Proposed acquisition by Frito Lay Trading Co GmbH, a subsidiary of Pepsico Inc, of certain assets of the Golden Wonder Group Ltd, namely the Wotsits brand and associated production and distribution facilities

No. ME/1302/02

A report under section 125(4) of the Fair Trading Act 1973 on the advice of the Director General of Fair Trading, given on 8 July 2002, to the Secretary of State for Trade and Industry under Section 76 of the Act

JURISDICTION

The merger satisfies the FTA's share of supply test in respect of the supply of savoury snacks in the UK.

THE PARTIES

PepsiCo is a major food and drink supplier, with a substantial presence in salty snacks, refreshment beverages and branded juices. Frito Lay Trading Co GmbH (FL) is a subsidiary of Pepsico Inc (PepsiCo). FL's Walkers Snack Food Division (Walkers) is best known in the UK for its Walkers crisps, Quavers, Doritos and Monster Munch products. In the year-ended 31 December 2001, Walkers reported pre-tax profits of £[ ] (see note 1) on turnover of £[ ] (see note1). Gross assets at that date were £[ ] (see note 1).

Golden Wonder Group Ltd (GW) makes and distributes bagged snacks. In the year ended 30 June 2001, GW reported an operating profit of £14.6m on turnover of £152m. Gross assets at that date were £[ ] (see note 2). The transaction involves the proposed acquisition by FL of the Wotsits brand, certain production lines, and GW's van sales business (Golden Wonder Snack Services) comprising 150 delivery vans, 18 depots, and the employees and customer details of that business. The parties are unable to estimate the individual gross value of each of the assets being acquired but have advised that the total consideration being offered is approximately £[ ] (see note 1), of which we are told that a substantial proportion is attributable to goodwill. If this transaction goes ahead, the remainder of GW is to be acquired by Snack Factory Ltd (SFL) in an independent transaction on which we have advised separately.

ASSESSMENT

Relevant markets

The parties overlap in the manufacture and supply of savoury snacks in the UK. Savoury snacks, at their widest, consist of nuts, crisps, extruded snacks (such as Wotsits), corn snacks and baked snacks. The Monopolies and Mergers Commission (MMC) examined this sector in 1982 in the course of their investigation into the proposed merger between Nabisco Brands Inc and Huntley Palmer Foods Plc. The MMC defined a market covering all the product types mentioned above, with the exception of nuts sold as cooking ingredients. We have received no evidence to suggest that any of the above products should no longer be considered as a substitute for one another.

Third parties have however suggested that, on the demand side, there may be a distinction between sales of savoury snack multi-packs in large multiple retailers for take-home/sharing consumption (or 'lunchbox' purchases) and sales of single packs via other channels, mainly independent and convenience outlets, for immediate consumption, characterised as 'impulse' purchases.

For lunchbox consumption, customers tend to purchase multi-packs of savoury snacks, typically as part of a weekly 'shop'. Around 80-90 per cent of savoury snacks sold in multiple retailers are in multi-pack form. For the snack manufacturers, their customers here will be the large multiple retailers. Another important feature of the lunchbox sector is the presence of own-brand savoury snacks, which represent a significant proportion of sales in major retailers.

Within the impulse sector, savoury snacks are typically sold in single bags alongside confectionery items. For manufacturers of savoury snacks, the customers are cash-and-carry wholesalers as well as wholesale distributors. Several manufacturers have set up their own sales forces to sell directly to small retail outlets. In practice the main suppliers of branded goods currently sell into both lunchbox and impulse sectors and consumers appear to access and use both sectors. Therefore, as the MMC found in 1982, it does not appear that either sector will be immune from competition from the other.

The parties and third parties were in broad agreement that the geographic market was the UK.

Horizontal issues

Post merger, Walkers' share of total UK savoury snacks sales (by value) will increase to 47 per cent (increment 3 per cent): it will have 5 of the top 10, and 8 out of the top 20, snack brands (by value) in the UK. The most significant competitors following the acquisition will be KP (6 of the top 20 brands) and GW/SFL (3 out of the top 20 brands).

The acquisition of Wotsits thus represents only a relatively small increment to Walkers' current strong position in a sector where new products and brands are constantly being introduced. Examples of successful recent new entry include Pringles and Kettle Chips.

The merger might lead to a reduction in competition if the combined GW/SFL business represented a significantly weaker competitive force than GW did pre-merger. This might be the case as the Wotsits brand will no longer represent a significant competitive constraint on Walkers.

Vertical issues

The acquisition of GW's van fleet and depots has caused concern among wholesalers and competitors, who argue that this will foreclose them from access to outlets in the impulse sector. Walkers already operates a fleet of 51 vans servicing the on-licence sector and a further 27 vans operating in the Meridian TV region as 'Walkers Local'. The acquisition of a further 150 vans (and depots) was considered by some third parties to be a significant 'step change' in Walkers' UK competitive position.

However, the van sales business is, in effect, moving from one vertically integrated supplier to another. While this is likely to lead to some shift in product sales made by these vans from GW and other savoury snack manufacturers to Walkers, this is unlikely to be a significant volume of product. Moreover, manufacturers and suppliers will have a number of alternative ways through which to supply outlets in the convenience and impulse channels, including delivered wholesalers.

As regards the cumulative effect of the increase in Walkers' position at the horizontal level together with its increased presence downstream in delivery to the impulse sector, this transaction is not expected to lead to a substantial lessening of competition within the impulse sector. On the supply side, manufacturers will still have a range of alternative means of accessing that customer group. On the demand side, consumers will continue to have a range of alternative purchase options, including buying more savoury snacks in the weekly shop, to avoid impulse purchases.

Third party views

A substantial volume of representations has been received on the proposed acquisition. The concerns related to both the unilateral and portfolio effects arising from the merger. It was alleged that:

• Walkers currently offered worse terms and prices than other manufacturers and the addition of a new brand would inevitably lead to an extension of that effect;
• the loss of the Wotsits brand reduced the ability of GW to compete due to the loss of its only top ten brand;
• the acquisition of GW's distribution fleet would also increase Walkers' market share since sales currently made from these vans will change directly from GW (and other manufacturers' products carried on GW vans) to Walkers' products (although Walkers claimed that it would continue to carry third party products on these vans);
• the acquisition also further reinforced Walkers' portfolio of leading brands, which several third parties alleged would increase its ability to act anti-competitively.

In this respect, it was alleged that Walkers currently:

(a) pays lump sums to retailers to separately locate competing brands or de-list them;

(b) offers incremental retrospective rebates based upon volume of sales above the general rate of growth in sales of savoury snacks;

(c) places display stands for exclusive Walkers' use within smaller retailer shops leaving little space for other competitors to place products; and

(d) offers preferential terms to retailers who allow Walkers to manage their savoury snack stock.

The views of Walkers

Walkers acknowledged that, as a consequence of the acquisition of the Wotsits brand, it will have an increased presence in the top 10 savoury snack brands with an increase in overall share of about 3 per cent. It argued that the increment should, however, be seen against the backdrop of a huge product choice (some 350 lines), low barriers to entry and a general downward trend in retail prices.

The GW van sales operation currently sells Walkers' and other competitors' products alongside GW's products: the proportions (by volume) being about 77 per cent GW and 23 per cent others (Walkers 4 per cent). The volume of snacks sold on the vans represents less than [ ] (see note 1) per cent of the impulse segment with around [ ] (see note 1) (out of approximately 350,000) outlets in the impulse sector serviced by the vans – just under [ ] (see note 1) per cent of this sector by number (perhaps slightly more by value). Walkers claimed the acquisition of GW's van sales operations did not give it a new route to the convenience and impulse sector since Walkers already had a presence there through its existing distribution network and the sale of its products via other van delivery systems. There are also other competing routes to the market, notably through cash-and-carry and delivered wholesalers.

On the question of the allegations concerning its current trading practices, Walkers explained that it had transparent trading terms and conditions which it applied irrespective of the status of the customer. Discount incentives within its pricing structure comprised a mixture of 'Cost to Serve' (volume based) and 'Invest for Growth' (based on greater turnover of Walkers' products).

Walkers said it had no exclusive arrangements with any retailer, nor was it aware of any de-listing inducements having been offered. It did, however, accept that its trading terms may, indirectly at least, have a partial effect on retailers stocking competitors' products but that was one of the effects, it said, of competition and consumer choice. It did not believe that its discount structure was anti-competitive either in intention or effect. Walkers confirmed that where it had supplied branded stands, it required that these be used solely for the display of Walkers' products – the commercial objective being to secure maximum visible value from the fixtures supplied. This was essentially Walkers using its own stands to promote its own products.

Public interest issues

Four production lines for the Wotsits brand will move from Corby to Coventry and one line from Scunthorpe to Swansea. [ ] (see note 1). While the relocation will result in job losses in the current locations these will be mitigated by new opportunities elsewhere.

CONCLUSION

By this transaction Walkers will acquire the Wotsits brand and production facilities as well as some 150 delivery vehicles and 18 depots. This will increase Walkers' share (by value) in savoury snacks by some 3 per cent to 47 per cent. Walkers will have 5 of the top 10 leading snack brands (and 8 of the top 20).

Many representations have been received about this transaction which some third parties perceive as giving rise to further consolidation in favour of a powerful competitor/supplier. In addition, significant concerns have been expressed regarding Walkers' current trading practices, but these concerns do not arise as a result of this merger situation. Indeed, the representations may be more relevant for possible investigation under the Chapter II prohibition of the Competition Act. We will consider them accordingly and intend to pursue the issues with the companies concerned once a decision on the merger has been announced.

The question at hand is whether the merger itself leads to a substantial lessening of competition. In that respect, the increment arising from the merger is not large and is attributable to only one brand (albeit the most profitable brand in GW's portfolio). This increment, in itself, therefore is unlikely substantially to alter the structure of competition among savoury snacks in the UK. In any event barriers to entry are not insuperable.

The acquisition of the van sales fleet will increase Walkers' presence in the delivery of savoury snacks to the convenience and impulse sector of the market. However, the acquisition of another 150 vans is unlikely to have a significant impact on its and others' ability to sell to impulse/convenience outlets, given the alternative routes available in accessing this sector. It is difficult therefore to see how Walkers' competitors would be foreclosed anti-competitively from accessing customers in this sector following Walkers' acquisition of GW's van sales operations.

In conclusion, while there are some questions about the nature of competition in this market, it appears unlikely that this transaction will lead to a substantial lessening of competition.

I therefore conclude and recommend that you do not refer this merger to the CC.

NOTES

1. Withheld at the request of PepsiCo.

2. Withheld at the request of GW.

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