Evaluation of the Merger
The Relevant Market
8.
Defining a relevant market for consumer products is notoriously difficult. Delineating a relevant
market for beverage products is especially difficult because one is faced with not only the subjective proclivities of consumers
but also the marketing stratagems of firms as they attempt to differentiate their products in response to competitive threats.
9.
Beverage antitrust cases have long been the subject of bitter contestation over relevant market
definition. On the one hand merging parties contend they are merely minor players fighting for their “share of the throat”,
in a market where the fizzy drink competes with anything that can be imbibed from fruit juices to tea. On the other hand competition
regulators argue that the fizzy drink is the relevant product market.
10.
Ultimately each case must be determined on its own facts and foreign judgments can do no more than
give us guidelines to method for they cannot serve as a way for us to come to a conclusion on facts. The behavior of a teenage consumer
of carbonated beverages in Texas is no more use to us as evidence than the behavior of the French consumer of carbonated mineral
water.
11.
The Commission in this case is in the highly unusual position of a competition regulator arguing for a wider market definition than the merging parties. The Commission says the relevant
market is the market for non-alcoholic beverages. On this basis the market share of the sports and energy drinks is a mere 2,6 %
and of which the merged entity would comprise a modest 1%. Not surprisingly, on this definition of the market they conclude that
the merger raises no concerns.
12.
The merging firms did not share the Commission’s expansive view of the market. Whilst we cannot say they contradicted the Commission on this point, in argument before us and in their documentation they did not pursue the point with any
conviction choosing instead to focus on barriers to entry.
13.
However internal documents supplied by both parties to the Tribunal subsequent to the Commission’s
report point to a much narrower definition of the market - that for RTD sports drinks only. As we argue below the behavior of both
merging firms suggests that this is how they understood the relevant market.
14.
We say this for the following reasons-
14.1
In its business plan Bromor identifies sports drinks as a category. This is not merely labeling, as the company is also involved in other non-alcoholic beverages and significantly does not deal with them in the
same category. The only competing products named are other sports drinks and the only competing brand specifically named is PowerAde.
14.2
National Brands in its Business Plan for the Game Sports Drink dated July 1998 and six months prior to
the merger having been mooted, considered an ambitious plan to re-launch the Game RTD and powder products. The document is premised
on the assumption that the market is a sports drinks market and specifically identifies Game’s competitors as Energade, PowerAde
and Lucozade. In a market survey conducted for them by Markinor in January 1998 only the three leading brands, i.e. Game, PowerAde
and Energade are compared.
14.3
The Sale Agreement between the parties contains a restraint of trade prohibiting National Brands from
carrying on a competing activity for a period of five years. “Competing activity” is defined as an activity in the “
the sports energy drinks category”.
14.4
A market survey performed by Nielson compares total annualized volume yields on “Sports Drinks”.
14.5
The prices of the sports drinks differ considerably from that of the nearest possible beverage substitute
namely energy drinks. Although all the prices of these products fluctuate depending on the outlet at which they are sold Red Bull
is consistently and significantly more expensive than the RTD products.
14.6
Post merger Bromor was able to sustain an 8 % price increase on its Energade product and an 8.7% increase
of its newly acquired Game brand including bringing price parity between the two brands.
14.7
The rationale for the merger from Bromor's point of view was anti-competitive and the intention was to
prevent the Game Brand from becoming available to either a new entrant or to an existing competitor viz. PowerAde. Mr. Cowie the
marketing director of Bromor informed the Tribunal that the Cadbury –Schweppes board was concerned that a “ formidable
competitor” like Coca Cola could easily have bought the brand as well.
14.8
There is a lack of price competition in the sports drink market, which facilitates the ability of Bromor
as the leading firm on its own or Bromor and Coca Cola jointly to raise prices to a supra-competitive level. This is evident from
the Game business plan referred to above where in paragraph 4.4 of the pricing plan the authors note that the RTD market is “not
a price sensitive market” This observation is made prior to the merger being contemplated. Mr. Cowie in his submissions refers
to the fact that what distinguishes brands is whether they are actively marketed or not “otherwise you land up competing on
price.” The parties have also indicated that prices are not uniform and depend on the nature of the outlet where the product
is sold. The consumer purchasing from a refrigerator at a “point of sweat” will pay considerably more than the consumer
purchasing off the shelf at the super market.
15.
None of these factors on their own is decisive as to the relevant market but the accumulation of these factors suggests that the relevant
market is for RTD sports drinks. On this basis and adjusting the Commission’s figures to exclude Red Bull the market pre and
post merger is highly concentrated.
Product |
Pre-merger Market Share (%) |
Pre-merger
Concentration
(HHI) |
Post-merger
Market Share
(%) |
Post-merger
Concentration
(HHI) |
| Energade |
55.1 |
3036 |
60 (incl. Game) |
3600 |
| Powerade |
30.5 |
930 |
30.5 |
930 |
| Game (RTD) |
4.4 |
19 |
|
|
| Lucozade |
1.0 |
1 |
1.0 |
1 |
| Other |
8.9 |
9 (a) |
8.9 |
9 |
| Total |
|
3995 |
|
4540 |
Source: Based on figure in Competition Commission’s Report
We have assumed that 50% of the Game product is sold in RTD form and that the figures
quoted for the other products are for RTD sales.
Market share percentages and Herfindah- Hirschman Index (HHI) values have been rounded-off.
(a) The HHI calculation assumes that ‘other’ comprises 9 firms of equal share ( 1%).
16.
As far as the geographic market is concerned there is no dispute that this is the whole of South Africa.
Barriers to Entry
17.
As we stated earlier the merging parties have focused their defence of the merger on the basis that barriers to entry in the industry
are low because there are no significant regulatory hurdles and capital expenditure on plant is not significant. This they say is
evidenced by the proliferation of small brands in the market.
17.
If we exclude the four largest brands the remaining brands account for only 9 % of the sports drinks
market. Given that the fourth largest Lucozade only has a share of 1% we assume that none of the present remaining brands has a market
share significant enough to discipline the behavior of PowerAde and Energade / Game in the market.
18.
This leaves us to consider the role of potential competition as a deterrent effect. Whilst the parties
are correct in contending that capital is not a serious deterrent to entry in this market, establishing a brand is. Since brands
are essential in the market for fast moving consumer goods, no firm will enter unless they are willing to sink significant sunk costs
in marketing a brand that can compete successfully with the two market leaders. By sunk costs are meant costs that cannot be recovered
if the entry is a failure. Advertising to create a brand image is a classic example of a sunk cost.
19.
In one of the best-known merger cases in the history of the beverage industry the FTC successfully
challenged Coca Cola’s attempts to acquire rival carbonated soft drink producer Dr Pepper. In 1986 a Federal District Court
granted a preliminary injunction that thwarted the merger. In delivering the judgment Judge Gessel made the following observations
about sunk costs that we find instructive,
20.
“ to establish a major new brand requires large expenditures for advertising to fix the brand
name and image in the mind of the consumer – expenditures that cannot be recovered if the introduction fails. … Effective
entrants must also match the considerable promotional budgets of the dominant companies in targeting their brands for effective distribution
through retailers … Finally, it has been the experience of the industry that effective entry against dominant companies is
likely to require years of sustained effort for any continuing success.”
21.
Shepherd argues that advertising costs for a new entrant are higher than those for existing firms
with established brands. This is because to enter a firm must meet penetration costs, which escalate sharply with as a firm tries
to increase output.
22.
The marketing information submitted by both parties is consistent with the view outlined above.
Even Energade the leading brand was concerned that PowerAde, with Coca Cola’s resources behind it, might win the battle to
obtain celebrity sports endorsements. Indeed the very demise of Game is illustrative of what can happen to an established brand,
which fails to sustain its marketing edge over its rivals.
Rationale for the merger
23.
Even if the merger may lead to a substantial lessening of competition we are obliged to consider
whether it has any pro-competitive effects. At the hearing we explored this issue with the parties and they adduced no satisfactory
evidence on this point. On the contrary, the representative of Bromor indicated that when National Brands put Game on the market
there was concern that the brand might be purchased by a competitor, more specifically Coca Cola. The decline in the Game brand since
February 1999 suggests that the purchasers were less concerned with reinvigorating a past champion brand and more with keeping it
away from competitors.
24.
A document placed before the Board of Cadbury Schweppes indicates their intention to utilise Game
as a “ fighting brand against regional competitors in the sports drinks market.”
25.
We are further concerned that the real intention of Bromor was to remove the Game RTD brand from
the market. In their letter to the Tribunal dated 9th March 2000 Bromor observe that the market for the Game liquid has all but collapsed.
The thrust of Mr Cowie’s oral submissions to the Tribunal was to the same effect. Consumer indifference to the brand is cited
as the reason for this. Yet in March 1999 total Game sales were at a peak for the 12 month period from July 1998 to June 1999. The
decline in the brand was conceded by Bromor, who said they had no interest in maintaining it once it was going to be sold. Although
the agreement was only signed in August the agreement to sell appears to have been finalized in February or March. Had Bromor seriously
intended to retain a vital brand it would have taken the normal steps to ensure the brand remained viable during the period between
the conclusion of negotiations and the effective date. The extraordinary decline of the brand in this period suggests Game RTD’s
demise rather than its continued vigour may have been their real purpose.
Sale of the plant and powdered IP rights
26.
The sale of the plant raises no competitive concerns as market power in this market derives from
control over brands in the RTD sports drinks market not ownership of plant. Secondly we also conclude that the powdered drinks constitute
a separate market from the RTD. The powder product is not ready to drink and hence attracts a different consumer. It pricing and
marketing are different as well and it also is less constrained in methods of distribution i.e. not requiring fridge space. Since
Bromor was not in this market before the merger it raises no concerns.
Conclusion
27.
We find that the merger substantially prevents and lessens competition in the market for sports
drinks because:
a.
The merger will lead to a higher levels of concentration in an already concentrated market;
b.
There is an increased likelihood of collusion between the two remaining brands;
c.
The Game brand has been removed as the most likely effective competitor to the two dominant brands;
d.
There are no pro-competitive efficiencies or public interest considerations which otherwise justify the merger.
Remedy
28.
Since this is a Schedule 3 merger it means that the parties were lawfully entitled to implement
the merger without prior approval from the Tribunal. At the time of this decision the merger will have been in effect for over seven
months.
29.
Given our conclusion that the merger is anticompetitive we have three possible remedies-
a.
to prohibit the merger
b.
to approve the merger subject to an appropriate structural remedy
c.
to approve the merger subject to a behavioral remedy.
30.
Prohibiting the merger is too drastic a remedy given that-
a.
the merger has already been implemented and the Game brand has since weakened;
b.
not all aspects of the merger are anti-competitive. There are for instance no concerns about the sale of the plant or the sale of
the powdered Game product;
c.
Separating the powdered brand from the RTD is difficult since they are both marketed under the same brand name.
31.
The next option would be to approve the merger but make it subject to an appropriate structural
remedy. The most obvious structural remedy on the facts of this case would be to order Bromor to divest itself of the Game RTD brand’s
intellectual property to a third party acceptable to the Tribunal. This remedy as well is too drastic in our view.
32.
If we had to order divestiture an appropriate time period would have to be given for Bromor to sell
the Game intellectual property to a third party. A period of at least six months would be appropriate. This means that at least thirteen
months would have elapsed since the sale of Game to Bromor and nearly twenty months since the brand was last viable. There is no
guarantee that at that stage the Game brand would be significantly more useful to a new incumbent than establishing a new brand given
that there would be no incentive for Bromor to retain the brand for the benefit of a future vigorous competitor even at the expense
of a short-term loss on the price achieved through a sale.
33.
Normally the practice in the circumstances would be for the competition authority to appoint a trustee
to administer the assets to be divested so as to retain their value prior to a sale. Given that in this case we are concerned with
divesting a brand and not a separate business this remedy is completely impractical let alone not worth the expense.
34.
Secondly the Game brand also attaches to the powder form product, which, as we have noted, is in
a separate market and does not raise competition concerns. Practically separating the brand is impossible and means a divestment
remedy would have to include the powdered product. Thirdly the rights to Game include rights to the brand in other non- South African
markets. We have no jurisdiction to assess competitive effects beyond our borders in terms of section 3 of the Act.
35.
Divestiture is too extreme a remedy in the circumstances nor is there any expectation that it will
be an effective one either. It is not surprising that other jurisdictions are loath to impose divestiture as a remedy where a merger
has already been implemented, hence the rationale for pre-merger notification. The Federal Trade Commission noted in their 1999 study
on their divestiture process that divestiture after consummation is frequently inadequate. One example they give is of this is that
the goodwill of the acquired firm may be dissipated making it a weaker competitive force after divestiture.
36.
One of the primary changes in the merger regime between the present act and its predecessor, the
Maintenance and Promotion of Competition Act (Act 96 of 1979), was the introduction of compulsory pre-merger notification. If a structural
remedy is considered appropriate it is less offensive to the merging parties settled rights if imposed prior to consummation because
one does not have to unscramble a merged entity.
37.
We conclude that the only appropriate remedy is a behavioral one. Although the remedy we are proposing
is mild and may be entirely academic it is based on the recognition of the disciplining effect of potential competition. We find
the restraint of trade imposed on National Brands unnecessarily restrictive and not related to the goodwill of the Game brand as
they could only enter with a new brand without violating the intellectual property rights to the Game brand owned by Bromor. Since
National Brands with its experience of the consumer market is always a viable potential entrant its potential as an entrant may discipline
the remaining players more than any other potential competitor.
38.
Secondly given the fact that we find the merger anti-competitive the potential for future restrictive
practices to take place in this market is by no means remote. These could take the form of either an abuse of a dominant position
or a horizontal restrictive practice between the major players. A possible remedy if this does occur and no adequate behavioral remedies
are available is for the Commission or complainant to seek an order of divestiture against Bromor. This potential remedy which may
have a disciplining effect on the firms in the market will only be feasible if the Game brand retains some value so that divestiture
to a third party is more attractive than establishing a new brand. For this reason we have made the additional order that Bromor
must maintain the Game RTD brand for a period of at least two years. If a successful restrictive practice case is brought against
Bromor in this period and divestiture is a competent remedy the retention of the Game brand will also ensure that it is a practical
remedy. We have been at pains not to be prescriptive in this regard as we are sensitive about interfering with Bromor’ s commercial
freedom unduly.
Order
39.
We approve the merger subject to the following conditions-
39.1
that clause 12 of the sale agreement dated 31 August 1999 is declared void with effect from the date
of this order;
39.2
that Bromor continue to maintain the Game ready to drink brand in the national market at levels not substantially
less than it does currently including expenditure on advertising or otherwise promoting the brand for a period of not less than two
years from the date of this order;
39.3
that the obligation in sub-paragraph 2 does not prevent Bromor from selling the Game intellectual property
or parts of it to a third party during this period provided that-
a.
third party is-
i.
not Cadbury-Schweppes , Coca Cola or a firm controlled by either of them or Bromor ; and
ii.
genuinely at arms length form any firm contemplated in sub-paragraph (i) ; and
b.
the transaction is notified to the Competition Commission prior to implementation.
________________
Date:
14 April 2000
N.M. Manoim
D. H Lewis and S. Zilwa concurred.
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