W-3.3

• HKUST m !BUSINESS SCHOOL \�} IHI fl :k \illi � '1l

WORlD ClASS IN ASIA

YUK-FAI FONG MARY HO

I Thompson Center for Business Case Studies m1: iffi �� 1J� iff � cfJ ,c,

HBP Product ID: ST39

UST039

To Enter or Not to Enter: Competitive Environment of

Supermarkets in Hong Kong

In November 2014, international conglomerate ICL I was assessing the potential of entering the retail grocery market in Hong Kong. ICL owned one of Europe's major supermarket chains that specialized in operating very large supermarkets known as hypermarkets. Since the 1970s, ICL had grown rapidly and expanded into drugstores and convenience stores. In early 2014, it owned over 300 hypermarkets in 15 countries. ICL also operated sizable online grocery-delivery services in several European countries. And it had strong private-label brands, with gross margins as high as 40%.

ICL's interest in the Hong Kong supermarket industry was initially kindled by the plan of Hutchison Whampoa, Ltd. (HWL) to sell its leading supermarket chain, PARKnSHOP, in August 2013. Companies like U.S.-based Walmart, Japan-based AEON, China Resources Enterprises, and Australian Woolworths Ltd. were among the eight invited bidders. However, in October 2013, HWL reversed course and decided not to sell PARKnSHOP, saying that the sale would not deliver maximum value to its shareholders. In 2012, PARKnSHOP's annual revenue was HK$21.7bn, and its earnings before interest, tax, and deprecation/amortization were HK$1.4bn. 2 It was estimated that HWL could have realized US$3bn-$4bn in the deal. 3·4

1 ICL is a hypothetical supermarket player created purely for teaching purposes and for hypothetical discussion in a classroom environment.

2 Prudence Ho and Yvonne Li, "Buyer Show Appetite for Hong Kong's PARKnSHOP,'" Wall Street Journal, 21 August 2013, accessed December 2014.

3 "PARKnSHOP no longer for sale," Hong Kong Business, 24 October 2013, ht1p://hon!!kongbusiness.hk/retail/news/parknshoitno-longer-sale , accessed November 2014.

4 US$1 = HK$7.8.

Mary Ho prepared this case under the supel'l'is10n of Professor Yuk-fai Fong solely as a bas1s for class d1scuss10n. The authors 1n1roduced a fictitious company !Cl for case illustrat10n purpose only. Cases are 11ntten in the past tense; tlus 1s not mean/ to imply that all practices, organi=ations. people. places or facts mentioned m the case no longer occur, exist, or apply. Cases are not mtended to se/'l'e as endorsemenls. sources of pnmary data. or illustration of ejfecti1•e or ineffective handling of a business situation.

To order copies or request permission to reproduce materials wnte [email protected] or l'isit www.bm.ust.hk!cbcs

© 2014 by the Hong Kong University of Science and Technology. This publication may not be digitized, photocopied or otherwise reproduced, posted, or transmitted without the permission of the Hong Kong University of Science and Technology.

Last edited 26 July 20/ 5

HKUST Business School Thompson Center for Business Case Studies

Before embarking into new territory, ICL wanted an in-depth understanding of the Hong Kong grocery market environment, competitors, and potential barriers to entry. ICL was aware that a new Competition Law, which was expected to take effect in 2015, might have profound implications for the grocery market landscape in Hong Kong. Some analysts said HWL's decision to put PARKnSHOP up for sale might have been motivated by the introduction of Competition Law, which could potentially break the dominance of the leading supermarket chains.

5 With more rigorous enforcement against

cartels and abuse of substantial market power, would the law be effective in encouraging more competition, thereby offering more opportunities for new entrants to enter the grocery market? Despite all the uncertainties surrounding the effectiveness of the new legislation, ICL management hoped to make a decision before the end of the financial year to allow sufficient time to move forward with the plan or divert resources to other potential growth areas.

Grocery Market in Hong Kong

Grocery Market Landscape/Characteristics

Groceries included food (other than food sold for consumption on the premises), alcoholic and nonalcoholic drinks, cleaning products, toiletries, and household goods. 6 As of December 2011, an estimated HK$79 .3 bn 7 of annual grocery sales were made in grocery outlets and convenience stores in Hong Kong, with supermarket annual sales amounting to HK$41.3 bn. 8 In 2011, there were 77 supermarket establishments (including convenience stores) in Hong Kong. 9

Grocery shopping could be categorized into two types, i.e., "one-stop grocery shopping," and "secondary shopping." One-stop shopping was defined as shopping for the bulk goods needed for a household's periodic grocery needs, carried out in a single trip and in one store. Secondary shopping

5 Anuj Gangahar, ··Hong Kong: PARKnSHOP sale worries Li Ka-shing watchers," EUROMONEY. September 2013, http://\V\Vw.euromonev.com/Article/3254868/Hong-Kong-ParlmShop-sale-worries-Li-Ka-shing­ watchers.html?cop\Tightlnfo=trye, accessed November 2014.

6 Foodstuff includes fish, livestock, poultry (fresh or frozen), fruits, vegetables, bread, pastry, confectionery, biscuits, and other foods, per Hong Kong Consumer Council, ·'Grocery Market Study, Market Power of Supermarket Chains Under Scrutiny," 19 December 2013, p. 50, WW\v.consumer.org.hk/oompetition/ issues/grocerv/GMSReport20131219.pdf , accessed November 2014.

7 Hong Kong Consumer Council, ·'Grocery Market Study, Market Power of Supermarket Chains Under Scrutiny,'" p. 31.

8 Census and Statistics Department, ·'Key Statistics on Business Performance and Operating Characteristics of the Import/Export, Wholesale and Retail Trades, and Accommodation and Food Services Sectors in 2011;· January 2013.

9 In Hong Kong, the Census and Statistics Department classified supermarkets as establishments that ·'engage(d) in the retail sales of general provisions including a variety of food-stuffs as one of the major items" and that ·'use(d) self-serving retail method.'' They therefore also included conventional supermarkets and convenience stores. Conventional supermarkets were those retail stores selling general provisions, including a great variety of foodstuffs as the majority, and were self­ service. Convenience stores were those small, retail self-service stores selling a moderate number of fast-moving food and nonfood items, usually with extended hours of operation, generally easily accessible, and often located along busy roads or at petrol stations. (Source: Census and Statistics Department --Key Statistics on Business Performance and Operating Characteristics of the Import/Export, Wholesale and Retail Trades, and Accommodation and Food Services Sectors in 2011,'" January 2013.)

ST39

UST039 2

To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

typically involved instant consumption and generated lower average spending per basket. 1 ° For

instance, the majority of purchases made at convenience stores were secondary shopping. Supermarkets, in general, provided a one-stop grocery experience by offering a wide range of foodstuff and household necessities. Hence, they competed with different categories of shops. In the market for fresh produce and packaged food, supermarkets in Hong Kong competed with wet markets. In the market for household products and necessities, supermarkets in Hong Kong competed with retail outlets such as drugstores and personal care chain stores.

Grocery Shopping Behavior

Shopping at grocery retail outlets was a daily activity for many consumers in Hong Kong, partly due to the Chinese tradition of cooking fresh produce. Hong Kong consumers were therefore inclined to patronize the outlet that was most convenient or closest geographically. According to a survey of household shopping behavior by the Planning Department in 2005, most Hong Kong households (95.2%) normally purchased food in their district ofresidence, with 68.7% patronizing food stores near home (i.e., within 10 minutes' walking distance or 500 meters). Also, 97.4% of households normally purchased general household goods from stores inside their district of residence, with 76.6% patronizing stores near home. 11

Consumers in Hong Kong usually shopped for groceries frequently, not only because of their preference for fresh food but also because of the difficulty or inconvenience of making bulk purchases. Unlike consumers in many Western economies, most consumers in Hong Kong traveled to grocery outlets by foot instead of by car. The car ownership rate in Hong Kong was very low compared with other advanced economies. 12 For every 1,000 people in Singapore and London, there were I 00 and 300 cars, respectively. In Hong Kong, there were only 63. 13 Insufficient household space was also a factor that affected Hong Kong consumers' grocery shopping behavior. Hong Kong was a compact city with an average living space of only 13 square meters per person as of March 2014. 14 By comparison, the average living space per person was about 40-50 square meters in the richest economies (e.g., in Scandinavia) and usually 20-30 square meters in Central Europe.

15 The small average living space in Hong Kong made it difficult for general households to store a large amount of food and grocery necessities at home.

10 Ibid, p. 4. 11 Ibid., p. 36. 12 As of 2013, there were 501,021 registered private cars in Hong Kong. 13 Chi-fai Cheung. ··Private car fleet passes 500,000,'" South China Morning Post, 4 May 2013,

h1tp://www.scmp.com/news/hong-kong/article/1229525/private<ar-fleet-passes-500000-mark, accessed December 2014. 14 Hong Kong Housing Authority, ·'Housing in Figures 2014.'" 15 Helgic Analytics, "Housing Stocks," http://w\\w.helgilibrarv.com/indicators/index/housing-stocks-sgm-per-pcrson.

accessed December 2014.

ST39

UST039 3

To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

The Hong Kong Supermarket Industry

The first conventional supermarket 16 in Hong Kong opened in the I 950s. At that time, high-income citizens or foreigners were the target customers; supermarkets were not popular among locals. 17 In the I 970s, supermarkets began to gain popularity in every household, especially after they obtained the necessary government permission to sell rice. 18 In the I 980s, PARKnSHOP and Wellcome established their positions as market leaders. After a fierce price war, a number of small-scale supermarkets were forced out of the market.

In 1996, there were approximately I ,050 supermarkets and convenience stores in operation, about I 4 times the number in I 976.

19 The number of stores increased more rapidly between I 978 and I 985,

with an annual average growth rate of 26%. The rapid growth was partly attributable to the emergence of convenience stores during the period. However, from the mid- I 980s to I 996, the average growth rate slowed to 4% per annum.

20

Major Players in the Supermarket Industry

Chain operation was a predominant feature of the supermarket industry. Since the I 980s, PARKnSHOP and Wellcome had remained the dominant players in the Hong Kong supermarket industry. Not only did they outperform their competitors in terms of number of stores, but they also captured dominant market shares. In 2013, PARKnSHOP and Wellcome accounted for about 75% of all supermarket turnover in Hong Kong. 21 The third and fourth players, i.e., CR Vanguard Shops and OCH Food Mart, did not come close to the two market leaders in terms of number of stores and market share.

Wellcome

Founded in 1945, Wellcome was the first supermarket chain in Hong Kong. It was owned by Jardine Matheson Holdings (JMH) via its Dairy Farm subsidiary. The majority of JMH's businesses were in Asia, including subsidiaries like Jardine Pacific, Jardine Motors, Jardine Strategic, Mandarin Oriental Hotel Group, and Hongkong Land. In November 20 I 4, the supermarket chain had over 280

16 Please refer to footnote 9 for the definition of a conventional supennarket. 17 K. C. Mun, "Opportunities for supermarket development in Hong Kong.'' Journal of The Chinese University of Hong

Kong 11, no. 11 (1974); and H. Or, ·'Customer Satisfaction and Market Segmentation of Hong Kong Supermarket Industry;· City University of Hong Kong. 2004.

18 W. L. Cheung and K. T. Fang, ·The comparison of shopper purchasing behaviour and demographic profiles of two supermarket giants: A Hong Kong Perspective,'' BRC, Hong Kong Baptist College, May 1994, pp. 2-4.

19 Census and Statistics Department. "Operating Characteristics and Business Performance of Supennarkets,'' Hong Kong Monthly Digest a/Statistics, March 1997, http://www.censtatd.gov.hk/hkstat/sub/sp320.jsp?productCode=FAI00204, assessed November 2014.

20 Ibid. 21 USDA Foreign Agriculture Service. "Hong Kong Retail Food Sector Annual 2014,'' 18 March 2014, p. 10.

ST39

UST039 4

To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

stores in Hong Kong. 22 Wellcome was the first supermarket to establish a home-delivery service division. "Wellcome Delivers On-line" was especially designed by Wellcome for customers using its online shopping services. Free delivery was provided for each order over HK$500. Wellcome's parent company Dairy Farm began introducing high-end supermarket brands to Hong Kong in 2007. Stores carrying the following brands were opened to capture an upscale market: 23

};>, Jason's MarketPlace was a lifestyle supermarket catering to discerning consumers seeking quality gourmet groceries, fine wines, and top-brand health and beauty products.

>- Oliver's was Hong Kong's premier fine wine and food store, offering consumers a wide array of quality gourmet food and wines from around the world.

};>, ThreeSixty was Hong Kong's largest organic and natural food store. It boasted an extensive range of healthy foods, as well as environmentally friendly household and personal care products.

PARKnSHOP

Supermarket Chain PARKnSHOP was a member of the A.S. Watson Group (ASW), a wholly owned subsidiary of Hutchison Whampoa Limited (HWL). The HWL Group mainly operated businesses related to properties and hotels, retail, ports, and related services. PARKnSHOP opened its first store in Stanley, Hong Kong, in 1973. By November 2014, PARKnSHOP operated more than 260 stores in Hong Kong. 24 Its website P ARKnSHOP Online allowed customers to place orders on line. 25

Home delivery was free for a purchase of HK$500 or more. PARKnSHOP store was the group's mainstream brand. To target different customer segments, it also operated some upscale stores under different brand names. Some of the higher-end stores operated by PARKnSHOP were lifestyle food stores, which offered a variety of imported goods to target middle- and upper-class customers. For example: 26

};>, International by P ARKnSHOP was an international supermarket concept that provided the different flavors of East and West and catered to international Asian and Western customer segments.

};>, Taste was an international Asian superstore concept that provided customers with a "More than Food" shopping experience.

>- Fusion by PARKnSHOP was an international superstore concept that combined fresh produce with a wide selection of Western delicacies.

PARKnSHOP also operated Gourmet Food Hall, Great, SU-PA-DE-PA, "5tt�(1" Japanese and Korean snack specialty store, Express, and PARKnSHOP Frozen Food. PARKnSHOP set up its first

22 Wellcome. ·'About Wellcome,'· http://www.wellcome.com.hk/wd2shop/enthtml/comorate/compam-profile/about­ wellcome.html, accessed November 2014.

23 Dairy Farm Group, ·'Our Businesses-Supermarkets and Hypermarkets,'" httpJ/www.dairvfunngroup.com/Our­ Businesses/Supermari(ets-and-Hypennarkets, accessed November 2014

24 PARKnSHOP, ·'About PARKnSHOP,'" http:/ /W\l.w.parlgt.�hop.com/WebShop/JumpPage.do?comeFrom=MenuContent&menuld"' I 00001 &parents Id= I 00000, accessed November 2014.

25 PARKnSHOP, --PARKnSHOP.com online store,'· httpJ/www.parimshop.com/WebShop/LomnPage.do, accessed November 2014.

26 PARKnSHOP. --About PARKnSHOP.'"

ST39

UST039 5

To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

Japanese and Korean snack specialty store ";tt°*{3f' in August 2014, and it had plans to establish about 50 stores in Hong Kong. 27

CR Vanguard

The distant, third-ranking supermarket chain in Hong Kong was CR Vanguard. The supermarket chain was owned by the China Resources Group (CRG), a Chinese state-owned conglomerate. The group's main business was importing mainland Chinese products (including energy) to Hong Kong. CRG also controlled China Resources Ng Fung Limited (CR Ng Fung), the biggest frozen and fresh food wholesaler in Hong Kong. CR Ng Fung strived to become the leading brand in the fruit and vegetable market in China. CR Vanguard closely collaborated with CR Ng Fung to build the authentic, vertically integrated industry chain from the source to the retail store. 28

The CR Vanguard supermarket chain set up its first store in Hong Kong in 1984 and expanded to operate about 95 stores in Hong Kong by November 2014. 29 While CR Vanguard carried a variety of products from different countries, a major portion was sourced from Mainland China. 3° CR Vanguard did not offer an online shopping channel in Hong Kong.

DCH Food Mart

Established in 1992, OCH Food Mart was the retail arm of Dah Chong Hong Holdings Limited, a conglomerate parented by CITIC Pacific. CITIC Pacific was 58% owned by the state-owned CITIC Group in Beijing. OCH Food Mart was the fourth-largest food retailer in Hong Kong. It had also become the market leader in the frozen food specialty chain store market in Hong Kong. 31 OCH Food Mart provided various types of frozen seafood, meat, poultry, dried seafood, and basic groceries sourced globally. A new store format was launched in 2007. OCH Food Mart Deluxe was a premium specialty store, providing a full range of international gourmet food and imported fresh fruits and vegetables. In 2014, the chain had over 90 stores in Hong Kong, with a number located near wet markets. 32·33 OCH offered an online shopping channel through its "OCH Food Mart Deluxe-Gourmet Delivery Service" website, which provided customers a convenient, one-stop shopping experience. 34

OCH Holdings Limited had over 60 years of experience in the food business and had expanded into food manufacturing, distribution, and retailing, forging a total food supply chain. In upstream food

21 "l!l�jlo.Jfi§"�? '§��g� 50 * r '�°*{*J �-ttfc5,'' Apple Daily, hnp://hk.apple.nextmedia.com/realtime/finanre/201408 I I /52782970, 11 August 2014, accessed November 2014.

28 China Resources Ng Fung, ·'Main Business.'' http://\vww.nlh.eom.hk/enibusiness/ , accessed November 2014. 29 China Resources Vanguard Co., Ltd., "�r&ffiti (Development History),''

http://www.crv.com.m/CRV /chinese/about/course, accessed November 2014. 30 USDA Foreign Agriculture Service, Hong Kong Retail Food Sector Annual 2014, 18 March 2014, p. 10. 31 Ibid. 32 China Resources Ng Fung, ·'Main Business;· hnp:/lwww.nlh.oom.hk/en/busines , accessed November 2014. 33 USDA Foreign Agriculture Service, Hong Kong Retail Food Sector Annual 2014, p. 10. 34 Dah Chong Hong Holdings Limited. ·'OCH Food Mart Deluxe-Gourmet Delivery Service,''

http:/�vw.eshop.dcllfoodmartdeluxe.com. accessed November 2014.

6 ST39 UST039 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

manufacturing, it offered frozen and chilled food products as well as tea and coffee blending. In midstream food trading, it distributed food commodities and represented international fast-moving consumer goods brands. 35

Other Supermarket Players

Other supermarket operators in Hong Kong included AEON Stores, Y ATA, City'Super, Sogo, UNY, and Kai Bo Food Supermarket. Other than Kai Bo, these Japanese lifestyle stores carried an extensive range of imported products with a variety of items sourced from Japan and other countries. They attracted many middle-class customers and expatriates who were receptive to higher-priced imported products. Since most of these supermarkets were part of Japanese department stores, many were located in commercial and tourist districts rather than residential areas. Kai Bo featured frozen products, with most of the food supplies coming from China or Southeast Asia.

36 [Exhibit 1 shows the

number of supermarket retail chains in Hong Kong in 2003 and 2013.]

Convenience Stores

In 2013, there were over 1,300 convenience stores in Hong Kong. 37

Convenience stores operated round the clock and were relatively small. Since they offered a limited selection of products at less competitive prices, most purchases were for convenience, i.e., goods normally bought in small quantities for instant consumption. Consumers often considered convenience stores as fill-in stores, i.e., filling the void when other retail stores were closed, unavailable, or unreachable. A number of convenience stores in Hong Kong had set up hot food counters offering Hong Kong traditional snack food. Some convenience stores operated jointly with gasoline stations. where select grocery items were sold in bulk packages, targeting consumers with cars.

Seven Eleven, Circle K, and VanGo were three leading convenience store chains in Hong Kong. 38

The leading chains had close business connections with leading supermarkets. Seven Eleven was a sister company of Wellcome, while VanGo was owned by CR Vanguard. Circle K was owned by Convenience Retail Asia Limited (CRA), which was a subsidiary of Li & Fung, a global sourcing firm and one of the largest retailers in Hong Kong.

Personal Care Chain Stores and Drugstores

Some drugstores and personal care chain stores in Hong Kong sold selected, popular grocery items, primarily snacks and drinks, to drive store traffic. Mannings and Watsons were two leading personal health and beauty retailers in Hong Kong, offering an extensive range of pharmaceutical, health care,

JS Dah Chong Hong Holdings Limited, ·'Business Profile,'" ht1p://www.dch.eom.hk/en2lish/about dch/dch group/corp profilelprofile/index.php. accessed November 2014.

36 USDA Foreign Agriculture Service, Hong Kong Retail Food Sector Annual 2014, p. 13. 37 Ibid .. p. 12. 38 Ibid .. p. 12.

7 ST39 UST039 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

personal care, skin care, and baby care products. They also carried a limited selection of snacks and packaged food products. Mannings belonged to the Dairy Farm Group, while Watsons was part of the AS. Watson Group. Hence, the two leading personal health and beauty retailers were closely connected to the two leading supermarket chains in Hong Kong.

Wet Markets

Wet markets39 in Hong Kong generally offered a wide choice of fresh meat, seafood, vegetables, and fruits. Since fresh produce was common in Chinese cooking, wet markets played an important role as an outlet for fresh provisions; some residents visited markets daily to buy fresh food. Many of Hong Kong's wet markets were publicly owned and maintained by the Hong Kong government under the Housing Department and the Food and Environmental Hygiene Department. In this regard, the Hong Kong government played a key role in maintaining wet markets and had acted to improve public wet­ market facilities. Some new public wet markets were built with air-conditioning and provided a more hygienic and pleasant environment than the previous ones. Many stalls were equipped with freezers and chilling equipment to maintain food quality. A Hong Kong Planning Department survey in 2005 revealed that 74% of the respondents normally purchased food from wet markets and 25.4% from supermarkets. 4° Consumers who preferred wet markets indicated that they were more conveniently located and offered fresher food and a wider variety of food at low prices. Another report observed that wet markets still maintained a significant share of the fresh food sector, but there were indications ofa gradual decline in consumer patronage.

41 Even though sales for both wet markets and supermarkets

had increased from 1995 to 2013, supermarkets had captured a greater portion of total sales.

Competition from New Entrants

Although the dominant positions of PARKnSHOP and Wellcome had remained stable since the 1980s, they faced challenges from two market entries, i.e., Carrefour and adMart, from 1996 to 2000.

Carrefour

In 1996, Carrefour, a French multinational retailer and one of the world's largest hypermarkets, attempted to enter the Hong Kong grocery market. The first store was opened in December 1996 in a residential district, Heng Fa Chuen, on Hong Kong Island. The company subsequently opened three more hypermarket stores in the New Territories. Carrefour initially had an aggressive pricing strategy upon entry, intending to attract customers by selling some products below suppliers' recommended

39 A wet market is a market selling fresh meat and produce, distinguished from dry markets that sell durable goods. Source: Wholesale Markets: Planning and Design Manual, Fao Agricultural Services Bulletin, no 90. 40 Hong Kong Consumer Council, ··Market Power of Supermarket Chains Under Scrutiny,'" Groce,y Market Study, 19 December 2013, p. 3 8, http://ww\\.consumer.org.hk/competition/ issues/grocerv/GMSReport20131219.pdf, accessed November 2014. 41 ··Wet Markets versus Supermarkets: Competition in the Retailing Sector,'" Co nsumer Council Report. August 2003.

8 ST39 UST039 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

resale price to undercut the prices of Wellcome and P ARKnSHOP. However, this strategy did not last long. In 1997, Carrefour complained to the Consumer Council about the pressure suppliers applied to force Carrefour to sell products at the recommended resale price. In response, the Consumer Council interviewed 22 suppliers that had allegedly blacklisted Carrefour. Seven admitted to taking action to enforce minimum prices, 12 denied the charge, and 3 declined to comment on principle.

42 The council

concluded that the suppliers had applied pressure on Carrefour to maintain price levels, failing which, supplies of goods would have been cut off. In September 2000, Carrefour closed its stores in Hong Kong. Failure to secure the right locations for new outlets was the main reason behind its decision. With regard to the location problem, the management of Carrefour made the following comment:

In Hong Kong, we had a shortage of places and we had no sites. It was not possible to find new locations and we wanted to become a significant size in Hong Kong. 43

The Consumer Council's 2003 study reported that the average quarterly selling prices of 127 fast­ moving consumer goods (FMCG) of the two largest supermarket chains significantly increased after the exit of Carrefour. 44

adMart

In the late 1990s, adMart made a high-profile attempt to enter the Hong Kong supermarket scene and change the way groceries were sold in Hong Kong. adMart was established as an online retailing and home-delivery store by Jimmy Lai, a media magnate who controlled Apple Daily, one of Hong Kong's largest-circulation newspapers. In June 1999, the cut-price grocery-delivery business commenced its no-store, online business. Customers could place their orders via telephone, fax, or Internet. Soon after adMart launched its free home-delivery service, Wellcome launched its own home­ shopping website and matched adMart's free delivery service. PARKnSHOP also expanded its online business, scrapped the delivery fee, and expanded the delivery service to all outlets. In early August 1999, P ARKnSHOP initiated a price war, in which 1,000 items per week were discounted for an indefinite period. Wellcome immediately responded with similar price reductions. Such aggressive price-cutting campaigns initiated by the two dominant players caused adMart's daily sales to drop by one-third. 45

In the months following the launch, adMart was accused of selling substandard electrical appliances, food products that had passed their use-by date, fake wine and cognac, and food products

42 Suzanne Harrison and Ben Kwok, ·'Carrefour bails out after failure to reach critical retail mass,'' South China Morning Post, 30 August 2000, http://ww\\.scmp.oom/article/325154/caa:efour-bails--0ut-after-failing-reach-critical-retail­ mass, accessed November 2014.

43 Ibid. 44 ·'Wet Markets versus Supermarkets: Competition in the Retailing Sector," Consumer Council Report. 45 USDA Foreign Agriculture Service, Hong Kong Market Development Reports 1999-Price War Erupts Among

Hong Kong Retailers, 20 August 1999, p. 2.

9 ST39 UST039 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

without the proper expiration labels. 46• 47 In October 1999, Hong Kong Customs officials raided adMart's eight warehouses and arrested 10 men for selling fake liquor. 48 In response to adMart's scandals, PARKnSHOP offered to exchange fake liquor bought from adMart for the real product. adMart saw a significant increase in customer complaints, and there were also allegations that adMart did not honor its promise of a full refund within 30 days of purchase. 49 Before adMart commenced its operations, both PARKnSHOP and Wellcome had been major advertisers in Apple Daily. But they pulled their ads when adMart began to compete with them. On December I 0, 2000, adMart ceased its operations after losing about HK$ l 30mn. 5° Chief Executive Officer Anton van Gorp commented on the failure of adMart's business model:

We began this business based on the belief that we could migrate traditional retail business away from the brick-and-mortar approach to online purchases . . . . [Howeve,J, significant buying online has not taken hold in Hong Kong, and the value . . . of each purchase has not reached the point where costs of home delive,y are fully covered. 51

759 STORE

A new local entrant, 759 STORE, identified a market niche in the Hong Kong supermarket industry in 2010 and grew rapidly to become a competitive player. Established in 2010, 759 STORE's rapid growth created a stir in the Hong Kong supermarket industry. 759 STORE derived its English name from the Hong Kong Stock Exchange Code of its parent company, CEC International Holdings Limited (CEC). CEC was founded in I 979 and was engaged in the design, development, manufacture, and sale of electronic components, including coils, inductors, and transformers. Due to slow growth and intense competition in the electronic components industry, CEC decided to diversify into the supermarket industry. With valuable business connections in Japan, CEC was able to source a variety of imported products for its newly set-up supermarket business. To refer to the Japanese consumer culture, 759 STORE derived its Chinese name "lfciJ{'§�" from a popular Japanese drama "lfciJ{'§(Oshin)." Since the opening of its first store in July 20 I 0, 759 STORE had expanded rapidly, and by the end of April 20 I 4, it had established I 92 outlets covering 18 districts in Hong Kong. 759 STORE selected its retail sites carefully in order to penetrate local residential areas. Most of the branches were located in shopping malls and shop units of public and private housing estates. 52

759 STORE sold brands of grocery, snacks, beverages, food, and other household products that PARKnSHOP and Wellcome did not carry. It imported mainly Japanese, Korean, and other foreign

46 Samuel Yeung, ··Lai sees end to adMart red ink,'" South China Morning Post, 10 March 2000, hnp://www.sgnp.oom/article/3 l 0399/lai-sees-end-admart-red-ink, accessed November 2014.

47 Emily Lam, '"adMart shakes up HK retailing," South China 1\,/orning Post. 19 December 2000, http://www.scmp.com/article/334557/admart-shakes-hk-retailing, accessed November 2014.

48 Clifford Lo, "10 men arrested as Customs seize 12,000 bottles of fake Bordeaux," South China Morning Post, 12 October 1999, http://www.scmp.oom/article/296394/l O-men-arrested-customs-seize-12000-bonles-fuke-bordeau.,, accessed November 2014.

49 Lam, '"adMart shakes up HK retailing.'" 50Ron Gluckman, ·'Going offiine in Asia,'· http://w,vw.gluckmanoom/E-ComAsiahtm, accessed November 2014. 51 Lam, ··adMart shakes up HK retailing.'" 52 CEC International Holdings Limited. 2013/14 Annual Report.

10 ST39 UST039 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

products and sold them at relatively low prices, compared with substitutes available in supermarkets in Hong Kong. 759 STORE set its product prices based on a formula with a constant markup percentage. In this way, customers of 759 STORE could buy foreign imported products in Hong Kong at consumption levels similar to those in the country of origin.

53 In an interview with the media, Coils

Lam, founder and CEO of 759 STORE, said his company applied a gross profit margin on products of just 37.5%, in contrast to the bigger chains that had gross profit margins ranging between 40% and 50%. According to Lam, "The retail price equals the cost and a markup. Nothing more."

54

759 STORE adopted a direct procurement model, with more than 95% of the products imported directly from overseas wholesalers and manufacturers, bypassing local distributors.

55 • 56

With its high inventory turnover policy, 759 STORE could place steady and long-term purchase orders with foreign distributors and manufacturers. It aggressively expanded its product sourcing network, which grew from IS countries and regions in 2013 to more than 60 in 2014. Initially, 759 STORE mainly sold snacks, beverages, grocery food items, and wine and spirits. As it expanded, it successfully introduced a number of new product categories, with product types increasing from 3,500 in 2013 to over 14,500 in 20 I 4. 57 Product categories were extended to cover frozen food, household products, baby products, personal care products, cosmetics, and miscellaneous items. To cater to the needs of customers, 759 STORE carried different products at different store locations. For instance, the stores located at Causeway Bay carried more cosmetics to attract tourists, while the store in the central business district carried more varieties of snacks to target office workers. Selected stores also operated round the clock to compete with convenience stores. 759 STORE had once tried to sell fresh vegetables and fruits, but the management decided to withdraw the fresh vegetable category due to unsatisfactory sales, lack of processing resources, and intense competition with traditional market booths and shops. 58 759 STORE was eager to develop a more diversified source of goods. According to Lam, the diversification of the 759 model would give the company "more bargaining power to better store locations." 59 In 2014, 759 STORE set up various new trade names and specialized stores, including "759 STORE Household Market," featuring household goods and small electrical home appliances; "759 STORE Frozen Market," specializing in selling frozen food and grocery food items; "759 KAW Al I LAND," which mainly sold personal care products, skin care and cosmetic items, and various goods from Japan; and "759 STORE Supermarket," which sold all types of goods self-imported by the group. 60

With more than 95% of products imported directly, 759 STORE only sourced a small proportion of supplies from local distributors, which the firm believed were susceptible to anticompetitive pressure by Hong Kong's established retailers. In early October 2011, Coca-Cola's Hong Kong-franchised

SJ Ibid. 54 Imogene Wong, "Magic Numbers: Lady Luck smiled on Coils Lam Wai-chun, when the chairman of CEC

International named his chain of retail outlets 759;· The Standard, 26 May 2014, http://www.thestandardcom.hk/news printa�p?art id=J45717&sid, accessed November 2014.

55 CEC International Holdings Limited, 2013/14 Annual Report; and Amy Nip, ·'New law no contest for supermarkets· power,'· South China Morning Post. 13 June 2014, http:/lwww.sgnp.com/news/hong-kong/article/1531053/new-law-no­ contest-supennarkets-oower, accessed November 2014.

56 CEC International Holdings Limited, 2013/14 Annual Report. 57 Ibid. 58 Ibid. 59 Wong, "Magic Numbers: Lady Luck smiled on Coils Lam Wai-chun:· 60 CEC International Holdings Limited, 2013/14 Annual Report.

11 ST39 UST039 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

Swire Group61 demanded that the 759 STORE chain raise the Coca-Cola retail price, as it was selling below the suggested retail price. After 759 STORE declined the request, Swire Group made the decision to adjust the wholesale price of a can of Coca-Cola from HK$2 to HK$2.2. On 10 October 2011, 759 STORE decided to stop selling Coca-Cola. Swire Coca-Cola later issued a statement admitting that it provided suggested retail prices to customers of various sales channels for their reference and had not received new orders from the 759 STORE since the last delivery. 62 In addition to the Coca-Cola incident, 759 STORE also complained that some local suppliers stopped their supplies after the company priced its goods cheaper than competing supermarkets.63 In its annual report for the year ended 30 April 2014, 759 STORE said its management had tried to source more supplies from local suppliers, especially small and medium-sized suppliers. However, it noted that there were "fundamental conflicts existing in price setting." Even though 759 STORE requested no listing fee, some suppliers could not accept its pricing model because of their need to control market prices and maintain relationships with other key large retail chains. 64 Lam pointed out that some landlords placed restrictions on items that the chain could sell, including staples like rice. However, he did not believe his firm was being deliberately targeted by the larger property development companies. 65 In its annual report for the year ended 30 April 2014, 759 STORE said it strove to enhance communications with landlords in search of more spacious shop locations to build up a "micro-department store" model. Accordingly, it would no longer set the number of branches as its development benchmark. 66 759 STORE highlighted its differentiation strategy in its 2013/14 Annual Report:

Compared with other sizeable supermarket chains, 759 STORE does not resemble any of the feature[s] of the traditional supermarket chain; it basically does not display any well-known brand products that are supplied by local distributers. In contrast, 759 STORE 's procurement team worked hard to explore the products that gain popularity in oversea markets while lack[ing] promotion in HK. In terms of product selection, it is obvious that basically there is no overlapping between 759 STORE and major supermarket chains. (Both are nmning on its own in different tracks). The Group believed that large supermarket chains were absolutely capable to increase the proportion of products that are imported on their own so as to import exactly the same products as 759 STORE's, without much difficulty. However, their existing operation model would have to be changed. 67

61 The Swire Group was a diversified conglomerate headquartered in England. Its core businesses in Hong Kong were held by the listed company Swire Pacific Limited. Its core businesses covered various sectors including property, aviation. beverages, marine services, trading, and industrial.

62 Swire Coca-Cola HK, Company statement of Swire Coca-Cola HK on the incident of·'759 Store,'" https://www.bonaguacom.hk/b\\oV2/webui/News/Ne�o20lmages/759"/o20Store-Statments-20111029.pdf. accessed November 2014.

63 Benjamin Robertson, ·'Hong Kong·s competition regulator faces challenges in supermarket sector,"' South China Morning Post, 30 June 2014, http://ww,\.scmp.com/business/companie article/1543169/hong-kongs-competition-regulator­ faces-challenges-supenmuket, accessed November 2014.

64 CEC International Holdings Limited, 2013/14 Annual Report. 65 Robertson, ·'Hong Kong's competition regulator faces challenges in supermarket sector.'· 66 CEC International Holdings Limited. 2013/14 Annual Report. 67 Ibid.

12 ST39 UST039 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

Market Environment and Competitive Landscape

With two rivals having left the market, Wellcome and PARKnSHOP continued to thrive, grabbing more market share after the 2000s. As modernization and keen competition forced the less competitive operators out of the market, there was a substantial decline in small supermarket operators of approximately 41 % from 1996 to 2001.68 The Hong Kong Consumer Council reported that the two market leaders together had grown, in total, 29% (28% for PARKnSHOP and 31 % for Wellcome) in terms of the number of outlets from 1993 to 2003.

Driven by the influx of investment, the economy of Hong Kong continued to grow in 2013. The economy recorded an increase of GDP and per capita GDP by 4.2% and 3.7%, reaching US$272bn and US$37,859, respectively, in 2013.

69 Total retail sales of food and drinks in Hong Kong for 2013

reached US$10.75bn, representing growth of 5.4% compared to 2012. In July 2013, the Wall Street Journal reported that the two largest supermarket chains in Hong Kong accounted for a combined 73% market share of the supermarket industry based on the number of stores: Wellcome, 39.8%; PARKnSHOP, 33.1%. CR Vanguard, at 7.8%, was a distant third.70

As supermarkets sourced products from suppliers and distributed them to consumers, the extent of competition in the supermarket industry had implications for the relationship between suppliers and supermarkets, as well as supermarkets and consumers.

Economics of the Supermarket Industry

Suppliers

The relationship between supermarkets and suppliers often depended on their relative bargaining powers. Given that supermarkets operated a one-stop shopping facility, they had to make bulk purchases in order to offer a broad assortment of products for customer selection. For the suppliers, there was only a limited number of large retailers to whom they could sell and generate volume sales. There were often no alternative distribution channels comparable to the combined size of the leading supermarket players. Some suppliers carried products that were relatively more supermarket-dependent than others. For instance, beverages were less dependent on supermarket sales than rice, because beverages were more easily distributed through convenience stores and other outlets. 71 Even though suppliers tried to diversify their distribution channels, they often had to incur the higher costs of serving a large number of smaller retailers.

68 Hong Kong Consumer Council, "Grocery Market Study. Market Power of Supermarket Chains Under Scrutiny.'· 19 December 2013, p. 11, www.oonsumer.org.hk/competition/ issueslgrocel'\ /GMSReport201312 I 9.pdf, accessed November 2014.

69 Hong Kong Census and Statistics Department and USDA Foreign Agriculture Service, Hong Kong Retail Food Sector Annual 2014, 18 March 2014, p. 3.

70 Ibid. 71 Consumer Council,·' 1994 Report on the Supermarket Industry in Hong Kong;· p. 14.

ST39

UST039 13

To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

Suppliers normally negotiated with supermarkets on a number of trading and promotion terms before they could distribute products via their outlets. These terms might include a listing fee for new products, slotting fee, rebate, advertising fee, promotion discount, new-store-opening discount, new­ store-opening support, damaged-goods allowance, or defective or outdated product recall. Supply contracts typically lasted for one year and were subject to conditions upon renewal.

Supermarkets in Hong Kong charged suppliers one-off listing fees to allow a new product to be put on their shelves. The listing fees were subject to negotiation and could vary greatly among different supermarket chains and product categories. Major supermarket chains with many outlets generally charged high listing fees. Industry sources revealed that key supermarket chains might charge HK$1,000 (US$ I 30) per SKU 72 for each of its stores. 73 A discount might be offered to certain suppliers, depending on the popularity of the products and the bargaining power of the supplier. Some suppliers in Hong Kong complained that it was difficult to get their products on the shelves of the two big supermarket chains due to their weak bargaining position. They also said that Japanese supermarkets were more receptive to new products and were more reasonable in terms of pricing, discount, and promotion. 74 Suppliers of milk products also found it difficult to get their products on the shelves ofWellcome, which was owned by Dairy Farm Group and a main distributor of Dairy Farm milk. 75

The trading terms between suppliers and supermarkets often incorporated various fees to be paid to supermarkets based on product turnover. These included an annual flat rebate based on the annual turnover of products and an incentive rebate as a percentage of turnover when products' sales exceeded the agreed amount. Large supermarkets could usually obtain more competitive and advantageous trading terms from suppliers. It had been observed that about 15% of the annual turnover had to be rebated to the major supermarkets and 8% to small ones. 76 Suppliers or agents distributing popular products with high turnover had stronger bargaining power and could negotiate a lower rebate rate. Major supermarket stores often offered discounts to customers and tried to transfer the cost to suppliers by requesting lower prices for supplies. Ordinary retailers who had weak bargaining power would not enjoy similar advantageous terms from suppliers.

Large supermarkets requested many suppliers to contribute to the supermarkets' advertising expenditure. A survey conducted by the Hong Kong Consumer Council in 2012 showed that about 46% of suppliers bore the cost of advertising their products, while 29% shared advertising costs to some degree. 77 In addition to advertising costs, some 90% of suppliers were required to pay slotting fees for placing or shelving their products at the retailers' premises. 78 It was also common for suppliers to pay a damaged-goods allowance to supermarkets. This effectively meant that suppliers were liable for goods that were damaged and often simply unsold. Some suppliers had to retrieve the unsold goods.

72 SKU = stock-keeping-unit. 73 USDA Foreign Agriculture Service, Hong Kong Retail Food Sector Annual 2014. 18 March 2014, p. 11. 74 Consumer Council. ·'1994 Report on the Supermarket Industry in Hong Kong,'· p. 13. 75 Ibid. 76 lbid. 77 Hong Kong Consumer Council, .. Grocery Market Study, Market Power of Supermarket Chains Under Scrutiny.'· 19

December 2013, p. 79, www.consumer.org.hk/competition/ issues/grocerv/GMSReport20131219.pdf, accessed November

2014. 78 Ibid.

ST39

UST039 14

To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

Moreover, suppliers could be asked to reduce the supply price of unsold goods during the contract period or to compensate the retailers for those unsold or returned goods. Some supermarket chains had imposed constraints on business that went beyond trading terms. The Hong Kong Consumer Council survey revealed that it was relatively common for supermarkets to include contractual terms that restricted suppliers' ability to sell to other customers. These included requesting suppliers to obtain prior approval or consent from supermarkets before they sold to new customers.

79 In response to

requests for exclusive supplies, some suppliers overcame such constraints by packaging the same line of products differently for sale in other supermarket chains. 80

Resale price maintenance meant that suppliers set a recommended retail price for products for all supermarkets. Individual supermarkets, however, could determine the exact selling price and might sell the products at lower prices. Larger supermarkets monitored competitors' prices, and if they found a supplier's product was selling cheaper elsewhere, they might be able to reclaim the difference, depending on the contract terms. This effectively put the onus on suppliers to control prices. Some suppliers tailored their sale price after knowing a supermarket's profit expectations. According to Ringo Wong, director of Wilson Fine Foods,

The only way to stop other chains fi·om selling at a low price is for the supplier to sell to them at a relatively high price. For example, if Daily Farm requires a 40 per cent margin, you supply them a certain price. Jf759 only requires a 30 per cent margin, then, basically, the principal needs to sell them 10 per cent more expensive so you can counter off the difference. Othe,wise, they will always sell IO per cent cheaper. 81

Private-Label Products

The big chains PARKnSHOP and Wellcome began to carry their own private-label products in the 1980s. Wellcome launched its first corporate brand "No Frills" in 1985, offering customers over 300 everyday products. No Frills offered a diverse range of products, including rice, snacks, canned seafood, frozen foods, pet food, and health and baby products. Wellcome established its second international corporate brand, "First Choice," in 1998. The First Choice brand grew to cover an extensive product range of over 1,000 items sourced from around the world. The third corporate brand, Yu Pin King, launched in 2006, offered premium authentic Chinese food and ingredients. By 2014, Yu Pin King had a range of 250 products.

82 PARKnSHOP also sold a wide range of products under the generic brands

"Select," "Best Buy," and "Imperial Banquet," covering both food and nonfood products. Such private­ label products carried the cheapest prices in designated categories. 83

79 Ibid. 8 ° Consumer Council, ··1994 Report on the Supermarket Industry in Hong Kong, .. p.15.

81 Robertson, ··Hong Kong's competition regulator faces challenges in supermarket sector." 82 Wellcome, ··Corporate Brands,'· http://www.\\ellcome.eom.hk/wd2 hop!en/htmVcorporate/companv­

profile/corporate-brands.html, accessed November 2014. 83 Gary Chau, ·'Crowd Master,'" The Standard, 9 December 2013,

http:/ /www.thestandardcom.hk/news printasp?art id= l 40392&sid=4 I 085190, accessed November 20 14.

15 ST39 UST039 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

In 1993, the contribution of private-label products to total sales was about 4% for P ARKnSHOP and less than 3% for Wellcome. 84 A study conducted by the Consumer Council in 1994 also showed that smaller supermarket chains that did not carry private-label products offered more varieties of products than the two dominating chains in Hong Kong.

85 In a survey conducted by the Consumer

Council in 2013, 86% of suppliers indicated that their retail clients engaged in offering self-branded products that directly competed with their products. 86

Access to Retail Sites and Rental Costs

Since PARKnSHOP and Wellcome had entered the supermarket industry long before many other players, they enjoyed a pioneering advantage in occupying prime retail sites in Hong Kong. Being part of conglomerates engaged in real estate, they could also secure easy access to prime new sites. The Consumer Council observed that in all properties developed by Hutchison Whampoa Ltd. and Cheung Kong (Holdings) Ltd. with supermarket facilities, all the supermarkets were operated by PARKnSHOP. Likewise, in Hongkong Land (Holdings) Ltd.'s properties, there were only Wellcome supermarkets.

87

There were allegations that the two supermarket chains could leverage their group business connections to prevent competitors or new entrants from operating near their stores. In densely populated districts, competitors could avoid these hurdles by operating retail stores around the corner. However, in large development areas controlled by the big conglomerates, alternative sites could be a substantial distance away. In the absence of prime sites, small players or new entrants were forced to acquire and operate supermarkets at marginal sites, which in turn might adversely affect their competitive edge.

Rental costs were a significant component of the cost structure for supermarkets. In Hong Kong, rental costs could account for about 10% of the supermarket's expenses. 88 Hence, without a large amount of capital, a new entrant could not establish an extensive network of stores. Backed by strong financial resources, the dominant supermarket chains could operate outlets in Jess developed areas, even though they had to suffer losses in the early stages of establishment. Smaller and less competitive entrants that could not afford such potential losses were preempted from entry to developing areas. To control rental costs, some supermarkets chose to establish outlets in acquired properties. Over the years, CR Vanguard had succeeded in extending its outlet network by acquiring properties for operation.

The Link Real Estate Investment Trust (Link REIT) managed many retail properties in Hong Kong. Its portfolio consisted of properties with an internal floor area of approximately 11 million square feet of retail space in purpose-built shopping malls. 89 Substantial price advantages, in bundling rental arrangements between the largest supermarket chain operators and the Link REIT, might not be possible

84 Consumer Council Report, ·'Report on the Supermarket Industry in Hong Kong,'' November 1994, p. 29. 85 Ibid. 86 Hong Kong Consumer Counc il, ·'Grocery Market Study, Market Power of Supermarket Chains Under Scrutiny," 19

December 2013. p. 80, w,vw.consumer.org.hk/competition/ issues/grocerv/GMSReport20131219.pdf, accessed November 2014.

87 Consumer Council, .. 1994 Report on the Supermarket Industry in Hong Kong." p. 21. 88 Ibid., p. 20. 89 Hong Kong Consumer Council, .. Grocery Market Study, Market Power of Supermarket Chains Under Scrutiny.'' p.

6.

ST39

UST039 16

To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

between single shop operators and the Link REIT. 90 Other than privately owned retail properties, there were shopping centers and retail facilities managed by the Hong Kong Housing Authority. The Housing Authority adopted its leasing arrangement in response to market demands in order to cater to the daily necessities of the public housing residents. It was reasonably expected that P ARKnSHOP and Wellcome generally stood in better positions than new entrants to win tender for supermarket operations due to their bidding experience, strong financial strength, and their experience in operating supermarket outlets.

Pricing Strategy, and Marketing Trends and Development

To establish themselves as price leaders, both PARKnSHOP and Wellcome promised their customers that their stores set the lowest price. For example, PARKnSHOP's "PriceWatch/'Two Times Difference' Guarantee" promised that the company checked the prices of over 1,000 product items sold by its competitors and matched the lowest prices. 91 Under the guarantee, the product had to be a PriceWatch Product item, i.e., it had to be displayed with a PriceWatch Shelf Insert or PriceWatch Poster. Wellcome had a similar price-matching policy, which allowed customers to seek refunds of double the price difference for products marked with lowest price guarantee, in case they were undersold. A survey conducted by the Hong Kong Federation of Trade Unions from February to March 2012 revealed that the selling prices of eight targeted commodities set by P ARKnSHOP and Wellcome were almost identical over consecutive periods. In addition, the survey also found that the price of selected goods in so-called "Friday sales" at both PARKnSHOP and Wellcome were priced higher than their regular prices during other days of the week. 92 Nevertheless, the two market leaders denied that they had engaged in a conspiracy to fix prices.

In the face of strong competition, leading supermarket chains in Hong Kong were moving to establish larger, more modern outlets that carried a wider variety of fresh food. Fresh seafood and meat counters that resembled wet-market stalls were introduced in large outlets. The leading supermarket chains had also established upscale brands in order to compete in stratified segments of clientele in the grocery market. They placed such upscale stores strategically in large shopping malls to target middle­ to high-income customers. With Hong Kong consumers becoming more health conscious, supermarkets introduced more organic food products with new varieties. Prepackaged fresh meat and soup ingredient packs were offered to cater to customers who had shorter meal-preparation time. PARKnSHOP held an annual food festival to promote special international products and determine market trends. Leading supermarket chains had also launched customer loyalty programs. For instance, PARKnSHOP launched the MoneyBack membership program, which allowed members to accumulate bonus points for every purchase; a certain amount of points could be redeemed for products or cash coupons. Since transactions were recorded through the MoneyBack card, it helped PARKnSHOP to build customer knowledge and obtain information about customer shopping habits. Through the card,

90 Ibid. 91 PARKnSHOP, ·'PriceWatch/Two Times The Difference Guarantee,"

http://www.parknshop.com/WebShop/JumpPage.do?comeFrom=MenuContent&menuid"'l00007&parentsld=I00000. accessed November 2014.

92 Li li-kui, ·'Leading supermarket chains deny price fixing," China Daily, 12 April 2012, http://www.chinadailv.corn.cn/hkedition/2012-04/12/content 15027056.htm, accessed November 2014.

17 ST39 UST039 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

PARK.nSHOP found that it accounted for 80% of the table wine sales in Hong Kong. 93

Riding on such a phenomenal market share, PARK.nSHOP created a mobile phone app for wine lovers, allowing them to look for their favorite labels in terms of country, origin, and vintage. Wellcome, CR Vanguard, and 759 STORE also had their own customer loyalty membership programs. Wellcome's rewards program was tied to customers' Octopus card (Hong Kong's well-known smart card payment system), 94 thus allowing rewards to be offset against spending at Wellcome or other Octopus Rewards partners.

Change in Regulatory Landscape: The Competition Ordinance

Before 2012, Hong Kong did not have a specific law governing anticompetitive conduct or practices. In December 1997, the Hong Kong government established the Competition Policy Advisory Group (COMP AG) to review competition issues. Chaired by the Financial Secretary, COMP AG issued a Statement on Competition Policy in May 1998 [see Exhibit 2]. 95 The policy served as a framework to foster competition across various business sectors in Hong Kong. The government made clear in the statement that it would not interfere with market forces simply on the basis of the number of operators, scale of operations, or normal commercial constraints faced by new entrants. It would only take action when market imperfections or distortions limited market accessibility or market contestability, and impaired economic efficiency or free trade, to the detriment of the overall interest of Hong Kong. Where justified, the government would take necessary and appropriate administrative or legal steps to remove restrictive practices that impaired economic efficiency or free trade. To supplement the statement, COMP AG published a set of guidelines in 2003 to provide pointers with objective benchmarks and principles.

96

In June 2006, COMPAG made a recommendation to introduce a new law in Hong Kong with the objective of tackling anticompetitive conduct. A draft Competition Bill was first introduced to the Legislative Council in July 2010, and a Competition Ordinance was later passed on 14 June 2012. The purpose of the Competition Ordinance was to prohibit and deter all sectors from adopting anticompetitive conduct that had the object or effect of preventing, restricting, or distorting competition in Hong Kong. It provided for general prohibitions in three major areas of anticompetitive conduct, i.e., the First Conduct Rule, the Second Conduct Rule, and the Merger Rule, which were collectively known as the "Competition Rules."

97 As specified in the Competition Ordinance, the following conduct would

be prohibited [see Exhibit 3 for more details]: 98

i) Agreements, decisions, and concerted practices among undertakings which prevented, restricted, or distorted competition in Hong Kong (First Conduct Rule, Section 6 of the Ordinance). Four

93 Chau. ··crowd Master." 9� The Octopus card was a stored value smart card for making electronic pavments in online or offiine systems in Hong Kong. It was used for payment for public transport and purchases in many retail shops in Hong Kong.

95 Competition Policy Advisory Group, ·'Statement on Competition Policy," http://www.compag.gov.hk/polic\'/contenLh1tn, accessed November 2014.

% Competition Policy Advisory Group. ··About COMP AG,'. hup://www.compag.gov.hk/about/oontenLhtm. accessed November 2014.

97 Competition Commission. ·'Competition Ordinance;· http://www.rompcomm.hk/en/compctition ordinance.html, accessed November 2014.

98 Competition Commission. ··f AQ on the Ordinance and the Commission.'" http://w,,w.compoomm.hk/en/fug.html accessed November 2014.

ST39 UST039

18 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

types of such anticompetitive conduct were particularly serious, namely, price-fixing, market allocation, output restriction, and bid-rigging.

ii) Abuse of substantial market power that prevented, restricted, or distorted competition (Second Conduct Rule, Section 21 of the Ordinance).

iii) Mergers that substantially lessened competition (Merger Rule-only applied to telecommunications sector, Section 177, Schedule 7 of the Ordinance).

The Competition Ordinance also laid down various exclusions and exemptions. Two bodies with judicial enforcement authorities were established under the Competition Ordinance, i.e., the Competition Tribunal (Tribunal) and the Competition Commission (Commission). The Tribunal was set up within the judiciary as a superior court of record to hear and adjudicate competition cases brought by the Commission, private actions as well as reviews of determination of the Commission. Where there was a breach of Competition Rules, the Tribunal could levy sanctions against a contravening party. These included pecuniary penalty, director disqualifications, and prohibition, damage, and other orders. For pecuniary penalty, the Tribunal could impose a penalty up to 10% of the turnover of the undertakings involved for up to three years in which the contravention occurred. 99 The Commission was empowered to investigate competition-related complaints, and to bring enforcement action before the Tribunal in respect of anticompetitive conduct, on receipt of complaints either based on its own initiative or based on government or court referral. 100 In October 2014, the Commission and the Communications Authority jointly issued six draft guidelines under the Competition Ordinance for public comment. As required under the Competition Ordinance, the Commission had to develop regulatory guidelines and consult the Legislative Council and stakeholders on them before the Ordinance fully came into effect. Although the guidelines would not form part of the law, they would provide interpretations of the key legal provisions of the Ordinance for enforcement and illustrate circumstances for application. It was expected that full commencement of the Competition Ordinance in 2015 could have significant impact on the conduct of businesses, including supermarkets in Hong Kong. According to Consumer Council Chief Executive Gilly Wong,

More rigorous enforcement against cartels and abuse of substantial market power induce more competition, thus offer more protection to consumers ..... We can't forecast how many supermarkets or outlets will exist in a shopping arcade following the launch of the new law. But we have a high hope that those which remain in the market will be of good quality in terms of the competitiveness of their prices as well as the quality and variety of the services and goods they provide. 101

To Enter or Not to Enter

The supermarket business was a low-margin industry worldwide, with the average net profit margin typically ranging from 1 % to 2%. However, natural, organic, and gourmet food markets

99 Competition Commission. "Competition Ordinance.'· 100 Ibid. 101 Patsy Moy, ·'New Hong Kong Competition Law could break dominance of two chains,'· South China Morning Post,

31 January 2013, http:/l,V\,-w.scmp.com/news/hong-kong/article/1139632/new-hong-kong-competition-la\\-could-break­ dominanoe-two-chains, accessed November 2014.

ST39

UST039 19

To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

enjoyed higher net profit margin averages, from 3.5% to 6%. 102

With limited core assets to leverage, ICL would need to consider the opportunity cost of making an investment in the Hong Kong grocery market. If ICL decided to enter the Hong Kong market, what could it do to increase the chances of a successful and profitable entry? Given the uncertainty over the draft guidelines and possible weaknesses of the Competition Ordinance, would the new legislation promote competition in the supermarket industry that could break the existing dominance by the two major players?

102 Tiffany Right, .. What is the Profit Margin ofa Supermarket," Demand Media, http://vourbusiness.azcentral.com/profit-margjn--supennarket-17711.html. accessed December 2014.

20 ST39 UST039 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

EXHIBIT 1: SUPERMARKET RETAIL CHAIN OUTLETS IN 2003 AND 2013

Supermarket No. of Outlets No. of Outlets

2003 2013

Wellcome 242 280

MarketPlace by Jasons NIA 23

ThreeSixty NIA 2

PARKnSHOP 211 210

International 25 22

Taste 3 10

Fusion NIA 12

Gourmet NIA I

Great NIA I

SU-PA-DE-PA NIA I

City'super

I I 4

CR Vanguard 79 95

JUSCO Supermarket 4 9

YA TA Supermarket 2 3

DCH Food Mart 43 37

OCH Food Mart Deluxe NIA 48

Kai Bo Food Supermarket NIA 86

Kai Hing Supermarket NIA 8

PrizeMart NIA 21

PARKnSHOP Frozen NIA 12

610 885

Source: Hong Kong Consumer Council, "Grocery Market Study, Market Power of Supermarket Chains Under Scrutiny," Decemberl9, 2013, p. 34, www.consumer.org.hk/competition/ issueslgrocervl GMSReport20131219.pdf, accessed November 2014.

ST39

UST039 21

To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

EXHIBIT 2: HONG KONG SAR GOVERNMENT STATEMENT ON COMPETITION POLICY (MAY 1998)

Introduction

l. This Statement sets out the objective of the Government of the Hong Kong Special Administrative Region's competition policy and offers some specific pointers to facilitate compliance with the policy.

Objective

2. The objective of the Government's competition policy is to enhance economic efficiency and free flow of trade, thereby also benefiting consumer welfare. The Government is committed to competition as a means to achieving the said objective, and not as an end in itself.

3. The Government considers competition is best nurtured and sustained by allowing the free play of market forces and keeping intervention to the minimum. We will not interfere with market forces simply on the basis of the number of operators, scale of operations, or normal commercial constraints faced by new entrants. We will take action only when market imperfections or distortions limit market accessibility or market contestability, and impair economic efficiency or free trade, to the detriment of the overall interest of Hong Kong. We will strike the right balance between competition policy considerations on the one hand, and other policy considerations such as prudential supervision, service reliability, social service commitments, safety, etc., on the other.

Pro-competition Principles

4. All government entities, and public- and private-sector bodies are encouraged to adhere to the following pro-competition principles for the purpose of enhancing economic efficiency and free trade

a. maximizing reliance on, and minimizing interference with, market mechanism;

b. maintaining a level-playing field;

c. minimizing uncertainty and fostering confidence in system fairness and predictability by -

i.consistent application of policies; ii. transparent and accountable operations; and

iii.adherence to equitable and non-discriminatory standards and practices.

Restrictive Practices

5. The Government recognizes that not all practices that limit market accessibility or contestability impair economic efficiency or free trade. Only those that do, and are not in the overall interest of Hong Kong, should be attended to. The determination of whether a practice is restrictive, detrimental to economic efficiency or free trade, and against the overall interest of Hong Kong must be made in the light of the actual situation.

ST39 UST039

22 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

EXHIBIT 2: HONG KONG SAR GOVERNMENT STATEMENT ON COMPETITION POLICY (MAY 1998) (CONT'D)

The intended purpose and effects of the practice in question, and the relevant market or economic conditions, etc., must all be taken into account.

6. As each practice must be examined on its own, it is difficult and misleading to generalize. For illustrative purpose only, some business practices which may warrant more thorough examination are set out below -

a. price-fixing* intended to distort the normal operation of the market, increase the cost for purchasers, and have the effect of impairing economic efficiency or free trade;

b. bid-rigging*, market allocation*, sales and production quotas* intended to distort the normal operation of the market, increase the cost for and reduce the choice and availability to purchasers, and have the effect of impairing economic efficiency or free trade;

c. joint boycotts* intended to distort the normal operation of the market, deprive supply or choice to the targets of the boycott, and have the effect of impairing economic efficiency or free trade; and

d. unfair or discriminatory standards* among members of a trade or professional body intended to deny newcomers a chance to enter or contest in the market, and have the effect of impairing economic efficiency or free trade.

7. The Government further recognizes that scale of operation or share of the market per se does not determine whether a business is anti-competitive or not. The determining factor is whether a business, through abusing its dominant market position, is limiting market accessibility and contestability and giving rise to economic inefficiency or obstruction of free trade to the detriment of the overall interest of Hong Kong. Each case has to be examined on its own. For illustrative purpose only, some examples that may involve an abuse of market position are set out below-

ST39 UST039

a. predatory behaviour such as selling below cost for the purpose of driving out competition followed by substantial price increases in an area of economic activity where there are constraints to market accessibility and contestability;

b. setting retail price minimums for products or services where there are no ready substitutes; and

c. conditioning the supply of specified products or services to the purchase of other specified products or services or to the acceptance of certain restrictions other than to achieve assurance of quality, safety, adequate service or other justified purposes.

23 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

EXHIBIT 2: HONG KONG SAR GOVERNMENT STATEMENT ON COMPETITION POLICY (MAY 1998) (CONT'D)

Approach

8. There is no international standard or consensus on what is the best approach to achieve competition in order to enhance economic efficiency and free flow of trade. Some economies have competition laws which differ widely in scope of control, enforcement mechanisms and remedies available. Other economies shun the legislative route. The choice is heavily influenced by the characteristics, development history and socio-economic background of an economy.

9. For Hong Kong, a small and externally-oriented economy which is already highly competitive, the Government sees no need to enact an all-embracing competition law. To maintain overall consistency in the application of the competition policy, we provide a comprehensive, transparent and over-arching competition policy framework through this Policy Statement and reinforce this with sector-specific measures not limited to laws.

I 0. In the Hong Kong environment, the Government is promoting economic efficiency and free trade through competition by -

ST39 UST039

a. raising public awareness of the importance of competition for the enhancement of economic efficiency and free trade;

b. identifying, on a sectoral basis, obstacles and constraints imposed by the Government and other public sector entities which limit market accessibility and contestability and compromise economic efficiency and free trade to the detriment of the overall interest of Hong Kong, and removing them through voluntary, administrative, legislative, etc., measures as appropriate;

c. initiating pro-competition measures, on a sectoral basis, in the Government and public sector through administrative, legislative, etc., measures as appropriate;

d. encouraging the private sector to embrace competition and its stated objective of enhancing economic efficiency and free trade through voluntary action;

e. supporting the Consumer Council's work in drawing up codes of practice that promote competition and its stated objective of enhancing economic efficiency and free trade;

f. working together with the Consumer Council to encourage the private sector to adopt pro-competition measures, such as self-regulatory regimes that preserve and enhance free competition; and to monitor and review business practices in sectors prone to anti-competition behaviour;

g. establishing a central repository of competition-related concerns and complaints to facilitate the identification of possible deficiencies and areas for improvement; and

24

To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

EXHIBIT 2: HONG KONG SAR GOVERNMENT STATEMENT ON COMPETITION POLICY (MAY 1998) (CONT'D)

h. providing a dedicated forum under the Financial Secretary (already established and known as the Competition Policy Advisory Group or "COMPAG" in short) to review policy issues related to competition.

Implementation

11. The Government is committed to pro-actively nurture and sustain competition for the purpose of enhancing economic efficiency and free trade. COMPAG will invite all government entities to adhere to the Statement, propose initiatives for furthering the policy objective, examine the impact of all new proposals on competition and, where appropriate, bring this to the attention of the Executive Counci I and the Legislature. They are also expected to ensure that all statutory bodies under their charge pay heed to the Statement as well.

12. The Government calls upon all businesses to cease existing, and refrain from introducing, restrictive practices that impair economic efficiency or free trade on a voluntary basis. Where justified, the Government will take administrative or legal steps as appropriate to remove such practices if necessary.

13. Alleged restrictive practices in the public and private sectors may be referred to the concerned policy bureau or government department for consideration. Separately, the COMPAG Secretariat will keep track of all referrals and bring these to the attention of COMP AG should there be substantial policy or systemic implications.

*These are various forms of horizontal restraints among competitors typically for the purpose ofraising or fixing prices (so-called "price-fixing"), compressing bid prices ("bid-rigging"), allocating specific customers or sales territories to particular firms and not competing over the territory or customers of other firms ("market allocation"), setting quotas on the supply of certain goods or services in order to push prices up ("sales and production quotas"), and not dealing with firms that supply other firms in their market ("collective boycotts").

Source: Competition Policy Advisory Group, "Statement on Competition Policy," May 1998, http://www.compag.gov.hk/policy/content.htm, accessed November 2014.

ST39 UST039

25

To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

EXHIBIT 3: EXCERPTS FROM HONG KONG COMPETITION ORDINANCE CAP619

Section 2: Interpretation

"serious anti-competitive conduct" (/fil[&M-¥.ff �) means any conduct that consists of any of the following or any combination of the following- (a) fixing, maintaining, increasing or controlling the price for the supply of goods or services; (b) allocating sales, territories, customers or markets for the production or supply of goods or services; (c) fixing, maintaining, controlling, preventing, limiting or eliminating the production or supply of

goods or services; ( d) bid-rigging;

"bid-rigging" (�ffl) means­ (a) an agreement- (i) that is made between or among 2 or more undertakings whereby one or more of those undertakings agrees or undertakes not to submit a bid or tender in response to a call or request for bids or tenders, or agrees or undertakes to withdraw a bid or tender submitted in response to such a call or request; and (ii) that is not made known to the person calling for or requesting bids or tenders at or before the time when a bid or tender is submitted or withdrawn by a party to the agreement or by an entity controlled by any one or more of the parties to the agreement; or (b) a submission, in response to a call or request for bids or tenders, of bids or tenders that are arrived at by an agreement- (i) that is made between or among 2 or more undertakings; and (ii) that is not made known to the person calling for or requesting bids or tenders at or before the time when a bid or tender is submitted or withdrawn by a party to the agreement or by an entity controlled by any one or more of the parties to the agreement;

Section 6: Prohibition of anti-competitive agreements, concerted practices and decisions (I) An undertaking must not- (a) make or give effect to an agreement; (b) engage in a concerted practice; or ( c) as a member of an association of undertakings, make or give effect to a decision of the association, if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong. (2) Unless the context otherwise requires, a provision of this Ordinance which is expressed to apply to, or in relation to, an agreement is to be read as applying equally to, or in relation to, a concerted practice and a decision by an association of undertakings (but with any necessary modifications). (3) The prohibition imposed by subsection (I) is referred to in this Ordinance as the "first conduct rule".

ST39 UST039

26

To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

EXHIBIT 3: EXCERPTS FROM HONG KONG COMPETITION ORDINANCE CAP619 (CONT'D)

Section 21: Abuse of market power ( 1) An undertaking that has a substantial degree of market power in a market must not abuse that power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong. (2) For the purpose of subsection (1 ), conduct may, in particular, constitute such an abuse if it involves- (a) predatory behaviour towards competitors; or (b) limiting production, markets or technical development to the prejudice of consumers. (3) Without limiting the matters that may be taken into account in determining whether an undertaking has a substantial degree of market power in a market, the following matters may be taken into consideration in any such determination- ( a) the market share of the undertaking; (b) the undertaking's power to make pricing and other decisions; (c) any barriers to entry to competitors into the relevant market; and (d) any other relevant matters specified in the guidelines issued under section 35 for the purposes of this paragraph. (4) The prohibition imposed by subsection (I) is referred to in this Ordinance as the "second conduct rule".

Section 177: Transitional and savings provisions in relation to amendments made by this Ordinance ( 1) Schedule 9 contains transitional and savings provisions in relation to amendments made by this Ordinance to the Telecommunications Ordinance (Cap 106), the Broadcasting (Miscellaneous Provisions) Ordinance (Cap 391) and the Broadcasting Ordinance (Cap 562). (2) The Chief Executive may make regulations containing transitional provisions and savings that are necessary or convenient for the transition to the provisions of this Ordinance from the provisions of the Telecommunications Ordinance (Cap 106), the Broadcasting (Miscellaneous Provisions) Ordinance (Cap 391) or the Broadcasting Ordinance (Cap 562) as amended by this Ordinance. (3) Without limiting subsection (2), regulations made under this section may, in particular, provide for - (a) the application of provisions of this Ordinance to telecommunications services or broadcasting services; or (b) the continued application of provisions of the Telecommunications Ordinance (Cap I 06), the Broadcasting (Miscellaneous Provisions) Ordinance (Cap 391) or the Broadcasting Ordinance (Cap 562) in force immediately before the commencement of any provision of this Ordinance to telecommunications services or broadcasting services. (4) Regulations made under this section may, if they so provide, be deemed to have come into operation on a date earlier than the date on which they are published in the Gazette but not earlier than the date on which this Ordinance is published in the Gazette. (5) To the extent that any regulations made under this section come into operation on a date earlier than the date on which they are published in the Gazette, those regulations are to be construed so as not to--

ST39 UST039

27 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

EXHIBIT 3: EXCERPTS FROM HONG KONG COMPETITION ORDINANCE CAP619

(CONT'D)

(a) affect, in a manner prejudicial to any person, the rights of that person existing before the date on which the regulations are published in the Gazette; or (b) impose liabilities on any person in respect of anything done, or omitted to be done, before the date on which the regulations are published in the Gazette. (6) If there is any inconsistency between any regulations made under this section and the provisions of Schedule 9, Schedule 9 prevails to the extent of the inconsistency.

Schedule 1: General Exclusions from Conduct Rules

1. Agreements enhancing overall economic efficiency The first conduct rule does not apply to any agreement that­ (a) contributes to- (i) improving production or distribution; or (ii) promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit; (b) does not impose on the undertakings concerned restrictions that are not indispensable to the attainment of the objectives stated in paragraph (a); and (c) does not afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the goods or services in question. 2. Compliance with legal requirements ( 1) The first conduct rule does not apply to an agreement to the extent that it is made for the purpose of complying with a legal requirement. (2) The second conduct rule does not apply to conduct to the extent that it is engaged in for the

purpose of complying with a legal requirement. (3) In this section- "legal requirement" UtWmJE) means a requirement-

(a) imposed by or under any enactment in force in Hong Kong; or (b) imposed by any national law applying in Hong Kong. 3. Services of general economic interest etc. Neither the first conduct rule nor the second conduct rule applies to an undertaking entrusted by the Government with the operation of services of general economic interest in so far as the conduct rule would obstruct the performance, in law or in fact, of the particular tasks assigned to it. 4. Mergers (I) To the extent to which an agreement ( either on its own or when taken together with another agreement) results in, or if carried out would result in, a merger, the first conduct rule does not apply to the agreement. (2) To the extent to which conduct (either on its own or when taken together with other conduct) results in, or if engaged in would result in, a merger, the second conduct rule does not apply to the conduct. 5. Agreements of lesser significance (1) The first conduct rule does not apply to- (a) an agreement between undertakings in any calendar year if the combined turnover of the undertakings for the turnover period does not exceed $200000000; (b) a concerted practice engaged in by undertakings in any calendar year if the combined turnover of

ST39 UST039

28 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

EXHIBIT 3: EXCERPTS FROM HONG KONG COMPETITION ORDINANCE CAP619 (CONT'D)

the undertakings for the turnover period does not exceed $200000000; or (c) a decision of an association of undertakings in any calendar year if the turnover of the association for the turnover period does not exceed $200000000. (2) Subsection (I) does not apply to an agreement, a concerted practice, or a decision of an association of undertakings, that involves serious anti-competitive conduct. (3) Subject to subsection (4), the turnover period of an undertaking is- (a) if the undertaking has a financial year, the financial year of the undertaking that ends in the preceding calendar year; or (b) if the undertaking does not have a financial year, the preceding calendar year. ( 4) The turnover period of an undertaking is the period specified as such for the purpose of this subsection in the regulations made under section 163(2) if- (a) for an undertaking that has a financial year- (i) the undertaking does not have a financial year that ends in the preceding calendar year; or (ii) the financial year of the undertaking that ends in the preceding calendar year is less than 12 months; or (b) for an undertaking that does not have a financial year- (i) the undertaking is not engaged in economic activity in the preceding calendar year; or (ii) the period in which the undertaking is engaged in economic activity in the preceding calendar year is less than 12 months. (5) In this section- "preceding calendar year" (fL..t0ffif�) means the calendar year preceding the calendar year

mentioned in subsection ( l )(a), (b) or (c); "turnover" ( �*�}- (a) in relation to an undertaking that is not an association of undertakings, means the total gross revenues of the undertaking whether obtained in Hong Kong or outside Hong Kong; and (b) in relation to an association of undertakings, means the total gross revenues of all the members of the association whether obtained in Hong Kong or outside Hong Kong. 6. Conduct of lesser significance (I) The second conduct rule does not apply to conduct engaged in by an undertaking the turnover of which does not exceed $40000000 for the turnover period. (2) Subject to subsection (3), the turnover period of an undertaking is- (a) if the undertaking has a financial year, the financial year of the undertaking that ends in the preceding calendar year; or (b) if the undertaking does not have a financial year, the preceding calendar year. (3) The turnover period of an undertaking is the period specified as such for the purpose of this subsection in the regulations made under section 163(2) if- (a) for an undertaking that has a financial year- (i) the undertaking does not have a financial year that ends in the preceding calendar year; or (ii) the financial year of the undertaking that ends in the preceding calendar year is less than 12 months; or (b) for an undertaking that does not have a financial year- (i) the undertaking is not engaged in economic activity in the preceding calendar year; or

29 ST39 UST039 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong

HKUST Business School Thompson Center for Business Case Studies

EXHIBIT 3: EXCERPTS FROM HONG KONG COMPETITION ORDINANCE CAP619 (CONT'D)

(ii) the period in which the undertaking is engaged in economic activity in the preceding calendar year is less than 12 months.

( 4) In this section- "preceding calendar year" (f;t...t0Mif.) means the calendar year preceding the calendar year in

which the conduct mentioned in subsection ( 1) is engaged in; "turnover" (if�mi) means the total gross revenues of an undertaking whether obtained in Hong

Kong or outside Hong Kong.

Source: Competition Ordinance, http://www.legislation.gov.hk/blis _pdf.nsf/ Cur AIIEngDoc/F209 l B 1 D7DE087EC48257 A240054AA88?0penDocument, accessed November 2014

ST39 UST039

30 To Enter or Not to Enter: Competitive Environment of Supermarkets in Hong Kong