Leaving the door open for other comments by Sept. 16 before making a final decision in October, the U.K. Competition and Markets Authority (CMA) restated on Sept. 2 its provisional ban on JD Sports Fashion’s already completed acquisition of the Footasylum, in spite of criticism expressed by the Competition Appeal Tribunal on March 4. The latter asked the CMA for further examination of the anti-trust case, particularly in view of the possible effects of the Covid-19 pandemic and the likely post-merger constraints from Adidas’ and Nike’s direct-to-consumer (DTC) strategies.
The British anti-trust authority, which started to look into the case on May 17, 2019, had already concluded on May 6, 2020, that the transaction has resulted or many be expected to result in a “substantial lessening of competition” in the retail supply of sports-inspired casual footwear.
The CMA pointed out that both JD Sports and Footasylum offer sports-inspired casual footwear and that there is a high degree of geographic overlap in their physical stores. They also target a similar demographic in the 16-24 age group, although Footasylum appeals more than JD to male customers.
This time, the CMA said that the aggregate constraints from rival retailers and from the two major brands would not be sufficient to offset the competitive constraint that JD Sports imparts on Footasylum, while admitting to an “only moderate” constraint by Footasylym on JD Sports. Therefore, the CMA indicated, the merger could lead JD to worsen Footasylum’s offering “profitably or not improve that offering as much as it would otherwise have done across aspects of price, quality, range and service levels.”
Responding to this claim, JD said it “does not understand how the CMA can so clearly agree with JD that it would have no incentive to deteriorate the price, quality, range and service offered at JD but then still find, despite all the market dynamics, that JD would find it commercially rational to worsen the Footasylum retail offer for a period of two years or more.”
Peter Cowgill, executive chairman of the JD group, insisted that the CMA’s clearance of the transaction “would enable JD to invest in Footasylum and work with its management team to increase the quality, range and choice of products available to its consumers which will bring wider benefits to a UK High Street decimated by a number of high-profile closures.”
JD also said that it “remains committed to its transaction goal of improving Footasylum’s resources, access to product and differentiated customer proposition.” It did not elaborate on the issue of the chain’s “access to product,” although both Adidas and Nike have repeatedly described the JD group as one of their strategic retail partners, in contrast with many wholesale accounts that are being cut off.
The CMA said it took into account the growth of Nike’s and Adidas’ DTC sales and possible changes in Footasylum’s product allocations in its latest findings. Commenting on them, JD pointed out that the Covid pandemic has accelerated Nike’s and Adidas’ DTC strategies. Prior to the pandemic, DTC represented less than a third of Nike’s total sales and about one-third of Adidas’ sales. DTC grew to almost 40 percent of Nike’s sales in the financial year ended last May 31, and the company announced a new target of 60 percent by 2025. For Adidas, DTC grew to over 40 percent in the year ended last Dec. 31, and the company now has a target of 50 percent by 2025.
Noting that it held a formal hearing with Nike and obtained “confidential” evidence from the brand about its relation with Footasylum and other British retailers since 2019, the CMA concluded that, under “the most likely scenario,” Footasylum would have continued to receive products from Nike if it had not merged with JD, and that it would have continued to compete effectively. The CMA also noted that Adidas’ DTC operations have been growing strongly, but they have become a stronger constraint on JD Sports than on Footasylum, which carries fewer footwear items by the German brand than JD.
The CMA also mentioned a survey of online consumers conducted in May, which showed that JD Sports was by far the closest alternative for Footasylum’s online customers, followed by Nike’s DTC offerings. It added that the survey’s results indicated that Footasylum has weakened in customers’ minds since it issued its previous report on the merger. JD Sports customers now consider Nike, Foot Locker and Adidas as their alternatives ahead of Footasylum, which previously ranked second after Nike.
