Are Tech Giants’ Investments into Smaller Companies a Concern for Watchdog Regulators? Amazon’s Investment into Deliveroo
The United Kingdom's Competition and Markets Authority (“CMA”) paused Amazon's investment into online food delivery company Deliveroo while it investigates the deal. (Kate Holton and James Davey, Reuters). In May 2019, Amazon led a $575 million investment, with other businesses, into Deliveroo. (Business Insider). Although Amazon would only retain a minority share in Deliveroo, the CMA is concerned this investment could “result in Amazon and Deliveroo ceasing to be distinct.” (Danica Kirka, AP News).
While the food delivery industry made over $100 billion globally last year, the market is very competitive. Currently there are three prominent food share services in the UK: Deliveroo, Just Eats, and Uber Eats. (Rory Cellan-Jones, BBC News). Amazon had been in the market before an exit late last year. (Olivia Rudgard, The Telegraph). Currently, Just Eats dominates the industry with an estimated 3-4 times greater share of the market than Uber and Deliveroo combined. (Rory Cellan-Jones, BBC News). In many places in the UK, Just Eats is the only food delivery option. Id. However, Just Eats shares fell significantly in this competitive space, and in the last 12 months alone, its share price dropped by 25%. (Giles Turner and Wout Verguwen, Bloomberg News).
Deliveroo argues the minority investment from Amazon will allow it to expand and target more customers. Deliveroo, a London-based company with a valuation of $4 billion, is a restaurant delivery service working with over 80,000 restaurants in over 500 cities across 14 markets around the globe, including Australia, Belgium, France, Germany, Hong Kong, Italy, United Arab Emirates, and the United Kingdom. (Deliveroo Newsroom). Deliveroo says the investment will allow it to expand its tech and engineering teams as well as invest in new innovations like its delivery-only kitchens, which will allow restaurants to expand into new areas at lower costs. Id.
Amazon's investment into Deliveroo is one of its many attempts to enter the UK food delivery industry. (Mathew Field, The Telegraph). Amazon, the world's largest internet business with a market value of $920 billion, attempted to outright purchase Deliveroo twice. (Mark Kleinman, SkyNews). Additionally, Amazon created Amazon Restaurants, a direct competitor to Deliveroo, which was shut down in late 2018. Id. Although Amazon does not currently offer restaurant delivery services, it operates Amazon Fresh, which delivers groceries to customers worldwide. (Jasper Jolley, The Guardian).The companies failed to disclose the size of Amazon's Investment, but both state that Amazon's minority investment does not give Amazon control of Deliveroo. Id. Nonetheless, the CMA, in its initial enforcement order on July 24, 2019, paused the investment as it was suspicious that the two companies were planning to merge. Such a merger, it argued, would violate competition rules in the UK. (Gov.uk). On October 17, 2019, the CMA said the investment warranted a full investigation and it began phase 1 of its investigation. Id. This phase decided whether the investment "may result in the creation of a merger situation under the merger provisions of the Enterprise Act 2002, and, if so, whether the creation of that situation may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom's goods and services." Id. On December 13, 2019, the CMA decided the investment warranted more investigation and it entered phase 2 investigations. (Gov.uk).
The CMA has the power to halt any deal between companies if it believes the deal will restrict competition. (Jasper Jolley, The Guardian). The CMA is a watchdog group that launched in April 2014 to examine competition policy in the UK. (Economics Online). Additionally, it is a non-ministerial department, which grants it a level of independence from the UK government. (Jonathan Person, Institute for Government). The CMA investigates deals between companies, and if it decides the deal creates an anti-competitive environment, the deal is dissolved. Id.
Over the last year, the CMA has taken a more interventionist approach. Since Andrew Tyrie took over the CMA in 2018, the CMA has focused on preventing the emergence of monopolies. (Danica Kirka, AP News). For instance, the CMA halted the merger between Sainsbury’s, the UK’s second-largest chain of supermarkets, and Walmart’s Asda for fear the creation of the country's largest supermarket would result in higher prices and reduced quality of goods for shoppers. Id. The CMA’s focus on Amazon’s investment suggests a shift in direction in the CMA, as it no longer focuses purely on mergers and is now looking at any investment, says Clive Black, head researcher at the financial firm Shore Capital. (Danica Kirka, AP News). Considering the CMA has the power to block any deal in the UK, Amazon and Deliveroo face an uphill battle getting the investment approved. (Shona Ghosh, Entrepreneur).
There are varied opinions regarding the investment. Ian Whitaker, research analyst at investment bank, Liberum, believes the investment appears to be Amazon's attempt to stay in the food delivery market. (Dearbail Jordan, BBC News). However, others like former Deputy Leader of the Labor Party, Tom Watson, believe this investment is Amazon's strategy to gather consumer data. (Hasan Chowdhury, The Telegraph). Watson states: “they [Amazon] want Deliveroo's tech and data, and they want to know how best to extract your cash throughout your waking and sleeping hours.” Id.
On December 13, 2019, the CMA decided to proceed with more investigations into Amazon’s investment into Deliveroo. (Gov.uk). The CMA stated both companies failed to resolve its concerns that the merger would result “in substantial lessening of competition within a market or markets in the United Kingdom. (Gov.uk). As such, the phase 2 investigation signals that the CMA may halt the investment completely, and force Amazon to divest from Deliveroo. (Shona Ghosh, Entrepreneur).