Earlier this year we published an article considering recent approaches to product market definition in UK consumer goods merger decisions. The CMA's recently published decision on the acquisition by Hain Frozen Foods UK Limited of Orchard House Foods Limited is another reminder about the scope for markets to be defined narrowly in consumer goods mergers and the potential implications for specialist producers.
Hain and Orchard are suppliers of own-label chilled freshly squeezed fruit juice to both retail and food service customers in the UK. The parties submitted that the appropriate frame of reference for the competitive assessment of the deal should comprise all branded and own-label chilled fresh fruit juices, including chilled freshly squeezed fruit juice, chilled not-from-concentrate (NFC) juice and smoothies. The CMA considered a range of narrower alternatives.
2. Freshly squeezed v NFC
The CMA identified differentiating demand factors between freshly squeezed and NFC juices, including the 'flatter' taste, longer shelf life and lower prices of NFC juices. Market testing highlighted that a price increase of more than 5% to 10% in respect of freshly squeezed juice would be needed to trigger consumer switching to NFC alternatives, and suggested that freshly squeezed juices are seen as a superior quality product, sometimes favoured by more affluent consumers. On the supply side, the CMA noted the significant differences in manufacturing methods and reported that no NFC producers were interested in switching to manufacture freshly squeezed juices, despite, in some cases, their customers having asked them to do so in the past. On that basis the CMA found insufficient evidence to be able to conclude that NFC and freshly squeezed juices compete in the same market.
3. Own-label v branded
The CMA referred to previous UK consumer merger decisions, which do not take a uniform approach to the question whether branded and own-label goods compete, and emphasised the need for a fresh assessment on the facts of each case. Interestingly, the CMA cited the fact that retailers tend only to sell own-label freshly squeezed juices, whereas food service customers mainly sell branded equivalents, as evidence of a limited awareness of opportunities for substitution. Some customers reported that pricing and brand loyalty were also important distinguishing factors, but most customers indicated that consumers would switch from own-label to branded in the event of a small price increase. Acknowledging the mixed nature of the available evidence, the CMA took a cautious approach and assessed own-label separately from branded juices.
4. Retail v food service
The CMA referred to previous UK merger decisions recognising that suppliers may be able to price discriminate between the two types of customer. In this case, however, the available evidence was mixed. Some customers suggested that product labelling and package formats differentiated supplies to the two types of customer, whilst some competitors indicated that retailers are sometimes more concerned about product quality than food service customers, which tend to focus on price. Again, on a cautious basis, the CMA decided to assess the competitive impact of the deal on the basis of the narrower possible market definition of separate markets for retail and food services.
5. Substantive assessment and commitments
Once the CMA had decided to assess the transaction on the basis of the narrow potential frames of reference outlined above, the outcome of the substantive assessment was almost inevitable on the facts of this case:
- In respect of the wholesale supply of chilled own-label freshly squeezed fruit juice, either to retail and food service customers separately or to both of those customer groups together, the merging parties' combined market shares were between 90% and 100%;
- The merging parties were found to be each other's closest competitors in respect of the wholesale supply of freshly squeezed juice (indeed one internal memorandum prepared by Orchard for the purposes of the merger failed to name any other competitors at all).
The CMA concluded that, on the basis of horizontal unilateral effects resulting from the loss of actual competition in the wholesale supply of own-label chilled freshly squeezed juice to retail and food service customers in the UK, the deal would result in a substantial lessening of competition.
On 1 June 2016 the CMA indicated that it is considering commitments proposed by Hain to divest its UK chilled own-label freshly squeezed juice business, including manufacturing assets, key staff, know-how and customer contracts, as a going concern to an upfront buyer (i.e. a buyer approved by the CMA as a pre-condition to clearance).