Carbonated Soft Drink Industry 1 Case Study

Carbonated Soft Drink Industry 1

Case Study February 20, 1986: n Coca Cola announced intentions to purchase Dr Pepper n Pepsi announced intentions to buy Seven. Up n The FTC (Federal Trade Commission) announced decision to oppose n Pepsi withdrew; Coca Cola persisted n 2

FTC’s Ranking of Competitiveness: Concentrated Case Study Herfindahl Index (no merger) 37. 42+28. 92+5. 72+4. 62+3. 02… = 2324 4 -Firm Concentration Ratio 37. 4+28. 9+5. 7+4. 6 = 76. 6 3

Case Study n Herfindahl with merger 422+28. 92+5. 72+3. 02… = 2668 4

Anti-trust Enforcement Department of Justice /Federal Trade Commission Enforcement n FTC Horizontal Merger Guidelines http: //www. usdoj. gov/atr/public/guidelines/horiz_book/hmg 1. html FTC Competition Enforcement Reports http: //www. ftc. gov/bc/caselist/index. shtml n 5

DOJ/FTC Horizontal Merger Guidelines The Guidelines describe the analytical process that the Agency will employ in determining whether to challenge a horizontal merger. First, the Agency assesses whether the merger would significantly increase concentration and result in a concentrated market, properly defined and measured. Second, the Agency assesses whether the merger, in light of market concentration and other factors that characterize the market, raises concern about potential adverse competitive effects. Third, the Agency assesses whether entry would be timely, likely and sufficient either to deter or to counteract the competitive effects of concern. Fourth, the Agency assesses any efficiency gains that reasonably cannot be achieved by the parties through other means. Finally the Agency assesses whether, but for the merger, either party to the transaction would be likely to fail, causing its assets to exit the market. The process of assessing market concentration, potential adverse competitive effects, entry, efficiency and failure is a tool that allows the Agency to answer the ultimate inquiry in merger analysis: whether the merger is likely to create or enhance market power or to facilitate its exercise. 6

The general standards for horizontal mergers are as follows: a) Post-Merger HHI Below 1000. The Agency regards markets in this region to be unconcentrated. Mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis. b) Post-Merger HHI Between 1000 and 1800. The Agency regards markets in this region to be moderately concentrated. Mergers producing an increase in the HHI of less than 100 points in moderately concentrated markets post-merger are unlikely to have adverse competitive consequences and ordinarily require no further analysis. Mergers producing an increase in the HHI of more than 100 points in moderately concentrated markets post-merger potentially raise significant competitive concerns depending on the factors set forth in Sections 2 -5 of the Guidelines. 7

c) Post-Merger HHI Above 1800. The Agency regards markets in this region to be highly concentrated. Mergers producing an increase in the HHI of less than 50 points, even in highly concentrated markets postmerger, are unlikely to have adverse competitive consequences and ordinarily require no further analysis. Mergers producing an increase in the HHI of more than 50 points in highly concentrated markets postmerger potentially raise significant competitive concerns, depending on the factors set forth in Sections 2 -5 of the Guidelines. Where the postmerger HHI exceeds 1800, it will be presumed that mergers producing an increase in the HHI of more than 100 points are likely to create or enhance market power or facilitate its exercise. The presumption may be overcome by a showing that factors set forth in Sections 2 -5 of the Guidelines make itunlikely that the merger will create or enhance market power or facilitate its exercise, in light of market concentration and market shares. 8

Concentration Measures and Antitrust n FTC Enforcement Reports and. Horizontal Merger Guidelines http: //www. ftc. gov/bc/caselist/index. shtml http: //www. usdoj. gov/atr/public/guidelines/horiz_book/hmg 1. html n Department of Census http: //www. census. gov/epcd/www/concentration. html http: //factfinder. census. gov/servlet/Econ. Sector. Servlet? caller=dataset&sv_name=*&_Sector. Id=31&ds_name=EC 0700 A 1&_lang=en&_ts=314058002437 Retail Bakery (311811) 4 - firm CR = 3. 7, HI=7. 3 Soft Drink Manufacturing (312111) 4 - firm CR = 58, HI=1, 095 9

Problems with using only CR and HI to proxy for level of competition 1) 2) 3) 4) 5) Often difficult to Define Relevant Market Does not take into account Entry Barriers Cannot necessarily equate more concentration with less competition Merger may increase efficiency which may benefit consumers Must consider how industry is likely to evolve with and without merger 10

Major Changes in CSD Industry Post-1985 1. 2. 3. 4. 5. 7 -Up and Dr. Pepper merged in late 1986 and Cadbury-Schweppes purchased them in 1995. Cadbury-Schweppes also acquired a number of other brands including Canada-Dry, Sunkist, A&W, Crush and Hires. Technological change results in greater economies of scale associated with bottling. Coca-Cola and Pepsi vertically integrate by acquiring a number of their bottling companies. Diet CSDs’ market share has increased (from 25. 9% in 1999 to 30. 2% in 2004). Prices increased and consumption steadily slipped over the past eight years 11

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“Is This the End of the Soft-Drink Era? WSJ, January 2013 Coca-Cola Co. , Pepsi. Co Inc. and Dr Pepper Snapple Group Inc. have struggled to reverse the decline in soda consumption in the U. S. , where shoppers increasingly reach for water, coffee, and other drinks. Now they have a bigger worry: soda revenue. As U. S. consumption steadily slipped over the past eight years, the beverage giants typically were able to raise prices enough to keep soda revenues from America's favorite drink growing. But soda sales at U. S. stores declined in the second half of last year—including during the holidays, when partygoers normally pay up to gulp more. Now industry analysts wonder if the downturn in sales is here to stay. "The question from here is if that is the new norm, '' Steve Powers, a beverage analyst at Sanford C. Bernstein, said of the latest store sales numbers. Soda companies raised prices aggressively in 2011 after commodity costs surged. Prices were increased a bit in late 2012, but volumes fell even more sharply. Sugary bubbles have become a lightning rod in the U. S. for consumer health concerns, such as diabetes and obesity. Meanwhile, baby boomers are aging, and soda's traditional target market— youth—is often turning to water, energy drinks and coffee instead. Soda sales declined 0. 6% last year through Dec. 30 to $28. 70 billion at U. S. stores tracked by Symphony. IRI Group. In volume terms, sales dropped 1. 8%. 15