Case No COMP/M.1972 - GRANADA / COMPASS REGULATION

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Case No COMP/M.1972 -

GRANADA / COMPASS

Only the English text is available and authentic.

REGULATION (EEC) No 4064/89

MERGER PROCEDURE

Article 6(1)(b) NON-OPPOSITION

Date: 29/06/2000

Also available in the CELEX database

Document No 300M1972

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Telex: COMEU B 21877. Telegraphic address: COMEUR Brussels.

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 29.06.2000

SG(2000)D/

To the notifying parties

Dear Madam/Sir,

Subject: Case No COMP/M.1972 – Granada/Compass

Notification of 25/05/00 pursuant to Article 4 of Council Regulation No 4064/89

1. On the 25 May 2000 the Commission received a notification of a proposed concentration

pursuant of Article 4 of Council Regulation (EEC) No. 4064/89

, whereby Granada

Group PLC (Granada) UK and Compass Group PLC (Compass) UK enter into a full

merger.

2. After examination of the notification, the Commission has concluded that the notified

operation falls within the scope of Council Regulation (EEC) No 4064/89 and does not

raise serious doubts as to its compatibility with the common market and with the

functioning of the EEA Agreement.

I THE PARTIES

3. Granada is a publicly quoted company listed on the London Stock Exchange. Granada’s

principal activities are in media (broadcasting, programme production and pay TV),

hospitality (hotels, contract catering, motorway service areas and roadside restaurants)

and television rental.

4. Compass is a publicly quoted company listed on the London Stock Exchange it is active

in contract catering, concession catering and vending services.

OJ L 395, 30.12.1989 p.1 corrigendum OJ L 257 of 21.09.1990, p.13; Regulation as last amended by

Regulation (EC) No 1310/97 (OJ L 180, 9.7.1997, p1, corrigendum OJ L 40, 13.2.1998, p 17)

PUBLIC VERSION

MERGER PROCEDURE

ARTICLE 6(1)(b) DECISION

In the published version of this decision, some

information has been omitted pursuant to Article

17(2) of Council Regulation (EEC) No 4064/89

concerning non-disclosure of business secrets and

other confidential information. The omissions are

shown thus […]. Where possible the information

omitted has been replaced by ranges of figures or a

general description.

II THE OPERATION

5. The merger was announced on 17 May 2000 and notified on 25 May 2000. It will be

implemented by means of inter-conditional schemes of arrangement whereby a new

company, Granada Compass Plc, will be put in place above both Granada and Compass

companies. Shareholders will receive shares in the new company in lieu of their present

shareholdings. On completion of the merger Granada securities will receive

approximately 66.25% of the share capital of Granada Compass Plc. Compass

securities receive the remaining 33.75%. Within 12 months of the merger a demerger

will take place to separate Compass Hospitality and Granada Media.

III CONCENTRATION

6. The operation is a concentration in the sense of Article 3(1)(a) of the Merger Regulation

since Granada and Compass will cease to exist as separate legal entities.

IV COMMUNITY DIMENSION

7. The undertakings concerned have a combined aggregate world-wide turnover of more

than EUR 5 billion

(Granada: EUR 6.5 billion, Compass: EUR 7 billion) in 1999. The

aggregate Community-wide turnover of each party exceeds EUR 250 million (Granada:

EUR 5925 million, Compass: EUR 3817 million), but they do not achieve more than

two-thirds of their aggregate Community-wide turnover within one and the same

Member State. The notified operation therefore has a Community dimension.

V COMPETITIVE ASSESSMENT

8. Both Granada and Compass are active in contract foodservice and concession

foodservice, they overlap in contract foodservice in the UK and Ireland and in

concession foodservice in the UK.

A THE RELEVANT PRODUCT MARKET

(i) Contract foodservice

9. Contract foodservice consists of the preparation, presentation and delivery of food and

beverage services to clients and their customers where clients have chosen to outsource

this activity on its premises. The client pays the contract caterer a fee for the provision

of the catering service and the food is often sold to consumers at subsidised prices.

Contract catering services are carried out in various sectors, these include business and

industry (staff canteens in both public and private sectors); healthcare (hospitals, nursing

homes); and education (schools, universities). The largest sector is business and

industry which represents 40%

of all meals served. This is followed by education

which accounts for 23.1% of meals served.

Turnover calculated in accordance with Article 5(1) of the Merger Regulation and the Commission Notice

on the calculation of turnover (OJ C66, 2.3.1998, p25). To the extent that figures include turnover for the

period before 1.1.1999, they are calculated on the basis of average ECU exchange rates and translated into

EUR on a one-for-one basis.

British Hospitality: Contract Catering Survey 2000

10. Demand side considerations are driven by the desire to outsource catering requirements

at the client’s premises, this is generally carried out through a tendering process. The

parties suggest, that there are no significant supply side differences between the client

segments and refer to the Accor/Wagons-Lits decision (M126) where the Commission

argued against segmentation of the market on the basis that the basic know-how is the

same and the majority of undertakings were engaged in all the above market segments.

This also applies in the present case, although, the Commission notes that the sectors

differ in respect to the margins earned, growth projections and penetration rates.

11. For the purpose of this case, however it is not necessary to decide whether different

catering segments constitute relevant product markets, because irrespective of the

definition adopted the analysis and assessment of this concentration would be the same.

(ii) Concession foodservice

12. Concession is the provision of foodservice requirements to the public in travel related

locations such as airports, railway stations, ferries, roadsides, retail related locations

such as departments stores and sports stadia and leisure venues. The principal purpose

of the customer’s visit is not for the consumption of food or beverage but for an

alternative purpose. The contractor pays the client a rent for the right to trade at the

premises; the contractor’s income is sourced entirely from sales made to the public.

13. Brands both internal and franchised are playing an increasing role in this market. High-

street brands, such as KFC and Burger King, for which the parties both hold franchises,

have penetrated the transport concessions segment but has had limited impact on the

sports and leisure concessions.

14. The inclusion of shopping malls in the market definition, by the parties, is contrary to

their own description of the market in published documents and third party descriptions

of the market. The Commission has doubts whether such an inclusion is justified but

accepts that there are certain similarities between outlets at shopping malls and other

concession outlets.

15. For the purpose of this case, however it is not necessary to decide whether concession

foodservice or some segmentation thereof constitutes the relevant product markets, nor

is it necessary to decide whether shopping malls should be considered as part of the

concession foodservice market because irrespective of the definition adopted the

analysis and assessment of this concentration would be the same.

(iii) Concession and contract catering

16. There are supply side similarities between contract and concession foodservice, (the

outsourcing element, the provision of a service to consumers whose main reason for

being at the location is generally not the consumption of food or drink, the joint

management of these services and the joint purchasing of supplies). However, only few

companies operate in both markets and these are the larger competitors. The barriers to

entry into concession foodservice are higher in terms of investment, reputation and

access to established brands. In addition concession contracts are generally longer and

the prices to consumers at these outlets higher. The conditions of competition also differ

whereas contract caterers compete only at the tendering stage, concession caterers,

whilst also subject to tendering, often face competition from other outlets within the

facility.

17. The Commission, therefore, for the purpose of this case views contract foodservice and

concession foodservice to constitute separate relevant markets.

B RELEVANT GEOGRAPHIC MARKET

18. When defining the relevant geographic market the parties refer to the Accor/Wagons-Lits

decision where the Commission viewed the markets as national. This definition was

based on legislative differences (public procurement and labour laws); national

preferences (in terms of quality, charging and prices) and strong differences with respect

to in-house providing of feeding needs. The parties argue that this analysis applies

equally well to contract foodservice markets in the UK and Ireland and to concession

foodservice in the UK.

19. The Commission notes that the market is opening up with some contract catering

contracts being signed on a European or even global level. This type of business

however is still developing and has yet to change the geographical scope of the market.

20. The Commission concludes that the market is national at present and considers the

relevant geographic markets are the UK and the Ireland for contract foodservice and the

UK for concession foodservice.

C ASSESSMENT

1. CONTRACT FOODSERVICE

(i) Ireland

21. The parties estimate the size of the contract foodservice market in Ireland to be EUR 203

million. The market leader is Campbell Catering with [40-50]%, followed by Sodexho

with [15-25]%. The combined market share of the parties is [15-25]% (Granada [15-

25]%, Compass [<5]%).

22. The market is very concentrated at present with the top three players accounting for [80-

90]% of the market. This concentration, however, only involves a small increase in

market share and does not change the market structure significantly.

23. The Commission concludes that the concentration does not give raise to serious doubts

as to its compatibility with the common market in Ireland.

(ii) United Kingdom

24. The parties estimate the UK market for contract foodservice to be worth EUR 4.7

billion. On the basis of these figures the parties would have a combined market share of

[35-45]% (Granada [20-30]% and Compass [10-20]%), the present market leader

Sodexho Alliance has [20-30]% of the market. The next largest competitor is Alpha

Catering with [1-10]% of the market but it is only active in the in-flight catering sector.

It is followed by a group of companies with market shares between 1-4%. The market

has a large number of small companies with market shares below 1% these account for

[5-15]% of the total market.

25. Segmenting the market by client type results in the following market structures:

Business and

Industry (%)

Healthcare

(%)

Education

(%)

Granada [25-35]2 [20-30] [10-20]

Compass [15-25] [10-20] [10-20]

Sodexho [20-30] [35-45] [15-25]

Aramark [1-10] [<1] [1-10]

Initial [<1] [<1] [15-25]

Elior [1-10] - [<1]

Granada Compass Combined [45-55] [30-40] [25-35]

26. The merged entity would become market leaders in all sectors but healthcare where

Sodexho has [35-45]% as compared to the parties [30-40]%. In the Business and

Industry sector the combined market share will be [45-55]% with Sodexho at [20-30]%

and in Education it will have [25-35]% with Sodexho at [15-25]%.

27. With scale economies in purchasing the concentration would give the merged entity a

cost advantage over small companies in particular as the parties have other hospitality

business (hotels, motorway service areas and roadside restaurants) for which joint

purchasing is possible. However Sodexho, a French company which is active world-

wide, is a large established competitor in the UK foodservice market. There are also a

group of players (Elior (Avenance), Aramark and Initial) with substantial competitive

strength derived from their activities in overseas catering markets or in other business

service market in the UK. Elior, belongs to a French catering group, which during this

investigation acquired Nelson Hind, a food services company in Scotland and the

Midlands, and thereby became the third largest caterer in the UK. Aramark is large US

foodservice supplier and Initial is part of the Rentokil Initial Group. Other smaller

competitors also provide effective competition at the local level because they can

provide a personal touch and are more flexible in terms of process, decision making,

contractual terms and operation. Market testing carried out by the Commission

confirmed this view.

28. Barriers to entry into the UK contract catering market are considered to be low owing to

the small initial outlay needed (premises and equipment are provided by the client and

staff is often inherited from previous contractor); high level of transparency (contracts

are awarded by tender and listing of companies which outsource are available); short

contracts (between two to five years); market growth (the total market is estimated to be

growing at 2-3% pa, with higher growth expected in the education and healthcare

sectors) and the use of catering consultants (with market knowledge).

29. The contract caterer is generally chosen through a tendering process whereby a handful

of companies will be invited. Typically the contracts are short term with a right of

termination after three to six months. According to the parties 20% of tenders are

arranged through catering consultants which will generally handle the larger and more

complex contracts. Consultants are awarded largely on savings made on contracts and

therefore have incentives to ensure keen competition.

30. With respect to multiple-site contracts the merger will reduce the number of eligible

companies which can fulfil such contracts because some smaller contract caterers are

unable to tender for reasons of cash flow, geographical coverage, multiple-site

management expertise and investment requirements. The parties state that multiple-site

contracts account for 15-20% of their overall business, these contracts however are

subject to close scrutiny of experienced buyers and are re-tendered frequently. Market

testing confirmed this and commented that the merger would represent an opportunity

for a smaller company to be included in the tendering process. Moreover, if the client

wishes to have greater choice between caterers it can split the contract down into smaller

contracts for which there would be more eligible providers or could take the catering

function in-house.

31. The Commission therefore concludes, not withstanding its high market share, the

merged entity will continue to face substantial competition. The concentration thus does

not raise serious doubts as to its compatibility with the common market.

2. CONCESSION FOODSERVICE

32. The parties estimate that the concession catering market in the UK is worth EUR 2949

million, if shopping malls are excluded this falls to EUR 1740 million. The combined

market share of the parties including shopping malls in [15-25]% without shopping

malls it is [25-35]%. The next largest competitor is Sodexho with market shares of [1-

10]% or [5-15]% respectively.

33. When considering the market segments the structure is as follows:

Airport

(%)

Railway

(%)

On-Ferry

(%)

Sports and

Leisure (%)

In Store

(%)

Shopping

mall (%)

Granada [10-20] [30-40] [<5] [15-25] [<5]

Compass [20-30] [65-75] [15-25] [<5]

Sodexho [15-25] [<5]

Others [55-65] [25-35] [60-70] [55-65] [70-80] [90-100]

Granada Compass

Combined

[35-45] [65-75] [30-40] [15-25] [15-25] [<5]

34. The on-train segment is excluded because neither party is active in that sector. The only

substantial overlap is in the airport sector where the combined market share is [35-45]%.

The main customer in this sector is BAA with substantial countervailing power. It

requires concession caterers to charge ‘high street prices’ and monitors carefully the

share of turnover within BAA airports held by each company.

35. Compass estimates it has [65-75]% of the railway concessions segment, but Granada is

not active in this segment. Compass purchased Travellers Fare from British Rail during

the privatisation process in 1994, and many of these outlets are governed by the

Landlord and Tenants Acts which entitles Compass to a renewal of the lease unless the

landlord proposes refurbishment or development and are thus not open to other

competitors. At major stations, however, competition is opening up with more sites are

being developed by Railtrack, concessions there are subject to competitive tender.

36. The On-Ferry sector is characterised by a high degree on in-house provision, the parties

estimate the proportion of outsourcing to be 43% whereas it is 97% in the Airports

segment and 100% for railways. Granada has [30-40]% of the outsourced market

whereas Compass is not active in this market.

37. Entry costs into the concession foodservice market are higher than for contract catering

as the entrant needs to invest in the premises, pay the rent and access to an established

brand. In addition contracts are of a longer duration 5-7 years to allow the provider to

recoup its initial investment.

38. However, the clients are mainly large and in some cases have an incentive to ensure

value for money for the ultimate consumers. This is because poor service or high

pricing would reflect on the reputation of the client. Moreover other concession

providers, although small, do exist and the client can encourage these into the facility

thereby providing more competing outlets. In addition there appears to be nothing

preventing established high-street brands from tendering for concession outlets.

Furthermore, clients also have the option of taking catering in-house although the

feasibility of this option may be limited in some cases.

39. For all those reasons, the Commission concludes that the concentration does not raise

serious doubts as to its compatibility with the common market.

VI CONCLUSION

40. For the above reasons, the Commission has decided not to oppose the notified operation

and to declare it compatible with the common market and with the EEA Agreement.

This decision is adopted in application of Article 6(1)(b) of Council Regulation (EEC)

No 4064/89.

For the Commission,

Mario MONTI,

Member of the Commission