The European Commission's EU Merger Regulation clearance of Zalando's acquisition of About You marks the latest decision to recognise the increasing competitive constraints posed on online marketplaces from other online and offline distribution channels.

The merging parties are both active in the sale of mass-market fashion products, through online shopping platforms through which brands and retailers can sell their products to consumers. They also provide certain business-to-business services to brands and retailers, such as software to manage and optimise their e-commerce businesses and logistics services.

While the Commission's formal conclusions on market definition largely followed the approach it has developed in its previous decisions relating to online retailers of luxury fashion products, the decision breaks new ground by treating multi-category online platforms as direct competitors in mass-market fashion retail and develops further the Commission’s approach to out of market constraints, recognising that mass-market fashion retailers are (unlike luxury retailers) also subject to competitive constraints from sellers of pre-owned and fast fashion items.

In particular, in line with previous decisions, the Commission concluded that:

• mass-market fashion retailers do not compete with luxury fashion retailers, as consumers do not view their offerings as substitutable;
  
• third-party marketplaces compete with distributors that buy and resell products (3P vs 1P distribution models); and
• the geographic scope of the markets should be assessed at the national level, for sales to consumers, and EEA-wide, for marketplace services to brands and retailers.
  

The Commission also opted to cautiously exclude operators of offline retail stores, mono-brand retailers and retailers of pre-owned fashion products from the scope of the relevant market, due to factors such as different timings and magnitudes of promotional periods in offline and mono-brand channels and the different quality and pricing of pre-owed products.

Nevertheless, the Commission devoted a significant part of its competitive assessment to explaining why these alternative channels play "an important role" in the mass-market fashion sector and "pose a certain level of competitive constraint" on the parties.  In particular, the Commission recognised that most mass-market fashion products are sold through these other distribution channels and that, accordingly, when making their strategic commercial decision (e.g. on pricing) the merging parties had to take into account the potential for customers to switch to them.

The Zalando/About You decision also contains some important differences to previous decisions of the Commission.  Unlike the luxury fashion sector, where "multi-category" online platforms like Amazon and eBay where not considered (at the time of the previous decisions) to compete in the same market, in this case the Commission found that they were direct competitors to online mass-market fashion retailers.  Similarly, it found that specialised sports, adventure and lifestyle retailers, such as JD Sports and Decathlon, also competed in the market having increasingly become more focused on fashion than "pure function".  Fast fashion retailers like Temu and Shein were not considered important competitors, due to perceived differences in the quality of their fashion goods, although the Commission acknowledged that they already now constrain the Parties to a certain extent. That position may evolve, with the Commission noting that fast fashion retailers are seen as disruptors and that their importance is expected to increase in the future.

Despite the parties having reported high market shares in some countries (e.g., over 70% in Croatia and 60% in Hungary) the Commission cleared the transaction, in part because it considered those market share figures to be unreliably high, but primarily because of the significant number of alternatives that were available to consumers and brands, including a number of other close competitors, and the relative ease with which customers could switch to those alternatives and to other "out-of-market" distribution channels.

Implications for online retail

The decision represents the continuation of a trend towards increasing recognition by the Commission of competition between different online retail channels for mass-market consumer goods, as well as the considerable (albeit out-of-market) competition that online retailers face from offline retailers.  Another recent example of this trend is the Commission's decision in JD Sports/Groupe Courir in which the Commission accepted that the parties' online and offline sales of sports apparel and footwear faced strong competition from multi-channel retailers such as Amazon and Zalando.  These developments suggest greater scope for securing clearances of mergers between competing online retailers.