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[2015] ZACT 130
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Pioneer Foods (Pty) Ltd v Future Life Health Products (Pty) Ltd (LM017May15) [2015] ZACT 130; [2016] 1 CPLR 208 (CT) (22 December 2015)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No:
LM017May15
In
the matter between:
Pioneer
Foods (Pty)
Ltd
Primary Acquiring Firm
and
Future
Life Health
Products
(Pty)
Ltd
Primary Target Firm
Panel
: Norman Manoim (Presiding Member)
Yasmin Carrim (Tribunal
Member)
Andiswa Ndoni
(Tribunal Member)
Heard
on
: 08 July 2015, 01, 02, 04, 10 September 2015 & 26 October 2015
Order
issued on
: 09 November 2015
Reasons
issued on
: 22 December 2015
REASONS
FOR DECISION
INTRODUCTION
1.
This
is a merger
in which
a
large
integrated food
manufacturer
Pioneer
Foods (Pty)
Ltd
("Pioneer")
seeks
to
purchase
a
50%
interest
in
a
smaller
food
manufacturer,
Future
Life
Health Products (Pty)
Ltd
("Future
Life").
[1]
2.
Pioneer makes many products and is the largest manufacturer of
breakfast cereals in the domestic market. Included in its cereal
portfolio is Pro Nutro, one of the most prominent and enduring of the
local brands, described in the industry as an instant porridge.
3.
Future Life is a recent start up and entrant into the market. It
makes a variety of food products apart from its standard
porridge offering and is diversifying into snacks, other cereal
segments such as oats and has ambitions to go into many other food
types with an emphasis on a health offering. Its eponymous primary
and pioneering product can be consumed either as a porridge
or a food
supplement drunk as a shake. The issue in this case is whether this
product is competitive with the Pro Nutro product
made by Pioneer,
and if it is, what market they compete in. Over the course of this
case that question has received inconsistent
answers, with the
candidate markets ranging from one extreme position - they do not
compete at all as they are in separate markets,
to the other -
they are the closest competitors in a narrow market-for ready
to eat porridges.
4.
The appwach
io
market definition and the history of this case
are inextricably linked. When the merger was notified to the
Commission the parties
argued that the parties' products were not
substitutes. Pioneer's products, including Pro Nutro were breakfast
cereals. Future
Life, although similar to a breakfast cereal in
texture and appearance was not one, but rather what is termed a
"functional
food" and hence not considered a substitute for
a breakfast cereal. If the two products were not substitutes they
argued,
the merger did not lead to any increase in concentration of
Pioneer's share of the cereal market and hence posed no competition
concerns.
5.
The Competition Commission ("the Commission") investigated
the merger and concluded that the merging parties were correct.
Future Life's products it concluded were functional foods and hence
not substitutes for the breakfast cereals of Pioneer. However
during
the course of the investigation, Kellogg, a significant competitor of
Pioneer, disputed this market definition and suggested
that the
merger would harm competition.
6.
When the matter first came before this panel on 08 July 2015 we were
of the view that the Commission's conclusions that the products
were
not in the same market, appeared to be inconsistent with the
documents it had accumulated in the record. Further, Kellogg
was not
alone among the third parties interviewed by the Commission to
suggest that Future Life and Pioneers' products, in particular
Pro
Nutro, competed, some going further and suggesting, like Kellogg,
that they were each other's closest competitor.
7.
For this reason we felt the matter required further probing and
exercising our inquisitorial powers we requested further information
from the Commission, the merging parties and Kellogg.
8.
This
information
was subsequently
provided.
We also permitted Kellogg to intervene in
the
matter,
although
there
was no
formal
intervention
application,
because
the
merging
parties, to
their
credit,
raised
no
objection.
Kellogg
thus
performed
the
role of
challenging the merging parties' version,
a role
normally taken by
the
Commission.
We
have
found
that
participation
of
Kellogg's
legal
team
in this
matter
was useful
and
appreciate
the
efforts
made
by their
attorneys
and
expert,
even
though
ultimately we have not followed their suggested remedy.
[2]
Issues
raised by the merger
9.
This merger has raised two issues; first the market definition on
which turns an assessment as to whether the merger will lead
to
unilateral or co-ordinated anticompetitive effects; the second
relates to the control of the post-merger company. As we go on
to
discuss we see an interrelationship between these issues.
10.
On 09 November 2015 we gave our order to approve the merger subject
to the conditions which are attached to these reasons. These
conditions in our view mitigate the anticompetitive effects which we
have found the merger brings about as, for the reasons we
go on to
discuss later, these effects are likely to be transient and will be
mitigated by the timely, likely and sufficient entry
of an incumbent
competitor.
The
transaction description
11.
The transaction entails Pioneer buying 50% equity in Future Life Pty
Ltd. The remaining shares will be owned by Mr. Paul Anthony
Saad
("Saad") the founder and who wholly owns the company prior
to the merger.
12.
Pioneer and
Saad have entered into a shareholders
agreement
which
provides,
inter
alia,
for
Saad to continue managing the company for at least 5 years. The
agreement
also
purports to regulate the rights of the shareholders
vis
a
vis
one
another.
During
the course
of the
hearing in
response to questions
from
both
Tribunal
members and
Kellogg's
representative
it
became
apparent
that the
agreement
was
far from
clear as to
whether
Saad
enjoyed
full
autonomy to
manage
the
company
or whether
this
autonomy
was
constrained
by
Pioneer's
right to
veto
or
require
approval
of
certain
strategic
decisions.
[3]
13.
During their oral testimony both Saad and Mr. Phildon Martin Roux
("Roux"), the Chief Executive Officer of Pioneer
Food Group
Ltd ("Pioneer Group"), conceded this
point
but
stated
that
the
intention
of
the
parties,
regardless
of
how
the
agreement
had
been
drafted,
was
to
give
Saad
the
autonomy
to
run
the
company
subject
to
Pioneer's
rights
to
know
how the
business
was
being
run
hence
their
presence
on
the
board.
[4]
But
this was
contrary
to what
had been
uncompromisingly
stated
in the
merging
parties
competitiveness
report where
on
the
issue
of
post-merger
control the
position
was
explained
in this
way:
'The
merging patties
wish
to state
explicitly
at
the outset
that
they
seek
approval
of
the
Competition
Commission
in
respect
of
this
transaction
on
the
basis
that
Pioneer
will
have
an
unfettered
discretion
from
a
legal
point
of
view
insofar
as
the manner
and
form
of
control
that
it is able
to
exercise
in
respect
of
the
target firm
because
this
is
germane
to
the rationale
for
the
transaction
from
Pioneer,
Future life's
and
Mr
Saad's perspectives".
[5]
14.
At the end of the hearing however the merging parties had abandoned
this position and retreated to asserting that Roux's and
Saad's
understanding was the correct one, notwithstanding that this was far
from clear in the shareholders' agreement. For this
reason we imposed
as a condition for the approval of the merger a recordal confirming
Saad's status as having management control.
There are two reasons why
post-merger, the issue of control should be clear. In the first place
as a juristic fact in all mergers
the post-merger control position
needs to be clear. Merger notification is after all premised on a
change in control - one asks
the question from whom to whom? In the
second place in the context of this merger the issue of who controls
the company post-merger
is important to the substantive competition
analysis that we go on to discuss.
Who
the merging firms are
15.
The primary acquiring firm in this merger is Pioneer. It is a
subsidiary of Pioneer Group, a large food service company that
operates in several markets,
inter
alia,
of
relevance to this merger, in the upstream production of inputs to the
cereal market, the downstream cereal market and products
considered
adjacent to these markets such as snack bars.
16.
Over the past few years Pioneer has been an aggressive acquirer of
breakfast cereal brands in mergers that have been notified
to the
competition authorities. One such
acquisition
in 1999 was the acquisition of the Pro Nutro brand from Anglo Vaal
Industries.
17.
Pioneer Foods is now the number one firm in cereals and owns four of
the top ten brands. These brands are Weetbix, Pro Nutro,
Bokomo
Cornflakes and Alpen Nutrifix.
18.
Recently in April 2013 Roux, formerly with Tiger Brands, the leading
rival to Pioneer, took over as Pioneer Group Chief Executive
Officer.
In the hearing Roux was frank about what he saw as the faults of his
new company and what steps he was taking to rectify
them. Of
relevance to this transaction was an ambition to own winning brands
and hence his decision to acquire the
stake in Future Life,
which as we explain below, is perceived in the industry to be a
winning brand.
19.
Future Life
was founded
in 2007 by
i
ts
sole shareholder,
i.e. Saad
in Kwa-Zulu Natal. At that time Saad was
involved in
the South African feeding
scheme
program, which was
aimed
at
giving
basic
food
and
other
essentials
to
impoverished
and malnourished
communities
throughout
the
country.
This
work
inspired
him to
develop a
health product that
could be
successfully
and
affordably
commercialised.
Future
Life
took
2
years
to
fully
research and
develop. By
2009
the
product
was ready
and
the
first
sales
of
the brand
started
coming
through
from
retailers
and
pharmacies.
[6]
20.
Initially intended to be a health food, it has evolved rapidly into a
brand which defies easy categorisation; is it a cereal
or the
enigmatic new concept of functional food. According to Kellogg, for
whom there is no mystery about the categorisation, this
product is a
breakfast cereal and on its estimate, Future Life is now the third or
fourth largest cereal player produced in the
country and has the
number 5 cereal brand nationally.
21.
Given that Saad had no prior experience in this market, his product
is novel and his firm is start-up, this is no small achievement
in a
market dominated by large firms, including global players, with years
of experience in brand management and a superior access
to retail
particularly the large chains where the success or failure of a brand
is determined.
22.
But the
porridge-like
avatar
of
Pro
N
utro,
whilst
the
standard
product
of
Future
Life is not
the only
one it makes.
[7]
I
t
also makes crunch (a muesli-like cereal), smart drinks and snack
bars.
23.
Saad's vision is largely, if not wholly, what Future Life is about.
During his testimony what became clear was that he was an
entrepreneur, a maverick with a huge passion for what he does. But
nor is he some starry eyed idealist. He is underneath a smart
businessman who would not be doing this deal if he did not recognise
the advantage it would have for his company in expanding its
footprint into other products and other markets.
24.
This
accounts for a key reason for why Saad wanted this merger. Saad wants
to use the Future Life brand to expand
into other
product categories.
Several of
these don't require the
merger
and
hence
need
not be
discussed
now.
However
one
of
these does.
[CONFIDENTIAL].
Having
carefully thought through this option and seeing its limitations,
he explored
merger
options
with
other
firms.
None
were
appropriate
as he
explained
in his
evidence.
[8]
They
either
wanted
control
of
his brand
or were
not
interested
in a deal.
25.
Pioneer
proved
the
ideal
partner. As
we explain later
this
was not
a
first time
romance.
The
deal
was
initially
explored
but
not
consummated
a few
years
ago.
[9]
According
to
Saad
he
had
rejected
Pioneer's
offer
because
he was
still
developing
his
brand.
[10]
We do know
that only
after Roux
came
to Pioneer
was the
deal
possibility
resuscitated
in 2014
and
hence the
present
merger.
RELEVANT
MARKET
26.
When the merging parties notified this merger their position was that
the two firms made complementary not competing products.
Future Life
was a functional food and not a breakfast cereal. Pioneer on the
other hand was a manufacturer of breakfast cereals.
The Commission in
its recommendation accepted this thesis. However in the course of the
merger hearing the merging parties, but
not the Commission, changed
their position. This was largely it appears because their
expert witness, economist -Mr. James
Hodge ("Hodge"), did
not advocate this thesis. Rather his position was that Future Life
was a cereal competitor of Pro
Nutro but in a wider cereal market and
not necessarily the closest competitor of Future Life.
27.
Hodge was correct to change the argument here. The merging parties
contention of separate markets was wholly unsustainable and
at
variance with their own internal documents. The Commission however
did not change its view and remained steadfastly adamant
about the
correctness of its recommendation. This is how it put in the final
paragraph of the heads of argument that it presented
at the end of
the hearing:
"For these
reasons
the
Commission
has
not
changed
its
view
and recommends
an
approval
without conditions."
28.
It is a matter of regret that the Commission adopted so inflexible
and blinkered approach to the facts of this case. Fortunately
the
efforts of Kellogg ensured that th issues of the case were debated
exhaustively and thus enabling us to assess the evidence
with the
benefit of a proper consideration of the key issues.
29.
Whilst the debate moved on in the course of the hearing from
functional foods to a broader cereal market it is necessary to
briefly consider what the contentions were.
30.
The
term
functional
food
is
not a
recent
invention
of
Future Life
nor
is the
term
its own
and it
has
some
food
industry pedigree.
According
to
a
defin
i
tion
we
were
provided with
a
functional
food
is a food
that
beneficially
affects
one or
more target
functions
in the
body beyond
adequate
nutritional
effects
in
a way
that
is relevant
to
either
an
i
mproved
state of health and well-be
i
ng
and/or
reduction
of risk of disease. It is consumed
as part of
a normal food
pattern.
I
t
is not a pill, a capsule
or any form
of
dietary
supplement.
[11]
31.The
question for us at the beginning of the case - before the merging
parties changed their position on this - was whether this
industry
categorisation translated itself into one whose distinctiveness was
appreciated by consumers and hence to put into our
language,
constituted it into a relevant antitrust market.
32.
The functional food characterisation had two aspects to it. The first
was the idea of a food that was not culturally defined
by a
traditional meal time. Not a cereal associated with breakfast as the
first meal of the day although appropriate then too,
but also a
hunger buster capable of being consumed at any time of the day. The
second characteristic was a health one. The consumer
of the product
wanted it for some health attribute it possessed which the consumer
apparently found lacking in a traditional breakfast
meal.
33.
In the continuum between a cereal and a health supplement, at least
as one marketing document the merging parties sought
to rely on
suggested, Future Life lay closer to the supplement end than the
cornflakes end.
34.
However Future Life fell short of convincing us on this issue and it
seems the merging parties' economist.
35.
The standard Future Life product which is its smart sub-brand is
priced close to those of cereals like Pro Nutro and considerably
cheaper than the products located in the supplements markets which it
had tried to convince us it competed with. Nor admittedly
with one or
two exceptions did the latter supposed rivalry, evidence itself in
the parties marketing materials. Rather the most
consistent theme
through both firms marketing materials was a recognition of a close
rivalry between Pro Nutro and Future Life.
36.
Finally,
and
most
tellingly,
bar one
retail
outlet,
Future Life
found
itself
placed in the
most
significant
outlets
in the
cereal category
most often
from photos we
saw of the
displays
right
next to
Pro Nutro.
Saad
himself
conceded that he had not wanted
his product
in the
supplements
shelves
because of
their
low
footfall.
[12]
37.
We thus find that Pro Nutro and Future Life do not fall into separate
markets. However the more difficult question is that even
if they
fall into the same market what are its boundaries. This was the main
issue that pre-occupied the hearing.
Parties'
contention on the relevant market
38.
Commission:
The Commission, as we have seen, argued
that the merger did not result in an overlap as- the two firm's key
products, i.e. Pro Nutro
and Future life competed in separate
markets.
39.
Kellogg:
Kellogg
oscillated
between
two
theories
of the
relevant
market. The
one
contended
for
most
strongly
was
that
the
two
products
formed part
of
a
narrow
Ready to
Eat ("RTE")
porridge
category.
The
consequence
of this
market definition
was
that
the merging
parties
would
have
in
excess of
[CONFIDENTIAL]
of
the
market.
[13]
However
Kellogg
also
conceded
that
the
market
might
be
as wide
as
all
RTE
cereals,
in which
case
the
combined
market
shares
would
be
approximately
[CONFIDENTIAL],
comprising
of
Pioneer
at
[CONFIDENTIAL],
and
Future
Life
at about
[CONFIDENTIAL].
However
i
ts
central
contention
was
that
this was a market in which products were differentiated but that the
two products
Pro Nutro
and Future Life were each other's
closest
competitor. The merger would thus
lead to
significant unilateral effects and
the
possibility of Pioneer as
the leading
manufacturer of breakfast cereals acquiring
portfolio
power
vis
a
vis
retailers.
[14]
It
would also,
Kellogg
argued,
lead to
the
removal
of
a
maverick
firm
whose
behaviour
had
changed
the
structure
of the
market.
[15]
40.
Merging
patties:
The
merging parties
in their
final
argument,
whilst
still
contending
for
Future
Life
as
a
functional
food,
argued
that
the
relevant
market
was
a
broad
cereal
market,
which
included
hot
cereals
such
as
oats
and
in the
case
of
Future
Life,
should
i
nclude
supplements.
Expressed
differently,
having
once
contended
for
separate
markets,
the
merging
parties
now viewed
Future
Life as
a product
on the boundaries of two
markets -
one for
cereals
more broadly and one for supplements.
More
specifically
the
merging
parties
averred
"
...Pro
Nutro
and
Future
Life
are
not
particularly
and
uniquely
close
competitors".
[16]
Analysis
41.
Two conceptual problems arise in this merger. First the products that
serve as possible candidates for the relevant market are
differentiated from one another. Second that this differentiation
makes assessing the boundaries of the market the approach
antitrust
traditionally takes more difficult
42.
We will analyse this case by performing two exercises. First we ask
of Pro Nutro and Future Life whether they are each
other's closest
substitute, and then we ask, if they are, what the extent of the
market in which they operate in is.
1)
Closest substitutes
43.
One
of
the
factors
that
the
Act
expressly
recognises
in
assessing
the
competitive
effects of
a merger is "...
whether
the merger
will
result in the removal of an effective competitor".
[17]
Expressed
differently
what
this
is saying
is,
the
closer
two
products
are to
one
another
as
substitutes
the
more a
merger
between
them
may
mean the removal of an effective
competitor.
44.
European
competition
law
recognises
this
approach
as well. As
one
l
eading
text
on the
subject
puts
it:
"
The
closer
the
competition
between
parties
before
the
merger, the greater
the
loss
of
competition,
as a
result
of
the merger'.
[18]
45.
The reason for this is clear. If the merging parties' products are
the closest substitutes of one another then it makes
a post-merger
price increase more likely. Assume the acquiring firm owns product A,
which has as its closest substitute, pre
merger, product B which
it acquires as a result of the merger. The acquiring firm is likely
to consider that a post-merger price
increase for product A, may
still be profitable, because even though it may lose some customers
of A, as long as it can recapture
a sufficient number of those lost
customers if they are likely to switch to product B.
46.
Bishop and
Walker
point
out
that
when
dealing
with
differentiated
products
the
traditional
relevant
market
approach
fails
to
take
into
account
that
the
strength
of
competitive
constraints
can vary.
[19]
Thus they argue that irra broadly defined
market, a
merger between two firms whose
products
together have a high market share
may
despite
this,
be
less problematic
if the
products
are
strongly differentiated,
than
one where
the
market
shares
of the
respective
firms
are
lower,
but the
products
of the firm
are less differentiated.
In other
words what matters is
the
strength of competition between the two firms' products in relation
to that with other products of non-merging
firms
in the
candidate
relevant
market
47.
The central contention of Kellogg in this case is that Pro Nutro and
Future Life are the closest competitors of one another.
The merging
parties whilst belatedly acknowledging the existence of a competitive
dynamic between them, deny that they are the
closest competitors.
48.
Economists typically regard cross-price elasticity evidence as the
most robust test of whether two products are close
competitors.
Cross-price elasticity tests whether a price rise for product A will
lead to an increase in demand for product B.
49.
This would have been an ideal case for such a test because
supermarket data which are available to firms, would have been well
suited to such a test. However both economists in this matter, Hodge
for the merging parties and Mr. Patrick Smith ("Smith")
for
Kellogg, stated they could not perform such a test due to the lack of
time given to them in this case.
50.
This means that we have had to look at o her sources of evidence to
come to a conclusion on the closeness of competition
between the
products.
51.
In the
well-known
United
States
Supreme
Court
decision
in
Brown
Shoe,
the
court dealt
with
the
problem
of
whether
markets
for
products
could
be
segmented
into
smaller
ones
for
the purpose
of
considering
the
competitive
interaction
between differentiated
products.
The court suggested
a list of
what
it
termed
indicia to
use to
examine
the
evidence.
We
followed
this
approach
in our
decision
the
JD
Ellerines
merger.
[20]
In
Brown
Shoe
the
court held,
''[t]he
boundaries of [
a
product
market]
may
be
determined by examining such practical indicia--as industry
or
public
recognition
...,
the
product's
peculiar
characteristics
and
uses, unique
production
facilities,
distinct
customers,
distinct
prices,
sensitivity
to
price
changes, and specialized vendors."
[21]
52.
Although
the
Brown
Shoe
indicia
had become unfashionable, with economists
considering
that
more
recently
acquired
economic
tools could
do
a
better
job of
testing for differentiation,
it is still
followed
by
courts.
For
instance in the recent case
of
FTC
v
Sysco
Corporation
et
al
the
U.S.
District
Court
for
Columbia
took
the
approach
of
applying
the
indicia
despite
being
aware
of
this
criticism
and
having
economic
evidence
available
to
it
from
both
sides
of
the
dispute.
[22]
The
reason
for
this
we would
suggest
is that
despite the existence of economic tests,
in most
cases
we
find that that they either
are
not used, perhaps
because
of time or data constraints, or when they
are, remain the subject of contention
between
experts
and
hence
prove
inconclusive.
[23]
53.
We have decided to take the approach suggested in
Brown
and
apply some of the indicia to the facts of this case.
(i)
Views of industry participants
a.
Competitors
54.
The views of Kellogg on this issue have already been mentioned. The
views of the other rivals whilst less strident than
those of Kellogg
tend to confirm this view in respect of those who opined. For
instance RCL a competitor had indicated to the Commission
that it had
done its own research comparing the two as RCL wants to introduce its
own sorghum based brand into this category
called Monati
instant. Similarly Nestle, Alphen Foods and Tiger were of the view
that the two products were substitutes.
b.
Customers
55.
One customer, Mohamed Casoojee of the Independent Buyer Consortium
stated that the functional food distinction was not as big
a
difference as merging parties alleged. He was more equivocal when
asked by the Commission pursuant to a request from the Tribunal
to
provide greater specificity. This reticence however may have been the
instinct of someone not wanting to get further involved.
His initial
submission was strong on the point of closeness of competition. Given
that unlike Kellogg, he is a customer, not a
competitor of the
merging parties whose views need to be taken with the caution, we can
accept his evidence on this point is not
opportunistic.
(ii)
Internal marketing documents
56.
Both firms have third party consultancies undertaking marketing and
brand surveys for them from time to time. What is striking
about this
merger is that each party had separately acquired research, from
different consultants who independently came to the
same conclusion
viz. that Pro Nutro and Future Life are each other's closest
competitors. Granted, some surveys also mention other
products in the
cereal category that compete with these two products but none are as
consistently and as significantly signalled
to the respective firms
as the rivalry between the two products. The advice given is on how
to further differentiate the two products
and assess strengths and
weaknesses. However the fact that the firms tried to differentiate
their products respectively and target
different customer groups,
does not detract from the fact that they may still be each other's
closest substitute. It is precisely
to avoid head on competition that
rival firms seek to differentiate their products; it's another matter
if they succeed.
57.
The record shows for instance the extent to which Pro Nutro was
trying to model itself on Future Life by changing the look of
its-
product's box, -using sports stars to market it (each had their own
swimming star and soccer stars endorsing them).
58.
The strongest evidence of the closeness of competition comes from a
strategy document prepared for Pioneer by a company called
Carnelly
Rangecraft entitled the "Pro Nutro reality". This document
prepared in 2014 compares the respective market shares
of Pro Nutro
and Future Life over a two year period between 2011 and 2013. It must
have rung alarm bells at Pioneer Foods because
it contains a graph
that shows that Pro Nutro's market share (it assumes a two firm
market) had dropped from 63% to 38%. In a separate
graphic Future
Life was shown to have grown in three years from 26% to 43%. Other
points on the page headed
"
Current Pro Nutro
vs Future Life",
Category Drivers?,
PN
Innovation
-
concept,
taste?
59.
From its side Future Life had marketing material prepared for it that
compares the two products respective sales at the four
largest retail
outlets. ProNutro is the only other product compared in this
particular survey with Future Life.
60.
These documents support the Kellogg's view that there is a separate
porridge market with only these two firms as significant
players.
Strengthening the suggestion is that both firms had independently,
before the merger, instructed consultants to prepare
these
comparisons.
61.
Neither
firm gave a convincing
account of
why this should not be evidence that they are
each
other's
closest
competitors.
Roux to
be
fair was
not the
one who
commissioned the
Pioneer
survey so he could not comment on it, but he did concede under
cross
examination
that
this
constituted
"...
a
battle
plan
to
counter
Future
Life".
[24]
Saad
explained
that
the
surveys
were
done
because
Future
Life is
located
on
shelves
next to
Pro Nutro
in all these
outlets and
hence they competed for them for
shelf
space
or
in
retail
market
jargon
facings.
To win
more
facings
in
the
store
and
thus
be
more
visible
to
consumers
and
sell
more,
a
brand
has
to
win
more
facings
by
outselling
competitor
products;
in this
sense
Future
Life
competes
head
on with
Pro
Nutro for
shelf
space.
Put
differently,
Saad
sees
a
difference
between
being close
competitors
and
competing for shelf space because of what
he regarded
as a
retailer
imposed
shelving
regime as
opposed
to
his choice
of
close
rival
62.
However Saad may feel personally about what retailers dictate, the
fact is that the two products are placed next to each other
in stores
because the retailers perceive that they are nearest competitors and
hence Future Life is forced to compare its performance
with that of
Pro Nutro. This is entirely consistent with the case of Kellogg. That
Saad may not want this to happen is beside the
point.
63.
There are however other indicators in the marketing material
suggestive of a market wider than RTE porridges. Although Kellogg
has
discounted these as not meaningful, they appear in snippets in both
firm's marketing materials. Whilst certainly less compelling
than the
rivalry suggested between Pro Nutro and Future Life, they are
referred to nevertheless and it is a factor that we have
had regard
to when we discuss some of the economic evidence later.
(iii)
Company minutes
( natural experiment )
64.
There are no minutes for Future Life in the record however we have a
few for Pioneer Foods and they are illuminating on the
subject of how
Pioneer saw competition from Future Life.
65.A
2011 minute
records
that the
Pioneer
l
egal
department
was
attending
to a
complaint against
Future Life
regarding claims made on
its
packaging. Although
the
fact of
this complaint does not indicate which
brand
Pioneer saw as most threatened by Fut
u
re
Life,
it
later
becomes
clear,
as
the
same
minute
goes
on
to
state:
"Pro
Nutro volumes are still
a
concern
with
Future Life ( Moducare)
the
major competitor. 8-Fast volumes are declining all the time".
[25]
66.
Another
extract from the Pioneer minutes indicates that
Future
Life's (and Kellogg's)
"aggressive"
pricing
was
considered
a
threat
to
Pioneer
breakfast
products
which had
lost volume.
[26]
67.
But
the most
important
fact
that
emanates
from the minutes
is
an
indication
of
Pioneer's
strategy
toward
Future
L
i
fe.
In a minute
dated
30
May 2013 the following is
stated:
"Future
Life
growth
as
a
functional
cereal
remains
a
major
threat.
The
strategy
of
acquiring
Future
Life
was
not
successful.
The
alternative
strategy
to
develop
functional
c
ereals
now needs
to
be fast
tracked."
[27]
68-.Thereafter
followed a discussion of what the strategy was. According to the
minute, and as confirmed by Roux in his testimony,
the alternative to
buying out Saad, which as the minute noted had failed, was to launch
a product to compete with Future Life for
which testing of a new
ingredient was apparently taking place at a laboratory. It is not
clear from this extract as to whether
the product was going to be a
revamped ProNutro or a new brand. As it happened the new product was
not developed because when Roux
joined Pioneer discussions with Saad
were resumed and resulted in an agreement for the present
transaction. Roux's evidence is
he had realised that Pro Nutro could
not compete with Saad and hence the strategy of taking him on was
never going to happen. That
of course presupposes that the deal would
happen. It seems highly probable that if the deal did not happen that
Pioneer would not
meekly yield the field to Future Life.
Rather they would have taken counter measures and Pro
Nutro was best placed
to do this.
69.
The respective decisions made by Pioneer; to re-enter into
negotiations with Saad and to discontinue the strategy to compete
head to head with Future Life, whilst not simultaneous, were so close
in time as to suggest that they were interdependent. It is
probable
that the likelihood of a deal with Saad was what led Pioneer to
abandon going head to head with Future Life. But absent
the deal the
probability is that they still would. As the minutes indicate they
had too much to lose if they didn't.
(iv)
Survey evidence
70.
The bulk of the time during the hearing was devoted to hearing and
critiquing survey evidence introduced by the merging
parties
through two witnesses a Mr. Martin Neethling ("Neethling"),
the newly appointed Chief Marketing Officer of Pioneer,
and their
economic expert i.e. Hodge.
71.
This evidence did not form-part of the Commission's record and was
introduced by the merging parties for the purpose of the
hearing. It
emerged that of the surveys, two had been conducted for the purpose
of the hearing at the request of the merging parties.
72.
We will not spend as much time as the parties on this evidence. This
is for several reasons. The reliability of the surveys
was seriously
open to question with even the merging parties expert conceding that
in some respects one of the surveys contained
calculation errors.
Secondly, the data was peripheral to the main question as to whether
Pro Nutro and Future Life were the closest
competitors. Third, the
fact that data was prepared as survey evidence for the
sole purpose of this litigation as opposed
to survey evidence
conducted by firms in the ordinary course of business, such as the
marketing material referred to earlier, meant
that its independence
as research was less reliable. Finally, the conclusions sought to be
reached from the data was unusual and
unorthodox for the purpose of a
competition analysis.
73.
Bar one survey, which did not suffer from the same defects, and which
we go on to discuss, we have decided to reject any
reliance on this
evidence. To the extent that this evidence, at best, says something
about a concept known as repertoire shopping,
we go on to discuss
this more fully below.
(v)
Functionality
74.
In examining the issue of substitutability or whether products are
the closest competitors of one another competition
authorities will
also consider the functional characteristics of respective products.
With differentiated products the strength
of competition between
products may be assessed by the degree to which they differ or are
similar functionally. The merging parties
made much of what they
alleged were important product differences between Pro Nutro and
Future Life. They argued that Future Life
had far more health
ingredients than Pro Nutro. Future Life appears to have used this in
marketing particularly with dieticians
in order to make its product
distinctive from others. Yet Pro Nutro also promotes the health
attributes of its product. Dieticians
aside, whether consumers- would
detect-a profound difference between the products or know whether
claimed ingredients (such as
Moducare an input into Future Life) make
the products distinctive has not been established. Rather, it appears
from the packaging
and internal marketing materials that both firms
used health as a marketing strategy and it is unlikely that consumers
perceive
the differences or perceive them so as to diminish the
strength of competition between them.
75.
Kellogg
relied
on
functionality
to
make the
opposite
argument.
The
physical
characteristics of
the
products,
(both
a
porridge
like
substance,
which
came
in
a
standard
version
and
then
different
flavours
which
themselves
were
similar)
their
preparation
(both were
ready to
eat and did not require cooking time as
might other
porridges)
made the
products
functionally
similar.
[28]
Kellogg
also
relied
on
the fact
the two products
had
closely
resembling packaging (Pro Nutro having recently modified its
packaging
making
it
look
more
alike
to
that
of
Future
Life)
with
the
standard
product
coming
in
the same
size.
(vi)
Pricing
76.
The pricing
of two standard
products
whilst
not
identical is in a similar
range with
Pro
Nutro at
the time selling for
R33.99 and
Future Life for R35.95. In most cases Future Life's
standard
product
was
pricing
at
a
slight
premium
to the
standard
Pro
Nutro
product but
an
internal
Pioneer
document
from
a 2104
strategy
session
noted that
in KZN Future Life was
cheaper
than
Pro
Nutro.
[29]
77.
Future
Life was
also
planning a
300 gram pack (the standard
pack is 450
grams)
to
target,
as the
company
put
it, the
lower end
of the
market.
[30]
78.
Future
Life
also has
higher
value
increased
protein
product
priced
at
a
substantial
premium
to
the
standard
product
and
the
Commission
appeared
to
see
this
difference
as creating
a distinction suggesting the products did not compete with one
another.
However
as
Kellogg's
expert
Smith
pointed
out,
the
relevant
competitive
dynamic
is
with
the
standard
products
and thus
the
Commission
erred,
particularly
in a table
it prod
u
ced
for
this
hearing, in
failing
to
make this
distinction.
[31]
79.
In contrast
the price differences
between the
so called
health
products as evidenced from Future
Life's
own
internal
materials
shows
that they
price
at
a
substantial
premium to
the Future Life product suggesting that they are not in
the same
segment of
the
market
as the
standard
Future
Life
product
and
hence
competition
between
these products and
Future Life
would
be
much weaker
than the
more closely
priced Pro
Nutro. For
instance
one internal
document
from
Future
Life
notes
that
the
supplements are priced at three times that
of the
standard
product.
[32]
(vii)
Presence on retailer shelves
80.
Whether manufacturers approve or not retailer decisions have
substantial impact on consumer perceptions of substitutability.
The
evidence in this case was that all major grocery retailers placed the
two products Future Life and Pro Nutro next to one another
on their
shelves. The only exception to this practice is the pharmacy group
Dischem with whom Future Life has an arrangement to
give it a
dedicated shelf to all its products. Since the majority of sales are
through retail grocery outlets this exception does
not significantly
alter the fact that retailers present the two products to consumers
in a manner that suggests they are each other's
closest substitute.
Conclusion
81.
The evidence suggests that on a balance of probabilities, pre-merger,
Pro Nutro and Future Life were the closest substitutes
in a ready to
eat breakfast market. This evidence comes from the internal marketing
material of both merging parties which is consistent
on this fact,
views of a representative number of industry participants, the
concessions made in cross examination by merging party
witnesses and
most strongly from the board minutes of Pioneer and its actions
pursuant to this in the market place. However it
is also bolstered by
their functional and pricing similarities and the manner in which
they are marketed at retail level to consumers.
Boundaries
of the market
82.
Although we have determined that Pro Nutro and Future Life's standard
products are the closest substitutes for one another in
the market we
have not yet determined the boundaries of that market, a far more
difficult question.
83.
Both
Kellogg and the merging parties have through these proceedings
changed their
positions
on this. The merging parties recall had originally contended that the
products
operated in
separate
markets in
their
notification, but
abandoned
that position for
a broader
breakfast
market that
included
not just
RTE
products,
but hot
porridges
such as oats.
However
in their
original filing they
had
referred to Pro Nutro as
belonging
to
an
RTE market
that
excluded
hot
products.
[33]
84.
Kellogg had argued for a narrow RTE porridge product in which the
merging parties would have had
[CONFIDENTIAL]
of the
market with an increment of
[CONFIDENTIAL].
However in final
argument this contention was softened by the suggestion that the
market may include some RTE products but they
rejected the idea that
it could include hot products.
85.
As Justice Wood remarked in
Kraft Foods
a United States
decision in a cereal market merger:
"In
a
differentiated
product
market
such
as
the
RTE
cereal
market,
the
decision whether to include
a
product-in
the-market is
inevitably
somewhat
arbitrary,
because
not
all
products
in
a
relevant
market
compete
equally
with
all the other products".
[34]
86.
We cannot conclude with definity on the boundaries of the market as
we lack sufficient data on this aspect. It seems that the
market is
likely to be broader than that of RTE porridges. Kellogg appears
latterly to concede this. The only economic evidence
we have on this
point that is of probative value, is data from the survey firm
Nielsen and confirmed over a longer period by another
firm Aztec
which suggested that Future Life's gains and Pro Nutro's losses were
not wholly explicable by a shift from one to another
and that brands
such as Kelloggs cornflakes, not classified as a porridge, also seem
to have been harmed by the entry of Future
Life.
87.
If this data was unreliable Kellogg would have been in a very good
position to refute it; at least in respect of its own products.
Given
that Kellogg's legal team produced no evidence at all from their
client, we draw the inference that they could not, and hence
we can
assume, that at least in this respect, the data showing switching
away from other non-porridge brands to Future Life is
reliable even
though the extent of the effect is not known.
88.
Hence we conclude that the two products compete in a broader RTE
market which includes further non-porridge RTE cereal products
that
are competitive with those of the merging parties. However the latter
are likely to impose a weaker competitive constraint
on Future Life
and Pro Nutro than they impose on each other. Nor is it likely that
all RTE products can be considered substitutes
but precisely where
that boundary is to be drawn is difficult to establish on the present
evidence.
Repertoire
shopping
89.
An argument raised by the merging parties during the hearing was that
consumers of cereals engage in what is known as repertoire
shopping.
As explained by their expert (Hodge), repertoire shopping involves a
consumer choice to favour buying not one type of
cereal but several
at the same time. Thus a person who does the household shopping may
choose to buy a muesli cereal, a cornflake
and a porridge, at the
same-time, as part of a repertoire of-breakfast products.
90.
The relevance of the repertoire, on this argument of the merging
parties, is that consumers will substitute from one product
in the
repertoire to another in response to a price increase. Whilst at best
for the merging parties there was some evidence of
substitution on
some surveys it is by no means clear why this was happening nor
whether this was connected to a price increase
in another product.
91.
Nor is it clear that because consumers have a repertoire - which may
exist simply to provide consumers with variety to avoid
the monotony
of facing the same packet at the breakfast table each morning - tells
us anything of consumer behaviour in the face
of a price increase of
one product in the repertoire and if there is, whether it will be
replaced by another existing product in
the repertoire or another not
in the repertoire but a closer substitute, i.e. from one brand of
muesli to another as opposed to
from muesli to more cornflakes.
92.
We thus do not find that the repertoire shopping thesis tells us
anything meaningful about the likely future competition between
the
two products.
93.
The merging parties have attempted to introduce a theory of consumer
behaviour posited as a finding of fact in one case
(Kraft)
and to rely on it to support a general theory of substitution in
the present case. But in this case the supporting data shows at
best
shifts in buying patterns, but does not explain why they came about.
It cannot be relied on to establish that other brands
in a repertoire
act as a constraint on either Pro Nutro or Future Life.
Conclusion
on substantial lessening or prevention of competition
94.
On balance the evidence shows that although the relevant market in
which the merging parties products operates is probably
wider than
the RTE porridge market and would include certain other RTE products,
the exact boundary is uncertain. We can however
conclude that on a
balance of probabilities Pro Nutro and Future Life are less
differentiated from one another, than other candidate
RTE products in
this market, and hence a merger between-the two will weaken the
competitive constraint between them in two respects;
price and
non-price competition in the form of innovation and improved
products.
Efficiency
95.
Although
Saad in his
evidence
raised what
may be
considered
an
efficiency
defence by
alleging that the joint
venture
will allow him to
expand
his brand
into new products
in the
cereal
market that
he would
not
have been
able
to
do
timeously
without
the
production facility afforded
him by the
merger, the
merging
parties
in
final
argument
did
not seek to
rely
on
this to
justify
the
merger
and
accordingly
we
do
not
need to
consider
this
aspect
further.
[35]
Remedies
96.
Analysing the effects of this merger is complicated by the fact that
this is only a partial merger. Pioneer is only buying half
of Future
Life, whilst Saad, the other joint venture partner, has stated that
he has no financial interest in Pioneer Foods or
its brands. Thus,
post-merger, absent co-ordination, Saad's incentives do not change.
97.
Pioneer's might however. As only a 50% owner of the joint venture, it
could have the incentive to facilitate a price rise increase
for
Future Life. If the lost sales in Future Life's product are diverted
to Pro Nutro or to a lesser extent to other Pioneer brands,
supporting such a price rise would remain profitable as it owns a
100% of the latter.
98.
On the other hand Saad, not having any interest in the fortunes
of Pioneer and in the absence of collusion, would have the same
interest as he has had in pre-merger in ensuring the profitability of
his brand only and thus might be more circumspect about a
price rise
if it is not profitable for Future Life even if it is profitable for
Pioneer, by virtue of the diversion it might enjoy
from its 100%
owned brands.
99.
For this reason the remedy offered by the parties address two key
issues. It serves to remove the ambiguity around who controls
the
joint venture post- merger, making it quite clear that Saad does.
This condition means that for as long as the condition is
in
place-the incentives of Future Life or the acquired firm remain what
they were pre-merger.
180.
As Salop and O'Brien explain an article on the competitive effects of
partial ownership in mergers:
"A
corporate control structure characterised
by
a
silent
financial interest
is
one in
which
the acquiring firm is entitled to
a
share of
the acquired firm's profits
but
has no power
to
control or even influence
the
decisions
of
the acquired firm.
Instead
the
acquired
firm
acts
as
if
it
were
an
entity
independent
of
the
acquired
firm.
Silent
financial
interest
may
arise
from
the
issuance
of
non-voting
stock,
enumerated restraints on
decision-making
power
of
the
acquired
firm,
or
the
acquisition
of
a
financial
interest
too
small
to
ever
be
decisive.
Silent
financial
interest
does
not lead
to
any change in the incentives
of
the acquired firm" .
[36]
101.
Second, it reduces the possibility for
a collusive outcome by inhibiting
the
information flow between the joint venture and Pioneer. The mechanism
for doing so, whilst not perfect, ensures that
the Pioneer appointees
on the Future Life board are not operational people in the Pioneer
cereal business. In short they sit on
the board as representatives of
an investor not a competitor.
102.
The third mechanism introduced by the condition is to ensure that
Pioneer does not reduce investment in Pro Nutro for the next
two
years thus ensuring that the brands retain their pre-merger
competitive intensity in this respect.
103.
The conditions are capable of easy monitoring and cannot be
criticised in this respect.
104.
Notable however is their brief duration. The conditions apply for a
five year period and the investment condition in respect
of Pro Nutro
applies for a two year period. While their temporary nature may be
the subject of criticism there is a reason for
them not being much
longer.
105.
Barriers
to
entry
in
this market
are
high
-
the
costs
of
developing
a
winning
product
and
having
the
capital
equipment
to
manufacture
it
to
the
requisite
standard.
[37]
This
is
the
difference
between
producing
a
product
with
a
small
distribution product to smaller retail outlets, of which there are
many, and breaking
into formal
retail,
which
as
Saad's
own
experience
has shown,
is
not easy.
Indeed,
his success
thus far
is
an exception
not the
norm in
this
market
and his need to find a
partner
a
recognition
that
even
successful
start-ups
can
plateau
without
a
larger
partner.
106.
Further, a product capable of disciplining the pricing power of
Pioneer and the joint venture post-merger must be capable of
entering
the retail market by having access to organised retail outlets.
107.
The
standard
approach to
the entry
problem
in mergers
is to view
entry from
the
vantage
point of
whether
it
will
be
timely,
likely and
sufficient.
[38]
108.
What is notable in this market is the presence of strong competitors
with access to the retail market. Among Pioneer's
more significant rivals in the RTE
cereal category are a large domestic integrated
food company, Tiger Brands and two
international firms with a strong local presence in the form of
Kellogg
and Nestle.
109.
We
heard
evidence
already
that Tiger
has entered
the
market with
its own
RTE
porridge
brand
although
its
success
to
date
is
not clear.
However
anyone
of
these firms
is
likely
in the
event
of
a
sustained
price
rise
by the
merging
parties to
enter this
market
given the
success
of
Future
Life to
date,
a success
which
has not
gone
unnoticed
by rivals.
RCL had
indicated that
it is
trialling
a
similar
product.
There
are
also
a number
of
medium
sized
firms
producing
health
products
which
might
enter as
well
although
the effectiveness
of their
entry would
be open to
greater
doubt.
[39]
110.
For this reason a post-merger price increase by the merging parties
above a competitive level, will make entry of another RTE
porridge-like brand into the market from a strong player likely, and
given the strength of some of these firms, if it is one of
them, then
substantial. What is not clear is timeliness given that entry and
trialling of a new brand may take time. Hence the
time period of five
years for the control condition and two years for the investment
condition, is intended to deal with possible
anticompetitive effects
during the period when new entry is embryonic and not yet effective.
111.
We are satisfied then that the undertaking made by the merging
parties and which we have made a condition of the approval of
the
merger will remedy any short term anticompetitive effects and that
entry of new products by existing rival firms is likely
to make any
longer term anticompetitive effect less likely.
Public
interest
112.
The merger it was common cause would be employment neutral and have
no adverse effects on the public interest.
Conclusion
113.
For these reasons the merger was approved on 09 November 2015 subject
to the condition annexed hereto as "annexure A".
22
December 2015
Date
_______________________
Mr
Norman Manoim
Ms
Yasmin Carrim and Ms Andiswa Ndoni concurring
Tribunal
Researcher
: lpeleng Selaledi
For
the merging parties
: Adv. Jerome Wilson and Adv. Michelle le Roux instructed by Cliffe
Dekker Hofmeyr
For
Kellogg
: Anthony Norton and Paul Russell of Nortons Inc.
For
the Commission
: Daniela Bove and Anisa Kessery
[1]
We will use the term Future Life from now on to refer to both the
company and its brands which
bear the
same name.
[2]
Kellogg
had
proposed the divestiture
of the
Pro Nutro
brand.
[3]
Compare
paragraphs
9.6
and
9.4
for
example.
[4]
Transcript,
pages 88,
90, 94, 313,
368
and 369.
[5]
See competitiveness
report
record
page 463,
paragraph
1.7. See
also
paragraphs
1
A
and
1.6.
[6]
Record,
page 2368.
[7]
RCL a rival of both firms,
refers to
Pro Nutro as an old fashioned version
of
Future
Life.
Record,
page
1512.
[8]
Transcript, pages
77
-
78.
[9]
Saad
said
this
happened
3 or 4
years
ago
- Transcript
page 228.
[10]
Transcript
p.228.
[11]
Record, page 2369.
[12]
Transcript,
pages
57-58.
[13]
See Kellogg's heads of argument
paragraph
2 and reference to record,
pages 3260
and 3331.
[14]
Ibid
paragraph
3.
[15]
Ibid paragraph 4-5.
Kellogg
says that
Future
Life is one of the few
mavericks
to enter the market in the last two decades.
It relies
on
Roux
for the contention that Future Life had "..
changed
the structure
of
the market."
(See
Transcript
337).
[16]
See
merging
parties'
heads
of
argument,
paragraphs
1.3.2
-
1.3.4.
[17]
Section 12A(2)(h).
[18]
European
Merger Control: Rosenthal and Thomas,
Paragraph
C 150.
[19]
Bishop and Walker, Economics of European Competition Law, page 126
paragraph 4.87
[20]
JD
Group Ltd and Ellerine Holdings Ltd,
case
number: 78/LM/Jul00.
[21]
Brown
Shoe,
370
U.S. at 325.
[22]
Case
1:15-cv-00256-APM
Document
192 Filed
06/29/15
[23]
In Sysco the court noted the criticism of
Brown
Shoe
as
being 'old school',
but
nevertheless
noted
that:
"Courts
have relied on the Brown
Shoe
factors in
a
number
of
cases
to
define the relevant product market.
See,
e.g.,
Staples,
970 F.
Supp.
at
1075-80;
Cardinal
Health,
12 F.
Supp. 2d
at 46-48;
Swedish
Match,
131 F.
Supp.
2d
at 159-64; CCC
Holdings,
605 F.
Supp. 2d at 39-44;
H&R
Block,
833 F.
Supp. 2d at 51- 60.
[24]
Transcript,
page 346.
[25]
Record,
page
1864.
[26]
Record, page
1856.
[27]
Record,
page 3480.
[28]
Alphen
Foods told
the
Commission
the same
thing
about the
similarities
between
textures
of the two
products.
Record,
page
1507
[29]
Record,
page
1160: 2014
Pro Nutro
strategy
session.
[30]
Record, page 2967.
[31]
Transcript,
pages 393
-394.
[32]
Record, page 2219.
[33]
Record, page
498.
[34]
New
York
v Kraft Gen. Foods Inc.,
926
F. Supp.
321
(S.D.N.Y.
1995) at
334.
[35]
Note
Kellogg
challenged
the
submission
that
Saad
required
the
merger as
opposed
to
an
agreement
to access
this
manufacturing
facility.
[36]
Steven C.Salop and Daniel P. O'Brien "Competitive Effects of
Partial Ownership: Financial Interest and Corporate Control.
67
Antitrust Law Journal 559
- 614(2000) at 577.
[37]
That
barriers
to entry
are
high
is
supported
by a
number
of the
industry
participants
interviewed
by the
Commission.
See for
instance
the views
of
Nestle,
Record
page 499
and
Alphen,
record
page
1507.
[38]
See US Horizontal merger guidelines para 9, pages 27 - 29.
[39]
These firms
include
Vitality
Life,
Healthy
Life,
Gluco-less,
Smart
Life and
Nutri
Start.