Proposed acquisition by Nestle SA of AS Watson (Europe) Manufacturing Ltd and AS Watson European Investments Sarl

No. ME/1097/03

Report under section 125(4) of the Fair Trading Act 1973 on advice given on 4 April 2003 to the Secretary of State for Trade and Industry under section 76 of the Act

JURISDICTION

The merger satisfies the assets test and the share of supply test of the Act in the supply of bottled water coolers, bulk packaged water used in such coolers and mains-fed water coolers to offices and public places.

THE PARTIES

Nestlé S.A. (Nestlé) is the Swiss parent company of the Nestlé Group which is active in the production, marketing and sale of a variety of food products.  The Group's Nestlé Waters business supplies bottled water, water coolers and water for such coolers in the UK.  In the year-ended 31 December 2001, Nestlé Group reported pre tax profits of approximately £4.1bn on turnover of approximately £39.7bn and had gross assets of approximately £44bn.

A.S. Watson (Europe) Manufacturing Limited and A.S. Watson European Investments S.a.r.l. form part of the Hutchinson Whampoa Group of Companies.  They operate under the 'powwow' brand in the UK.  Powwow's UK business supplies water coolers and water for such coolers predominantly to places of work.  In the year-ended 31 December 2001, A.S. Watson (Europe) Manufacturing Limited reported a pre tax loss of £6.2m on turnover of £35.3m.  No published accounts are available for A.S. Watson European Investments S.a.r.l.  The value of the gross assets being acquired is £190.8m. 

ASSESSMENT AND RECOMMENDATION

The acquisition qualifies on both the assets test and share of supply test of the Act.  The parties overlap in the supply of bottled water coolers, bulk packaged water used in such coolers and mains-fed water coolers to offices and public places (together referred to as all water coolers) in the UK.  The bottled water cooler business is effectively a form of service and consists of the supply of the electrically powered cooler units, re-useable large bottles (around 19 litres in capacity) of water to use with such units and ancillary services such as maintenance of such coolers.  The supply of mains-fed water coolers is less like a service as no regular water deliveries are required although regular maintenance of the coolers units is still needed.

It appears that competition occurs at both national and regional levels, depending on over how large an area the customer requires water coolers.  The supply of bottled water coolers is centred on water bottling plants and distribution centres.  In densely populated areas it is likely that there will be more overlaps between distribution centres and increased competition for marginal customers, making an effective chain of substitution more possible in such areas.  In less populated areas, such a chain of substitution would be likely to be significantly less effective.

The merged entity would have [25-35] per cent [see note 1] of the supply of all water coolers in the UK (increment [10-20] per cent) [see note 1].  The parties would have a share of supply of bottled water coolers of more than [50-60] per cent [see note 1] in three regions: London, the Midlands and the North.  In conjunction with the relatively small size of the nearest competitors (both nationally and regionally), these factors could raise potential competition concerns from the possibility of unilateral effects including price increases becoming profitable.

However, this is unlikely to be the case because it is likely that the merged entity would still be constrained both by national and by regional or local competitors in the areas where it would operate.  In addition, low set up costs indicate ease of entry into the industry and the expected growth in the industry over the next few years is likely to reduce the level of concentration through the entry of new firms.  Recent new entrants include Struthers (Lochwinnoch) Ltd and AG Barr.

Although Nestlé owns several brands of retail bottled water, vertical issues are unlikely to reduce competition, as little emphasis is placed by consumers on the type of water used and supplying such branded water instead of non-branded for bottled water coolers would increase costs to a large degree.

On these grounds we recommend that this merger is not referred to the Competition Commission.

NOTES

1. Actual figures replaced by a range at the request of Nestlé.

Back to top