JD Sports must sell Footasylum rules CMA
JD Sports must sell Footasylum after the competitions watchdog found serious concerns that competition would be reduced following an in-depth investigation, but JD has asserted the decision "defies logic".
The Competition and Markets Authority (CMA) said JD Sports is “by far and away” the closest alternative for shoppers at Footasylum and ordered JD Sports to sell it.
It follows a second investigation by the agency after JD Sports appealed against a previous ruling, saying investigators failed to take into account online sales through Nike and Adidas in the UK.
But the CMA said it expects JD Sports’ £90 million takeover of Footasylum would continue reducing competition even after taking into account the growth in online shopping.
According to the watchdog, 50% of online shoppers surveyed said they would go to JD Sports if they were unable to shop at Footasylum for clothing.
A further 43% said they would the make the switch if they could no longer buy footwear from Footasylum.
The CMA said these figures were substantially higher than for any other retailer and that another survey of in-store shoppers showed similar results.
Investigators added that they believed Footasylum would remain in robust health even if no longer owned by JD Sports, which bought the brand in April 2019, despite the pandemic and increased competition from other brands.
They pointed out that total revenues for last year were £232 million with underlying pre-tax profits of £29.3 million – up from £25.5 million a year earlier.
The CMA added: “Requiring JD Sports to sell Footasylum is the only way to address its competition concerns and protect consumers.
“It will oversee the sale and approve the purchaser, in order to ensure that Footasylum will be run as a fully independent competitor.”
Kip Meek, chair of the CMA inquiry group, said: “The UK boasts a thriving sports fashion market and today’s decision reflects our commitment to keeping it that way.
“We strongly believe shoppers could suffer if Footasylum stopped having to compete with JD Sports. It is likely they would pay more for less choice, worse service and lower quality.
“The pandemic may have altered the way we shop but innovative businesses, driven by healthy competition, will rise to the challenge and successfully cater to changing tastes and habits."
In a statement JD Sports pointed out that the CMA had acknowledged in its investigation that the biggest competition JD Sports faced was from direct to consumer sales by the sports giants, such as Nike and Adidas, stocked by JD. It pointed out that Footasylum's market share was less than 5%.
Given this was the case, JD said there was no incentive for it to raise prices or lessen its offer to consumers.
"This is the first time ever that the CMA (including its predecessors) has decided to block or remedy a deal between competitors where it found that there will be no 'substantial lessening of competition' in relation to the acquiring business.
"Prior to this, in every other case under the UK merger regime between competitors, including its first review of this merger with Footasylum, the CMA has justified its intervention on the basis that the merger eliminated important rivalry for both the acquiring and the target business.
"Given the critical areas in which the CMA agrees with JD and the fundamental change in its conclusion between the two inquiries, the decision to prohibit the acquisition defies logic."
The CMA was ordered to carry out a second inquiry into JD's acquisition of Footasylum after the sports giant won an appeal pointing out that its first inquiry contained "irrational errors".
JD's key argument was that the CMA misunderstood market dynamics and did not take digital competition, such as Nike and Adidas's online stores and international rivals such as Foot Locker, into consideration when defining competitors.
The company described the outcome of the second investigation as "extreme and unprecedented", given the small market share that Footasylum held and said it would no longer be able to invest in Footasylum to improve its business, as it had intended.
Peter Cowgill, Executive Chairman of JD Sports, commented: "The CMA rightly concludes that, following the acquisition of Footasylum, JD would have no incentive to raise prices or worsen its offer as its most important competitors are the DTC operations of the international brands themselves.
"However, the CMA has then somehow concluded that the competitive threat from DTC does not extend to Footasylum and that JD would have an incentive to worsen the offer in Footasylum to the detriment of both consumers and suppliers. We would suggest that the CMA is in a minority of one in reaching this conclusion.
"Overall, the CMA's decision today continues to be inexplicable to anyone who understands what difference the pandemic has made to UK retail and how competition and the supply chain in our markets actually work. It is deeply troubling at a time when the UK high street has been seriously damaged already and is vulnerable to further closures."