Behind Asahi's softdrink fizzer

The Australian Competition and Consumer Commission's decision to oppose Asahi's planned $358 million acquisition of P&N Beverages Australia is, in a back-handed sort of way, testimony to the ever-increasing power of the supermarket chains.

The decision wouldn't have come as a complete surprise to Asahi, which owns the Schweppes brand in this market, given that the ACCC's statement of issues late last year was quite strongly-worded and flagged significant concerns about the impact of the proposed acquisition on the carbonated soft drink (CSD), fruit juice and bottled water markets.

That's despite the fact that P&N has relatively modest market shares in those markets, which tended to be dominated by Coca-Cola Amatil. In CSDs, the largest of the markets, CCA has a revenue share of about 72 per cent, Schweppes 20 per cent and P&N is the third-largest player, with a meagre 3.4 per cent.

P&N is much bigger in fruit juices than CCA and Schweppes, although it holds only about 11 per cent of a market where National Foods' Berri brand is the major player. In bottled water, CCA has a 49 per cent share and P&N and Schweppes roughly equal shares of 10 per cent and nine per cent respectively.

Conventionally, given that Schweppes badly lags CCA's share in the key markets, the number two player would (and no doubt did) argue that acquiring P&N would enable it to compete more effectively against the market leader, although Asahi probably didn't help its cause by conceding to the commission that if the acquisition was completed it would not be able to produce any of P&N's existing cola products.  

The ACCC would presumably also have taken into account the fact that P&N has no "power" brands – its brands are third tier by comparison with CCA's and Schweppes'.  Acquiring them wouldn't help Schweppes compete more aggressively with CCA's brands.

The more significant issue, however, flows from P&N's position in the industry and particularly the role it plays in the CSD market. Because of the market structure it has a disproportionate level of influence.

P&N produces a range of branded CSDs – Pub Squash is probably the best known of them – but it also supplies Woolworths, Coles, Aldi and Franklins with private label products. It also produces private label fruit juices for the chains.

P&N's own brands under-cut the majors on price while private label products tend to be the lowest-priced products in a segment. While still a relatively small share of the market, private label products, including CSDs, are growing quite rapidly as the chains respond to greater customer acceptance of them and the greater price-sensitivity of consumers in the wake of the financial crisis.

Most importantly, from the ACCC's perspective, private label products give retailers, particularly the two dominant supermarket chains, leverage over the big suppliers of branded product and enable them to exert some pricing pressure on them.

Private label products, and indeed even P&N's branded products, are low-margin and their production needs to be high-volume to create the economics of scale which makes them profitable. In this market that means the manufacturer needs to have national contracts with the major chains.

The ACCC came to the conclusion that only CCA, Schweppes and P&N had the capacity to supply the chains with private label product in the volumes they require.

At present only P&N does produce private label CSDs and while Schweppes had indicated it would continue to supply most of P&N's private label range if it acquired the group the ACCC was somewhat cynical about the notion that Schweppes would, in a market dominated by the two big players, allow P&N to compete vigorously with its own higher-margin brands.

The ACCC's opposition to the acquisition is an acknowledgement, if one were needed given the controversies surrounding Coles' $1 a litre home brand milk strategy, of the increasing ability of the bigger supermarket chains to use their private label products to force their terms on suppliers, whether directly or simply via the competitive dynamics.

In the soft drinks market, the ACCC sees that as a force for good, one that increases and protects competition. Whether it feels the same way about $1 litre home-branded milk… well, we'll just have to wait and see.