South Africa: Commission sees benefits in SAB’s takeover of Smirnoff, Guinness products

The Competition Commission has recommended the Competition Tribunal approve a transaction whereby South African Breweries (SAB) intends to acquire the rights to a range of products from Diageo South Africa, the Engineering News reported on July 19.

The Diageo brands in question include Smirnoff’s ready-to-drink (RTD) products namely Storm, Guarana, Spin, Pine Twist and Berry Twist products, excluding the Smirnoff Vodka brand, as well as Guinness’ products, excluding its Foreign Extra Stout and Malta brands.

The rights comprise the licences to manufacture, market, distribute and sell the products.

Additionally, Diageo owns 11 000 coolers and fridges that will be acquired by SAB as a result of the transaction.

The commission found that the merger raised a material competition overlap in the market for the manufacture and supply of flavoured alcoholic beverages (FABs).

The FABs market is a highly concentrated market in South Africa, with Distell being the outright dominant player and the proposed merger will likely create further concentration in this market.

The merger substantially alters the structure of the FABs market as it is essentially a combination of the second- and third-largest players, SAB and Diageo, in the FABs market.

Given the relatively high post-merger market share of the merged entity, the commission considered various factors in its unilateral effects assessment such as the structure of the market, closeness of competition, potential price increase, potential dampening of competition and barriers to entry.

In relation to closeness of competition, there is mixed evidence to the question of closeness of competition between the Smirnoff RTDs and the SAB FABs.

From a pricing perspective, the commission said the Smirnoff RTDs appeared, generally, to be priced significantly higher than the SAB FABs brands. On the other hand, the taste profile of the Smirnoff RTDs and SAB’s Brutal Fruit brand appeared to be on the same spectrum.

The commission, therefore, proceeded on the basis that there was some degree of competition between the merging parties’ brands that would likely be lost as a result of the proposed merger.

However, the commission found that, on the whole, the proposed transaction was unlikely to distort competition and have any notable effect on the prices of Diageo and SAB’s FABs post-merger, as the parties would still be constrained by other brands.

Further, the commission found that the FABs market had high barriers to entry. The transaction was unlikely to substantially negatively affect the businesses of Diageo’s input suppliers because the Smirnoff RTD products account for about 10% of the market for the manufacture and supply of FABs, the commission said.

The commission also found that the merger may provide new opportunities for SAB to engage in exclusionary tying and bundling strategies, since rivals would be unlikely to be in a position to effectively imitate such a strategy given SAB’s dominance in the beer market and the relatively high market share that would accrue to it post-merger.

“Nevertheless, there are tangible and significant efficiencies associated with the merger that will likely benefit consumers, including the increase in volume of the Smirnoff RTD products and the implementation of a returnable bottle policy, that influence against these concerns.

“Such increase in volume will benefit the consumers as the Smirnoff RTDs will be widely available and this will present better consumer choices,” the commission stated.

The proposed returnable bottle policy for larger-sized Smirnoff RTD packs is likely to reduce the production costs of the Smirnoff RTDs, should SAB implement it akin to its own policy.

Thus, the proposed transaction will ensure the Smirnoff RTDs impose a better competitive constraint on the dominant Distell FABs brands and, as such, it is likely to increase competition in the FABs market.

To address any potential bundling and tying, the commission imposed a condition requiring SAB to make a commitment not to engage in any bundling or tying strategies of its FABs and beer products in future.

The merging parties are also required to make a commitment to ensure that there is no flow of competitively sensitive information as a result of the merger.

Additionally, the merging parties are required to make a commitment that competing third-party FABs will obtain access to the 11 000 Diageo fridges acquired by SAB.

The merging parties are also required to make firm commitments on the localisation and production of the Guinness beer brand in South Africa, including providing the expected timelines of the localisation of the Guinness brand in South Africa.

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