Lauralyn Kaziboni
In April 2015, Pioneer Food Group (Pioneer), the leading breakfast cereal producer in South Africa, with popular brands such as ProNutro, Weet-Bix and Bokomo Limited1 announced that it was planning to enter into a joint venture (JV) with Future Life Health Products (Future Life), a scientifically formulated nutrient-dense functional food products company.2 The merging parties cited improved product efficiency and learnings as crucial benefits of this arrangement.3 The JV was contested by Kellogg’s, the second largest breakfast cereal producer, as it would likely result in the removal of an effective competitor.4 The Competition Commission of South Africa (the Commission) recommended that the merger be approved without conditions. However, the Competition Tribunal of South Africa (the Tribunal) approved the merger with conditions on 9 November 2015.5 This article reflects on the key considerations of the competition authorities regarding the merger, including the removal of an effective competitor in Future Life.
Background to the merger
Currently Future Life has JVs with Clover and Pioneer plus two more in Uganda and Angola, and another to follow in United Arab Emirates.6 The joint venture (50/50) with Clover was intended to launch a ready to drink version of Future Life in 2015, with other variants to follow. In this arrangement, Clover is in charge of production, sales, distribution and merchandising, while Future Life contributes its expertise in cereals and functional food.7
The joint venture between Future Life and Pioneer provides an opportunity for both companies to combine their expertise in the food and beverage and functional foods sectors in order to explore profitable categories outside of their traditional markets, and to unlock new product opportunities. The partnership will afford Future Life the opportunity to expand the company’s exposure to the corporate-based health and wellness market. Pioneer indicated that the venture would complement their existing product portfolio with the addition of the health brands as both companies would be able to combine their expertise to produce new products that they would not be able to manufacture individually.8
These agreements may be propelled by the desire to overcome certain barriers to entry such as brand loyalty and access to markets, where the larger incumbent firms have well-established distribution and marketing presence in the various countries.9
The merger was contested by Kellogg’s which viewed the transaction as the removal of an effective competitor following the Commission’s recommendation to approve the merger without conditions. According to Kellogg’s, ProNutro and Future Life are in the same market and this merger would lessen the competition in the market by reducing their incentives to compete. On this basis, it assumed that the merger would lead to a combined market share of 50% for Pioneer and Future Life in the ready to eat (RTE) market. However, the Commission concluded that ProNutro and Future Life operated in different markets and, therefore, did not compete with each other.10
The merger was subsequently approved by the Tribunal subject to certain comprehensive conditions. Behavioural conditions were enforced on the merging parties to ensure that ProNutro’s development continues for the next three years and to safeguard competition. The conditions that were applied specifically to deter information sharing and coordination can be summarised as follows:
- The founder shareholder of Future Life will exercise final and determinative power regarding strategic marketing and/or pricing policies for Future Life and its products.
- None of Pioneer’s representatives appointed to Future Life’s board will directly partake in any of the day-to-day management and/or oversight of Pioneer’s operations or be a member of Pioneer’s executive management team.
- Pioneer shall be administered as an independent unit, in accordance with its business trading policies and practices as at the implementation with certain exceptions.
- The merging parties shall establish ‘ethical’ and/or ‘invisible’ and/or ‘Chinese walls’ so as to restrict the flow of sensitive information between the parties.
- Future Life’s members (at the cost of Future Life) shall undertake regular training and/or awareness sessions from and with legal and/or other professionals, in relation to the Competition Act, its impact on Pioneer.11
Conditions of this nature are often necessary in mergers involving competitors or firms in adjacent market where there is likely to be cross-directorship or partial ownership between the firms. O’Brien and Salop consider that partial ownership mergers, are not likely to restrict competition as there is typically limited control by acquiring firms or partners over the management and day-to-day activities of the other firm.12 In instances where the JV partners share control, there is likely to be collusive behaviour and information sharing which may hinder competition. Total control by a particular company is usually advisable in JVs whereby the likelihood of a conflict of interest is reduced and one partner is then in charge of decision making in the best interest of the JV. In the case of horizontal JVs where the two companies have competing products, such as in this case, conflicts of interest may be a concern given that the firms may have less of an incentive to compete aggressively.13 In a full merger, merging firms that are close competitors are able to internalise losses suffered from market strategies (prices increases) which drive customers to consume the products of the other merging party.
The breakfast cereal market
In 2014, the breakfast cereals market, was valued at R4.3 billion per year.14 The table below illustrates market shares in the breakfast cereals market. Pioneer is the leading company followed by Kellogg’s, Tiger Brands and Nestlé, respectively.
Table 1: Breakfast cereals market15
The smaller cereal companies in this market include Pouyoukas Foods, Alpen Food Company, Simply Cereal and Future Life. Future Life is growing rapidly and, according to Kellogg’s, is an effective competitor in the breakfast cereals industry. In this industry, consumers have limited disposable income and are less inclined to spend on cereal. However, there is a desire for alternatives among health-conscious consumers typically in higher Living Standards Measure (LSM) categories which Nestlé, Tiger Brands and Future Life are increasingly targeting.16
In a previous Tribunal case between Pioneer Foods and SAD (2002), Pioneer was found to operate in the ready-to-eat (RTE) cereal market through ProNutro.17 Similar to ProNutro, Future Life is a cereal which is prepared through the addition of water or milk. Numerous internet sites by health trainers and dieticians consider ProNutro and Future Life to be in the same market. This is evident in various articles that compare these cereals where their consumers indicate the pros and cons of each product.18 Based on customer perceptions, these products may be in the same market although pricing data and other information would have been considered by the authorities to make a determination.
The proposed acquisition of Fruit and Veg City (FVC) by Pick n Pay (PnP) which was prohibited in 2007 raised similar issues regarding the removal of a (potential) effective competitor where products are close or potential substitutes. FVC was a start-up part-line grocery retail firm that grew exponentially and was positioned to be an effective competitor to PnP in the fresh food market. In 2006, FVC had been in existence for 13 years and had 80 stores across South Africa focusing on the supply of fresh fruit and vegetable. PnP was the leading retail supermarket which was rebranding to attract consumers of higher LSM categories.19
PnP withdrew the proposal to acquire FVC due to the prohibition recommendation by the Commission. The Commission argued that the merger would limit or prevent competition in the fresh food market. In the future this would reduce the prospects of product diversity and competitive pricing.20 The effects of the prohibition are evident today where FVC’s annual turnover increased by approximately 300% to R5 billion over 10 years.21 FVC’s portfolio has since diversified to include bakeries, butcheries and delis in 114 large stores, allowing the retailer to provide effective competition in the grocery retail market.
As with most mergers, there are likely to be significant efficiencies derived from a partnership between Pioneer and Future Life and the competition authorities would have considered the importance of permitting the partnership in order to preserve these likely gains to the economy. Limited information is available publicly regarding the precise efficiency gains expected to be derived through the merger. It is clear however that the Tribunal has anticipated that the JV was likely to result in commercial links between the firms which would undermine their incentives to compete in the market including through making further investments in the development of each brand. This would amount to the removal of an effective rival in the markets where there overlap in the firms’ activities. In some cases, behavioural conditions are sufficient to address concerns relating to information sharing in particular, although it is clear in the theory that total control, outright prohibition or divestitures are typically more reliable ‘remedies’ in situations where effective rivals or potential competitors seek to merge.
A PDF copy of this article can be found here.
Notes
1. Who Owns Whom. (2014). Manufacture of breakfast cereals
2. See note 1.
3. Botha, A. ‘Clover and Future Life ‘milking it’ together’. Moneyweb. (17 March 2014).
4. Peters, F. ‘Kellogg delays Pioneer’s cereal merger’. Business Day Live. (27 October 2015).
5. Pioneer Foods. ‘Pioneer Foods and Future Life Announce Joint Venture to Unlock New Product Opportunities’. (23 April 2015).
6. Moorad, Z. ‘Future Life to expand into Emirates’. (09 April 2014). Business Day Live.
7. Harris, S. ‘Clover Industries: bringing more variety’. Financial Mail. (27 March 2014).
8. See note 6.
9. The Competition Tribunal. (2002). In the large merger between Pioneer Foods (Pty) Ltd and SAD Holdings Limited Case No: 23/LMA/Apr02
10. Peters, F. ‘Kellogg delays Pioneer’s cereal merger’. Business Day Live. (27 October 2015).
11. Competition Tribunal of South Africa. (2015). In the matter between: Pioneer Foods Proprietary Limited and Future Life Health Products Proprietary Limited. Case No: LM017May2015
12. O'Brien, D. P. & Salop, S. C. (2000). Competitive effects of partial ownership: Financial interest and corporate control. Antitrust Law Journal, p. 559-614.
13. See note 12.
14. See note 1.
15. See note 1.
16. Schmalenensee, R. (1977). Entry Deterrence in the ready-to-eat breakfast cereals industry.
17. See note 9.
18. Based on a collation on the comments gathered from the online sites. These articles are as follows: Muscle and Strength. ‘Future Life vs ProNutro?’. Muscle and Strength Forum. (14 August 2011); Anabolics Steroids SA. ‘Future Life cereal’. Anabolics Steroids SA Forum. (27 July 2012); P.H. Fat. ‘Battle of snacks: ProNutro or Future Life?’. P.H. Fat Facebook Page. (25 April 2013).
19. The Competition Commission of South Africa. ‘Competition Commission recommends that Pick n Pay should be prohibited from acquiring Fruit & Veg City’. Newsletter. (2007)
20. Das Nair, R., & Dube, S. C. (2015). Competition, Barriers to Entry and Inclusive Growth: Case Study on Fruit and Veg City. CCRED Working Paper 2015
21. Shevel, A. ‘Fruit & Veg looks healthy’. Business Day Live. (11 November 2012).