On 25 December 2013, the Serbian Commission for Protection of Competition conditionally approved the takeover of the leading Slovenian commercial chain Mercator by Agrokor, the largest privately owned Croatian company. Through their respective subsidiaries, both Mercator and Agrokor are active in Serbia on the market of wholesale and retail of FMCG, while Agrokor is also active in the production of food and drinks. The core market of both companies is retail. Based on the respective turnovers generated in 2012, Mercator and Idea (Agrokor’s retail company in Serbia) were the second and third largest retailers in Serbia, respectively.
Procedural background
According to information from the Commission’s decision, Agrokor notified the proposed concentration on 28 June 2013, following the execution of an SPA between Agrokor and a consortium of majority shareholders of Mercator of 14 June 2013. Based on this agreement, Agrokor undertook to purchase 53.12% of shares in Mercator, thereby acquiring sole control of the company.
Although in its notification Agrokor proposed that the Commission approve the proposed transaction in summary (Phase I) proceedings, the Commission on 3 September 2013 decided to open a Phase II investigation of the merger and invited all interested parties to deliver to the Commission any information which may contribute to establishing the relevant facts in the proceedings. The Commission noted that an investigation was necessary due to the merger’s horizontal (arising out of the overlap in business activities between the concentration participants) and vertical (in relation to the fact that Agrokor’s activities include both production and retail of certain products) aspects alike.
Relevant markets
Agrokor proposed that, for the purposes of assessment of the concentration, two relevant markets be defined – one which would encompass the retail activity of Agrokor and Mercator and the other which would cover the wholesale aspect of the concentration participants’ businesses. The Commission in general accepted such market determination, but disagreed with Agrokor concerning the exact scope of the retail market definition, as will be described below.
Wholesale business
Concerning wholesale, Agrokor proposed and the Commission agreed that the relevant product market be defined as the market of wholesale of food and consumer products. The Commission also accepted Agrokor’s proposal that the relevant geographic market for wholesale be defined as national, i.e. comprising the whole territory of the Republic of Serbia. The Commission established that the conditions of competition in the area of wholesale do not vary significantly across different regions in Serbia, mainly due to the mobility of so-called “professional buyers” (customers that buy products not for direct consumption but for resale or for business purposes) who are able to quickly and easily switch to suppliers from different regions across Serbia.
In examining the state of competition on the relevant wholesale market, the Commission found it to be highly competitive. In this respect the Commission in particular referred to the values of the Herfindahl–Hirschman Index (HHI) before and after the implementation of the concentration. As noted in the Commission’s decision, the current HHI of the relevant wholesale market is 102.72, while following the implementation of the concentration the index would increase to 137.36, i.e. by 34.64 index points, which is, according to the Commission, an insignificant increment.
The Commission also noted that the concentration would not lead to a significant increase in the market shares of the concentration participants – Mercator’s market share pre-merger is below 5%, while Idea’s share is between 5% and 10%. Following the implementation of the concentration, the combined market share of the concentration participants on the wholesale market would remain below 10%.
The Commission concluded that the planned concentration would not raise any competition concerns on the relevant wholesale market and focused its analysis on the relevant retail market.
Retail business
With respect to retail, which accounts to a predominant part of revenues for both Idea and Mercator, Agrokor proposed that the relevant product market be defined as retail of predominantly food, drinks and tobacco products (i.e. fast moving consumer goods – FMCG) in non-specialized stores in the format of convenience stores, discount stores, supermarkets, and hypermarkets. The Commission in general accepted such proposal, but disagreed with Agrokor concerning the exact scope of the relevant product market.
The first disagreement between Agrokor and the Commission concerned the issue of inclusion of specialized stores (such as butcher shops and drugstores) and open food markets into the scope of the relevant product market – while Agrokor maintained that these should be included into the relevant market, the Commission rejected such proposal. With respect to specialized stores, the Commission accepted that such stores can compete with the largest retail chains but only and exclusively concerning the range of products offered by such specialized stores, which is not sufficient for their inclusion into the relevant market. Concerning open food markets, the Commission noted that they cannot be a part of the relevant product market as the turnover generated through that channel cannot be quantified, either in terms of volume or in terms of value. As support for its decision to leave open food markets outside of the relevant market, the Commission also noted that the sales generated on such markets were omitted from an economic study that Agrokor itself submitted to the Commission.
Another point of disagreement between Agrokor and the Commission concerned Agrokor’s proposal that corner shops (operated by sole proprietors) and kiosks also be included into the relevant product market, which was rejected by the Commission. While it did not further expound on why corner shops should not be a part of the relevant market, the Commission did offer reasons for excluding kiosks from further analysis. The Commission noted that the sale of products available in kiosks (cigarettes, newspapers, sweets, etc.) has only a symbolic value in the structure of turnover of stores which the Commission included in the relevant market. In addition, the Commission noted that, due to uniform retail prices of basic products offered in kiosks (cigarettes, newspapers), purchases in these outlets are “impulse purchases” by buyers who are not prepared to go longer distances to purchase the same products elsewhere.
In justifying its standpoint, the Commission noted that leaving specialized stores and corner shops outside of the relevant product market was in accordance with the practice and experience of the European Commission. The Serbian Commission, however, did not cite specific EU cases in this respect.
The Commission also addressed the issue of whether discount stores and cash-and-carry outlets belong to the relevant product market, agreeing with Agrokor’s proposal that these should be included into the relevant market. Concerning discount stores, the Commission concluded that these stores are interchangeable with supermarkets from the consumers’ point of view. The Commission came to the same conclusion with respect to cash-and-carry stores, finding that, although these stores are in general intended for purchases by owners of small retail shops, in Serbia they are widely frequented by consumers who purchase goods for personal consumption.
With respect to the geographic dimension of the relevant market, the Commission agreed with Agrokor’s proposal that individual cities and municipalities (with certain adjustments in accordance with the special local conditions) be treated as separate geographic markets. According to the Commission, such definition of the relevant geographic market was justified since cities and municipalities represent logical geographical units in which most consumers live, work and satisfy their needs for FMCG.
Notwithstanding such relevant market definition, the Commission first turned to the effects which the concentration will have on the retail market at the national level. The Commission noted that HHI on this market is currently 1095.49. According to the Commission, rates of concentration between 1000 and 1800 represent the area of “moderate concentration”. After the implementation of the concentration, HHI would increase to 1382.05 (the increment being 286.56 index points), which, according to the Commission, represents only a slight increase.
The Commission also analyzed the market shares of the concentration participants at the national level. Based on turnover generated in 2012, Idea’s market share at the national level was between 5% and 10% while Mercator’s was between 10% and 20%. After the implementation of the concentration, the combined national market share of the concentration participants would be between 20% and 30%, which would make Agrokor the second largest market participant, with Delhaize retaining its leading position.
The Commission also established the participants’ respective national market shares based on retail space. Based on this criterion, Idea’s market share is currently between 10% and 20%, while Mercator’s is between 20% and 30%. Following the implementation of the concentration, the combined market share of the concentration participants would be between 30% and 40%, which will make Agrokorthe leading retailer in this respect.
In assessing the effects of the proposed concentration on the national retail market, the Commission noted that the concentration would change the structure of this market from asymmetric oligopoly to oligopoly. According to the Commission, at the national level, Delhaize was so far not exposed to significant competitive pressure, which will change following the implementation of the concentration. Even though Delhaize would still be the leader in terms of revenue, following the concentration Agrokor will surpass Delhaize with respect to the retail space available. Accordingly, the Commission concluded that the planned concentration would not lead to the creation of a dominant undertaking.
Once it found that the planned concentration would not raise competition concerns at the national level, the Commission turned to analyzing the effects of the concentration on local retail markets. In this respect the Commission analyzed the state of competition in individual municipalities and cities where the concentration participants are active.
The Commission found that in 64 cities/municipalities either one or both concentration participants are present, while both are present in 31 of those 64 localities. The Commission focused its analysis on 15 geographic areas in which, following the concentration, the combined market share of the concentration participants would exceed 40% and the increment would be higher than 5 percentage points. The structural measures contained in the Commission’s decision are aimed precisely at eliminating competition concerns the Commission identified in these geographic areas.
Negotiation of remedies
Against the facts established in the proceedings, the Commission found that the planned concentration cannot be cleared unconditionally. In this respect, on 6 November 2013, the Commission issued a statement of objections to Agrokor and invited it to propose measures aimed at eliminating the Commission’s concerns.
After three sets of Agrokor’s proposals, which the Commission found unsatisfactory, and two negotiation sessions, the Commission and Agrokor finally agreed to a set of conditions to the concentration approval.
Structural remedies
Agrokor agreed to divest 21 (alternatively, 22, since regarding one locality Agrokorhas the option to either divest one larger or two smaller outlets) retail outlets in 15 geographic markets across Serbia. The divesture should decrease the combined retail capacity of the concentration participants for around 20,000 square meters of net retail area.
The following specific structural measures have been ordered: 1) sale of business to an actual or potential competitor active in the retail market in Serbia or abroad, or cancellation of lease agreement if the sale of business is not possible (this concerns 18, alternatively, 19 outlets); 2) reduction of net retail area in certain individual outlets (2 outlets) and 3) change of the purpose of the outlet, in order for it not to be used for retail activities (one outlet). The deadlines within which the sale of business/cancellation of lease and the change of the purpose are to be effected are treated as confidential in the published version of the Commission’s decision. However, the published decision does disclose that the reduction of net retail area is to be implemented within 6 months from the closing.
Behavioral measures
In assessing the effects of the concentration on the upstream market of production of FMCG, the Commission found that there will be no negative effects on such market because none of the concentration participants was a predominant customer of any of the surveyed suppliers. The Commission also addressed vertical integration issues arising out of the fact that Agrokor is present on both the market of production and the market of retail of certain FMCG. In this respect, the Commission found that Agrokor will not have business interest to cut-off certain suppliers, as that would limit the range of products available in its retail outlets and create the risk of certain customers switching to competitors. In addition, the Commission noted that the sale of Agrokor’s own products contributed to only a small portion of this company’s retail revenue in Serbia and was stable over the past three years.
However, during the negotiation of conditions for approval of the concentration, the Commission asked Agrokor to include in its proposal a set of behavioral measures in order to alleviate residual competition concerns arising out of possible changes in Agrokor’s relations with suppliers. In this respect, the applicant offered and the Commission accepted behavioral measures enabling the Commission to monitor possible modifications in Agrokor’s business policies.
Specifically, Agrokor has agreed to deliver to the Commission within 15 days of the closing Idea’s business policy, containing conditions this Serbian retail chain owned by Agrokor offers to its suppliers (rebate policy and other relevant criteria concerning purchases from suppliers).
Agrokor has also undertaken to deliver to the Commission, on annual basis over the next five years, certain documents and information based on which the Commission may monitor possible changes in the retailer’s business policies. In this respect, Agrokor has agreed to deliver to the Commission on an annual basis a template supply agreement and copies of its actual agreements with five largest suppliers of the products which are also produced by Agrokor (ketchup, mayonnaise, margarine, ice-cream, frozen fish, frozen vegetables and pastries, sunflower oil and water). In addition, in response to the Commission’s concern that the concentration might harm small and medium-sized suppliers, Agrokor has undertaken to provide to the Commission annual reports on changes in its business relationship with suppliers from this category, such reports to indicate the commencement and the end dates of each relationship, changes to the scope of products and reasons behind termination of the relationship or, as the case may be, change of its scope.
***
Based on information available on the Commission’s website, Agrokor/Mercator is the second of only two cases decided in 2013 in which the Serbian Commission decided on a conditional clearance of a concentration, the first one being the conditional approval of Sunoko’s takeover of Hellenic Sugar. During the same period, the Commission did not prohibit any concentration. This may be taken as an indication that the Commission has a moderate approach to concentrations and is willing to negotiate remedies adequate to alleviate competition concerns arising from a merger.
