MEXICO CITY (Reuters) - Mexican officials blocked Walmart Inc’s deal to buy delivery app Cornershop because Walmart could not guarantee a level playing field for rival retailers, whose customers use the app to order groceries and other goods, according to an official document and an interview with the top competition regulator this week.

FILE PHOTO: The Walmart logo in New York, U.S., May 1, 2018. REUTERS/Brendan McDermid/File Photo

Cornershop operates in Mexico and Chile, promoting the app as providing delivery of “groceries to your front door in one hour” from retailers including Costco Wholesale Corp, Chedraui and Walmart. It charges retail chains a commission for its services.

Walmart had struck a deal to buy the popular app for $225 million in a bid to boost its e-commerce ambitions in Mexico, one of the retailer’s priority markets, and better compete with Amazon.com online.

The deal would have put Walmart in the unusual position of owning an online platform selling its own merchandise alongside goods sold by rivals, with potential access to data about orders placed with competitors.

That raised a red flag for the regulator in Mexico, where Walmart’s Walmex unit is already a dominant bricks-and-mortar retailer. Walmex operates 2,459 stores in Mexico, and is the country’s largest supermarket chain by far.

After months of analysis, Mexico’s Federal Economic Competition Commission (Cofece) last week opposed the deal, saying Walmart and Cornershop could “displace” competitors.

“It all has to do with Walmart’s size,” Cofece’s president, Alejandra Palacios, told Reuters in an interview at the regulator’s headquarters. “If you’re going to discriminate against or help one of the parties, you’re usually going to help the big one.”

A 92-page resolution, obtained independently by Reuters ahead of publication, underlines the depth of Cofece’s worries about the deal, which now likely will be tough for Walmart to revive.

Walmart made a number of proposals to address Cofece’s concerns, including not allowing overlapping board members between Walmart and Cornershop, according to the document. The commission rebuffed the attempts as too weak to guarantee they could be carried out properly.

“It is not clear to the commission that there would be independence between the Cornershop MX business and the interests of Walmart,” the document says. “Walmart has incentives to favor its supermarkets and price clubs or bestow unfavorable treatment to its competitors.”

Walmart has said it is analyzing how to respond to Cofece and that the deal would be positive for consumers and competition. The retailer declined to comment on Cofece’s findings in the document and comments from Palacios when contacted by Reuters.

The surprise denial could hurt Walmart’s ambitions for online supremacy in Mexico, its largest market outside the United States by store count.

Although Walmart rakes in nearly 60 percent of Mexico’s total supermarket sales, it does only about 1 percent of those sales online.

The threat of Amazon’s encroaching on Walmart’s territory began to loom larger in Mexico last year, when the online powerhouse launched deliveries of non-perishable groceries like beer and coffee.

Cofece’s denial also likely dashed Walmart’s hopes that Cornershop could serve as a model in its global quest to quickly deliver household products and fresh foods to shoppers’ homes.

In the United States, Walmart has struggled to get some of its delivery partnerships with third-party companies to work. For example, Walmart in the past year has ditched its grocery-delivery partnerships with Uber, Lyft and Google-backed Deliv, and has struggled to get its employees to deliver groceries, although it announced last week a revival of a service to use its own workers to deliver groceries straight to customers’ refrigerators.

It has had stumbles in the online realm. Walmart on Wednesday said it would overhaul start-up Jet.com, which it acquired in 2016 for over $3 billion, in a move that will reduce the unit’s scope and importance.

MARKET RISKS

Palacios said the Mexico deal could have hindered business for both supermarket and delivery app competitors, given Walmart’s potential to control Cornershop’s terms. For example, she said, Walmart could deliver fresh fruit in its own orders but rotten fruit from other stores.

In addition, Walmart might have used data from other stores on shopper habits for its own benefit, she said, and it might harm other delivery apps by choosing not to participate on them, in favor of Cornershop.

Palacios said Walmart’s proposals to resolve Cofece’s concerns would have been difficult to enforce.

“We didn’t think they were strong enough to mitigate the risks,” she said.

According to the Cofece document, Walmart and Cornershop said Cornershop board members, executives and staff would not be allowed to use store data to benefit Walmart. Cofece responded that the burden should fall on both companies to prevent leaks, not just one.

The commission requested information from delivery apps Rappi and Mercadoni, plus grocers Soriana, La Comer, Chedraui and Costco, to complete its analysis, according to the document.

Palacios declined to comment when asked if Cofece saw Amazon as a competitor to Walmart or Cornershop.