Commission, November 27, 2013, No M.7057

Dear Sir/Madam,

Subject: Case No COMP/M.7057 - SUNTORY/ GLAXOSMITHKLINE (RIBENA AND LUCOZADE SOFT DRINKS BUSINESS)

Commission decision pursuant to Article 6(1)(b) of Council Regulation No 139/20041

(1)     On 22 October 2013, the European Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No 139/2004 by which Suntory Beverage & Food Limited ("SBF", Japan), ultimately controlled by Suntory Holdings Limited ("Suntory", Japan), acquires sole control of the whole of the Ribena and Lucozade soft drinks business (the "Target Business", the United Kingdom) from GlaxoSmithKline plc ("GSK", United Kingdom), by way of purchase of assets. Suntory is hereinafter referred to as the "Notifying Party". Suntory and the Target Business are collectively referred to as the "Parties".

1.          THE PARTIES

(2)     Suntory is a Japanese company active in the following businesses worldwide: food and non-alcoholic beverages, restaurants, sports, flowers, service companies and cross-functional companies. Suntory is active in the soft drinks sector in the EEA mainly through its subsidiary Orangina Schweppes Group. It has a number of brands such as Orangina, Oasis, Trina, Sunny Delight, Snapple and V Energy.

(3)     The Target Business is active in the manufacture, distribution and sale of energy and sports drinks under the Lucozade brand and a number of soft drinks (non- carbonated juice drinks, still drinks, dilutes and carbonated flavoured drinks) under the Ribena brand, mainly in the United Kingdom ("UK") and Ireland. The Target Business comprises a factory based in Coleford (UK) and various related assets.

2.          THE OPERATION AND CONCENTRATION

(4)     On 9 September 2013, SBF and GSK entered into a sale and purchase agreement according to which Suntory will acquire sole control over the Target Business. The proposed transaction therefore constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation.

3.            EU DIMENSION

(5)     The undertakings concerned have a combined aggregate worldwide turnover of more than EUR 5 000 million2 (Suntory: EUR […]; the Target Business: EUR […]). Each of them has an EU-wide turnover in excess of EUR 250 million (Suntory: EUR […]; the Target Business: EUR […]). Only the Target Business achieved more than two- thirds of its aggregate EU-wide turnover within one and the same Member State. The notified operation therefore has an EU dimension.

4.                RELEVANT MARKETS

4.1.              Introduction

(6)     The proposed transaction primarily concerns the manufacture, distribution and sale of non-alcoholic beverages ("NABs") to the retail sector. NABs can be broadly divided into carbonated soft drinks ("CSDs") and non-carbonated soft drinks ("NCSDs").

(7)     Within NABs, the Parties mainly overlap in branded non-cola-flavoured CSDs and in particular in branded carbonated energy drinks sold to retailers. In addition, the Parties also overlap in a potential market for carbonated and non-carbonated  energy and sports drinks.3

4.2.      Relevant product market definition

4.2.1.      Type of NABs

4.2.1.1.     Non-cola-flavoured carbonated soft drinks (CSDs)

(8)     In previous decisions, the Commission has consistently considered a distinction between the supply of CSDs and NCSDs.4 With respect to CSDs, the Commission has also differentiated between non-cola-flavoured CSDs and cola-flavoured  CSDs.5 Furthermore, in Cadbury Schweppes/Pernod Richard6 the Commission concluded that individual flavours of non-cola CSDs may constitute distinct product markets, but ultimately left the market definition open.

(9)     The market investigation confirmed that CSDs and NCSDs belong to separate markets based on both demand- and supply-side considerations. Furthermore, the market investigation also indicated that cola-flavoured and non-cola-flavoured CSDs may constitute distinct product markets since customers are unanimous in considering that demand would not switch from non-cola-flavoured to cola- flavoured CSDs following a 5-10% price increase. Regarding potential segmentations based on individual non-cola flavours, the market investigation was inconclusive, though the majority of retailers have not indicated that flavours are essential for end-customers.

(10)    In any event, for the purposes of the assessment of the notified operation, the question whether cola-flavoured CSDs and non-cola-flavoured CSDs belong to separate markets, as well as the question whether a potential market for non-cola-flavoured CSDs should be further segmented based on individual flavours, can be left open since the notified operation does not raise serious doubts as to its compatibility with the internal market even under the narrowest market definition.

4.2.1.2.     Energy and sports drinks

(11)    The Parties' activities overlap in carbonated energy drinks. In addition, the Target Business is active in still sports drinks. In this respect, the Notifying Party submits that sports and energy drinks should not be viewed separately. In particular, it considers that still sports drinks should not be considered separately from carbonated sports drinks or energy drinks. It argues that sports and energy drinks are purchased by both sports participants and non-participants for both sporting and non-sporting occasions. It also notes that sports and energy drinks compete with CSDs such as Coca-Cola and other soft drinks brands (e.g. Pepsi, Fanta or Tango).

(12)    There are no previous Commission decisions specifically concerning carbonated energy drinks.7

(13)    According to the Notifying Party, sports drinks serve to rehydrate and replenish lost energy and are usually isotonic (i.e. containing a similar concentration of dissolved particles, such as salts and sugars, as human bodily fluids), but can also be hypotonic (i.e. containing a lower number of dissolved particles than human bodily fluids) or hypertonic (containing a higher number of dissolved particles than human bodily fluids). Energy drinks are beverages with a concentrated source of carbohydrates and sometimes caffeine, which are usually hypertonic and are used to top up energy levels.

(14)    The wide majority of respondents to the market investigation have confirmed the characteristics of sports and energy drinks described by the Notifying Party.8

(15)    With respect to whether (i) energy and sport drinks (still or carbonated) would constitute a distinct market from (ii) non-cola-flavoured CSDs or even a wider market for CSDs, the answers to the market investigation were mixed. While some customers and competitors tend to view them separately in terms of target groups (younger profile for energy users), end use (energy and sport drinks offer a function beyond hydration), formats (energy drinks tend to be sold as single serve or in impulse packs), and prices (energy and sport drinks are more expensive), some consider that these differences are not significant.9

(16)    With respect to a distinction between (i) energy drinks and (ii) sport drinks, on the one hand the market investigation indicated that there are no significant differences between the two products in terms of consumption habits, prices per litre or targeted consumer groups,10 but on the other hand it indicated that customer switching is unlikely since energy drinks and sport drinks offer a different benefit to the consumers (i.e. energy drinks are intended to provide energy boost, while sport drinks are intended to replace fluids lost during exercise).

(17)    From a supply side-perspective, the market investigation indicated that switching production between carbonated drinks is possible, but may require capital investment for changing the sizes of cans or for investing in pasteurization technology to heat- treat the beverages if preservatives are used. On the other hand, a switch from non- carbonated to carbonated drinks would in addition require substantial investment on carbonating equipment. Furthermore, any switch would require changes in recipes and labelling.11

(18)    In any event, for the purposes of the assessment of the notified operation, the exact delineation of the relevant product market concerning carbonated energy drinks can be left open. Irrespective of whether carbonated energy drinks constitute a separate  market or are part of wider markets, such as (i) carbonated and non-carbonated sports and energy drinks, (ii) non-cola-flavoured CSDs, or (iii) all CSDs, the notified operation does not raise serious doubts as to its compatibility with the internal market.

4.2.2.           Private label vs. branded products

(19)    In the dairy products markets, the Commission envisaged a potential distinction between branded products and private labels, although in some instances it came to the conclusion that they belong to the same market.12

(20)    The Notifying Party submits that, regarding both CSDs and NCSDs, private label products constitute a significant competitive constraint to branded products, and that branded and private label products may be considered as part of the same market.

(21)    The market investigation indicated that branded prices are higher and that customers would not switch from branded to private label NABs or carbonated energy drinks.13 While some competitors consider that private labels compete with branded NABs/carbonated energy drinks, others consider that brand loyalty would deter consumer switching. Regarding supply-side substitutability, though a supplier would be able to switch production from private label to branded NABs or carbonated energy drinks, some capital investment into building and promoting the brand is required.14

(22)    In any event, for the purposes of the assessment of the notified operation, the question whether private labels and brands are part of the same market can be left open since the notified operation does not raise serious doubts as to its compatibility with the internal market even under the narrowest market definition.

4.2.3.     Off-trade vs. on-trade distribution channel

(23)    The Commission has in previous decisions considered a further segmentation based on whether a product is sold through the on-trade/out-of-home channel (i.e. hotels, bars, cafes) or through the off-trade channel (i.e. sales to grocery retailers) given  that product offerings, packaging formats and sizes, profit margins, prices and distribution systems tend to differ between the two distribution channels. However, this distinction was ultimately left open.15

(24)    The Notifying Party considers that the distinction between the supply to the on-trade customers and the off-trade customers can sometimes be blurred, as for example wholesale customers can supply CSDs and NCSDs to both the on-trade and off-trade channels.

(25)    In any event, for the purposes of the assessment of the notified operation, the question whether there are distinct markets for the supply to the on-trade and off-trade channels can be left open since the notified operation does not raise serious doubts as to its compatibility with the internal market even under the narrowest market definition.

4.2.4.           Type of packaging

(26)    The Commission has not previously defined separate markets for types of packaging (e.g. PET, cans, glasses, carton) when considering transactions involving the acquisition of soft drinks brands, but rather for transactions involving the acquisition of private label bottling companies.16

(27)    In any event, for the purpose of the assessment of the notified operation, the exact delineation of the relevant product market can be left open as the notified operation would not raise serious doubts as to its compatibility with the internal market even under the narrowest market definition.

4.3.            Relevant geographic market definition

(28)    According to the Commission’s decisional practice,17 the market for the production and supply of NABs to off-trade and on-trade customers is national in scope in light of differentiated consumer preferences between countries, the importance of national brands, significance of marketing and advertising expenses, and the significance of transport costs in relative terms to the final value of the product.

(29)    The Notifying Party concurs with the Commission's decisional practice submitting that the relevant geographic markets for the supply of NABs and its potential segments are national in scope.

(30)    According to the market investigation, the markets for the supply of branded CSDs and branded energy and sport drinks are national in scope taking into account that: (i) tenders are generally national in scope;18 (ii) brand preferences differ across EEA countries;19 (iii) prices appear to vary across Member States and depend on  a  multitude of factors including macroeconomic drivers such as inflation, disposable income and exchange rates;20 and (iv) national sales forces are a pre-requisite in the countries where retailers have outlets.21

(31)    Therefore, for the purposes of the assessment of the notified operation, the relevant geographic market is defined as national.

5.       COMPETITIVE ASSESSMENT

(32)    The proposed transaction only leads to affected markets in the UK and Ireland in the following off-trade markets:22 (i) carbonated energy drinks; (ii) carbonated and non- carbonated energy and sport drinks; and (iii) non-cola flavoured CSDs. The Parties' combined market shares (and increments) would not be significantly different if    a distinction were made between the branded and private label segments, though market shares are slightly higher where private labels are excluded since the Parties are not active in private labels.

(33)    Suntory is present in the UK and Irish off-trade markets for carbonated energy drinks through its subsidiary Frucor, which produces the drink V Energy. It does not have any sports drinks brand, but it completes its non-cola-flavoured CSD portfolio with the brand Orangina, available in a range of citrus flavours. The Target Business competes with V Energy through the brands Lucozade Energy and Lucozade Revive. In sports drinks, it is present through the brands Lucozade Sport and Lucozade Sport Lite, whereas its portfolio of non-cola-flavoured CSDs also includes the Ribena Sparkling brand, available in raspberry and blackcurrant flavours

(34)    The tables below present the Parties' combined market shares in the UK and Irish off-trade segments under the various potential relevant product market  definitions.23

Table 1 – Parties' market shares (by volume) in the supply of branded NABs to the off- trade channels in the UK and Ireland

Source: Euromonitor data; Nielsen data; Notifying Party's estimates.

Table 1 – Parties' market shares (by value) in the supply of branded NABs to the off- trade channels in the UK and Ireland

Source: Euromonitor data; Nielsen data; Notifying Party's estimates.

(35)    As can be seen from these tables, the increment brought by the transaction under any potential market definition is always small (below [0-5]%).

(36)    Regarding carbonated energy drinks, in the UK the top competing brands are Red Bull ([20-30]%), Monster ([5-10]%), Relentless ([5-10]%) and Boost ([0-5]%).24  In  Ireland, competing brands are Red Bull ([20-30]%), Mountain Dew Energy ([0-5]%), BPM Energy ([0-5]%) and Monster ([0-5]%).25

(37)    In a market including energy and sports drinks (both carbonated and non-carbonated), in the UK the top competing brands are Red Bull ([20-30]%), Powerade ([0-5]%), Monster ([0-5]%), Relentless ([0-5]%) and Boost ([0-5]%).26 In Ireland, competing brands are Red Bull ([10-20]%), Club ([10-20]%), Powerade ([5-10]%) and Mountain Dew Energy ([0-5]%).27

(38)    In a wider market for non-cola-flavoured CSDs, in the UK the top competing brands are Red Bull ([10-20]%), Schweppes ([5-10]%), Fanta ([5-10]%), Irn-Bru ([5- 10]%), Sprite ([0-5]%) and Dr Pepper ([0-5]%).28 In Ireland, competing brands are 7-Up ([10-20]%), Club ([10-20]%), Red Bull ([5-10]%) and Fanta and TK (each [0- 5]%).29

(39)    The Notifying Party submits that the transaction does not raise competition concerns given that, irrespective of the relevant market definition, the increment is minimal and there are a number of strong competitors that can exert a competitive constraint on the Parties.

(40)    The market investigation indicated that Lucozade Energy and Lucozade Sport drinks are must-stock brands for retailers, while Suntory' V Energy drink does not present any specific advantage in potential markets for carbonated energy drinks or including both energy and sports drinks.30 From a demand-side perspective, the market investigation confirmed that Suntory's V Energy drink and the Target Business' Lucozade Energy and Sport drinks are not each other closest competitors.31

(41)    In addition, regarding a potential market for non-cola-flavoured CSDs, the market investigation  indicated  that  Ribena  Sparkling is a must-stock brand for   retailers while Suntory's Orangina is a small brand in the UK and does not present any specific advantage in the non-cola-flavoured CSD market.32 From a demand-side perspective, the market investigation confirmed that Suntory's Orangina drink and the Target Business' Ribena Sparkling drink are not each other closest competitors in the markets for non-cola-flavoured CSDs.33

(42)    Furthermore, the respondents to the market investigation indicated that there have been new entries and expansions in the last three years regarding both energy and sports drinks.34 In addition, other brands are expected to enter the market for carbonated energy drinks in the next two years.35

(43)    In light of the small market share increment, the presence of other strong competitors, the frequency of entry and expansions into the market and the absence of substantiated concerns voiced during the market investigation, it is concluded that the proposed transaction does not raise serious doubts as to its compatibility with the internal market with respect to the potential markets for the supply of (i) carbonated energy drinks, (ii) energy and sports drinks, or (iii) non-cola-flavoured CSDs to the off-trade channels in the UK and Ireland.

6.          CONCLUSION

(44)    For the above reasons, the European Commission has decided not to oppose the notified operation and to declare it compatible with the internal market and with  the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of the Merger Regulation.

1                      OJ L 24, 29.1.2004, p. 1 ('the Merger Regulation'). With effect from 1 December 2009, the  Treaty on the Functioning of the European Union ('TFEU') has introduced certain changes, such as the replacement of 'Community' by 'Union' and 'common market' by 'internal market'. The terminology of the TFEU will be used throughout this decision.

2               Turnover calculated in accordance with Article 5 of the Merger Regulation.

3               The Parties also overlap in the retail segment for branded NCSDs (such as still drinks and dilutes) but this overlap does not lead to affected markets.

4               Case COMP/M.6522 - Groupe Lactalis/Skanemejerier, Case COMP/M.2504 - Cadbury Schweppes/Pernod Ricard, Case COMP/M.2276 - The Coca-Cola Company/Nestle/JV.

5               Case IV/M.794 - Coca-Cola/Amalgamated Beverages GB. In subsequent decisions the precise market definition was ultimately left open. See for example Case IV/M.1065 - Nestle/San Pellegrino; Case COMP/M.2504 - Cadbury Schweppes/Pernod Ricard.

6                      Case COMP/M.2504 - Cadbury Schweppes/Pernod Ricard.

7               However, in a few previous decisions the Commission has discussed whether energy and sports  drinks form a separate market from other CSD and NCSD drinks. Case COMP/M.6522 - Groupe Lactalis/Skanemejerier; Case COMP/M.5633 - PepsiCo/The PepsiCo Bottling Group; Case COMP/M.2275 - PepsiCo/Quaker

8               Replies to questions 8 to 10 of the Commission's request for information pursuant to Article 11 of Council  Regulation (EC) No 139/2004 addressed to customers and competitors of 23 October 2013.

9               Replies to questions 12, 17, 19 and 25 of the Commission's request for information pursuant to  Article 11 of Council Regulation (EC) No 139/2004 addressed to customers and competitors of 23 October 2013.

10            Replies to questions 17 and 22 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to customers and competitors of 23 October 2013.

11            Replies to question 15 and 19 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to competitors of 23 October 2013.

12            Case No COMP/M.6242 - Lactalis/Parmalat.

13            Replies to questions 20, 21 and 22 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to customers of 23 October 2013.

14            Replies to questions 26, 27 and 28 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to competitors of 23 October 2013.

15            Case COMP/M.2276 - The Coca-Cola Company/Nestle/JV.

16            Case COMP/M.6924 - Refresco/Pride Foods.

17            Case COMP/M.6924 - Refresco/Pride Foods, Case COMP/M.6522 - Groupe Lactalis/Skanemejerier, Case COMP/M.5633 - PepsiCo/The PepsiCo Bottling Group.

18            Replies to questions 27 and 32 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to customers and replies to questions and 34 and 37 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to competitors of 23 October 2013.

19            As one competitor explains, "whilst market research would indicate that other EEA countries have experienced growth in the sales of taurine based energy drinks (such as Red Bull), the UK and Ireland has maintained a high volume of sales in the glucose based energy drinks segment. This segment of the market was created by the Lucozade brand in the 1980s." Reply to question 32.2 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to competitors of 23 October 2013. See also replies to questions 32.1 to 32.3 and 35.1 to 35.3 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No  139/2004 addressed to competitors of 23 October 2013.

20            Reply to question 32.3 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to competitors of 23 October 2013.

21            Reply to questions 25 and 30 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to customers of 23 October 2013.

22            The Target Business has minimal sales through the on-trade channel. In the UK on-trade sales represent approximately [0-5]% by value of the Target Business's total sales. In Ireland, only Lucozade Energy is sold for the on-trade channel through wholesalers. The Target Business estimates these sales to represent up to [5-10]% by value of the total sales of Lucozade Energy.

23            As mentioned before, the increment brought by the transaction if private labels were included would be similar (below [0-5]%).

24            Market shares based on value.

25            Market shares based on value.

26            Market shares based on value.

27            Market shares based on value.

28            Market shares based on value.

29            Market shares based on value.

30            Replies to question 36 the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to customers and replies to question 40 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to competitors of 23 October 2013.

31            Replies to questions 37 and 43 the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to customers and replies to questions 41 and 47 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to competitors of 23 October 2013.

32            Replies to question 36 the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to customers and replies to question 40 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to competitors of 23 October 2013.

33            Replies to questions 37 and 43 the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to customers and replies to questions 41 and 47 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to competitors of 23 October 2013.

34            For example, regarding carbonated energy drinks: Mountain Dew's new version called Amp Energy (Pepsi via Britvic), EQ8 Limited, KX (Tesco), Little Big Shot, Monster new variants and flavours (e.g. Monster Absolute Zero), No Limit Energy drink, Pussy Energy drink, Red Bull editions (cranberry, lime and blueberry), Relentless' new flavour Lemon Ice (Coca-Cola), Rockstar' new variants and flavours (e.g. Rockstar Super Sours), Supernatural, and other private label carbonated energy drinks. As regards other non-cola-flavoured CSDs, respondents mentioned for example Laimon Fresh (Green Me). With respect to sports drinks: new versions and flavours of Emerge sport drinks (mixed berry and tropical flavours), Gatorade (Pepsi via Britvic) and private label carbonated and non-carbonated energy and sport drinks.

35            Replies to questions 40.1, 41.1, 46.1 and 47.1 the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004 addressed to customers and replies to   questions 44.1 and 45.1, 50.1 and 51.1 of the Commission's request for information pursuant to Article 11 of Council Regulation (EC) No 139/2004  addressed to competitors of 23 October 2013.