COMMISSION DECISION of 28/02/2000 declaring a concentration to be compatible with the common market (Case No IV/M.0032 - * GRANARIA/ÜLTJE/INTERSNACK/MAY HOLDING) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)

Brussels, 28.02.2000

PUBLIC VERSION

MERGER PROCEDURE ARTICLE 6(1)(b)

TO THE NOTIFYING PARTIES

Dear Sirs,

Subject : Case No COMP/JV.32 - Granaria / Ültje / Intersnack / May-Holding Notification of 22 November 1999 pursuant to Article 4 of Council Regulation No 4064/89

1. On 22 November 1999, the Commission received notification of a proposed concentration pursuant to Article 4 of Council Regulation (EEC) No 4064/89 [1] (the "Merger Regulation") by which Granaria Food Group BV ("Granaria"), Ültje Vermögensverwaltungs-GmbH (" Ültje"), Intersnack Knabbergebäck GmbH & Co. KG ("Intersnack") and May Holding GmbH & Co. KG ("May Holding") intend to create a joint venture company ("JVC"), which will manufacture and distribute nut snacks. The JVC will combine the existing nut snack businesses of Granaria, Ültje and Felix Snack Holding GmbH & Co. KG ("Felix"), which is jointly controlled by Intersnack and May Holding.

[1] OJ L 395, 30.12.89, p.1; corrected version OJ L 257 of 21.9.1990, p13; as last amended by Regulation (EC) No 1310/97, OJ L 180, 9.7.1997, p.1, corrigendum in OJ L140, 13.2.1998, p.17

2. After examination of the notification, the Commission has concluded that the notified operation falls within the scope of Council (EEC) Regulation No 4064/89 and does not raise serious doubts as to its compatibility with the Common Market and the EEA Agreement.

I. THE PARTIES

3. Granaria is a Dutch-based food group which manufactures and distributes food products, in particular nut snacks. Granaria is active in nearly all EU Member States, in particular the Netherlands and France.

4. Ültje is a German-based company which manufactures branded nut snacks and distributes them in Austria, France, Germany, Italy and Luxembourg.

5. Intersnack is a German-based company belonging to the Pfeifer & Langen sugar group. It manufactures and distributes savoury snacks, i.e. potato chips/crisps, salty biscuits and extruded snack products but has no activity in nut snacks. It is active in all EU Member States, in particular Germany and France, as well as other countries, in particular Poland.

6. May Holding is a German-based holding company. Apart from Felix, its other subsidiaries are engaged in the production of soft drinks, tin sheet packaging, logistics and real estate.

7. Felix is a German-based company, jointly controlled by Intersnack and May Holding. Felix manufactures nut snacks and distributes them in nearly all EU Member States, in particular Germany and France.

II. THE OPERATION

8. The parties will merge the nut snack businesses of Granaria, Ültje and Felix in the newly created JVC in accordance with a Joint Venture Agreement made on 6 September 1999 ("JVA"). The JVC will process, market and distribute nut snacks.

III. THE CONCENTRATION

a) Joint control

9. According to the JVA, Ültje and the parents of Felix (Intersnack and May Holding) will together acquire joint control of 50 % of the shares of the JVC (via an intermediate holding company) and Granaria will acquire the remaining 50%. The JVC will have a supervisory board of directors appointed jointly by Granaria, Ültje, Intersnack and May Holding. All board members will have an equal vote. Each of Granaria, Ültje, Intersnack and May Holding will exercise decisive influence over the JVC and will therefore have joint control.

b) Full-function joint-venture

10. Granaria, Felix and Ültje will contribute to the JVC all their existing nut snack activities, which currently operate as independent businesses. The JVC will have its own management and will be established on a permanent basis. It will therefore perform on a lasting basis all the functions of an autonomous economic entity.

11. The notified operation therefore constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation.

IV. COMMUNITY DIMENSION

12. The combined worldwide turnover of the parties does not meet the EUR 5,000 million threshold in Art. 1(2) of the Merger Regulation, however, it does meet the thresholds of Art. 1(3) of the Merger Regulation. The combined worldwide turnover of all the undertakings concerned exceeds EUR 2,500 million [2] (Granaria: EUR 944 million, Felix: EUR [...] million, Intersnack: EUR [...] million and Ültje: EUR [...] million). The combined aggregate turnover of all the undertakings concerned exceeds EUR 100 million in each of Germany (EUR [...] million), France (EUR [...] million) and The Netherlands (EUR [...] million). The aggregate turnover of each of [...] and [...] exceeds EUR 25 million in each of the same three Member States. The aggregate Community-wide turnover of each of Granaria and Felix exceeds EUR 100 million. Felix, Intersnack and Ültje each achieve more than two-thirds of their Community-wide turnover in Germany, but Granaria does not achieve two-thirds of its Community-wide turnover in any single Member State. Therefore, not all of the parties achieve more than two-thirds of their aggregate Community-wide turnover in one and the same Member State. The notified operation therefore has a Community dimension. It does not constitute a co-operation case pursuant to Article 57 of the EEA Agreement.

[2] Turnover calculated in accordance with Article 5(1) of the Merger Regulation and the Commission Notice on the calculation of turnover (OJ C66, 2.3.1998, p.25). To the extent that figures include turnover for the period before 1.1.1999, they are calculated on the basis of average ECU exchange rates and translated into EUR on a one-for-one basis.

V. COMPETITIVE ASSESSMENT

a) Relevant product market

13. The only sector where more than one party is active is the processing and distribution of nut snacks. Nut snacks consist mainly of peanuts and to a lesser extent cashews, pistachios, brazil nuts, hazelnuts, almonds, walnuts, macadamia and pekans. These are processed by various combinations of cleaning, blanching, oil or dry roasting, salting, spicing, coating, mixing and packaging. Throughout the Community, peanuts account for the major share of all nut snacks.

14. All parties operate at the wholesale level. They distribute the product to retailers and wholesalers.

15. The parties submit that the relevant product market consists of all savoury snacks, including nut snacks as well as potato crisps and chips, savoury biscuits and extruded snack products (made from potato or dough). The parties estimate the value of this market within the Community at wholesale level at Euro 5,473 million in 1998 (based on ex-factory prices).

16. The parties' view is based on some evidence of demand substitution between nut snacks and other savoury snacks. This includes data on Procter&Gamble's launch of its 'Pringles' chips in Germany. The launch was followed by a significant fall in sales of both other chips as well as of nut snacks. The parties also refer to similar pricing and the joint placement of all savoury snacks on supermarket shelves.

17. The Commission examined the savoury snacks sector in 1992 in Pepsico/General Mills [3]. In that case, the Commission found that savoury snacks were comparable in price and that there was a high degree of substitutability between the different savoury snack products. However, no conclusion was reached on the relevant product market definition.

[3] Decision of 5.8.1992 (Case IV/M.232)

18. During the Commission's investigation in the present case, some retailers considered the relevant product market as extending to all savoury snacks, others only to all nut snacks. The majority of nut processors did not regard the relevant product market as extending to all savoury snacks and identified all nut snacks as the relevant product market.

19. While none of the market operators argued any narrower market definition than all nut snacks, the Commission has also assessed the case for separate sub-markets for individual nut varieties, such as peanuts, pistachios, etc..

20. In defining the relevant market, the Commission takes into account all factors which exercise an "immediate and effective disciplinary force on the suppliers of a given product, in particular in relation to their pricing decisions." [4]

[4] Commission Notice on the definition of the relevant market for the purposes of Community competition law (97/C 372/03) of 9.12.97 OJ. C 372/5ff: Point 13

21. From the point of view of demand substitution between different varieties of nuts, the evidence available is not conclusive. There are some indications that it may be low. While all varieties of nut snacks are generally placed jointly on the shelves, consumer prices differ significantly between the different varieties of nuts.

22. In line with the Court's rulings [5], the Commission may also take supply-side substitutability into account "when defining markets in those situations in which its effects are equivalent to those of demand substitution in terms of effectiveness and immediacy. This means that suppliers are able to switch production to the relevant products and market them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices." [6]

[5] See Case 6/72 Europemballage and Continental Can v Commission [1973] ECR 215, paragraph 33 and also case 322/81 Michelin v Commission [1983] ECR 3461, paragraph 41 and 44

[6] When these conditions are met, the additional production that is put on the market will have a disciplinary effect on the competitive behaviour of the companies involved. Such an impact in terms of effectiveness and immediacy is equivalent to the demand substitution effect." (Commission Notice on the definition of the relevant market for the purposes of Community competition law (97/C 372/03) of 9.12.97 OJ. C 372/5ff: Point 20ff; see also point 13)

23. The Commission's investigation revealed a similarity of conditions of competition [7] at the wholesale level for the different nut varieties. Moreover, supply substitutability [8] between them appears to be high.

[7] See Michelin para 41 and 44

[8] See Continental Can para 33

24. As regards similarity of competition conditions, most suppliers indicated that they offer a wide range of nut snacks and most retailers stated that they invite tenders for full ranges of nut snacks rather than for individual nut varieties. Therefore, the same buyers and sellers are generally present for each nut variety.

25. As regards supply substitutability, competitors confirmed that the production processes are the same or very similar for the main nut varieties. Competitors indicated that they can and do use the same facilities for processing different varieties of nuts. Switching between varieties simply involves cleaning the processing equipment, which only takes a few hours. Certain nut snacks, e.g. peanuts roasted in their shell and coated nuts, do involve different or more complex processing and higher switching costs, however these account for a minor fraction of the market. [9] Finally, certain "mixed nut" snacks contain several varieties of nut. This would also indicate that the different nut varieties form a single nut snacks market.

[9] The most important of these are peanuts roasted in their shells. These require a dry roaster rather than the usual oil roaster. Competitors indicated that peanuts roasted in their shells account for some 15 to 20% of all peanuts used in nut snacks. The parties estimate the price of a competitive new dry roaster at Euro 0.5 Million.

26. Accordingly, there is evidence of a high degree of supply substitutability between the main varieties of nut snacks, which puts effective competitive pressure on the pricing of individual varieties. It can be expected that a small but significant and lasting increase in the price of an individual nut variety above its competitive level would induce suppliers to switch production to the variety in question and that this would compete away the differential.

27. In summary, the Commission has found strong indications that the relevant product market is at least as wide as all nut snacks and some indications that it may be as wide as all savoury snacks. However, it is not necessary to conclude on the precise delimitation of the relevant product market, because the operation does not raise serious doubts as to its compatibility with the Common Market on the basis of any narrower relevant product market.

b) Relevant geographic market

28. Whether the relevant product market is all savoury snacks or nut snacks, the parties argue that the relevant geographic market is at least Community-wide. They argue that the big manufacturer brands are increasingly international. With regard to the retailer's own label segment, they indicate that retail chains increasingly purchase the product on the basis of pan-European tenders.

29. In the Pepsico/General Mills decision of 1992, the Commission found some evidence that the market for savoury snacks was still national in scope, in particular differences in prices, low cross-border brand penetration and different taste preferences. However, no conclusion was reached on the geographic scope of the relevant market.

30. The Commission's investigation in the present case revealed indications of a tendency towards a Community-wide market for both nut snacks and other savoury snacks. Some of the large retail chains appear to use pan-European tenders for purchases and many competitors indicated that they consider themselves to be operating in a Community-wide market. A large proportion of retailers questioned by the Commission indicated that they would switch to foreign suppliers if prices for nut snacks or other savoury snacks increased by 5 to 10% in their home market.

31. Whilst these indications point towards an increasingly Community-wide wholesale market, in particular for nut snacks, the precise geographic scope of the market can be left open, because even on the basis of national geographic markets the notified operation does not raise serious doubts as to its compatibility with the Common Market.

c) Assessment

32. The following assessment considers the concentration on the basis of the wider market for all savoury snacks and the more narrow markets for nut snacks.

33. The three parties joining their businesses in the Joint Venture - Felix, Granaria and Ültje -are all active in nut snacks only. They do not produce any other savoury snacks. One parent company, Intersnack, is active in other savoury snacks only and not in nut snacks.

34. The only segment of the wider savoury snacks market in which the market structure changes due to the concentration is therefore the nut snacks segment. It is in this segment that the concentration creates an overlap. In the neighbouring segment of other savoury snacks (chips, crisps etc.) the proposed concentration does not alter the market structure as only one parent party, Intersnack, is active in this segment and exclusively so. The following assessment therefore starts with the effect of the concentration on the nut snack market.

(1) Assessment on the basis of nut snacks markets

35. Based on a relevant product market of all nut snacks, the affected markets [10] are Austria, Denmark, Finland, France, Germany, Sweden and The Netherlands and, depending on the scope of the relevant geographic market, the Community as a whole.

[10] Within the meaning of Form CO section 6 III

36. The following table shows the parties' estimated market shares in the wholesale nut snacks market including sales under their own brands and retailers' own labels.

Overlap analysis on the market for all nut snacks

(including the parties' sales under their own brands and retailers own labels) Value market shares in % [11]

[11] Excluding sales to competitors

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37. While the table shows significant market shares, most of this is attributable to the parties' sales under retailer own labels. The parties sell most of their nut snacks under retailer own labels and only a minor share (ca. [10-20]%) under their own brands. The parties estimate the market shares of their brands as [10-20]% in Austria, [10-20]% in France, [10-20]% in Germany, [10-20]% in The Netherlands and [0-10]% in Denmark, Finland and Sweden. This demonstrates the concentration of the parties' business on the own label segment.

38. According to the parties' estimates, the JVC will become the largest Community supplier of nut snacks, with [20-30]% of the Community market. The relative positions of its main competitors on the affected markets (based on the parties' estimates) are as follows:

Market value shares in wholesale markets for nut snacks (including sales under manufacturer brands and retailer own labels)

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39. If the relevant geographic market were to be defined as Community-wide, the parties' combined market share of [20-30]% would not raise serious concerns, given the large number of existing suppliers, low entry barriers, several recent market entries and significant production over-capacity (as detailed below). The following assessment therefore concentrates on national nut snack markets.

40. On the basis of national nut snack markets, the JVC will become the largest supplier in Austria, Denmark, France, Germany and The Netherlands. The relative positions of the JVC and its main competitors in those Member States (based on the parties' estimates) are shown in the above table. Some customers perceived the risk that the concentration may reduce competition, that it may leave them with too few alternative suppliers, or that it may create a dominant position.

41. The Commission has pursued these concerns in its investigations but considers that, despite the relatively high market shares in some Member States, the notified operation does not create a dominant position in any of these countries for the following reasons.

42. A particularity of the nut snack sector is the strength of retailer own labels and the relatively weak position of manufacturers' brands. According to the information provided by the parties, retailer own labels account for approximately two-thirds of total sales of nut snacks. According to the parties, this proportion applies to the overall nut snacks sector as well as to the main segments for individual nut snack varieties and to each country. Furthermore, the Commission's investigation revealed that the share of own label sales is growing.

43. The parties attribute the relative weakness of brands and lack of brand loyalty in this business to the commodity character of the nuts and the fact that consumers perceive little if any difference in quality between rival products. Compared with other savoury snacks, nut snacks allow for little product differentiation and involve very little value added. Raw material prices account for [60-90]% of ex-factory prices. [12]

[12] Estimates by the parties

The parties' position in branded nut snacks

44. The parties' brands are Ültje in Germany and Austria, Klijn in The Netherlands and Benoit in France. They also trade under two other names in Germany, Pittjes and Kunz, however, the parties do not regard these names as brands, due to lack of any promotion and other brand criteria.

45. Within the branded segment of nut snacks, the proposed concentration does not create any significant overlap. Felix' brand Benoit is significant only in France, Ültje's brand Ültje is significant only in Austria and Germany and Granaria's brand Klijn has significance only in The Netherlands.

46. Furthermore, according to the parties, the JVC will not be the leading supplier of branded nut snacks in any Member State and will compete with brands of multinational companies such as Bahlsen, Sara Lee and United Biscuits. With a market share of [10-20]% in Austria, the JVC's brand Ültje comes third after Kelly's [20-30]% and Bahlsen [20-30]%. With a market share of [10-20]% in Germany, the JVC's brand Ültje comes second after Bahlsen with [10-20]%. With a market share of [0-10]% in France, the JVC's brand Benoit comes third after Sara Lee's [10-20]% and Bahlsen's brands [10-20]%. In The Netherlands the JVC's brand Klijn with [10-20]% comes second after Sara Lee's brand Duyvis with [30-40]%. The parties have no significant brands in the other affected markets. Taking further into account that the parties branded nut snacks compete with retailer own label nut snacks, the Commission does not consider that the combination of the parties' brands will create or strengthen a dominant position.

The parties' position in retailer own label nut snacks

47. As indicated above, the parties are mainly active in the own label segment of the nut snack sector. The own label segment appears to be dynamic with considerable countervailing bargaining power on the demand side, low entry barriers, several recent market entrants and potential competition from suppliers of industrial ingredient nuts.

- Retailers use multiple suppliers and can switch suppliers easily for their own brands

48. Retailers control their own brands. This gives them the flexibility to use multiple suppliers and to switch suppliers relatively easily or indeed set up their own roasting and packaging facilities. The Commission's investigation indicated that the major retailers generally use three or more nut snack suppliers and in many cases procure their nut snacks using Community-wide tenders. Purchase contracts are typically in the form of annual framework arrangements, allowing the retailer to call off quantities as required, without giving the supplier any commitment on the volume of purchases. The parties have stated that [...] of their major retailer customers have reacted to the proposed joint venture by switching purchases to third parties. In addition, there appears to be a large number of existing suppliers of own label nut snacks. According to the parties, own label nut snacks are supplied by as many as 75 different suppliers in the Community.

- Low barriers to entry for own label nut snacks

49. Entry barriers to the own label nut snack business appear to be low. Competitors indicated that competitive roasting and packaging equipment can be purchased for between EUR 1 and 2 million. As regards access to raw materials, competitors referred to the JVC's strong bargaining position on the sourcing markets but indicated no problems with availability. Other, intangible barriers, such as the need for a brand and a distribution network are not significant here, as the product is packaged under the retailer's brand and delivered to centralised distribution centres.

50. The parties indicate that over the last five years there have been as many as nine new entrants to the nut snacks business, including Internut Handel GmbH&Co. KG (Germany), Max Kiene GmbH (Germany), Maitre Prunille SA (France), Imperial Snacks Foods Ltd. (UK), Zerno (Lux).

- Potential competition from suppliers of industrial ingredient nuts

51. In addition to their use in nut snacks, processed nuts are also supplied to the food industry as intermediate ingredients for use in confectionery, breakfast cereals etc. This neighbouring industrial ingredient market is of approximately the same size as the nut snack market [13]. Only one of the parties (Granaria) is active in this industrial supply sector and only to a marginal extent.

[13] The parties estimate total Community nut snack sales in volume at 345,000 tonnes p.a. and industrial ingredient nut sales at 400,000 tonnes p.a.

52. Differences between the industrial ingredient and retail nut snacks sectors are related mainly to product specifications and packaging. Industrial customers often use very precise specifications. In addition to the basic cleaning and roasting processes used for nut snacks, industrial customers often require chopping or slicing of the nuts. Industrial supplies are forwarded in bulk in big bags, drums or tank-lorries. The basic cleaning and roasting processes are however essentially the same for both sectors.

53. Suppliers of own label nut snacks face actual and potential competition from manufacturers supplying processed nuts as industrial ingredients:

- Most nut processors supplying the industrial sector indicated that they are also active in the retail segment and that they can switch production easily between the two sectors. Such switching should also be facilitated by the fact that the industry operates with significant over-capacities.

- The parties have provided several examples of companies which have recently switched between the two sectors, such as Echalie (France), Q-Peanuts (UK) and Zerno (Lux).

- For those industrial suppliers who do not currently produce nut snacks, the main technical barrier appears to be the lack of appropriate packaging equipment. Economically this does not appear to constitute a significant barrier, given the relatively low cost of such equipment [14] and the possibility of subcontracting indicated by competitors. As stated above, more intangible barriers to entry, such as the need for a brand and distribution network do not apply when entering the own label segment.

[14] Competitors have indicated that nut snack packaging facilities can be purchased for between EURO 200,000 and EURO 500,000.

54. Most market participants questioned by the Commission considered that the pricing of industrial nut supplies affects the wholesale prices of nut snacks. The parties have provided information that their margins in both sectors are essentially the same. It can therefore be concluded that the pricing power held by the parties in the nut snack sector is constrained by the potential competition from industrial nut processing companies. [15]

[15] If industrial ingredient nuts and consumer nut snacks are taken together, the parties shares in this hypothetical market are as follows: EU [10-20]%, Austria [20-30]%, Denmark [30-40]%, Finland [30-40]%, France [20-30]%, Germany [20-30]%, The Netherlands [20-30]%.

55. Considering these factors, the parties have a considerably weaker position in the own label segment than suggested by their market shares in the nut snacks markets.

Aspects common to branded and own label nut snacks

56. In both the branded and the own label segment the parties face considerable buying power as well as actual and potential cross border competition from suppliers with excess capacities.

- Buying power

57. The parties face the buying power of the consolidating retail sector. The parties view the proposed concentration as a response to the increasing concentration of their retailer customers. The parties estimate their top five customers to have a market share of the total nut snacks market of 70% in France, 71% in Germany, 95% in Sweden and 95% in The Netherlands.

- Cross border competition

58. The Commission's investigation revealed that big retailers monitor offers from suppliers in different Member States before purchasing nut snacks and that many bigger retailers use Europe-wide tenders for their major contracts. Even on the hypothesis of national geographic markets, this is evidence of potential cross-border competition, which can be expected to restrain the JVC's power in pricing its products.

- Excess production capacity

59. The parties' market power is further restrained by production overcapacity throughout the Community of approximately 30%.

60. In conclusion, the nut snacks sector is characterised by the very strong presence of retailers' own labels. By controlling their own brands, the retailers are able to use multiple suppliers and to switch between suppliers. Combined with the high level of concentration of the retailers as customers of the parties, this creates significant countervailing purchaser power. The parties are further constrained by potential competition from the large neighbouring industrial ingredient nuts sector, low entry barriers to the own label sector and production over-capacity throughout the Community. These features also apply to the main sub-segments for individual nut varieties such as peanuts, cashews, pistaches and nut mixtures.

61. The Commission therefore considers that the concentration will not provide the parties with the power to increase prices of their nut snacks above the competitive level.

(2) Assessment on the basis of a product market for all savoury snacks

62. Based on a relevant product market of all savoury snacks, the affected markets are Austria, France and Germany. The parties estimate their combined market shares as follows:

Overlap analysis on the market for all savoury snacks

Value market shares in %

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63. Only Intersnack, a parent of the JVC, is engaged in the production of other savoury snacks. Accordingly, on the basis of a relevant product market of all savoury snacks, the proposed concentration would create an overlap in the sub-segment of nut snacks only.

64. The market shares of the parties (JVC + Intersnack) on the basis of a market for all savoury snacks would be: [40-50]% in Germany, where Intersnack has a strong position in the other savoury snacks market, [20-30]% in France and [20-30]% in Austria. EU-wide the market share will be [10-20]%.

65. These market shares do not translate into dominance. In the wider all savoury snacks market, the parties compete with large multinational food companies such as Procter&Gamble, PepsiCo, Phillip Morris, United Biscuits and Sara Lee. Recent entries of new brands into the German savoury snacks market include Procter&Gamble's launch of Pringles and PepsiCo's launch of Fritolay.

66. On the demand side, the parties again face the major retailers with their bargaining power. The Commission's enquiries indicate that a large proportion of retailers compare price offers from suppliers in several countries before entering into major contracts, again suggesting that high national market shares may not result in corresponding market power, due to competitive pressure from suppliers in neighbouring Member States. In this respect, the situation appears to be essentially the same as for nut snacks.

67. The Commission therefore considers that the operation would not raise doubts as to its compatibility with the Common Market on the basis of a relevant product market of all savoury snacks.

VI. COOPERATIVE EFFECTS

68. Only one parent company (Intersnack) will retain activities in any related market - that of savoury snacks. The joint venture will therefore not lead to cooperative behaviour between the parents.

VII. ANCILLARY RESTRICTIONS

69. No restrictions have been notified for assessment in conjunction with the joint venture.

VIII. CONCLUSION

70. For the above reasons, the Commission has decided not to oppose the notified operation and to declare it compatible with the Common Market and the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of Council Regulation (EEC) No 4064/89.

For the Commission,