Arla Foods amba and Express Dairies plc: A report on the proposed merger.

Summary of report (html format)
Full text (pdf format)

Adobe Acrobat Reader can be downloaded from http://www.adobe.com

Summary

Introduction

The proposed merger between Arla Foods amba (Arla) and Express Dairies plc (Express) was referred to the UK competition authorities by the European Commission in June 2003. Subsequently, the Secretary of State for Trade and Industry asked us to report on whether the proposed merger may be expected to operate against the public interest, limiting our consideration to the market for supply of fresh processed milk in the UK (see Appendix 1.1 for our terms of reference). The relevant businesses are both major fresh milk processors in Great Britain.

Arla is a large Scandinavian dairy cooperative with a commercial presence in most EC countries and some further afield. It is the ultimate parent of Arla Foods plc (Arla UK) which is currently the fourth largest supplier of fresh processed milk in the UK. Arla UK supplies liquid milk, cream, other value-added and branded dairy products.

Express was demerged from Northern Foods plc in 1998. It is one of the largest suppliers of fresh processed milk in the UK. It supplies a wide range of customers, including a significant number of doorstep customers.

The relevant markets

Fresh processed milk includes organic, regional and specially filtered milk as well as regular whole, semi-skimmed and skimmed milk. The market for fresh processed milk is distinct from that for UHT, sterilized and flavoured milk as there is little demand- or supply-side substitution between these products.

The market for fresh processed milk can be broken into three different customer segments:

— national multiples (that is, Asda, Marks & Spencer, Morrisons, Safeway, Sainsbury’s, Somerfield, Tesco and Waitrose);

— middle ground customers (including retailers other than the national multiples, public sector bodies, catering customers, bottled milk buyers and other wholesalers); and
— doorstep customers.

The national multiples and doorstep customer segments are reasonably homogeneous groups—both displaying quite distinct requirements in terms of volume, distribution and/or quality standards. However, the middle ground segment is very much a ‘catch-all’ definition, covering a wide range of customers with varying characteristics and requirements.

There are different geographic markets for each of these three market segments. The geographic scope for supply to the national multiples is no wider than Great Britain, whereas the middle ground segment has a large number of overlapping markets and doorstep supply must be considered locally.

Public interest issues

In order to consider the impact of this merger on the public interest, we address the question of what would be likely to happen in the absence of the merger. Although we consider both Arla UK and Express to be viable businesses at present, in the absence of the merger we would expect Express’s competitive position to weaken. This is the position against which we assess the effects of the merger.

We considered the impact of the merger on competition in the three market segments identified. As part of this review, we considered whether it would result in an increased incidence of coordinated behaviour by suppliers of fresh processed milk. Finally, we assessed whether there could be expected to be wider impacts of the merger that would affect the public interest.

We concluded that:

(a) We do not expect there to be a substantial lessening of competition in any of the market segments identified.

(i) In particular, in relation to supply to national multiples:

— in the absence of the merger Express’s competitive position would weaken, potentially severely so;

— there will be continuing overcapacity in the industry which should give these customers flexibility to switch their supply between processors (given that there is evidence of competition between the major processors and no brand loyalty for regular milk); and

— the buyer power of national multiples will be adequate to counter increased concentration of suppliers to this segment.

(ii) In relation to middle ground customers, we expect the significant number of alternative suppliers to middle ground customers to exert competitive constraints on the merged business.

(iii) In the doorstep customer sector, we expect the merger to have little impact on competition.

(b) Although the merger will reduce the number of competitors, we have not formed an expectation that coordinated behaviour (either tacit or explicit collusion) will occur as a consequence of the merger.

(c) We do not expect the merger to result in any other wider impacts that would operate against the public interest.

Overall, we conclude that we do not expect the merger to operate against the public interest. In particular, we do not expect it to lead to a substantial lessening of competition in the supply of fresh processed milk.

Full text

Back to the top