Diageo plc / Nolet Beheer BV

OFT closed case: Anticipated joint venture between Diageo plc and Nolet Beheer B.V. involving the 'Ketel One' business.

Affected market: Vodka

No. ME/3515/08

The OFT’s decision on reference under section 22(1) given on 29 February 2008. Full text of decision published on 11 March 2008.

Please note that square brackets indicate text or figures which have been deleted or replaced with a range at the request of the parties and third parties for reasons of commercial confidentiality.

PARTIES

Diageo Brands Holdings B.V. (Diageo Brands) is controlled by Diageo plc (Diageo). Diageo is a global company involved in the production, distribution, marketing, exporting and importing of spirits and wine. Diageo owns a number of brands, including Smirnoff vodka, Johnnie Walker Scotch whisky, Baileys liqueur and Captain Morgan rum.

Nolet Beheer B.V. (Nolet) produces, distributes and markets vodka. Nolet is the owner of two leading brands in the US market, Ketel One Vodkas and Ketel 1 Jenever. Nolet’s UK turnover in 2007 was [ ].

TRANSACTION

The agreement between Diageo Brands and Nolet to create a 50:50 company (Newco) was entered into on 5 February 2008. Newco will hold the intellectual property licence and distribution rights for Ketel One brands (the Ketel One Business), while Nolet will maintain the legal ownership of those brands and its manufacturing facility in the Netherlands. Diageo will, through Newco, have the exclusive rights to sell, distribute and import the brands within the Ketel One Business on a worldwide basis.

A statutory merger notice was received by the Office of Fair Trading (OFT) on 6 February 2008 and the OFT’s statutory deadline for deciding whether to refer the merger to the Competition Commission is 5 March 2008. The merger has also been notified to the competition authorities in the US and Germany.

JURISDICTION

As a result of this transaction Diageo and the Ketel One Business of Nolet will cease to be distinct. The parties’ combined share of supply of vodka in the UK is above 25 per cent and as a consequence the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

MARKET DEFINITION

The parties overlap in the supply of vodka.

Product scope

Diageo submitted that the appropriate frame of reference is the supply of vodka. In Guinness / Grand Metropolitan [see note 1] and Pernod Ricard / Diageo / Seagram [see note 2] the European Commission considered that the spirit market was segmented by spirit type (for example, vodka, rum, gin) because they are not substitutable or interchangeable from the viewpoint of either final customers or intermediate customers. The European Commission also found that there was no need for further segmentation based on quality levels such as premium/secondary brands or private labels. However, the European Commission considered that it could be the case that whisky should be further segmented by origin, particularly in relation to scotch whisky, and that narrower definitions could be appropriate to specific products or geographic areas. [see note 3]

Diageo’s internal documents suggest that there could be a split between standard, premium and super premium vodka, and that Ketel One is considered to be in the super premium bracket. Diageo submitted that these documents referred to the US market only, where such a distinction could be relevant, and that in the UK and Europe there is no single quality or price point (or range) which enables a meaningful distinction between those categories. Diageo does not recognise the existence of different vodka segments in relation to the UK market.

However, all third parties contacted by the OFT in the course of this investigation considered that the vodka market should be split into different categories in terms of price and/or quality due to lack of demand-side substitutability. There were divergences, however, on the classification of different brands under each category, and also the number of different categories (for example, own-label, standard brands, premium brands and super premium brands). In particular, some third parties identified Ketel One as a premium product, whereas others considered it to be a super premium vodka brand. There were also differences in relation to the price cut-off between premium and super premium brands, but the suggested cut-offs were in the £15-£20 range.

The third party competitors who responded to the OFT’s investigation had mixed views on the ease of supply-side substitution between standard brands and premium and super premium branded vodka. One competitor said that switching supply from other brands of vodka to premium and super premium brands would be relatively easy, but noted that gaining acceptance in the market place might prove difficult. Another competitor said that switching supply in this way would take around 12 months, and would require significant marketing resources to make the switch successful.

In this case, given the minimal increment to Diageo’s share of supply on either basis, it is not necessary to conclude on the issue of whether the supply of vodka should be further segmented.

Geographic scope

The parties submit that the relevant geographic frame of reference is the UK. This is consistent with European [see note 4] and UK [see note 5] precedents and is based on differences between countries in consumption patterns, logistic and distribution networks, marketing strategies, taxation and legislation. The evidence before the OFT does not suggest that it should deviate from this geographic frame of reference in this case.

HORIZONTAL ISSUES

The parties overlap in the supply of vodka in the UK, more specifically in the super premium branded segment.

Taking the supply of UK vodka as a whole, Diageo’s share is around 47 per cent, and Nolet’s is significantly less than one per cent. Post-merger Diageo will face competition from a number of alternative suppliers, including the next largest supplier, Glen Catrine (Glen’s Vodka) with a share of supply of approximately 15 per cent, and suppliers with smaller shares such as Vladivar, Absolut, Chekov and Stolichnaya. Accordingly, the OFT has ruled out competition concerns in the supply of vodka in the UK on the basis of an almost negligible increment in share of supply and the competition provided by other vodka suppliers.

Considering the most narrow segment, that is ‘super premium’ branded vodka (using retail prices above £15 as the relevant criterion) [see note 6] which catches Ketel One and Diageo’s Smirnoff Black, the combined share of supply is between [5-10] and [10-20] per cent, with a very small increment of between [less than five] and [less than five] per cent. [see note 7] On the basis of any other segmentation of the supply of vodka in the UK (for example, premium and super premium branded vodka), the increment in share to Diageo would be even smaller (that is [less than five] per cent). [see note 8]

Post-merger, the segment for super premium branded vodka in the UK will remain highly fragmented, with a number of suppliers with shares of supply at about the same level as Diageo’s, such as Bacardi (Grey Goose and 42 Below), Fior (Skyy), First Drinks (Reyka), MH (Belvedere) and Ocean Spirtis (Nemiroff). Bacardi will remain the leading supplier with approximately between [5-10] and [20-30] per cent of sales, closely followed by Skyy and Reyka each with approximately between [5-10] and [10-20] per cent. Accordingly, the OFT has also ruled out competition concerns on the most narrow segment, super premium branded vodka, on the basis of the small increment in share of supply and the continuing existence of a number of suppliers post-merger, including three suppliers that will continue to be larger than Diageo in this segment.

This assessment on horizontal issues is corroborated by third parties who confirmed that Ketel One’s sales in the UK are very limited, that there will continue to be plenty of choice in terms of brands and suppliers, and that this is accentuated by the fact that customers tend to multi-source from a number of distributors.

THIRD PARTY VIEWS

No third parties raised any competition concerns in relation to this case.

ASSESSMENT

The parties overlap in the supply of vodka in the UK. Some third parties suggested that the market for vodka should be segmented in terms of price and/or quality, but it was not necessary to conclude on this since the merger will only cause a very modest increment to Diageo’s share of supply on any market definition. In addition, there are alternative brands and distributors active in the UK, and no third parties raised any competition concerns.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTES

  1. Case No IV/M.938 - Guinness/Grand Metropolitan, 15 October 1997.

  2. Case No COMP/M.2268 - Pernod Ricard/Diaego/Seagram Spirits, 8 May 2001.

  3. Case No IV/M.938 - Guinness/Grand Metropolitan, 15 October 1997, para 23.

  4. Case No COMP/M.2268 - Pernod Ricard/Diageo/Seagram Spirits, 8 May 2001.

  5. Office of Fair Trading Anticipated acquisition by Diageo plc of the ‘Old Bushmills’ Distillery Company Limited 11 August 2005.

  6. Diageo noted that £15 was an arbitrary cut-off point used to create a worst-case scenario, that is, an overlap between Ketel and Smirnoff Black. A higher cut-off point to, say, £17 would cause Smirnoff Black and Ketel one to fall into distinct categories.

  7. At the request of the OFT, Diageo derived market share estimates upon which the ranges are based from IWSR. Given that a proportion of the total vodka market is accounted for by vodka brands that could not be individually identified (‘other imported vodka’) and therefore could not be classified as super premium or otherwise, two estimates were given. In one, all ‘other imported vodka’ was considered to be super premium and therefore it underestimates the other players’ market shares. In the other all ‘other imported vodka’ was considered not to be super premium and therefore it overestimates the other players’ market shares.

  8. This assumes Ketel One is categorised as a super premium brand

Published 29 February 2008