[Home] [Databases] [WorldLII] [Search] [Feedback] South Africa: Competition Tribunal

You are here:  SAFLII >> Databases >> South Africa: Competition Tribunal >> 2003 >> [2003] ZACT 36

[Database Search] [Name Search] [Recent Decisions] [Noteup] [Help]

DISTILLERS CORPORATION (SA) LIMITED and STELLENBOSCH FARMERS WINERY LIMITED (08/LM/Feb/02) [2003] ZACT 36 (18 June 2003)

.PDF of original document

.RTF of original document

COMPETITION TRIBUNAL 

REPUBLIC OF SOUTH AFRICA

Case No: 08/LM/Feb02

In the large merger between: 

Distillers Corporation (SA) Limited Primary Acquiring Firm

And

Stellenbosch Farmers Winery Group Ltd Primary Target Firm

______________________________________________________________

Reasons for Tribunal Decision - Non-Confidential
______________________________________________________________


Finding

1. We have found that a substantial lessening of competition is likely in the proprietary spirits market, one of several markets implicated in this transaction. For the reasons outlined below we find that a consideration of the claimed efficiency gains is not pertinent. We have found that there are no consequences for the public interest that influence our finding.

2. A further hearing will be convened in order to determine an appropriate remedy in respect of that market in which we have found the likelihood of a substantial lessening of competition.

The Parties

Primary acquiring firm¹

3. Distillers Corporation (SA) Limited (“Distillers”) was a listed investment holding company, involved, through its subsidiaries, in the production and wholesale distribution of branded spirits, wine and ready to drink / flavoured alcoholic beverages (‘RTDs’ or ‘FABs’). Distillers produced, marketed, sold and distributed various brandy brands (including Oude Meester, Richelieu, Viceroy, Klipdrift), whisky (Harrier), vodka (Count Pushkin), cane (Seven Seas), premium wines (including Fleur du Cap, Le Bonheur, Neethlingshof and Grunberger), sparkling wines (J.C. le Roux) and liqueurs (Amarula Cream). The FABs manufactured and distributed by Distillers included Bacardi Breezer, Bernini and Castello. Distillers also acted as the South African agent and distributor of international brands such as Gordon’s gin, Martini, Bacardi rum, and Glenfiddich whisky.

Primary target firm

4. SFW was a producer and wholesaler of wine, spirits and alcoholic fruit beverages within South Africa. As a leading wine producer, it boasted names such as Nederburg, Zonnebloem, Graca, Chateau Libertas and Plaisir de Merle. Its spirit brands included Mellow-Wood brandy, Old Buck gin, Mainstay cane spirit and Romanoff vodka. It had the distribution rights in SA for Martell brandy² and Bols brandy³. It was the market leader in the FABs market with brand names such as Hunter’s Dry, Hunters Gold, Crown, Savannah, Esprit, Montello and Manhattan.

Shareholding structure

5. SFW and Distillers were both controlled by the same trio of shareholders. The two companies had an identical shareholding structure:

· Rembrandt-KWV Investments (“RemKWV”) held 60% of the shares of both parties. RemKWV is a joint holding company of Rembrandt and KWV, in which each holds a 50% interest. KWV’s interest in RemKWV is held through a listed subsidiary, KWV Investments Limited in which KWV owns approximately 54%;

· SAB held 30% of both companies through its wholly owned subsidiary Other Beverages Industries (Pty) Ltd (“OBI”);

· The general public held the remaining 10% of both companies.

Other significant participants in the production and distribution of alcoholic beverages

6. The merged entity’s most significant competitors in the production and distribution of spirits are GUDV and E. Snell & Co. GUDV is the South African subsidiary of multinational spirit producer Diageo, which was established out of the merger between Guinness and Grand Metropolitan. GUDV has the largest market share in whisky (including the J&B, Johnny Walker and Bell’s brands) and vodka (Smirnoff). It has smaller stakes in brandy, gin, and FABs. GUDV thus competes primarily with Distell in the middle and upper segments of the spirits markets. As elaborated below these are commonly referred to as the ‘proprietary’ or ‘prop’ and ‘premium’ spirits.

7. E. Snell & Co is a smaller South African company, which produces mainly, although not entirely, ‘value-for-money’ spirits – the low-price end of the market - including brandy (Wellingtons and Bols), whisky (Two Keys and Firstwatch), vodka (Absolut), cane (Cape to Rio), Gin (Strettons Deluxe Gin) and an alcoholic fruit beverage or ‘FAB’ (Snapper).

8. Douglas Green Bellingham (DGB), a long established South African company, is mainly a wine merchant, but its portfolio does encompass some well-know spirits brands in whisky (Balantine Finest) and brandy (Connoisseur). Brown and Forman, a major international liquor company, also distributes some of its important proprietary and premium spirits, notably Jack Daniels whiskey. The South African licensee of Brown and Forman brands is the Really Great Brand Company, which also performs distribution and related sales functions for E. Snell & Co. Other competitors include Seagrams (whose brands were subsequently acquired by Pernod Ricard), African Wines & Spirits and a large number of wine producers. The UK-based Bulmer, which has substantial international interests in cider, entered the South African market in 1999, when it acquired certain cider brands from Gilbeys. Bulmer exited the local market in 2002.

9. South African Breweries has a near-monopoly in beer where it enjoys a market share of approximately 95%. It has also recently begun producing FABs.

The Merger

The transaction

10. On September 20, 2000 Distillers and SFW entered into an agreement in terms of which Distillers would acquire, subject to the approval of the shareholders, the assets and liabilities of SFW, including the shares held by SFW in the issued share capital of Western Province Cellars Limited, SFW Holdings Limited, Bofor Properties (Pty) Ltd, and Devon Road Property (Pty) Ltd, and all the trade names and trademarks of SFW. The assets sold by SFW to Distillers included SFW’s shares in its operating companies and all its trademarks, but excluded certain specified assets. An addendum to the sale agreement was executed on 9 October 2000 (A171). Pursuant to the transactions, the merged entity was renamed Distell Group Limited (“Distell”).

11. Two common shareholders, Rembrandt-KWV Investments (currently known as Remgro-KWV Investments Limited) and South African Breweries, held 90% of the voting equity in both acquiring and target firm. The remaining 10% of each firm was held by the general public.

12. Post-merger the (simplified) share holding structure is as follows:

Remgro KWV Investments South African Breweries Public shareholders

60% 30% 10%

Distell Group Limited

South African Distillers and Wines

SFW Holdings Limited Others

History of the transaction

13. On 8 June 2000, the legal representatives of the merging parties approached the Commission and asked it to clarify whether the proposed transaction to merge the businesses of SFW and Distillers constituted a notifiable transaction. The parties’ essentially held that because of the common identity of the parties’ shareholders the transaction constituted an internal restructuring and not a merger as defined in the Act. On 7 August 2000, the Commission concluded in a letter addressed to the parties’ legal representatives, that the proposed transaction would not constitute a merger as defined in section 12 of the Act and accordingly was not notifiable in terms of section 13. Based upon this opinion, the parties proceeded to issue cautionary announcements advising of the proposed merger.

14. In terms of an agreement dated 20 September 2000 (amended on 9 October 2000) the merging parties effected a transaction whereby Distillers acquired all the principal assets and liabilities of SFW. The purchase consideration in respect of the SFW assets, in the amount of R515 157 950,31, was settled through the issue by Distillers to SFW of 55 580 000 Distillers ordinary shares in the share capital of Distillers. These Consideration Shares were distributed by way of a dividend in specie and reduction in share capital to the SFW shareholders.

15. Seagrams, a large multinational producer of various alcoholic beverages, subsequently launched an application in the Cape High Court on 10 November 2000 in which it asked the court to find that the transaction between SFW and Distillers constituted a merger in terms of the Act. The applicant sought an interdict restraining the respondents from implementing the merger, alternatively an order referring the matter to the Competition Tribunal. In his judgment, Jali J ruled that section 65(3) made it clear that the High Court did not have jurisdiction to hear the matter, insofar as it related to competition matters within the exclusive jurisdiction of the competition authorities.⁴

16. Bulmer SA (Proprietary) Limited (“Bulmers”) (the local subsidiary of another large multinational producer and distributor of alcoholic beverages) and Seagram Africa (Proprietary) Limited (“Seagrams”), both competitors of Distell, subsequently brought an application to the Competition Tribunal in terms of section 62(1) of the Competition Act 89 of 1998. The basis of the application was that the respondents failed to notify a transaction that the applicants contended was a merger as defined in terms of section 12(1) of the Act.

17. The Tribunal found that the transaction constituted a merger as defined in terms of section 12 of the Competition Act and ordered the parties to notify the merger to the Competition Commission. This judgement was upheld by the Competition Appeal Court on 27 November 2001.⁵

18. The merger was subsequently notified on 12 December 2001. The Competition Commission recommended in June 2002 that the merger be approved subject to certain conditions. Essentially, the conditions recommended by the Commission relate to the sale of a number of brandy and sparkling wine brands.

Rationale for the transaction

19. The parties claim that the merger will generate increased efficiencies that will enhance international competitiveness and shareholder value. In particular, they argue that, absent the merger, neither company could afford the intensive marketing strategies nor effectively manage the supply and distribution of alcoholic products overseas. The merged entity, on the other hand, would, through combining marketing budgets and by cost savings, achieved through economies of scale and reduced duplication, have a significantly greater chance of penetrating international markets. The cost savings would be realized by a rationalization of support services, manufacturing and distribution facilities and by reductions in working capital and fixed assets.

The Hearing

20. After the merger was referred to the Competition Tribunal in June 2002 a prehearing conference was held July 7^th 2002, and a hearing was duly convened, spanning five days in total:

• 15 August 2002

• 16 August 2002

• 22 August 2002

• 9 October 2002

• 15 November 2002

21. A total of nine witnesses were heard. These were called by the Competition Commission, the merging parties and the Competition Tribunal.

22. The following witnesses were called by the Competition Commission:

- Mr. Alistair Norman Lewis, AC Nielsen South Africa

23. The following witnesses were called by the merging parties

    • Mr. John Forsyth, partner McKinsey and Company

    • Mr. Johannes Jacobus Scannel, MD of Distell

    • Mr. Valerio Doriano Toros, Distell

    • Mr. Jacobus Hendrik Visser, Distell

24. By the Competition Tribunal:

    • Mr. Michael Clifford Veysie, MD Bulmers

    • Mr. Tim Hutchinson, CE Douglas Green Bellingham

    • Mr. David Hooper, MD E. Snell & Co

    • Mr. Colin Robinson, MD Robinson Liquors

Competition Evaluation

Background

25. The alcoholic beverages sector represents to competition folklore in South Africa, what, we imagine, the oil industry represented to those concerned with competitive markets in the USA at the turn of the last century. Not only do we have what is, to all intents and purposes, a single domestic beer producer, but we have a longstanding history of state intervention in the production of wine and spirits, intervention manifestly designed to support narrow private interests rather than the public interest, that is possibly unparalleled in its breadth and intensity. The 1982 Competition Board Report on the liquor industry notes:

“As early as 1918 a written agreement, a so-called ‘gentlemen’s agreement’ was entered into by the KWV and the wine merchants under which the KWV would refrain from competing with the merchants it supplied. Specifically, the KWV, as a quid pro quo for the co-operation of private entrepreneurs, undertook not to compete with the existing interested parties in the trade in or distillation or manufacture of wines and spirits in Africa south of the equator.”

26. And, further: “In 1924 Parliament incorporated this principle in Act 5 of 1924, so that the KWV is not allowed to sell any wine or spirits to any person not being a bona fide distiller, wholesaler, association of distillers or wholesaler or co-operative society”.⁶

27. However, the apotheosis of anti-competitive conduct in this sector is surely the agreement which secured South African Breweries’ beer monopoly and the Rembrandt Group’s pre-eminent position in the spirits, particularly the brandy, market. We refer, of course, to the notorious market sharing arrangement between the beer producer and its counterpart in the wine and spirits sectors that saw the former agreeing to limit its involvement in wine and spirits in exchange for an undertaking from the Rembrandt group to stay out of the beer market. To add insult to injury, KWV was allowed to take up a significant share of the new spirits and wine company.⁷

28. The market sharing arrangement was effected by the restructuring in 1979 of the South African liquor industry. This involved an arrangement between SAB, SFW, OMG (effectively Distillers’ predecessor) and KWV, culminating in the formation of a new entity, Cape Wine and Distillers Limited (“CWD”).⁸

29. CWD was listed on the Johannesburg Stock Exchange, its shares being allocated (and held) in the following manner:

- The Rembrandt group: 30%

- SAB: 30%

- KWV: 30%

- General public: 10%

30. This restructuring was designed to facilitate a split in the liquor industry in terms of which:

    • SAB purchased the Rembrandt Group’s beer interests (Intercontinental Breweries, or ICB, the large brewery with which SAB had been in a price war that year);

    • SAB agreed to pool its wine and spirits interests (including SFW and Henry Tayler & Ries) via the CWD and to limit its involvement in wine and spirits to its 30% investment holding in CWD;

    • The Rembrandt Group sold its wine and spirits operations (the Distillers Corporation Ltd and the Oude Meester Group and thereby the retailers Western Province Cellars and Liquortown);

    • The Rembrandt Group undertook to have no interests in the beer market;

    • Rembrandt and SAB undertook to divest their retail liquor interests; and

    • SFW, Distillers and OMG become wholly-owned subsidiaries of CWD.

31. This restructuring effectively meant that SAB sacrificed its wine and spirits interest to CWD in return for a beer monopoly and a stake in CWD, whilst spirit and wine production was concentrated in the CWD, which acquired the two largest producer-wholesaler bodies, namely SFW and Oude Meester Group (OMG).

32. Shortly thereafter, the Rembrandt Group and KWV pooled their shares in CWD (60%) in a jointly owned holding company, Rembrandt-KWV Investments Limited.

33. In 1982 the Competition Board (Competition Board Report no.10) recommended that the vertical integration in the liquor industry be prohibited and that the merger which had taken place in 1979, giving rise to the formation of CWD, be reversed:

”The competition that previously existed between SAB and ICB and between the two largest producer-wholesalers of wine and spirits SFW and Oude Meester, has inevitably been either terminated or restricted by the restructuring”

And further: ”The Board is convinced that the circumstances described … do not justify in the public interest the KWV’s acquisition of an interest in CWD”.

34. This recommendation was rejected by the government of the day.

35. However, in 1988, the then Minister of Economic Affairs supported a separation of the two main components of the CWD, namely SFW and OMG, reportedly motivated by a desire to enhance competition. The separation was effected by a separate listing on the Johannesburg Stock Exchange of SFW and a new entity, named the Distillers Corporation SA Limited, comprising the interests of OMG. This event constituted a partial reversal of the 1979 restructuring that had created a concentration of wine and spirit interests within a single corporate structure.

36. It is undoubtedly the breathtaking audacity of these manifestly anti-competitive agreements and their endorsement by the political powers of the time, that accounts for the persistence of anti-competitive structures in the alcoholic beverages sector and for the intensity of the disquiet articulated by consumers, distributors, the current government and, in particular, other, inevitably smaller, producers at the state of affairs in this industry. However, while the structure of the industry that has emerged as a result of these agreements undoubtedly demands an unusual degree of vigilance from the competition authorities, we cannot use the provisions of the Competition Act to turn the clock back, to redeem, ex post facto, the sins of the past. We are, regrettably, obliged to take the structure of the industry as we find it and, in merger proceedings at least, to limit our interventions to those transactions that result in a substantial lessening of competition.

The Relevant Markets

The Geographic Market

37. It is common cause between Distell and the Competition Commission that the relevant geographic market is national. The Tribunal agrees that the relevant geographic market is indeed the South African market and this issue will not be considered further.

The Product Market

38. In common with other contested merger proceedings, the main area of contention between the parties and the Competition Commission centres on the identification of the relevant product market. In short, whereas the merging parties contend for a broad product market that encapsulates all alcoholic beverages, the Commission prefers a narrower definition that places each traditional category of alcoholic beverage – brandy, whisky, wine, etc – in separate relevant markets.

39. The Commission defines a variety of relevant product markets based on traditional liquor categories, including spirit type, different types of wine (table wine, sparkling wine and fortified wine) and a market for flavoured alcoholic beverages or FABs.⁹ The Commission finds product overlaps in the following markets:

Table 1: Market shares and HHI changes per liquor category

Source: AC Nielsen data and Competition Commission recommendations

40. While, as will be elaborated below, the Commission found that the impact on competition of the horizontal overlap in most of these markets is ameliorated by other factors – for example the unusual dynamism of the FABs market or the merged entity’s relatively small market share in whisky – the Commission’s narrow, category-based market definition was the basis for its finding of a substantial lessening of competition in the brandy, sparkling wine and gin markets and, accordingly, for its recommendation that the merged entity be compelled to divest itself of a number of brands in these markets.¹⁰

41. In the brandy market the Commission recommended that Distell be compelled to dispose of 16% of its market share whilst terminating the manufacture and distribution of all KWV brands. In the sparkling wine market the Commission recommended that Distell dispose of brands with a cumulative market share of between 20-30% in volume.

42. The merging parties on the other hand define the relevant market to include all alcoholic beverages, ranging from beer to spirits, including wine and FABs. The parties find that Distell’s post-merger market share in the national alcoholic beverage market, based on litres absolute alcohol, is 19.7%.¹¹

43. Accordingly, the parties have argued that there is no substantial lessening of competition in the relevant market and suggest that, even if there was, the efficiencies generated by the merger would offset any detrimental effects of the merger.

44. Much hinges then on the identification of the relevant product market. Unfortunately, however, the Commission has produced scant evidence in support of its view of the relevant product market. For the most part, it elected to support its case through a critique of evidence produced by the parties and through examining witnesses called by the Tribunal. It is not surprising then that counsel for the merging parties should have raised, at the commencement of the hearings, the question of onus, arguing that it is not for the parties to prove that competition will not be substantially lessened by the merger, but rather for the Commission to establish the likelihood of a substantial lessening of competition.

45. However, the question of onus is not as clear-cut as the parties would have us believe. The Tribunal is the decision maker in respect of all large mergers. It is, in other words, required to establish not whether some participant has discharged an onus, but, rather, whether or not there has been a substantial lessening of competition. This it will do on the basis of the evidence and argument submitted to it, including evidence garnered through the Tribunal’s exercise of its inquisitorial powers. It will, indeed, become apparent that our reading of the evidence and argument that we have heard has led us to a view of the relevant market distinct from that of both the Commission and the parties.

46. That having been said then, the Commission has argued for a particular conclusion, namely, that the transaction is likely to substantially lessen competition, and the remedies proposed by it consequent upon this finding embody potentially important consequences. In doing this the Commission has relied almost entirely on a critique of the parties’ own arguments and the evidence of the parties’ witnesses. However, a critique, no matter how trenchant, of the parties’ argument and of the evidence led by them may establish that the parties are wrong; but it cannot, on its own, establish that the counter-argument is correct. In short, for an adverse finding the Tribunal must be satisfied that the evidence and argument that has been presented, whether from documents discovered or oral evidence led by the Commission, the parties and the Tribunal, affirms that the transaction is likely to lead to a substantial lessening of competition. Evidence presented by the Commission has made but a small contribution to meeting this standard.

47. To return then to the definition of the relevant market, the Commission’s finding of a substantial lessening of competition in the brandy and sparkling wine categories rests heavily on its insistence that there is a range of narrow relevant markets defined by traditional liquor categories including spirit types (e.g. brandy, whisky, vodka, etc), different categories of wine (e.g. table wine, fortified wine and sparkling wine) and a separate market for FABs.¹² In short, the Commission avers that faced by an increase in the price of brandy, consumers will not switch to another spirit category or, even less will they switch to one of the other categories of alcoholic beverages such as wine, FABs or beer. It insists, in other words, that inter-category competition will not constrain an exercise in market power on the part of a producer whose market share in one or more of the separate categories increases as a result of this transaction.

48. The Commission’s contentions with respect to the relevant market rest on two pillars. The first is international jurisprudence which, the Commission pointed out, mostly supports the narrow, category based relevant markets contended for by the Commission. Secondly, the Commission insists that evidence presented to the Tribunal establishes the weakness of inter-category competition in the South African market. As we have already intimated, the overwhelming bulk of the evidence was presented by the parties themselves, although important evidence was also presented by witnesses called by the Tribunal. Hence, the Commission relies overwhelmingly on a critique, on its particular interpretation, of this evidence. The Commission called a single witness, Mr. Alistair Lewis, an employee of AC Nielsen, the well-known market research firm.

International Jurisprudence

49. The Commission avers that competition authorities and courts elsewhere have, when confronted with the task of establishing a relevant market in the alcoholic beverages market, found for narrow, category-based markets. The Commission particularly relies on US and European decisions in two prominent mergers, namely, the Guinness Plc and Grand Metropolitan Plc (1997) and Pernod Ricard/Diageo/Seagram Company Ltd (2001). These mergers were evaluated by the European Commission¹³ and, in the case of Guinness/Grand Metropolitan, also by the US Federal Trade Commission. The Guinness/Grand Metropolitan merger was also investigated by the Australian ACCC.

50. In the Guinness / Grand Metropolitan transaction the European Commission based its market definition on spirit type. This conclusion rested, inter alia, on the finding that spirit drinkers display brand loyalty within the category of choice and also on the observation of well-entrenched ‘occasion-based’ consumption patterns which renders substitution on the basis of small price variations unlikely. The European Commission highlights the importance to competition in the spirits market of branding and its application to individual spirit types as a further justification for product markets not wider than that for each main spirit type, i.e. whisky (further segmented to differentiate Scotch whisky), brandy (further segmented to differentiate Cognac/Armagnac), rum, gin, vodka, tequila and flavoured spirits.

51. Note that the European Commission conceded the possibility of market segmentation based on price and quality differentiation observing that ‘a consumer who habitually drank a premium brand would not regard a cheaper one as providing an adequate substitute in terms of taste, image and so forth’.¹⁴ However, this observation did not, in the view of the European Commission, alter the finding that placed individual spirit categories at the centre of the relevant market definition but rather constituted the basis for a further segmentation, this time within the separate spirit categories.

52. In its assessment of the Guinness/Grand Metropolitan merger, the Federal Trade Commission focused on whisky and gin, and particularly on the premium segments within those categories. Within the whisky category it distinguished between origins (i.e. Scotch Bourbon and Irish) as well as different quality and price categories. The definition of premium gin included a reference to its origin (i.e. England) and a retail price level, comparing prices of specific brands.¹⁵

53. The ACCC found limited demand substitution between various spirit categories, with price increments in a particular category tending to result in brand shifting rather than a reduction in sales in that category, supporting a relevant market definition based on the spirit categories.

54. In the Pernod Ricard / Diageo / Seagram Company Ltd transaction the European Commission cites the Guinness/ Grand Metropolitan judgement in its relevant market definition and re-emphasises the importance of branding. Although the European Commission notes the possibility of defining the market according to different price/quality combinations, i.e. premium, secondary brands, private labels, low price etc, the market definition in this judgement is at one with the finding in Guinness / Grand Metropolitan. The European Commission concludes that as ‘there is a continuous price spectrum ranging from the most expensive to the cheapest’ and as ‘rebates can change the position of a given brand in the spectrum’ the price/quality distinction was only found applicable to the exclusion of Cognac/Armagnac from the product market that otherwise included all brandies.¹⁶

55. The Competition Commission insists that we would need particularly powerful contrary evidence to row against the tide of international opinion that has found narrow category-based markets. We are mindful of this. Indeed Section 1(3) of the Act explicitly empowers those interpreting or applying the Act to have recourse to international jurisprudence, a wise provision given the immaturity of our jurisdiction relative to those who have worked with competition law and economics for many years. However, whilst foreign jurisprudence may be, indeed it certainly has been, of great assistance in refining our understanding of legal questions and economic theory and in guiding our factual enquiries, it cannot detract from the strong factual basis that must ultimately underpin all efforts to determine a relevant market. Counsel for the merging parties cites an extract from our decision in the large merger between Bromor Foods (Pty) Ltd. and National Brand Limited:¹⁷

“Defining a relevant market for consumer products is notoriously difficult. Delineating a relevant market for beverage products is especially difficult because one is faced with not only the subjective proclivities of consumers but also the marketing stratagems of firms as they attempt to differentiate their products in response to competitive threats.

Beverage antitrust cases have long been the subject of bitter contestation over relevant market definition. On the one hand merging parties contend they are merely minor players fighting for their "share of the throat", in a market where the fizzy drink competes with anything that can be imbibed from fruit juices to tea. On the other hand competition regulators argue that the fizzy drink is the relevant product market.

Ultimately each case must be determined on its own facts and foreign judgments can do no more than give us guidelines to method for they cannot serve as a way for us to come to a conclusion on facts. The behavior of a teenage consumer of carbonated beverages in Texas is no more use to us as evidence than the behavior of the French consumer of carbonated mineral water.”

56. It should be noted that the European Court of First Instance has itself explicitly insisted on the overriding significance of a current factual enquiry when determining relevant markets even to the extent of diminishing the weight of a prior finding of the European commission when making a subsequent relevant market determination or, what is the same thing, a finding of dominance:

“Second, a finding of a dominant position by the Commission, even if likely in practice to influence the policy and future commercial strategy, does not have binding legal effects as referred to in the IBM judgment. Such a finding is the outcome of an analysis of the structure of the market and of competition prevailing at the time the Commission adopts each decision. The conduct which the undertaking held to be in a dominant position subsequently comes to adopt in order to prevent a possible infringement of Article 86 of the Treaty is thus shaped by the parameters which reflect the conditions of competition on the market at a given time.¹⁸”

57. In short, while we will not simply ignore the US, European and Australian findings, the weight assigned them is reduced if the evidence indicates that the general features of the South African market differ significantly from those that characterize these other national markets. And, if evidence is adduced that directly conflicts with the inferences drawn from the general features of the market – in other words, if, for example, we are shown persuasive evidence of inter-category substitution in the South African market then this must, at least in respect of those categories that have been shown to be substitutable, surely trump a decision based on the general characteristics of the market.

58. That then is the sequence of the argument: we first consider the international jurisprudence which finds overwhelmingly for relevant markets defined by liquor category; we then ask whether the evidence demonstrates that the characteristics of the South African market approximate those of the markets that generated these findings; and we finally ask whether there is evidence of consumer behaviour in South Africa that is at odds with the inferences drawn from the general characteristics of the market. In this case, the evidence in point would relate to the issue of inter-category substitution.

59. The Competition Commission argument effectively holds that consumer behaviour in the USA, Europe and Australia is sufficiently similar to that of South African consumers of alcoholic beverages to justify the simple importation of conclusions regarding the relevant market from these jurisdictions. It would have us accept that if brand loyalty and occasion-based drinking – the two features upon which their relevant market findings are based – are prevalent in the USA, European and Australian markets, then they will be present in the local market as well.

60. However little evidence has been presented in support of this far-reaching and essentially factual assertion. And yet there are clear prima facie grounds for questioning its validity. South Africa’s particular income distribution and the absolute levels of poverty with which a large proportion of the liquor-consuming population contend is, per definition, an extremely powerful determinant of consumption patterns and behaviour, particularly where ‘discretionary’ consumption is concerned – little evidence is needed to assert the massive disparities between South Africa and the highly developed countries from whom the Commission would have us draw essentially factual conclusions regarding the relevant market.

61. Moreover, the truly unique features of South Africa’s liquor history - recall that until relatively recently the vast majority of South Africa’s population was, by law, not permitted to enter outlets at which spirits were sold – throw the Commission’s questionable proposition into sharp relief. Indeed the parties argue that the fact that the bulk of liquor purchased in South Africa is still sold and consumed in the semi-legal shebeen environment is evidence of the unusual character of the South African market. The rapid and massive shift in consumption away from sorghum beer to other alcoholic beverages is also a unique feature of the South African market. The single witness called by the Commission, Mr. Alistair Lewis of AC Nielsen, identified another distinguishing feature of alcoholic beverage consumption in South Africa, namely, the:

“huge wine market, which is not so predominant in other parts of the world. In other words, I’m not talking necessarily of quality wine. I’m talking about the bottom end of the market, which traditionally started here back in the sixties or even before that.”

62. Lewis nevertheless insisted that, but for this distinction, which strikes us as rather significant, the consumption patterns in the South African market match those found elsewhere.

63. The merging parties have, for their part, presented evidence of the distinctive features of South African liquor consumption. Hence they submit – and this was not contested by the Commission - that South African spirits consumers, in contrast with their developed country counterparts, rarely drink spirits neat, but rather use it to add alcoholic content to a mixer, so that the key attribute of the spirits is, in the minds of South African consumers at least, its alcohol content rather than its particular taste. This would portend a greater possibility of substitution, at least between spirit categories. The parties also insist that liquor consumption in South Africa, as opposed to other societies in which similar research has been conducted, is less ‘occasion based’, less structured by the time of day at, or occasion on, which it is consumed, an assertion borne out by the research conducted as part of the ‘brandy study’.¹⁹

64. The Commission purports to find support for its claim that “the broader South African alcoholic beverage market is not substantially different from the markets in the United States of America, Australia and all the member states of the European Community …” in research results which indicate that a significant proportion of the respondents consumes more than one kind of drink at a particular occasion. This, the Commission argues, is evidence of occasion-based consumption among South African liquor consumers.

65. However, this response confirms at best that more than one brand is consumed by a significant proportion of consumers on any one occasion. This does not show that the occasion determines the switch – indeed, in the absence of further evidence, it may be reasonably inferred from this that South African liquor consumers, in apparent contrast with their counterparts in the other jurisdictions cited, display little brand or category loyalty. In short, this evidence may well support the notion of a wide relevant market, in which consumers drink more than one type of drink at any one occasion.

66. Moreover, Mr. John Forsyth, the parties’ expert witness, testified that market surveys that attempted to relate specific occasions to particular liquor products using a sample of South African consumers, called into question the notion of occasion-based drinking in South Africa:

(Paragraph omitted, contains confidential information)

67. And, Forsyth concludes:

(Paragraph omitted, contains confidential information)

68. In summary, we find unpersuasive the Commission’s reliance on foreign jurisprudence in determining the relevant market. Certainly, the evidence provides little justification for the uncritical application of the European and US findings to South Africa. On the contrary, the available South African evidence suggests that there are important unique features of South African liquor consumption that will have an important bearing on the definition of the relevant market.

Inter-category Competition: the South African evidence

69. We have been presented with a confusing welter of evidence, some of it empirical and much of it anecdotal drawn from a combination of market survey and direct experience of the market. We are also faced with appeals – largely emanating from the Commission - to ‘common sense’, to the personal knowledge or, at least, personal opinion, that many have of this mass consumption market. The proponents of ‘common sense’ effectively ask us to accept that consumption of a particular category of alcoholic beverages is a matter of deep personal taste that will not be compromised by a mere increase in price. While an increase in the price of tea may plausibly give rise to a switch to coffee, a loyal brandy – or whisky or wine or beer – consumer will, in a manner of speaking, simply swallow the price increase, his expressed commitment to his alcoholic beverage of choice would inhibit him switching to another category or even decreasing significantly his overall consumption of his chosen alcoholic beverage.

70. While we cannot simply ignore these conventional wisdoms – the particular categories do, after all, have different tastes or, in the language of marketing specialists, ‘intrinsics’ – we cannot base a definition of the relevant market on these insights alone. It would introduce an intolerable degree of subjectivity and uncertainty into competition analyses, most particularly where consumer goods markets are at issue.

71. The evidence on substitutability presented by Mr. Lewis and on which the Commission sought to rely for its version of the relevant market related, firstly, to the form in which Nielsen collected data, and, secondly, to evidence of long term stability in the market shares of the various traditional categories within the broader alcoholic beverages market.

72. Lewis testified that Nielsen’s clients in the liquor industry do not generally and traditionally request information on liquor sales as a share of total spirit sales or of all alcoholic beverages. The services rendered to AC Nielsen clients in South Africa include a bimonthly presentation that incorporates an overview of economic trends in the SA market and a brief overview of the total liquor market. For the most part, however, Nielsen is required to report on the individual spirit categories. This, the Commission averred, constituted evidence that, in their daily practice, the actual participants in the liquor industry themselves worked with category-specific relevant markets. ‘Why’ it is implicitly asked ‘would they ask for information delineated by traditional liquor category if they genuinely believed that their products in these categories competed with products in all other categories, that is, with products in the alcoholic beverages market?’

73. Even if we assumed that the Nielsen experience confirmed that firms were predominantly interested in sales data in traditional liquor categories, it is by no means clear that we should be drawing the inference sought by the Commission. It is wholly possible to imagine motorcar manufacturers asking for data to be collected that would help identify the most popular colour vehicle that they produced but this would surely not justify a conclusion that placed red and blue vehicles in separate relevant markets!

74. Nor is it clear that Nielsen’s clients do, in fact, always require that data are collected in traditional liquor categories or, when tracked in traditional categories, that they use the data in this form. Firstly, Lewis acknowledges that Nielsen is no longer asked to collect separate data on gin, vodka and cane spirits but rather to aggregate these in a collective ‘white spirits’ category. Particularly interesting is Lewis’ acknowledgement that this has shifted over time, an admission that supports the parties’ notion of a dynamic market characterized by significant shifts as new consumers and new products enter the market and tastes change. Secondly, Lewis admits that a major Nielsen client, South African Breweries, requires data of the overall alcoholic beverages market and that it uses this in order to track the performance of its products, beer, and, recently, FABs, vis-à-vis spirits and wine. Again, this is identified as a relatively recent mode of collecting and presenting data.

75. The parties predictably deny that the form in which Nielsen data is collected has any bearing on the identification of the relevant market. They effectively suggest that this simply reflects a convenient mode of organizing masses of market data.

76. Moreover, the parties insist that their broad view of the relevant market is shared by many of their competitors. This is however only partly true. Hence SAB and GUDV, the large multinational producers of a broad range of alcoholic beverages, both consider their various products to be competing in the broad alcoholic beverages market. Snell, a locally based participant in the alcoholic beverages market, avers that it is ‘an acknowledged fact’ that ‘beer, wine, RTDs, ciders and spirits fiercely compete for liquor consumers’. On the other hand, Seagram, also a large multinational producer of alcoholic beverages, and DGB, a local producer and distributor, appear to support a narrow market definition. On the basis of its experience in a range of national markets and on a telephone survey of local FAB consumers, Bulmer, yet another multinational producer and recent entrant into the South African market, contends that FABs are a separate market, although it is not clear that this conclusion is supported by the results of the survey that they commissioned.²⁰ The merging parties also find support for their broad market definition in the views of industry analysts.

77. The parties claim that the experience of the ‘brandy study’ also confirms their view of the relevant market. This study was commissioned by Distell and undertaken by McKinsey, the large US based management consultancy.

78. Although initially conceived as a study of brandy consumption and hence dubbed the ‘brandy study’, Mr. John Forsyth, a McKinsey executive who testified on Distell’s behalf at the hearings, averred that it immediately became apparent to the McKinsey research team that the patterns of, and prospects for, brandy consumption could not be understood without locating it in a wider study of the consumption of alcoholic beverages generally. Forsyth testified that his company characteristically approached requests to analyse the positioning of particular products in the market by asking consumers a range of pertinent questions concerning the product under scrutiny. If, in the course of their survey of consumers, the respondents persistently mentioned other products, this signalled the necessity for widening the scope of the study to include these other products.

79. Hence, the ‘brandy study’ effectively became a study of brandy’s place within the broader alcoholic beverages market. In essence the study found:

(Paragraph omitted, contains confidential information)

80. In fact it found that a significant proportion of the population (accounting for a significant part of consumption) is prepared to change drinking patterns in response to a change in price or other product attributes.

81. While the finding cited in the preceding paragraph is, on the face of it, pertinent, we are provided with no further basis for this conclusion, nor are we told what liquor categories are referred to. Moreover, changes inspired by ‘fashion’ are likely to be of a longer-term nature – more akin to a shift of, rather than along, a demand curve – than are those inspired by price changes.

82. This goes to some of the reservations that we have about the brandy study for the purposes of conducting a competition analysis. It is a study manifestly designed to inform Distell’s marketing strategy and although it does, in the process, unearth insights and information that are of some indicative interest in a competition analysis, it is not a competition analysis. That it asks ‘how can I, predominantly a producer of brandy and other spirits, persuade beer drinkers to come over to my product’ or ‘what steps do I need to take to prevent the breweries wooing away my customers’ is not, on its own, the identification of a relevant market that includes both brandy (and other spirits) and beer (or, for that matter, wine).

83. It merely acknowledges that, new consumers aside, the most likely source of additional custom for any alcoholic beverage is to be found in the ranks of existing consumers of alcoholic beverages, rather than in the ranks of, say, church congregants. It simply says that those who are regularly to found in a bar or shebeen – rather than at Sunday School - constitute the most fertile ground on which to market an alcoholic beverage. Many of the patrons of a shebeen or bottle store – the vast majority, given current South African consumption patterns of alcoholic beverages – are beer drinkers. Hence, that beer drinkers should be a major target of a spirits’ producer is not surprising. It is, indeed, as little surprising as the converse – we would expect beer producers to be as much concerned with its ability to make inroads into the ranks of brandy consumers and this likely explains SAB’s interest in gathering data of alcoholic beverages consumption from AC Nielsen.

84. At most it may reflect that in the long term battle to change tastes, to develop both ‘intrinsics’ and ‘extrinsics’ that would boost the long term prospects of a particular type of spirit – that would move the demand curve for that particular type of spirit outwards – a spirits producer would target, inter alia, beer consumers, that great rump of consumers who already consume alcoholic beverages. It does not suggest that the current competitive strategy, particularly the pricing strategy, of a spirits producer is materially influenced by the competitive strategy of the beer brewers.

85. We have already dealt with the question of ‘occasion-based’ drinking, the overriding basis for the European decisions that confined relevant markets to traditional categories. The absence of evidence of occasion-based drinking in South Africa clearly opens the way to hypothesise that consumers would switch between categories in response to price movements and this hypothesis appears to be confirmed by the brandy study and a number of authoritative studies and observers.

86. The brandy study finds that ‘..consumers consume products from a number of categories and freely switch between categories’

(Rest of paragraph omitted, contains confidential information)

87. The Brandy Study also identifies a blurring of the division between traditional liquor categories.

(Rest of paragraph omitted, contains confidential information)

88. It is also noteworthy that the consumer category whose participants are most wedded to the occasion-based drinking patterns identified in the European cases represent a very small proportion of the adult South African population and that large proportion of the South African population (representing a significant part of liquor consumption) is prepared to change drinking patterns in response to a change in price or fashion.

89. However, when the brandy study isolates consumer responses that may assist us in arriving at precise conclusions regarding substitutability, it appears that the actual blurring of traditional liquor categories is between spirit categories:

(Paragraph omitted, contains confidential information)

90. The assessment by another group of market researchers commissioned by the parties, Ingwe Communications, of the abovementioned research reinforces the focus on inter-spirit category substitution:

(Paragraph omitted, contains confidential information)

91. Moreover, Distell appears to have acted on these findings:

(Paragraph omitted, contains confidential information)

92. What little independent research has been presented to us appears to support the conclusions of the parties’ research insofar as it demonstrates substitution between spirit categories. Hence independent research on the behaviour of South African consumers reported in the 2001 Alcoholic Beverage Review concludes that ‘consumer behaviour in the face of economic hardship continues to move from a premium brand in one category to a cheaper category rather than a cheaper brand’. We were informed of research on product innovation that concluded that: ‘the growth of RTD’s/FAB’s has resulted in a blurring of the traditional product categories’.

93. The Commission however presents evidence that purports to question substitution between spirit categories. It argues that certain of the data presented by Nielsen, in particular those data indicating the apparent long-term stability of the distribution of market shares between spirit categories, support a category-based definition of the relevant market. The Commission effectively contends that if competition was occurring between categories, then one would expect to see movement over time in the shares of the alcoholic beverages market commanded by the various categories – the stability in these shares indicate that competition occurs within the respective categories.

94. The Commission presents a 10-year trend in the market shares (based on litres sold) in narrow spirit categories:

Table 2a Trends in spirit category market shares

Source: AC Nielsen

95. However, the Commission’s reliance upon long-term trends in the liquor industry as evidence of low inter-category substitution has several drawbacks. First, substitution in response to a price increase does not have to be long-term in nature in order to qualify as evidence of substitutability for the purposes of a competition analysis – indeed it is generally accepted that long-term trends are rather indicative of changes in tastes, new product innovation, etc., that is, changes that cause a shift of, rather than a movement along, the demand curve. Secondly, using the long-term liquor sales data runs the considerable risk of masking underlying and, from the perspective of a competition evaluation, critical shorter-term trends.

96. In other words, it is wholly conceivable that an increase in the price of a particular liquor category, A, may have caused a significant sales decline in the short term as consumers switched to category B. However, assume that, for whatever reason, the producer of Category B could not hold its prices at the relatively low level and, a year later was obliged to increase its prices to the level of Category A thus losing sales to that category. If the producers of the respective categories then, for say the next five years, maintained this parity between the prices of the two categories, the long term trend would indicate relative stability in the overall shares of the two product categories and, in the Commission’s view, an absence of inter-category competition, while an analysis of short term trends and events may indicate a degree of substitutability between the categories that placed them in the same relevant market. In our view year-on-year changes in market shares of the various products in a declining market are important to indicate substitution is occurring in that market, even if the market shares return to historical levels every decade or so.

97. Indeed, although more rigorous econometric analysis would be necessary in order to establish a structural break in the data set, it is nevertheless reasonably clear that there are at least two conflicting trends discernable in the period under review. Hence, if one takes 1993 and 2002 as a basis for comparison it appears that brandy lost only 8.8% and gin 8.5% while vodka increased its share by 2.1%. However, a significantly different picture emerges if we distinguish between 1993-97 on the one hand and 1998-2002:

Table 2b Trends in spirit categories market shares

Source: Calculations based on AC Nielsen data

98. Note that the decline (increase) in the brandy share is accompanied by increases (declines) in vodka and gin. For the remaining spirit categories, the trend is indeed one of either long-term decline or growth:

Table 2c Trends in spirit categories market shares

Source: Calculations based on AC Nielsen data

99. Clearly for the market share data to provide any meaningful insight into the extent of substitutability between categories, they would have to read alongside price fluctuations over the same period – hence, as we will elaborate below, it is extremely pertinent that the break in the trend coincides with the Oude Meester price hike in 1997. The Commission has argued – and this too is examined below – that the break is caused by the behaviour of a statistical outlier, namely Kwazulu-Natal. However, eliminating this important piece from the overall data set requires detailed justification. Certainly, a simple assertion based on the long-term trends revealed by the Nielsen data reveals little about the competitive interplay between the traditional liquor categories.

100. Some of the witnesses have confirmed the simultaneous existence of stable long-term market shares and short-term fluctuations. Mr. Hooper, the witness from Snell, identified this phenomenon:

“I think if brandy were to go up in price significantly and there have been other instances where Distell might point to that having happened. In Natal, for example, fairly recently brandy went up fairly substantially in relation to Smirnoff. And Smirnoff picked up a lot of market share in Natal. You do get these shifts and you do get them in pockets, but if one looks over a medium period of time, I think you’d find that those shifts are there, but they are relatively minor. And if you take a brandy category, for example, which is as large as brandy is in the South African market that the brandy price goes up out of kilter with other spirit categories or any other alcohol category, it may suffer, but it would suffer to a relative degree. I don’t think you’re going to suddenly find brandy going from its fifty percent (50%) market share of the spirits market, for example, rocketing down to forty percent (40%) or below forty percent (40%). I don’t think you’re going to get that sort of shift occurring in a short to medium term. In the long term it is a possibility, but I don’t see it as a short or medium term reaction.”²¹

101. Other witnesses have pointed to the significance of shifts in market shares, however small, in a declining market. Forsyth, the parties’ expert witness, testified as follows:

“If the market on the other hand has been growing, then you could say well some of that additional consumption in alcohol beverages could come from other drinks that they may have, but because it’s shrinking or stable then there’s probably a high degree of substitution going on.”

102. Clearly, then the Nielsen data on market share do not materially assist in determining the extent of inter-category substitutability and do not make a significant contribution to the task of identifying the relevant market.

103. The parties, for their part, insist that the evidence of substitutability between the various traditional categories supports their case for defining an alcoholic beverages market. They rely on a range of sources in support of their claim that competition occurs across the traditional liquor categories and, accordingly, that a broad definition of the relevant market that includes all alcoholic beverages should be accepted.

104. The parties’ marketing research provides some interesting data indicative of the vulnerability of spirits to substitution, illustrating that within the spirits category certain spirits enjoy considerably less category loyalty than others and that in those same categories a significant proportion of consumers is highly ‘at risk’ to other categories.