Guest blog post by Stefan Rating, an expert in competition and regulatory Law at Rating Legis SLP and a former European Commission special assistant to the Director General of DG Competition.
Today, the European Commission cleared a merger first announced on January 16th, 2017 and notified on August 22nd., Essilor/Luxottica (M. 8394). Unusually after a Phase II procedure, clearance is unconditional.
The outcome after six months of investigation is particularly eye-catching considering the facts of the case. Luxottica controls brands like Ray-Ban, Persol, and Oakley, a distribution network covering more than 150 countries and 8,000 own retail stores, and has 60% of the sunglasses market in the US. Combined with Essilor, they will control almost 50% of the global market for sunglasses. If we look at prescription lenses, Essilor is the leading global producer with a 45% market share, more than three times that of the next competitor. In terms of R&D, Essilor’s 2016 figure of $200 million in 2016 is also more than its next three competitors combined.
There is every chance that the Essilor and Luxottica combination will substantially reduce competition and evolve far beyond the reach of any competitor. It will have an even firmer grip on optician sales outlets and formidable market power to dictate prices in every market in which it is active. It is no coincidence that the solitary precedent of a competition authority acting against merely recommended (!) prices was precisely in one of the relevant markets that the Commission has now assessed: in 2009, the German Bundeskartellamt prohibited lens manufacturers, including Essilor, from using recommend retail prices – normally a textbook example of a legitimate business practice – because no optician on record ever diverged from such recommendation.
On substance, just as the Brazilian competition authority (CADE) did in its clearance decision on February 23rd, the Commission focused on possible vertical effects of this merger, notably integration effects between the manufacture and wholesale supply of eye frames and retail of optical products and services. It finds that “even if [Essilor] followed [bundling and tying] practices, this would be unlikely to marginalise competing suppliers of lenses and harm effective competition” and that, generally, “Essilor has insufficient market power and incentives to shut out Luxottica’s competitors”. It will be most interesting to see how the Commission backs up the latter statement in the actual decision, not just regarding frame manufacturers.
The Commission does not seem to have considered that these vertical effects, and the increase in the combined entity’s portfolio power over retailers (which will have consequences across the entire range of optical products), will be greatly enhanced by the fact that Essilor and Luxottica disappear as each other’s strongest competitor. Market power is not a question of competitors’ headcount but of their competitive clout. As Commissioner Vestager herself aptly put it, “we can’t assume that a merger won’t harm consumers, just because there are still competitors somewhere in the world” – or can we?
The unparalleled strength of Essilor and Luxottica is no coincidence: rather, over the last decade each purposefully expanded to challenge the other. In 2010, Essilor entered the finished eyewear business (frames and lenses) by acquiring FGX, then the leading designer and marketer of non-prescription reading glasses in the US. In 2011, Essilor acquired Stylemark, a major designer and distributor of branded sunglasses that included the Nine West, Dockers, Reebok, Hello Kitty and various Disney brands. Then it added Foster Grant and, in 2013, the Infokus and Solair brands as well as China’s two most popular mid-priced sunglasses brands, Bolon and Prosun. Next, Essilor directly took on Luxottica’s premium Ray Ban and Oakley brands by purchasing Costa del Mar, which promotes both fashionable sunglasses and prescription frames.
These acquisitions gave Essilor the know-how and capacity to threaten Luxottica’s dominance. Conversely, Luxottica started expanding into Essilor’s markets by creating large-scale optical labs and introducing its own prescription and nonprescription lenses for its most popular brands.
So is such a massive concentration of market power really going to benefit EU consumers? As Commissioner Vestager has recently said: …“we have competition rules because we believe they make our society a better place to live. That they make our markets work more fairly for consumers.” Given the decentralised application of EU competition law, the answer will now largely depend on whether national authorities channel Argus Panoptes and how seriously they monitor the predictable anticompetitive vertical effects of this merger.
As to the European Commission itself, it had better remember its infamous “one merger too many” clearance of Kimberly-Clark/Scott Paper in 1995, which nappy customers remember to this day, and stand up to any further acquisitions by EssilorLuxottica. Which is what it eventually did with another French champion, EDF, after having allowed it to acquire most potential challengers of its national dominance in the late nineties.
Turning to Washington has not helped much: today, the FTC has also cleared the deal despite higher market shares in the US. Indeed, the head of the Department of Justice’s Antitrust Division stated recently that differences in approaches to mergers on both sides of the Atlantic “have narrowed considerably”. If this is the case, the US authorities should likewise see to it that “EssilorLuxottica” has no reason to quote famously shortsighted Quincy Magoo anytime soon by boasting “You’ve Done It Again!