Competition Bureau statement regarding the acquisition by Essilor of Coastal Contacts

OTTAWA, April 25, 2014 — This statement summarizes the approach taken by the Competition Bureau in its review of the proposed acquisition by Essilor International S.A. (Essilor) of Coastal Contacts Inc. (CCI), pursuant to an agreement announced on February 26, 2014. Both companies operate in the vision care sector.

On April 25, 2014, the Bureau issued a No Action Letter (NAL) to Essilor stating that the Commissioner of Competition does not, at this time, intend to make an application under section 92 of the Competition Act (Act) in respect of the transaction.Footnote 1 Section 97 of the Act provides for a one-year period following completion of the transaction during which the Commissioner may challenge the transaction before the Competition Tribunal.

The focus of the Bureau’s review was on the vertical relationship between Essilor as an upstream supplier of prescription lenses and CCI as a downstream retailer of prescription eyeglasses. Consistent with the approach to vertical mergers outlined in the Bureau’s Merger Enforcement Guidelines, the Bureau assessed both Essilor’s ability and incentive to totally or partially foreclose the supply of prescription lenses to downstream retailers, and whether any such foreclosure would result in a substantial lessening or prevention of competition for the retail sale of prescription eyeglasses.

The Bureau has concluded that the proposed transaction is unlikely to result in a substantial lessening or prevention of competition due to, among other things, the presence of vertically-integrated retailers who are able to self-supply and effectively compete against the merged entity.

Background

Essilor is the largest prescription lens supplier in the world and is vertically-integrated across several points along the supply chain, including the manufacture of semi-finished stock lenses and the coding and licensing of design software used to direct the physical cutting or grinding of specific prescriptions into stock lenses to create finished prescription lenses. Essilor owns several prescription labs in Canada from which it supplies finished prescription lenses to retailers located across the country.

CCI is a Vancouver-based retailer of prescription eyeglasses and contact lenses. Although most of CCI’s revenues are generated through online sales, the company also has two retail stores in Vancouver and one in Toronto.

Considering that CCI currently represents a small portion of Essilor’s upstream revenues and a comparably small portion of the retail sale of prescription eyeglasses in Canada, the Bureau determined that Essilor likely does not have an incentive to engage in total foreclosure. Therefore, the focus of the Bureau’s review was on partial foreclosure.

Based on information sourced from industry stakeholders, the Bureau concluded that Essilor accounts for a significant share of the prescription lenses supplied to retailers in Canada and likely has the ability to raise rivals’ costs. The Bureau therefore assessed Essilor’s incentive to raise wholesale prices to its customers, including both:

  1. multi-store retailers and
  2. independent retail locations typically owned by optometrists or ophthalmologists.

The Bureau concluded that multi-store retailers currently supplied by Essilor could, in the event of a wholesale price increase, vertically integrate upwards and acquire their own prescription lab. Many such retailers in Canada have already pursued this option, made easier recently by the commoditization of semi-finished stock lenses and the ability to license design software from companies other than Essilor. The viable threat of vertical integration likely functions to deter Essilor from pursuing a raising rivals’ costs strategy with respect to multi-store retailers.

Similarly, the Bureau identified the presence of already vertically-integrated downstream retailers currently in competition with CCI and poised to capture a significant share of diverted sales in the event Essilor raises prices to independent optometrists or ophthalmologists. The presence of these retailers would likely serve to deter Essilor from pursuing such a strategy and, even in the event of a wholesale price increase, serve to ensure that downstream consumers do not face a material price increase. Based on information obtained in the course of its review, and as noted above, the Bureau found that such vertically-integrated retailers have access to design software other than Essilor designs and the ability to self-supply prescription lenses, with the result that they will remain effective competitors to the merged entity.

Conclusion

Although Essilor currently accounts for a significant share of the prescription lenses supplied to retailers in Canada, the Bureau concluded that the transaction will not create an incentive for Essilor to foreclose downstream rivals and that it is not likely to result in a substantial lessening or prevention of competition in any relevant market due to the presence of effective remaining competition.

The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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