The competition watchdog has given the green light to a huge shift in Australian pharmacies, opting not to block a merger between Chemist Warehouse and Amcal + franchisor Sigma.

The $8.8 billion deal will create a pharmacy behemoth that stretches across medical supply chains right down to customers at the retail level, but the Australian Competition and Consumer  Commission (ACCC) found it wouldn’t “substantially lessen” competition for consumers.

“There is, and will continue to be, effective competition at all levels of the pharmacy supply chain, capable of constraining a combined Sigma Chemist Warehouse,” ACCC chair Gina Cass-Gottlieb said.

“The ACCC’s analysis found that the proposed merger is unlikely to substantially lessen competition nationally or locally because other pharmacies and non-pharmacy retailers will continue to compete to the same extent they compete now.”

Supply chains focus

The Chemist Warehouse merger is mainly focused on wholesale supply chains and so consumers aren’t expected to see any direct changes once the merger happens.

But RMIT University Professor Angel Zhong said the longer-term impact on service quality and prices “remains to be seen”, with the potential for the merged entity to capitalise on its market power.

“Based on academic research, reduced competition in any sector generally leads to higher prices for consumers,” Zhong said.

Pharmacy behemoth rivals Bunnings in scale

Zhong explained that the merger is a blend of vertical and horizontal integration, where Chemist Warehouse is acquiring a competing business and also buying a large part of its own supply chain.

That will help the company transform into a retail player with scale and dominance that rivals Bunnings Warehouse in hardware.

A key component of the ACCC approval of the merger was a court-enforceable undertaking from Sigma that pharmacies would be allowed to switch wholesalers easily.

“[That] helps maintain competitive pressure on the merged entity,” Zhong said.

“Specifically, this includes not enforcing contractual restrictions on exit and ensuring that payments under contracts to not make it costly for pharmacies to switch.”

Cass-Gottlieb said the ACCC gave “careful focus” to how overall competition would be affected.

“The transaction is unlikely to result in a substantial lessening of competition in any market,” Cass-Gottlieb said.

Competitive impact after merger

The ACCC believes there are many other pharmacy retailers that will continue to provide “meaningful and ongoing competition” to Chemist Warehouse and Sigma’s banner pharmacies.

But while that undertaking “alleviates some concerns”, Zhong said there remains concerns about non-prescription “front of store” products, which make up 67 per cent of Chemist Warehouse sales.

“The long-term impacts of this merger on service quality, innovation and prices remains to be seen,” Zhong said.

“While the undertakings aim to preserve competition, the consolidation of market power could influence these factors in various ways.”

The ACCC indicated it did consider the impact on competition for non-pharmacy goods and concluded that the leading supermarkets are “key providers” of such products too.

“We reviewed the transaction very closely to test these concerns and conducted detailed analysis of Chemist Warehouse and Sigma’s internal documents,” Cass-Gottlieb said.