Uber’s Latin American Antitrust Challenges Regarding its $459 Million Acquisition of 51% of Cornershop.

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On October 11, 2019 Uber announced an agreement to acquire majority ownership of Cornershop, a leading online grocery provider in Chile, Mexico, and more recently in Peru, Canada, Brazil and Colombia.

Dara Khosrowshahi, Uber’s CEO stated: “We’re excited to partner with the team at Cornershop to scale their vision, and look forward to working with them to bring grocery delivery to millions of consumers on the Uber platform.”

The deal involves a reported $459 million for 51% of Cornershop, a valuation that puts the company in striking distance of achieving unicorn status, the first Chilean technology startup to achieve such a milestone. It’s a rare and laudable feat after the startup raised $31.7 million over the course of four VC funding rounds from firms based in the U.S. (Accel Partners and Jackson Square Ventures), Mexico (ALLVP) and Europe (Creandum), among other early backers.

But this deal has been hampered by antitrust regulators in Latin America, even before Covid-19 put a damp on the global economy, which has created a whole new set of issues for pending M&A transactions. However, fortunately for Cornershop, demand for their online grocery delivery service has surged dramatically during this coronavirus pandemic and its economic fallout.

But this is not Cornershop’s first run-in with antitrust regulators in Latin America. Back in September of 2018, Walmart announced the acquisition of Cornershop for $225 million, a deal that was promptly approved by the Chilean National Economic Prosecutor (“FNE”), the antitrust regulator in Chile. But in Mexico, it got delayed for months by COFECE, the Mexican antitrust regulator, before the agency ultimately nixed it.

Now, it’s back to square one with Uber’s deal. However, the FNE announced on January 24th a deeper “phase 2” review of the Uber-Cornershop transaction, currently pending in Chile. Moreover, the transaction has yet to go through the merger review in Mexico (where COFECE and IFT — 6 months after the announcement of the transaction — are still embroiled in a turf battle to claim jurisdiction to oversee the transaction), a scary prospect since it’s in Mexico where the Walmart transaction got blocked.

Background on Cornershop

Cornershop was founded in 2015 by Oskar Hjertonsson, Daniel Undurraga and Juan Pablo Cuevas, a trio of tech entrepreneurs known in Chile for having sold Clan Descuento to Groupon in 2010, and subsequently managing “Groupon Latin America” with over 1,000 employees in the region.

But in 2013, Hjertonsson and Undurraga left Groupon and moved to San Francisco, where they worked on new projects. In 2015, they noticed that on-demand grocery services did not exist in Latin America, which prompted them to launch Cornershop in Mexico (a market that they knew well from their Groupon days) and Chile (where they based their engineering team).

Since then, the company has become a Latin American startup success story. However, competition is fierce in the online grocery delivery market, and the outcome is far from settled. The market is highly dynamic with little to no barriers of entry, and new offerings and companies have risen at multiple levels:

  1. Incumbent grocery stores. There are major grocers in the region that have substantial financial resources and have built, or are in the process of building, their own online delivery options. In addition, many grocers are experimenting with new formats to reach customers online such as “dark stores” (retail outlets or distribution centers that cater exclusively for online shopping.) For example in the U.S., retailers are trying out services such as “curbside pick-ups” (where groceries are ordered either online or by the phone, and picked up directly outside the store) or delivering groceries directly to customers’ fridges when no one is home, using smart-entry technology and wearable cameras. In Mexico, incumbent grocery stores include Chedraui, Costco, HEB, La Comer, Soriana, and Walmart de México, in addition to a number of regional players and multi-formats. In Chile, there are four major grocery chains including Walmart (Líder), Cencosud (Jumbo), Falabella (Tottus) and SMU (Telemercados).
  2. Other Food Delivery Apps. There are many platform competitors to Cornershop in Latin America. Regional players include Colombia’s Rappi (which operates in 9 countries and raised eyebrows when it received a staggering $1 billion investment from Softbank in 2019); Uruguay’s Pedidos Ya (acquired in 2014 by Germany’s juggernaut Delivery Hero); Brazil’s iFood (Latin America’s largest delivery app, which received a $500 million investment in 2018 from a group of investors including South African media group Naspers and Jorge Paulo Lemann, with plans to increase to 1,000 from 200 the number of supermarkets served by its platform), Supermercado Now (acquired this year by Brazilian online retail company B2W); and Spain’s Glovo (operational in 20 countries globally, including Central America plus Argentina, Ecuador and Peru). In addition, international delivery apps such as China’s DiDi entered the Mexican food delivery market in 2019, and the door is open for any U.S. delivery platforms such as DoorDash, Postmates or Instacart.
  3. Other E-Commerce Players. Amazon (with Amazon Prime Now and Amazon Fresh) is already offering grocery delivery in Mexico, the UK, U.S. and elsewhere, and could continue expanding to other Latin American countries. Argentina’s Mercado Libre (NASDAQ:MELI), the largest online commerce ecosystem in Latin America with 274 million users, has already entered grocery in Mexico and will do so soon in Argentina and Brazil. Moreover, the company announced a “moto-boy” app in Argentina and Mexico that will compete with Rappi, Cornershop and Fedex. The company invested $2 billion across Latin America in 2018, with about a quarter of that focused on logistics.

The uncertain outcome of the online grocery delivery market.

It should not be controversial to state that this nascent market is going through a period of hard-fought Schumpeterian competition. But particularly after the global onset of Covid-19, no one can credibly claim to know with any reasonable degree of certainty how the market will eventually play out. The market is still very much up for grabs, including which technologies or delivery options will prevail in the long run.

Given all this complexity and dynamic market trends, why do local antitrust regulators think that they can predict the outcome of these early stage technology trends and future scenarios under such substantial uncertainty? This would require them to become even more adept than entrepreneurs and investors to spot the next big thing. Let’s just say that the probability that they can do that accurately, when even in Silicon Valley they can’t, is slim to none.

Antitrust Review of the Uber-Cornershop Transaction in Chile

On January 24th, the FNE in Chile announced an extended “phase 2” review of the proposed Uber-Cornershop transaction, claiming that the transaction could harm competition because: 1) it could give rise to unilateral anti-competitive effects by eliminating the entry of a potential new competitor (Uber) into the grocery delivery market in Chile; 2) it could diminish the incentives of the merging parties to innovate in related markets (!?); and 3) it could create merger conglomerate risks.

The first element to note is that when the FNE approved the Walmart-Cornershop transaction on January 11, 2019, it found that there were no significant barriers to entry in the grocery delivery market in Chile, and that the rapid growth of the market would increase the entry, expansion or repositioning of new market players.

Without going into a full analysis of the antitrust claims, at the minimum it’s hard to see how the Uber-Cornershop merger is expected to reduce the output of the merged firms in the market in which these firms might compete, compared to no merger. The FNE has categorized three different delivery markets: supermarket (groceries), stores and food (restaurants).

Cornershop operates mainly in the first two categories, whereas Uber (through Uber Eats), competes in the third category. But these lines are getting increasingly blurrier, and consolidation is happening at a large scale.

It’s also important to note that even if Cornershop currently has the largest market share in the Chilean supermarket delivery market, this metric is so dynamic that their lead could change at anytime. It’s also hard to claim that Cornershop has any “market power” within such a narrow and fluid market where margins are thin to negative, and where consumers are highly price sensitive.

The four major grocery chains in Chile collectively account for more than 90% of grocery sales, and all of them are building out new apps and online capabilities. Cornershop relies on these grocers for its sales in Chile and they do not have exclusive distribution agreements with any of them. In fact, three of the four major grocery chains (Cencosud, Falabella and SMU) do not work with Cornershop in part because they are prioritizing their own online delivery options. Therefore, Cornershop relies mostly on its sales via Walmart/Lider based on a negotiated commission. This structure represents anything but “market power.”

Moreover, as discussed above, the online grocery delivery segment is changing so rapidly that all the players, including the incumbent grocers, food delivery apps and e-commerce platforms are currently jockeying to grab market share, with no significant barriers to entry.

It’s also plausible to argue that the merger will generate efficiencies that will benefit end consumers, merchants, delivery partners and shoppers. For Cornershop, the merger will help accelerate growth to new geographic areas within Chile and globally thanks to Uber’s larger geographic coverage, greater financial resources and technical expertise, whereas for Uber, the Cornershop acquisition will allow to accelerate their entry into supermarket deliveries (a market that they have not tapped into yet) thanks to Cornershop’s technology and grocery-specific logistics expertise in Latin America.

The case of Cornershop highlights how regulators can suck the air out of innovating startups with global ambitions. Instead of promoting technology innovation, this is a prime example of how innovation can be regulated to death. For a 5-year old startup trying to carve out its place in such a competitive new marketplace, long and protracted antitrust challenges of this sort can be a death knell since capital injections (such as the one proposed in the context of this merger) can get stalled for months, and for startups without profits, the name of the game is growth. After the Mexican authorities nixed the Walmart deal, the Uber-Cornershop transaction may unfortunately be the next to fall through.

Consequences for the Latin American Venture-Backed Startup Ecosystem

Beyond the specific case of Cornershop, challenges by local antitrust regulators can also endanger the nascent Latin American venture-backed startup ecosystem. This is due to the fact that venture-backed startups, for better or for worse, rely on exits (whether via IPOs or acquisitions) to provide liquidity to founders, executives, investors and employees. If there are no exits, then the obvious consequence is that there will be less incentives to make VC investments. Since most venture-backed exits occur via acquisitions, and since the VC industry follows a power-law distribution, VCs rely on outsize returns to provide liquidity to their limited partners. However, the bigger the transaction— as in Uber-Cornershop’s case—the more they may attract novel and overzealous antitrust reviews.

In a region where VC is still relatively scarce, antitrust challenges to early stage startup transactions can set a dangerous and speculative precedent. In the first half of 2019, VC investment in Latin American startups totaled $2.6 billion across 160 transactions according to LAVCA. That compares to just under $2 billion in 2018 and $500 million in 2016. Investments are also concentrated in a few markets. Per Crunchbase, Brazil, Mexico and Colombia (the latter bolstered by Softbank’s $1 billion investment in Rappi) made up 91.9% of the dollars invested and 84.9% of the deal count during the first half of 2019.

Cornershop is therefore a regional outlier and should be considered a “national champion” from Chile, but regulators in Mexico and (now in Chile) have been hampering its growth and global ambitions, first by killing the $225 million Walmart deal, and now by challenging the $459 million Uber deal.

Perhaps the new trend of reviewing “Big Tech” transactions by U.S. and European antitrust regulators is spilling over to Latin America. The FTC recently issued special orders to five large technology firms (Alphabet/Google, Amazon, Apple, Facebook and Microsoft), requiring them to provide information about prior acquisitions not reported to the antitrust agencies under the Hart-Scott-Rodino (HSR) Act.

Separately, the U.S. Justice Department’s Antitrust Division is also exploring the intersection between venture capital and antitrust law and recently hosted a full-day workshop at Stanford University with a focus on what antitrust enforcers can learn from investors about how to identify nascent competitors in markets dominated by technology platforms. This is a surprising turn of events, and as Stanford’s Business School Dean Jonathan Levin mentioned in his speech at the event: “25 years ago [when I first started conducting economics research] I never thought that I would see antitrust and VC in the same sentence.”

However, this trend is very specific to a category of acquisitions led by “Big Tech” firms with high levels of profitability that have amassed significant market power. It would be hard to place Uber in this same bucket since it is not even clear whether the company will actually reach profitability, and its own future, and that of the online grocery delivery market, is still very much to be determined.

Author: Evan M. Epstein
Founder & Managing Partner
Pacifica Global Corporate Governance

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Pacifica Global was founded in San Francisco to serve as a leading corporate governance advisory firm. The mission of Pacifica Global is to help public and private companies solve some of their most complex corporate governance conflicts and challenges.

Exec Dir of Center for Business Law & Adj Prof, Univ of California, Hastings / Founder & Managing Partner, Pacifica Global / 🎙 http://boardroom-governance.com

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