OTTAWA, October 22, 2013 — The Competition Bureau announced today that, following a review of Sobeys Inc.’s ("Sobeys") proposed acquisition of substantially all of the assets of Canada Safeway ("Safeway"), it has reached an agreement with Sobeys that preserves competition in the retail sale of a full line of grocery products in certain areas in Western Canada.
Under the terms of the Consent Agreement, which has been registered with the Competition Tribunal, Sobeys must divest 23 grocery stores in four provinces. A full list of the stores to be divested is included at the end of this statement.
This statement summarizes the approach taken by the Bureau in its review of the proposed transaction1.
The proposed transaction, which was announced on June 12, 2013, includes the purchase by Sobeys of the following assets from Safeway:
- 213 grocery retail locations, which include 199 in-store pharmacies and 62 co-located fuel stations;
- 10 liquor stores;
- 4 primary distribution centres and the related wholesale business; and
- 12 food manufacturing facilities.
Competitive Effects Analysis
i. Grocery Industry
The Canadian retail grocery industry includes several large national (e.g., Loblaw, Sobeys and Wal-Mart) and regional (e.g., Overwaitea and Calgary Co-op) retail chains operating under multiple banners, which generally have their own distribution networks and facilities. The industry also includes numerous local independent, specialty and non-traditional grocers and food stores that generally rely on third party wholesalers to source their grocery products. From the consumer’s perspective, competition among these grocers is played out in ways that include the size and format of store, range and quality of product offerings, service levels and pricing. Vigorous competition in the grocery industry is essential to ensure that Canadian consumers benefit from low prices, a high quality and selection of grocery products, and high service levels.
Sobeys and Safeway are full-line grocers that compete with one another in the retail sale of grocery products. Full-line grocery stores typically carry a wide variety of food items, such as bread and dairy products, refrigerated and frozen food and beverage products, fresh and prepared meats and poultry, produce (including fresh fruits and vegetables), shelf-stable food and beverage products (including canned and other types of packaged products), and staple foodstuffs. Full-line grocery stores typically also carry non-food items, such as household products.
At the retail level, many full-line grocery stores also offer additional products or services, either in-store or in a location adjacent to the store. These may include pharmacies, gas bars and liquor stores. In this particular case, the parties’ additional products and services overlapped with respect to their pharmacy and liquor store operations. Consumers purchase these types of products from a variety of other retailers, including drug stores and liquor stores respectively. Following its analysis, the Bureau concluded that there was sufficient effective remaining competition for these additional products and services in all overlapping markets. The remainder of this statement will therefore focus on the Bureau’s analysis of the parties’ grocery retail and wholesale operations.
ii. Grocery Retail
A significant number of Safeway's 213 grocery stores are in relatively close proximity to at least one Sobeys’ grocery store. The Bureau's review of the parties’ grocery retail operations therefore focused on whether the proposed transaction would provide Sobeys with enhanced market power in the retail sale of grocery products.
The Bureau concluded that the relevant product market for the purposes of this review was the retail sale of a full-line of grocery products that allows consumers to purchase the complete range of their grocery needs in a single location. Generally, stores with less than 10,000 square feet dedicated to grocery products do not offer the breadth and volume of products necessary to be considered a full-line grocery store.
The Bureau gave significant consideration to the degree of differentiation between conventional grocery stores, such as Sobeys and Safeway, and more discount-oriented retailers, such as Loblaw No Frills or Wal-Mart Supercentre. These grocery store formats seek to differentiate themselves from one another in a number of ways, including through their pricing, quality and range of product offering, as well as through their service levels. Specifically, in markets with both conventional and discount-oriented full-line grocery retailers, the Bureau considered whether the discount-oriented grocery stores would act as effective remaining competitors given the loss of some competition between conventional grocery stores after the proposed transaction. Following an analysis of both qualitative and quantitative factors, the Bureau concluded that most discount-oriented grocery stores in the markets reviewed act as effective competitors and should be included in the relevant product market, provided that they offer a full-line of grocery products and have at least 10,000 square feet dedicated to grocery products.
The Bureau concluded that the relevant geographic market for the retail sale of a full-line of grocery products is local. Consumers choose where to do their full-line grocery shopping based on a number of factors, including convenience and the proximity of the grocery store to their home. The Bureau determined the geographic boundaries of each local market based on a variety of factors, such as whether the market was urban, suburban or rural; the existence of natural barriers, such as rivers and highways; and traffic patterns. The Bureau also used customer surveys and loyalty card data provided by the parties and third parties to determine the origin of customers and the associated boundaries of the markets.
In most local markets, the Bureau found that a number of national, regional and local competitors will act as effective remaining competitors post-transaction. However, in certain local markets, the parties have significant market share and the extent of other competition is limited. Furthermore, the Bureau found that barriers to entry are relatively high. These barriers include the amount of time and costs required for an entrant to access an appropriate real estate location, obtain the necessary permits and governmental approvals, and build or convert a suitable retail store. In particular, it is often difficult in urban markets to access appropriate real estate locations for full-line grocery stores in a timely manner.
In concentrated markets, the Bureau interviewed market participants to assess the competitive landscape and the potential effects of the proposed transaction. In addition, in particularly contentious markets, the Bureau consulted with an industry expert and conducted site visits to analyze local competitive dynamics.
The Bureau considers that certain stores that do not necessarily offer a full-line of grocery products, such as Costco, Target, Wal-Mart (non-Supercentre locations) and Shoppers Drug Mart, may also have a constraining effect on retail grocery prices for certain products. The presence of one or more of these stores in any given market was taken into account.
The Bureau concluded that the proposed transaction would lead to a substantial lessening or prevention of competition in the retail sale of a full-line of grocery products in a number of local markets in Western Canada. The Bureau believes that the Consent Agreement entered into with Sobeys to divest 23 retail stores resolves these concerns.
iii. Grocery Wholesale
Effective competition at the wholesale level is an integral part of overall competition in the grocery industry. As a result, the Bureau examined the potential impact of the proposed transaction on competition at the wholesale level, particularly in light of concerns that were expressed by market participants. The Bureau conducted extensive interviews with independent retailers, competing wholesalers, and industry associations, and also reviewed the parties’ internal documents and communications.
The Bureau determined that the relevant product market for the purposes of this review was the wholesale supply of a full-line of grocery products to independent retailers (“full-line wholesale”). Although independent retailers can purchase certain grocery products from a variety of sources, including directly from manufacturers and from various specialized wholesalers, the administrative costs and foregone economies of scale associated with dealing with multiple wholesale suppliers make it necessary to define full-line wholesale as a separate product market.
The geographic scope of the wholesale markets is regional, with certain wholesalers capable of covering an entire province and beyond with a single distribution centre.
The Bureau assessed the extent of current and potential competitive rivalry between the parties and determined that the parties generally are not close competitors with respect to full-line wholesale in various regions in Western Canada. While Safeway, through its Macdonalds Consolidated division, has a significant presence in Western Canada, Sobeys concentrates primarily on supply to its franchisees and has a limited number of independent wholesale customers. Nonetheless, in certain regions, the parties compete with each other more directly. Even in these regions, the Bureau determined that existing wholesalers generally provide sufficient effective remaining competition to prevent the exercise of market power arising from the proposed transaction. In addition, the Bureau found that certain wholesalers are well-positioned to expand their operations in the event of a potential exercise of market power by the merged entity. Throughout its analysis of potential anti-competitive effects to wholesale supply, the Bureau was mindful of the significant efficiencies that the proposed transaction would generate.
Given that Sobeys and Safeway both operate retail grocery stores, the Bureau also considered whether the proposed transaction could increase Sobeys’ incentive and ability to reduce supply to, or raise wholesale prices for, certain independent retailers that currently compete with either of the parties’ retail stores in certain local markets. The Bureau determined that, due to the presence of effective competitors and their ability to expand, independent retailers will continue to have other wholesale options following the proposed transaction. Therefore, effective remaining competitors will act as a constraint to an exercise of market power arising from the proposed transaction.
Under the terms of the Consent Agreement, Sobeys is to divest the following 23 grocery stores in Western Canada:
|Sidney, BC||Safeway Sidney, 2345 Beacon Avenue|
|Tsawwassen, BC||Safeway Tsawwassen, 1143 — 56th Street|
|Victoria, BC||Safeway University Heights, 3958 Shelbourne Street
Safeway Fort and Foul, 1950 Foul Bay Road
|New Westminster, BC||Thrifty Foods Sapperton, 270 East Columbia Street|
|Edmonton, AB||Safeway Millwoods, 2331– 66th Street
Sobeys Hawkstone, 18370 Lessard Road
Sobeys Goldbar, 5036 — 106th Avenue
IGA Ottewell, 6204 — 90th Avenue NW
|Canmore, AB||Sobeys Canmore, 950 Railway Avenue|
|Cochrane, AB||Sobeys Cochrane, 65 Bow Street|
|Leduc, AB||Sobeys Leduc, 5421 — 50th Street|
|Fort McMurray, AB||Safeway Thickwood, 131 Signal Road|
|Fort Saskatchewan, AB||Sobeys Station Square, 10004 — 99th Avenue|
|Taber, AB||Safeway Taber, 4926 — 46th Avenue|
|Wetaskiwin, AB||Sobeys Wetaskiwin, 4703 — 50th Street|
|Regina, SK||Safeway Regina, 3801 Albert Street|
|Saskatoon, SK||Safeway 8th/Circle, 3310 — 8th Street East|
|Winnipeg, MB||Safeway Main Street, 1441 Main Street
Safeway Southdale Centre, 77 Vermillion Road
Safeway Grant Park, 1120 Grant Avenue
Safeway St. Vital, 850 Dakota Street
Price Chopper Stafford Square, 677 Stafford Street
1 Analytical methodologies are applied, and enforcement decisions are made, on a case-by-case basis. The methodologies and conclusions discussed in this statement are specific to the review of the proposed transaction in question and are not binding on the Commissioner. The legal requirements of section 29 of the Competition Act, and the Bureau's policies and practices regarding the treatment of confidential information, limit the Bureau's ability to disclose information obtained during the course of a merger review. (back to footnote reference 1)