Thailand: CP-Tesco ruling riles rivals

• Nov 16, 2020

A recent ruling by the Office of the Trade Competition Commission (OTCC) raised eyebrows when it granted conditional approval to the acquisition of the local retail business of Tesco by Charoen Pokphand (CP) Group, causing some to question if the Thai conglomerate has a monopoly.

Among the conditions of the US$10.6-billion acquisition deal is a ban on CP entering any other modern trade retail mergers for three years, excluding e-commerce.

The conglomerate will be required to buy more products from local small and medium-sized enterprises (SMEs), and to honour existing contracts with suppliers for at least two years.

The transaction will result in “increased market power, but not a monopoly”, said the OTCC in a statement.

“The deal may significantly lower competition, but won’t create major damage to the economy or consumers’ benefits.”

CP already operates nearly 12,000 branches of 7-Eleven, as well as 134 branches of the Siam Makro wholesale chain.

Under the agreement, first announced almost eight months ago, CP Group will gain control of a network of about 2,000 Tesco Lotus hypermarkets and smaller stores across the country. CP also acquired a smaller number of stores in Malaysia as part of the transaction with the British retailer.

The OTCC approval marks the end of Tesco’s 22-year presence in Thailand under the Tesco Lotus brand and cements CP Group’s position as the country’s dominant retailer.

CP is controlled by the Chearavanont family, the wealthiest in Thailand with a net worth of $27.3 billion, according to Forbes magazine.

Bloomberg estimates the family is the 13th richest in the world.

IMPOTENT LAW

The Tesco deal is the first major test for the Trade Competition Act, passed in 2017. It was billed as a tougher version of a law passed in 1999, under which no successful prosecutions ever took place.

Sathien Setthasit, chairman of the board of directors of CJ Express Group, the operator of CJ Supermarket, said his company will be inevitably affected by the CP-Tesco merger deal.

Given the company’s smaller scale and lower bargaining power, it may have to buy products from suppliers or manufacturers at relatively higher prices, he said.

“We expect an impact from the deal, but with the government’s competition watchdog approving the deal, we have to find our own way to stay afloat and be competitive,” said Mr Sathien, also the founder and chief executive of Carabao Group, the producer of energy drinks under the Carabao Dang and Carabao brands.

CJ Supermarket deals with more than 600 suppliers.

He said although the prices of products his supermarket buys from suppliers are relatively expensive compared with those bought by large-scale retail chains, the company retains its competitiveness because of effective cost management.

For instance, CJ Express opted to hire young and energetic executives with a monthly salary of a few hundred thousand baht, instead of hiring experienced executives aged over 40 for more than 400,000 baht in monthly salary, said Mr Sathien.

Milin Veraratanaroj, chairman of Tang Ngee Soon Super Store, one of the largest traditional wholesale and retail chains in Udon Thani province, said he feels disappointed by the OTCC’s ruling, as the outcome will cause collateral damage to the overall industry, across upstream, midstream and downstream sectors.

“Thailand’s antitrust law is impotent. This team of commissioners deserves to be sacked,” Mr Milin said.

“This is regarded as a new challenge for Thai retail and wholesale operators, in addition to competition with foreign players and online channels.”

PUBLIC EXPLANATION URGED

Nipon Poapongsakorn, a distinguished fellow at Thailand Development Research Institute, said certain conditions imposed by the commission’s ruling seem impractical. These include a ban on sharing any trade secrets or marketing information with manufacturers or distributors of goods or raw materials, as well as requirements to increase sale volumes for SMEs, Otop and community products by at least 10% from the previous year for five consecutive years.

“The authorities have no way of knowing whether they share trade secrets and marketing information, while the private sector itself is unlikely to tell the truth to the authorities. Such conditions will instead create costs for the public sector,” he said.

Mr Nipon wants to know how the competition watchdog defines the market, as details on a market definition will determine the segment in which the merged entity will engage.

“The motion that stipulates the deal will only bring about market dominance in small modern trade or convenience store business is not untrue, because Tesco is a large-scale retail business operator. Only Tesco Express is a small convenience store,” he said.

Mr Nipon said the commissioners should have taken into account provincial market information to evaluate whether consumers will still have product choices.

“For instance, certain provinces have only Makro and Lotus stores, meaning there is competition. Once the deal is approved, there will be a monopoly because they have the same owner,” he said.

“Although Makro ostensibly operates in the wholesale business, in reality it does both wholesale and retail.”

Tesco also operates in wholesale on top of the retail segment.

Mr Nipon said similar cases can be found in the convenience store segment.

He said certain provinces may have only 7-Eleven and Tesco Express, but once the merger is approved, there will no longer be any competition.

“For its next ruling, I propose the commission issue more than a press release of the ruling,” said Mr Nipon.

“All commissioners and the office should hold a press conference to explain the ruling to the public. It should have details of the verdicts from all commissioners, regardless of their vote.”

He insisted merger deals that have a broad impact require input from all stakeholders, be they competitors or suppliers.

Somsak Kiatchailak, secretary-general of the OTCC, said following the commission’s ruling, the office is waiting for a letter from CP Group accepting the conditions imposed.

If CP Group disagrees with the ruling, it can bring the case to the Administrative Court within 60 days, he said.

By law the office has to disseminate all judgements within 30 days after a ruling is made.

“All judgements by commissioners, including those voting for anwd against deals, will be published for the public to view over the next two weeks,” said Mr Somsak.

SEPARATE ISSUE

The CP-Tesco acquisition may have some effect on the market, but it will not lead to a monopoly as other hypermarkets remain and authorities are monitoring competition among large retailers, said the Federation of Thai Industries (FTI).

Giant retail operators such as Big C Supercenter continue to play an active role in the market, meaning a monopoly is not imminent with the takeover, said FTI chairman Supant Mongkolsuthree.

But it is possible “competition in the retail business may intensify” amid weak purchasing power caused by the recession, he said.

In his view, Tesco Lotus, Big C and other hypermarket owners all need to adjust to market conditions.

Mr Supant does not believe the takeover will affect the supply chain in the manufacturing sector, which depends more on Thai economic conditions than a change in retail outlet ownership.

The impact on the supply chain should be considered a “separate issue”, he said.

Authorities, especially those sitting on the OTCC, will not let a monopoly form easily.

“Asset acquisition can occur, but the government is armed with instruments to prevent monopoly,” said Mr Supant.

The OTCC is aware of worries over the CP-Tesco acquisition, and resolved to set seven measures and conditions for CP to mitigate risks to competition.

One is a three-year ban on another acquisition in the modern trade sector, excluding e-commerce.

CP All, the retail subsidiary of CP, and Ek-Chai Distribution System, which operates Tesco Lotus Express, are also required to increase sale volumes of agricultural and community products supplied by SMEs or Otop products by at least 10% from the previous year for five consecutive years.

Otop, which stands for One Tambon, One Product, features well-known and often unique products made by communities.

Suwat Wattanapornprom, an analyst at Asia Plus Securities, said the SMEs may include products from local agribusinesses.

Another condition is CP must maintain existing contract terms and agreements with manufacturers and distributors for two years.

The prerequisites are designed to protect smaller businesses from a monopolistic market.

With these conditions in place, CP All should not benefit much from the acquisition in the short term, but could anticipate long-term corporate synergy, said Mr Suwat.

Source: https://www.bangkokpost.com/business/2020183/cp-tesco-ruling-riles-rivals