Bottling merger worries smaller beverage firms
A proposed merger of several large bottling operations in South Africa spells potential difficulties for small, independent beverage companies to get fridge space in the country’s biggest retailers.
The Competition Tribunal held a closed prehearing last week, after the Competition Commission recommended in December that several conditions be placed on the proposed merger of SABMiller PLC, Gutsche Family Investments and the Coca-Cola Company’s nonalcoholic beverages division.
If the commission’s recommendations are approved by the tribunal and the deal goes ahead, the merger will combine the bottling operations of four of the five authorised Coca-Cola bottlers in South Africa into one entity, to be known as Coca-Cola Beverages South Africa (CCBSA).
It will be controlled by SABMiller, with Gutsche and the Coca-Cola Company as minority shareholders. The proposed merger will see SABMiller transferring its Appletiser, Grapetiser, Fruitiser, Peartiser and Lecol brands to the Coca-Cola Company.
The merger is part of a broader amalgamation, in which the still-to-be-formed Coca-Cola Beverages Africa will also take control of the Coca-Cola South African Bottling Company’s existing African bottling operations in Uganda, Ethiopia and Kenya. Despite being approved by the Common Market for Eastern and Southern Africa’s Competition Commission late last year, the move has prompted speculation about its potential effect in the region.
South Africa’s Competition Commission has raised concern about possible consequences. These include the merger’s effect on suppliers, the dilution of black ownership in the supply chain and the effect on employment in the sector and on small companies by one dominant player.
The merging parties intend to develop “new channels of distribution” for their products. Following negotiations with the commission, they have committed to invest R500-million “to develop the downstream distribution and retail aspects of CCBSA as well as the development of additional black-owned retailers of CCBSA’s products”.
In addition, said Competition Commission spokesperson Itumeleng Lesofe, a R150-million fund will be put in place to support and train historically disadvantaged farmers and small suppliers to the Coca-Cola Company.
In spite of the pledged R650-million, the commission is “concerned that the new retailers to be supported by CCBSA may operate exclusively to CCBSA”.
The merging parties have undertaken that these retailers will not be required to operate on an exclusive basis and “shall be free to sell competing products”.
But merely being allowed to sell competing products may not be enough to entice retailers to stock smaller, less powerful brands.
Gladys Mawoneke, managing director of Breva Beverages Company, an independent nonalcoholic craft beverage producer, said that this undertaking may not help companies such as hers.
“That commitment does not palliate the consequences of the dominance of the merging parties on our business. In fact, its unintended consequence is that it may further strengthen the position of the merging parties in the marketplace. Although they aren’t duty-bound, the retailers may be inclined to lean towards where they think their bread is buttered and to protect the interests of the merging parties.”
To address concerns such as this, the commission has imposed a condition requiring at least 20% space allocation for competing products in the new retail outlets created by the merger. Most industry players agree that securing sufficient, visible fridge space is key to driving sales. But in Mawoneke’s opinion, retailers may not implement the allocation.
“The challenge of monitoring and policing compliance in this market may well continue to make it difficult for the small beverage players to secure much-needed space in refrigerators and coolers,” said Mawoneke.
In addition, she said, “we would also like to see this condition being extended to all retail outlets and not just the new retailers to be supported by the merging parties. Effective communication to retailers explaining this condition might mitigate the possible exclusivity of fridge usage by the merging parties.”
But even if that were done, some smaller players might simply not be able to afford the fridge rental costs that large retailers expect.
Tatenda Zengeni, a researcher at the Centre for Competition, Regulation and Economic Development, said in the centre’s November quarterly review: “The nature of the beverage industry favours companies that have high capital outlay, established brand names and expansive distribution channels. This poses a threat to new entrants who do not have established brands and distribution networks, although these concerns may be pre-existing and as such not merger-specific.
“To the extent that distribution and marketing arrangements with retail and wholesale outlets will be applied by the merged entity in country markets throughout the continent, the decision to approve the transaction may have significant adverse consequences for rival manufacturers, including new entrants that may not have the strong distribution systems of the incumbents.”
When approached for comment, SABMiller did not respond to specific concerns, but said it “noted” the outcome of the Competition Tribunal prehearing held last week.
“The tribunal has set the matter down for a second prehearing in February 2016, with a formal hearing scheduled for May 2016,” said SABMiller. “The merger parties will be making representations to the tribunal to address the issues raised by the commission as well as the various interested parties who made submissions at the recent prehearing.”
The party most prominently opposed to certain aspects of the merger thus far is SoftBev, a Durban-based company that sells brands such as Coo-ee Iron Brew in the KwaZulu-Natal area, Mirinda, 7Up and Mountain Dew.
SABMiller asserted that “the parties are confident that the merger is in the best interests of consumers and customers”.
But business owners feel differently. “We celebrate the success of Coca-Cola and SABMiller,” said Mawoneke. “Nevertheless, we are concerned by any increase in concentration of power in the market and the effect it would have, whether it be from brand owners or retailers. The merger will lead to fewer players in the market, more power to these parties and the lessening of competition.
“It will stifle innovation and competition, and most probably result in higher prices for the consumer. We hope that the Competition Tribunal will put in place conditions that are aimed at protecting and strengthening small businesses more.”