The Relevant Market
Product Market
12.
The Commission identified two types of product sold by a typical pharmacy. On the one hand it dispenses
pharmaceutical products (dispensary products) and, on the other, it sells more general consumer products (front shop products).
Front Shop Products
13.
The parties classify their products under three categories: health products, lifestyle products
and beauty products. The CC defined the market more narrowly, according to 14 categories of consumer goods in which both the acquiring and target firms have competing products. These products are referred to as “front shop” products.
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Hair care market
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Body care market
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Feminine hygiene market
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Skincare market
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Foot care market
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Baby care market
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Men’s toiletries market
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Vitamins market
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Bath products market
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Eye care market
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First aid market
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Make-up market
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Diet formulae market
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Perfume market
14.
For reasons emphasized in other similar mergers, we are not concerned with competition in this market. In respect of the lifestyle, beauty and health markets, a proliferation of competitors sell the same or similar products, including the large and smaller grocery retail chains and independent
health shops. For instance, significant competitors of New Clicks in the retail of lifestyle, beauty and health products include
Pick ‘n Pay, Shoprite Checkers, Superspar, numerous pharmacies and health stores, Woolworths, Stuttafords, Edgars, Truworths,
Foschini, @ Home, Mr Price Home, Game and Makro.
Retail Pharmaceutical (Dispensary) products
15.
The Commission did not initially evaluate the dispensary product market at all, since until Clicks
receive their license to dispense pharmaceutical products or dispense scheduled drugs, there is no product overlap with the retail
pharmaceutical business of the target firms. However, the Tribunal requested both the parties and Commission to provide additional information and to make further submissions in respect of the likely evolution of this market from both a regulatory and competition perspective.
Geographic Market
16.
The geographic market was deemed by the Commission to be local since both acquiring and target firms
set prices according to conditions in the local market. It proceeded to evaluate the number of pharmacies owned by the target firm
in various magisterial districts around the country. [The conclusion was that both parties to the merger compete in the major towns
and cities around SA and there are large numbers of competitors in these markets].
17.
The parties argued that there are no national retail pharmaceutical chains as such. This is due
to historical legislation prohibiting non-pharmacists from owning pharmacies. Accordingly no corporate model of ownership has to
date emerged in the retail pharmaceutical market. Despite the phenomena of franchising and buying groups, pricing of pharmaceutical products is not centrally managed on a national level, but is determined
instead as a competitive response to conditions in each local market by the professional pharmacist who owns each of the stores.
These pharmacists seek to retain control over the local operations even when part of a larger franchise or buying group.
18.
Trevor Milton alluded to two distinct modes of competition in the areas of chronic and acute medication.
Purchasers of chronic medicines, these being regular purchasers of the same drug over a lengthy period, are more easily serviced by big national mail order suppliers like Direct Medicines and Chronic
Medicines than are the consumers of acute medication. On the other hand considerations of convenience and effective therapy dictate that acute medication will be purchased at the local pharmacy – these drugs must be available on request and, unlike the case of chronic medicines, demand cannot be accurately predicted in advance. While this explanation would suggest that there will be some competitive threat to TCO around at least chronic medication, further investigation is required to enable us to make a clear finding.
19.
If the market is segmented between consumption of chronic and acute medicines, then the relevant
geographic market could either be defined as local (acute medication) or national (chronic medication), although we probably require
additional information in this regard. However we need not define this conclusively in light of the findings elaborated below.
Impact on competition
20.
As mentioned, our fundamental concerns with this merger lay in the retail pharmaceutical or dispensary market. These concerns centred on the prospect of large potential competitors such as Pick ‘n Pay entering this market.
21.
The Commission took the view that because TCO was not already active in the retailing of pharmaceutical products, this transaction presented no competition issues in this market. On this view, TCO was a new entrant in this market. However, what is significant is that TCO was always the most likely potential entrant into this market. TCO had for a long time set itself up to enter once the regulatory barrier was removed. It’s looming presence had, in all likelihood, already acted as a competitive constraint on participants already active in the market - TCO was a large front shop waiting to get into the back shop. TCO has now entered thus eliminating itself as a potential threat. But because it has done so by choosing to enter via acquisition rather than by rolling out its own, new pharmaceutical branches, its elimination as a potential threat has not been compensated by the injection of additional capacity, by the addition of a new active competitive presence. In summary, then, TCO, because of its particularly strong potential presence should, for the purposes of this merger, properly have been treated as a market participant and effectively presumed to constrain existing rivalry. Accordingly, the theory of potential competition
allows us to impute into our analysis the market shares of a firm, that would not otherwise have been considered a competitor because
of there being no product overlap. It would accordingly have been appropriate if the Commission had evaluated this market initially.
22.
The case of the Federal Trade Commission v The Proctor and Gamble Company is instructive. Here the US Supreme Court upheld a decision by the Federal Trade Commission ordering a manufacturer of household products to divest
itself of certain liquid bleach assets. The Court referred in its reasons to the acquisition of Clorox by Proctor eliminating Proctor
as a potential competitor:
“It is clear that the existence of Proctor at the edge of the industry exerted considerable influence on the market. First, the market
behaviour of the liquid bleach industry was influenced by each firm’s predictions of the market behaviour of its competitors,
actual and potential. Second, the barriers to entry by a firm of Proctor’s size and with its advantages were not significant…”
23.
An analysis of the post-merger market, the structure of which will be enormously influenced by a
new regulatory environment, would obviously be highly speculative. It is not known how many licenses will be secured by TCO, nor
which or how many other new entrants will be licensed to compete with them. We have previously imposed a postponed divestiture remedy
precisely because the regulatory environment in which the markets in question operated were, as in this case, in considerable flux.
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