Amazon’s UK ambitions have been checked by the competition watchdog after it launched an in-depth investigation into the online retailer’s purchase of a stake in food delivery company Deliveroo.
The Competition and Markets Authority announced the probe on Friday after Amazon and Deliveroo declined to offer concessions in response to the CMA’s initial raising of concerns earlier this month.
Amazon was the lead investor in a $575m (£442m) funding round, announced in May, which reportedly gave it a 16% stake in Deliveroo.
Deliveroo has been seeking investment to boost its performance against other deep-pocketed rivals such as Uber Eats, owned by the taxi app company Uber, and Just Eat, the FTSE 100 delivery platform that is the subject of a bidding war.
However, the CMA’s decision to refer the transaction to a full investigation on Friday will cast doubt on whether the investment can go ahead. The regulator has the power to block the investment completely or demand specific remedies from the companies.
The CMA said the deal could leave customers, restaurants and grocers facing higher prices and lower-quality services. Amazon and Deliveroo had been given five days from 11 December to come up with changes but did not offer alterations to the deal. The CMA says it will conclude its investigation by 11 June 2020.
One of the main concerns was the impact on the incipient ultra-fast grocery delivery market. In the UK Deliveroo has been working on grocery deliveries within half an hour with convenience stores such as the Co-op, going up against Amazon’s venture with Morrisons, which is available to some subscribers to its Prime service. While the sector is still relatively small – other ultra-fast services include Sainsbury’s Chop Chop, Ocado Zoom and Waitrose’s Rapid delivery service – the CMA was concerned that an effective merger between the two firms could erode competition.
Amazon has previously tried to enter the food delivery market. In 2016 it launched Amazon Restaurants, which was initially available to some Londoners as part of its Prime subscription service. However, the operation was closed in December 2018, a testament to the difficult economics of delivering hot food at low cost.
Food – a market worth nearly $1tn a year in the US alone – remains a key part of Amazon’s plans. In June 2017 Amazon bought the organic food chain Whole Foods, giving it a foothold in bricks-and-mortar retail.
The CMA’s investigation represents a rare regulatory rebuke to Amazon. The $926bn company, founded by Jeff Bezos, has built up commanding positions globally in online retail and cloud computing with relatively few regulatory hurdles.
However, its size and use of offshore jurisdictions to minimise tax payments have increasingly attracted the attention of politicians across the world. The US Democratic presidential candidates Elizabeth Warren and Bernie Sanders have called for Amazon, and other online platforms such as Google and Facebook, to be broken up.
In the UK Boris Johnson last month said internet companies needed to make a “fairer contribution” on tax, although trade experts have questioned whether his government will push ahead with a levy that could anger the US ahead of crucial post-Brexit trade talks.
The CMA decision will be a blow to the growth plans of Deliveroo. The company, which was founded in London by the former investment banker Will Shu, has raised a total of $1.5bn since 2013 from backers including fund manager Fidelity and California-based tech investor Greenoaks Capital.
Much of that investment has been used to fund expansion in new markets as well as development of its online takeaway technology. Revenues of Deliveroo’s parent company, Roofoods, rose by 72% to £476m in 2018, but the company made a loss of £232m.
It is understood the CMA will publish an issues statement, setting out in detail what it expects to investigate, in the coming weeks.
The companies are expected to focus on persuading the CMA the minority investment by Amazon will not prevent the US company from re-entering the British food delivery market, as well as highlighting the differences in their business models.
A spokesperson for Deliveroo said: “Deliveroo has been working closely with the CMA and will continue to do so. We are confident that we will persuade the CMA of the facts that this minority investment will add to competition, helping restaurants to grow their businesses, creating more work for riders, and increasing choice for customers.
“Deliveroo is a British company operating right across the country and this investment will be particularly beneficial to the UK economy.”
An Amazon spokesperson said: “A homegrown UK business like Deliveroo should have broad access to investors and supporters. Amazon believes that this investment funding will lead to more pro-consumer innovation by helping Deliveroo continue to build its world-class service and remain competitive in the restaurant food delivery space by creating more highly skilled jobs, innovating in the restaurant food delivery sector, and developing new products for customers.”