Company Announcements

Update on CMA review of Footasylum acquisition

Source: RNS
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JD Sports Fashion Plc
02 September 2021
 

2 September 2021

JD Sports Fashion Plc

Update on CMA review of Footasylum acquisition

JD Sports Fashion Plc (the 'Group' or 'JD') notes the announcement earlier today from the Competition and Markets Authority ('CMA') that it has again provisionally prohibited the Group's acquisition of Footasylum Limited ('Footasylum').

JD nevertheless remains committed to its transaction goal of improving Footasylum's resources, access to product and differentiated customer proposition.

This case was remitted back to the CMA by the Competition Appeal Tribunal (the 'Tribunal') on 4 March 2021. The Tribunal had quashed the original report which prohibited the deal noting that the CMA had "acted irrationally in that it did not have the necessary evidence" in relation to its conclusions on the possible effects of the COVID-19 pandemic on our market. 

In its ruling, the Tribunal found that a pivotal failing of the CMA was its lack of inquiry into the increased competitive threat of Nike's and adidas' own Direct to Consumer ('DTC') retail offer caused by the pandemic.  A unique feature of this market is that, as with all retailers in the brands' wholesale channel, JD and Footasylum, rely entirely on these brands for their supply of Nike and adidas branded product but also compete hard against their growing DTC operations. 

Accordingly, one of the CMA's primary tasks in the remittal process was to consider the impact that COVID-19 has had on Nike's and adidas' DTC strategies.  A specific way of measuring this change is to look at the ratio of the brands' DTC sales to the sales they make to third party retailers on a wholesale basis.  In May 2020, the CMA reached a static conclusion that "the ratio of DTC to wholesale sales will not change significantly".  The Tribunal found that the CMA had failed to investigate the dynamic question of "whether, and to what extent, the unfolding pandemic might affect the DTC-wholesale ratio".

The evidence to answer that dynamic question is indisputable. By causing a structural shift in favour of online shopping, the COVID-19 impact has empowered and accelerated Nike's and adidas's DTC strategies:

·          Nike: Prior to the pandemic, DTC represented less than a third of total sales growing to almost 40% in its last financial year to 31 May 2021. In June 2021, Nike announced a new target of 60% sales from DTC by 2025.

·         adidas: Prior to the pandemic, DTC represented approximately a third of total sales growing to over 40% in its last financial year to 31 December 2020. In March 2021, adidas announced a new target of 50% sales from DTC by 2025.

 

In addition, while DTC has expanded so strongly, the CMA now correctly concludes that "the constraint by Footasylum on JD Sports to be only moderate, at best".

 

The Group finds it surprising that these key facts have changed so substantially but the CMA's conclusion has not.  In these circumstances, it struggles to understand how the merger could result in a "substantial lessening of competition" in a market which is increasingly being shaped by the brands' DTC strategies. In particular, the Group 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.

 

These findings are provisional and we will continue to make our case strongly to the CMA before it releases its Final Report due in October 2021.

Peter Cowgill, Executive Chairman of JD Sports Fashion Plc, commented:

"We have made compelling submissions on the committed positioning of the global brands towards Direct to Consumer and the consequent impact on an extremely competitive marketplace.  I am perplexed and again disappointed that these have been rejected.  I am not sure what further evidence the CMA needs to appreciate the extent of this dynamic change which has been substantially accelerated by COVID-19.

"If the CMA's mission is indeed to "make markets work well in the interests of consumers, businesses and the economy" then I urge the CMA to reconsider its position before making its final determination.  This transaction will simply not "lessen" competition, let alone "substantially".  On the contrary, clearance 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."

 

Enquiries:

 

JD Sports Fashion Plc                                                                                     Tel:  0161 767 1000

Peter Cowgill, Executive Chairman

Neil Greenhalgh, Chief Financial Officer

Jennifer Iveson, Investor Relations

 

MHP Communications                                                                                     Tel:  0203 128 8193

Andrew Jaques

Peter Hewer

Charles Hirst

Catherine Chapman

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