Vj-116/1999/29
PURCHASING A FACTORY OF STOLLWERCK-BUDAPEST LTD BY GYŐRI KEKSZ LTD
Győri Keksz Ltd applied for an authorisation of the Office of Economic Competition to the acquisition of the Székesfehérvár biscuit and wafer factory of Stollwerck-Budapest Ltd.
The Parties
The Dutch United Biscuits Investment (member of the United Biscuits group, the world`s fourth and Europe`s second largest food producer and distributor) concluded an agreement with the German Stollwerck (one of the major sweet producers of Europe) concerning its Hungarian subsidiaries. According to this agreement Győri Keksz, fully owned by United Biscuits Investment purchased the Székesfehérvár biscuit and wafer factory owned by Stollwerck-Budapest including the real estate, equipment, trademarks, design patents and labour contracts.
Győri Keksz produces and distributes traditional sweet and savoury, filled and coated biscuits, wafers and different types of sweets.
Stollwerck-Budapest has specialised on quality sweet products, chocolates and pralines. Its Székesfehérvár factory was built as a green field project in 1995 and made the company own the second largest biscuit and wafer production capacity in Hungary.
The Market, Arguments of the Parties
The crucial points of the competition supervision proceedings were the determination of the relevant market of goods, the problem of substitutability and the consideration of potential dominant position. There was a considerable difference between the opinions of the applicant and of the investigation on these points affecting largely the outcome of the proceedings.
The applicant appraised its market position following the transaction on the basis of a much larger market of products, therefore it showed such a small market share (17-21%) that precluded the possibility of the creation of dominant position at once.
The investigation, on the contrary relied on a much smaller market share evaluated by considering the share of the Győri Keksz and Székesfehérvár factory products in the total production of Hungary (63%), accordingly it assumed the creation of a dominant position to be proved.
The applicant defined the relevant market of products as the market of snack products, which are eaten after or between main meals or are purchased for presentation and hospitality, regardless of their origin and producers. It presented biscuits and wafers as insignificant segments of the snack market. In its view, snack products (sweets/candies, small chocolate bars and tablets, pralines, cereal bars, honey cakes, potato crisps, extruded products, savoury sticks, pretzels, roasted oily seeds, milk based chilled products and impulse products) have partly or totally the same function in consumption as biscuits and wafers.
The investigation, however, regarding that Győri Keksz together with the Székesfehérvár factory counts for two third of the present domestic biscuit and wafer production took into account the 1998 figures of market share of their biscuit and wafer products and the prospective effects of the concentration on competition.
It disputed the argument of the applicant that biscuit and wafer products form a segment of snack market and therefore are reasonable substitutes for any other snack products.
In its view, confectionery products include three groups: the types of cereal-flour based biscuits and wafers and their savoury varieties; chocolate products; chewing gums. These groups can be well separated according to the materials used for production, the functions they have and the characteristics of consumption, therefore they may be regarded as separate groups of products.
The snack products taken into consideration by the applicant can also be completely separated from the biscuit and wafer products both on the basis of the materials used for production (mainly extruded maize or various savoury potato crisps, oily, roasted, savoury seeds).
The investigation did not share the opinion of the applicant that the market of snack products include all the three groups of confectionery products as well as snack products. The investigation considered snacks as a separate group of confectionery products, since they are substitutes for neither flour based nor cocoa based chocolate products. The investigation could neither accept the small market share assessed by the approximation of the applicant.
The investigation attached great importance to the appraisal of competition between the biscuit and wafer products relevant to the transaction, since in its opinion.
The realisation of the acquisition creates a market where one single actor (Győri Keksz) controls almost two third of the market, which means lack or restriction of competition.
As a result of the transaction, Győri Keksz may pursue its business activities to a great extent independently of the other market participants without being forced to take into account substantially the reactions of its competitors, customers and other trading parties when deciding its market conduct, therefore the concentration of biscuit and wafer production creates a dominant position on the relevant market.
As a result of the significant expansion of capacity, the company will continue to increase its share in the domestic market and can act regardless of any competitors endangering its market position. The shares in the domestic market of all types of goods produced by the company will exceed 60 per cent. Beyond the multinational companies acting in Hungary almost fifty smaller firms with more or less equal market shares are present in the remainder of the market, which means that the importance of one further participant of the market is so small that their output and their prices cannot detriment the market position of Győri Keksz.
The Decision of the Competition Council
When appraising the application for authorisation, the Competition Council partly accepted the arguments of both the applicant and of the investigation but partly refused them.
The Competition Council defined the relevant market of products as the market of sweets (sweet biscuits, wafers, chocolates, cereal bars and honey cakes), savoury products (savoury biscuits, crisps, sticks, pretzels, roasted oily seeds), and special biscuits for the purpose of baking (so called "household" biscuit).
As a starting point the Council accepted the view of the investigation that relevant products are those produced both by Győri Keksz and by the Székesfehérvár factory of Stollwerck-Budapest. However, it did not share the opinion of the investigation that these products have no substitutes, neither did it agree with the applicant that the relevant market is the single market of snack products including biscuits and wafers. Nevertheless, snack products shall be taken into account as reasonable substitutes for goods subject to the transaction.
Appraising the substitutability of snack and other products, the Competition Council stated that considering the purpose of purchasing, especially presentation and hospitality, snack products have the same function (except for the special household biscuits, which cannot be used for the functions mentioned and other snack products cannot be used instead of them).
Considering biscuit and wafer products, sweet snack products such as chocolates, pralines, cereal bars and honey cakes hardly differ from biscuits and wafers, therefore they can be taken into account as substitutes.
As far as savoury snack products are concerned, according to the aspect of quality, crisps, sticks, pretzels and most oily seeds can be taken into account as reasonable substitutes for savoury biscuits.
The Competition Council stated, however, that apart from the significant correspondence in the purposes of purchasing, snack products are different in some important characteristics, namely in their quality. Considering any of the purposes, the flavour of the product (sweet or savoury) has outstanding importance. Therefore, in no circumstances can sweet products substitute for savoury goods and vice versa.
Considering milk based chilled products and impulse ice creams, the fact that they have to be refrigerated after purchasing is such a significant difference that exclude them from the group of substitutes.
The Competition Council accepted the argument of the applicant that the intense substitutability of the relevant products precludes the possibility of the creation of dominant position and stated that although a relatively high market share exists in one smaller segment of the relevant market of products (on the market of the special household biscuits), market entry is rather easy, because of the simple technology and no protected brand names, therefore effective competition would not be impeded by the planned merger. Consequently, the Competition Council decided to authorise the transaction.
November 30, 1999. Budapest
dr. Bodócsi András sk. előadó
Fógel Jánosné dr. sk.
dr. Sólyom Eszter sk.
Szabó Györgyi