JD Sports Regulatory News (JD.)

06 May 2020

JD Sports Fashion Plc

Update on CMA review of Footasylum acquisition

JD Sports Fashion Plc (the "Group") today provides an update following the Competition and Markets Authority's ("CMA") decision to prohibit the Group's acquisition of Footasylum Limited ("Footasylum") and require the sale of the Footasylum business.

The Group fundamentally disagrees with the conclusion reached by the CMA in its Final Report, which materially fails to take proper account of the dynamic and rapidly evolving competitive landscape in which we operate, as well as the long lasting - and likely permanent - impact that COVID-19 has had on our industry, which may never return to its pre-merger state, to the particular detriment of smaller retailers like Footasylum.

UK sports retail is one of the most dynamic and intensely competitive markets in the world, within which a large number of retailers selling third-party brands compete not only with each other, but also with major online pure-players and the increasingly powerful direct to consumer ("DTC") operations of the international brands themselves.

Yet, despite numerous public announcements from direct competitors such as Sports Direct confirming that they are elevating their propositions to compete even more closely with JD, alongside the very public and undeniable marked acceleration in adidas and Nike's DTC growth strategies, the CMA has failed to properly understand these trends and has completely dismissed any evidence which goes against their prejudged and erroneous interpretation of our market.

Even before considering the impact of COVID-19, the UK sports retail market is, without doubt, materially different today than when the CMA instigated its review 12 months ago. Additionally, the CMA's conclusion becomes even more difficult to comprehend in the context of COVID-19 and the seismic impact it has had on the current UK retail environment; not to mention the enduring challenges that will exist beyond the current lockdown as a result of social distancing and weakened consumer confidence.

In March 2020 alone, the Office for National Statistics reported that UK retail sales experienced their biggest monthly fall since records began over 30 years ago, with clothing seeing the largest drop-off in demand, as sales volumes decreased by 35%. This downward trend is especially pertinent for Footasylum, which was in a weakened financial position at the time of the acquisition, is heavily dependent on sales from its physical store estate, and which, without JD's financial backing, may well have been forced to exit the market, joining the long list of retail casualties we've already seen during the current crisis.

The CMA recently reiterated its merger assessment criteria and its position on deals involving "failing firms" during the COVID-19 pandemic stating that; "Events which occur during the CMA's review of a transaction (such as the business impact of Coronavirus (COVID-19)), but which are not a result of the merger, can be incorporated into the counterfactual." It is clear from today's Final Report that the CMA has failed to recognise the reality of Footasylum's financial situation and the impact of the current crisis on its long-term prospects.

In conclusion, we firmly believe that the CMA has failed to meet its objective of protecting consumer interests and today's decision will be detrimental for Footasylum, its customers, its 2,500 staff and the UK sports retail market as a whole. We are carefully considering whether to make an application to the Competition Appeal Tribunal to review this decision.

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

"We fundamentally disagree with the CMA's decision, which continues to rely on an inaccurate and outdated analysis of the UK sports retail competitive landscape, and is underpinned by outdated and flawed customer surveys.

"At the same time, incredibly, the CMA has been taken in by the self-serving testimony of one notoriously vocal competitor, who has made numerous public announcements confirming their ongoing investment in their elevation strategy and who has blatantly participated in the process for their own commercial interests rather than for the benefit of consumers.

"When the CMA published its provisional findings in February, we said at the time that they demonstrated a complete misunderstanding of our market to an alarming extent. Today, and equally frustratingly, in the midst of a global pandemic and with the UK high street in a state of complete lockdown, the CMA's final decision is even more absurd.

"Since the CMA launched its review 12 months ago, the competitive landscape in which we operate has changed beyond recognition. Further, since the outbreak of COVID-19, competition has not lessened; it has become even more intense as the consumer transition to online has accelerated at a meteoric rate. We are astounded that the CMA has failed to recognise that this isn't just a short-term blip, but rather a long-term societal and behavioural change in how consumers shop.

"As physical stores have closed in line with Government guidance, consumers have shifted their spending exclusively online, where Footasylum is an insignificant player in the context of the overall market and heavily dependent on its store estate. The clear evidence from China and other European markets is that, when current lockdown measures are lifted, it is virtually certain that footfall levels will not return to pre-crisis levels. This outcome would disproportionately impact smaller retailers like Footasylum, whose stores and shopping centre outlets rely so heavily on concentrated footfall and high trading densities.

"It is therefore extraordinary for the CMA to now require the divestment of Footasylum, in full knowledge of the impact that COVID-19 has had on its operations and, indeed, the retail industry as a whole. In this regard, we must face the fact that there is a significant probability that a prospective purchaser could look to substantially reduce Footasylum's central operations, resulting in a considerable loss of jobs, particularly in the North West of England, which is entirely at odds with the Government's current strategy.

"When the Group made its offer in March 2019, it was our intention to fully support Footasylum and its employees to grow the business and increase the quality, range and choice of products available to customers. We still firmly believe that bringing Footasylum into the Group will deliver these significant benefits for both consumers and the UK high street.

"At no time during this process has the CMA considered deviating from its erroneous view of competition in our market, which was determined at a premature stage, and heavily influenced by a snapshot customer survey and the picture presented by a self-interested third party. Given the injustice of the CMA's decision and its disregard of irrefutable evidence of real-world competition, we will now carefully consider whether to formally challenge today's decision in the Competition Appeal Tribunal."

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