Amazon-Deliveroo fightback needs UK's CMA to change line on convenience deliveries

7 February 2020 10:48am

4 February 2020 by Victoria Ibitoye

Amazon.com and Deliveroo have a challenge ahead to defend their stake-purchase agreement by convincing the UK's competition regulator that they don't compete with each other — a finding that would require it to diverge from its established approach.

The most contentious aspect of the Competition and Markets Authority's phase I decision was that Amazon's investment in Deliveroo could hinder competition in the supply of "online convenience groceries."

This rests on a view that the CMA established last year in its Sainsbury's-Asda probe — that delivery on demand of convenience-store groceries ordered online is a market in and of itself, distinct from the wider market for scheduled delivery of supermarket groceries ordered online, because it doesn't allow customers to carry out a full grocery shop.

Amazon bought a minority stake in Deliveroo, a UK-based online delivery company, in May as the lead investor in a $575 million funding round. The deal is now subject to a phase II investigation by the CMA's inquiry group, an independent panel of experts that examines mergers referred from an initial review.

Last week the CMA published the companies' response to its phase I review, in which Amazon and Deliveroo are revealed to have rubbished the regulator's claim that their tie-up could harm both existing and potential competition in provision of online convenience groceries.

They said they "serve very different shopping missions at very different price points" and accused the CMA of taking a "highly artificial approach" to market definition.

To secure a rethink, the companies will need the CMA inquiry group to reconsider the approach taken in the probe.

The CMA wasn't prepared to diverge in its phase I decision, made in mid-December, and doubled down on this view in its full decision, published last week. It called Amazon and Deliveroo leading players in the "online convenience grocery sector," and said this view was "consistent" with its Sainsbury's-Asda approach.

Phase I view

The CMA believes that the online convenience grocery sector is "quickly evolving in the UK but is still at a nascent state," and that Amazon and Deliveroo have a distinct market advantage due to their UK-wide delivery networks.

With Amazon, the watchdog's attention is on the US technology giant's Prime Now service, which provides delivery of groceries within one or two hours to certain locations. With Deliveroo, the scrutiny is on the company's convenience delivery partnerships with the Co-operative supermarket chain, BP and Shell service stations, and a number of independent convenience stores.

The CMA said that, despite some differences in their current services — with "Amazon offering a broader range of products often at a somewhat slower speed" — the companies are "two of the strongest players in the market at present with plans to expand."

It said internal planning and strategy documents, analysts' reports and evidence from third parties suggested both companies have "major expansion plans" in this area, which would "bring them into closer competition in the future."

"The merger would result in the combination of two of the largest and best established suppliers of online convenience groceries. Most competing grocery retailers that are trialing propositions in this market are reliant on a single logistics supplier (Stuart), which does not have the scale of either Deliveroo or Amazon," the CMA said.

Minutes vs hours

Amazon and Deliveroo have forcefully rejected this analysis. They say their delivery services are fundamentally different and cater to different shopping missions. While it may be the case, as the CMA suggests, that there is a very small overlap in the types of product listed on Deliveroo and Amazon, they don't operate in the same way, they say.

"Deliveroo can get that item to you in 20 to 30 minutes, whereas Amazon can get it to you in a one- to two-hour window at comparable prices to the supermarket, provided minimum spend thresholds are met," the companies said. "The CMA's assumption that 50 percent of Prime Now sales should be treated as convenience grocery is not evidenced and clearly incorrect."

The CMA does not provide a definition of what constitutes "convenience grocery" nor does it identify which parts of Amazon's offering it believes compete or overlap with Deliveroo's offering, they add. "The framing of the definition has changed over the course of the Phase I investigation (from 'food for now' in the Issues Letter to 'urgent missions' in the Phase 1 decision)."

Swathes of the companies' rebuttal to the CMA's findings on online convenience deliveries are redacted, but the gist is clear: Amazon regards itself as more aligned and more of a competitor to UK supermarkets than it is to Deliveroo.

Phase II hope

For that to be accepted, it would call the CMA's Sainsbury's-Asda finding into question, specifically its exclusion of Prime Now from the wider UK online grocery deliveries market. That's an admission the CMA might be unwilling to make, particularly given its view that the convenience grocery delivery market is still young and with potential to grow into a large market of its own.
Amazon and Deliveroo can take some comfort in knowing that the in-depth probe allows them to put forward their arguments afresh. The CMA's inquiry group has already indicated flexibility in saying it will consider possible alternative counterfactuals — what the market would look like absent the merger — and will review the regulator's assessment of its jurisdiction to review the deal.