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 created.
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.
The table 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 region.
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 pubcos.
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 the UK.
- Petty Sessional Division.
- The off-trade data are taken from Scantrack. The on-trade data are taken from AC Nielsen.