ACCC opposes the Coca-Cola/Schweppes aquisition

The proposed acquisition of the Schweppes beverage brands by The Coca-Cola Company (TCCC) is likely to breach the merger provisions of the Trade Practices Act 1974, the Australian Competition and Consumer Commission said today.

In December 1998, TCCC announced that, subject to regulatory approval, it proposed to purchase Schweppes on a global basis. On 16 February 1999, the ACCC received full details of the proposal from the merger parties when they made their submission to the ACCC on the Australian aspects of the merger.

The brands affected by the acquisition in Australia include 'Dr Pepper', 'Canada Dry' and 'Schweppes' branded beverages, including Schweppes mixers, its carbonated soft drinks such as its lemonade and cola, as well as its flavoured mineral waters.

In Australia, the acquisition involves the retention by TCCC of these beverage brands, while, as the proposal initially put to the ACCC contemplated, the bottling assets and national and regional beverage brands like 'Solo', 'Passiona', 'Woodroofes' and 'Tarax' are to be sold off to an as yet undetermined buyer.

The global nature of the merger means that the ACCC is one of a number of competition law enforcement authorities scrutinising the merger. The acquisition, however, does not apply in the USA and France, where there has been a history of competition concerns with soft drink acquisitions, nor in South Africa.

"The ACCC concluded that there would be a substantial lessening of competition in the market for the production and wholesale supply of carbonated soft drinks in Australia. This market includes cola, lemonade, other flavoured carbonated soft drinks and carbonated mineral waters, as well as mixers such as soda water and ginger ale", ACCC Chairman, Professor Allan Fels, said.

"The ACCC conducted a wide range of market inquiries into this matter and considered the views of many interested parties.

"The ACCC's inquiries indicated that carbonated soft drinks are close substitutes with one another. The evidence also indicates that juices, milks and other cold beverages are not such close substitutes, and that price rises in carbonated soft drinks do not lead to substantial switching of purchases to other beverages like juices. For example, if there was a price rise in one carbonated soft drink product, demand shifts to other carbonated soft drinks more so than to other beverages.

"The acquisition would result in the addition of the pre-eminent Schweppes brand to TCCC's range of international and national brands, and Coca-Cola Amatil's regional brands, which together include Coca-Cola, Diet Coke, Sprite, Lift, Fanta, Deep Spring, Kirks, Shelleys, Ecks and Marchants.

The proposed acquisition would see the share of the Coke business move from 65% to around 75% in the carbonated soft drink market. Concentration would be even higher in non-supermarket segments of the market, such as the supply of carbonated soft drinks to refrigerators in convenience stores or to hotels, clubs and sporting venues.

"There is competition between TCCC's products and the various brands of Schweppes. TCCC (through Coca-Cola Amatil) sells a variety of brands that compete with Schweppes including cola, lemonade, mixers and carbonated mineral waters.

"With the Schweppes international brands in particular, the Coke business would have a pre-eminent range of premium priced, premium branded carbonated soft drinks. Besides the direct diminution of competition between TCCC and Schweppes the merger would create a business which would offer a very powerful portfolio of established brands. This portfolio would cover most parts of the market and threaten the capacity of the remaining and/or new participants to compete in supplying retailers. Retailers in turn would have reduced choice as to the source of supply.

The Coke business has an extensive distribution system, with the large majority of Australia's beverage vending machines and glass door refrigerators, and a network of exclusive accounts for the supply of post-mix. The ACCC considers that no competitor, even with the national brands of Schweppes (which TCCC does not propose to retain), could provide an effective constraint on the merged firm.

"With barriers to entry or expansion on a national scale in the relevant market being very high, the ACCC was concerned that the removal of the Schweppes international brands as a vigorous, effective and innovative competitor to the Coke business, would be likely to eliminate any real prospect of effective future competition, potentially giving the Coke business control of the carbonated soft drink market in Australia.

"Market inquiries have indicated that the presence of the Schweppes brands particularly in the market has been significant in constraining prices, maintaining service levels and generating innovation. Schweppes provides significant competition to the Coke business across all channels of distribution - through supermarkets, convenience stores, vending machines and in such places as hotels, clubs and sporting venues.

"The ACCC has advised the parties of its views. The parties have put to the ACCC a revised proposal. This will be made public in due course. Once made public, the ACCC will make inquiries of the marketplace on the effect on competition of this proposal.

Further information Professor Allan Fels, Chairman, (02) 9290 1812 or pager (016) 373 536 Ms Lin Enright, Director, Public Relations, (02) 6243 1108 or (0414) 613 520

MR 35/98 8 April 1999

Background

In December 1998, The Coca Cola Company (TCCC) announced that, subject to regulatory approval, it proposed to purchase Schweppes on a global basis. On 16 February 1999, the Commission received full details of the proposal from the merger parties when they made their submission to the Commission on the Australian aspects of the merger. The brands affected by the acquisition in Australia include 'Dr Pepper', 'Canada Dry' and 'Schweppes' branded beverages, including Schweppes mixers, its carbonated soft drinks such as its lemonade and cola, as well as its flavoured mineral waters. In Australia, the acquisition involves the retention by TCCC of these beverage brands, while the bottling assets and national and regional beverage brands like 'Solo', 'Passiona', 'Woodroofes' and 'Tarax' were to be sold off to an as yet undetermined buyer.

The ACCC has the role of applying the merger provisions of the Trade Practices Act 1974. In particular, section 50 prohibits mergers and acquisitions that are likely to have the effect of substantially lessening competition in a market. In reaching a view the ACCC considers a wide range of factors set out in the legislation including the level of market concentration, barriers to entry, import competition, degree of countervailing power, whether the acquisition results in the removal of a vigorous and effective competitor, the ability of the merged entity to increase prices or profit margins, availability of substitute products, and dynamic characteristics of the market.

To assess the above issues in relation to the proposed acquisition by TCCC of the international beverage brands of Schweppes in Australia the ACCC conducted a wide array of inquiries and received comments relating to the proposed merger from such interested parties as beverage manufacturers, wholesalers and distributors of soft drinks, large and small purchasers of soft drinks, relevant industry associations, independent vending machine operators and some suppliers of inputs into soft drink bottling.

Relevant Market

The ACCC considered the impact of the merger in the market for the production and wholesale supply of carbonated soft drinks (CSDs) in Australia. The ACCC's inquiries indicated that CSDs are close substitutes with one another. The evidence also indicated that juices, milks and other cold beverages are not such close substitutes, and that price rises in carbonated soft drinks do not lead to substantial switching of purchases of other beverages like flavoured milks. For example, if there was a price rise in one carbonated soft drink product, demand shifts to other carbonated soft drinks more so than to other beverages.

In addition, other factors pointed to differences between CSDs and other beverages, for instance: Consumers appear to treat CSDs differently from other cold beverages such as milks and juices. For instance, they are often consumed for different reasons and on different occasions. The price of CSDs is often determined by brand strength. Beverages like fruit juice and milk are considered to have lower levels of brand loyalty. There appear to be unique aspects to the process of manufacturing different beverages. Significant investment in dedicated lines may be required in order for manufacturers to switch from the production of one product to another. While a producer of say, a lemonade, could quite easily swap to production of a cola (in response to, say, an increase in the price of cola), it would not easily switch to producing flavoured milk or juice.

A variety of courts and competition authorities in overseas jurisdictions have considered the issue of soft drink acquisitions, and in many cases have viewed such acquisitions in the context of a market for carbonated soft drinks.

Market Concentration

In the national market for CSDs the merger clearly breaches the Commission's concentration thresholds. The merged entity will move from 65% to around 75% of the defined market. The merged entity is likely to enjoy a higher market share outside of the grocery (ie. supermarket) segment, that is, in the route and licensed and leisure/post-mix channels. The Commission considers the effects of the acquisition are likely to be most acutely felt in the non-grocery segments of the market.

Import Competition

There is negligible competition from imports in the CSD market. Imports do not act as an effective constraint on the exercise of domestic power by the merged entity.

Barriers to Entry

The ACCC found that while a small-scale entrant may face relatively low barriers to entry, in order to effectively constrain the market power of the merged entity, substantial economies of scale are required. A large scale national entrant would face high barriers to entry, including: The merged entity will have substantial brand strength in a market where brand differentiation is important. New entrants face significantly high costs in establishing successful national CSD brands; Further, new entrants would need to have not just one desirable product, but a range of them to compete with the merged entity's power to offer a full portfolio of premium CSDs; The strength of Coke's distribution network is linked to its brand strength. Large scale competitors to the merged entity would need, amongst other things, a strong distribution network including glass door refrigerators, vending machines, post-mix equipment together with a portfolio of premium brands, a network of exclusive accounts and adequate support staff to service this machinery; There is excess capacity in the sector, and in the context of an industry already characterised by significant economies of scale and scope, this may have the potential to discourage entry.

Countervailing Power

The ACCC considers that it is unlikely that any purchasers have sufficient countervailing power to constrain the merged entity due to the significant brand equity enjoyed by the merged entity. Even for the supermarket chains, the degree of countervailing power against the merged entity is questionable.

Removal of a Vigorous and Effective Competitor

The removal of the international Schweppes brands as competitors to the CSD products of TCCC would be likely to have a substantial impact on competition due to the following: Schweppes is the number two competitor to TCCC products across all channels (ie, grocery, route and post-mix) of the CSD market. Although it does not have a strong cola brand, Schweppes currently bottles the number one brand in the mixer and lemonade segments. The Commission found that the inclusion of Schweppes international brands in the Coke portfolio is likely to give the combination of brands great market power. For instance, it lessens the choice that retailers have in sourcing their purchases of CSDs. Schweppes currently is the most effective competitor to TCCC in the route and licensed and leisure channels and has the only other comprehensive distribution network. With the loss of key Schweppes brands post-merger, it is questionable whether this distribution system will survive. Schweppes and Pepsi-Cola Bottlers Australia are likely to be the only companies that are able to constrain the prices charged by the Coke business.

The merger would leave competition considerably weakened.

The merger will result in the removal of a vigorous, effective and innovative competitor in the Schweppes brands, and may potentially eliminate any real prospect of effective future competition, potentially giving the Coke business control of the CSD market in Australia.

Conclusion

On the basis of the above the ACCC is of the view that the proposed acquisition is likely to have the effect of substantially lessening competition in the national market for the production and wholesale supply of carbonated soft drinks, in breach of section 50 of the Trade Practices Act 1974.

The ACCC is particularly concerned that the merged entity may be in a position to increase prices above competitive levels and be followed, rather than constrained, by its competitors.