As the competition watchdog decides whether to block JD Sports Fashion’s takeover of rival Footasylum, Drapers explores what the “landmark ruling” will mean for the future of the fashion retail sector.
No retailer can avoid the hardline of the UK’s competition watchdog, as JD Sports Fashion is realising.
Under the iron fist of chairman Andrew Tyrie, the Competition and Markets Authority (CMA) is resolute in protecting consumer interests at all costs. Supermarkets Sainsbury’s and Asda felt the impact of its tough stance when their planned merger was axed last year. This has been followed by, among others, probes into Takeaway.com’s planned take over of Just Eat and Amazon’s investment in food delivery firm Deliveroo.
The watchdog has also recently moved in on the fashion retail scene, and on 11 February blocked JD Sports Fashion’s £90m purchase of rival Footasylum.
The CMA believes the deal, agreed last March, could “substantially lessen” competition and leave shoppers worse off. Following the second phase of its investigation, it said the takeover could lead to fewer discounts, a lower level of service and less choice in stores and online. The watchdog has asked JD Sports to offer remedies by 25 February, or it will block the takeover and force it to sell Footasylum. A final decision will be made on 11 May.
“This is a large and growing market in the UK, so it is important that the CMA carefully scrutinises a deal between two key rival businesses,” said Kip Meek, chair of the independent inquiry group leading the investigation.
The provisional findings have split industry opinion, but several retailers have welcomed the ruling, suggesting that the merger had the potential to create an “unfair” playing field.
“I think this is the right decision for the market moving forward,” one multiple sportswear retailer said. “There cannot be players monopolising the high street as they push everyone else out. I don’t think it’s negative because I believe someone else will come in and buy Footasylum anyway – but it will give other retailers a chance.”
The reality is that there are only a couple of outliers in the industry doing well. It’s consolidating, rather than expanding
High street footwear retailer
One high street footwear retailer agreed: “As a competitor, it’s a good thing if they are forced to sell Footasylum. The reality is that there are only a couple of outliers in the industry doing well. It’s consolidating, rather than expanding. There aren’t many retailers of this size kicking about. The only time we’ll probably see this again in our lifetime is if another supermarket wants to merge.”
JD Sports Fashion has more than 2,400 stores across a number of fascias worldwide. In sports fashion, these include JD, Footpatrol, Size?, Sprinter and Tessuti, while its outdoor formats include Blacks, Millets and Go Outdoors.
Nick Mavrides, owner of sportswear store Ace Sports in London’s Kentish Town, who wrote a formal letter to the CMA expressing his concerns about the merger, said: “I’m really pleased with the outcome because it would have created even less choice for the general public, as JD Sports and Footasylum would have swooped in and dominated the high street. Mergers are creating a very unfair, uneven playing field.”
He hailed the decision as a “landmark ruling” for fashion retailers: “This has opened a can of worms and will get people to start taking notice of what is happening on the high street.”
Richard Lim, CEO at Retail Economics, agreed that the decision seems to have confirmed that the CMA is taking “a much more hands-on approach” in shaping the composition of the retail sector going forward.
CMA ’misunderstands’ current market
However, executive chairman of JD Sports Fashion Peter Cowgill lambasted the CMA’s “fundamentally flawed” findings, arguing that they did not reflect “the intensive and dynamic competitive reality of the UK sports retail market”.
The sportswear business said: “Large numbers of retailers selling third-party brands compete not only with each other, but also with major online pureplayers and, most importantly, the increasingly powerful direct to consumer operations of the international brands themselves.”
JD Sports has reiterated its argument that the major sportswear brands, namely Nike and Adidas, set the competitive framework between retailers. It also said it anticipated that Footasylum would contribute less than 2% of the group’s earnings in the year to January 2020.
The high street needs to consolidate if it is to survive, so mergers are a highly necessary part of this process
Mark Pilkington, retail analyst
Several industry observers criticised the CMA’s decision, agreeing that the government has an old-fashioned view of the shifting sector.
“JD is absolutely right to say that the CMA has fundamentally misunderstood the nature of the current retail market,” said retail analyst Mark Pilkington. “We are witnessing a fundamental revolution in the brand and retail market, with the rise of ecommerce players and direct-to-consumer brands. This is creating widespread disruption in the market and leading to unprecedented bankruptcies and store closures.
“The high street needs to consolidate if it is to survive, so mergers are a highly necessary part of this process,” he added. “The government is treading on the retail industry when it is down.”
Investment broker Shore Capital said it was “surprised and disappointed by the CMA’s provisional findings” and it hoped “common sense would prevail”.
“Bad news” for Footasylum
Others are concerned that if the merger were to be formally blocked, it would set a negative precedent for the sector.
One source close to JD’s rival Sports Direct described the ruling as a “load of nonsense”: “JD may be dominant and getting bigger, but frankly, so what? The high street is not an easy place to be right now, with shoppers having more choice than ever before through a multitude of online, physical and social channels – and JD Sports is rising above that and bucking the struggling retail trend.”
He added: “This watershed decision will set a negative precedent for retailers wanting to expand or acquire new businesses. They will be cautious as they now know it could cause a huge inconvenience and rack up large costs. It feels very biased against retailers when authorities make decisions like this.”
Stephen Sidkin, fashion law partner at Fox Williams, agreed: “Similar retail mergers could now face similar investigations by the CMA and provisional outcomes. As such, JD Sports and Footasylum could well be a precedent.”
Industry observers have predicted that Footasylum would suffer if JD is forced to sell.
“There don’t seem to be many remedies being proposed by the CMA to rescue the deal: a sale of the business seems the only route open to JD at this stage,” said Jonathan Pritchard, retail analyst at Peel Hunt.
“We struggle to see how Footasylum is going to prosper post-sale. Of course, the obvious bidder is [Sports Direct owner] Frasers Group, but there would appear to be as many [competition] issues as there are with JD. Whilst the flagship Sports Direct stores are impressive, it’s hard to argue that the Footasylum product range and service culture would improve more [under] that ownership than with JD. As a standalone business, Footasylum has already been exposed as being flawed.”
Kate Ormrod, lead retail analyst at GlobalData, said it would be “a tall order” to convince the CMA of the merger’s merits, but added that if JD Sports was unable to push the deal through it would only be “a hiccup in its history” as it would continue to acquire businesses from outside the UK.
Drapers has contacted the CMA and Frasers Group for comment on this article. JD Sports declined to comment.
The Drapers Verdict
In a market that is obsessed with athleisure, JD Sports Fashion has blown the competition out of the water with its strong brand relationships, customer proposition and innovative marketing.
As the multi-billion-pound sportswear behemoth continues to swoop on struggling retailers to strengthen its group proposition, it is no wonder that its rivals and the CMA are concerned about market competition.
But is the watchdog’s clampdown on mergers actually hurting the industry? Footasylum could collapse if the merger is blocked, resulting in another blow to the high street. In turn, this could discourage other retailers from acquiring businesses in the future, leading to yet more empty units in towns across the UK.