COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 23/LM/Apr02
In the large merger between:
Pioneer Foods (Pty) Ltd
and
SAD Holdings Limited
Reasons for Decision
________________________________________________________________
APPROVAL
On 2 July 2002 the Competition Tribunal issued a Merger Clearance Certificate
approving the merger between Pioneer Foods (Pty) Ltd and SAD Holdings Limited
in terms of section 16(2)(a). The reasons for the approval of the merger appear
below.
The Parties
1. The acquiring firm is Pioneer Foods (Pty) Ltd (“Pioneer”), a wholly owned
subsidiary of the Pioneer Food Holdings Ltd.
2. The target firm is SAD Holdings Limited (“SAD”). It has various subsidiaries
including SAD Wingerdvrugte (Pty) Ltd, SAD Boomvrugte (Pty) Ltd, SADOR
Boerdery (Pty) Ltd, Elim Veldblomme (Pty) Ltd, Cape Dried Fruit (Pty) Ltd
and Laeveld Neute (Pty) Ltd, to name a few.
The Merger Transaction
3. Pioneer will purchase all of the shares in SAD. Accordingly Pioneer
will,postmerger, own SAD and all its subsidiaries.
Rationale for and Background to the Transaction
4. Pioneer was formed from the merger of the Sasko and Bokomo co
operatives. Sasko was primarily active in milling and baking, while Bokomo
had diverse interests in milling, baking, poultry, animal fees and branded
consumer goods. Today, milling and baking still account for 70% of
Pioneer’s activities, despite it being a highly diversified food group, housing
20 wellknown brands.
5. As part of its strategic diversification, Pioneer seeks to further broaden its
offering of consumer products in order to become more competitive. In a highly
competitive retail market, shelf space is everything and it is hard to compete with a
limited range of brands. Since SAD has a thriving export business, Pioneer hopes
to expand internationally. It states that with its economies of scale as a result of
their sales and merchandising, marketing and distribution activities in the market, it
will complement the activities of SAD.
6. SAD was founded in 1908 and operated until 1993 as a dried fruit farmers’
cooperative. In 1993, under the spectre of deregulation, the group decided
to expand into a food business and, to this end, started acquiring a variety
of other businesses. SAD views the merger as enhancing its ability to
compete effectively in the food sector by boosting its status from a medium
sized enterprise to achieve the critical mass necessary to be able to
compete effectively as a large player, both vis àvis other food
manufacturers, as well as retailers. It cannot continue to stand alone if it
wants to complete its capital expansion programme for manufacturing.
7. Nature’s Source started operating in the early 1990’s as a smallscale,
entrepreneurial homebased operation. Founded by two South African
entrepreneurs who developed a uniquemix quality muesli formula, the
entrepreneurs who developed a uniquemix quality muesli formula, the
business quickly expanded in response to everincreasing consumer
demand for its product. In 1998, a private equity firm, Aquila, acquired a
40% stake in the company, in order to enable it to raise finance. SAD then
bought Nature’s Source in 1999 and it became SAD’s whollyowned
subsidiary. Nature’s Source was acquired to complement its existing range
of food products, providing it with much needed manufacturing finance.
They retained the existing management until this year. Nature’s Source will
however not be able to finance further growth if the status quo is retained.
The relevant product markets
8. Presently, Pioneer owns five business divisions, namely Sasko Milling and
Baking (producing wheaten flour, maize flour, breads, bake mixes, pasta
and rice), Pioneer Agri (farming and selling of commercial eggs and
broilers, manufacture of animal foods), Bokomo Branded Foods (hot and
readytoeat cereals and other breakfast products, frozen foods, jams and
preserves, glazed fruits and bottled fruit and vegetables, Bokomo Africa
(chicken farming, milling and baking in other African countries) and Craft
Box Packaging (corrugated carton production).
9. SAD operates in various business areas through its various subsidiaries.
These markets include nuts, vinegar, dried flowers, dried fruit, wine, food
enhancers, soup, beans, noodles, dehydrated vegetables and salads.
10. The focus of analysis is on only two markets where there is a product
overlap, namely the breakfast cereal market, particularly readytoeat
(RTE) cereals and jar vegetables (salads) . The relevant market is
therefore the readytoeat (RTE) cereals market on the one hand and the
jar vegetables (salads) market on the other.
Geographic market
11. Products are sold to retailers throughout the country, with minimal import
competition, therefore the relevant market is South Africa.
A. The Jar Vegetable/Salad Market
12. SAD manufactures and sells its jarred vegetables under the Werda brand.
Pioneer too prepares bottled salads, through its Sugarbird division, but only
house brands for the supermarkets (retail chains) and does not sell under
its own brand name.
Impact on competition
Salads/Jar vegetables
Tiger Brands 44%
Pioneer (house brands) 12%
SAD 24%
Others 20%
PostMerger 36%
13. Despite high concentration levels in this market, the Tribunal was
persuaded by further investigation which revealed that entry barriers into
this market are low, since technological requirements and setup costs are
minimal. As a result, there are many speciality stores and home industries
which service this market. Supply elasticity is high for any producer already
having bottling capability, of which there are several. Of significance is the
fact that Pioneer only manufactures house brands for the retailers and has
no brand equity in this market. Accordingly, the merging parties pointed out
that Pioneer is disincentivised from raising prices, since should they do so,
that Pioneer is disincentivised from raising prices, since should they do so,
retailers could easily find another producer to manufacture their own
brands, and Pioneer would lose market share. A final persuasive factor is
that the size of the bottled salad market is very small, relative to the formal
retail food market and since Tiger Brands is the dominant player in this
market, the instant merger will not change the status quo .
xiv.Accordingly, the Tribunal’s focus of consideration in this
merger falls on the RTE cereal market.
B. The ReadyToEat (RTE) Cereal Market
15. SAD operates in the RTE market through its Nature’s Source subsidiary .
Pioneer manufactures hot and readytoeat (RTE) cereals through its
Bokomo branded food division.
16. The evidence further revealed that breakfast cereals comprise hot cereals,
and muesli products, based on consumer preferences. If one takes the
cereal market as a whole, specifically because of its dominance in the hot
cereal market, Tiger Brands would be the prominent player. On the other
hand, looking at the branded cereal market, Kelloggs is dominant. However,
in the muesli market, Nature’s Source is dominant. Therefore, the market
positions vary depending on how we define the market. We could, strictly
speaking, define the market more narrowly. However, there is evidence of a
high degree of substitutability between these different cereal types,
particularly between muesli and RTE cereals. 1 The evidence revealed that
consumers prefer, and indeed tend, to select from a wide array of cereals
within the RTE market, and this includes different types of muesli products.
Consumer demand is very elastic and they will readily switch to substitute
products in response to price increases. Furthermore, though muesli might
occupy a separate “niche” market, in any event, as will be discussed later,
the barriers to entry into this market are quite low.
Impact on competition
17. As evident from the market share figures below, the merging parties are the
17. As evident from the market share figures below, the merging parties are the
number two and three manufacturers in the RTE market. This, together with
the high concentration levels, necessitated a closer evaluation of the RTE
cereal market.
1 The parties went to great length, by means of price and cross price elasticity studies, to persuade us that
the relevant market is RTE cereals, with no further subdivisions into narrower markets based on product
categories, in other words, consumers regard all RTE cereal products as interchangeable. Other jurisdictions
have also accepted this market definition of the cereal market (see State of New York v Kraft General Foods Inc,
Nabisco Cereals 1995 926 F. Supp. 321)
Market Shares
RTE Cereals
Kellogg 51.5%
Pioneer (Bokomo) 35%
SAD (Nature’s Source) 8.5%
Own Brands 3.5%
Others 1.5%
PostMerger 44%
Barriers to Entry
18. Generally, largescale cereal manufacturers face high entry barriers
in the form of costly capital equipment (“process technology”) and huge
investments in advertising and promotional activities. From the oral
evidence presented at the hearing, it appears that, to the extent to which
the local RTE market is branddriven, brands, too, constitute significant
entry barriers. The Kelloggs “premium” brand is internationally well
established, thanks to significant advertising expenditure and many years of
reputationbuilding.
19. However, what is peculiar about the South African RTE cereal market is
that though all products in this market are readily substitutable, there are
products which compete in the “mainstream” and those which compete on
the fringes. Smallscale producers, notably producers of muesli ,
differentiate their products by catering to a health conscious or higher
income niche market. On the other end of the scale, large manufacturers
mass produce products to meet the volume and consistency of supply
requirements of the large retail chains. Not only the volume supply
requirements of the retailers, but the branddriven nature of the market, the
high capital expenditure on “process” technology, as well as costly
marketing and promotional strategies, mean that the smaller, single brand
products are faced with a limited ability to compete at this mainstream level.
This is an industry in which critical mass is crucial in order to capture
market share from reputable and established players.
20. On the other hand, in their favour, the smaller cereal manufacturers face
20. On the other hand, in their favour, the smaller cereal manufacturers face
lower entry barriers relative to their larger, mainstream competitors, who
must invest huge amounts on both technological process equipment and
advertising. According to the Commission, barriers to entry in the
manufacturing of muesli are very low. 2 The inputs are primarily raw
products such as flaked oats, which are then mixed and possibly baked in
either microwave or conventional ovens. Therefore, the opportunities for
new entrants to enter this market are fairly good. Further, the evidence at
the hearing revealed that retailers actually support these smaller
competitors to roll out new brands, in the form of affording them greater
shelf space at lower cost, to offset the might of their larger counterparts.
Therefore, muesli manufacturers who operate at the periphery of the
market, can enter the market relatively easily. The parties advised that
there are in fact a number of smallscale muesli manufacturers in the
market already, including Post Muesli; CMC, selling through retail only
under the name Alpen; Tristar Foods, which sells through retail stores such
as Pick ’n Pay and is designed for diabetic consumers; Vital Health; TL
Sugarfree Muesli, mainly sold in fruit and vegetable city stores and finally
Pouyoukas Foods recently acquired by the Steers Group . However, once
they have entered, there is a wide chasm they have to cross before they
can compete at the Kelloggs and Pioneer Foods’ level.
21. Nature’s Source lies somewhere on the cusp between these large
mainstream brands and the small fringe brands. The Managing Director of
SAD stated at the hearing that Nature’s Source is a highquality premium
product, compared to other muesli products. It caters for low fat, diabetics
and low cholestrol diets. It is manufactured slightly differently in that it
undergoes microwave baking. However, not having the money to invest in
marketing makes passage into the main line cereal business very difficult,
as explained below.
Is an Effective Competitor being removed?
as explained below.
Is an Effective Competitor being removed?
22. Postmerger, Pioneer will have approximately 44% of the RTE cereal
market. As mentioned already, Nature Source is not an effective competitor
per se, since it does not have the technology nor the differentiated product
range available to compete at the largescale, mass producer level.
Although Nature’s Source is a number three competitor which is being
acquired, being a mediumsized player with a limited product range, it does
not compete in the mainstream, largescale end of the RTE market, as do
Pioneer and Kelloggs.
23. Moreover, the evidence reveals that Nature’s Source has in fact been losing
market share over the last few years. The parties attribute this to a lack of
capital financing for dedicated advertising and investing in brandbuilding.
This lends credence to the argument that its status as a strong,
independent competitor to the established brands is doubtful. Large
companies such as Nabisco, CPW and General Mills can enter the SA
2 This market was described as the most volatile in the RTE market.
market very easily, if there is enough of a margin for them. The parties
further maintain that Pioneer’s acquisition of it will improve the
competitiveness of the RTE market since it will be able to more effectively
compete with Kelloggs.
24. The parties also stated that they are not getting equity from the Nature’s
Source brand in terms of the margins it currently commands. The parties
advised that despite its being a premium product, Nature’s Source is a
single product company. Products with single brands find it very difficult to
compete in supermarkets, especially since they cannot command greater
shelf space.
25. The parties’ graphs of own price and cross price elasticity show that the
elasticity of demand for Kellogg’s products is relatively low. In other words,
Kelloggs can extract a premium price for its products because of
consumers recognition of and loyalty to its brand. However, by contrast, the
elasticity of demand for Nature’s Source and Bokomo products is relatively
high as they have not until now built up brand recognition to the same
degree as Kelloggs. Therefore consumers will respond by buying
substitutes if prices for these products rise. What is significant is that this
merger will not strengthen the Nature’s Source or Bokomo brands.
Countervailing Power
26. The parties made much about the countervailing power of the retailers .
Consumers react to price increases, as they are very price sensitive and
will switch to another brand. This reaction, in the form of reduced turnover
for a particular product, is acutely felt by the retailers, who have the ability
to exert pressure on manufacturers in terms of bargaining tactics, for
instance, a falloff in sales is penalised by reduced shelf space.
27. The parties maintain that the retailers have huge negotiating power.
27. The parties maintain that the retailers have huge negotiating power.
Manufacturers negotiate for discounts from them and retailers yield
considerable power when it comes to bargaining for shelf space and
discounts. As a second brand to the market leader, Pioneer has to fight for
shelf space since retailers favour the market leader in terms of margins.
However, there is no convincing evidence to suggest that retailers will not
pass on price increases to consumers. What is significant is that retailers’
power and negotiating tactics add to the difficulty of mediumsized players
to compete in the market. This is because of the importance of critical mass
to make a noticeable imprint on retailers’ shelves.
Potential for Collusion
28. The products on which there could ostensibly be collusion, are not
homogenous, each having different pricing structures, based on input costs,
which makes it difficult to engage in coordinated conduct in respect
thereto. Price collusion is also made difficult by the relationship that the
firms have with retailers. Firms are offered the opportunity to run
promotions with a retailer on dates determined months in advance with the
particular retailer. A collusive strategy requires the ability to track a rival’s
pricing changes and to react quickly to them. The promotions system
makes such a strategy more difficult, because of its inflexibility and the fact
that pricing information is less transparent. We accordingly accept the
parties’ argument that collusion amongst the two most prominent cereal
manufacturers in the RTE market is not feasible, and hence unlikely.
Vertical Integration
29. Although the Pioneer group is vertically integrated, in that it supplies much
of the inputs that go into RTE products, it does not appear that the merged
firm could embark on a successful foreclosure strategy. It appears that
rivals can source equally successfully from other firms including via imports
as Nature Source does currently.
Conclusion
We conclude that the merger will not lead to a substantial lessening of competition
in the RTE cereal market. In respect of mainstream cereal products, there will be
no change occasioned by this merger. The only change is in respect of muesli
products – Pioneer is acquiring an established brand which cannot effectively
compete on its own in any event.
It is possible for small players to continue to enter the market by developing niche
brands. The merger is not likely to adversely affect the potential small scale or
niche entrants to the market.
The Tribunal therefore approves the transaction unconditionally. There are no
The Tribunal therefore approves the transaction unconditionally. There are no
public interest concerns which would alter this conclusion.
_____________ 17July 2002
N. Manoim Date
Concurring: D.Lewis, M. Holden