The French Competition Authority (the “FCA”) considered online and offline sales of toys as forming part of the same market in the context of its investigation of the merger of toy companies Luderix International and Jellej Jouets. The FCA thus relied once more on the methodology it applied in its Fnac/Darty merger clearance decision, when it concluded to the existence of a single market including both physical and online retail channels for the distribution of consumer electronics.
On April 17, 2019, following a phase 1 investigation, the FCA unconditionally cleared the acquisition of joint control of Luderix International (“Luderix”) by Jellej Jouets and Gifram, a company owned by the Mulliez family. Both Luderix International and Jellej Jouets (which had acquired Toys’R’Us in October 2018 after the group was placed into receivership) are active in the toy sector, both in the upstream market for the manufacture and wholesale distribution of toys, and in the downstream market for retail distribution. In the downstream market, Luderix operates 20 specialized toy stores and a website under the “Picwic” brand, while Jellej Jouets runs 44 specialized toy stores and a website under the “Toys’R’Us” brand. The decision highlights the FCA’s willingness to take into account the competitive pressure exerted by online sales in retail distribution markets.
The relevant product markets for toys
The FCA first distinguished the market for the manufacture and wholesale distribution of toys from the toy retail market, before analysing whether an additional distinction should be made, within the toy retail market, between in-store/offline and online distribution channels. As regards in-store sales, the FCA considered that the toy retail market includes large specialized toy retailers as well as hypermarkets, stores specialized in recreational equipment, and shops selling home decoration and leisure products, provided that they dedicate more than 200m2 of their retail space to the sale of toys. As a second step, and in line with the notifying parties’ argument, the FCA thoroughly analysed the competitive pressure exerted on brick and mortar stores by online sales – whether through “pure players” platforms (such as Amazon or Cdiscount) or through traditional retailers’ websites. The FCA concluded that the development of online sales in the toy sector over the past five years justified taking the competitive pressure exerted by online sales on brick-and-mortar sales into consideration, and thus included both distribution channels in the definition of the relevant retail market.
To reach this conclusion, the FCA relied on precise and concurring evidence showing that offline and online sales were sufficiently substitutable.
First, on the supply-side, the FCA noted that (i) the penetration rate of online sales in the toy sector has been consistently high over the past few years (28,3% in France in 2017); (ii) traditional players have adapted their internal organization and their commercial and pricing strategy in order to respond to the growth of online players (e.g., through the development of websites) and remove any differentiation between the online and in-store distribution channels (e.g., through specific refunding policies); (iii) the same type of products and services are offered in brick and mortar stores and on online platforms; and (iv) retail prices offered in the online and offline channels are increasingly aligned.
Second, on the demand-side, the FCA found that consumers do not differentiate between the online and offline channels and use both channels to first compare prices and then purchase toys. Moreover, the majority of participants to the market test conducted by the FCA indicated that differences between online sales and brick-and-mortar sales had significantly decreased, and considered that both channels belonged to the same market. In particular, participants estimated that most consumers would switch to other online shops to purchase toys in the event of a 5 to 10% price increase by the new Luderix-Jellej Jouets entity following the transaction.
The FCA’s analysis is consistent with the approach followed in its landmark decision approving the acquisition of Darty by Fnac in 2016 where the FCA considered for the first time that the relevant market for the retail distribution of consumer electronics and certain home appliances should include both online and in-store sales.
The competitive analysis
When analysing the horizontal effects resulting from the transaction, the FCA considered that the transaction did not give rise to any competition concerns whether in the upstream market for the manufacture and wholesale distribution of toys or in the downstream toy retail market, regardless of the scope of the geographic market.
As regards the retail distribution of toys in particular, the FCA conducted its assessment both at the national and local levels. In practice, the FCA first estimated in-store market shares at the local level through the application of a coefficient, corresponding to the proportion of retail space dedicated to toys compared to the total turnover achieved by each brick and mortar store. Then, based on the assumption that the competitive pressure exerted by online sales is homogeneous on the French territory, the FCA allocated, for each catchment area, the turnover associated with online sales to each competitor, according to their market shares on the online channel at the national level.
Based on this methodology, the FCA concluded that the transaction led to horizontal overlaps in nine catchment areas but considered that a detailed local assessment of the competitive situation was only needed when the combined local market shares of the parties were between 25% and 50%. In those areas, the FCA ultimately ruled out any risk of competitive harm following the transaction given the competitive pressure exerted by other local brick-and-mortar stores (especially large specialized toy stores such as JouéClub or Maxi Toys) and pure players (in particular Amazon and Cdiscount).
With a second merger control decision concluding to the substitutability of online and in-stores sales, the FCA clearly shows its ability to adapt its enforcement action to changing competitive dynamics resulting from the growth of online sales and the development of “pure players”. This significant evolution is expected to progressively extend to other sectors as online sales keep growing.
 Decision No.19-DCC-65 of April 17, 2019, regarding the acquisition of joint control of Luderix International by Jellej Jouets and the Mulliez undivided ownership.
 Decision No. 16-DCC-111 of July 27, 2016. regarding the acquisition of Darty by Fnac.