JD Sports savages CMA concerns over Footasylum acquisition

Bury-based sports and athletic leisurewear retailer JD Sports has rejected the provisional findings of the Competition and Markets Authority (CMA) into its acquisition of the Footasylum retail chain.

The CMA said it has competition concerns regarding the deal.

In a stock exchange update today, JD SPorts said the CMA’s provisional findings do not reflect the intensive and dynamic competitive reality of the UK sports retail market today, where a large number of retailers selling third-party brands compete not only with each other, but also with major online pure-players and, most importantly, the increasingly powerful direct to consumer (DTC) operations of the international brands themselves.

It said the CMA has failed to recognise and accept clear evidence of the rapidly-changing nature of this market, which has materially altered even during the period of the CMA’s review.

The statement said: “CMA concludes, correctly, that (i) online and stores compete in ‘the same market’; (ii) customers use ‘these channels interchangeably’; (iii) online is ‘growing fast and a key driver of overall growth’; and (iv) the DTC offer of Nike and adidas will ‘continue to grow strongly in the UK, predominantly online’.

“Given these findings, we cannot comprehend how the CMA concludes that Nike and adidas, will not be significantly stronger competitors in the marketplace over the next few years. Experienced analysts in this sector simply would not recognise this conclusion.

“Further, the suggestion that ‘there could be fewer discounts and less choice in stores and online’ is entirely at odds with our continuing drive to provide a market-leading, best in class consumer-focused experience with consistent standards across our global territories.”

The statement added: “We feel that, in its findings, the CMA has lost sight of its objective to protect consumer interests.

“We still firmly believe that bringing Footasylum into the group will deliver significant benefits for both consumers and the UK high street, and we will continue to make our case strongly to the CMA in the coming weeks.

“The CMA itself recognises that Footasylum has a less than five per cent market share. Therefore, it is clear that this transaction is small, both in the context of our increasingly international-focused group and the extremely crowded marketplace in which we operate.”

JD Sports said it anticipates that Footasylum will contribute less than two per cent of the group’s earnings in the year to January 2020, which, after a robust post-Christmas sales period in its key overseas markets, are now expected to be at least equal to the top end of current market expectations, which after adjusting for IFRS 16, range from £403m to £434m.

Peter Cowgill, JD’s executive chairman, said: “The CMA’s provisional decision is fundamentally flawed and demonstrates a complete misunderstanding of our market to an alarming extent, given its six-month review.

“The competitive landscape described by the CMA is one which neither I, nor any experienced sector analyst, would recognise.

“Just take a walk down any major UK high street or search for Nike or adidas trainers on Google and you can see for yourself how competitive this marketplace really is.

“The CMA’s provisional findings do not reflect the objective evidence, with excessive weight being placed on surveys asking hypothetical questions of a small sample of selected customers equivalent to less than 25% of the footfall of one JD store in Manchester for one week, rather than assessing the reality of how consumers actually shop on a national scale.”

He added: “When the group made its offer in March 2019, it was our intention to support Footasylum and its employees to grow the business and increase the quality, range and choice of products available to customers.

“We remain convinced that a combination of the two businesses would provide significant long-term benefits to customers, colleagues and brand partners, while maintaining Footasylum’s presence on the high street as the music-inspired casual retailer which it is today.”

Kip Meek, chair of the independent inquiry group leading the CMA investigation, said: “This is a large and growing market in the UK, so it is important that the CMA carefully scrutinises a deal between two key rival businesses.

“We’re currently concerned that shoppers could lose out after the merger, for example through fewer discounts and less choice in stores and online. This could particularly affect younger customers and students, who shop in JD Sports and Footasylum.”

The CMA has today set out potential options for addressing its provisional concerns.

It is now asking for views on its provisional findings by March 3, and possible remedies by February 25, and will assess all evidence provided before making a final decision.

Its current view is that blocking the deal by requiring JD Sports to sell the Footasylum business may be the only way of addressing these competition concerns. The deadline for the CMA’s final report has been extended to May 11, 2020.

Russ Mould, investment director at Manchester investment platform, AJ Bell: “Investors appear to be taking the news that trainers and tracksuits retailer JD Sports might have to abandon its acquisition of rival outfit Footasylum in their stride.

“To loud howls of protest from JD, the Competition and Markets Authority (CMA) has intervened, suggesting the deal would be bad for shoppers and provisionally indicating it is prepared to block it.

“This might end up being a blessing in disguise for JD Sports.

“Although it apparently targeted a slightly older demographic, Footasylum never looked much of a prize, even if the involvement of JD Sports’ founders in the venture made it a logical fit.

“Footasylum had endured a spell on the stock market which was painful as it was short before JD stepped in last March.

“Unlike its larger counterpart, Footasylum had found life on the high street a struggle and being forced into selling stock at big discounts won’t have done much for the integrity of the brand.

“In coming out swinging against the CMA decision, not unfairly it has to be said given the legitimate points about just how competitive a market sports retail is, management have also revealed just what small beer the transaction represents to JD.

“The CMA’s actions demonstrate an increased willingness on the part of the regulator to intervene following the nixing of the Sainsbury’s and ASDA merger and a current probe into Amazon’s investment in food delivery service Deliveroo.

“Consumer-facing UK businesses pursuing M&A in the future will have to watch out for these sharpened claws.”