The Australian Competition and Consumer Commission has decided that a revised proposal by The Coca-Cola Company to buy the international Cadbury Schweppes soft drink brands is likely to breach the merger provisions of the Trade Practices Act 1974, it announced today.
The ACCC decision was made after conducting extensive marketing inquiries.
"In March 1999, the ACCC opposed a proposal by The Coca-Cola Company to purchase those assets of Cadbury Schweppes primarily related to its beverage trade marks in Australia," ACCC Chairman, Professor Allan Fels, said today. "This original proposal envisaged that The Coca-Cola Company would retain only the Cadbury Schweppes international beverage brands (that is, Schweppes, Dr Pepper, Canada Dry). All other assets would be divested to an undetermined buyer.
"The merger parties lodged a revised proposal in April after being advised of the ACCC's decision. Under the revised proposal The Coca-Cola Company still proposed to acquire the international beverage brands of Cadbury Schweppes. Rights to produce, sell and distribute these brands would subsequently be licensed to The Coca-Cola Company's part-owned Australian bottler Coca-Cola Amatil. Cadbury Schweppes's Australian subsidiary, Cadbury Schweppes Australia, would otherwise remain intact. In addition, the proposal envisaged that Cadbury Schweppes Australia would acquire ownership of all carbonated soft drink brands currently owned by Coca-Cola Amatil and not licensed from The Coca-Cola Company. These brands include Kirks, Halls, Gest, Shelleys, Ecks, Marchants and Deep Spring.
"The revised proposal did not address the competition concerns that the ACCC had previously expressed with respect to the original proposal," Professor Fels said. "The core concern is that the premium Schweppes branded drinks remain part of the transaction.
"The merger would result in a market structure where the leading carbonated drinks in almost every category will be controlled by Coke. This will be the case in every channel: in supermarkets, milk bars and convenience stores, vending machines and in pubs, restaurants and entertainment venues.
"By marginalising the competition, the merger will result in an increased likelihood that consumers and small businesses will be paying substantially more for carbonated soft drinks if this merger goes ahead.
"With the premium Schweppes brand in its portfolio, The Coca-Cola Company's share (through Coca-Cola Amatil) of the Australian carbonated soft drink market, in terms of value, will increase immediately from its current share of about 65 per cent. While it is difficult to give a precise post-merger share figure, given the variations of the share increase in the different channels of carbonated soft drink distribution, a working estimate is of an overall value increase of several percentage points. (This is even after allowing for the transfer of various regional brands owned by Coca-Cola Amatil to Cadbury Schweppes Australia).
"Moreover, in the short to medium term, The Coca-Cola Company's share is likely to increase even further, particularly in all those areas outside supermarkets where carbonated drinks are sold, such as milk bars, vending machines, and in pubs and clubs. In these areas there is limited space and high margin premium brands like Schweppes and Coke dominate.
"However, second tier brands, like those Coca-Cola Amatil were to sell to Cadbury Schweppes Australia under this proposal, have very limited turnover in these channels. Cadbury Schweppes Australia's ability to compete effectively and vigorously will become increasingly marginalised.
"The Coke business will possess a pre-eminent range of national premium priced, premium branded carbonated soft drinks, whereas Cadbury Schweppes Australia's portfolio, apart from the Solo and Sunkist brands, will comprise primarily regional, price fighting brands that enjoy little or no brand strength and have a low presence outside of the supermarket channel.
"The ACCC is of the view that in outlets like milk bars and convenience stores, the proposed product range of Cadbury Schweppes Australia will not justify the allocation of refrigerator or shelf space that Cadbury Schweppes Australia currently enjoys. In the vending machine segment, Cadbury Schweppes Australia will no longer be able to participate effectively as its proposed range will generate significantly reduced stock turnover. In the 'on-premise' segment, which includes pubs, clubs and entertainment venues, The Coca-Cola Company, with its increased market power, will be in a position to effectively lock out the competition. In the supermarket segment, Cadbury Schweppes Australia will no longer have a national premium multi-flavour brand to pit against the Coke business, so its effectiveness in this channel may be marginalised as well.
"In these circumstances, Cadbury Schweppes Australia's post-merger portfolio is likely to have a more limited effect in constraining the price and output decisions of The Coca-Cola Company. The ACCC considers that, should this merger proceed, there is a likelihood that prices will rise in the carbonated soft drink market. This is a concern given that Cadbury Schweppes Australia, and the Schweppes brands in particular, have been a significant force in constraining prices, maintaining service levels and generating innovation in the carbonated soft drink market to date".
The ACCC has advised the parties of its view, which simply put, is that the merging in Australia of the international brands of The Coca-Cola Company and Cadbury Schweppes would be likely to have the effect of substantially lessening competition.
A number of overseas competition law enforcement authorities have been scrutinising the proposed Coke/Schweppes merger. The merger does not apply in the United States or France, where there has been a history of competition concerns with soft drink acquisitions nor in South Africa. On 24 May 1999, the merger parties announced that they were revising the international transaction to exclude more than 20 European countries, following regulatory resistance in a number of these jurisdictions.
