London — Amazon.com’s multimillion-pound purchase of Deliveroo could hurt competition by discouraging the US company from re-entering the British food-delivery market, the UK competition watchdog said on Wednesday.
The Competition and Markets Authority (CMA) will continue to review Amazon’s investment in the fast-growing start-up unless they offered remedies to address competition concerns within five days. The investigation, which began in October, may go into a second phase and could eventually result in the blocking of the investment of about $500m.
Over the next four years, the food-delivery business is estimated to increase 12% a year, to $76bn in 2022, according to investment firm Cowen. While the UK market is competitive, Amazon’s size makes it a major force in any sector. The CMA said the deal might end Amazon’s interest, discussed in internal documents, in re-entering the British market through the purchase of another platform. It shuttered its Amazon Restaurants delivery unit in 2018.
“Evidence examined in the CMA’s investigation indicated that Amazon has a strong continued interest in the restaurant delivery sector,” the regulator said on Wednesday. “The CMA believes that Amazon’s investment in Deliveroo was strategic and that offering rapid food delivery is important to Amazon, and so it may have looked to invest in an alternative business absent the merger.”
Unusual review
The original decision to investigate the deal was unusual for the CMA as it does not typically review minority acquisitions. Fears of damage to competition may have been fed by previous mergers by tech giants that were let through by regulators, such as Facebook’s acquisition of messaging service WhatsApp.
There is a “real risk” that Amazon’s investment “could leave customers, restaurants and grocers facing higher prices” because of reduced competition, CMA executive director Andrea Gomes da Silva said in the statement.
A spokesman for Deliveroo said the company is “confident” it can persuade the CMA the investment will “add to competition”, while an Amazon spokesman said Deliveroo should have “broad access to investors and supporters”.
The decision may cause concern for the internet giant, which has already faced European hurdles.
It closed its own UK food-delivery service in December 2018, with the US unit following the same path several months later. Amazon was among the five big businesses singled out in December by the Labour Party, which said they “exploited, ripped off and dehumanised” their workers, just after regulators in Europe said over the summer that they would start looking into how tech companies protect customers’ privacy.
Difficult decisions
The CMA has offered Amazon and Deliveroo the chance to avoid an extended probe if they offer changes to its competition worries. Alan Davis, a competition lawyer at Pinsent Masons, said it is “difficult to see immediately what remedies they could offer at Phase 1 to resolve the concerns”.
The UK food delivery sector is dominated by three players, Just Eat, Uber Technologies’s unit Uber Eats and Deliveroo. Competition between them is considered fairly fierce, making it difficult to make money. Deliveroo has never made a profit, losing £232m in 2018.
Meanwhile, Just Eat, the UK’s biggest food deliverer by market share, is the target of a possible takeover by Naspers subsidiary Prosus. The company advised shareholders to reject Prosus’s latest 740p per share offer on Tuesday, preferring them to stick to an all-share combination with Netherlands-based Takeaway.com.
The CMA decision also puts the undisclosed rights that Amazon acquired as part of the acquisition in the spotlight.
“The nature of the CMA’s concerns seems the rights that come with the minority holding,” said Josh Buckland, a competition lawyer at Linklaters. “One potential solution could be to relinquish those rights and stay on board as a minority shareholder.”
It is very likely that the deal would be referred to an in-depth investigation, Buckland said.
The CMA also expressed concern about how Amazon’s investment might change the online convenience grocery delivery market outside food. Deliveroo is focused on food delivery, and supermarket chains may rely on it to deliver “ultrafast” groceries because their own logistics providers can’t meet the tight deadlines, the CMA said.
“The CMA believes that both parties have major expansion plans in this area which would bring them in closer competition in the future,” the regulator said. “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” without the scale of either Deliveroo or Amazon.
Bloomberg
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