Soluble coffee: A report on the supply of soluble coffee for retail sale within the United Kingdom

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On 9 April 1990, the Director General of Fair Trading asked the MMC (see Appendix 1.1) to investigate and report on the supply of soluble coffee for retail sale within the United Kingdom. In 1989 The Nestlé Company Ltd (Nestlé) supplied some 48 per cent of the volume and 56 per cent of the value of soluble coffee for retail sale. A monopoly situation therefore exists in favour of Nestlé, and we have had to consider whether any aspects of the monopoly situation operate against the public interest.

Nestlé has a strong market position, and high profits, with a return on capital employed on its soluble coffee business in 1989 of over 100 per cent. Its profitability is to an extent overstated, particularly by the present age profile of its assets, but even allowing for this factor, its profitability is considerably higher than that of industry in general or of other firms in its own industry.

In our view, however, the soluble coffee market is characterised by an exceptionally wide range of price and quality from which the consumer can choose, and by effective competition both from other brands of coffee, and from retailers' own-label coffee. There are, for example, over 200 types of soluble coffee available, supplied by at least a dozen manufacturers or importers including new entrants to the United Kingdom market, and retail prices of the most important types range from 50 pence per 100 gramme jar of coffee/chicory mixtures to £2.55 for `super premium' coffees such as Nestlé's Cap Colombie and Alta Rica.

We have received no complaints of any anti-competitive practices on the part of Nestlé and indeed received very few complaints about any aspect of Nestlé's conduct or performance. We believe that Nestlé has been able to achieve its current market share and its present profitability in a competitive market, by operating efficiently and by developing products and brands that offer consumers good value for money. Nescafé, in particular, which accounts for 38 per cent of the total soluble coffee market and contributes over 85 per cent of Nestlé's profits, is regarded as one of the most successful grocery brands.

Our inquiry was in part prompted by concern about the slow adjustment of prices of soluble coffee and particularly Nestlé products to changes in the prices of coffee beans. This delay is, we believe, primarily accounted for by the delay before movements in the world price of coffee beans were reflected in Nestlé's own costs. Over the longer term, absorption of at least part of the fall in green bean costs has contributed to the increase in Nestlé's profitability, but in our view consumers have at all times had ample choice of alternative products, including own-label coffees, the prices of some of which have recently fallen more rapidly in line with the price of coffee beans.

We have concluded, therefore, that Nestlé's prices and its profitability reflect its success in meeting consumer preferences in a market characterize by effective competition and a wide degree of consumer choice. We have not identified sufficient weaknesses in price competition to justify intervention, which we believe would be to the detriment of consumers in the longer term; Nestlé's high profitability may in this particular case be seen as an incentive for other firms to compete in this market.

We have therefore found no facts which operate or may be expected to operate against the public interest.

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