The Competition Authority annuls the merger of Haga and Lyfja

The Competition Authority has annulled the merger planned through the acquisition of all shares in Lyfju hf. by Haga hf.

The Competition Authority's conclusion is that with its acquisition of Lyfju, Hagar would have strengthened its dominant market position in the grocery market and a harmful concentration would have occurred in the markets in which both Hagar and Lyfju operate, not least in the cleaning products- and cosmetics market. The merger would have resulted in the elimination of the competition that currently exists between Hagar and Lyfja in that market. The changes would have been likely to harm competition, to the detriment of the public and business life. It was therefore unavoidable to annul the merger.

The above decision is taken following a detailed investigation which included, amongst other things, the following points:

• Position in markets in which both Hagar and Lyfja operate:
  The Competition Authority's investigation revealed that the companies are close competitors in the retail of toiletries and cosmetics, the market for vitamins, supplements and minerals, and the market for food and drink products in the health food category.

  Turnover in these markets is a total of around 20 billion króna per year. The companies are both strong competitors in the aforementioned markets, and the combined company would have had a significant market share. Following the merger, competition between the companies would have disappeared and, in some areas outside the capital region, the combined company would have been the sole retailer of the products in question.

  The Competition Authority's conclusion is that the merged company would have had a significant competitive advantage over other competitors, partly due to its financial strength and strong position in importation and distribution in certain sectors, which would have been difficult to compete with. The Competition Authority considers that the merger would have significantly distorted competition in these markets. By annulling the merger, consumers are protected from the harm that would otherwise have resulted, for example, in the form of higher prices, reduced service or a smaller range of products.

• Haga's dominant market position in the grocery market:
  The Competition Authority's investigation also focused on whether Hagar's position in the grocery market had changed in recent years, as competition authorities and the courts had previously concluded that the company was in a dominant position. In the opinion of the Competition Authority, Hagar is still in a dominant market position. In this regard, consideration was given, among other things, to the company's significant market share, while the views of customers and competitors that were gathered also indicate that the company's position is strong.
  The Competition Authority's investigation further reveals that the merger would have strengthened Haga's dominant market position. This strengthening would have primarily manifested itself in the increased purchasing power of the merged entity, the integration of stores, store locations, and the potential for an expanded product range in Lyfju stores. Each of these factors would have been likely to strengthen Haga's dominant market position in the grocery market, directly or indirectly, and thereby distort competition.
• The Costco effect:
  In merger cases, the Competition Authority is legally required to make a decision within a specified time limit. It has only been a short time since Costco began operating in this country. The case examined, as far as was possible, the effect that Costco's operations would have on the markets concerned. Statistical information and viewpoints were obtained from Costco and other retailers and suppliers in the relevant markets, the findings of various analysts were examined, information was obtained about the experience of Costco openings elsewhere, and data was gathered on the experience of other foreign retail companies that have commenced operations in Iceland. Based on the available data, different scenarios regarding the potential long-term effects of Costco were then developed.

  The conclusion of this study is that the opening and presence of Costco in the Icelandic market has a limited impact on the markets in which both Hagar and Lyfja operate, namely, primarily the toiletries and cosmetics market.

  The available information indicates that the opening of the Costco store has had a positive effect on competition in the grocery market. However, at this stage, there is no basis to assume that Costco's operations have significantly reduced Haga's strong market position. The outcome of this case will therefore not be based on the assumption that Hagar is no longer in a dominant market position, or that such a change will occur in the near future. In this regard, the Competition Authority agrees with Hagar and other market players who have stated that it is too early to say what effect Costco will have in this country in the long term.

  There is, however, every reason to monitor the market's development closely over the coming quarters.

• The duty-free shop and online shopping:
  The Competition Authority also investigated whether the duty-free shop at Keflavik Airport and online retail were considered part of the relevant markets. To this end, the Authority collected data on sales in this sector, including turnover, frequency and distribution, and also examined decisions from foreign competition authorities. The Competition Authority also commissioned a special consumer survey to shed light on consumer purchasing behaviour and attitudes.

  The findings of this study strongly suggest that duty-free shopping and online retail are not part of the relevant market, although they do provide a certain competitive restraint to domestic retail.

• Conditions:
  During the course of the case, Hagar put forward proposals for conditions which the company considered would prevent the merger from distorting competition. These proposals were subject to special review, and the views of interested parties were sought. The Competition Authority assessed that the proposals were not sufficient to eliminate the harmful effects the merger would otherwise have on competition. Hagar were not prepared to submit further proposals for conditions.

Páll Gunnar Pálsson, Director-General of the Competition Authority:
„The public in Iceland is to enjoy lower prices and better service in important consumer markets, based on effective competition. The merger rules of competition law are intended, among other things, to ensure this. Our investigation shows that this merger would have been a step in the opposite direction.

In the decision No. 28/2017, The decision, which is available on the Competition Authority's website at www.samkeppni.is, provides a detailed account of the rationale for the decision, the underlying investigations and the handling of the case in other respects.

A satisfactory merger notification was received by the Competition Authority on 31 January. An investigation into the matter was launched in its wake and was extensive, as the decision shows.