Affected market: Manufacture of beer
The OFT's decision on reference under section 33 given on 9 July 2004
Scottish Courage Limited (SCL) is a subsidiary of Scottish and
Newcastle plc (S&N) a major brewer which is also active in the
wholesale of beer to both the on-trade and off-trade and the retail of
beer (see [note 1]). Northern Clubs' Federation Brewery
Limited's (Federation) roots lie in running working men's clubs in
the North East of England. It owns one brewery located in Dunston,
Gateshead, a wholesaling operation and 36 tenanted pubs and clubs. Its
turnover in 2003 amounted to £55.6 million.
SCL proposes to acquire substantially all of the business and assets of
Federation (the Business). The administrative deadline is 16 July 2004.
As a result of this transaction SCL and the Business will cease to be
distinct. The parties overlap in the supply of beer in the Tyne-Tees
region and the share of supply test in section 23 of the Enterprise Act
2002 (the Act) is met. A relevant merger situation is likely to be
The parties overlap in the supply of beer by brewers, the wholesaling of
beer and the on-trade retail supply of beer.
Previous cases (see [note 2]) have segregated the supply of beer
from other beverages (including cider, wine, spirits and soft drinks).
There are three main levels of activity in the vertical supply chain in
the beer industry which past cases have identified as being separate
segments for assessing competition:
a) the supply of beer by brewers; (see [note 3])
b) wholesaling and distribution of beer; and
c) the supply of beer by retailers.
At the wholesale and distribution levels, brewers may be active in
selling not only their own beers but also beers and other drinks
produced and sold by other brewers and drinks suppliers. In
Interbrew/Bass, the Competition Commission (CC) drew a distinction
between wholesaling to the on-trade (to pubs, restaurants etc) and
wholesaling to the off-trade (off-licences, supermarkets), because of
differences in packaging and distribution requirements.
At the retail level, previous cases have divided the retail level into
the on-trade and off-trade. The overlaps between the parties in the
on-trade segment are minimal. Nationally, the merger results in an
increment of less than 0.06 per cent (see [note 4]) Locally,
the merger does not create or strengthen the parties' position to 25
per cent of pub licences or more in any PSD (see [note 5 ]).
The overlap in on-trade retail is therefore not considered further.
The relevant frames of reference in this case are therefore considered
to be the brewing of beer, wholesaling of beer to the on-trade and
wholesaling of beer to off-trade retailers.
We have received some comments suggesting that the above frames of
references may no longer be an appropriate framework within which to
analyse competition. First, other alcoholic drinks may compete with
beer more closely than in the past due to changing consumptions
patterns. Second, segmentation by types of beer may be appropriate, as
used by the CC in Interbrew/Bass. On neither basis would the
conclusions of our competition analysis differ and so neither
possibility has been investigated further.
In Interbrew/Bass, the effects of the merger were primarily considered
across Great Britain but also across Scotland, and England and Wales,
and to an extent at a regional level for brewing (using TV regions). In
this particular case the parties have a stronger presence in the North
East. A cautious approach has been taken in this case and competition
has been analysed on national and regional bases.
attached (see [note 6]) sets out the parties' shares of supply
for each frame of reference:
The increments nationally are small and do not raise concerns. The
shares regionally, although large for brewing and wholesaling to the
on-trade, do not raise concerns given that a number of large competitors
will remain in the region post-merger (such as Carlsberg and Interbrew)
and third parties believed that the merged entity's behaviour would be
further competitively constrained by alternatives outside the Tyne-Tees
Some third parties were concerned about the effect of the merger on the
supply of own-label beers to retailers. However, a large number of
alternative own-label suppliers would remain post-merger and so no
competition concerns in this regard arise as a result of this merger.
Barriers to entry
At the brewing level, barriers to entry are considered high. Entry
would involve construction of a new brewery (involving large sunk
costs), marketing costs and access to retailers. At the wholesaling
level, distribution is characterised by economies of drop size and
density. Entry would need to be on a fairly large scale to be cost
competitive and allow the entrant to compete closely with the merged
entity. Entry at either level is therefore considered to be difficult.
Countervailing buyer power is considered to be limited to a small number
of retailers, such as major supermarkets and, to an extent, large
No vertical concerns arose in this case.
THIRD PARTY VIEWS
The majority of third parties were unconcerned about this merger.
The parties overlap in brewing and retailing of beer, and wholesaling of
beer to the off- and on-trade. No competitive concerns arise on either
a national or regional basis within each of these frames of reference.
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.
This merger will therefore not be referred to the Competition
Commission under section 33 (1) of the Act.
- S&N would like to make clear that it is only active in the retail
of beer through a small number of tenancies.
- Case No. IV/No.582 Orkla/Volvo (1996), Interbrew SA and Bass PLC: A
report on the acquisition by Interbrew SA of the brewing interests of
Bass PLC (2001, Cmnd 5014), Case No COMP/No.1925 S&N/Groupe Danone
(2000) and Case No. COMP/No.2740 S&N/Hartwall (2002)
- Brewing includes packaging and marketing of the beer as well as the
actual brewing operation itself
- Post-merger, the combined entity will have 0.13% of pub licences in
- Petty Sessional Division.
- The off-trade data are taken from Scantrack. The on-trade data are
taken from AC Nielsen.