b)
The vertical effects insofar as they effect the merged firm’s buying power in the market for the purchase of furniture from
manufacturers
Horizontal effects
34.
As we have seen from our earlier description, the two merging firms are both holding companies that
own subsidiary businesses, which compete in the retail market selling furniture and appliances.
35.
Their businesses range from dedicated appliance discounters to furniture chains that sell a variety
of goods and are aimed at distinct niches in the market.
36.
There is no dispute that the merging parties subsidiaries compete with one another. There is, however,
some dispute as to the boundaries of the market in which they compete.
37.
To understand the differences in approach to defining the market in this case it is first necessary
to understand how the retail furniture and appliance sector is structured and then to locate relevant markets for the purpose of
competition analysis.
38.
Retailers who sell furniture and appliances have, not surprisingly, found many routes to the market.
39.
That all compete are in the business of selling furniture is not in doubt. What is in dispute is
whether consumers consider these different routes to the market as equivalent offerings, and hence as substitutes for one another.
40.
Outlets differ from one another not only in terms of the range of products they sell and their level
of prices, but which customers they target, whether they offer credit and where they are located, to name but a few distinctions.
41.
Like JD and Profurn, certain retailers have organized themselves in chains - not only to afford
themselves a wider geographic exposure, but also so that they encompass, within a single corporate structure, a range of routes to
market.
42.
One type of store is referred to in the industry as the ‘mass discounter’. Mass discounters
are stores whose competitive advantage is on price. They trade in high volumes and can be price competitive because of low margins.
In order to operate in this type of market a mass discounter must be able to turn over a high volume of product in a short time,
have a regular cash flow and offer consumers a wide choice of product. For this reason mass discounters operate from large stores
usually located in urban areas where customer volume densities are more assured, sell on a cash only basis and offer minimum service.
43.
The sale of appliances as opposed to furniture is the dominant product offering of the mass discounter.
44.
The next type of store is the furniture retail outlet. This type of store is, in the hands of the
chains, organized like a consumer product according to a carefully marketed brand aimed at a targeted group of consumers. Within
the JD and Profurn groups we see this as well, as we observed above in the description of the parties. These retail outlets are usually
targeted at a range of consumer Living Standard Measure (LSM) categories, typically a brand will target between 3 to 4 LSM bands. The chains’ carefully research consumer behaviour to ensure that the particular brand remains aligned to its targeted LSM groupings.
This entails different product offerings, price ranges, store location and medium of advertising. These stores not only sell furniture,
but also appliances and cell phone services.
45.
These stores are smaller in size than the mass discounters but are for that reason more ubiquitous
or, in the language of retailers, have a wider footprint. The chains refer in their reports to their roll out of stores in a particular
chain. What they mean is that they are continually on the lookout for new locations for their stores whilst at the same time reassessing
the location of existing branches. Like skilful chess players the chains’ managements are continually moving their pieces to
outflank their opposition or to avoid being removed from the board. Hence this type of store is less rooted to any one location than
the mass discounter.
46.
The management challenge is to match the brand to its targeted market in product, price and location.
47.
Within this universe of furniture chains at least three broad segments exist -a mass market, middle
market and mid/ upper market.
48.
What distinguishes the furniture chains inter alia from the mass discounters is that the former
sell to the consumer on credit, a fact particularly important for consumers who are ineligible for credit cards. As they have with
targeting their market in terms of product choices, so the chains have developed the granting of credit into an art. They spend vast
resources on creating models of likely risk and use sophisticated information technology to assess and reassess their credit policies.
49.
The JD Group has indicated that it has undergone significant changes to its credit granting policies
as a result of the decline in the lower end of the market.
They are able to do so through sophisticated IT systems that enable them to develop and continually update sophisticated risk profiles.
50.
In a recent report this is described as follows:
“This process has been successful in predicting the payment behaviour of debtors with a particular status in a specific geographical
area. This has resulted in a reduction of risk allowing for greater levels of predictability at store level.”
51.
The final type of player in the market is the ‘independent’ store, so called, because
they are not part of any chain or group and are usually managed by their owners. The independents are typically single outlet businesses
with the largest type of business in this category not exceeding four outlets. Independent stores vary from being specialist outlets e.g. retailers of expensive high- tech equipment to general dealers who sell
a bit of everything.
52.
As mentioned above we have previously had to deal with a merger in this industry in the Ellerines case. In that decision we adopted the following market definition:
“In summary then we conclude that the relevant market is composed of furniture shops (with a product mix of furniture and appliances)
directed at credit sales to consumers in the LSM 3 –5 category)”
53.
The merging parties have urged us not to adopt the same market definition in this merger and have
argued instead for a relevant market that is composed of all furniture and appliance retailers aggregated together into a national
geographic market.
54.
Using the Ellerines decision as their point of departure, they go on to consider the possible ways of segmenting this market. These according to them
might be based upon:
a)
Price and Quality differences
b)
Furniture store – cluster or product cluster
c)
Credit sales
d)
LSM customer grouping
55.
They conclude after an examination of each of these possibilities that there is no valid basis for
finding narrower markets by applying any of these criteria.
56.
As to the geographic market they make the contention, whose logic is not easy to follow, that:
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