ we too will follow
the approach in Brown Shoe and examine whether or not there are ‘practical indicia’ that place ‘furniture shops’ – the term that
we will use to describe the retail format employed by the parties – in a relevant market distinct from that of other sellers
of similar or even identical products. This approach has been followed by a number of US Courts. In Bon-Ton Stores, Inc. v. May Department Stores, despite acknowledging that ‘..in a broad sense, traditional department stores do compete in a vast marketplace encompassing
retailers in general’, an enquiry into the ‘practical indicia’ of Brown Shoe nevertheless led to a rejection of the defendant’s view that held that ‘traditional department stores’ referred
to an excessively narrow market in that it excluded from consideration a range of other retail outlets selling products identical
to those available from the ‘traditional department stores’: “Applying the Brown Shoe ‘practical indicia’, the court found that there were qualitative differences between traditional department stores and
other retailers, including the physical appearance and layout of the stores, distinctive customers, the wide range of brand-name
merchandise, and service.”
This approach was effectively followed by the European Commission in a recent matter involving the acquisition of the Dutch assets
of the US super store toy retailer, Toys R Us, by a Dutch toy retailer, Blokker. Here the EC defined the relevant product market
as ‘the retail of toys through specialized toy retail outlets’ thus rejecting the parties’ plea to include all toy outlets – department stores, general stores,
etc - in the relevant market.
.RTF of original document