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Massmart Holdings Limited and Moresport Limited (62/LM/Jul05) [2006] ZACT 40 (12 May 2006)

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COMPETITION TRIBUNAL

REPUBLIC OF SOUTH AFRICA

Case No: 62/LM/Jul05

In the large merger between:

Massmart Holdings Limited Acquiring Firm

And

Moresport Limited Target Firm

Reasons for Decision [NON-CONFIDENTIAL]

________________________________________________________________

PROHIBITION

1. On 10 April 2006 the Competition Tribunal prohibited the merger between Massmart Holdings Limited and Moresport Limited in terms of section 16(2)(c) read with Rule 35(5) of the Competition Act. The reasons for this decision appear below.

THE PARTIES

2. The primary acquiring firm is Massmart Holdings Limited (“Massmart”), a public company listed on the JSE. Though it is not controlled by any one group, the major shareholders of Massmart are:

• Old Mutual Group 14.22%

• Public Investment Commission 5.42%

• Participants of the Massmart Holdings Share Trust 5.18%

3. Massmart controls and operates various divisions, grouped as follows:

Massmart Holdings

Massdiscounters

Game

Dion

4. Massmart is described by the merging parties as a high volume, low margin retailer of food, liquor and general merchandise. General merchandise encompasses a disparate array of products including office supplies, DIY equipment, hi-tech products, household appliances, sporting and recreational goods and categories of clothing.

5. While Massmart controls a number of chain stores across and retails a range of products, the relevant divisions for purposes of this transaction are its Masstores namely Makro, Game and Dion through which it retails a range of sports and recreational¹ goods

6. Massmart’s rapid growth as a national retailer is to large extent due to a number of acquisitions it has made over the last 18 years.². Sporting and recreational goods, which are sold through its Masstores (Makro, Game and Dion) chain, account for nearly R675million of the group’s annual turnover. Over the last decade the Massmart Group has become a significant national chain of sports and recreational goods with a credible and material offering in sports and outdoor merchandise.

7. The primary target firm is Moresport Limited (“Moresport”), a private company controlled by Vestacor Limited (“Vestacor)(28.8%), Nedcor Investments Limited (“Nedcor”) (28.8%) and by a management consortium (40%).

8. Moresport sells sports and recreational goods through three branded chain stores:

• Sportsmans Warehouse (SWH), the flagship store of the Moresport Group. It focuses on general sports and recreational apparel, footwear and equipment, with a large offering of functional sports equipment.

• Outdoor Warehouse (OWH), which offers a range of sport and recreational apparel, footwear and equipment; and

• Sports Shoe World (SSW), which sells sports and recreational footwear.

9. Moresport, over time, has also expanded its operations through a strategy of acquisition and growth. It had its origins in the Moregro Group, when it founded TotalSports in the mid-1980s. TotalSports grew to a size of 70-80 stores over a period of 10 years. Subsequently, it went through an acquisition and restructuring process. It bought Logan’s Sportsmans Warehouse and Sports Shoe World in 1996. In 1998, Vestacor bought into the Moregro group and the structure was dismantled, with TotalSports being sold off, Outdoor Warehouse being injected and the entity being listed as Moresport. In 1999, Moresport purchased the Pro Shop and sold TotalSports the following year to the Foschini group. In 2000 the company de-listed and the Pro Shop was sold off in November 2003. Today the company consists of the three chains, SWH, OWH and SSW, which together form South Africa’s largest and most dominant sports retail business.³

The Merger Transaction and Rationale

10. In terms of the sale of shares agreement Massmart would acquire sole control of Moresport by acquiring 84,12% of the shares and issued share capital of Moresport, presently held by Nedcor Investments Limited, Vestacor Limited, Gerald Burken Rubenstein, Kevin Graham Hodgson, Elizabeth Antoinette Haarburger, Roy William Ansel.

11. The remaining shares, which comprise approximately 15,88% of the issued share capital in Moresport, will remain vested in the following parties: Hodgson as to 7,42%, Haarburger as to 4,77%, Ansel 1,69% and Rubenstein as to 2% of the entire shares.⁴

12. The stated rationale for the transaction is Massmart’s intention to expand its business operations and increase its participation in the sports retail market. The parties submit that post merger the incumbent management of Moresport will be retained. Moresport has indicated that some of its shareholders wish to realise their investments in the company and its management is eager to expand its business operations beyond its current parameters.⁵

History of Proceedings

13. The Commission’s recommendation was filed on 14 October 2005. The matter was heard on the following dates: 30 January – 3 February, 20 February, 28 February, 6-7 March and 27 March 2006.

14. The following witnesses were led by the merging parties –

    1. Mr Mark Lamberti, the Chief Executive Officer of Massmart;

    2. Mr Kevin Hodgson, the Managing Director of Moresport; and

    3. Mr James Hodge, an expert from Genesis-Analytics.

15. The following witnesses were summoned by the Commission-

    1. Mr William Keet;

    2. Mr Paul Stone;

    3. Mr William Keet;

    4. Mr Leroy Reynolds;

    5. Mr Trevor Burger;

    6. Mr Rhys Hughes; and

    7. Mr Peter Reeves.

16. In the course of the proceedings, the merging parties submitted that they were not relying on an efficiency defence in the event that the Tribunal found that there was a substantial lessening of competition. The merging parties also submitted that they sought an outright approval or a prohibition from the Tribunal and did not seek a conditional approval.

Background to the sports and recreational industry

17. The merging parties are both involved in the retailing of sports and recreational goods. Sports and recreational goods are considered to be discretionary goods, sought by people who wish to participate in such activities. These goods would include apparel, footwear and equipment utilised in a number of indoor and outdoor sporting and exercise activities such as tennis, cricket, rugby, hockey, running, swimming, cycling, hiking, camping and mountain climbing, table tennis and general exercise.

18. Consumers of sports and recreational goods are generally categorised as having some disposable income and a certain level of education. Children, in particular school children, are seen as important consumers in this industry (or rather the parents of school children) because they are likely to be involved in a number of sporting activities at school and may graduate in time to a more sophisticated level of, and therefore more expensive, product

1. The sports and recreational market is not segmented along LSM levels. However products in each sports category could be distinguished along entry, middle and prime levels.⁶ Entry-level products are directed at those sporting or outdoor consumers who are involved in the activity for purely recreational, leisure or social aspirations. The product quality and price levels are lower, since consumers at these levels are not so discerning and merely want a functional product. Mid level products are directed at consumers who regularly participate in a particular discipline. Product quality and price is higher than entry level, but not to the same degree as the next level of product. Prime or premium level products are typically of a higher quality, and are aimed at those consumers involved in the particular activity at an intense, competitive and professional level.

19. The determination of where each level starts and ends is not that easy and is at times subjective. Experienced buyers, traders, participants or experts in a particular category best do such classification. In some categories prime level products are easier to identify because of the brands associated with them. In such cases the brand is associated only with prime level product. However many international brands (premium brands) such as Nike, Adidas, Gunn & Moore make product across all three levels. Moreover the same customer could buy product across all three levels. A father may purchase an entry- level tent for his son, a prime level hockey stick for his wife and a mid-level golf club for himself. An experienced hiker may purchase prime level hiking boots but an entry-mid level tennis racket. The purchases of customers may be a function of need and affordability. Whether these three levels are sufficiently distinct to constitute separate antitrust markets, as argued by the merging parties, is examined below.

20. Many changes have occurred in the retailing of sports and recreational goods especially in the last fifteen years. In the past sports and outdoor goods were sold by general sports traders who sold product across a range of sporting codes and levels and which did not belong to a national chain. These retailers were localised to a particular province or region or even suburb. Over time, this general sports retailer has been pushed out by the advent of the national retail chain store. The modern independent sports store is no longer a general retailer of sports and recreational goods but has become a specialist in one or two sporting categories. These stores focus on and are usually associated with a retired professional or expert in a specific sporting code, are usually smaller stores and owner managed, generally not found in major retail nodes but in suburbs or near sporting facilities and tend to provide expert advice in the particular sport in which they specialise. Among the specialist independents, we find one or two speciality stores wishing to expand their footprint across the country. Only a few independent general retailers exist in the country but these are found in one or two locations, either in a province or a region and are not part of a national chain.⁷

21. The national chains (general national chains) have, in this period, expanded the range of sport and recreational goods on their floors. These retailers are large and may, in addition to sports and recreational goods, sell a variety of other general merchandise. They are found in major shopping malls or in nearby retail value strip-malls. They employ a national pricing policy and national strategies and may or may not be part of a listed entity. They move large volumes of merchandise and are considered to be mass merchants. Amongst the offerings of the national retailers we find a difference of emphasis, with some of them focussing on apparel and footwear with a small offering in equipment, and others such as Massmart, which has a material offering in equipment.

Commission’s Recommendations

22. According to the Commission both parties are mass retailers and sell a number of overlapping products as set out below-

23. The Commission concluded that the parties compete with each other in the following six relevant markets-

    1. the market for the retailing of general sports footwear through national chains;

    2. the market for the retailing of general sports apparel through national chains;

    3. the market for the retailing of general sports equipment through national chains;

    4. the market for the retailing of general outdoor apparel through national chains through national chains;

    5. the market for the retailing of outdoor footwear through national chains; and

    6. the market for the retailing of outdoor equipment through national chains;

7. The Commission was of the view that no competition concerns arose in the sports apparel and footwear and outdoor apparel and footwear markets.⁸ Competition concerns arise only in relation to the market for the retailing of general sports equipment through national chains and the market for the retailing of outdoor equipment through national chains.

8. Within this market, the Commission recognises that sports and outdoor equipment may be divided into three levels – entry, middle and prime level products or professional grade products. The Commission asserts that though these three types of product categories differ according to quality and price, they are nevertheless functionally interchangeable. Whether these different product categories ought to be merged into one market should, asserts the Commission, be determined by the willingness of and extent to which the consumer and suppliers would switch entry, mid and professional grade products.

24. The Commission went on to conclude in its investigation that entry and mid level products are closer approximates to each other, than to prime/premium categories of product. It arrives at this conclusion on the basis that the movements in prices between the entry and mid level products are highly correlated and because they constrain each other in respect of price and quality and act as substitutes with respect to each other.

25. The Commission’s view is that the general sports and recreational retailing, market should be defined in a distinct and separate market to that of specialised sports and retailing, which falls within the ambit of independent sports retailers. The general sporting retailers, such as the merging parties, tend to focus more on the entry to mid- level, lesser-known brands and a lesser technical form of goods. The Commission therefore identifies segmentation into a general market (entry and mid levels) and a specialised market (prime or premium level) for sports and outdoor equipment.⁹

26. As far as independents are concerned, the Commission finds that there are two types of independents. The word “independent” itself is somewhat imprecise but seems to be understood by the industry. The first type of independent is the general retailer of sports and outdoor goods who offers a range of goods across different categories. The independent general retailers are not part of a national chain and are located regionally or locally and may or may not sell other general merchandise. Typically this type of independent is owner managed with one or two outlets.

27. The second type of independent store is the specialist store, which is focussed on one specific sports or outdoor category. These stores are often owner managed and at times associated with a professional or past champion in that particular sports category. They also sell a greater proportion of branded, technical range equipment and sporting products in one sporting discipline and therefore, according to the Commission, these specialists form part of the “prime” level of the market. Most of these specialist independents are located outside of major retail nodes and do not have a national footprint. However a few of them do have stores in more than one major city.

28. The Commission concludes that both these types of independents are not effective competitors to the merging parties and are not in the same relevant market.

29. According to the Commission the market participants and markets shares for the relevant markets would be as follows:

The market for the retailing of general sports equipment through national chains ¹⁰

The market for the retailing of outdoor equipment through

national chains¹¹

30. In the sports equipment market the Commission held that market shares for the merged entity would be 81% with a change in HHI of 2999 showing a high degree of concentration. In the outdoor equipment market the Commission held that the market shares for the merged entity would be 70.66% with a change in HHI of 2264. For ease of convenience, the sports and outdoor markets will be referred to as the equipment markets.

31. As the tables indicate, both the pre merger and post merger shares indicate a highly concentrated market and the changes in HHI also indicate a highly concentrated market. An HHI above 1800 is generally considered to be an indication of a highly concentrated market. Mergers that produce an increase of more than 50 points are regarded by the US antitrust authorities as enhancing or creating market power.¹²

32. The Commission concluded that in the equipment markets the transaction would lead to a substantial lessening of competition. It further concluded that the parties had been unable to show any efficiencies resulting from this transaction or any public interest ground that could justify an approval despite the finding of a substantial lessening of competition. Furthermore the Commission concluded that a structural remedy for separating out the sports and outdoor equipment from the rest of the retail businesses of the two parties was not a viable solution in order to remedy the competition concern. Accordingly the Commission recommended that the transaction be prohibited.

The parties’ submissions

33. The merging parties have changed their definition of the relevant market between when they first notified the merger and during the hearing. In their competitiveness report, the merging parties submit that the relevant markets are those for sports and recreational footwear, sports and recreational apparel and sports and recreational equipment which consumers are able to buy from one store. The merging parties provided the Commission with market share figures of the merging parties based on turnover.

34. According to the merging parties the participants in the relevant market and their respective market shares were-

35. The post-merger market share of the merged entity in the equipment markets calculated by the merging parties would be 49%. Despite this high market share it was submitted by the parties that there was no lessening of competition because barriers to entry were low and customers had countervailing power.

36. However, during the hearing, the merging parties agreed with the Commission’s segmentation into sports and outdoor goods, which are further divided into three categories namely apparel, footwear and equipment. However they argue for a further segmentation of the market into two sub-markets namely the market for entry level goods on the one hand and the market for middle-prime level goods on the other hand. In effect the merging parties argue for 12 sub-markets i.e. they argue that each of the Commission’s relevant markets can be sub-divided into two further relevant markets. According to the merging parties, Massmart occupied the entry- level market and Moresport the middle-prime level market. In support of this contention the merging parties filed an expert report by Mr James Hodge of Genesis-Analytics.

37. It was argued by Mr James Hodge that Moresport may have an overlap of products with Massmart in the entry-level segment of sports and outdoor equipment but that this was not significant. He submitted that even though Moresport and Massmart were national chains and could be seen, at a broad level, to be competing with each other, Moresport occupied a different level of the market. Mr Hodge contends that Massmart was a general merchandiser and sold a range of merchandise including sports and recreational goods and was a high volume low margin business, focusing on entry level products, whereas Moresport was focussed only on sports and outdoor and was a high margin business focusing on middle-to-prime level products. Mr Hodge relied on a number of practical indicia, such as access to branded products, service levels, store design and aesthetics, advertising and promotion, differences in product levels sold (product segments), median pricing policy and margins to support the argument that Moresport occupied a different level of the market from Massmart. On the basis of this segmentation, it was argued further that there is no need for the Tribunal to decide conclusively on the boundaries of the geographic market or whether or who the other participants of this market were. All that the Tribunal had to decide was that Massmart and Moresport were not in the same relevant market. And similarly there was no need for them to give any market shares since there was no overlap.

Note on outdoor

38. It was agreed between the Commission and the merging parties that no competition concerns arose in relation to the sports and outdoor apparel and footwear markets. The reason for this was because there were a large number of competitors to the merging parties in these markets on a national basis. Competition concerns only arose in relation to the sports and outdoor equipment markets.

39. It was also common cause that the both Massmart and Moresport offer sports and outdoor equipment across a number of product categories, rather than specialising in one type of sports or outdoor activity.

40. Neither the merging parties nor the Commission led any evidence as to what would constitute outdoor and sports equipment and the delineation between the two. The merging parties, in their filing to the Commission clearly consider the sports and outdoor equipment markets as one market, namely sports and recreational equipment and have provided consolidated market shares in relation thereto. Subsequently they have accepted the distinction made by the Commission into sports and outdoor but have argued for market segmentation for both the sports and outdoor equipment markets on the basis of Mr Hodge’s indicia.

41. At this stage it seems to us that the segmentation of the industry into sports and outdoor may be somewhat embryonic as evidenced by competitors specialising in one or other different format. Massmart for example offers both sports and outdoor equipment under one roof as do many other stores. Moresport offers it in a seemingly specialised format through Outdoor Warehouse (OWH) but still seems to offer some outdoor goods in SWH. However, in our view nothing much turns on the segmentation of the equipment markets between sports and outdoor. Unlike specialist stores specialising in one sport category or one type of outdoor activity, both merging parties offer sports and outdoor equipment across a number of categories. Both the merging parties and the Commission have agreed that competition concerns arise in relation to the equipment markets, wherever the line between sports and outdoor may be drawn. Hence we have reviewed the evidence led on the practical indicia, as being equally applicable to both the sports and outdoor equipment markets.

42. A further issue to note is that the merging parties have provided us with market shares in their competitiveness report for a market described as sports and recreational equipment. While no evidence was led as to what constitutes recreational goods, we have understood the merging parties, by accepting the Commission’s distinction between sports and outdoor, as saying that sports and recreational is nothing more than sports and outdoor described in another way. If we have misunderstood the merging parties¹³ and recreational includes something more than outdoor, then we have been generous to the merging parties by relying on market share figures that possibly include more than sports and outdoor equipment in our competition analysis.

43. It is common cause that there are no vertical concerns in this transaction and that competition concerns arise only in relation to the equipment markets.

44. Prior to the commencement of the proceedings, the Tribunal requested a number of internal documents from both merging parties. During the course of the hearing, the Tribunal requested a number of additional documents and requested the Commission to conduct a price comparison of similar products in the relevant stores of the merging parties in order to obtain some price band comparison of the merging parties. The outcome of the Commission’s shop-out was submitted to the Tribunal after all the evidence had been led. The Tribunal will also consider this documentary evidence together with that of key witnesses in defining the relevant market.

RELEVANT PRODUCT MARKET DETERMINATION

45. The definition of a relevant product market for anti-trust purposes is not an easy exercise, particularly in markets where there is a high degree of product differentiation and the existence of non-price competition, such as in retail markets. Retail markets are dynamic and competitors are constantly striving to differentiate themselves from each other through a degree of non-price competition and product differentiation. Own brands and different model numbers on similar products are often used as “fighting brands”. Store formats, promotions, branding, advertising and service levels may be used as competitive strategies to attract the customer. Price comparisons may tend to become increasingly difficult for consumers in such a context. Hence businesses may differ at their peripheries even though they may be effective competitors or appear similar even though they may not be effective competitors. In order to determine whether two businesses are in the same relevant market, competition authorities seek to find evidence of rivalry between merging parties.

46. In this fluid and dynamic environment, traditional tests utilised by competition authorities such as the SSNIP test do not necessarily provide accurate tools with which to predict the impact of a merger on consumer behaviour. Neither are cross-elasticises of demand easily calculated in such markets. In the absence of evidence on cross-elasticises of demand and in a consumer or demand driven market such as this one, reliance is placed on practical indicia to assist a competition authority in determining a relevant market.

47. The merging parties accept the Commission’s broad segmentation of the relevant market into the sports and outdoor markets, then into apparel, footwear and equipment. However as discussed above they argue that the markets are further segmented into entry-level and middle-prime level markets. They submit that while Massmart and Moresport have an overlap in entry-level products, this overlap was insignificant and that Massmart occupied the entry-level segment and Moresport occupied the middle-prime level segment, and accordingly no competition concerns arose. The merging parties rely on the approach of the court in Brown Shoe, which approach has been adopted by this Tribunal in JD v Ellerines and a number of subsequent mergers. In Brown Shoe the court held that broader economic markets could be segmented into relevant markets for anti-trust purposes by having regard to practical indicia. The practical indicia for determining whether a sub-market exists include “industry or public recognition of the sub-market as a separate economic entity, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, grades of material, quality of workmanship, distinct prices and specialised vendors.”¹⁴ The list of practical indicia was not exhaustive.¹⁵

48. While many lawyers and experts may argue that the definition of a relevant market for anti-trust purposes is not the same as that defined by laymen or business people, the definition of a relevant market for anti-trust purposes is not a theoretical notion not based in the reality of commerce. Practical indicia are considered by competition authorities not simply to determine that one business is different from another, but for the purpose of determining the market in which companies (businesses) strive for profit or where in fact competition exists.¹⁶ Indeed the “determination of a relevant product market is a matter of business reality …of how a market is perceived by those who strive for profit in it.” ¹⁷ It is not an exercise whereby the practical indicia are simply enumerated in an exhaustive manner in order to highlight the similarities or differences between businesses but is rather an exercise in which competition authorities endeavour to identify from whom and from where a business faces competitive constraints or effective competition. It is for this reason, that competition authorities also have regard to the internal documents of each company, their pricing policies in relation to each other, the evidence of key executives or persons experienced in those businesses or in that industry, as well as the indicia listed by Mr Hodge, in order to define the relevant market.

49. Moreover competitive landscapes are dynamic in nature. The landscape in one retail market may not be the same over different time periods and one retail sector may differ from another, even though both may be located in a retail sector. Each case must be considered on its own facts and context. We turn to consider the internal documents of the merging parties, the evidence of key witnesses and outcomes of the shop-outs conducted by the Commission.

50. Most of the evidence considered hereafter is to assess whether such segmentation exists as argued by the merging parties, based on the approach of the court in Brown Shoe.

Strategic internal documents and evidence of key witnesses

1. Despite the suggestion by Mr Hodge, that Moresport has no competitors, the merging parties’ own competitiveness report, states that the parties do compete;

“The South African Sports market is made up of two main components; sports equipment and sports clothing and footwear. The sports equipment market is served by Game, Dion, Makro, Sportsman’s Warehouse, Pick and Pay Hypermarket, Checkers Hyper, Trade Centre and a number of independent specialists, including the Pro Shop and Cycle Labs.”¹⁸

51. This view is echoed in a research report conducted by McGregor’s “Who Owns Whom” which states that the retail section of the sports industry is dominated by the big three – Sportsmans Warehouse, TotalSports and Game and Dion.¹⁹

52. In the course of a valuation of Moresport conducted by Nedbank, the Massmart Group is identified as representing the largest competitor in the equipment space. Makro, Dion and Game are stated as having a material offering of entry-level sporting equipment at competitive prices and that management estimates that Massmart, TotalSports and Edgars make up the rest of the 80%-75% of the market in which SWH competes,²⁰ Massmart is seen as a competitor to Sportsmans Warehouse (SWH) and the Pro Shop at the entry level,²¹ and a dominant competitor in the outdoor equipment market.²² This valuation was done by Nedbank in 2003 on behalf of a management buy-out of Moresport. At that time the Pro Shop, a specialist golf shop, was still part of the Moresport group but was maintained as a separate business within the group. Further, in the athletic branded footwear market, Moresport is identified as competing “head-on with retailers such as Massmart, Foschini and Edgars”²³. In the Nedbank valuation, only national chains, which offer a range of sports and outdoor goods, are identified as competitors. No mention is made of the independent general retailers. Mr Hodgson, the managing director of Moresport attempted to argue, unpersuasively to the Tribunal that the drafters of the valuation report were not necessarily qualified to identify Moresport’s key competitors. This despite the fact that the persons cited as authors of the report served as directors on the Board of Moresport and the report was compiled in consultation with Moresport management.

53. A closer inspection of the minutes of Moresport’s merchandise strategic meetings confirms the view that Massmart was considered to be a key competitor to Moresport across a number of sports categories. In minutes entitled “Strategic Drivers for FY03/04” and under the heading “Monthly competitors shop-out must be done (see Schedule A),” buyers in each department were required to do formal monthly shop-outs of competitors listed in a schedule to the minute. Massmart is listed as competitor in Footwear, Equipment 1,²⁴ Equipment 3,²⁵ Equipment 2²⁶ and Golf. Buyers were required to do formal monthly shop-outs and feed the information back into the strategic meetings. ²⁷

54. Massmart itself considers Moresport to be a key competitor in the sports equipment market. In the Massmart Board Approval report,²⁸ the sports equipment market is said to be served by Game, Dion, Makro, Sportsmans Warehouse, Pick n Pay Hypermarket, Checkers, Hyper, Trade Centre and a number of specialist independents including the Pro Shop and Cycle Lab. In its strategic documents entitled “Sports Department Strategy Update 2005” ²⁹ Massmart reflects an assessment of its competitors. The document identifies its key competitors as Sportsmans Warehouse and the Pro Shop. Other national chains and independents are listed but not as key competitors. ³⁰

55. Hence, a consideration of the internal documents of the merging parties contained both in the record and those that were subsequently filed in the course of the proceedings indicate that both Massmart and Moresport consider each other as key competitors across a range of sports categories. While other national chains and independents are mentioned in relation to specific sports categories, both Massmart and Moresport consider each other as major rivals in the general sports and outdoor market and Massmart is listed by Moresport as a key competitor in the general sports equipment space and across a range of specific sports categories.

56. The evidence of key witnesses tends to confirm this. Mr Paul Stone and Mr William Keet had been called by the Commission under subpoena to testify before the Tribunal. Both are experienced buyers in the sports industry and specifically in sports equipment.

57. Mr Paul Stone, who was previously employed by Moresport as a buyer of several equipment departments until 2005 at Sportsmans Warehouse (SWH), and whose initials appear in the Moresport minutes referred to above as the person responsible for doing such shop-outs, confirmed that buyers did indeed conduct such shop-outs and that Massmart was considered to be a key competitor of Moresport. He explained that as part of their shop-outs buyers would go to their competitors’ stores, look at the product in-store and also analyse the leaflets that were distributed. He testified that he himself had conducted such shop-outs and that the pricing information obtained by him would be fed back into Moresport meetings as part of the information utilised in setting their prices. The competitors they looked to were Massmart, TotalSports, Pro Shop and one or two larger independents in the Cape Town area. However, in his view Massmart and Moresport were the major players in the sports equipment market, with TotalSports, being a smaller player in the equipment space. Mr Stone also confirmed that in the area of general sporting equipment, namely a store that carries a wide range and not just one sporting code, there were only two other national chains, namely Massmart and TotalSports.³¹

58. Mr William Keet who had been a buyer for the Massmart group, principally on behalf of Game until September 2005, testified that in the sports equipment market Moresport was the only true competitor. Mr Keet was a buyer with the Massmart group since 1996 and has 17 years experience in the industry. He explained that from a Game perspective, his competitors were more Makro, Dion and SWH. After the merger of Game, Makro and Dion, only Sportsmans Warehouse was a true competitor in the sports equipment market.

MR KEET: …So those would have been the chains. Towards the end of my career it was really just what we were setting and Game and Dion and Makro was one, as you know. So it would have been Sportsman’s Warehouse was my only true competitor that I could shop out and measure against.³²

And,

…Certainly the Massmart Group and Moresports. I mean that’s a fact. You can’t run away from it. Those are the two players. I mean who else do you see out there? Not Pro Shop. ³³

59. Mr Keet explained that he constantly monitored Moresport’s prices and at the time that the SWOT analysis (strategy document referred to above) was compiled, there was a threat of Moresport “coming down” into the Massmart market. By the time he left Massmart, Massmart was certainly “playing in the Sportsmans Warehouse space.” He also testified how, over time, his prices were moving closer to Sportsmans Warehouse and converging.³⁴

“You were forever comparing prices. You were getting ideas from them. They were market leaders in many instances. We followed. Sometimes we were maybe a market leader and maybe they followed.” ³⁵

60. The internal documents of the merging parties and the evidence of key witnesses suggest that both Massmart and Moresport were seen as national general retailers of sports and outdoor goods, and that both viewed the other as a key competitor in the equipment space across a number of sports categories. Both companies were described as wrestling for market leadership with each other.

61. Furthermore both Mr Keet and Mr Stone,³⁶ described a market that had changed considerably over the years, in which the independent general sports retailer had been pushed out of the market by the national chains and in which the independents were now more specialist stores. There were a few general independents but these were usually localised to a particular city, town or region. At a national chain level only Massmart, TotalSports and Moresport were seen as general sports retailers in the sports equipment market.

Extent of overlap, product segmentation and customer focus

62. Mr Hodge, the expert witness for the merging parties, submits the overlap between Massmart and Moresport was only at entry level but this overlap was insignificant and that Moresport was more focused on middle-prime level segments while Massmart was focussed on entry level goods. However on being asked as to how he could determine the extent of the overlap and the difference between entry and the other levels, he replies –

MR HODGE: Look, with all due respect, I don’t consider myself a sports expert. I’m not. I’m not sure the extent to which the Commission is able to determine exact overlapping functional characteristics. I’m not sure who did this comparison, but I would question their expertise. I certainly learnt in a huge amount of walking around with a buyer on aspects that would not even occur to me. ³⁷

And further,

MS KALLA: And in your analysis you didn’t do anything to show this difference and/or similarity? Wouldn’t you thought it was important for purposes of trying to define the market, to have that analysis? The Commission has done it to an extent and you’ve made criticisms of that analysis, yet your report is void of that same analysis?

MR HODGE: Well, I think that’s because it’s the difficulty. I as an economist cannot stand up here and say, this bike and that bike are exactly the same functionally. That’s not my expertise and so for me to presumably try and do that in my report, really...

MS KALLA: But that information was available to you?

MR HODGE: Well, it couldn’t be evidence through me. I can’t make that. I’m not an expert. You know, maybe if we have a number of expert buyers here, they can make those judgements (our emphasis), but I’m certainly not in a position to. ³⁸

63. While much of the witness testimony around the contours of the relevant market was impressionistic, a discernable pattern emerged.

64. Mr Hodgson, the CEO of Moresport, suggested that the extent of the overlap was at entry-level product and was only approximately 10% of Moresports’ business. However when he was asked by Ms Kalla on behalf of the Commission to discuss the overlap by category of sports it emerged that the overlap is not identical across all categories thus demonstrating that the extent of overlap varied from sports category to category and that there was a degree of fluidity in the overlap.

65. While no further evidence was led by the merging parties as to where the dividing line between entry level or middle level could be found, or how the figure of 10% was calculated, both Mr Stone and Mr Keet, testified that the overlap in product level sold by Massmart and Moresport varied from category to category and even though Massmart had lower entry price points and Moresport higher exit price points, the overlap was more an entry-to-middle level. ³⁹ Both Mr Stone and Mr Keet were buyers of sports equipment and were closer to the business than either Mr Hodgson or Mr Lamberti, who were further removed from the business.⁴⁰

66. Mr Keet and Mr Stone testified that as buyers they had the responsibility of sourcing products from suppliers, negotiating lower prices and setting selling prices, having regard to the departmental targets of margin and turnover.

67. Mr Stone testified that the overlap between Massmart and Moresport was much more than 10% sometimes reaching 80% in the categories in which he had direct experience. By way of example he stated that in the categories he purchased, such as swimming the overlap would be 80%- 90%, in underwater 50%, digital watches 50- 60%, there was no overlap in heart rate monitors and in golf it was about 60%.⁴¹ He also testified that in some categories such as golf, Moresport was focussed on entry level to mid with a small offering in prime level in selected stores. Furthermore the products at entry level at the Massmart stores and the entry-level products at a Moresport store were functionally interchangeable even though they may have used different brands.⁴² In this regard both he and Mr Keet explained that they would often obtain the same or similar product but with a different name or number from the same supplier.

68. Both Mr Stone and Mr Keet referred to price points, rather than product segmentation, as a measure of rivalry and target market.

69. Mr Stone explained that in the market there were opening price points and then middle and upper, as you go through the ranges. He stated that the store (referring to SWH) would offer mostly all three levels of entry, mid and premium but that the bulk of the market would be the opening or put another way the entry sort of price with a little bit of mid to top.⁴³ He stated that in each category there was a target market and in some categories there was a wider range of target. Golf for instance, the target was –

“the entry level golfer, the guy that’s starting to play, who may be intimidated by the Pro Shop because it’s a very big store and the salespeople there are really good golfers generally. They play single figure handicaps and people had been intimidated by the Pro Shop. But then on golf accessories like gloves and tees and golf balls, there you could target anybody, because there’s no advantage to go into the Pro Shop. So there you could target any golfer. In swimming Moresport catered for the entire market, from entry level right through to top-end. In underwater the target market was more recreational, rather than top end and was generally aimed at your average non-professional, not very serious, more educational type customer.”

And

“We didn’t do the scuba diving equipment. So we didn’t really target that person and in fact in wetsuits we targeted the tunic and the surf suit. We actually got out of the whole diving suit market. So it was more a recreational use.” ⁴⁴

70. Under cross-examination by the merging parties, a fair amount of focus was placed on golf and exercise equipment to demonstrate that Moresport carried prime level products which Massmart didn’t. However Mr Stone maintained that while Massmart may have entry level they have a bit of middle level and that in a category such as golf Moresport did focus on entry level and only kept a few premium brands in selected stores. ⁴⁵

71. Mr Stone’s evidence is confirmed by Mr Hodgson who states that in a category such as golf, SWH did not have the same credibility as the Pro Shop or Golfer’s Club and that the Moresport merchandise strategy was to offer a range of product to the new entrant.⁴⁶

72. Mr Keet confirms that the overlap is category dependent but that Massmart and Moresport have been moving closer together in their product offerings. He testified that prior to the merger between Game and Makro, Massmart’s focus was on entry level but that over time they had grown closer to SWH. They were constantly trying to push the boundaries of their traditional markets and price points. By the time that he had left Massmart in 2005, Massmart had an entry to mid level offering and that the “cross-over” with Moresport would be more in the middle entry to early middle levels. -

MR KEET: Normally in the middle. One didn’t want your entry price point to be your bestseller. There’s normally a little less margin on it, although the exercise cycle was a different issue. It’s nicer to sell more expensive stuff. You’ve got to sell a lot less of it to make your budgets. It’s less pressure on the stores. So one would always generally … the middle to upper for us were our best sellers, certainly in those categories.⁴⁷

…Once again it’s category specific. I would probably say because they were always slightly higher than us, more our mid entry. The crossover was most probably more in mid entry as opposed to the real start or the entry price point product. ⁴⁸

…So we certainly weren’t an entry price point retailer because we had a range of 4, 5, 6, 7 treadmills on a range at any one varying time, starting at I think R3 999,00. When I left my last one I put into the business was probably about 10, or R11 999,00. Once again before my R12 000,00 treadmill came in, my best selling treadmill in the range was the R9 999,00 treadmill, not my R3 000,00 treadmill. So we certainly wouldn’t be seen in that category of merchandise to be an entry price point retailer by no means, because Sportsman’s Warehouse certainly carried treadmills at the same price points with similar specifications or identical specifications. ⁴⁹

73. Under cross examination by the merging parties:

ADV SUBEL: There was an overlap but it appears that theirs starts where almost you are exiting.

MR KEET: I think many years ago we didn’t even get to them, but as the years have gone one, we’re encroached onto their market and in a years time we would’ve been probably right in the middle of them, but currently there certainly is an overlap in that area.⁵⁰

74. He went on to state that in the area of exercise equipment for example, while some of their products were differentiated by the same suppliers providing them with different labels, the product was essentially the same.⁵¹ He went on further to explain that the type of consumer that would buy a treadmill is a financial buyer and that the health equipment offered by Massmart was functionally interchangeable with that offered by Moresport even though Moresport would have a higher exit price. Since there was no internationally recognised brand that anyone aspired to in a treadmill, a buyer of a treadmill will purchase on the basis of their budget, the features and the benefits of the treadmill and on the basis of store location.⁵²

75. Mr Rhys Hughes, the joint managing director of the Pro Shop, testified that SWH dabbled with technical or top-end product and that while they carry a sprinkling of it, “its best a sprinkling of top-end merchandise and that they were not really serious in that business” and they were simply stocking these products as a showcase. According to him SWH was more active in the entry level or entry to lower mid.⁵³ In his view Moresport had remained static in the Golf category but that Massmart had experienced a flurry of improvement, even though in his last shop-out he was surprised to see a small offering at Massmart.⁵⁴ He testified that the overlap between Pro Shop, Massmart and Moresport in golf was entry to middle level. In explaining this he also testified that the products offered at Massmart, Moreport and Pro Shop at entry level at least were functionally interchangeable. While all three companies would not stock the same brands at entry level and would utilise a brand strategy to differentiate their products, they would all carry similar products in a category.⁵⁵

76. From the testimony of these experienced industry participants, a picture emerges that Massmart and Moresport competed with each other even though the extent of the product overlap between them varied from category to category. Over time they in fact have grown closer together in product and price overlaps. In certain categories such as treadmills and exercise bikes Massmart went right to the top. In other categories such as golf Moresport kept a sprinkling of the top. There was a degree of fluidity in the extent of the overlap and their products were functionally interchangeable. By and large, they targeted the same customer, seemingly on the entry-to-middle levels of the market. School children were a significant component of their customer base.⁵⁶ In the case of Moresport, Mr Hodgson claims that their principal customers were children between the ages of 10 to 18 and that a significant part of their marketing strategy was oriented around school going children. ⁵⁷ This target market can hardly be said to have a large number of advanced players. Moresport offered a few prime level products in certain categories but was not considered to be a serious player in this level of the market.

Pricing and margins

77. Mr Hodge relies on the notion of median pricing and margins as a basis for market segmentation. The use of this methodology for market definition is unorthodox and we have not found it being mentioned by competition law academics or competition agencies.⁵⁸ Much reliance was place by Mr Hodge on the approach of the US court in Federal Trade Commission v Staples Inc. and Office Depot Inc.⁵⁹ and the approach of this Tribunal in JD Group Limited and Ellerines Holdings Limited.⁶⁰ We review his approach below.

Pricing

78. Mr Hodge on behalf of the merging parties testified that the median price of Massmart and its margins on sports equipment were much lower than that of Moresport. This indicated that Moresport sold a very different basket of goods to a very different customer and that its focus was more on the mid-to-prime level segments of sports equipment whereas Massmart was concerned with low margins and high volumes. The median price calculated by Mr Hodge was not a mean or average price of a product in a category, but was seemingly an average price adjusted for volume. According to him a median price was calculated by looking at the middle price in range of products. So for example, if there was a range of 10 cricket bats sold by the company the price of cricket bat 5 would constitute the median price. He calculated median prices of selected products for both Massmart and Moresport and compared the two as shown in the table below.

Hodge’s Median price for sports equipment item sold at Game/Dion, Makro and Sportsmans Warehouse.⁶¹