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					6 Third party views




Contents
                                                                                                                                                      Page

Contents...................................................................................................................................................137
Introduction .............................................................................................................................................138
Brewers ...................................................................................................................................................139
   Adnams Plc .........................................................................................................................................139
   Anheuser-Busch Inc ............................................................................................................................139
   Daniel Batham & Son Ltd ...................................................................................................................144
   Burtonwood Brewery Plc ....................................................................................................................144
   Carlsberg-Tetley plc ............................................................................................................................144
   Diageo plc ...........................................................................................................................................151
   Frederic Robinson Limited..................................................................................................................151
   Fuller Smith & Turner Plc...................................................................................................................151
   Hall & Woodhouse Limited ................................................................................................................151
   Heineken NV.......................................................................................................................................152
   Joseph Holt Ltd ...................................................................................................................................153
   J W Lees & Co ....................................................................................................................................153
   Maclay Group plc................................................................................................................................153
   Morrells of Oxford Limited.................................................................................................................154
   T D Ridley & Sons Ltd........................................................................................................................155
   Royal Grolsch NV ...............................................................................................................................155
   Scottish & Newcastle plc ....................................................................................................................156
   St Austell Brewery Company Limited ................................................................................................161
   The Belhaven Brewery Company Limited ..........................................................................................161
   The Black Sheep Brewery Plc.............................................................................................................162
   The Heavitree Brewery plc..................................................................................................................162
   The Wolverhampton & Dudley Breweries PLC..................................................................................162
   The Wychwood Brewery Company Ltd..............................................................................................162
   Timothy Taylor & Co Ltd ...................................................................................................................162
   Tollemache & Cobbold Brewery Limited ...........................................................................................163
   [      !           ] ...................................................................................................................................163
   Brewer A .............................................................................................................................................164
   Brewer B .............................................................................................................................................165
   Brewer C .............................................................................................................................................165
   Brewer D .............................................................................................................................................166
Wholesalers and distributors ...................................................................................................................167
   Tavern Group Limited.........................................................................................................................167
   Tradeteam Ltd .....................................................................................................................................169
   An independent wholesaler .................................................................................................................169
Pub chain operators (pubcos) and retailers..............................................................................................178
   Allied Leisure plc ................................................................................................................................178
   Avebury Taverns Limited ...................................................................................................................178
   Bass Taverns Limited..........................................................................................................................179
   Caledonian Heritable Ltd ....................................................................................................................181
   Co-operative Wholesale Society Limited............................................................................................181
   Enterprise Inns plc...............................................................................................................................181
   First Leisure Corporation PLC ............................................................................................................183
   First Quench Retailing Limited ...........................................................................................................183


                                                                            137
  Glendola Leisure Limited....................................................................................................................184
  Inn Partnership Ltd..............................................................................................................................185
  Luminar plc .........................................................................................................................................188
  Merlin Inns Limited.............................................................................................................................188
  Old English Inns Plc............................................................................................................................188
  Pubmaster Limited ..............................................................................................................................188
  Punch Group Limited ..........................................................................................................................189
  J Sainsbury plc ....................................................................................................................................196
  Somerfield plc .....................................................................................................................................197
  Tesco Stores Ltd..................................................................................................................................197
  The Pyramid Pub Management Company Limited .............................................................................198
  The Unique Pub Company Plc ............................................................................................................198
  Town & Country Inns plc....................................................................................................................202
  J D Wetherspoon plc ...........................................................................................................................202
  Whitbread PLC....................................................................................................................................202
  White Rose Inns plc ............................................................................................................................203
Trade associations and allied organizations ............................................................................................203
  Brewlab ...............................................................................................................................................203
  British Entertainment & Discotheque Association Ltd .......................................................................204
  Campaign for Real Ale Limited ..........................................................................................................204
  Cask Marque .......................................................................................................................................208
  Federation of Licensed Victuallers Associations ................................................................................208
  International Brewers’ Guild...............................................................................................................209
  The Maltsters Association of Great Britain .........................................................................................209
  Society of Independent Brewers..........................................................................................................209
  The Association of Licensed Multiple Retailers ................................................................................. 210
  The International Centre for Brewing and Distilling...........................................................................211
  The Scottish Licensed Trade Association ...........................................................................................212
Government departments and councils....................................................................................................212
  East Staffordshire Borough Council....................................................................................................212
  Ministry of Agriculture, Fisheries and Food .......................................................................................212
  Scottish Executive ...............................................................................................................................213
Trade unions............................................................................................................................................213
  Amalgamated Engineering and Electrical Union and the General Municipal Boilerworkers and Allied
  Trades Union .......................................................................................................................................213
  Transport and General Workers’ Union ..............................................................................................213
Others ......................................................................................................................................................215
  Mr C N Broom ....................................................................................................................................215
  Mr D J Cheadle ...................................................................................................................................215
  Councillor Andrew Coulson................................................................................................................215
  Ms Janet Dean MP ..............................................................................................................................216
  Mr Simon M Gibson............................................................................................................................216
  Mr Jeffrey B Gilbert ............................................................................................................................216
  Mr Antony Hicks.................................................................................................................................216
  Mr Martyn Jones MP...........................................................................................................................216
  Dr John Marek MP ..............................................................................................................................217
  Mr David Marshall MP .......................................................................................................................217
  Mr Michael J Martin MP.....................................................................................................................218
  Mr Paul Martin MSP ...........................................................................................................................218
  Mr Ken Peet ........................................................................................................................................218
  Mr Kevin Rhodes ................................................................................................................................219
  Mr K Robinson....................................................................................................................................219
  Dr Tom W Young................................................................................................................................219
  Mr Iain Wright ....................................................................................................................................220
  A constituent of Mr Patrick McLoughlin MP .....................................................................................220



Introduction
   6.1. We invited views from a range of companies and organizations in or relating to the brewing in-
dustry. Hearings were held with Anheuser-Busch, Carlsberg-Tetley, Enterprise, Greene King, Heineken


                                                                             138
NV, Inn Partnership Ltd (IP), an independent wholesaler, Pubmaster, Punch, S&N, Tradeteam, the
Transport and General Workers’ Union, The Unique Pub Company Ltd and Wetherspoon.


Brewers

Adnams Plc
    6.2. Adnams Plc said that the merger was only a slightly greater threat to competition than the other
factors which were leading to a process of consolidation in the UK brewing industry. It noted that
Interbrew proclaimed itself to be ‘the world’s local brewer’ and hoped that this meant renewed invest-
ment in UK beer brands such as Draught Bass, which would be to the benefit of the industry as a whole.
It doubted whether any conditions could be imposed on the merger to reinforce such a commitment to
local brands, although some comments by the CC in this respect would be useful. As far as the consoli-
dation of lager brands was concerned, this might well be an unstoppable process.


Anheuser-Busch Inc

Summary

    6.3. Anheuser-Busch provided a summary of its position. It said that the acquisition of Bass Brewers
by Interbrew reduced from four to three the number of national brewer-wholesalers in the UK. The last
attempt to reduce the number of national brewer-wholesalers from four to three had been the proposed
merger between Bass, Carlsberg and Carlsberg-Tetley in 1997. That proposed merger had been con-
sidered to have an adverse effect on the public interest by the MMC and was ultimately blocked by the
DTI. Anheuser-Busch said there had been no material change of circumstances which would justify a
different outcome in the present inquiry.

    6.4. At the brewing level, the merged business had a market share of some 40 per cent and a
portfolio of leading brands in every major product category (except stout). The only remaining com-
petitor with a comparable market share and a brand portfolio with equivalent breadth and depth was
Scottish Courage with a 29 per cent market share. At the wholesale level, Interbrew and Scottish
Courage also enjoyed much broader and cost-efficient wholesale and distribution operations than any
competitor had or could replicate. The likelihood of a brewing duopoly being maintained in the long term
by Interbrew and Scottish Courage was almost inevitable given that the two brewers would be protected
by a parallel wholesaling duopoly.

    6.5. Anheuser-Busch said that it was not acceptable to have a reduction in the number of national
brewers from four to three unless that consolidation were accompanied by a complete break in the
vertical link between brewing and wholesaling, the termination of all Interbrew’s supply agreements with
the retained estates of Whitbread and Bass, and divestment of its interest in Tradeteam.

    6.6. It was clear that divestment of brands and brewing assets alone would not be a sufficient safe-
guard against the adverse effects of the merger. Any such partial remedy would be wholly inadequate,
since it would fail to address the higher barriers to entry and expansion created as a result of the
concentration of the Whitbread and Bass operations at the wholesale level.

    6.7. If the CC were to decide not to prohibit the merger or not to sever the vertical link between
Interbrew’s brewing and wholesaling operations in the UK, any partial divestment package must include
at least a brand portfolio, brewing capacity, wholesale and distribution operations, related supply con-
tracts with third party on-trade and off-trade retailers and other related assets which would be sufficient
to create a strong fourth national brewer-wholesaler with long-term prospects as a free-standing business
and with a UK market share that was equivalent to that of the WBC pre-merger (ie approximately 15 per
cent). Each level of the package should include the ‘crown jewels’ of either the WBC or Bass Brewers
and Interbrew must not be allowed to include any underperforming assets, brands or operations as part of
the divestment package. The capacity and market shares of the divested wholesaling and distribution
assets should be in excess of the market share that the divested brands and brewing assets represented, so
that the divestment of the wholesaling and distribution operations would have the effect of opening up
the market.


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    6.8. Anheuser-Busch also encouraged the CC to draw to the attention of the DTI the absence of
effective competition at the wholesaling level of the UK beer market and to invite it to address this in its
decision on the review of the Beer Orders.


The effects of the merger

    6.9. Anheuser-Busch made a submission relying on its own estimate of market shares based on
figures obtained from A C Nielsen, the BLRA and Plato Logic Limited. It said that the merger had
resulted in a reduction in the number of national brewer-wholesalers from four to three by combining the
second and third largest national brewer-wholesalers (Scottish Courage being formerly the largest with
about a 29 per cent market share, Bass Brewers having about a 25 per cent market share and Whitbread
having about a 15 per cent market share). The effect of the transaction was therefore that Interbrew and
Scottish Courage controlled nearly 70 per cent of the UK brewing market, with Carlsberg-Tetley being a
much smaller brewer-wholesaler, having a market share of about 13 per cent. The remaining brewers had
much smaller brand portfolios and market shares: Guinness about 6 per cent; Anheuser-Busch about
3 per cent; and regional and microbrewers and imports making up the remaining 9 per cent.

    6.10. In terms of overall market concentration, the HHI would be 2,664, an increase of 750 points
from the present HHI of 1,914. The proposed 1997 Bass/Carlsberg-Tetley merger which in the event was
prohibited, would have had an HHI of 2,332, which represented an increase of 644 points. Thus the
Interbrew/Bass merger had increased industry concentration levels substantially more, at both the
brewing and wholesale levels, than would have resulted from the prohibited 1997 merger.

   6.11. Portfolio power should be taken into consideration. Anheuser-Busch made the following
points:

   (a) Beer brands. Before Interbrew’s acquisition of WBC and Bass Brewers, no major brewer had
       controlled more than two of the top ten beer brands. However, since the Interbrew acquisition of
       WBC and Bass Brewers, Interbrew and Scottish Courage controlled six of the ten top-selling
       beer brands in the UK (namely, Carling, Fosters, Stella Artois, Tennents, John Smiths,
       Heineken). Three of these were included in the five top-selling beer brands (Carling, Fosters,
       Stella Artois).

   (b) Lager brands. Prior to the Interbrew acquisitions of WBC and Bass Brewers, Scottish Courage
       controlled four of the top ten lager brands (Fosters, Kronenbourg, Millers and McEwan’s); Bass
       controlled two of the top ten brands (Carling and Tennents); Whitbread controlled two of the top
       ten brands (Stella Artois and Heineken); and Carlsberg-Tetley owned Carlsberg. As a result of
       the Interbrew/Bass Brewers transaction, Interbrew and Scottish Courage now collectively
       controlled eight of the ten top-selling lager brands in the UK.

   (c) Ales. Before the Interbrew acquisitions of WBC and Bass Brewers, Scottish Courage controlled
       three of the top ten brands (John Smiths, Youngers Ales and McEwan’s Export); Bass controlled
       three (Worthington, Stones and Caffrey’s); Whitbread controlled two (Boddingtons and
       Whitbread Trophy); and Carlsberg-Tetley controlled Tetley Bitter. Following the Interbrew/Bass
       Brewers transaction, Interbrew and Scottish Courage now collectively controlled eight of the ten
       top-selling ale brands in the UK.

    6.12. Thus the effect of the merger was that Interbrew and Scottish Courage now each had very
broad and deep portfolios of leading brands covering every major product category in the UK, except
stout. The third national brewer-wholesaler, Carlsberg-Tetley, was much smaller than Interbrew and
S&N and had a much weaker brand portfolio. Carlsberg-Tetley’s account base in the free trade was much
smaller than that of Interbrew and Scottish Courage because of its much weaker product portfolio
offering; it could only offer the number three standard lager (Carlsberg), the number five premium lager
(Carlsberg Export), and the number two ale (Tetley). It faced the same disadvantages as the smaller
brewers in the on-trade sector, and these disadvantages were only temporarily mitigated by its supply
agreements with the Allied-Domecq pub estate.

   6.13. The remaining competitors (Guinness, Anheuser-Busch and regional brewers) did not have
brand portfolios with anywhere near the breadth or depth of the brand portfolios of Interbrew and
Scottish Courage. Guinness and Anheuser-Busch were essentially single-brand brewers and did not have


                                                    140
a portfolio of brands spanning all the major beer categories. More importantly, although Guinness and
Anheuser-Busch each had a single brand that was one of the few top ten UK brands not controlled by
Interbrew and Scottish Courage, those brands were highly dependent on Interbrew and Scottish Courage
for wholesale distribution to premises in the critical on-trade sector. This dependency at the wholesale
level precluded any possibility that these single-brand brewers might somehow overcome the formidable
full-line leveraging and other predatory foreclosure powers enjoyed by Interbrew and Scottish Courage
by virtue of their powerful brand portfolios.

    6.14. Anheuser-Busch said that it did not have information on the national brewer-wholesalers’
market shares for wholesaling. However, given that the European Commission had very recently
concluded that the UK national brewer-wholesalers had distribution shares similar to their production
shares, it was apparent that the combination of two of the four national brewer-wholesalers would also
result in a significant increase in the degree of concentration at the wholesale level. Furthermore, the
share of supply at the distribution level attributable to Interbrew and Scottish Courage might be higher
than their market shares at the brewing level since they both acted as wholesalers for beers brewed by
others. For example, Anheuser-Busch made about [!] per cent of its sales to the on-trade channel
through Interbrew and Scottish Courage.

    6.15. Anheuser-Busch considered that the effect of the merger would be to weaken Carlsberg-Tetley
as a potential third force at both the brewing and wholesale distribution levels. As for single brand and
regional brewers, the merger created a highly concentrated duopoly situation with high barriers to entry
and expansion at both the brewing and wholesale levels and therefore defeated any realistic potential for
competitors to provide rigorous and sustained competition.

    6.16. Anheuser-Busch submitted evidence about the dominance of national brewer-wholesalers.
About [!] per cent of its total UK sales volumes were sold through the higher-margin on-trade segment
(ie pubs and restaurants), with the remainder being sold through off-trade channels. About [!] per cent
of the on-trade sales were distributed by the national brewer-wholesalers, primarily Interbrew and
Scottish Courage. The on-trade segment accounted for 69 per cent of the total beer market but only
[!] per cent of Anheuser-Busch’s sales. Anheuser-Busch had not been able, despite being the largest
brewer in the world and having an annual UK advertising spend of about £[!] million, to obtain a
proportionate presence in the on-trade segment, because of the barriers to expansion which had been
erected by the national brewer-wholesalers and which could be expected to increase as a result of the
merger.

    6.17. At the wholesale level of the market, the absence of effective competition had long been
recognized as being a problem in the UK beer industry, given the substantial presence of the major
national brewers at both the brewing and wholesale levels of the market. In the 1989 report, the MMC
had found that the lack of competition from independent wholesalers was due to the policy of the
brewers. The aim of the 1989 Beer Orders had been to open up competition, in particular at the
wholesale level. However, the Beer Orders had not resulted in competition being opened up at the
wholesaling level, as the national brewer-wholesalers had been able to replace ownership links with
formerly-tied outlets with long-term supply agreements containing minimum purchase obligations and/or
exclusive supply terms with their divested estates. The effect of this was that the national brewer-
wholesalers exercised a significant degree of control over many retail outlets through supply agreements,
which also enabled supplies to be driven through the wholesaling businesses of the national brewers, thus
excluding independent wholesalers.

    6.18. Interbrew and Scottish Courage now had the largest and most cost-efficient UK wholesale and
distribution operations, which supported their broader and deeper brand portfolios. The two companies
had the ability to spread distribution costs across multiple brands; to cross-subsidize very low or
predatory prices and/or high promotional support; and to offer high-volume discounts on specific brands
within their portfolios. This gave them tremendous portfolio leveraging powers vis-à-vis retailers,
independent wholesalers and independent or regional brewers. Anheuser-Busch said that examples could
be given of how the cost of wholesale distribution for the two companies’ own brands was cross-sub-
sidized, while higher costs for wholesale distribution were made for other brands.

    6.19. There were no alternative routes to market, either actual or potential, with distribution capa-
bilities equivalent to those of Interbrew and Scottish Courage. Small or independent brewers could make
direct sales to the on-premise segment, but Anheuser-Busch did not have the distribution capabilities to
sell directly to retail outlets. In reality, the pubcos were much more dependent on the national brewer-


                                                  141
wholesalers than the national brewer-wholesalers were on pubcos. Independent wholesalers were unable
to compete effectively as they had little access to the pubcos and were highly dependent on the brand
portfolios of the major brewers. Logistics companies might appear to be a further alternative but would
not be able to compete with the national brewer-wholesalers on cost. Anheuser-Busch submitted that
Tradeteam could not be deemed a truly independent distributor from a competition law perspective.

    6.20. Anheuser-Busch concluded that it was impossible to replicate a national distribution network,
as had been concluded by the MMC in the 1997 report, and that circumstances had not changed.

    6.21. As regards wholesaling in the off-trade sector, Anheuser-Busch expected the impact of the
merger to be less significant, as large customers typically refused to enter into exclusive agreements and
there were lower barriers to entry and expansion. As a result of this, Anheuser-Busch’s position in the
off-trade segment was much healthier than its position in the on-trade segment. Sales to the off-trade
segment accounted for 31 per cent of all beer sales, while [!] per cent of Anheuser-Busch’s sales were
to this segment. Anheuser-Busch considered that this provided evidence of the distortive effects of
brewer concentration at the wholesaling level on Anheuser-Busch’s ability to increase its sales in the on-
trade segment of the market.

   6.22. Anheuser-Busch submitted that there were incentives for Interbrew and Scottish Courage to
exercise coordinated market power. Its concerns were reinforced by recent European Commission cartel
investigations into the activities of Interbrew and the Kronenbourg unit acquired by Scottish Courage.
Anheuser-Busch believed that the creation of an effective duopoly between Interbrew and Scottish
Courage was facilitated in the UK market by: their high market shares at both the brewing and
wholesale/distribution levels; the similarity in breadth and depth of their brand portfolios; the static or
declining UK beer market; and their knowledge of customer and volume details in relation to third party
brands.

    6.23. Anheuser-Busch further submitted that there were incentives for Interbrew and Scottish
Courage to promote their own brands at the expense of third party brands. They had equivalent brands in
their own portfolios for most third party brands which they sold as wholesalers. They could reduce
wholesale prices or alternatively quote artificially higher prices for third party brands. Anheuser-Busch’s
concerns were reinforced by the ancillary long-term supply agreements which Interbrew had with the
retained Whitbread and Bass estates and which Scottish Courage had with its estate. Anheuser-Busch
said that Interbrew’s supply agreements with retained estates foreclosed competition and reinforced the
wholesaling duopoly.

   6.24. Anheuser-Busch added that there were almost insurmountable barriers to entry and expansion.
By controlling the route to market, Interbrew and Scottish Courage controlled the extent to which other
brewers could grow their market share because the wholesaling duopoly allowed them to control their
competitors’ cost of distribution; to control the availability of their competitors’ products; to win
accounts, in particular through cross-subsidy of margins; and obtain information on competitors.

   6.25. Anheuser-Busch believed that ultimately the effect of the merger would be higher prices and
fewer choices for UK customers. Smaller brewers might be forced out of the market, thereby reducing
consumer choice.


Further points on the effects of the merger

   6.26. Anheuser-Busch made a further submission to us on a number of points.

    6.27. Anheuser-Busch submitted that foreign brands would be unable to enter the UK market
independently of Interbrew and Scottish Courage. There were very few significant foreign beer brands
not already present in the UK. Licensing agreements were not equivalent to independent entry since the
licensee would take decisions regarding pricing and wholesale distribution. Anheuser-Busch was the
only example of a licensing arrangement which eventually led to independent entry into the UK beer
market in the last 20 years (not taking into account brands which have attempted to enter independently
but have subsequently withdrawn, for example Molson). Carlsberg-Tetley was an unlikely entry route for
foreign brands as it lacked a strong and cost-efficient distribution system, and would want to protect its
own market share.

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   6.28. Anheuser-Busch did not consider that Interbrew would have the incentive to compete fully and
vigorously with Scottish Courage in the future. The market structure post-merger exhibited all the classic
symptoms of an oligopolistic market structure, namely:

   (a) high barriers to entry because of: the strong brand portfolio of incumbent companies; difficulty
       for new entrants gaining access to retail outlets; and massive advertising by the incumbent
       companies;

   (b) lack of countervailing bargaining power on the part of the pubcos and retailers;

   (c) the homogeneous nature of the products (except possibly Guinness); high sunk costs; and high
       fixed-to-variable cost ratios; and

   (d) market-specific transaction transparency because of the dependency of small and regional
       brewers on the wholesale distribution operations of Interbrew and Scottish Courage.

    6.29. With regard to alleged vigorous competition on the renewal of contracts with a small number
of large pubcos, Anheuser-Busch said that this was not indicative of the likelihood of continuing
effective competition. The change in the market structure from four relatively well-balanced competitors
to a duopoly with a weak number three (namely, Carlsberg-Tetley) would weaken such competition as
currently existed. The pubco contracts being currently contested represented a small proportion of the
total market. There was no evidence that competition would continue. [

                                     Details omitted. See note on page iv.

                                                                                                            ]


Response on public remedies

  6.30. Commenting on the CC’s Issues and Remedies Statement (see Appendix 2.2), Anheuser-Busch
made the following points in addition to those in paragraphs 6.3 to 6.8.

    6.31. On the possibility of divestment of the Bass business in its entirety, or possibly without its
activities in Scotland and Northern Ireland, Anheuser-Busch considered that this would be appropriate
and consistent with the Secretary of State’s 1997 prohibition of the Bass/Carlsberg-Tetley merger.
Divestment of Bass Brewers would return the market to the pre-merger status quo and could result in a
more competitive structure if Bass Brewers were to be sold to a strong and committed company.

    6.32. Anheuser-Busch did not consider that it would be possible for Interbrew to retain Bass’s
business activities in Scotland without raising competition issues. Even though the acquisition of Bass
Brewers by Interbrew might not appear to give rise to any major overlap in Scotland, the use by Bass
Brewers of the same brands and infrastructure in Scotland as in the rest of Great Britain would suggest
that Bass’s activities in Scotland were too closely intertwined with the rest of its British businesses to be
capable of being divested as a stand-alone business. There would also be difficulties in finding an appro-
priate buyer, as Scottish Courage already had a very significant presence in Scotland.

   6.33. Anheuser-Busch did not have any serious concerns with regard to Northern Ireland, but
considered that divestment by Interbrew of the Bass business in its entirety was the preferable remedy.

    6.34. As to the possibility of divestment of the Whitbread brewing business, with or without the
rights to the Stella Artois brand, Anheuser-Busch said that the Whitbread brewing business had no
significant value without the Stella Artois brand. It was highly unlikely that Interbrew would ever agree
to divest the rights to the Stella Artois brand in the UK. Potential purchasers would want to be satisfied
that the Heineken brand would continue to be available, but this appeared unlikely given recent press
comment.

    6.35. As to the possibility of divestment of such brands and associated brewing and wholesaling
capacity as would enable the creation of a competitive fourth brewer-wholesaler, Anheuser-Busch said
that this was a considerably less attractive option in competition terms than the divestment of the whole
of the Bass brewing business. Any divestment would need to include assets, brands and operations which


                                                    143
were of sufficiently high quality to ensure the long-term viability of the stand-alone business. However,
such a solution was bound to create continuing uncertainties.

    6.36. On the possibility of divestment of the wholesaling and distribution businesses of Bass and/or
Whitbread, Anheuser-Busch considered that it was hard to comment pending the outcome of the
Secretary of State’s review of the Beer Orders. The current market structure allowed Scottish Courage
and Carlsberg-Tetley to have their own wholesale distribution operations. Any divestment would need to
be combined with divestment of Interbrew’s interest in Tradeteam and the termination of existing supply
agreements. Behavioural remedies might also be required.

    6.37. As to the possible behavioural remedies suggested by the CC (see Appendix 2.2), Anheuser-
Busch considered that these were not appropriate. They would be impossible to police and were not
suitable to prevent possible collusive behaviour.


Daniel Batham & Son Ltd
   6.38. Daniel Batham & Son Ltd said that it had no objection to the takeover of Bass by Interbrew.


Burtonwood Brewery Plc
    6.39. Burtonwood Brewery Plc (Burtonwood) said that, if the merger took place, Interbrew would be
Burtonwood’s biggest single supplier by volume, representing approximately 65 per cent of its draught
lager portfolio. Burtonwood said that it was concerned at this dominance in the draught lager market and,
whilst it would try to continue to offer its licensees a range of products, it would be sourcing two-thirds
of its draught lager from a single supplier.


Carlsberg-Tetley plc
    6.40. Carlsberg-Tetley said that the adverse effects on competition arising from the merger were
similar to, although greater in scale than, those identified by the MMC and Secretary of State in the case
of the 1997 proposed Bass/Carlsberg-Tetley merger. The transaction would give rise to a level of
concentration in the UK market that was even greater than that which would have been the case in
respect of the prohibited Bass/Carlsberg-Tetley merger, with a greater degree of concentration in terms
of lagers and a stronger brand portfolio. A brewer which was able to supply a range of leading brands
had a significant competitive advantage. Pubs were increasingly reluctant to source from more than one
or two brewers and they made their choice on the basis of the strength of the brands offered by each
brewer. A brewer needed to provide brands holding the number one or two position in each product
market; those brands continued to take an even greater market share. A brewer or wholesaler unable to
provide such a selection would find it very difficult to enter the market or to retain market share.

   6.41. In particular, the following adverse effects would arise:

   (a) The position of the merged entity as a producer and wholesaler of beer would be substantially
       strengthened, following the elimination of one of the three major competitors at the national
       level.

   (b) Smaller niche brewers, regional brewers and independent wholesalers would be disproportion-
       ately and adversely affected if the merged company chose to lower prices in order to target
       markets selectively.

   (c) The merged company would be the primary UK distributor for five of the ten top-selling beer
       brands in the UK. This portfolio of brands would place it in a strong position to exert continuing
       influence over the purchasing decisions of retail outlets, even if the company’s tied estate were to
       be substantially reduced.

   (d) Marketing and advertising costs to support those brands would eventually lead to a reduction of
       the overall number of brands available. The size of the merged entity would give a scale and
       purchasing power in marketing that was very valuable.

                                                   144
    6.42. Carlsberg-Tetley submitted that Interbrew would enjoy a position of dominant market power in
the premium lager and standard lager markets in the on-trade. It would also enjoy a strong position in the
overall brewing sector. The combination of its brand strength, product portfolio, large market shares and
supply agreement with the Bass and Whitbread estates ensured that it would dominate those two markets.
If the market were defined more narrowly (all lager or all beer), the merged entity would still enjoy a
strong position with a share of nearly 40 per cent for all beer and about 45 per cent for lager. Interbrew’s
Stella Artois was the only growing brand in the premium lager sector and it had a market share more than
twice that of its nearest competitor. If Stella-Artois were combined with Carling, Interbrew would be in
an extremely powerful position.

    6.43. Interbrew would be in a position to offer a full range of leading brands to the Bass and
Whitbread estates under the supply agreements negotiated as part of the merger and to other pubcos with
which it had supply agreements. There would be little incentive for those estates, or for Interbrew as a
distributor, to acquire or supply third party products. The effect of the agreements would also be that
Interbrew could place Whitbread beers in the Bass estate and Bass beers in the Whitbread estate, thereby
increasing their respective market shares.

    6.44. Interbrew would be able to reduce or increase prices depending on the strength and market
position of any particular competitor. An immediate target was likely to be the standard ale market,
where the merged company would have the number three and four brands and would be in a strong
position to coordinate activity in relation to those brands so as to successfully take the number two
position from Carlsberg-Tetley’s Tetley Bitter. The merged company might reduce prices in the short
term to undermine particular competitors. It could do this either by directly cutting the price of
Worthington’s (Worthington’s was only 1 per cent behind Tetley Bitter in terms of market share) or
Boddingtons, or offering price incentives across its portfolio. Once it had succeeded in damaging a
competitor through such a strategy it would be in a position to significantly increase prices. [
                                  Details omitted. See note on page iv.
                                                           ] That equated to approximately [!] outlets
which could initially be targeted by Interbrew—about [!] per cent of Tetley’s on-trade volume.
Interbrew would have a ‘must stock’ brand in the premium lager market and the leading standard lager
brand. It would be able to promote those throughout its network and beyond, and be a price leader in
those markets.

    6.45. Interbrew might not need to implement a price reduction strategy in order to damage com-
petitors and further enhance its market position. The strength of the Interbrew portfolio might be such as
to give it scope to increase prices because, with the possible exception of S&N which was unlikely to
present a major competitive challenge and was likely to share Interbrew’s price-raising objectives, there
was no competitor capable of providing an alternative to the Interbrew product portfolio. Carlsberg-
Tetley said that Interbrew had said that it hoped to increase its volumes, either by growing the market or,
more likely, by growing its market share. Carlsberg-Tetley said that Guinness and Anheuser-Busch were
niche players which were required to undertake disproportionately high levels of marketing spend to
compete with Interbrew and S&N, and which were largely dependent on other brewers for direct sales,
promotion at outlets and physical distribution.

    6.46. Carlsberg-Tetley said that it was the only brewer other than Interbrew and S&N with a credible
national product portfolio. That said, however, it had lost market position in recent years and it did not
have the product strength, brand range or marketing budget to compete effectively with Interbrew and
S&N. [                                                                                 Details omitted. See
note on page iv.                                               ] It had concentrated its resources on pro-
moting its leading brands but, in the long term, a brewer needed a portfolio of brands.

    6.47. In Carlsberg-Tetley’s view, there were no remedies that effectively addressed the serious
public interest concerns raised by the transaction, short of Interbrew being required to divest Bass
Brewers. The only alternative remedy would, as a minimum, require the disposal of either the Carling or
Stella Artois brands, together with the Tennent’s lager brand from the lager portfolio, and either
Boddingtons or Worthington’s from the ale portfolio. In addition, disposal should be required of
appropriate production facilities to maintain production of these brands and the Tradeteam distribution
network. That remedy would ensure that significant competitors remained in the market with a portfolio
of products and a distribution network sufficient to compete effectively with the other brewers.

   6.48. The disposal of a lesser range of brands was an ineffective remedy because it would not give
access to major national retail accounts. Thus, for example, in Carlsberg-Tetley’s view, Heineken would


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lose significant market share if it were taken out of the Whitbread product portfolio and distribution
network unless it were acquired by another major brewer, which would be very unlikely. Heineken alone
was not of sufficient strength to form the core of an alternative portfolio. Similarly Tennents had strength
in Scotland but its national market share of 6.5 per cent was not significant. In any event, so far as
Heineken was concerned, Carlsberg-Tetley’s understanding was that the disposal of the brand was not
within the gift of Interbrew, but that the Heineken brand remained licensed to Whitbread which
subcontracted production and distribution to Interbrew. If Interbrew were to terminate the Heineken
arrangements, the Carling brand would be likely to replace Heineken in a significant proportion of
outlets. Furthermore, in Carlsberg-Tetley’s view, the termination of the Interbrew supply agreements
with the Bass and Whitbread estates would be an ineffective remedy. Inertia, and Interbrew’s brand
strength, would mean that other brewers had very limited opportunity to gain access to those estates.

    6.49. Carlsberg-Tetley submitted, further, that press reports had indicated that Interbrew’s strategy
was very much as Carlsberg-Tetley had outlined. It added that it had been a bidder for Bass, but had
ultimately bid less than the price Interbrew paid, with a condition in its bid that the bid would be subject
to the decisions of the European and UK competition authorities.

   6.50. Carlsberg-Tetley said that Bass linked brand pricing and distribution pricing. If that link
continued and were increased, it would be impossible for any new entrant to compete and it would be
impossible for Carlsberg-Tetley’s portfolio to compete effectively. The independent wholesalers had
weaker networks than those of the brewers and they tended to deal mainly with the free trade, although
even in this area their business was limited. They were unable to compete on price with the major
brewers. Any brewer that sought to transfer its brand distribution from a national brewer to an inde-
pendent wholesaler would suffer a drop in market share of approximately 90 per cent.

    6.51. Responding to our Issues and Remedies Statement (see Appendix 2.2), Carlsberg-Tetley made
the following points about brewing in addition to those noted above (paragraphs 6.28 and 6.38):

   (a) The merger would reduce competition, as the competitive restraint that Bass provided for
       Whitbread and vice versa had been lost. Carlsberg-Tetley would not be able to compete with the
       significant market power of Interbrew, or Interbrew in conjunction with Scottish Courage.

   (b) Post-merger, the two leading brewers (Interbrew and Scottish Courage) would ultimately be in a
       position to increase wholesale prices because of the dependence of pubs on the brand ranges of
       these two brewers. Interbrew and Scottish Courage would have no incentive for competitive
       pricing, and limited industry capacity would act as an incentive to price increases. Interbrew
       would be likely to rationalize brands and reduce consumer choice.

   (c) It would be impossible for new entrants to establish themselves in the market because of the lack
       of a strong brand portfolio. Interbrew would have an even larger and stronger portfolio than that
       enjoyed by Scottish Courage.

   (d) Interbrew would have a position of market dominance based on leading brands; and Mr Powell,
       Interbrew’s Chief Executive Officer, had confirmed the importance of portfolios in an interview
       in Brewers’ Guardian.

   (e) It was not realistic to assume that Carlsberg-Tetley could build a portfolio in competition with
       Interbrew, or even Scottish Courage, as its chances of making material gains in market share
       were limited.

   (f) No other competitors possessed the necessary brand portfolios and financial resources to
       compete effectively.

   (g) The merger would lead to increased marketing spend, including advertising and promotion
       spend, concentrated on fewer brands.

   (h) Interbrew would reduce the number of brands which it chose to actively advertise and promote.

   (i) Interbrew might decrease its exports.

   (j) Interbrew had indicated its general intention to raise prices.


                                                    146
   6.52.   As to wholesaling and distribution, Carlsberg-Tetley made the following points:

   (a) The reduction in national distribution operations from four to three would mirror the consoli-
       dation in brewing and wholesaling. Interbrew would be able to discriminate in favour of its own
       brands in its distribution operations.

   (b) Interbrew’s expected strength at the distribution level would be a consequence of its market
       power in brewing and wholesaling. Carlsberg-Tetley considered that wholesaling was an integral
       part of a brewer’s brewing and brand ownership activities. Interbrew’s dominance emanated
       from its ability to produce and wholesale a wide portfolio of strong brands rather than from the
       distribution function.

   (c) Carlsberg-Tetley’s position as a wholesaler would become increasingly less attractive. The
       arrangement within the M25 area whereby Whitbread leased depot space from Carlsberg-Tetley
       was unlikely to continue.

   (d) Interbrew would have direct access to high-volume retail outlets and estates and therefore no
       need to utilize third party wholesaling and distribution channels.

   (e) Interbrew would, in effect, be able to require customers to take a complete range of products.

   (f) Different prices charged to independent wholesalers and retail outlets were not justified by cost
       differentials and post-merger this situation would worsen because of the supply agreements with
       the Bass and Whitbread retail estates. Drop size had the greatest influence on the cost of delivery.
       If Interbrew supplied the large premier pub estates, its delivery cost would be lower.

   (g) Interbrew’s portfolio power would lead to a position where 60 to 70 per cent of volume sold was
       of ‘must stock’ brands. It would be able to cross-subsidize basic prices.

   (h) Interbrew would use its stronger brands to support and help promote its weaker brands, to the
       exclusion of other brewers’ brands.

   (i) Interbrew would be able to control the individual prices of its own brands and indulge in
       marginal cost pricing, taking advantage of its guaranteed supply to the Bass and Whitbread
       estates.

   (j) The price paid by Interbrew could not be justified by synergies.

    6.53. In connection with factors affecting delivery, Carlsberg-Tetley gave information about the
important factors affecting delivery costs. The effect of the order or drop size had the greatest influence
on the cost per barrel of delivery to any particular outlet. Other factors such as drop density and distance
between depot and customer outlet also had an impact but were far less significant. The merged entity
would have a significant competitive advantage because of its supply of the premier pub estates would
result in higher products costs and lower delivery costs.

   6.54.   As to retailing, Carlsberg-Tetley made the following points:

   (a) The long-term supply agreements between Interbrew and the Bass and Whitbread estates would
       perpetuate and increase the existing degree of foreclosure.

   (b) Interbrew would therefore be able to compete aggressively on price and brand promotions for
       other customers’ business.

   (c) The pubcos did not have sufficient market power to countervail Interbrew’s increased market
       power.

   (d) Free-trade outlets would be disadvantaged by increases in the wholesale prices of ‘must-stock’
       brands.

   6.55.   As to possible adverse effects on the public interest, Carlsberg-Tetley made the following
points:


                                                    147
(a) As to the possibility of higher wholesale prices and on-trade retail prices than would otherwise be
    the case, Interbrew would need to recoup its substantial investment in Bass (and Whitbread) and
    would therefore seek to maximize profits by increasing the wholesale price of beer. The retail
    pub chains were merely pricing in a manner which enabled them to make an adequate return on
    the capital they had invested in their pub estates. Interbrew would be subject to the same type of
    pressure and therefore the costs would be passed on to the customers. There was little doubt that
    the retailers would need to pass on the higher wholesale prices to the consumer. Although retail
    prices had, in recent years, increased more rapidly than wholesale prices, this had no relevance to
    the question whether increases in wholesale prices by brewers would be passed on to the
    consumer in the form of further retail price rises. Indeed the recent retail price rises indicated that
    the consumer was prepared to pay increased prices for beer. The retail price of beer was
    relatively inelastic and represented a small proportion of consumer spending. Therefore there was
    considerable scope for the retail prices of beer to rise to reflect rising wholesale prices. The only
    brewer to be in a position to offer a price-based competitive challenge to Interbrew was Scottish
    Courage. (No other brewer has a sufficiently strong brand portfolio.) However, there was no
    reason to anticipate that Scottish Courage would do this. Indeed Scottish Courage was likely to
    welcome an increase in wholesale prices and take the opportunity to increase its prices.

(b) As to the possibility of increased price discrimination between buyers, the large high-volume
    retail estate pubs would continue to get relatively better terms than the small free-trade outlets
    because of volume discounts to high throughput outlets, but the discounts would not be as good
    as currently. The smaller pubcos and free outlets would be unable to compete with the lower
    prices of the larger retail chains and would be forced to consolidate or pass on the higher cost to
    the consumer. Independent wholesalers would not be able to compete on price. As they were not
    producers, the independent wholesalers did not have sufficient margins to offer high discounts, or
    promotional support. It was in Interbrew’s interest to make its sales through its own wholesaling
    operations to achieve maximum margins and it would be able to do this because of its substantial
    range of brands. Independent wholesalers, which supply mainly to the small free-trade outlets
    would be unable to compete on price and would be forced to pass the higher price on to the
    retailers.

(c) As to the possibility of reduced choice of brands for retailers and consumer and a reduced rate of
    new product innovation, Interbrew would concentrate on building ‘must stock’ brands via
    marketing spend on fewer brands. The retailer, and therefore the consumer, would have less
    choice because of the increasing concentration on and promotion of a smaller number of brands.
    Interbrew would not have competing brands in each product sector (although it might have
    leading and support brands) so, for instance, Boddingtons and Worthington were an obvious
    target for rationalization. There would also be less incentive for product innovation as brewers
    consolidated their brand portfolios. To the extent that smaller brewers sought to introduce new
    brands, Interbrew would be able to undermine such brands by denying them wholesale
    distribution and/or by targeting Interbrew products to compete with such brands, using the
    strength of the Interbrew brand portfolio to promote the brand.

(d) As to the possibility of escalation of marketing expenditure leading to increase in entry barriers
    into brewing, new entrants would not be able to afford to spend the high amounts necessary in
    order to gain the significant brand portfolio volumes which would be necessary in order to
    compete effectively with Interbrew.

(e) As to possible remedies, Carlsberg-Tetley made the following points:

    (i)   On (a) Divestment of the Bass business in its entirety; or possibly without its activities in
          Scotland and Northern Ireland: The divestment of the Bass business would be an effective
          remedy. The disposal of the brewing interests of Bass would restore the competitive
          position to that which existed before the merger took place. If Interbrew were to dispose of
          the business in England and Wales and keep Bass’s activities in Scotland and Northern
          Ireland this would still be an effective remedy. Interbrew’s market share in England and
          Wales was sufficient that if its English and Welsh business were to be disposed of, a viable
          fourth competitor would be created. If Interbrew were to keep Tennants and production and
          distribution facilities in Scotland, this would not present a threat to the current conditions of
          competition across the UK as a whole.


                                                 148
(ii)   On (b) Divestment of the Whitbread brewing business, either with or without the rights to
       the Stella Artois brand: The divestment of the brewing interests of Whitbread without the
       Stella Artois brand licence would not provide an effective remedy. Whitbread would not
       provide a sufficient competitive restraint on Interbrew without the Stella Artois brand as it
       did not have a sufficiently strong portfolio of other brands. The vast majority of the value
       of Whitbread was contained in the Stella Artois licence. If the Whitbread brewing business
       were sold with a renewed licence exclusive of the Stella Artois brand, then, providing the
       licence provided for a sufficient period of time to justify the investment, this might prove to
       be an effective remedy because it would recreate the competitive position that existed prior
       to the merger. The licence would also have to contain adequate guarantees against inter-
       ference from Interbrew (which would, of course, be the owner of a competing brewer)
       which would have de facto control over the future of Whitbread through the brand licence.

(iii) On (c) Divestment of such brands and associated brewing and wholesaling capacity as
      would enable the creation of a competitive fourth brewer-wholesaler: This would be an
      effective remedy only if the brands divested consisted of a portfolio of other brands
      including Carling and/or Stella Artois and a leading ale brand. In particular, the ownership
      link between Carling and Stella Artois would need to be severed in order for a disposal of
      national brands to be an effective remedy. Any brand disposal would need to be sufficient
      so as to allow the buyer of the brands, either alone or in conjunction with its current brands,
      access to major national retail accounts. The disposal of Heineken would not be an effective
      remedy. Heineken would lose significant market share if it were taken out of the Whitbread
      product portfolio and distribution network unless it was acquired by another major brewer
      (which would be very unlikely). Heineken alone was not of sufficient strength to form the
      core of an alternative portfolio. It was number four in standard lagers with a market share of
      11 per cent and number 10 in premium lagers with a market share of only 2.1 per cent.
      These brand divestments together with the disposal of appropriate production facilities and
      the Tradeteam distribution network would ensure that a significant competitor (or competi-
      tors) remained on the market with a portfolio of products and a distribution network
      sufficient to compete effectively with the other brewers.

(iv) On (d) Divestment of the wholesaling and distribution businesses of Bass and/or
     Whitbread: For a remedy of this nature to be effective the whole of the wholesaling and
     distribution functions of Bass and Whitbread would need to be disposed of and this was not
     practically possible. The wholesaling function of a brewer was inextricably linked to the
     production of beer and they could not be separated. Indeed, in the short to medium term,
     the two separated entities (production and distribution/wholesaling) would still be depen-
     dent on each other and they would therefore need to continue to operate as one market
     dominant entity.

(v)    On (e) Divestment of the Interbrew/Bass interest in Tradeteam and renegotiation of the
       supply contract with Tradeteam on an arm’s length and non-preferential basis: The power
       of Interbrew lay in the strength of its brand portfolio and its ability to market the portfolio.
       The disposal of Tradeteam would make no different to these strengths. If Interbrew were to
       dispose of Tradeteam it would still exercise considerable brand portfolio power and would
       use this to sell its products directly to the retailers. Interbrew would still have considerable
       influence over Tradeteam even if there were a sale to an independent third party because of
       the volume of distribution which it would continue to provide to the business (approxi-
       mately 95 per cent). While the size of Interbrew’s business meant that it gained material
       saving in distribution costs, it would make no significant difference if physical distribution
       were undertaken by a partly-owned company (as now) or an independent distributor. In
       either case Interbrew would have cost advantages arising out of the size of its business. The
       cost of distribution was most influenced by volume and drop size/density. This meant that
       Interbrew would still be able to take advantage of lower distribution costs via an
       independent third party distributor. Further, to the extent that Interbrew had information
       advantages through wholesaling other brewers’ beers, those would remain because other
       brewers would continue to depend on Interbrew for wholesaling activities. Further, a
       number of Tradeteam’s operational sites were integrated with Bass sites and benefited from
       peppercorn rents. It would in practice therefore be very difficult to separate the two
       businesses. This would not, therefore, provide an effective remedy although it might be an
       appropriate remedy in conjunction with the brand disposals referred to in (c) above.


                                             149
       (vi) On (f) Termination of the supply agreements with the retained estates of Bass and/or
            Whitbread: This would be an effective remedy only if it were combined with the remedy
            suggested in (c) above. The termination of the supply agreements alone would not deal with
            the foreclosure effect that Interbrew’s complete brand dominance would give rise to. Even
            in the absence of the supply agreements, Interbrew would have de facto access to much of
            the Bass and Whitbread estate through a combination of inertia, the strength of existing
            relationships and the strength of its brand portfolio.

       (vii) On (g) Requirement not to discriminate in pricing at the brewing level, that is, to avoid
             differentials not justified by cost differences between sales to wholesalers and direct sales
             to retailers; and

       (viii) (h) Requirement not to discriminate in pricing at the wholesaling level, that is, to avoid
              differentials not justified by cost differences between sales of Interbrew beers and sales of
              competitors’ beers; and

       (ix) (i) Requirement not to engage in line forcing at both brewing and wholesaling levels, that
            is, not to require, or induce through differential terms, the purchase of a full range of
            Interbrew products: The potential undertakings outlined in (g) to (i) above would be
            impractical and impossible to monitor in practice. The sheer volume of separate price and
            supply negotiations that were carried out each year would make it administratively
            impossible to monitor and control the undertakings suggested. There were approximately
            60,000 pubs in the UK, only 25 per cent of which belonged to retail groups: therefore there
            were possibly 45,000 separate negotiations with customers each year. When Carlsberg AS
            and Allied Lyons PLC entered into a joint venture arrangements in 1992 they were required
            to give undertakings that they would not worsen the terms of supply to existing customers
            for three years but these undertakings were never meaningfully monitored. The potential
            undertakings would not be practically possible because it would take several years to get to
            a level playing field since the lowest prices are tied into long-term supply contracts. By the
            time that these contracts came to an end, the Interbrew brands would be well entrenched
            into the Bass- and Whitbread-retained retail estates. Interbrew would have also already had
            the opportunity to use its powerful brand portfolio to gain access to a large number of retail
            pubcos and other free-trade outlets. It was commercially unrealistic to suppose that the
            wholesaling arm of a brewer/wholesaler could not give preference to its own brands when it
            could earn the best return on its own products. An open-book wholesale pricing structure
            could easily be modified in the actual terms of any supply contract, for example by
            marketing allowances, listing allowances, packaging contracts, promotional support,
            favourable distribution and cellar services charges and preferential loans. Full-line forcing
            could legitimately be achieved through the simple mechanism of total volume discounts on
            a brand range to customers. In any event Interbrew would effectively have such a powerful
            brand portfolio that it would be in a position to sell the whole range of brands to a customer
            without having to actively pursue this policy. Even if Interbrew did provide its products to
            independent wholesalers at relatively competitive prices they would still not provide a
            competitive restraint on Interbrew. Wholesalers were just not able to provide the same level
            of support, services, expertise, loans or major promotions which would allow them to
            compete effectively with a beer producing wholesaler. Pricing structures in the UK beer
            industry were complex and much tailored to individual circumstances.

    6.56. Even if these remedies could be made to work, they would not address the central issue that
arises from this merger. A dominant player had been created as a result of this merger and there were
(apart from Scottish Courage) no effective competitors to Interbrew. Retailers would choose to take all of
their requirements from Interbrew because it would be able to supply all the major brands in all the
market segments at the lowest price, which was what the retailers want. The retailers were increasingly
reluctant to source from more from one supplier because it was easier and cheaper for them to source all
their supplies from one supplier. The economies of scale which Interbrew would benefit from would
mean that the price than one supplier which Interbrew would be able to offer to retailers would be lower
than any other brewer. These undertakings would not be effective to curb the duopoly position of
Interbrew and Scottish Courage. No other brewer would be in the position to offer an effective
competitive challenge to Interbrew and Scottish Courage. The strength of the brand portfolios of the two
major brewers would give them access to most major pubcos and much of the free trade. They would be
in a position to engage in significant marketing expenditure to protect and build their brands. The


                                                   150
absence of strong competitors would mean that the two leading brewers would ultimately be in a position
to increase prices because of the dependence of pubs on the brand ranges of these brewers. The two large
brewers would have a common interest in increasing wholesale prices and have no incentive to restrain
each other by competitive pricing.


Diageo plc
    6.57. Diageo said that Guinness Great Britain (GGB) was the sales and marketing division for Great
Britain of Guinness Limited, a subsidiary company of Diageo. GGB principally sold and marketed
Guinness stout and Kaliber alcohol-free lager but also sold small quantities of Guinness Draught Bitter,
Kilkenny Irish Beer and had a licence to sell Kronenbourg 1664 lager.

    6.58. The principal impact of the transaction in question would be that the parties would be able to
reduce costs/increase efficiencies across their value chain. This saving could be used, among other
things, to increase marketing and/or sales activity or increase wholesale discounts. The increased sales
and marketing activity were likely to increase competition in the UK market.


Frederic Robinson Limited
    6.59. Frederic Robinson Limited (Frederic Robinson) said that the merger would result in over
30 per cent of British beer being in the hands of one company. This would lead to a loss of choice, with
smaller brands being discarded. Competition would be lessened, resulting in price increases. Frederic
Robinson said that small brewers like itself which bought draught lager from the nationals would be
faced with a ‘take-it-or-leave-it’ price because there would be no one else it could approach. The pubcos,
many of whom were financed by the big brewers in return for taking their products exclusively, would
have a tighter range of products to offer to their customers to the exclusion of beers from smaller brewers
which were getting less opportunity to supply guest beers1 to the large pubcos.

   6.60. All this would result in more of the smaller, independent brewers ceasing brewing and thus
reduce the choice of draught beers, which was an important element of the English pub scene.


Fuller Smith & Turner Plc
    6.61. Fullers said that, if the merger were agreed, it would be concerned that there would be only
three major lager producers left in the country. This would lead to a lack of choice of lager brands and a
lack of competition. This would affect all ale-only breweries, such as Fullers, which had to buy in their
lager supplies. Fullers considered there should be no further major consolidations within the beer
industry.


Hall & Woodhouse Limited
    6.62. Hall and Woodhouse Limited (Hall and Woodhouse) said that the 1989 Beer Order had made a
revolution out of what was already an evolving process, yet failed to achieve the stated objectives on
consumer choice and consumer pricing. However, the revolution created the conditions for the pubco
phenomenon—a system of highly-geared property deals speculating on future property values based on
pubs coming from the tail ends of the national brewers’ estates. At the same time the national brewers
realized good cash values and ploughed much back into their best pubs.

    6.63. The MMC had failed to appreciate that, by 1986, massive pub ownership was no longer
essential to national brands’ power, that licensees and not consumers would in future dictate both
consumer choice and consumer pricing, and that ‘one-stop’ purchasing and size of trade discounts would
be powerful considerations. Moreover the MMC failed to appreciate that the UK was over-licensed, with
large numbers of obsolete and obsolescent pubs, and failed to appreciate what problems this would cause
later.


  1
   See glossary.


                                                   151
   6.64. The MMC inquiry had, however, created the conditions for a major explosion in pub branding
exercises; arguably most of which were in fact labelling rather than branding. Huge amounts of capital
were expended upgrading an oversupplied market but resulting in poor rates of return. The regional and
local brewers that made an exit from brewing and distribution were probably already going down that
road despite the MMC inquiry.

    6.65. Hall and Woodhouse said that the CC should focus on the mechanics and dynamics of the beer
distribution system. With the switch in power from brewers to pubcos, the balance of power now lay in
how distribution worked. There was a case for requiring that the remaining brewer in a merger situation
retained the brands acquired rather than being obliged on market share grounds to dispose of them to a
weaker party.



Heineken NV
    6.66. Heineken said that it was concerned that the strength of the Interbrew brand portfolio and the
limited access to the on-trade would make it difficult for stand-alone brands to create or hold a
sustainable position in the UK beer market. Heineken was not aware of the details of arrangements
between Interbrew and Whitbread and/or the Whitbread pub estate regarding the on-trade distribution
and was concerned that distribution of its brands to the Whitbread pub estate might in practice be
jeopardized, and that Interbrew also controlled access of Heineken’s brands to the Whitbread pub estate.

    6.67. Heineken said that its concerns, therefore, related to the Interbrew/Bass brand portfolio and
distribution. [                                                                      Details omitted. See
note on page iv.                                                                     ] As regards distri-
bution, Heineken believed that access to the on-trade would be possible only if limits were imposed on
the terms and conditions of supply agreements that Interbrew/Bass had entered into or might want to
enter into. In response to a question from us about its future intentions with regard to the Heineken and
Murphy brands, Heineken said that it had not yet taken a decision but that this might be taken shortly,
depending on the outcome of discussions taking place at the moment and that the decision might have an
impact on its and its competitors’ current volumes.

   6.68. In response to the Issues and Remedies Statement (see Appendix 2.2), Heineken said that [




                                    Details omitted. See note on page iv.




                                                                                                       ].


                                                  152
Joseph Holt Ltd
    6.69. Joseph Holt Ltd (Joseph Holt) said it was a small brewery operating in the Manchester area
which served 127 of its own pubs. It was opposed to the merger between Interbrew and Bass. If the
merger were allowed to proceed, it would mean that Interbrew would own both Whitbread and Bass
which, along with Scottish Courage, would mean there would be only two major brewers operating in the
UK. It was common knowledge that Interbrew, on the Continent, had been keen to discourage heavy
discounting and there must be concern that, with only two major suppliers to the UK market, this would
lead to a rise in prices.

    6.70. Joseph Holt said that it sought tenders from the major brewers for beers it bought in. The bulk
of its bought-in barrelage was now supplied by Bass and Whitbread. They tendered successfully for
contracts at Joseph Holt’s last review and indeed competed with each other. This was helpful because, at
that time, Joseph Holt had felt that Scottish Courage was not particularly competitive with its quote.
Certainly, if the current situation had existed at the time of its last tender, where both Whitbread and
Bass were owned by one company, it was likely this would have led to Joseph Holt being quoted higher
prices for the beers it currently bought in.

   6.71. Joseph Holt said that, if Interbrew were allowed to take over Bass and combine it with
Whitbread, it was likely that the policy of the new enlarged company would be to promote Stella Artois
and Carling lager to the detriment of traditional local bitters such as those produced by Joseph Holt.
Joseph Holt said that the combined marketing spend of Interbrew, Bass and Whitbread would make it
inevitable that, in the future, lager would be promoted at the expense of local bitters.

    6.72. Interbrew would be such a big player in the UK beer market that it could move demand away
from local cask ales to centrally-distributed keg products. A number of small brewers had recently been
forced either to sell, such as Morlands, Morrells, Vaux and King and Barnes, or to give up brewing, such
as Mitchell’s or Burtonwood. Joseph Holt felt that allowing Interbrew to take over Bass and combine it
with Whitbread would lead to a loss of more local breweries. Joseph Holt considered that it was against
the public interest for the UK beer market to be reduced to two major players and it therefore opposed
the merger.



J W Lees & Co
    6.73. J W Lees & Co (Lees) said that it was sad that UK had lost its most respected brewer to foreign
ownership. The main reason for this could probably be traced back to government interference in the
brewing industry. The merger illustrated the long-term vision of private companies, compared with the
short-term view forced upon plc’s in the UK by the stock market. It was difficult for Lees to speculate
whether the merger would be in the best or worst interest of brewers, wholesalers, distributors, retailers
or consumers. However, if the Government wished to protect choice to consumers, then it should do
everything in its power to protect companies like Lees, which offered choice particularly in its own
regional distribution area.



Maclay Group plc
    6.74. The Maclay Group plc (Maclay) said that it now outsourced the brewing of its brands, having
closed its brewery through economic necessity. Its distribution and pub estates remained.

    6.75. The Scottish market had historically been dominated by two major companies in the market,
being Tennent Caldonian Breweries (a division of Bass) and Scottish Brewers (a division of Scottish
Courage). Between them they supplied some 80 per cent of the overall beer market in Scotland. The
dominant brand was Tennent’s Lager. Tennent’s Lager was understood to have over 60 per cent of the
standard lager market. The merger would align Stella Artois, the leading premium lager brand, with
Tennent’s Lager, which would give Interbrew in effect both major lager brands, standard and premium.
The percentage of the market represented by premium lager was, however, small (around 4 per cent) and
it was unlikely that the merger would have a material effect on the existing competitive situation in the
market.


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    6.76. The differences between the Scottish and UK markets were being eroded because of the
increasing domination of major UK-wide pubcos in the on-trade and the increasing off-trade where the
market was again UK-wide and dominated by the multiple retailers. However, the continuation of the
existing competitive structure in Scotland would depend on whether Interbrew continued with
Bass/Tennents present pricing policy, where national suppliers often negotiated highly competitive deals
with pub companies whose volumes Maclay could not hope to emulate. Wholesalers had traditionally
been unable to command such attractive trade discounts from brewers as the retailer, and the position
was likely to deteriorate if present trends were allowed to continue.

    6.77. It was difficult to see that any good would be achieved by forcing the disposal of Tennents.
Either the position would remain much the same in new hands, or a buyer already represented in the
Scottish market would have even more power. This would act against Maclay’s interests, as the business
relied heavily on factored products.

    6.78. Brewing production continued to consolidate as it focused on specific brands. New brands had
a high cost of entry, given the marketing effort behind the major existing brands of the national brewers
and the strong regional brands of the regional brewers. The smaller brands and regional brewers would
continue to be squeezed. Wholesalers and distributors would continue to be caught in the middle as the
brewers biased pricing structures in favour of the increasingly dominant retailers at the expense of
intermediaries such as Maclay.

    6.79. Retailers had become the dominant feature of the market, and were continuously driving the
prices of products down, since they made their profits essentially from discounts negotiated with the
major suppliers. This had the effect of reducing the opportunities for independent brewers to compete on
price grounds. As long as there were a substantial overcapacity in brewing there was unlikely to be any
reduction in the squeeze on profits. Therefore the dominance of the retailers was more of a threat to
Maclay and its peers than the merger. Although the price of ales and other on-trade beverages had risen
ahead of inflation, on a European competitive basis, prices in the on-trade outlets of the UK remained
good value. It was clear, however, that the major pubcos pocketed the ever increasing discounts they
squeezed out of suppliers, but did not pass much, if any, of this on to the consumer. They argued that the
investment required in retail outlets to satisfy modern consumer demands was such that the prices
charged were not unreasonable and were needed to fund the necessary investment. Maclay did not
believe this altogether although, it was true in a general sense, as the whole retail industry in the UK was
suffering strong competitive pressures, and customer power prevailed.

    6.80. Research and new product development was unlikely to be affected. Given the barriers to entry
for smaller players, it had always been difficult to compete, and this would continue to be the case.
Successful introduction of new, lasting products into the trade was notoriously difficult.

    6.81. Maclay said that there had been much speculation that Interbrew might be required to divest
itself of a percentage of its market share following the merger. Some of this speculation had inevitably
attached to the position of Tennents. On the face of it, there would seem to be no real change to be
anticipated with regard to market share should Tennents as a brand change hands, but it was interesting
to reflect on the position that might evolve if Interbrew were forced to sell Tennent’s Lager and promote
Carling in Scotland as well as Stella Artois. It was most likely that Tennents would retain its historic
position, thus thwarting any intention to increase competition.

    6.82. Maclay said that it did not believe the merger was against the public interest. The main issue of
public interest regarding the trade was the increasing domination of the pubcos, which would hardly be
affected by the merger. Existing relations between the major players would continue and the pub
companies would continue to consolidate and become more powerful.


Morrells of Oxford Limited
    6.83. Morrells of Oxford Limited (Morrells) said that, as a licensed-house retailer, it was concerned
at the effect of a merger between two of the four major suppliers to its market. Its concern revolved
around the potential adverse supply price pressures and a reduction in the choice of brands. Any retailer
was concerned at cost-push pressures on its supply prices, but the potential ramifications on the pub
market could be far reaching. It would not take too great a shift in cost prices to force the closure of a
good number of pubs because of a lack of economic viability.


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   6.84. The concern would be for the smaller pub operators which were denied the bulk discounts
available to the larger operators and by definition, the smaller operators were more likely to be those
which ran the more marginal pubs. Morrells could foresee a large number of outlets that did not enjoy a
premium location being forced to close. The net effect of the Beer Orders had been a reduction in the
number of beer brands available and therefore of choice to the consumer. Morrells said that the country
had a heritage in brewing which had been pulled apart by consolidation and market forces over the last
20 years.


    6.85. While the consumer had had the choice of product reduced since the Beer Orders, there had
been gain in terms of the quality of the pub/café/bar/restaurant offering. Record levels of investment had
been poured into the licensed house business since the stranglehold of the major brewers’ tied estates had
been released. The choice of venue and standards of professionalism and quality had never been higher.
Morrells said the country had a more cosmopolitan offering available, which had been welcomed by the
public and reflected in improved levels of business. Any cost pressures on supply prices would make
future investment decisions more marginal. The levels of investment would drop as would the quality of
customer experience.



T D Ridley & Sons Ltd
    6.86. T D Ridley & Sons Ltd (Ridley & Sons) said that it had no objection to the merger because it
meant that there would be a reduction in brewing capacity in the UK. This might provide opportunities
for small brewers like itself to bid for low-volume brands to brew on a contract basis. It might also lead
to a reduction in the discounts currently available and help Ridley & Sons to reduce its own discounts
and improve profitability.



Royal Grolsch NV
    6.87. Royal Grolsch NV (Royal Grolsch) said that it had a joint venture arrangement with Bass
Brewers Limited and Grolsch (UK) Limited (Grolsch UK). The Grolsch UK joint venture had developed
well since its establishment in 1994 (for example, production had increased from 100,000 to 350,000
barrels a year) and Grolsch NV wished to see the continuation of this joint venture in accordance with
the terms of the relevant agreements.


    6.88. Grolsch was broadly in support of Interbrew’s acquisition of Bass. Nonetheless, Grolsch was
concerned to ensure that the future of Grolsch UK was not put at risk. Grolsch considered that the future
of its brand in the UK was dependent on the joint venture it had with Bass, and the brewing and
distribution arrangements that formed part of this. Grolsch NV did not consider that there were any other
suitable alternatives available to it if the arrangements that it had with Bass were to be terminated, as it
did not believe there were any other distributors in the UK which could fulfil Grolsch’s requirements and
which had access to the Bass tied estate. Whatever the outcome of the CC’s investigation it was
imperative, for the continuance and development of the Grolsch brand in the UK, that Grolsch continued
to have access through the Grolsch UK joint venture, to the Bass distribution network and to its brewing
facilities. In the interests of permitting continued competition from the Grolsch brand, Grolsch
considered that, if the merger were to be allowed to go ahead, Interbrew/Bass must not be required to
terminate or alter the joint venture arrangement and, furthermore, there should be specific measures put
in place preventing them from choosing to do so as means of satisfying any requirements of the Secretary
of State. If the joint venture arrangements were to be terminated as a consequence of the Interbrew/Bass
merger, Grolsch believed that competition in the UK beer market would be significantly affected in view
of the detrimental effect this would have upon the Grolsch brand and its survival.


    6.89. It should be noted, further, that the joint venture arrangement specifically provided for termin-
ation in only limited circumstances and prohibited Bass from disposing of its shareholders in the joint
venture vehicle without the consent of Grolsch. In addition Bass Brewers was not entitled to assign its
brewing and distribution rights under the joint venture arrangements.

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Scottish & Newcastle plc
    6.90. S&N said that it was important to assess the acquisition in the context of the recent and
ongoing changes that had occurred in the UK beer industry. S&N recognized that there were a number of
pressures for consolidation at the brewing, wholesale and distribution levels of the industry. Nevertheless
it recognized that the acquisition constituted a significant diminution of competition in brewing and
wholesale. It would also create a competitor with considerable market power. This would derive from its
strong brand portfolio—including ownership of the leading premium and standard lager brands—as well
as a variety of long-term supply agreements with a substantial proportion of the on-trade retail market.
Interbrew would also have the financial resources to invest in aggressive marketing in its top brands and,
as a minimum, S&N would be forced to scale up its marketing budget. S&N did not consider that there
was scope for duopolistic behaviour.

    6.91. If there were not to be an acceptance of the UK beer market being structured around two major
companies, then the only effective remedy would be to restore the previous competitive position by
separating the Whitbread and Bass brewing and wholesaling businesses. In practice, this would mean
Interbrew disposing of Bass, since Whitbread without Interbrew (and, in particular, the Stella Artois
brand) would not be a viable competitor.

    6.92. Over the last decade, the UK beer industry had been characterized by a series of profound
changes. Prior to the 1989 Beer Orders, the vast majority of pubs were owned by brewers, and took their
supplies almost exclusively from their owners. In this old world, the four key levels of the beer supply
chain—brewing, wholesale, distribution and retail—were typically vertically integrated. Today, the
situation was different. Following Interbrew’s acquisition of Bass and Whitbread, less then 20 per cent of
pubs were now owned by brewers. A further 17 per cent of pubs lay within the Bass, Whitbread and
Punch retail estates, which were essentially tied to Interbrew for their beer requirements. S&N estimated
that, of the remainder, around half were subject to short-term supply arrangements (which typically were
subject to renewal or replacement by competitive tender after periods of one to three years) or loan
finance arrangements (which could be terminated on three months’ notice), with the balance of pubs free
to obtain their beer from any source.

    6.93. This ability of retailers to switch suppliers for all or part of their beer requirements had led to
increased competition between brewers and wholesalers. This had been accentuated by the fact that an
increasing number of pubs were owned by large pub companies. These companies, which often had a
strong regional presence, provided an important route to market. They had strong buying power in their
negotiations with the wholesalers, and had been able to extract highly attractive terms. As a result of
these changes, net wholesale prices for beer had fallen progressively over the last eight years. These
falling prices had, in turn, led to profit margins being squeezed throughout the production, wholesaling
and distribution levels of the supply chain. This profit squeeze for the UK brewers had been compounded
by a swing in consumption away from beer towards other alcoholic drinks, away from the on-trade to the
off-trade and away from draught beer to packaged beer.

    6.94. The reduction in profit margins throughout distribution, wholesaling and brewing was expected
to lead to consolidation at all of these levels, since each of these activities was characterized by high
fixed costs. In brewing, the potential for pubs to source their beers from any suppliers, including taking
different beers from different suppliers, had led to a growth in demand for the strongest brands, and a
reduction in the demand for weaker brands.

    6.95. The loss of demand for these weaker brands would in turn reduce their viability, given the
fixed costs associated with brewing and marketing. As a result, a number of smaller regional brewers had
exited from brewing while the lesser brands held by the major brewers had also lost market share.
Brewer-wholesalers would find it difficult to remain viable with just one or two brands, as retailers
would, in practice, prefer to purchase from wholesalers which could provide a wide portfolio of products
where possible. Moreover, given the fixed costs associated with wholesaling, a wholesaler with just one
or two successful brands would find it increasingly difficult to survive on the slim margins that were now
available at the wholesale level.

   6.96. The OFT had stated its concern that Carlsberg-Tetley would be marginalized as a result of the
merger. S&N believed that the long-term viability of Carlsberg-Tetley as a wholesaler and distributor
was already in doubt. It was now largely reliant on two assets: the Carlsberg brands, and its supply
agreement with the former Allied-Domecq retail pub estate (now part of Punch). S&N estimated that

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Carlsberg-Tetley had lost market share over the last few years, falling from around 14 to 12 per cent
between 1996 and 1999. It was also relatively weak in the off-trade market, which was increasing in
importance. With just one successful brand, S&N believed that Carlsberg-Tetley was unlikely to survive
as a wholesaler following the termination of the supply agreement with Punch in about six years’ time.

    6.97. In contrast with the position of Carlsberg-Tetley, Whitbread had performed strongly in the UK
market and gained market share in recent years. Following its acquisition by Interbrew, Whitbread had
now secured the ability to continue to brew and wholesale Stella Artois—the best-selling premium lager.
It also owned Boddingtons, a popular bitter. Moreover, given its international beer interest, Interbrew
would be in a position to strengthen Whitbread’s portfolio by the addition of international brands, for
example, from Canada and the USA. This would replace Heineken, which was becoming weaker as a
brand in the UK, and for which Whitbread’s licence was due to expire within the next two years.
Interbrew/Whitbread also had the benefit of a long-term supply agreement with the Whitbread retail
estate. This comprised 2,952 pubs and 883 restaurants and accounted for around 5 per cent of the total
on-trade retail market (by volume). With strong brands and preferential access to a substantial proportion
of the retail market, Interbrew/Whitbread had been and would continue to be an effective competitor in
the markets for the brewing, wholesaling and distribution of beer in the UK absent the merger with Bass.
The acquisition by Interbrew/Whitbread of Bass therefore represented a diminution of competition in the
supply of beer.

    6.98. While further consolidation at the brewing, wholesaling and distribution levels was in some
cases the only realistic response to competitive pressures for consolidation, the acquisition of Bass would
create in Interbrew a competitor with market power and a strong position relative to all other market
participants, enhanced by a disproportionate share of secured distribution through long-term supply
contracts.

    6.99. This position would be principally derived from its strong brand portfolio, including ownership
of the leading premium lager brand (Stella Artois), the leading standard lager brand (Carling), plus a
variety of other popular and well-performing brands. Moreover, the combined business would have
additional financial resources to invest in aggressive marketing of their top brands, at levels which other
brewers with the exception of S&N would find difficult to compete with.

   6.100. [

                                  Details omitted. See note on page iv.

                                                                                                          ]

    6.101. This market power would be enhanced by the long-term supply agreements relating to the
large proportion of the highest quality pubs in the UK that it would have secured through supply agree-
ments. S&N understood that the merged party had entered into long-term supply agreements with both
the Whitbread and Bass retail estate. This combined estate included 5,467 pubs (around 9 per cent of all
UK pubs) plus around 1,312 restaurants. In total S&N estimated that these retail outlets accounted for
around 4.4 million hectolitres of beer per year, or around 11 per cent of the total on-trade. In addition,
Interbrew had now taken over Bass’s significant supply agreement with Punch. In combination, the
supply agreements with these three retail estates accounted for over 10,000 pubs or around 17 per cent of
all UK pubs.

    6.102. These vertical ties were anti-competitive and would strengthen Interbrew’s market position
for two reasons. It would restrict the ability of other brewers from competing for business with those
pubs; and would provide Interbrew with a guaranteed sales base, sheltering it from the normal com-
petitive effects of the market and giving it the opportunity of increasing market share through short-term
marginal trading.

    6.103. The combination of losing a competitor and creating a new player with market power would
require a strong remedy. S&N believed that the only appropriate remedy would be to restore the previous
competitive position by requiring a separation of the Interbrew/Whitbread and Bass businesses. The
disposal of Whitbread alone would not restore the competitive situation, since Whitbread without
Interbrew’s brands would not be a viable competitor. Accordingly, Whitbread/Interbrew should be
required to dispose of Bass. Moreover, if Interbrew had, as was usual, made its acquisition of Bass


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conditional upon regulatory approval, S&N believed that the appropriate measure to prevent any anti-
competitive effects would have been to prohibit the acquisition in the first place. S&N had considered
whether alternative measures could restore the competitive situation and, in particular, whether modifi-
cation of the long-term supply agreements with the Whitbread, Bass and Punch estates would have that
effect. However, this would not be sufficient to restore the competitive position given the substantial
market power that the combined Interbrew/Whitbread/Bass business would command.

   6.104. S&N said that, so far as the CC’s Issues and Remedies Statement (see Appendix 2.2) was
concerned, its primary concern related to the fact that the acquisition would both remove an effective
competitor from the market and create a player with substantial market power.

   (a) Removal of an effective competitor. Following its acquisition by Interbrew, Whitbread had
       permanently secured the ability to continue to brew and wholesale Stella Artois—the best-selling
       premium lager. S&N believed that it also had the benefit of a long-term supply agreement with
       the Whitbread retail estate. These factors placed Interbrew/Whitbread in a position to remain an
       effective competitor in the markets for the brewing, wholesaling and distribution of beer in the
       UK absent the merger with Bass.

   (b) Creation of market power. The acquisition of Bass would create in Interbrew a brewer-whole-
       saler with a strong brand portfolio, which included the number one premium and standard lagers
       (Stella Artois and Carling Black Label, respectively). The combination of the ‘key brands effect’
       and the ‘portfolio effect’ meant that other wholesalers would find it very difficult to compete
       against a brewer-wholesaler with so strong a brand portfolio. The acquisition would thus lead to
       a step change in Interbrew’s market power. Interbrew would be expected to gain increasing
       market share over time, as weaker players lost share or even left the market.

    6.105. As well as disadvantaging competitors, this increased market power would act to the
detriment of consumers:

   (a) Reduced variety. Consumers would face less variety of beer brands in their pubs, as Interbrew
       expanded its market share of wholesaling at the expense of other wholesalers, and as increased
       marketing led to a greater polarization of the market into top brands and niche brands (with
       medium-sized brands tending to disappear from the market).

   (b) Higher prices. While there might be a short period of aggressive price competition between
       brewer-wholesalers following the acquisition, from which customers might benefit (if the pub
       companies passed on their cost savings), this would lead to a shake-out of the market with the
       weaker competitors exiting. Prices might then rise to a higher level than would otherwise occur,
       as a consequence of the restructuring of the wholesale and brewing markets.

   6.106. In addition, these primary concerns might be exacerbated by the following secondary factors:

   (a) Line forcing. The ‘key brands effect’ could be exacerbated by line-forcing behaviour by
       Interbrew. [
                                    Details omitted. See note on page iv.
                  ] Clearly, this effect would be strengthened if Interbrew were able to line force such
        that pub companies were effectively required to take a number of more marginal beer brands if
        they wanted to carry the more popular brands (for example Carling Black Label and Stella
        Artois).

   (b) Supply agreements with the BLR, Whitbread and Punch retail estates. These vertical ties were
       anti-competitive and would further strengthen Interbrew’s market position for two reasons. First,
       they restricted the ability of other brewers from competing for business with those pubs. Second,
       they provided Interbrew with a guaranteed sales base, sheltering it from normal competitive
       effects over a significant proportion of its sales.

    6.107. Overall, S&N did not consider that the merger between Bass and Interbrew would give rise to
any consumer benefits. S&N did not believe that the high price paid by Interbrew for Bass entirely
reflected the potential for cost efficiencies, but rather that it also reflected the potential for Interbrew to
acquire market power and increase prices.

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Possible remedies

    6.108. (a) Divestment of the Bass business in its entirety; or possibly without its activities in
Scotland and Northern Ireland. S&N considered that the divestment of the Bass business in its entirety
was the most appropriate remedy to the public interest concerns arising from the acquisition of Bass by
Interbrew. This would restore the competitive position obtaining prior to the acquisition. It did not con-
sider that it would be possible or sufficient to divest the Bass business without its activities in Scotland
and Northern Ireland. As discussed above, the most important concerns arising from the merger related
to the strong brand portfolio that Interbrew would hold if this merger were allowed. It would be
unrealistic to divest brands in England and Wales only. Moreover, these concerns applied across the UK,
including Scotland and Northern Ireland.

    6.109. (b) Divestment of the Whitbread brewing business, either with or without the rights to the
Stella Artois brand. S&N assumed that this remedy would also involve the divestment of the Whitbread
wholesaling and distribution business, as well as its brewing business. Nevertheless, it did not believe
that either option would fully address the primary concerns arising from this merger, since neither would
recreate an effective competitor. Divestment of the Whitbread business without the rights to the Stella
Artois brand would not restore competition. First, Interbrew’s market power would still be enhanced; it
would retain both Carling Black Label and Stella Artois within its brand portfolio. Second, Whitbread
would not, on its own, be a viable competitor. It was currently not clear what would happen to the
Heineken (and Murphy’s) brands. However, even assuming that Whitbread would keep these third party
brands, it did not believe that Whitbread’s brand portfolio would be sufficient to maintain an effective
wholesaling and distribution system. It was not clear how a divestment of Whitbread with the rights to
the Stella Artois brand would work. If the worldwide brand rights were awarded to Whitbread in
perpetuity, with Interbrew retaining no control of ownership whatsoever, then this solution could
potentially recreate the competitive position prior to the acquisition. However, it did not believe that this
would be acceptable to Interbrew, given the importance to its business of Stella Artois.

  6.110. S&N did not expect this potential remedy to restore competition if the rights awarded to
Whitbread were either for the UK only or for a limited time period.

   (a) If the rights were for the UK only, then the potential for imports of Stella Artois from the
       Continent (either by Interbrew or by parallel importers) could threaten the viability of the
       divested company.

   (b) If the rights were not awarded in perpetuity, then it would presume that Interbrew would need to
       retain some control over Whitbread with respect to Stella Artois over the short term, at least in
       terms of brand management. More generally, it would almost certainly lead to close links
       between Interbrew and Whitbread that would not foster vigorous competition between them. In
       addition, Interbrew would presumably retain the right to switch wholesaler at some time in the
       future, at which point it could simply bring the brand in-house. This would strengthen
       Interbrew’s market power and threaten the viability of Whitbread, for the reasons discussed
       above.

    6.111. Finally, it was S&N’s understanding that Whitbread had already been so far integrated into
Interbrew that divestment of the current business could leave an emasculated entity, with all its
confidential commercial affairs known to a rival. This would further limit the potential of Whitbread to
act as an effective competitor to Interbrew.

   6.112. (c) Divestment of such brands and associated brewing and wholesaling capacity as would
enable the creation of a competitive fourth brewer-wholesaler. In principle, this option might be
acceptable, but it would need to pass three hurdles:

   (a) It would need to create an entity that would be a viable and effective competitor (or, more
       specifically, no less viable than Interbrew/Whitbread had been prior to the acquisition).

   (b) It would need to reduce Interbrew’s brand portfolio, such that its market power was no higher
       than prior to the acquisition. In particular, this would require the divestment of either the Stella
       Artois or Carling Black Label brand.

   (c) It must not raise new competition concerns.


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    6.113. In practice, the easiest way of achieving this would be simply to divest Bass (ie option (a)). It
believed it would be difficult to find an alternative solution that meets these three criteria. In any case, it
would be difficult to create within a workable timeframe a company that would be attractive to a third
party buyer, given that this approach would involve the creation of a wholesale and distribution business
with an untested portfolio mix.

    6.114. (d) Divestment of the wholesaling and distribution businesses of Bass and/or Whitbread.
S&N did not believe that this would be an appropriate solution to the public interest concerns raised by
this merger. As discussed above, the key concerns surrounding this merger were horizontal. They related
to the bringing together of a variety of key brands to create a ‘super-portfolio’ against which few other
wholesalers could compete effectively. This would not be solved by a vertical divestment. Moreover, so
long as Interbrew retained its entire brand portfolio, it would make little sense for it to divest any other
elements of its activity. Neither the Bass nor Whitbread wholesale and distribution arms would be able to
survive without access to these brands. This would require strong ties to Interbrew that would make the
divestment economically meaningless.

    6.115. (e) Divestment of the Interbrew/Bass interest in Tradeteam and renegotiation of the supply
contract with Tradeteam on an arm’s length and non-preferential basis. This essentially suffered from
the same problems as option (d). First, the ‘remedy’ would have no real impact, since the merger did not
raise significant competition concerns at the physical distribution level. Distribution was relatively
competitive, and there were a number of potential suppliers.

    6.116. Second, it would be hard for Tradeteam to exist without the Bass business, while at the same
time it would be relatively easy for Interbrew/Bass to build up the Whitbread distribution system in-
house to take over the distribution of the Bass brands. As such, Tradeteam’s bargaining position with
Interbrew/Bass would be weak, and it would only be viable if tied strongly to Interbrew on prearranged
terms. However, this would probably limit its potential to behave as an effective competitor to Interbrew
at the distribution level.

    6.117. (f) Termination of the supply agreements with the retained estates of Bass and/or Whitbread.
As set out above, S&N considered that Interbrew’s supply agreements with the retained estates of Bass
and Whitbread raised substantial competition concerns. They foreclosed a major part of the retail market,
and exacerbated the competition detriment arising from bringing together the brewing and wholesaling
interests of Bass and Interbrew. Moreover, they would provide Interbrew with a guaranteed sales base,
giving it the opportunity of increasing market share through short-term marginal trading. Nevertheless,
S&N did not consider that this remedy would in itself fully address the primary public interest concerns
arising from the merger.

    6.118. (g) Requirement not to discriminate in pricing at the brewing level, that is, to avoid
differentials not justified by cost differences between sales to wholesalers and direct sales to retailers.
S&N presumed that the aim of this remedy was to ensure that the wholesale price differential between
pub chains and the independent free trade did not widen as a result of the merger. As such, it did not
consider that it addressed the primary concerns arising from the merger. Moreover, in practice such a
behavioural undertaking would be difficult both to design and to enforce.

    6.119. (h) Requirement not to discriminate in pricing at the wholesaling level, that is, to avoid
differentials not justified by cost differences between sales of Interbrew beers and sales of competitors’
beers. This essentially suffered from the same problems as option (g). S&N presumed that the aim of this
remedy would be to protect third party brewers which sold through Interbrew’s wholesaling arm.
However, it did not consider that this was the primary competition concern arising from this merger.
Moreover, the proposal was impractical in a number of ways. It was not clear how it would be designed
or enforced, and there was a danger that it could stifle competition between different beers.

    6.120. (i) Requirement not to engage in line forcing at both brewing and wholesaling levels, that is,
not to require, or induce through differential terms, the purchase of a full range of Interbrew products.
As set out above, S&N considered that line forcing could be a serious potential problem in a situation
where one wholesaler had a number of key brands in its portfolio. It would exacerbate the ‘key brands
effect’ described in its submission and, moreover, there was evidence that Interbrew was already
engaging in line forcing at the wholesale level in Belgium. Nevertheless, S&N did not consider that this
remedy would in itself fully address the primary public interest concerns arising from the merger. The
‘portfolio effect’ and ‘key brands effect’ would persist even in the absence of line forcing.


                                                     160
St Austell Brewery Company Limited
   6.121. St Austell Brewery Company Limited said it noted that, if the merger were allowed to pro-
ceed, the market would be controlled by two major brewers and this was likely to lead to a price cartel.
This would be of no benefit to the market or to customers.



The Belhaven Brewery Company Limited
     6.122. The Belhaven Brewery Company Limited (Belhaven) said that the two principal beer
suppliers in Scotland were Bass through its subsidiary, Tennent Caledonian Breweries, and S&N through
its subsidiary, Scottish Courage. These two companies had been to the forefront for many years because
of the popularity of their brands in the free trade. Any attempt to regulate their market share in Scotland
would be ineffective as their brands would continue to be consumed by the public, no matter their
‘ownership’. Belhaven said that it would be a fundamental error for the CC to impose a condition on
Interbrew to divest its Scottish business (Tennent Caledonian) as it would result in the acquiring party
having at least the same share of the Scottish market as Interbrew and a potentially greater share if
Tennent were to be purchased by a brewer (or significant retailer) which already had a presence in
Scotland.


    6.123. Such had been the scale of disposal of pubs following the Beer Orders that the concentration
of power had switched from brewer to retailer. Decisions about the choice of beer products to be made
available to the consumer now lay with the multiple retailers, both in the on-trade and the take-home
market. Hence the elimination of so many famous brewery names which were not able (or not willing) to
discount the prices of their beer products to the levels demanded by the key retailers.


    6.124. The smaller brewers in the UK (such as Belhaven) which had popular regional ale brands
(such as Belhaven Best) could only exist as wholesalers and distributors to the independent trade if the
national brewers were prepared to agree competitive terms for the supply of the key lager brands which
they owned. Without these products at competitive prices within their portfolios, the smaller brewers
could easily be forced out of business. If Belhaven did not have a beer portfolio including popular brands
such as Tennent’s Lager and Stella Artois it would not be able to sustain its distribution business and its
own brands and brewery would quickly be foreclosed. The impact on Belhaven of Interbrew’s purchase
of both Whitbread and Bass was neutral, provided that Interbrew continued to transact business through
integrated regional breweries such as Belhaven, in the same way that Bass and Whitbread had done in
the past. Belhaven said that it accepted the assurances it had received from senior personnel within both
Whitbread and Bass that this would be the case.


    6.125. Because of the balance of power swinging from brewer to retailer in the past ten years, the
effective wholesale price of beer had reduced in real terms. The retailer had never bought as cheaply as
now. This was one of the reasons why the UK had lost so many breweries in the last few years.
Discounts to multiple retailers had increased at a rate well ahead of wholesale beer price rises. On-trade
retail prices had, however, increased in real terms. Most of the independent pub chains relied on the
discounts they received for their own income stream and did not pass the discount benefit on to the
consumer or to their tenants. Thus the pressure felt by the brewer had yet to benefit the pub drinker.
However, there were recent signs that this might change. There was already a new breed of ‘super pubs’
which were offering heavily discounted beer prices in order to gain retail market share at the expense of
the independent trade.


    6.126. Belhaven said that it believed Interbrew’s purchase of Whitbread and Bass would help redress
the weakening of the brewing industry in the UK which had been experienced in recent years. However,
the purchase would not create any material threat to the consumer in terms of higher beer prices.
Interbrew’s purchase of Whitbread and Bass would, at best, cause a slight swing in favour of the brewers
in their negotiating position with the key retailers in both the on-trade and the off-trade. The retail price
of beer was, if anything, likely to reduce as the pub trade took account of the advent of the ‘super pub’
and the grocery trade continued its aggressive pricing and promotional policies.


                                                    161
The Black Sheep Brewery Plc
    6.127. Black Sheep said it was uneasy at a situation that saw the further concentration of beer supply
in the UK, with two companies controlling up to 70 per cent of the market, given Scottish Courage’s
already strong position.

    6.128. However, Interbrew was a company committed to brewing, which would be keen to see a
proper return on its investment in the UK. This was in contrast to Whitbread and Bass which latterly had
been retailers with a rump of brewing interest, illustrated by their willingness to dispose of the most
historic part of their businesses. Interbrew might wish to put some margin back into its sales to the large
national pubcos, whereas its predecessors had been content to sell beer to those groups at discount levels
that probably represented sales values at below-prime cost. If this were to happen, it might make
profitable supply to the pubcos by the smaller brewers a possibility. The anticipation of this change
might be the reason why the leaders of one or two of the major pubcos had appeared in print as opposing
the takeover.


The Heavitree Brewery plc
   6.129. The Heavitree Brewery plc said the merger would lead to a monopoly situation with less
choice, fewer pubs and an industry owned by a foreign operator.


The Wolverhampton & Dudley Breweries PLC
    6.130. Wolverhampton & Dudley said that it was the largest regional brewer and the fourth largest
brewer. Bass and Whitbread had particularly strong market positions in South Wales and in the North-
West as a consequence of mergers and acquisitions in the 1960s and 1970s. The merger of Interbrew and
Bass would enhance already-dominant market positions. Bass held the largest market share for standard
lager and Whitbread for premium lager—with Carling and Stella Artois respectively. In addition, Bass
had a high market share in the standard ale sector with the Worthington’s brand and Whitbread held a
similarly significant position with the Boddingtons brand.

    6.131. The merger of these two businesses created a dominant position in three out of five main
market categories (premium lager, standard larger, standard ale. The other categories were: premium
cask ale and stout). The ability to supply major brands in three main sectors, would enabled the merged
entity to limit the opportunities for competing suppliers.


The Wychwood Brewery Company Ltd
    6.132. The Wychwood Brewery Ltd said that it was against the takeover of Bass. The supply of beer
was being controlled by fewer and fewer companies. Interbrew would have in the region of a 30 per cent
market share and S&N another 30 per cent. There would be upward pressure on beer prices and
discounts would be reduced. Choice would be reduced as lesser brands disappeared as Interbrew concen-
trated its efforts and marketing spend on its bigger brands. Guest beer provision would disappear in the
Bass pub estate. Competition might be assisted by the introduction of progressive beer duty for small and
microbrewers.


Timothy Taylor & Co Ltd
    6.133. Timothy Taylor and Co Ltd (Timothy Taylor) said that the CC should allow market forces to
have their way without interference or restriction. The takeover of Bass by Interbrew would create a
large player in beer production, but there would still be plenty of competition in the marketplace. The
real power in the marketplace now rested with the large retailers which could extract even lower prices
from brewers with weak brands. The wholesale price of beer was 15 per cent lower than in 1992 and
some 16 breweries had closed in the last three years.

    6.134. Brewers now needed strength or strong brands to survive the buying power of the multiple
retailers and pubcos. Timothy Taylor said that it considered the effect on the market would be:


                                                   162
    (a) The choice of product and distribution would be maintained for most brands.

    (b) The wholesale price was unlikely to be driven down much further but, equally, there was enough
        alternative competition to ensure it did not rise.

    (c) An end to the ever-escalating discount war would enable the smaller breweries to survive and,
        ultimately, provide greater choice of product.

    (d) The retailer ultimately controlled the price and choice for the consumer and tended to shop
        around to ensure the highest margins. The retailers’ price depended on location and type of
        outlet.

    (e) The pubco was only interested in rent and discount off wholesale list price. Therefore, it would
        choose the highest list-priced beer which could give the biggest discount.

    (f) It was likely that Interbrew, as a brewer, would take a dedicated view of brewing and look after
        brands of beer both as regards quality and taste.


Tollemache & Cobbold Brewery Limited
   6.135. Tollemache & Cobbold Brewery Limited (Tollemache & Cobbold) said it was broadly in
favour of the Interbrew/Bass merger because:

    (a) Interbrew was a brewer without any pubs. Therefore a large piece of vertical integration within
        the UK brewing industry would have been removed.

    (b) It believed that a further reduction in surplus brewing capacity would be encouraged as a result
        of the merger.

    (c) It believed that there would be business opportunities for smaller and regional brewers in the UK
        as some of the ale brands acquired by Interbrew would either be allowed to decline or be sold to
        the regional brewers.

    (d) It believed that the current imbalance of profitability between the brewers and the retailers with
        the balance currently in favour of the retailers would be redressed.

   6.136. Tollemache & Cobbold believed that the merger would help to create more competition
within the industry rather than less.


[       !         ]

   6.137. [           !           ] said that, in the spring of this year, it had believed that the
consolidation in the beer and pub industry would continue and this would lead to a reduction in choice of
brands for the consumer as the major brewers focused on a few drive brands and limited new product
development budgets. This would in turn lead to a consumer reaction as more discriminating drinkers
wished to find new tastes and new products, presenting an opportunity for small niche brands. [ ! ]
had believed at that point that the existence of several wholesalers supplying the on-trade and a wide
range of pub companies looking for ways to differentiate themselves would present routes to market for
niche brands.

    6.138. Six months later, the speed and scale of potential consolidation within brewers, wholesalers
and pub companies was greater than the [ !             ] had envisaged. It was consequently less optimistic
about the long-term opportunity for specialist niche brands. Consumer choice would be more
significantly reduced and barriers to entry raised. Increasingly, the UK beer market might look like that
of the USA where Anheuser-Busch, Millers and Coors dominated with an over 80 per cent share of the
market and made it difficult for competitors to grow beyond a certain level—many imported brands
found it difficult to get a sufficient share of effort from the key distributors, and leading microbrewers
got to a size where they found it difficult to grow further profitably. [ ! ] view was that the US


                                                   163
consumer had been deprived of the width and quality of choice of beers available in the UK, but action
was now required to preserve and enhance choice in the UK.

   6.139. With regard to possible remedies, [      !      ] made the following comments:

   (a) One alternative remedy would be to require Interbrew to divest brands to take it to a similar
       national market share as that of Scottish Courage. This action would need to be taken, in con-
       junction with other initiatives, to provide an opportunity for new brands.

   (b) Divestment of Bass’s Scottish and Northern Ireland business would not help—in Scotland the
       owners of the Tennents brand would by definition be the only major competitor to S&N in
       Scotland.

   (c) Divestment of the Whitbread brewing business (remedy (b)), would be a more credible alter-
       native to artificially creating a new fourth brewer (remedy (c)), but, without Stella Artois, it
       would be a weak competitor.

   (d) The divestment of the distribution (and cellar service) businesses of Bass and Whitbread could
       allow for the creation of a powerful new route to market, but only if the power of the big brands
       could also be constrained and smaller brands given an opportunity to access this route to market
       at reasonable commercial terms.

   (e) [ ! ] agreed that points (g), (h) and (i) of the list of remedies would help constrain the
       power of the big brands.

   (f) [ ! ] recognized that the remit of the CC was to look at the specifics of the Interbrew
       merger, but it believed that to address fully the adverse effects on public interest, it was important
       also to consider the effect of pub consolidation. There were currently over 5,500 pubs for sale,
       with a number of further disposals likely to be announced in the next few months. It was quite
       possible that, through purchase and merger, a pub operator could emerge with a portfolio of over
       10,000 pubs, and two or three portfolios of 6,000-plus pubs. This was likely to constrain severely
       consumer choice of beers on sale as the pub owners looked for a small range of highly profitable
       national brands. It would be helpful if clear guidelines could be given on what level of pub
       consolidation was acceptable before consolidation had gone too far. [ ! ] suggested that
       this covered both national market share and share by region/local area (at one time it was
       understood that no brewer would have more than 25 per cent of all pubs in a petty sessional
       division). Pub market share guidelines were also important in establishing the context within
       which brewers’ market share/dominance could be judged. If there were powerful pubcos, they
       might need to be balanced by powerful brewing groups to achieve market ‘balance’. At present
       the buying power of the retailer was such that there was little profit left for the brewer, itself one
       of the causes of brewer consolidation. Lack of profit in brewing/brand ownership also meant that
       few companies were attracted to investing in developing new products or challenging the
       dominance of the big brands.

   (g) At a practical level, the introduction of a guest draught beer provision to all pubcos (whether
       owned by a brewer or not) of over, say, 500 pubs would have the most directly beneficial effect
       on prices and consumer choice. The guest beer should include lager as well as bitter but, in order
       to avoid domination of the guest slot by the big brands from the big brewers—which would
       significantly undermine the profitability of tenanted pub companies—there should be some
       qualification to the types of brands that could be bought as guests, for instance brands from
       [       !       ] with a total barrelage of below, [  !     ].


Brewer A
    6.140. Brewer A said that it was concerned about the concentration of beer supply in the UK,
particularly of the market-leading brands, into two operators—S&N and Interbrew. This would represent
an effective duopolistic supply in key sectors of the beer market, and would render it more difficult for
smaller suppliers (or customers), including Brewer A, to compete in the beer market or to buy key beer
categories at competitive terms for its pubs.


                                                    164
    6.141. Interbrew’s market position would be materially strengthened by the transaction for two
reasons. It would enable the merged entity to rationalize duplicated infrastructure, such as breweries and
distribution facilities, generating many millions of pounds of extra revenue which could be reinvested in
gaining further market share by increasing brand advertising expenditure or by offering the larger on and
off-trade retailers greater discounts in the short term to induce the latter to extend the parties’ brands
distribution at the expense of competitors’ brands. More fundamentally, the merged entity would own an
even higher proportion of the UK beer market’s strongest ten brands. The top brands were increasingly
dominating the market as the larger brewers had grown their market share. For example, the top ten beer
brands had 39 per cent volume share in 1995, which had grown rapidly to 55 per cent by 1999 and which
was likely to continue further.

    6.142. The Interbrew-Bass merger would give Interbrew control of the UK’s number one premium
lager (Stella Artois), number one standard lager (Carling), number four standard lager (Heineken),
number one premium nitrokeg ale (Caffrey’s), numbers two and four standard nitrokeg ales
(Worthington’s and Boddingtons), number two stout (Murphy’s) and number two premium cask ale
(Draught Bass)—in total three of the top ten brands. Even excluding Heineken and Murphy’s (two of the
least important brands in the portfolio), this remained by far the most formidable brand portfolio of any
brewer and almost all retailers and wholesalers would be compelled to deal with this brand owner,
thereby reducing their purchasing power over the longer term.

    6.143. The inevitable result would be falling competition, rising brewing margins in the longer term
and likely consolidation among competitors and customers as they combined to strengthen their market
length or purchasing power in response. The spread of exclusive supply agreements between the national
brewers and pubcos would be likely to accelerate and would reduce customers’ choice on the bar or in
the supermarket.

    6.144. Brewer A believed that the principal point to be considered was the consolidation of the top
beer brands into fewer companies. In particular, the combination of Stella Artois, Carling, Caffrey’s,
Worthington’s and Boddingtons was a fundamental change in the balance of competitive power in the
UK beer market, which would lead to greater consolidation among pub retailers, competing brewers and,
ultimately, less choice for the UK consumer.


Brewer B
   6.145. Brewer B said that the acquisition should be made conditional upon Interbrew selling at least
two of its large breweries situated in England (for instance, the plants at Salmesbury and Magor)
separately to two brewing companies (for example, Heineken and South African Breweries) that did not
currently own a brewery in the UK and were large enough to compete with Interbrew and S&N in the
UK beer market. Interbrew/Bass should also be asked to sell some nationally-known UK beer brands
along with each of the two breweries.

   6.146. Without these conditions, the Interbrew purchase of the brewing activities of Bass would
reduce competition and the variety of products available to the UK consumer.


Brewer C
   6.147. Brewer C said it considered that the Interbrew/Bass acquisition was a deal too far, for itself
and the other regional brewers in the UK.

    6.148. Brewer C understood that it was proposed that the new company would enjoy supply
contracts with both the Bass retail estate and also the Whitbread retail estate. This would preclude other
brewers from enjoying supply on any scale to these estates for between five and ten years. The sheer size
of this opportunity would unfairly benefit the new brewing company and at the same time would increase
pressure upon companies such as Brewer C. Needless to say, given the range of brands available under
this new umbrella they would also be in a strong position to win other major supply contracts.

   6.149. The massive portfolio of brands created, combined with the second largest free-trade loan
book in the industry would ensure unfair advantage to the new company. For example, Carling would


                                                   165
immediately replace Heineken in the ex-Whitbread free trade and Stella Artois would take the place of
Grolsch or Carling Premier in the old Bass free-trading book.

    6.150. Within the distribution environment, Tradeteam (the preferred supplier for Bass) would have
a clear advantage, which would manifest itself with the ability to pick up further supply contracts.
Clearly, there was a linkage between brand supply and distribution and this new company would be in
pole position to exploit this. A good example of this had already been provided by Scottish Courage
retaining distribution of the ISL estate.

   6.151. The putting together of this brand portfolio with products such as Stella Artois and Carling
within the same stable would produce tremendous leverage when purchasing marketing services. Any
media buyer with the best-selling standard lager and best-selling premium lager within its portfolio
would exploit this to lower its cost of advertising purely by virtue of economies of scale.

    6.152. Brewer C said that it had lost a contract to a Dutch brewer, which indicated it was
economically viable to brew, can and distribute from Holland into the UK. Given the scale of the
Interbrew breweries, it believed that it was only a matter of time before Stella Artois consumed in the
UK was brewed on the Continent. Brewer C found it somewhat ironic that the Beer Orders, which were
designed to give the consumer enhanced choice, had had the reverse effect. If the merger were allowed to
proceed, 65 per cent of the UK brewing market would be in the hands of two companies. Two out of the
three largest brewing companies in the UK would also be in foreign ownership.

    6.153. The other result of the Beer Orders had been to create a number of enormous pub companies
with supply deals linked to the large brewing companies. This had limited consumer choice and Brewer
C surmised that this situation would get worse as the economies of scale of the big three allowed them to
drive costs out of the prices to the large pub companies. Brewer C said it considered that it was essential
for consumer choice and value that the UK’s brewing industry was kept diverse and to some degree
fragmented.



Brewer D
   6.154. Brewer D considered that the Beer Orders had been designed to ensure that there was con-
sumer choice on cask-conditioned ales and that tenants had the right to buy from multiple sources. These
objectives had now been circumvented by the restructuring of the industry. In 1989 the regional brewers
which supported the ‘Big Six’ were a vibrant force, geographically and in terms of brand choice for
consumers. Boddingtons, Greenalls, Devenish, Morlands, Morrells and Vaux were large brewing and
pub operators—and all had now gone. Only Wolverhampton & Dudley, Greene King, Fullers and
Youngs had been preserved and of these Wolverhampton & Dudley was now threatened with takeover.

   6.155. Brewer D believed that the review of the Beer Orders needed to ensure that multiple pub
operators were able to offer a choice of ales within their pubs and tenancies. It was essential that tenanted
pub operators were given the freedom of choice of suppliers that had existed before the Beer Orders were
enforced. These independent buyers supported the industry by buying from small and local breweries.

   6.156. If the merger were to go ahead, Interbrew would dominate the lager market and take a
substantial share of the British ale market. It was inevitable that range rationalization, price increase and
brewery closure would follow. Geographic domination of the Midlands, Scotland and the West of
England would also occur. Consumer price and choice would be dramatically affected by the change.
The Chairman of Interbrew had already indicated that he would pursue a higher pricing policy.

    6.157. The takeover would result in a complete removal of choice, similar to that experienced in
North America where Anheuser-Busch and Millers had complete market control. Consumer choice was
restricted and margins were forced upon retailers by dominant brewers. The independent wholesale
sector had been absorbed by three companies, Matthew Clarke Wholesale, Tavern and The Beer Seller.
Only The Beer Seller now remained to offer cask ale choice and it had now been purchased by
H P Bulmers. The entire redistribution of beer was largely controlled by the distribution businesses of
Bass (Trade Team), Scottish Courage (Scottish Courage Supply Services) and Carlsberg-Tetley which
ran their own distribution business and limited choice and availability mainly to their own brands.


                                                    166
   6.158. Predatory pricing in the last three years had resulted in margin reduction in almost all the
remaining brewery companies. Brewer D said that it was impossible to match the efficiencies of a multi-
million pound brewing business when companies like Brewer D were brewing on a scale that was in
some cases, one-hundredth the size of Interbrew.

    6.159. Since S&N had absorbed Grand Metropolitan Brewing and Courage, Brewer D had seen the
demise of all Webster’s brands, Watney’s brands, and Ruddles, a wind-down of the Courage brand, the
closure of the Courage brewery and the closure of Home Brewery, Nottingham and Webster’s in Halifax.
S&N were focused on three products—John Smiths Bitter, Fosters Lager and Kronenbourg. The fact that
Europe’s biggest cask-conditioned brewery, previously run by Courage in Bristol, had now closed was
the clearest indication that research and development of new ales by these dominant players was at an
end in terms of consumer choice. Whereas brewery-owned pubs a decade ago were using their own ale
and lager brands, Brewer D now saw a complete monopoly with products like John Smiths Smooth in
nearly every pub in the country, closely followed by Fosters or Carling Black Label (Interbrew).

    6.160. Brewer D said there was clear evidence that a vertically-integrated industry, which had
survived two centuries of brewing and pub retailing, had now been handed over to two major
corporations whose aim extended outside the UK. The profit yield from these massive combines would
inevitably lead to the removal of the smaller players. The evidence of the removal of consumer choice
from pubs was so overwhelming that Brewer D believed the CC would be able to demonstrate that this
merger should not proceed. If the objectives that the then Secretary of Trade and Industry, Lord Young,
had had in mind when he implemented the recommendations that became the Beer Orders were
considered, then Brewer D believed that both the Carlsberg-Tetley merger and the acquisition of
Whitbread Brewing by Interbrew should also have been halted. An opportunity existed for the CC to
advise the Government on a revision of the Beer Orders. The Interbrew/Bass merger should be refused
on the grounds that the industry restructuring had failed to deliver Lord Young’s intended objectives.



Wholesalers and distributors

Tavern Group Limited
    6.161. Tavern said that it was a national drinks wholesaler operating from 27 depots around the UK,
supplying a full range of beers, soft drinks, wines and spirits to the free on-trade market. Tavern was a
wholly-owned subsidiary of De Vere Group PLC, formerly the Greenalls Group. Tavern had traded with
both WBC and with Bass Brewers since it started trading in 1993. Tavern said that the future policies of
national brewers towards wholesalers would be a decisive element in the long-term survival of its
business.

    6.162. Tavern said that brewers maintained a high level of control over the market by controlling
distribution and routes to market. This was particularly true of draught beer, where brewers maintained a
high-cost infrastructure operated on a dedicated basis to maintain control over the supply of their own
beers from brewery to pub. Tavern believed that this operated against the public interest. Brewers
marginally-costed such activities when pricing this service to direct customers, and recovered the costs in
margin on beer sales. This excluded wholesalers and independent distributors from supplying beer to
such outlets. Inefficiency and extra cost was built into the market with pubs receiving multiple deliveries
from brewers with beer and from wholesale suppliers with wines, spirits and other products. Control of
distribution provided brewers with the leverage to negotiate solus supply with direct customers
restricting market access for other draught beer suppliers and limiting choice for the consumer.

   6.163. [
                                  Details omitted. See note on page iv.
                                                                                                          ]

    6.164. The two leading brewers (Bass Brewers and Scottish Courage) each operated a ‘wholesaler
policy’ which had the effect of restricting competition in the free on-trade market. Tavern provided
copies of these policies. Tavern said that the written elements of these policies included business plans,
standards of service; ‘open book’ exchange of information, transparent volume discounts and additional
discounts for ‘added value’ volume.

                                                   167
    6.165. Tavern said that in practice, however, this policy operated to ensure that: the wholesaler
supplied information to the brewer on where it sold the product; did not compete with the brewer’s own
direct sales force; did not supply product to other wholesalers; and operated a pricing policy in line with
the brewer’s expectations. Tavern believed this was against the public interest. Competition in the free
on-trade market was artificially restricted. The brewer operated a large and high-cost free-trade sales
operation dealing direct with a large number of small customers. Those inefficiencies led to higher prices
for free-trade customers. Where customers required a particular leading brand, such as Carling or
Fosters, they had to deal direct with the brewer to secure a competitive price, which was often linked to a
solus supply agreement. This restricted choice for the consumer and restricted market access for other
brewers.

   6.166. [


                                   Details omitted. See note on page iv.


                                                                                                           ]

    6.167. Tavern said it believed that the discount terms offered to independent wholesalers by the two
leading brewers (Bass Brewers and Scottish Courage) were designed to restrict competition in the free-
trade market. Both brewers had volume discounts which applied solely to wholesalers but those
discounts were uncompetitive compared with those offered to direct retail customers.

   6.168. [

                                   Details omitted. See note on page iv.

                                                                                                           ]

   6.169. Tavern believed there had been a concerted effort by the two brewers to reduce the level of
average discount in the free-trade market by selling to wholesalers at uncompetitive prices.

   6.170. [

                                   Details omitted. See note on page iv.

                                                                                                           ]

    6.171. Tavern said that the wholesale route to market for beer was under threat, and further
consolidation of brewing increased the risk that brewers would tighten their grip on the market through
control of distribution, ‘wholesaler policies’ of the type presented by Bass and Scottish Courage to
Tavern, and discriminatory pricing. Tavern said that it understood that Interbrew operated effectively
through wholesalers and distributors in other markets, and Tavern worked well with Interbrew UK in
UK. Therefore Tavern did not necessarily believe that Interbrew would dispute the need for a healthy
wholesale route to market or the need for robust safeguards to ensure its continued existence.

   6.172. Tavern, in response to the Issues and Remedies Statement (see Appendix 2.2), said that it
agreed with the issues raised by the CC on the wholesaling and distribution of beer, particularly 2(a),
2(d), 2(f) and 2(k). It was also certain that the adverse effects identified by the CC would result from the
merger (particularly 4(a) and 4(b)) unless safeguards or remedies were introduced.

   6.173. [


                                   Details omitted. See note on page iv.


                                                                                                           ]


                                                    168
[



                                  Details omitted. See note on page iv.



                                                                                                         ]

    6.174. [




                                  Details omitted. See note on page iv.




                                                                                                         ]

   6.175. With regard to paragraph 5(g) (Discriminatory price differentials at the brewing level),
Tavern said that wholesalers were charged higher prices for Bass (and Scottish Courage) brands than
similar-sized customers in other channels. These differentials were designed to restrict competition
between wholesalers and the brewer’s direct sales force. [



                                  Details omitted. See note on page iv.



                                                                                                         ]

    6.176. [

                                  Details omitted. See note on page iv.

                                                                                                         ]


Tradeteam Ltd
    6.177. Tradeteam told us that, so far as the merger between Interbrew and Bass was concerned, the
only observation it would make was that the structure of distribution operations in the drinks industry
was suboptimal. There was a cost reduction opportunity from achieving better critical mass of deliveries
into pubs, rather than the relatively fragmented solution that currently applied. Tradeteam said it was
possible that the merger might provide the opportunity to rationalize both Tradeteam’s and Whitbread’s
logistic operations and thereby achieve a significant cost reduction.


An independent wholesaler
    6.178. An independent wholesaler said it was a brand owner and producer of a range of alcoholic
drinks primarily for consumption in the UK, and also wholesaled within the UK both its own products
and alcoholic drinks produced by third parties.

   6.179. It said that it wished to draw the attention of the CC to: the large share of the market for the
production of long alcoholic drinks in the UK, and the market for the distribution of such drinks in the
UK, which Interbrew would have were the acquisition of Bass to be completed; the potential for

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Interbrew to discriminate unduly between equivalent wholesalers which distributed its products and
between wholesalers and retailers; and the adverse effects on competition and on the public interest
which would result from such discrimination.

   6.180. Datamonitor reported that in 1998 (the most recent year for which figures were available),
Bass had a 19.8 per cent share of sale (by value) of ales and stouts and Whitbread a 13.5 per cent share;
Bass had a 23 per cent share of sale (by value) of lager, and Whitbread a 13.8 per cent share; and Bass
had a 72 per cent share of sale (by value) of alcoholic soft drinks and Whitbread a 6.8 per cent share. Key
Note reported that ‘Bass accounted for 24 per cent of the UK beer market in 1998, and has a dominant
position in Scotland, where Tennent’s is the leading lager’. It noted that ‘Whitbread PLC’s share of the
UK beer market rose to 15 per cent in 1998 due to a successful policy of focusing marketing on key
brands such as Stella Artois and Boddingtons’.

    6.181. The Datamonitor and Key Note reports demonstrated that the combination of Interbrew/
Whitbread and Bass would give rise to high market shares in the market for production of long alcoholic
drinks for sale in the UK. The position the combined group would have at the distribution level was
likely to be even more significant. Interbrew/Whitbread and Bass distributed not only their own products
to larger retail customers in the UK but also distributed third party products to those key customers. It
was the concentration of power at both the production and distribution level which gave rise to the
concerns that the merger could seriously damage competition at the distribution level to the detriment of
distributors, retailers and to consumers. This concern was particularly acute in the on-trade sector, where
distributors and retailers were especially dependent on the key brands which would be owned by
Interbrew/Whitbread/Bass.

    6.182. The independent wholesaler said that producers of long alcoholic drinks looked to supply
their products to two different groups of retailers. These were:

   (a) retailers in the on-trade sector (including pubs, clubs, restaurants and hotels); and

   (b) retailers in the off-trade sector (principally supermarkets, off-licences and other retail stores).
       The wholesaler believed that problems of vertical tie-ups between producers and distributors
       were more likely to occur in the on-trade sector, primarily because retailers in the off-trade sector
       were buying a multiplicity of different brands and because those retailers dealt directly with
       brand owners.

   6.183. At the wholesale distribution level, there was competition between:

   (a) the ‘big four’ vertically-integrated brewers;

   (b) smaller vertically-integrated companies; and

   (c) independent (ie non-vertically-integrated) companies.

    6.184. The smaller vertically-integrated companies and the non-integrated distributors were at a
disadvantage. First, they could not compete for the business of the outlets which were owned by the
major brewers. Second, their ability to compete to supply non-affiliated entities was to a significant
extent controlled by the vertically-integrated companies. Circumstantial evidence suggested that the four
major brewers offered attractive and preferential terms to the large pubcos and other large outlets. Third,
independent wholesalers tended to be faced with significant uncertainty resulting from the vertical
integration of the four major brewers. Independent wholesalers knew they could generally service the
less profitable pubs and clubs, and hotels and restaurants: these outlets were rarely supplied or targeted
by the four major brewers. But independent wholesalers were deterred from competing for business from
the larger independent outlets by the knowledge that they were often swiftly displaced by a major brewer
offering preferential terms. Fourth, smaller vertically-integrated companies were at risk as they would
typically rely on one or more of the ‘big four’ to wholesale some of their output. The ‘big four’ could
threaten to favour the output or brand of another producer if the smaller vertically-integrated company
competed ‘too aggressively’ in its wholesale activities.

    6.185. The circumstantial evidence was that the four major vertically-integrated brewers would offer
to those retailers they chose terms which were considerably better than those offered to retailers they
regarded as less important, and would offer the preferred retailers terms which were better than those


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they offered to independent wholesalers. Such discrimination inhibited the ability of independent
wholesalers to compete for larger contracts, reducing competition in the distribution of long alcoholic
drinks. Independent wholesalers were weakened because they had fewer potential customers and because
the potential customers were smaller and generated lower revenues and profits. Second, this discrimi-
nation gave to those retailers supplied by the four major integrated groups under preferential terms
(namely the tied houses and the larger independent groups) a significant cost advantage over their
competitors. The ability of smaller on-trade outlets to compete was significantly damaged. Third, smaller
on-trade outlets typically depended heavily on supply by independent wholesalers. Often, for them, the
only alternative was purchase at a cash-and-carry. This was not a credible alternative to those serving
long alcoholic drinks on tap.

    6.186. The problems of discrimination and distortion of competition at the wholesale and retail level
already existed in an oligopolistic market dominated by a ‘big four’. The problems would be seriously
exacerbated, however, by a merger which would bring two of the ‘big four’ under common ownership
and control. A combined Interbrew/Bass/Whitbread would have significant market power. Datamonitor
and Key Note market share figures suggested that the combined group would have about 79 per cent of
the soft alcoholics drink sector, and between about 35 per cent and 39 per cent of the beer sector (which,
according to Datamonitor, accounted for about 91 per cent of the entire market for long alcoholic drinks).

   6.187. In particular, the merger would bring together a number of important brands:

   (a) The combined group would own five of the seven brands of ales and stouts which generated
       more than 3 per cent of UK sales by volume. These were Stones, Worthington’s BB, Caffrey’s
       Irish Ale, Bass and Boddingtons.

   (b) The combined group would own (or control in the UK) four of the six brands of lager which
       generated more than 4 per cent of UK sales by volume. These were Carling Black Label,
       Tennent’s Lager, Heineken and Stella Artois.

   (c) The combined group would own two of the major alcoholic soft drinks—Hooper’s Hooch (which
       accounted for 72 per cent of sales of alcoholic soft drinks) and Shott’s (which accounted for
       6.8 per cent).

A wholesaler’s ability to compete would be substantially impeded were it not to be able to deal with a
group with significant market share and a high proportion of the leading brands. And, were the combined
company to pursue a discriminatory pricing policy—which must be a serious risk when the target
company already seemed to pursue such a policy—the position of wholesalers became more precarious
still.

    6.188. The independent wholesaler was concerned that a combined group with market power would
discriminate between wholesalers and retailers in such a way as to damage competition at both levels. It
should be possible to address this concern by: requiring the merged group to deal with wholesalers on
published non-discriminatory terms which could make reasonable allowance for cost savings in
supplying larger volumes and/or through reduced transaction costs; to require the combined group to
trade with affiliated and independent wholesalers (and retailers) on a comparable non-discriminatory
basis; and to require the Interbrew group to maintain its brewing and wholesaling in separate subsidiaries
and to ensure transparency in its accounts sufficient to enable the OFT to monitor compliance with
undertakings to avoid discrimination.

   6.189. With regard to the CC’s Issues and Remedies Statement (see Appendix 2.2), the independent
wholesaler said that, as it did not have experience in all the sectors of the industry, it was not able to
address all the issues and remedies. Where it had comments, these were set out below. The numbering
and lettering followed that used by the CC in its Issues and Remedies Statement.


The effects of the merger on brewing

    6.190. (b) Whether the merger will have the effect of making market conditions more conducive to a
reduction in price competition, escalation in non-price competition and reduction in product innovation
on the part of Interbrew and S&N, and, if so, in what way such behaviour might manifest itself and with
what effects. The independent wholesaler said that the major brewers tended to set discounts to


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wholesalers in parallel. Typically, Courage led the way in reducing discounts to wholesalers and others
(including Bass) followed swiftly. The independent wholesalers’ strategy for survival in the wholesale
beer sector had been to try to find as many opportunities for wholesaling beer brands as possible, ie to
explore whether there were any major supplier that did not simply follow the practice of cutting
discounts to independent wholesalers. It had had some success in persuading Whitbread to supply on
what seemed to be reasonably competitive terms. Even these improved terms were not as competitive as
those offered to retailers and regional brewers for similar volume purchases. The other majors had,
however, acted in parallel in refusing to supply on competitive terms linked to volume. The independent
wholesalers’ experience confirmed the tendency for the major brewers to act in parallel to setting prices,
Whitbread being the possible sole exception. Further concentration and the elimination of Whitbread as
an independent competitor would inevitably increase the tendency towards price parallelism or a system
of price leadership under which one of the three remaining majors sets its prices—to the wholesale
and/or retail sectors, with the others following.

    6.191. (d) Whether the merger will create a position of market dominance for Interbrew based on
leading brands. The independent wholesaler said that, based on Key Note and Datamonitor data, the
combined Interbrew/Whitbread/Bass would not only have significant market share in brewing, it would
also have five out of seven leading ales and stouts and four out of six leading lagers in the UK. The
concentration of so many of the leading brands under single ownership was likely to increase the
dependency both of wholesalers and retailers on the merged group. It was virtually inconceivable that an
independent wholesaler could provide an attractive offer to any significant group of retailers without
including some of the brands of the merged group; and equally implausible that a significant group of
retailers could decide to do without nine of the leading 13 ale, stout and lager brands. The position might
be different if there were a history of new brands winning significant market share. But there was not.
The existing brands were well established. Datamonitor’s UK Beer and Cider 1999 listed all recent
developments in the ale, stout and lager sectors since 1996. While there were many instances of
repackaging of existing brands, and introduction of new specialist brands, there were no instances of a
small brand becoming a major seller, or of a new brand taking substantial market share.

    6.192. (l) Whether Interbrew has a financial incentive to increase wholesale prices as a result of the
price it paid to acquire Bass. There can be little doubt that Interbrew, following its acquisition of
Whitbread and Bass, would be looking for any economies and additional return which could be achieved.
Indeed, it would be behaving irrationally and commercially irresponsibly if it did not explore such
opportunities. The independent wholesaler said that the major brewers tended to ‘cherry pick’ retailers,
offering favoured (ie more profitable) retailers better terms while offering wholesalers much less
favourable terms even when those wholesalers were purchasing equal or larger volumes. The major
brewers took this decision knowing that neither independent wholesalers nor the less favoured retailers
could object—both groups remain dependent on the major brewers and could not do without their
brands. The effect of this decision on independent wholesalers which remained in the beer supply
market, and for those which reinvested into other non-products, had been extremely damaging. The
merger between Interbrew/Whitbread and Bass was likely, in the absence of regulatory intervention, to
lead to increased discrimination and increased wholesale prices. First, to date only Whitbread had
charged reasonably competitive prices to independent wholesalers—possibly because its brand portfolio
was not broad enough or powerful enough to seek to exploit dependent wholesalers. Post-merger, there
was a clear financial incentive for Interbrew to apply Bass’s discriminatory terms when contracting with
wholesalers for ‘Whitbread products’. Such a course would, by exploiting the combined powerful
portfolio of brands, boost income from wholesalers which could not look elsewhere. Second, the
powerful range of brands which would be available to the merged group might offer scope and incentives
for raising prices to wholesalers. Wholesalers would be dealing with the retailers not ‘cherry picked’ by
the major brewers. These retailers and the wholesalers would have no choice but to pay increased prices
demanded by a group with nine of the 13 most attractive ales, stout and lager brands. As mentioned
previously, prices to wholesalers had tended to move in parallel. If the merged group felt that any price
changes it introduced for wholesalers would quickly be followed by its two larger competitors, it would
be that much more ready to introduce those changes. And the prospect of price following must be high,
given that the two larger competitors would both be concerned, post-merger, not to allow the merged
group to pull ahead in terms of profits, spending on brands and so on.


The effects of the merger on the wholesaling and distribution of beer

   6.193. (a) Whether the merger will reduce competition in the wholesaling and distribution of a beer
as a result of Interbrew having control of the wholesaling and distribution operations of Bass and

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Whitbread. At present there was clearly some competition between Bass and Whitbread in terms of the
way in which they distributed their products and dealt with wholesalers. The independent wholesaler
believed that Whitbread, with the weaker brand portfolio, dealt with independent wholesalers on a less
discriminatory basis. This had presumably been a Whitbread tactic to compete with Bass (and Carlsberg-
Tetley and Scottish Courage). Bass, on the other hand, had sought to control its routes to market by
dealing with independent wholesalers only on discriminatory terms. Wholesale competition had to date
taken place between Bass, Carlsberg-Tetley, Scottish Courage, Whitbread and (in relation to Whitbread
beers) independent wholesalers. The merger was likely to eliminate both Whitbread and independent
companies as beer wholesalers increasing significantly the market power of Interbrew/Whitbread/Bass
(and possibly the two other remaining major brewers).

    6.194. (b) Whether the merger will increase barriers to entry or expansion in wholesaling and
distribution. The independent wholesaler said that, in the early 1990s, it had encountered no significant
barriers to entry. Neither the technical aspects of distribution nor the need to establish good working
relationships with retailers (nor any other aspect) prevented it from succeeding in entering the market.
Market barriers were erected in the mid-1990s when three of the four major brewers increased
significantly the prices they charged to independent wholesalers. The inability to secure beer from major
brewers at competitive prices had had profound effect on the independent wholesalers’ business and, it
believed, the business of other independent wholesalers. Its sales of beer fell enormously while its sales
of other alcoholic drinks grew. Rather than invest in a stronger independent wholesale business (to the
benefit of its customers and ultimately to consumer choice), it had been forced to invest in other areas. Its
experience was that the position remained the same today. There was just one main barrier to entry in
beer wholesaling—the inability to buy beer from three of the four major retailers at prices that enable the
wholesaler to compete effectively in supplying the retail market. The merger would exacerbate the
situation and increase this barrier. To date, the one way to surmount the barrier had been to acquire beer
from Whitbread. Whitbread had the weakest portfolio of brands. The independent wholesaler believed
that this prevented it from price discriminating in the way the other three main brewers did and led it to
pursue all competitive routes to market—including selling at more competitive rates to independent
wholesalers. The merger of the Whitbread and Bass brands might be expected to change this. No longer
would there be a major brewer that needed and encouraged the independent supply route.

    6.195. (c) Whether the merger will have any impact on Carlsberg-Tetley’s position in the whole-
saling and distribution of beer. To date, Bass, Scottish Courage and Carlsberg-Tetley had all pursued
similar strategies. They all had significant market shares and all owned important brands. They had all
adopted a similar approach in setting prices to wholesalers and had all run similar wholesale operations.
While the position of both Scottish Courage and Carlsberg-Tetley would be comparatively weaker
following the Interbrew/Whitbread and Bass merger, the independent wholesaler did not believe there
had been any indications that Carlsberg-Tetley would change its distribution strategy in any way. It was,
of course, possible, that Carlsberg-Tetley’s wholesale operations would suffer as a result of the merger. It
would not have the same ability as the merged group to meet all retailers’ needs and might as a result
find itself unable to compete effectively in wholesaling its own and third parties’ products. Were this to
happen—and the independent wholesaler did not believe this was the most likely outcome—the results
for competition would be yet more serious. Not only would independent wholesalers be squeezed as a
result of paying discriminatory high prices for beer but one of the major brewer/wholesalers would also
suffer. The diminution in competition in wholesaling (and indirectly both in brewing and in retailing)
would be significant.

    6.196. (d) Whether Interbrew will be able to use its expanded brand portfolio to deny leading brands
to competing brewers and wholesalers on terms that would enable them to compete effectively for the
business of retail outlets. Three of the four major brewers were already denying independent wholesalers
access to beer (including their major brands) at competitive prices. Only Whitbread (without the same
access to major brands) had been supplying independent wholesalers at more competitive rates. This was
now likely to cease.

    6.197. (e) Whether Interbrew will be in a position to require wholesalers or retailers to take its
complete product range (full-line forcing). The major brewers (other than Whitbread) had been denying
independent wholesalers access to their brands on competitive terms. They (and their vertically-
integrated wholesale/distribution operations) had been reserving to themselves all profitable contracts at
the retail level. It seemed unlikely that Interbrew would alter the policy developed by Bass (and the other
major brand owners) of denying access on competitive terms and switch to a policy of forcing
wholesalers to take entire ranges (presumably at competitive rates—there would be little or no point in


                                                    173
wholesalers otherwise acquiring any products from the range). Nonetheless, it was conceivable that the
merged group could see an advantage in forcing all or a large part of its range on wholesalers (and
retailers) with a view to foreclosing opportunities to other brewers to take their brands to the market. The
range of the merged group was likely to be sufficiently extensive to make such a policy viable, in that
retailers could satisfy most customers’ needs from within the portfolio of the merged group.


    6.198. (f) Whether the differences in the net prices charged to different buyers by Bass and
Whitbread are cost-justified; and what effect would the merger have on these net price differentials. The
differences in the net prices charged to different buyers by Bass were not cost-justified. The independent
wholesaler had explained that Bass offered retailers better terms than it offered wholesalers, even where
the wholesalers were purchasing the same or a greater volume, under a single contract for delivery to a
single depot. Whitbread, by contrast, was supplying wholesalers at more competitive rates which the
independent wholesaler believed were more likely to be cost related. As mentioned above, the incentives
which had prompted Bass (and Scottish Courage and Carlsberg-Tetley) to exploit its portfolio of strong
brands through a policy of price discrimination were likely to prompt Interbrew to do the same with both
the Bass and the Whitbread brands. The major brewers seemed to have regarded this policy as
commercially advantageous, enabling it to ‘cherry pick’ retail customers. There was no obvious reason
why Interbrew should adopt a different strategy. Indeed there was a risk that the scope of the
discrimination covered not only price and discounts but also other commercial incentives and terms.


    6.199. (i) Whether Interbrew will be able to lower the price of its own brands, or artificially increase
the price of competing brands, in order to encourage sales of its own brands to retail outlets and
disadvantage its competitors. This issue was closely linked to issue 2(e) of the Issues and Remedies
Statement on full-line forcing. The range which Interbrew would be able to offer was so large that it
would increasingly be the wholesaler of first choice for a large number of retailers. Some of those
retailers might agree to buy exclusively Interbrew brands. Others might not. In these circumstances,
Interbrew would undoubtedly have some flexibility on pricing. The extent to which it could structure its
wholesale prices to retailers to discourage sales of competitors’ brands would depend on the likelihood
that those retailers could (or would) switch to a completing wholesaler for competitors’ brands. Retailers
could answer better than the independent wholesaler whether they would switch in such a situation. The
independent wholesaler believed they might not wish to risk alienating their main brand supplier unless
the competitors’ brands were particularly important and were being supplied by Interbrew at particular
high prices.


    6.200. (j) Whether Interbrew will have greater access to information about its competitors’ sales to
retail outlets, and whether this will give Interbrew the ability to compete selectively to secure sales to
those outlets. There was little doubt that the combined Bass/Whitbread wholesale operations would give
Interbrew a particularly wide customer base with an equally wide pool of information as to the trading
habits of its customers and, in particular, the extent of its customers’ dealings with competitors. Industry
reports suggested that the merged group would have the largest market share at the brewing level. The
OFT report to the DTI suggested that the merged group would have an even larger market share at the
wholesale level. This would give the merged group more information about buyers needs and buying
habits than would be available to any other competitor. It would be irrational for the merged company
not to take this information into account when devising its sales strategy.


    6.201. (k) Whether Interbrew will be able to control the route to market, especially to the on-trade,
for competing brewers, or potential entrants to the market who lack their own wholesaling and
distribution functions, thereby placing them at a competitive disadvantage. Interbrew would undoubtedly
be an important route to market for all brewers. It would have a strong retail customer base and
competing brewers without a wholesaling or distribution arm would be keen to access that customer base
by employing the Interbrew route to market. Competing brewers (including any new entrants) would
have less cause for concern if they were confident that they could employ independent distributors or
wholesalers, particularly if Interbrew would not offer competitive terms. But the independent wholesaler
believed that the merger would permit Interbrew to price discriminate over a wide product portfolio in a
way which would eliminate any significant competition from independent wholesalers. If this were to
happen, then competitors (and in particular any new entrants) would be dependent on Interbrew for
effective access to the market. Interbrew could use this dependence to control the extent to which it
would allow another brewer to compete with it.


                                                    174
The effects of the merger on the retailing of beer

    6.202. (a) Whether the long-term supply agreements which Interbrew has entered into with the
retained estates of Bass and Whitbread effectively foreclose the estates to competitors for the duration of
the agreements and beyond; and if so, by what means. Independent wholesalers had never had access to
the retained estates of Bass or Whitbread (or of Scottish Courage or Carlsberg-Tetley). Indeed, it had
always understood that, were it to seek to win such business, this could lead to some form of retaliation.
It had been concerned, for example, that if it were to solicit this business, its ability to use the major
brewers’ wholesaling arms to distribute its own branded products could be jeopardized. The independent
wholesaler did not know the extent of the remaining ‘tie’—whether it was contractual, whether there
were some financial penalty if the estate bought from a competitor, or whether it were less formal.
Irrespective of the legal nature of the tie, the fact was that these retail outlets were effectively denied to
independent wholesalers.

    6.203. (b) Whether these agreements will enable Interbrew to compete more aggressively for other
business. Access to a captive market (and it would seem that the retained estates were in effect a captive
market) would afford Interbrew at least two advantages in competing for other business. First, it would
give Interbrew a secure base over which it could defray its wholesaling overhead expenditure. This
would enable it, if it wished to adopt such a strategy, to supply other retail outlets on aggressive terms
which were in effect cross-subsidized, undercutting those for whom such business would have to make
the normal contribution to profit. Second, it could allow Interbrew to deal in large volumes. To the extent
it chose (or was encouraged) to wholesale the beers of competitors, the fact that it was buying and selling
in greater volumes would help it achieve significant discounts, to its advantage and to the disadvantage
of smaller wholesalers.


Adverse effects on the public interest

    6.204. The CC raised four possible public interest detriments—higher prices, increased price
discrimination leading to adverse structural effects, reduced choice of brands and product innovation, and
escalation of marketing expenditure leading to increased barriers to entry. The independent wholesaler
had the experience to be able to comment only on the first two possible detriments. The major brewers
were discriminating in the terms they offered to retail and wholesale customers: that the discrimination
could not be justified on the basis of costs of supply; that the discrimination was leading to the decline of
independent companies wholesaling beer; and that the discrimination was leading to a distortion at the
retail level, in that smaller retailers were unable to buy beer at competitive prices either from the brewer,
or from an independent wholesaler or via a co-operative buying group. The merger of Interbrew/
Whitbread and Bass was likely to lead to discrimination across a much broader range of products and, as
a result, to an increasingly distorted marketplace. Increased discrimination against independent whole-
salers and smaller retailers would threaten the existence of those businesses. They would be forced to
charge higher and uncompetitive prices. The likelihood was that independent wholesalers would be
squeezed from the market and that many retail outlets would close. The merger was likely, then, to
contribute to the creation of a marketplace dominated by three major brewers and a small number of
powerful retail groups. Existing constraints on wholesale prices (for example Whitbread’s pricing policy
to independent wholesalers) were likely to vanish. It was not clear whether the only remaining constraint
(some countervailing power in the hands of some retailers) would be adequate to keep wholesale prices
to competitive levels. However, there were strong reasons to doubt that the retailers’ role would be
sufficient to constrain wholesale pricing. First, even the largest retailers would have little choice but to
deal with the merged Interbrew/Whitbread/Bass. ‘Falling out’ with the merged group would deny the
retailer nine of the 13 leading ales, stouts and lagers. Thus there would be a considerable incentive to
accept reasonable, if supra-competitive, prices.

    6.205. Second, in the past, the major brand-owning brewers had tended to change their wholesale
prices and pricing strategies in parallel. Price changes led by Courage in 1993 and 1994 were taken as
signals by the other major brewers which promptly followed the initiative. There must be a concern that
post-merger, Interbrew/Whitbread/Bass would signal wholesale price changes which other brewers
would swiftly follow. The past evidence was that the market was sufficiently transparent and the
inclination to follow prices sufficiently established to permit and encourage price following. These
factors at the least would increase the propensity of Interbrew/Whitbread/Bass to raise wholesale prices.
Third, there would be a group of retailers seeking to buy beer which would be relatively price insensitive
and which would have little negotiating power—small independent pubs, hotels, other restaurants, curry


                                                    175
houses and so on. These outlets would have to accept higher prices. In the absence of a competitive
wholesale sector, they would be forced to buy direct from the wholesale or distribution arm of one of the
three major brewers. The evidence was already that these outlets had difficulty obtaining competitive
prices and relied heavily on the declining independent beer wholesaling companies. Any step which put
at risk the existence of those wholesalers would be likely to lead to increased prices to such outlets. In
short, the merger would increase the potential for price discrimination to wholesalers putting at risk the
independent wholesale sector; that the increased price discrimination would involve higher prices being
charged to independent wholesalers; that the decline of that sector and the concentration in the number of
suppliers of major brands would increase dependence at the retail level; that many smaller retailers
would fail, while others (such as small independent pubs, hotels, other restaurants and curry houses with
customers less sensitive as to the price of a pint of beer) would be forced to raise prices; that even the
remaining large retail groups might not have sufficient countervailing power to negotiate competitive
prices and that those groups were unlikely to be willing to keep retail prices down at the cost of margin.


Possible remedies

    6.206. The independent wholesaler said that it was able to comment on the proposed remedies which
addressed the way in which brewers dealt with wholesalers and retailers, but did not have enough direct
information to comment usefully on the effectiveness or necessity of hypothetical remedies (a) to (c). Its
comments on the remaining hypothetical remedies are as follows:

   (d) Divestment of the wholesaling and distribution businesses of Bass and/or Whitbread. This
       remedy was unlikely of itself to be effective in ensuring that current levels of competition in beer
       wholesaling were maintained. As explained above major brand owners had historically
       discriminated against independent wholesalers. It was this discrimination which prejudiced
       competition at the wholesale level and which created the only significant barrier to entry to beer
       wholesaling. The divested wholesale/distribution business would, in the absence of additional
       regulation or undertaking, be likely to encounter exactly the same discrimination which indepen-
       dent wholesalers currently faced. There would be little point in ordering divestment of the
       wholesaling/distribution arm of Bass and/or Whitbread if, post divestment, that entity could not
       obtain beer from those companies at competitive rates.

   (e) Divestment of Tradeteam and renegotiation of the Tradeteam supply contract. Tradeteam was a
       distributor and not a wholesaler. Unless it had access to beer on a basis which would enable it to
       distribute on a competitive basis, it would be unable to compete in the market. The independent
       wholesaler did not know the terms of the current contract between Bass and Tradeteam. It might
       be possible in principle to revise the current contract so that Tradeteam could carry on business
       as a distributor on a competitive basis (for example, by providing, inter alia, that Tradeteam
       would be given ‘most favoured nation’ status). However, it was questionable whether the
       divestment of Tradeteam would of itself significantly reduce any concerns to which the merger
       gave rise. It might possibly alleviate some of the competition problems which retailers might
       encounter if they could not obtain supply via a distributor on an efficient basis and on effective
       rates. But the independent wholesaler understood that Tradeteam’s business was limited to
       physical dispatch of beer (ie fulfilling orders for beer) rather than competing in terms of whole-
       sale price. It was therefore unlikely that access to another distributor would in any way reduce
       the problems faced by retailers of the loss of an effective independent wholesale sector.

   (f) Termination of supply agreements with retained estates. Removal of this advantage would
       increase competition at the wholesale level by expanding the market they could serve and by
       creating a more level playing field for the customers who were currently tied to Bass. The
       remedy would, in this way, increase customer and therefore consumer choice. Whether such a
       remedy would be effective would also depend upon:

       (i) whether independent wholesalers could access beer on competitive terms; if not, they would
           in practice be no more able to supply beer to these former estates than they were to other
           large retail groups;

       (ii) whether brewing competitors would in practice seek to supply these former estates on
            competitive terms: history might mean that the former estates retained a strong preference to


                                                   176
          continue to be supplied by their existing supplier: or may stay with that supplier through
          lethargy; and

      (iii) whether the merged group could discourage or discipline competitors targeting these outlets,
            for example by wholesaling those competitors’ products only at inflated prices. If the
            merged group could behave in this way, the remedy of ‘breaking the tie’ would be in-
            effective.

  (g) No discrimination at the brewing level. The independent wholesaler had already recommended
      this remedy and explained why it believed it would be effective. In brief, this remedy should
      avoid additional discrimination and should help to preserve competition at the wholesale level.
      This would in turn provide some relief to those retailers which could obtain reasonable terms
      only from independent wholesalers (because their account was not significant enough to be of
      interest or otherwise attractive to the brewers). To be effective, this remedy would need to be
      coupled with a requirement that the merged group publish its terms (so as to avoid covert
      discrimination), and to maintain its brewing and wholesaling in separate subsidiaries in order to
      ensure transparency in accounts and to enable the OFT to monitor compliance and ensure that
      transfer pricing regimes were not used to avoid the intention of the remedy.

  (h) No discrimination at the wholesale level. There was a risk that Interbrew/Whitbread/Bass might,
      at the wholesale level, discriminate in favour of its own products and against the products of
      competitors. Moreover, it might use discrimination at this level as a way of disciplining any
      producer of alcoholic beverages which sought to grow market share through what the merged
      group regarded as ‘over-aggressive competition’. In other words, the pricing strategy of the
      merged group could be used as a mechanism to encourage tacit collusion. The independent
      wholesaler believed that smaller brewers and new entrants, in particular, could suffer as a result
      of discriminatory pricing policy. It had already indicated to the CC that it was concerned that the
      merged group might take action against its own branded products. It believed that there would be
      an equal concern of retaliation were it, or another smaller producer, to seek to win market share
      through, for example, a heavy price promotion. The safeguards provisionally proposed by the CC
      would help to ensure that the terms on which small brewers and producers had access to the
      wholesale and distribution business of the major brewer were competitive. They would limit the
      scope for discipline or retaliation and would help ensure that the merged group could not control
      competitors’ access to market to the advantage of their own business and brands.

  (i) No line forcing. As noted above there was a risk that the merged group would see an advantage
      in forcing all or a large part of its range on wholesalers. There would be a strong economic
      incentive to do this post-merger, to boost the brands of the merged group, to grow the weaker
      brands, to increase market share and return and to discourage innovation and new entry in
      competition with Interbrew/Whitbread/Bass’s business. The risk existed both at the wholesale
      and retail level. The more products the merged group required be taken as part of a package, the
      less scope there was for competitive brewers and independent wholesalers to win business from
      those buying ‘the package’. A remedy which required the merged group to supply each product
      separately and on non-discriminatory terms would clearly help avoid the exercise of portfolio
      power in a way which could exclude competition at both the wholesale and retail level, thereby
      reducing consumer choice.


Conclusion

  6.207. The independent wholesaler said it concluded that:

  (a) The proposed merger would lead to increased price discrimination by the major brewers against
      small and independent wholesalers. This was partly because of the disappearance of the one
      major brewer that discriminated less against independent wholesalers and partly because of the
      increased product range of the merged group which would increase wholesalers’ and retailers’
      dependence on the merged group and make both groups more vulnerable to discriminatory
      trading conditions.

  (b) Price discrimination was likely to force out independent wholesalers, to the detriment of whole-
      sale competition. This would ultimately prejudice retailers (particularly smaller retailers) and
      brewers without their own distribution network (including potential new entrants).

                                                 177
   (c) Essentially, the merged group might ‘cherry pick’ profitable customers and leave only the less
       profitable for competitors; and might engage in full-line forcing to boost sales while foreclosing
       opportunities to competitor brewers and wholesalers.

   (d) Discrimination, full-line forcing or other exclusionary practices would inevitably lead to the
       decline of independent wholesalers. It was also likely to lead to the failure both of smaller retail
       outlets and smaller brewers. The former might be denied access to beer at competitive prices,
       putting their business at risk. The latter might find it difficult to distribute their products
       effectively in the absence of a competitive wholesale market.

   (e) The independent wholesaler believed the most essential remedies were (g) and (h) which would
       constrain the major brewers’ power to price discriminate against independent wholesalers and
       help provide a market mechanism for trading at fair and competitive prices.

   (f) The proposed remedy of divestment of the wholesaling and distribution business of Bass and/or
       WBC would remove a market distortion but would only have a significant impact on competition
       if it accompanied remedies (g) and (h). The divestment of Tradeteam would have little effect as it
       did not actively compete in the wholesale sector.


Pub chain operators (pubcos) and retailers

Allied Leisure plc
    6.208. Allied Leisure plc (Allied) said that its major concern as a national retailer was that, prior to
the merger, it had had three choices of national suppliers: Whitbread, Bass and Scottish Courage and,
following the merger, there would only be two. Rumours were already circulating within the industry
that Interbrew would raise prices in order to show a suitable return on its investment. It was also
anticipated that Scottish Courage would take the opportunity to follow suit.

    6.209. Allied said that this was more likely to happen in a duopoly and would result in above-
inflation price increases to Allied as a retailer. As the major costs to Allied’s business were the costs of
product, staff and rent, it would not be able to cover these costs, which would have to be passed on to the
consumer. Allied said that it did not object to the merger. However, it believed that it was important for
these concerns to be drawn to the CC’s attention and requested that suitable safeguards were established
to avoid the situation whereby the duopoly was able to exploit retailers which, in turn, would have to
pass on increases to consumers.


Avebury Taverns Limited
     6.210. Avebury Taverns Limited (Avebury) said that it was formed in October 1997 and currently
operated 700 leased and tenanted pubs throughout England and Wales. Avebury was responsible for
negotiating and purchasing drinks products from the brewers on behalf of its tenants. Avebury said that it
was widely recognized that the structure of the brewing industry in the UK needed to change. However,
if the merger were allowed to proceed, the number of major brewers in the UK would have been reduced
from six to two since 1989.

    6.211. The merger of Interbrew and Bass would concentrate around 60 per cent of the domestic beer
market in the hands of just two parties. It would also lead to high levels of local-market dominance
where the representation of both Bass and Whitbread were historically strong. The effectiveness of the
only other significant brewer, Carlsberg-Tetley, would be weakened and the regional brewers would find
it all the more difficult to compete. Consolidation had already dramatically reduced choice of brands to
the consumer. This further development would further reduce choice and lead to an increase in price to
the consumer.

   6.212. If the merger were allowed, the market would tend towards an oligopoly, if not a duopoly.
Two roughly equal-sized players holding the majority of the main brands and a dominant market share
would be able to enforce a collective dominance. Strong competition between several major brewers had
helped keep the price of beer to retailers such as Avebury at a level that had enabled the company to pass
on part of the benefit to its tenants. They in turn had been able to pass these price benefits to the


                                                    178
consumer. A reduction in this competition would translate into higher prices. The range of brands avail-
able would be reduced as investment was concentrated into fewer, larger, brands. Smaller brands and
regional brands would disappear, reducing consumer choice. Since 1989, the choice of brands available
to the consumer had reduced dramatically and this merger would exacerbate this trend. Strong
competition between several major brewers had helped to keep the price of beer to retailers such as
Avebury at a level enabling the company to invest in its estate, thereby offering better quality
surroundings. It had also helped to keep pubs viable, particularly in rural areas. Avebury said that the
merger was not in the interests of the consumer and should not be allowed.


Bass Taverns Limited
    6.213. Bass Taverns Limited (trading as Bass Leisure Retail (BLR)) said that it was responding to
the Issues and Remedies Statement published by the CC on 24 October 2000. BLR said that it was an
interested party, owning and managing over 3,000 licensed on-trade retail outlets in the UK.
Additionally, BLR’s particular interest lay in the fact that the CC had identified the termination of the
Supply and Distribution Agreement between Bass Brewers Limited and BLR dated 22 August 2000 (the
BSA) as a hypothetical remedy were it to find that the merger operated, or might be expected to operate,
against the public interest.

    6.214. BLR considered that the merger (which included the BSA as an ancillary and integral
element) did not operate and might not be expected to operate against the public interest and that the
necessity for remedies accordingly did not arise. In particular the BSA did not have any adverse effect
upon competition in the UK markets for the brewing and retailing of beer, nor any other adverse effects
on the public interest.

    6.215. In any event, were the CC nevertheless to find that the merger, or any part of it operated or
might be expected to operate against the public interest, Bass considered that it would be inappropriate
for the CC to recommend any remedies which involved the BSA, as these would expose BLR and its
customers to the risk of other effects which would be adverse to the public interest and greater than any
adverse effects that they might seek to remedy.

    6.216. BLR considered that, in order to understand the effect of the BSA, it was necessary to
consider it in its proper context, both as an integral and ancillary part of the agreement by which Bass
PLC sold Bass Brewers to Interbrew and on its own as part of the UK beer market. The BSA was one of
a number of agreements entered into at completion of the merger. Given the previously vertically-
integrated nature of the Bass brewing and leisure retailing businesses, transitional arrangements were
required in order to allow both businesses time to adjust to a situation in which they would both be
operating as separate and fully-independent commercial entities. The BSA was, accordingly, ancillary to
the Sale and Purchase Agreement by which the disposal of Bass Brewers was effected. It was extensively
negotiated on an arm’s length basis, including the pricing terms and the agreed minimum purchase
obligations.

    6.217. Together with the separate WBC/Interbrew UK transaction, the merger had significantly
reduced the degree of vertical integration in the UK brewing industry which had, in any event, been
reducing over the last decade as national and regional brewers had disposed of pubs or ceased brewing.
Indeed, there was now only one significantly vertically-integrated brewer and retailer, S&N. The largest
regional brewer, Wolverhampton & Dudley, had also announced plans to dispose of its entire pub estate.
Vertical integration was therefore set to decline even further in the coming months. BLR considered that
the UK beer market was no longer significantly foreclosed, following significant pub disposals by a
number of brewers, the cessation of brewing by others, the disposals by Bass and Whitbread of their
brewing operations and the reduction in the number of brewers’ loan ties.

    6.218. Under the BSA, the BLR-retained estate would be subject to reducing minimum purchase
obligations, which would progressively allow it to purchase beer other than from Bass Brewers. From
[ ! ], the BLR estate would be entitled to purchase all its beer requirements from any brewer it
chose [              Details omitted. See note on page iv.              ].

   6.219. By Year [ ! ] of the BSA, BLR would be able to purchase significant quantities of beer
otherwise than from Bass Brewers. Given the nature of the BLR estate, competition between suppliers
was likely to be fierce. BLR therefore considered that the BSA did not have a significant foreclosure


                                                  179
effect, given the limited duration of the BSA, declining minimum purchase orders and the fact that
BLR’s existing outlets did not account for a significant proportion of UK on-trade beer sales.

    6.220. BLR considered, further, that the BSA was a vertical agreement and was therefore excluded
from the operation of the Chapter I prohibition of the Competition Act 1998. Vertical agreements did not
usually have an adverse effect upon competition and BLR considered that this was the case with the
BSA. In any event, BLR considered that the BSA would be entitled to an individual exemption were the
Chapter I prohibition nevertheless to apply to it and/or under Article 81 of the EC Treaty (were the
Commission Regulation on the Application of Article 81(3) of the Treaty to certain categories of vertical
agreements and concerted practices (2790/99/EC) not to be applicable), as it contributed to the
distribution of goods, allowed consumers a resulting share of the benefits (through [ ! ] pricing
over a [ ! ]-year period [            !           ]), did not contain any indispensable restrictions on
competition (given its ancillary and transitional nature, particularly for BLR) and the fact that there
would be significant and effective competition in the UK beer market notwithstanding the BSA.

    6.221. BLR was therefore of the view that the BSA did not and might not be expected to operate
against the public interest as it did not foreclose market opportunities for other brewers, either at all or to
an appreciable extent, for a prolonged period. Indeed, the BSA was an integral part of an arrangement (ie
the merger) that was very much in the public interest, as it facilitated the removal of a vertical
relationship and provided for no more than a transitional arrangement on a normal commercial arm’s
length basis.

    6.222. BLR then considered the hypothetical situation that would arise were the CC to find adverse
effects of the merger and recommended that the BSA be terminated or compulsorily amended in some
way. BLR pointed out that the legal and commercial consequences of remedies involving the BSA were
at present uncertain. However, BLR told us that any remedy relating to the BSA could seriously
adversely affect the interests of BLR as well as the public interests of its retail customers.

   6.223. [




                                    Details omitted. See note on page iv.




                                                                                                              ]

   6.224. BLR also told us that a number of the other hypothetical remedies identified in the Issues and
Remedies Statement would, if implemented, adversely affect both BLR’s business and the interests of
consumers in particular:

   (a) a partial disposal of Bass Brewers’ business, such as of the Scottish business, which would be
       [                           Details omitted. See note on page iv.
                                                                                                    ].

   (b) Divestment of such Bass Brewers brands and associated brewing and wholesaling capacity as
       would enable the creation of a competitive fourth brewer-wholesaler: BLR told us that splitting
       the current Bass Brewers’ brand portfolio and integrated brewing operations between two or
       more brewer/wholesalers would [

                                    Details omitted. See note on page iv.

                                                                                                              ]


                                                     180
        [
                                  Details omitted. See note on page iv.
                         ] have a significant adverse impact upon retail pricing, to the detriment of
       consumers.

   (c) Divestment of the wholesaling and distribution business of Bass and/or Whitbread: BLR had
       currently negotiated [             !              ] from Bass Brewers. Divestment by Bass
       Brewers of its wholesaling and distribution business could [
                                 Details omitted. See note on page iv.
                                                                                               ].

    6.225. BLR said that its response demonstrated that any remedies relating to the BSA would not be
justified, as the BSA did not operate (or could be expected to do so) in a manner contrary to the public
interest. Even if it were nevertheless to be found by the CC to do so (or be expected to do so), there was
no appropriate remedy that, in BLR’s view, would not expose BLR to [                Details omitted. See
note on page iv.                                                                          ]. The adverse
effects of this on BLR, its retail customers and upon competition at the retail level would outweigh any
benefits from imposing such remedies.


Caledonian Heritable Ltd
    6.226. Caledonian Heritable Ltd (Caledonian) had been in the licensing trade for over 20 years. It
was currently trading over 100 units, which were split between managed, tenanted and a loan book. Over
the years it had gained considerable experience and knowledge of the licensed trade, particularly in
Scotland. Caledonian said that in Scotland the takeover of Bass by Interbrew would see the joining under
one company of the number one standard lager and the number one growth premium lager. Combining
these under one ownership would reduce the choice of independent publicans, which was already
restricted in Scotland. There had been talk of the Tennents subsidiary in Scotland requiring to be sold off
either to another brewer or independently.

   6.227. The current arrangement in Scotland had been that Whitbread had supported its brands
independently with owner-operators and had its goods supplied in the main by Scottish Courage.
Caledonian said that it would be more beneficial in Scotland to have Tennents as an independent brewer.
This would maintain the choice available to independent publicans rather than the major brands being
combined under one dominant brewery with the only competition coming from Scottish Courage.


Co-operative Wholesale Society Limited
    6.228. The Co-operative Wholesale Society Limited (CWS) said that, if the merger went ahead, the
share of the UK beer market held by Interbrew UK would exceed 30 per cent. Therefore the influence
that Interbrew would have on the market would be considerable. Both customer choice and the
competitiveness of retail prices would be affected if brand rationalization occurred. As Interbrew would
have a major share in the market for both lagers and ales, the merger could have an effect on both these
sectors.

    6.229. The high penetration which would exist in the UK beer market between Interbrew and
Scottish Courage gave rise to concern over the consequent effects on retailer profitability because of the
likely control over pricing. The dominance of these two companies in the on-trade sector would have a
direct effect on the off-trade sector as customers looked for and expected to see brands in supermarkets
which they saw in pubs and clubs.

    6.230. A positive effect should be that Interbrew was a low-cost producer and CWS expected
efficiencies to be passed on to the consumer.


Enterprise Inns plc
   6.231. Enterprise said that it was one of the largest leased and tenanted pubcos and the only one
which had the added responsibility of a public listing on the London Stock Exchange.


                                                   181
    6.232. Along with most of the new breed of pubcos created following the Beer Orders, Enterprise
had for several years used the telesales, distribution and administrative systems of the supplying brewers
to get beer to pubs. As its companies had expanded and matured, most were now moving to ownership
and control of telesales and distribution, typically on an outsourced basis. This process involved taking
on additional costs, approximately £10 a barrel delivered. All supplying brewers, with the exception of
Bass, accepted that this transfer of tasks needed to be recognized in the pricing structure, and all but Bass
had come up with a price reduction broadly in line with the additional costs that had been incurred. Bass
had initially refused to offer more than a token contribution [ ! ] (finally increased [ ! ] but below
the additional costs incurred), effectively making it impossible for Enterprise to move away from the
Bass distribution network without a substantial loss of margin.


    6.233. In the end, Enterprise had taken the strategic decision to move entirely to independent supply,
losing a substantial amount of profit margin but refusing to accept what appeared to be Bass’s desire to
keep unreasonable control over distribution. Enterprise was concerned that other companies might not
have sufficient financial strength to take on Bass in this way. Enterprise’s supply chain, which was
subcontracted to Scottish Courage, was now fully independent of any brewer interference. Its contract
ensured that no benefits were given to the distributing brewer, which was contractually bound to offer the
same distribution service at the same price whether the product supplied was from Scottish Courage or
any other national, regional, family or local brewer. The debate therefore was whether the combined
power of Interbrew and Bass would unreasonably influence the freedom of pubs or pubcos to purchase at
competitive prices those products their customers demanded. The evidence suggested that Bass already
sought to exercise such influence and the concern was that the Interbrew/Bass organization would be
even more powerful.


    6.234. The arguments against the merger in respect of brand dominance were more straightforward
and the dangers of an unregulated duopoly were well understood. Following the Beer Orders, the UK
pub market had developed strongly. Brewers had sold 11,000 pubs (generally the worst in their estate).
At the time of these sales, the brewers had offered the new pubcos supply arrangements with
discounts/net prices at a level where subsidized rents could be maintained for licensees whilst allowing
the new pubcos to make a satisfactory return on their pub estates and generate funds for investment. At
the time when retail outlets had been divested, there had been an incentive for the brewers to set low
wholesale prices in order to secure the retail estates’ value. These low prices had established a
value/return equilibrium and had since been built into the bargaining between brewers and retailers. The
pubcos now offered the chance for licensees to take on, at relatively low entry costs, businesses which
could be developed in accordance with their own styles and business plans. In particular, those
businesses were unconstrained by the former brewery ties, which restricted the range of products that
licensees were able to offer. In the Enterprise estate now, licensees were able to offer their customers
products supplied by brewers representing more than 95 per cent of all production capacity in the UK.


    6.235. Enterprise believed that the risks of the proposed merger to the market were substantial, with
Carlsberg-Tetley and regional brewers being potentially marginalized and other brands being faced with
extinction. To suggest that the merged company should simply release certain fringe brands would be
doing no more than following its own business strategy. It was brand dominance across key market
sectors and the ownership of dominant brands which presented the greatest risk.


   6.236. We asked Enterprise why it had contracted out its distribution to Scottish Courage rather than
Tradeteam. Enterprise said that it had chosen Scottish Courage because of its superior service offering,
even though its price was higher. Fundamentally, it was not happy that Bass Brewers offered one price if
Tradeteam was used as a distributor of Bass beers, and another price if a different distributor were used.


    6.237. Enterprise added that its primary concern was that this approach might indicate that Bass had
sought to use market dominance to reduce choice to licensees by retaining control of distribution, thereby
creating a barrier to entry for its competitors, the result being increased net prices. The proposed merger
increased the danger that damage could be inflicted on the pub industry by a dominant brewer seeking to
increase net wholesale prices and thereby destroy the market equilibrium that had been established.
Ultimately brand dominance could affect wholesale prices and damage pub returns and viability, to the
extent that there would be a greater risk of pub closures. There would be a substantial reduction in brand
choice for licensees, and a risk of increased retail prices.


                                                    182
First Leisure Corporation PLC

    6.238. First Leisure Corporation plc (First Leisure) said that it wished to object to any further
reduction in the number of major brewers operating in the UK market. First Leisure was the second
largest nightclub operator in the UK with 44 late-night licensed venues with over 2,000 employees. First
Leisure relied heavily on competition in the beer supply market to ensure that prices for beer products
were maintained at reasonable levels.

    6.239. Currently, there were three major national brewers from which First Leisure purchased beer
products. This small number of suppliers already had the ability to exert influence over product-input
wholesale prices, which had an erosive impact on the margins that First Leisure and other similar
companies could achieve. In order to generate commercially-acceptable levels of profitability, any
increase in input prices had to be passed on to the end consumer because of the pseudo-monopolistic
practices currently employed by the three major players. If the merger between Interbrew and Bass were
allowed, it was likely that input wholesale prices incurred by First Leisure would see significant upward
pressure.

    6.240. Another issue was the likely reduction in consumer choice, which would result. Interbrew
would no doubt rationalize its supply offer, thereby diminishing the range of beer brands available for
sale to the end consumer. Any such rationalization would further increase the retail price paid by the end
consumer because of reduced brand competition and marketing support. First Leisure urged that the
merger be disallowed.


First Quench Retailing Limited

   6.241. First Quench said that it was an off-trade retailer of alcoholic drinks and related products. It
was owned 50/50 by Punch Retailing and Whitbread and had a logistics agreement with Interbrew
Distribution.

    6.242. First Quench said that, while distinct categories existed within the beer market and each had
its own trends, it would not be appropriate to view these as separate markets since the consumer was
‘promiscuous’ across each of these segments, especially within lager.

    6.243. Different occasions characterized the difference between the on- and off-trade from the
consumers’ perspective and this difference extended to a different perception of brand strengths and
pricing. In the beer market this was largely manifested in the consumption of product in a different pack
format.

    6.244. Because of the increasingly widespread availability of key brands and nationwide retailers,
the importance of regional products had diminished and the retail off-trade arena should be viewed on a
nationwide basis. In Scotland, Tennents had historically dominated the market but significant change was
occurring which was slowly eroding the brand’s position. The level of personal imports remained high
and there was increasing evidence of growing levels of the parallel importing of many pan-European
brands, for example, Grolsch, Stella Artois and San Miguel, predominantly within the wholesale and
independent sectors.

    6.245. First Quench said that, whilst it had a series of trading agreements with the major suppliers,
the only contract it had was with Whitbread and it was currently discussing the assignment of this to
Interbrew. The contract had been struck as part of the formation of First Quench and was based around
the achievement of 42 per cent of First Quench sales being from WBC. First Quench said that it had a
contract with Interbrew Drinks Logistics for it to act as a third party distribution company on its behalf.
A change of ownership might impact upon this, depending upon the new business’s attitude to dis-
tribution. The First Quench strategy remained to outsource its logistics operation.

    6.246. First Quench said that the price of beer had been declining in real terms over the past 20 years
because of increased competition, overcapacity, duty comparisons and declining volumes. Despite
Interbrew having a dominant position, it was unlikely that it would find itself in a monopoly position that
would allow it to increase prices unfairly.


                                                   183
    6.247. First Quench said that the merger of Bass and Interbrew would create a powerful organization
which was needed to sustain the levels of investment necessary within the UK beer market and to correct
the decline in sales volumes.



Glendola Leisure Limited
    6.248. Glendola Leisure Limited (Glendola) said that it was a privately-owned pub and restaurant
operator. Glendola said that, should Bass acquire Interbrew, this would result in a concentrated market
within the UK for beer production and would mean that there would only be two major brewers within
the UK, which would undoubtedly weaken Carlsberg-Tetley as a third force, leaving the remaining
regional brewers with a small share of the total market. If the merger were allowed, Interbrew would
have a market share of at least 40 per cent in the Midlands, Scotland and the North-West and, within
Scotland, the two major players would control more than 70 per cent of the on-trade market. Because of
the historical strength of Bass and Whitbread within certain regions, regional market shares were higher,
therefore creating an unacceptable dominance within the market. At present, no brewer had control of the
full range of brands but, if Interbrew owned the combination of market leaders such as Carling, Stella
Artois, Boddington’s Bitter and Draught Bass, it would have a complete dominance of the market.

    6.249. The distribution market dealing with transport, sales, after-sales service etc was currently
dominated by the four major brewers, and the smaller brewers used the current national brewers for
delivery of their beers. Should the merger be allowed, they would have an approximate market share of
44.6 per cent of the distribution of beer into the UK on-trade market. Other wholesale distribution
operators had a combined market share of approximately 8 per cent. In many cases, wholesale operators
were reluctant to distribute another brewer’s product and it was therefore more cost effective for pub
outlets to take deliveries from one distributor. Should the merger be allowed, Glendola would face the
prospect of having only one supply contract, whereas previously it had been able to negotiate better
prices by having competing suppliers.

   6.250. Glendola believed that the merger would result in Interbrew/Bass having a strong market
share in the production and distribution of beer supplied within the UK market. It assumed that the
merged entity would also inherit long-term supply agreements from both Whitbread and Bass, which
would account for roughly 12 per cent of the on-trade by number of house, and an estimated 15 per cent
by volume. The two major players would then enjoy similar market shares and strong brand portfolios.
Much care would be needed to ensure that they did not abuse their position at the expense of the smaller
competitors and, ultimately, the consumer.

    6.251. The end result, should the merger be upheld, would be against the public interest as it would
result in a dominant company within the market and would significantly restrict the ability of licensed
premises to meet the needs of their consumers, imposing higher costs and reducing consumer choice of
brands.

    6.252. The merger would lead to higher prices for consumers as competition between brewers in the
past had been fierce, resulting in deals that had allowed pubs to keep bar prices down. Pressure on pub
margins would lead to higher prices for the consumer. In the past, competition between brewers had also
allowed pubs to retain profit and thus invest in their businesses. Increased pressure on margins would
affect the quality and diversity of outlets available to customers.

    6.253. Glendola also believed that there would be fewer outlets should the merger be allowed, as the
reduced number of brewers would concentrate their discount and promotional support on the major
customers who had significant buying power—these being the supermarket chains and largest licensed
retailers. It would also be inevitable that the gap between large and small retailers would widen, raising
concerns for the viability of small independent retailers.

    6.254. Glendola said that none of the pub companies had more than 8.5 per cent of the pub market
and even those with significant buying power would not be able to act as an effective constraint to
prevent any anti-competitive effects arising from the merger. Glendola was therefore against the merger
as it would operate against the public interest and should therefore not be allowed.


                                                   184
Inn Partnership Ltd
   6.255. IP said that the acquisition of Bass Brewers by Interbrew would have a serious detrimental
impact on both price charged and choice of brands available to the consumer. The merger would create a
business that would not only become the country’s largest brewer but would also:

   (a) achieve a very strong position in the standard lager and premium lager markets;

   (b) market and distribute three of the top five brands in the standard lager market and three of the top
       five brands in the premium lager market;

   (c) become the market leader in the premium lager market and also have a market share of over
       double that of its next nearest rival;

   (d) [                           Details omitted. See note on page iv.                                 ];

   (e) [                           Details omitted. See note on page iv.                                 ];

   (f) have a substantial product/brand portfolio;

   (g) undertake wholesaling and distribution;

   (h) wholesale and distribute a number of the products of its major competitors; and

   (i) have a duopolistic position with S&N.

    6.256. IP said that the merger would result in the creation of a brewer which would independently
have significant market power, whether the relevant market were defined as the beer market generally or
as separate markets for lager and ale or distinct product markets. Interbrew would have significant shares
of a number of the product markets: 38 per cent of the standard lager market (49.4 per cent if Heineken
was included); 48 per cent of the premium lager market and 49 per cent of the lager market as a whole.
Moreover, Interbrew would have 26.3 per cent of the beer market as a whole (30.6 per cent if Heineken
and Murphy’s were included). It would have 20.2 per cent of the market for standard ales; 25.0 per cent
of the market for premium ales and 21.0 per cent of the market for ales as a whole. These figures
indicated a significant degree of market power in the ale markets. Interbrew’s closest rival, S&N, would
have 16.3 per cent of the market for ales and the third supplier, Carlsberg-Tetley, would only have
9.7 per cent.

    6.257. Interbrew would also have portfolio power as a result of its extensive portfolio of brands. In
all the markets except the packaged premium lager market, Interbrew would have the leading or the
second-placed brand.

    6.258. The merged business would have the highest volumes in the marketplace with unrivalled
strength particularly in the standard and lager markets. This would reduce retailers’ bargaining power.
[
                                   Details omitted. See note on page iv.
                                                                                                      ]

    6.259. The acquisition of a significant portfolio of products would give Interbrew a stronger position
in relation to its customers because it would account for a greater proportion of their business; greater
flexibility to structure its marketing activities, prices, promotions and discounts, allowing it to mar-
ginalize secondary brands and further reinforce its principal brands; greater potential for tying; and the
ability to realize economies of scale and scope in its sales and marketing activities; and an enhanced
ability to discipline its customers by means of the implicit (or explicit) threat of a less easily overcome
refusal to supply.

    6.260. Interbrew and S&N between them would account for 50 per cent of the overall beer market
and 68.8 per cent of the premium lager sector. The market share of the third supplier, Carlsberg-Tetley,
was only 10.4 per cent of the overall beer market and 9.2 per cent of the premium lager market. IP said
that the structure of the market was such that there was a risk of tacit collusion between the two large


                                                     185
brewers. In short, if the merger were allowed to proceed, Interbrew and S&N would become a duopoly
and could be expected to act in a way that further reduced any competition that remained between them.

    6.261. IP said that market entry was unlikely. The brewing market was undergoing a process of con-
solidation. There had been little or no effective market entry in the non-packaged segments (as opposed
to the packaged segments) in recent years. The most recent attempts had failed, as demonstrated by the
unsuccessful efforts of Anheuser-Busch. It was significant that the successful entry of Stella Artois
(brewed by Whitbread) occurred at a time when Whitbread did not have a competitive premium lager of
its own. The reason for the lack of successful entry was simply that the barriers were high. Consumer
conservatism and the importance of branding meant that the most significant barriers were the high costs
of marketing and advertising.

    6.262. IP said the portfolio approach meant that the supplier would want to encourage a pub
company to buy across the whole range. Therefore there was a disincentive to the supplier to arbitrarily
increase prices of a leading or dominant brand in a product market, to which the response of a pubco
could be to delist brands of less importance to the consumer. However, if a pubco were entirely
dependent on one brewer for key produce such as a standard lager and/or a premium lager for a
significant proportion of its sales, then that leverage was lost. An example of this in the IP estate was that
Bass could not arbitrarily raise the price of Carling, as IP could react by delisting or restricting
distribution of Worthington’s Bitter, Worthington’s Mild and Draught Bass. Other products acceptable to
the majority of retailers and consumers were available from other suppliers. If the merger were allowed
to stand, Interbrew’s Carling and Stella Artois brands would account for a high proportion of throughput.
[         Details omitted. See note on page iv.           ] Carling and Stella Artois were what IP called
‘traffic-building’ products, accounting for up to about 60 per cent of a pub’s throughput. With such
volumes of key branded products, any threat to delist as part of a negotiating strategy was unlikely to be
credible or commercially viable.

     6.263. IP and other pubcos had entered into a number of long-term supply contracts with the national
brewers to supply a proportion of the beer requirements of their estate. Pubcos such as IP which allowed
its tied tenants a relatively wide range of products to choose from would, proportionately, have a lesser
need to enter into long-term supply contracts than a pubco that required its tied tenants to purchase from
a more restricted list of beer products. Bass and Whitbread were now pubcos operating a managed estate.
Each company could be assumed to have entered into long-term supply agreements with Interbrew to
supply a significant proportion of their beer requirements. This meant that Interbrew would have
committed to supply some 6,500 pubs plus the long-term supply contracts that each of Bass and
Whitbread would have entered into with IP and many, if not most, other pubcos. Since long-term
contracts typically contained minimum purchasing obligations, this meant that Interbrew would, in
effect, be protected from the rigours of competition for at least the aggregate minimum supply
obligations. IP also had concerns about the concentration in distribution, increasing the likelihood of the
distributors forcing their brands by minimum purchase requirements and eliminating regional brands by
means of minimum keg-size requirements or differential pricing of distribution.

    6.264. IP considered that the market position of Interbrew would be such that the only way of pro-
tecting the wider public interest was to prohibit the transaction. If, however, the CC considered that the
transaction should be allowed, IP requested that recommendations of a structural, and not behavioural,
nature were made to protect the interests of consumers and to prevent restriction of competition in the
marketplace. IP believed that restrictions on price movement, capping of market share and/or distribution
of products would not be effective. IP therefore proposed that the disposal of Carling standard lager and
Carling Premier lager to a third party would be the minimum necessary action to ensure that the merged
business did not have the ability to distort competition, restrict choice or lead to higher prices for the
consumer. An important consequence of such a disposal would be to achieve an appreciable reduction in
the overall market power of the merged business. Because the Carling brand accounted for 31.5 per cent
of the standard lager market, the effect would be to reduce the aggregate market share of Interbrew in
that market, at the wholesale/retail level, from 49.4 to 17.9 per cent. It would also have an impact upon
the portfolio power that the merged entity would otherwise have. Retailers wanting to stock Carling
would still be able to source it but from a third party. Interbrew would cease to have a stranglehold over
the standard and premier lager markets and, as a consequence, the wider beer market.

    6.265. Such a disposal should be a precondition to the merger being allowed to proceed and should
include all necessary breweries, brewing assets, intellectual property rights and the necessary wholesale
and distribution businesses, including drinks logistics and cellar services referable to these brands. The


                                                     186
obligations under any long-term supply contracts for these brands should be transferred to the purchaser
to ensure no ‘interference’ from Interbrew after the disposal. IP believed that any prospective purchaser
must be of such a status as to be able to constitute an effective competitor in the brewing and wholesale
markets for standard lager and premium lager in the longer term. Such a competitor must not only be
independent and viable, but must also have the necessary incentives to compete. In IP’s opinion, S&N
would not be an appropriate purchaser.

   6.266. IP stressed the following points:

   (a) The merger would give Interbrew the two ‘must have’ brands in the very important standard and
       premium lager categories, namely Carling and Stella Artois. Neither IP nor its franchisees could
       commercially afford to drop Stella Artois or Carling.

   (b) Secondary brands currently played an important role in negotiation but post-merger this would
       not be the case because the merged entity would be able to offer a complete range of the leading
       brands.

   (c) The merger would increase the ability of Interbrew to phase out secondary brands in its own
       portfolio, and this would marginalize regional brands.

   (d) The merger would increase the ease of collusion between the few remaining national brewers.

   (e) The merger was likely to lead to distributors forcing their own brands by minimum purchase
       requirements and eliminating regional brands by means of minimum keg-size requirements and
       differential distribution pricing. [
                                        Details omitted. See note on page iv.
                                                                                                ]

    6.267. In response to the Issues and Remedies Statement (see Appendix 2.2), IP said that the
proposed acquisition of Bass Holdings by Interbrew raised significant competition concerns which
merited a recommendation that it should not be allowed to proceed. If the merger were not blocked
outright, any remedies imposed in relation to the merger must properly address the central issue of the
market power that would accrue to Interbrew and the lack of any significant countervailing buyer power
wielded by the pubcos, wholesalers and individual entrepreneurs. No one pub company currently had
more than 8 per cent of the UK pub stock representing 3 per cent of the on-trade beer volume. In this
context, the only effective remedy would be one which prevented the acquisition of market power at the
brewing level and which maintained consumer choice.

    6.268. IP said that it did not believe that purely behavioural remedies would be an adequate
counterweight to the substantial strengthening of the parties’ position resulting from the merger. A
structural remedy was required that would prevent the accumulation of that market power; otherwise the
structural deficiencies in the market would persist. IP said that remedy (a) (Divestment of the Bass
business in its entirety; or possibly without its activities in Scotland and Northern Ireland) was the most
effective remedy, whether or not the Scotland and Northern Ireland interests were included (and as long
as the divestment was not to S&N). The issues of large market shares and portfolio power would be
removed and the way would be open for a credible fourth player to emerge, provided that disposal
included all necessary infrastructure, including a means of distribution and supply contracts. Remedy (b)
(Divestment of the Whitbread brewing business, either with or without the Stella Artois brand) would
resolve the market share and portfolio issues as long as production and distribution of Stella Artois (and
distribution and supply infrastructure, ie an entire stand-alone business) were removed from the
Interbrew portfolio; otherwise Interbrew would still control the product market leaders in the standard
and premium lager markets.

    6.269. IP said that remedy (c) (Divestment of such brands and associated brewing and wholesaling
capacity as would enable the creation of a competitive fourth brewer-wholesaler) would be an effective
remedy as long as the divestment included Carling but not Stella Artois. If both Carling and Stella Artois
were divested, a new company might control the lead brands in both lager product markets. For this
remedy to be effective it would be imperative that the appropriate leading or near-leading brands (and
infrastructure) were divested to ensure that the new company were genuinely competitive. IP did not
consider that remedies (d) to (i) (see Appendix 2.2) would be effective either individually or collectively.
Specifically on (d) (Divestment of the wholesaling and distribution businesses of Bass and/or


                                                    187
Whitbread): IP believed that this would fail to address the key anti-competitive effect of the merger,
which would occur at the brewing level. The overwhelming market power and portfolio power in
brewing would still be held by Interbrew. The wholesaling and distribution business would be able to sell
only those brands that were produced by, and at prices driven by, the brewer. There would be no safe-
guards against the reinforcement of market power in the hands of Interbrew at the brewing level.


Luminar plc
    6.270. Luminar plc (Luminar) believed that the merger would benefit brewing in the UK in the short
term in certain areas of the business but that this would be more than outweighed by the automatic
transfer of power to brand owners. Luminar’s concerns fell into two categories; freedom of choice and
distribution.

    6.271. Unless safeguards were put in place by the regulatory bodies, then the brand owners (all
based outside the UK) would own two national brewers. This would result in a reduction of choice to the
consumer, greater brand propensity and an unprecedented rise in price to the wholesale business.
Existing brewers would become ‘distributors’, regional brewers would not compete, and the incentive for
a brand owner to brew a range of products which competed with its core brands would not exist.

    6.272. Luminar said that, if its view that brewers would become distributors were correct, then
whoever had the strongest brands would control distribution. Retailers would therefore consolidate their
business to get the best terms. The only benefactor would be the brand owner, and consumer choice
would be eroded. Luminar said it believed that, unless guidelines were put into place to control the power
that brands had, both in terms of competition and distribution, the UK would be treated as a regional
profit centre.


Merlin Inns Limited
    6.273. Merlin Inns Limited (Merlin Inns) said that it was opposed to the merger of Interbrew and
Bass on the basis that it would create a monopoly in the brewing industry, thus endangering customer
choice and competition. Prior to the 1989 report, there were six major Brewers in the country, which had
now been reduced to four. The merger would not only have the effect of reducing the number to three,
but there would only be two major brewers, Interbrew and Scottish Courage. Carlsberg-Tetley was only a
minor player, with a small share of the total market.

    6.274. Merlin Inns said that, with only two major players, they would be able to dictate pricing
policy, which would inevitably lead to an increase in prices. It would also result in a rationalization of
brands which would reduce customer choice.


Old English Inns Plc
   6.275. Old English Inns Plc said that, with regard to the Interbrew/Bass merger, it fully endorsed the
views of its association, the Association of Multiple Licensed Retailers.


Pubmaster Limited
    6.276. Pubmaster Limited (Pubmaster) said that it was an entirely tenanted pubco with about 2,000
pubs well diversified through England and Wales with a handful of pubs in Scotland. 75 per cent of its
turnover was represented by the wholesale turnover of beer; 20 per cent came from rental income; and
5 per cent from gaming machines.

    6.277. Pubmaster said that it was concerned that the industry would end up with a duopoly of
Scottish Courage and Interbrew. Carlsberg-Tetley, which was one of Pubmaster’s core suppliers, was
likely to be squeezed. Pubmaster said Interbrew had an extremely strong portfolio compared with
Carlsberg-Tetley and was probably on a par with Scottish Courage. It was concerned that Interbrew
might start to rationalize brands. Pubmaster said that, at one time, Stella Artois was a ‘must stock’ brand


                                                   188
for Pubmaster because of its original supply agreement with Whitbread but that had been terminated
when Interbrew purchased Whitbread.

    6.278. Pubmaster said that most of its product was distributed through Carlsberg. It would prefer all
of its product to be handled by one distributor but, at present, only Tradeteam was able to deliver Bass,
which owned 50 per cent of Tradeteam. Pubmaster said that it had various long-term agreements with
Carlsberg-Tetley, Scottish Courage, Bass and Interbrew which either had been renewed or it expected to
be renewed.

    6.279. Pubmaster said that the Competition Act 1998 would prohibit Interbrew and Bass from
foreclosing the market although they were likely to have similar aims.


Punch Group Limited
    6.280. Punch said that the merger, when combined with the recent acquisition of WBC by Interbrew,
would create an unacceptable level of concentration at both the production and distribution level which
would, if permitted to proceed, inevitably lead to less choice and higher prices in retail outlets. The
acquisition of Bass by Interbrew would result in a highly-concentrated market for the production of beer
in the UK and in regions of the UK with a post-merger HHI of concentration of 2,291 for production.
Punch noted, on the basis of A C Nielsen data for 12 months to July 2000, that Bass/Whitbread would
have 32.1 per cent, S&N 26.9 per cent and Carlsberg-Tetley 12.5 per cent of the British on-trade beer
market by value. However, because of the historical strength of Bass and Whitbread in certain regions,
the regional market shares were higher, thus creating an unacceptable level of market dominance.

    6.281. Punch contended that the merger between Interbrew and Bass would result in collective
dominance. Punch stated that market conditions would not be conducive to competition between the
three remaining brewer/wholesalers. Interbrew and S&N would be in a position to coordinate their
behaviour post-merger. Given its scale deficiency, weakness of brand portfolio and lack of tied estate,
Carlsberg-Tetley would be likely to be no more than a weak market follower. Punch noted that new entry
into both the production and wholesale/distribution markets was difficult because of minimum efficient
scale requirements, the importance of brand and advertising, the high sunk cost of building a national
distribution network, vertical ties through long-term supply contracts, the vertically-integrated structure
of the major brewer/wholesalers, wholesale pricing practices which favoured the distributors’ own
brands and discouraged new entry and the technical difficulties involved in switching because of on-
premises cellarage equipment and other switching costs at the retail level, including rebranding of
outlets. The other market conditions conducive to collusion identified by Punch included mature demand,
stable and symmetric market shares, the transparency of pricing, a sharing agreement between the major
brewers over cellarage equipment and the absence of buyer power. Punch contrasted the HHI of less than
500 on the buying side.

   6.282. Punch said that three main consequences flowed from the consolidation in the production
market:

   (a) Category dominance. The Stella Artois brand in the premium lager market, the Carling brand in
       the standard lager market and Caffrey’s in the premium ale market were likely to emerge as
       dominant brands for Interbrew; the only brands with a chance of competing would be the
       Scottish Courage brands, Kronenbourg and Fosters. Interbrew would be in a strong position to
       use its market power to tie the purchase of other products in its range to the purchase of Carling,
       Stella Artois and Caffreys.

   (b) Brand rationalization and reduced consumer choice. The Heineken, Murphy’s, Carling Premier
       and Grolsch brands were likely to be the immediate casualties of the merger as their production
       would be phased out or switched in favour of other Interbrew brands, thus strengthening the
       dominance of brands such as Stella Artois and Carling. The Carlsberg-Tetley brands and brands
       produced by small breweries might also find their position untenable in the medium term.

   (c) Further concentration. The cost base and marketing capacity gained by the leading two brewers,
       combined with the current strength of their brand portfolio and high barriers to entry, would
       make it difficult for Carlsberg-Tetley and smaller brewers to compete in the medium term.


                                                   189
    6.283. The significance of marketing (for instance, through television advertising and sports spon-
sorship) and benefits of scale could not be overemphasized in the beer industry. Increased scale resulted
in a virtuous circle as the improved cost base enabled greater marketing spend which, in turn, led to
increased market share and greater scale. Where scale was increased through consolidation to the level
envisaged by the merger, the result would be market dominance and foreclosure because of the high
barriers to entry, static demand and vertical effects.

    6.284. While Interbrew’s market share over production alone would be sufficient to give rise to a
dominant position, when combined with its share of the wholesale/distribution market, Interbrew would
be all the more strongly placed to exercise very substantial market power. Small brewers, importers and
retailers were dependent on the four national brewer/wholesalers for the supply and delivery of beer.
Together with high barriers to entry, this meant that the wholesaler/distributors effectively controlled a
bottleneck. Post-merger, Interbrew and S&N would control 77.5 per cent of this bottleneck and would
therefore be in a position to control the entry and expansion of rivals. Punch predicted that Interbrew’s
ability to behave independently of customers would be demonstrated in the short to medium term by
increases in the net wholesale prices (or a reduction in discounts) and the rationalization of the Interbrew
product range.

    6.285. The wholesale supply and distribution market consisted of the telesales, transportation and
after-sales service associated with the sale and delivery of beer to retail outlets. The market shares of the
UK national distributors of beer after the proposed merger would be of the order of 44.7 per cent for
Interbrew, 32.8 per cent for S&N and 15.2 per cent for Carlsberg-Tetley. The figures reflected the fact
that Interbrew/Bass/Whitbread would dominate the distribution market.

    6.286. The control exercised by the national brewers over distribution, their bargaining strength in
dealing with retailers and their use of vertical integration to reinforce their position in the brewing market
resulted from the following factors:

   (a) the fact that it was only practical and cost effective for retail outlets to take deliveries from one
       distributor and the reluctance of distributors to porter another brewer’s brand;

   (b) the fact that Interbrew’s ownership of the enlarged distribution operation would make it easy in
       the short to medium term to rationalize its own product range by winding down the promotion of
       Grolsch and Carling Premier (encouraging customers to switch to Stella Artois) and manage their
       own customer base away from Heineken and Murphy’s to Interbrew’s own brands (for example,
       Carling);

   (c) the ownership by the national brewers of essential infrastructure for cellar technical services
       (such as pipes and taps on retail premises), making switching between distributors only possible
       with their mutual cooperation, and switching to an independent distributor difficult if not
       impossible;

   (d) long-term supply commitments and/or a tradition for houses formerly owned by a particular
       brewer to continue to source their needs from that brewer and switch distributor only very rarely;
       and

   (e) the fact that the high entry costs involved in building a nationwide distribution network. Entry
       into distribution was made particularly difficult by the fact that the national brewers’ ties with
       retail outlets gave them a head start in achieving the requisite scale, and since setting up a new
       distribution network was not an economically feasible option, as Punch had demonstrated in a
       paper on distribution economics. Entrants (and regional brewers) relied on the national brewers
       to grant distribution on reasonable terms and this gave the large brewers considerable power over
       access to the market.

   6.287. Further concentration of the market would therefore occur between vertically-integrated
companies which were insulated from the threat of new competitors and would benefit from stable long-
term relationships with their customers. In these circumstances and, given the high market shares, the
market foreclosure and opportunities to exploit market dominance arising from the proposed merger
were clear.


                                                    190
    6.288. The UK Beer Orders had sought to address the nature of vertical integration by imposing a
constraint on the number of retail outlets which could be owned and tied by the national brewers.
However, since the Beer Orders, the national brewers had used the control of distribution and telesales as
a proxy for the control of pubs. Punch contended that vertical integration between producer and
distributor was as important as vertical integration between producer and retailer, given the control exer-
cised by the distributor over all levels of the supply chain.

    6.289. Punch contended that allowing the merger to proceed would be against the spirit of the Beer
Orders which was to promote competition at retail and production level. Punch understood that both the
Bass and Whitbread brewers were sold to Interbrew with long-term supply contracts into the Bass and
Whitbread pub estates. The combined Bass and Whitbread estates constituted 7,000 leading pubs,
accounting for an estimated 12 per cent of the on-trade by number of houses and an estimated 15 per cent
by volume. While these contracts did not constitute a tie enforced by ownership, as originally anticipated
by the Beer Orders, they consolidated control over the wholesale distribution bottleneck and clearly
served to increase vertical integration substantially and were diametrically opposed to the spirit if not
letter of the Beer Orders and created vertical integration to an extent not previously seen even prior to the
Beer Orders.

   6.290. Punch submitted that allowing the merger would be inconsistent with previous rulings on beer
from the competition authorities. In 1997, the then Secretary of State decided that the proposed
Bass/Carlsberg-Tetley merger would lead to a concentration in brewing which would be contrary to the
public interest and that the divestment of the parties’ retail interests would be an ‘inadequate
counterweight to the substantial strengthening of Bass’s position as a producer and wholesaler of beer’.
Although the Interbrew/Bass merger would not lead to a consolidation of retail interest, the fundamental
objection of the Secretary of State in 1997 to the Bass/Carlsberg merger was still valid. Indeed, the
consolidation of Bass and Whitbread under Interbrew would be a more formidable combination with a
higher combined market share.

   6.291. In return for approval of the purchase of the Allied-Domecq UK retail business and Inn
Business Plc by Punch. Punch had been required by the Secretary of State to dispose of or free from tie
such number of pubs in certain Petty Sessional Divisions (local licensing areas) as would reduce their
share of pubs to 25 per cent or less by June 2000. The proposed Interbrew/Bass merger would lead to a
market share in the brewing and distribution markets well above the 25 per cent level in the UK and even
more significant market shares in local or regional markets. Given also that the potential for abusing that
market power was all the greater by reason of the vertically-integrated nature of the brewing/distribution
business, the competition concerns raised by the Interbrew/Bass merger were far more significant than
those raised by the Punch transaction.

    6.292. Punch gave details of its calculations that, even after Interbrew had achieved substantial cost
savings from rationalizing and integrating the Bass and Whitbread businesses, Interbrew would earn a
return on capital well below its weighted average cost of capital. The only logical explanation for this
was that Interbrew, having paid a high purchase price, anticipated in its own calculations the ability to
extract monopoly profits. Punch contended that its bargaining position and that of other pub
owners/operators would be seriously undermined by the consolidation of Bass and Whitbread. The
ability of the major brewers to use pricing practices and other means to promote their own brands over
those of other brewers and to dictate entry at all levels would increase because of the merger, which
would also undermine Punch’s multi-sourcing policy and increase its dependence on the brands of
national brewers. This would cause a vicious circle, reinforcing the market strength of the major brewers
and undermining the position of retailers and smaller brewers. Competition at the production level would
be reduced, the wholesalers’ bottleneck with regard to distribution would be consolidated and consumer
choice at the retail level would be reduced. The end result would be monopolization by the remaining
national brewers, increased prices and lower quality. Punch considered that Carlsberg-Tetley would be
likely to become significantly less effective as a competitor as its cost position would be considerably
weaker than that of its larger competitors. Brand rationalization would also be inevitable, whether or not
Interbrew were to divest certain brands, since Interbrew would have the market power to steer customers
away from any divested brands. Reduced bargaining power and increased control by major brewers over
the wholesale/distribution bottleneck would also lead to a reduction in the availability of regional and
niche brands and a reduction in consumer choice. The only chance of securing reasonable prices and
choice at the retail level would be if there were keen competition between the national brewers/
wholesalers. The consolidation of Interbrew/Bass reduced this possibility, since the market would consist
of two strong players and one weak player. Given the high barriers to entry, stability of market shares,


                                                    191
mature demand, predictability of output and price, and the interdependencies and links between the
brewers/wholesalers, market conditions post-merger would mean the replacement of competition with
cooperation and collusion.

    6.293. Punch concluded that the Interbrew/Whitbread/Bass merger would change the competitive
structure of the UK beer market in a significant and irreparable way. Punch took the view that the com-
petition concerns raised by the merger were so fundamental that the only remedy capable of addressing
these concerns would be to prohibit the merger and order divestment by Interbrew of the whole Bass
brewery business to a buyer other than one of the existing national brewers.

    6.294. With regard to the Issues and Remedies Statement (see Appendix 2.2), Punch said that its
responses corresponded to the list used by the CC in its statement of 24 October 2000. The following
paragraphs are Punch’s response to the Issues and Remedies Statement.

   6.295. Punch said that the effects of the merger would involve the following:

   (a) The merger would reduce competition in the brewing of beer. This was evident from the
       reduction from four to three major national brewers. The main effects of this reduction in com-
       petition would be the disappearance of brands which would no longer be on the market as a result
       of the merger and the increase in price of those left on the market.

   (b) The merger would reduce price competition, would not escalate non-price competition and would
       result in the loss of product innovation. [       Details omitted. See note on page iv.
                                                                                                   ] The
       ability of Interbrew to increase prices would result from the high degree of concentration in the
       market. This would increase the ability of the two major national brewers, Interbrew and S&N, to
       collude, and Interbrew’s ability to exercise market power in the key standard and premium lager
       markets. The third national brewer, Carlsberg-Tetley, would not be in a strong position to
       compete on price, and other brewers would only be able to compete in relation to niche brands.
       While Guinness would retain a leading position in the stout market, the high price of Guinness
       indicated the ability to increase prices enjoyed by brewers with high market shares. The
       relationship between market power and concentration in the beer market was illustrated by a
       Margin Concentration Analysis paper which Punch had submitted to the CC. The reduction in
       product innovation on the part of the two major brewers, Interbrew and S&N, would be
       evidenced by the inevitable brand consolidation following the merger. In particular, it was likely
       that Grolsch and Carling Premier in the premium lager market would not survive in the short
       term.

   (c) The merger would increase barriers to entry or expansion in brewing. The barriers to entry would
       be increased as a result of the merger because of the following factors:

       (i) The refocusing of advertising spend by Interbrew on a few key brands would raise the cost
           of establishing a competing brand.

       (ii) The strengthening of Interbrew’s vertical ties and its control over retail outlets would raise
            barriers to entry at the wholesale/distribution level.

       (iii) The increased control by Interbrew over distribution would make it more difficult for small
             brewers and new entrants to find a route to market.

       (iv) The strong product range of Interbrew and its increase potential for full-line forcing would
            make it more difficult for new brewers to compete.

   (d) The merger would result in Interbrew having the leading brand in the standard lager (Carling),
       premium lager (Stella Artois) and premium ale (Caffrey’s) categories. Its market shares in these
       categories, combined with its hold over distribution, would enable it to exercise considerable
       market power. While S&N would also have a significant market share, the market would not be
       conducive to competition between the two remaining leading players. The merger would in effect
       create a position of collective dominance between Interbrew and S&N, with Carlsberg-Tetley as
       a weak market follower. The market conditions, including the high barriers to entry, the
       transparency of pricing, the stable and symmetrical market shares and declining demand, as well


                                                  192
       as the existing contractual links between the major brewers, would ensure that the market was
       conducive to the exercise of market power through coordination.

   (e) S&N would have the brand portfolios and necessary financial resources to remain on the market,
       although with little incentive to compete with Interbrew. Carlsberg-Tetley would not have suf-
       ficiently strong brands and scale to compete effectively with S&N and Interbrew following the
       merger.

   (f) Guinness would continue to exercise market power in relation to the stout market. The regional
       and local brewers would not be in a position to compete with the leading brewers on price,
       although they would be able to compete on the quality of certain niche ale brands. Anheuser-
       Busch had not, in spite of high advertising spend, been able to make significant inroads into the
       draught on-trade market. Heineken was likely to lose ground as a stand-alone product in the UK
       as it had lost its route to market (via Whitbread’s distribution network).

   (g) Small brewers would find it difficult to respond through increased output because they would
       lack the brand image and control of route to market enjoyed by the large brewers. S&N would
       have no incentive to react aggressively to a softening of competition as they and Interbrew would
       be able to leverage their respective brand strengths and raise prices post-merger. The importance
       of brand image and the barriers to expansion in the market would make it very expensive for
       either player to make significant inroads into the other’s market share. In fact, collusion would be
       possible and likely between the two leading players to allow prices to rise even further. A
       competitive response based on imports would face the difficulties that draught imports were
       uneconomic and market history showed (even in the bottled market) that brands tended to do
       better when brewed under licence by, or in partnership with, an established UK brewer. Imports
       were only relevant to the bottled lager segment.

   (h) The merger would not necessarily lead to an increased advertising spend, although Interbrew was
       likely to focus its spend on fewer brands. Smaller brewers would not be able to compete with the
       two leading brewers as they did not have the requisite financial resources to invest heavily for a
       sustained period in additional advertising. The paper provided by Punch illustrated the economies
       of scale in advertising and the significant unit-cost advantage enjoyed by the larger brewers. The
       paper illustrated the high barriers to expansion by reference to the increased advertising unit-cost
       burden on smaller brewers.

   (i) Interbrew would have a clear incentive to rationalize its brand portfolio. There would be little
       point in continuing to invest marketing spend on Grolsch or Carling Premier as it would seek to
       increase the dominance of Stella Artois, which had been growing strongly in recent years.

   (j) Punch was not in a position to comment on draught exports from the UK.

   (k) Tacit collusion or coordination between Interbrew and S&N would be feasible post-merger. Tacit
       collusion was not necessarily a concerted practice in breach of Article 81 of the EC Treaty, as it
       did not require any formal agreement or information exchange between the players. This was
       why the European Commission had used the EC Merger Regulation to block mergers which
       might lead to a position of collective dominance, rather than relying on Article 81 after the
       merger to control collusive conduct.

   (l) Interbrew clearly had an incentive to increase wholesale prices following the merger. However,
       the price paid by Interbrew for Bass showed that it must expect to be able to increase wholesale
       prices post-merger.

    6.296. Punch said that the effects of the merger on the wholesaling and distribution of beer involved
the following:

   (a) The reduction in competition at the wholesale/distribution level was illustrated by the fact that
       Punch’s ability to threaten to move its outlets from one brewer/distributor to another in annual
       negotiations was now curtailed by the reduction in choice from four to three brewer/distributors,
       with Carlsberg-Tetley struggling to maintain its position on the market.


                                                   193
(b) The merger would result in an increase in barriers to entry and expansion because of the
    following factors:

    (i) entrants would find it harder to achieve sufficient size to achieve economies of scale.

    (ii) Interbrew would be better able to impose restrictions on who could distribute its products
         and how much it charged for its products when distributed by a third party.

    (iii) Carlsberg-Tetley in particular could suffer as it was already in a weak position.

(c) Carlsberg-Tetley’s competitive disadvantage because of its lack of scale would be reinforced as a
    result of the merger.

(d) Bass had already tried to make it uneconomical for other wholesalers/distributors to purchase
    Bass brands. Whether this was because of a collusive policy between the major brewer/
    distributors to discourage the porterage of each others’ brands or Bass’s own policy of seeking,
    where possible, to extend its control over distribution (even at the expense of sales to other
    distributor/wholesalers), the ability to deny brands to competing wholesalers would clearly be
    enhanced by the merger.

(e) The ability of Interbrew to require retailers to take its whole product range would clearly be
    enhanced by the fact that the retailers’ alternatives would be reduced as a result of the merger. As
    indicated above, other brewer/distributors and the independent wholesalers would also find that
    Interbrew would be reluctant to sell to them (or to retail outlets with delivery via other distribu-
    tors) and would consequently do so only on terms which furthered Interbrew’s own commercial
    objectives.

(f) Punch had provided details on the current practice of bundling the price of beer and distribution
    by offering an inadequate discount where a barrel was distributed independently, while raising
    the price of porterage of competing brands compared with own brands. The discount offered by
    Bass for the supply of own brands to be portered by a third party was considerably smaller than
    the resulting distribution cost saving. Punch understood that the major brewers had argued that
    this represented the marginal cost saving, but strongly contended that the marginal cost
    justification was relevant only in relation to customers taking low volumes (below about 50,000
    barrels a year). Punch said that the discount was also considerably smaller than the charge made
    for portering a third party brand by Bass. Punch concluded that Bass already leveraged its control
    of the supply chain to drive sales of its own brands and disincentivize the purchase of other
    brewers’ beers. The ability to leverage market power to dictate customer choice in this way
    would be considerably enhanced by the merger, in particular by the strength of Interbrew’s post-
    merger product range. This was simply because customers would be faced with less choice of
    brewer/distributors and the two leading players would be able to collude over the porterage of
    each other’s and third parties’ brands.

(g) The merger would enhance the ability of Interbrew to undertake a range of anti-competitive
    practices, such as cross subsidization from markets where there was weak competition to markets
    where there was stronger competition, and selective pricing. However, Punch took the view that
    Interbrew would not find it necessary to enter into such practices (save at the margins) because
    the result of the merger would be such as to enable the two market leaders to enjoy a comfortable
    coexistence, and smaller competitors would be unable to compete by reason of their cost
    disadvantage.

(h) (and (i)): see response to (f) above.

(j) Interbrew would have greater access to information, which would increase transparency on the
    market and aid coordination. Punch took the view that, rather than leading to an increase in
    selective competition, this would lead to an overall reduction in competition as the two leading
    players were consolidating their position and competition would be dampened.

(k) Punch had illustrated that there were high barriers to entry to the distribution market and that the
    existing brewer/distributors, and Interbrew and S&N in particular, were likely to remain the only


                                                194
    routes to the on-trade market for smaller brewers. This point was accentuated by loan book ties
    (ie where the brewers lend money to the independent pub).

(l) Punch was not in a position to comment authoritatively on the off-trade.

(m) Punch considered that anticipated synergies (estimated to be £100 million after three years) did
    not justify the purchase price of the merger. Punch concluded that the purchase price anticipated
    the ability to extract monopoly profits and, therefore, that none of the synergies savings would be
    passed on to consumers. On the contrary, Punch concluded that the cost increase inherent in the
    purchase price would have to be borne by the consumer.

6.297. Punch said that the effects of the merger on the retailing of beer involved the following:

(a) Punch was not privy to the long-term vertical supply arrangements between Interbrew and the
    retained estates of Bass and Whitbread. These arrangements hindered the ability of these retail
    outlets to switch brewer/distributor. Punch considered that the effect of long-term arrangements
    was equivalent to the sort of ownership tie prohibited by the Beer Orders. Punch considered that
    these contracts had a ‘hysteresis’ effect on market shares (ie their impact persisted after the date
    of contract expiry).

(b) The tied arrangements with the Bass and Whitbread estates would strengthen Interbrew’s
    position. It was not clear, however, that the merger would lead to ‘aggressive competition’ in
    other areas, save possibly where weaker players such as Carlsberg-Tetley held a particularly
    precarious position.

(c) In relation to the buyer power of the pub companies, Punch noted that most of its estate
    comprised (4,060 out of 5,100) tenanted rather than managed pubs. This reduced Punch’s ability
    to exercise buyer power as it would be extremely difficult for Punch to delist an important brand
    entirely and, once the brand was listed, Punch did not control how much of the brand its tenants
    bought. Furthermore, the pressure on margins in pub retailing was evidenced by the substantial
    down-rating of the sector and declining returns on investment (such as refurbishment costs).
    Finally, Punch contended that there was a correlation between concentration in the market and
    margin, and noted that the level of concentration (measured by the HHI) of the brewers following
    the merger would be 2,291 over production and 3,311 over distribution, compared with a level of
    concentration on the retail buying side of below 500.

(d) Punch contended that the free trade could be severely impacted by the merger, and in a shorter
    timeframe, as free-trade outlets were not typically insulated from price increases by long-term
    supply contracts and were dependent on a single supplier.

6.298. Punch said that the possible adverse effects on the public interest involved the following:

(a) Punch agreed that the merger would result in higher wholesale and therefore higher retail prices.

(b) Punch agreed that the merger might increase the use of price discrimination, as well as other less
    tangible measures (for example, delays in agreement and delivery on portering third party
    brands) designed to discourage entry into and expansion in the wholesale/distribution and
    brewing markets. In particular, while Interbrew were unlikely to consider it necessary to employ
    such means to compete with S&N, it might well do so to discourage expansion by Carlsberg-
    Tetley or new entry. The merger would not specifically lead to price discrimination having a
    direct effect on the structure of the retail market, although the increased prices might have a
    greater adverse effect on smaller outlets less able to benefit from volume discounts.

(c) Punch agreed that the merger would result in brand consolidation within Interbrew and enhance
    the tendency of the major brewers to discourage retailers from purchasing third party brands.
    Given the increasing importance of marketing spend, the cost of innovation would increasingly
    outweigh the benefits and the major brewers were likely to focus on driving their key existing
    brands. While there might be scope for niche brewers to sell innovative brands, particularly in the
    ale markets, these brands would become increasingly expensive because of the cost of getting to
    market (in terms of both advertising and distribution).


                                                195
   (d) Punch agreed that increased marketing spend raised barriers to entry into brewing.

   6.299. Punch said that its views on the possible remedies were:

   (a) (and (b)) Punch agreed that either the divestment of the Bass business or the Whitbread business
       in their entirety would address the competition issues raised by the merger, provided that the
       purchaser were a strong brewer, such as Heineken or SAB, which did not currently have a
       significant market share in the UK but could support the business. The divestment of Whitbread
       would need to include the rights to the Stella Artois brand in the UK and, given that Stella Artois
       was an Interbrew brand, the divestment of the Bass business might be a more attractive pro-
       position to potential purchasers. A separation of the Bass assets and brands in Northern Ireland
       and Scotland would weaken the sale of the Bass business and should be resisted.

   (c) It was difficult to envisage a combination of assets and brands from the merged entity which
       would provide an effective remedy unless they comprised the entire Bass or Whitbread business.
       The complexity of the separation issues would be likely to make the sale difficult.

   (d) The divestment of the distribution and wholesale assets, even of both Bass and Whitbread, would
       be an insufficient remedy. This was because it would not address the competition concerns raised
       by the merger in relation to the production of beer and, in particular, the high levels of
       concentration in the standard and premium lager markets. Furthermore, it was quite likely that
       the interests of the purchaser of the Bass and Whitbread distribution networks would soon
       become aligned with Interbrew. There would be a significant burden on the OFT in ensuring that
       such vertical links did not in effect restore the vertical integration that the structural remedy had
       sought to address.

   (e) The divestment of the Bass interest in Tradeteam would amount to no more than a divestment of
       the Bass distribution assets and would be an inadequate remedy for the reasons explained above.
       The retained distribution network would, over time, simply take over the supply contracts
       currently held by Tradeteam.

   (f) (to (i)) The behavioural remedies (of termination of supply agreements, non-discrimination, cost-
       justified pricing and a ban on full-line forcing), which would need to be applied cumulatively,
       would be an inadequate remedy which would also impose a very significant burden on the OFT.
       There was evidence in other sectors (such as broadcasting or telecommunications) that regulatory
       concepts such as non-discrimination and cost-justified pricing were susceptible to a range of
       interpretations. The uncertainty that this entailed led to the commitment of significant resources
       by the regulatory authorities and market operators in assessing whether cost allocation and
       pricing methods did or did not comply with the behavioural obligations imposed and, in many
       cases, non-compliance with the obligations while the investigation was taking place.

    6.300. Punch contended that the only effective remedy to address the present merger would be a
structural remedy and that the only appropriate structural remedy was the divestment envisaged in (a)
and (b) above.

    6.301. Punch also provided evidence on the high cost of establishing an alternative distribution
network, the increasing significance of advertising spend, the economies of scale in advertising and the
relationship between margin and concentration. [
                                  Details omitted. See note on page iv.
                                                                                                           ]


J Sainsbury plc
   6.302. J Sainsbury plc (Sainsbury) said that the merged entity would have a large share of the market
especially after the Whitbread takeover by Interbrew earlier in the year. It would lead to a duopoly in the
beer industry of S&N and Interbrew which together would have over 60 per cent of the UK beer trade.

   6.303. Sainsbury believed that there would be a fall-out of competing brands from the combined
portfolios and, in particular, that the merger could have a detrimental effect on such brands as Heineken


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and Whitbread bitters, Worthington ales, etc. Sainsbury did have some concerns about the concentration,
although its trading relationship with these businesses, along with the Sainsbury beer strategy and
performance, did not seem to indicate any current trading difficulties.

   6.304. Sainsbury believed that the merger would further limit its scope to source its own-label beer.
Own-label supply had always been difficult in beer, and the concentration and inevitable closure of
production sites would not make this element of Sainsbury’s business any easier. Sainsbury felt that the
merger would also impact on Carlsberg-Tetley, the only remaining branded player in this particular
market.


Somerfield plc
    6.305. Somerfield plc (Somerfield) said that the most likely effect would be the loss of some
regional/local brands and, although experience suggested that there would be no shortage of suppliers
ready to fill any void, the merger could have some effect on consumer choice.

    6.306. The combined business would have a market share of approximately 38 per cent in the off-
trade/take home beer/lager market. This would be significantly ahead of the nearest rival, Scottish
Courage, which currently had a market share of 23.6 per cent. Within specific geographical regions the
new company would have an even greater market share—Scotland (40.8 per cent), Central (40.4 per
cent) and Granada and Yorkshire (40.3 per cent in both markets).

    6.307. The combined business would control distribution of 67 brands (either wholly owned or as
part of distribution arrangements with the brand owners). Within the brand portfolio, the combined
business would control four of the top ten premium lager/lager/bitter brands which accounted for almost
25 per cent of total sales in the UK off-trade. Within England and Wales the new business would be
represented by three of the top ten brands and would command a greater share than 25 per cent in
television areas such as Harlech and Westwood or Central.


Tesco Stores Ltd
    6.308. Tesco Stores Ltd (Tesco) said that if the proposed acquisition were completed, the number of
leading companies in the beer market in the UK would be reduced to two—Interbrew and Scottish
Courage. This would result in each of them having increased market power. Interbrew and Scottish
Courage would control 75 per cent of the top 40 brands. Interbrew, in particular, would exercise control
over the top two beer brands and a number of other leading brands. Interbrew would be in a position to
raise its prices and offer less favourable terms to wholesalers/retailers. Given the strength of the brands,
it was unlikely that Interbrew would face any significant loss of sales. This was even more so given that
sales of Scottish Courage’s top brand, Fosters, were significantly lower than those of Stella Artois and
Carling.

   6.309. [


                                   Details omitted. See note on page iv.


                                                                                                           ]

   6.310. [


                                   Details omitted. See note on page iv.


                                                                                                           ]

   6.311. [                         Details omitted. See note on page iv.
                                                                                                           ]

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[
                                  Details omitted. See note on page iv.
                                                                                                        ]

    6.312. [

                                  Details omitted. See note on page iv.

                                                                                                        ]

    6.313. [




                                  Details omitted. See note on page iv.




                                                                                                        ]

    6.314. [
                                  Details omitted. See note on page iv.
                                                                                                        ]


The Pyramid Pub Management Company Limited
    6.315. The Pyramid Pub Management Company Limited (Pyramid Pub) said that it derived its
income in various ways, one of which was a concessionary wholesale price received from the brewers in
return for given levels of purchases. This income was used to: invest in repairs and maintenance of the
properties; improve overall standards in properties in need of upgrading; provide consumer promotional
activity; and provide after-sales service to tenants. Any diminution in the value of this income stream
would have a detrimental effect on the viability of the Pyramid Pub head office business and the support
that could be given to tenants and their customers.

   6.316. The Pyramid Pub wished to seek assurances that a successful merger would not lead to the
reduction of discounts, which might be witnessed if competition were reduced. This assurance was
important since the present Chairman of Interbrew was on the record as saying that discounts devalued
brands. The Pyramid Pub also sought assurance that no substantial reduction in the range of brands
would follow the merger. While many products would be duplicated by type, specific brands played an
important role in the success of its smaller trading businesses.

    6.317. The Pyramid Pub said that many of its properties traded in areas suffering from poor
economic conditions and therefore were highly price sensitive. It was essential that the wholesale price
of beer to its tenants did not increase ahead of inflation. The tenanted pub industry continued to serve
local communities and anything that threatened the viability of these outlets should be avoided. The
merger would be against the public interest if these safeguards were not provided.


The Unique Pub Company Plc
    6.318. The Unique Pub Company Plc (Unique) said that it considered the merger dangerous from a
competition perspective and the wider public interest. The merger would: create a brewer with significant
market shares in key product markets; create an overwhelming product portfolio in a single source;
significantly increase the market power of the two surviving large brewers; significantly reduce price
competition; and significantly reduce consumer choice. In short, it would undo the pro-competitive
effects of the Beer Orders and should, therefore, be blocked or severely restricted.


                                                  198
   6.319. The market in the on-trade had seen important changes in the past few years as a result of
diversification in retailing (ie pub ownership) and a steady breaking of the vertical integration of the old
brewers. The degree of consolidation of pub ownership was now less than at the time of the Beer Orders.
These changes had pro-competitive consequences at the retail level, namely a number of large buyers
countering a similar number of large suppliers. However, the national brewers had already begun to
focus their marketing efforts on a number of key brands and specific categories of beer, whether
premium lager, standard lager or ale. The merger would accelerate this process, resulting in the
marginalization and disappearance of smaller brands, loss of choice for brewers customers and ultimately
consumers, and loss of employment.

    6.320. As a result of pressure from the competition authorities, Unique had spent the past few years
transforming the nature of its relationship with its lessees. It had negotiated supply terms with a wide
range of brewers centrally, while managing orders and delivery independently of the supplier. In doing
so, Unique had introduced a large number of new products to its lessees and passed on substantial
discounts to them. Many of its competitors had followed the same practice. Unique had so far been able
to do this because of the availability of credible alternative suppliers for each of the key product
categories.

    6.321. For companies like Unique, it was important that there remained a sufficient number of larger
brewers able to supply its core needs nationally. This was also necessary to provide an effective com-
petitive counter to the increased market power that national brewers held in comparison to the smaller
regional or microbrewers.

    6.322. There had been a significant diversification in pub ownership over the last ten years.
However, this had been accompanied by significant consolidation at the brewing level. Since the Beer
Orders, there had been a steady decline in the number of larger-scale brewers. In particular, out of the so-
called ‘National Six’ brewers in 1989, only three would survive following this merger. Moreover, if both
market shares and brand strength were considered, it was debatable whether Carlsberg-Tetley should be
considered on the same scale. Carlsberg-Tetley’s strategy focused on only two products, namely Tetley
and Carlsberg, neither of which was a segment leader, and its overall market share was much lower than
that of either Interbrew/Bass or S&N. Its business could be seen as being more in line with that of
Diageo (whose product was Guinness) or Anheuser-Busch (whose product was Budweiser) than with
S&N and Interbrew/Bass.

    6.323. Unique said that, even if the proposed merger were considered simply in terms of its impact
on a broadly-defined England and Wales beer market, Interbrew’s market share post-merger would be
very significant. Interbrew’s share of the beer market would be 37 per cent and it would own four out of
the ten best-selling beers by volume. This was of itself a strong indication of market power.

    6.324. Interbrew’s market power would also be significant, considered in terms of the share by
volume of sales of beer of each type, and the number of the leading brands (in terms of volume of sales)
of beers of each type. Interbrew would have a significant degree of portfolio power, with strong positions
in the important product markets of premium cask ale, standard lager, premium lager, standard keg ale
and premium keg ale. It would have 38 per cent of the standard lager market (49.4 per cent with
Heineken), 48 per cent of premium lager, 20.2 per cent of standard ale, 25.0 per cent of premium ale,
9.2 per cent of stout and 4.2 per cent of packaged premium lager. In all these markets except the
packaged premium lager market, Interbrew would hold the leading or the second brand. A consequence
of the weakening of the vertical link between brewers and retailers had been the increasing ability of
retailers to obtain supplies from a number of brewers. Prior to the merger, no single brewer had been
predominant across all product markets. The merger changed the position and, for the first time, retailers
would be in a position to obtain a complete portfolio of credible market-leading products from a single
source.

    6.325. Because it would carry a wide portfolio of brands, Interbrew would be able to engage in a
number of practices which would further reinforce its market power and further marginalize other
brands. Before acquiring Bass Brewers, Interbrew had not been able to disregard competitive constraints
because its customers had needed to turn to another supplier for at least part of their brand requirements.
Once Interbrew was able to supply a complete range of leading brands, it would be less exposed to
threats by customers to switch to an alternative supplier. Thus Interbrew would have greater opportunity
for tying supplies, allowing it to leverage its significant market power in the lager sector of the market
into other sectors. Once Interbrew owned a series of leading brands across all market sectors, it would be


                                                    199
able to sideline some of the less significant brands, thus reducing consumer choice, reducing inter-brand
competition and further increasing the strength of the already leading brands.

    6.326. Unique went on to say that Interbrew’s significant market power would be exacerbated rather
than diminished by the existence of only one other major national brewer, namely S&N. S&N owned
brands found in all market sectors but its share was slightly smaller than Interbrew’s. Nevertheless, S&N
had 19.5 per cent of the total UK on-trade beer market. In the crucial premium lager market, it had
20.7 per cent. Interbrew and S&N would therefore between them account for 50 per cent of the overall
beer market and 68.8 per cent of the premium lager market. Like Interbrew, S&N was in a position to
offer a complete portfolio of products, exacerbating the polarization of the market. The closest rival was
Carlsberg-Tetley, which had only 10.4 per cent of the overall beer market and, because of the weakness
of its brands, had less significant true market power than this share would indicate. This imbalance was
even more striking in the premium lager sector, where Carlsberg-Tetley had 9.2 per cent as against the
combined share of S&N and the merged entity of 68.8 per cent. The market was therefore characterized
by two very strong companies, Interbrew/Bass and S&N. The dramatic reduction in consumer choice
would be accompanied by polarization and an increase in the risk of tacit collusion between the two large
brewers.

    6.327. Unique said that market entry was unlikely. The brewing market was undergoing a process of
consolidation rather than innovation and market entry. There had been little or no effective market entry
in the non-packaged segments (ie the draught sector as opposed to the packaged segments) in recent
years. The most recent attempts had failed. Anheuser-Busch, the brewer of Budweiser, had not been able
to break into the UK draught market although Budweiser was the number one packaged lager. Although
Anheuser-Busch was a large undertaking, market entry had been difficult. Budweiser sold only an
insignificant amount of draught product. Similarly, Holsten Export, Castlemaine XXXX and Labatt’s
draught had been relatively unsuccessful as market entrants. In each case, the original brand owner had
sought a distribution or licensing arrangement with an established supplier in order to overcome high
entry barriers. However, the attempts had been unsuccessful. Significantly, the case of market entry that
did succeed was Interbrew’s Stella Artois where, uniquely, Whitbread, the local brewer, had no
competing product and was therefore able to devote its full energy to promoting the product.

    6.328. The reason for the lack of successful entry was simply that barriers to entry were high. They
included the brand loyalty of consumers and the conservatism of tenants, but the most significant barriers
were offered by the high costs of marketing and advertising required to enter successfully and
sustainably. Access to distribution networks was also a barrier to entry. In the case of draught beers,
distribution was a specialized activity, involving a large number of small but heavy deliveries, requiring
special handling and the creation of a dense network and optimal usage in order to maximize economies
of scale and scope. Entry into the distribution market itself was also difficult. The combination of
economies of scale with the established customer base of the national brewers’ tied and managed estates
and their long-term contracts with free houses and pubcos gave the national brewers’ own distribution
operations a significant head start over new entrants.

    6.329. Unique said that the preferable situation from a consumer perspective would be competition
from a number of suppliers and greater flexibility for new entrants to enter the market, particularly in the
case of draught beer. If the CC felt unwilling to recommend blocking the merger outright, it should
recommend that Interbrew be required to sell one or more premium or standard lager brands, for example
Stella Artois (premium) and Carling (standard). This would create an opportunity for a credible
purchaser to provide a competing force to counter the strong market position of the scaled-down
Interbrew business and S&N. It would prevent a package of leading brands across all the product markets
from being concentrated in a single supplier and would permit realistic second sourcing by purchasers,
with the result that the competitive balance would be more likely to be redressed. Divestiture of either a
premium or a standard brand (provided that the brand was a major one), together with the associated
brewing capacity and infrastructure, would at least unravel the portfolio power and would similarly
permit realistic second sourcing, although it would be less effective than divestiture of both premium and
standard lager brands, because it would tackle Interbrew’s market power in only one of the lager
markets.

    6.330. Unique said that divestment of brands in the beer market in the past had not always achieved
the expected result. However, invariably that had occurred because the brands chosen were not primary
brands. A move to divest Stella Artois and/or Carling would give a purchaser sufficient critical mass to
become a fourth national supplier. There were likely to be a number of interested parties. At the time of


                                                    200
the negotiations to sell Bass Brewers, there was much press speculation about the high level of interest
shown by other international brewing groups in entering the UK beer market.

    6.331. Unique said it did not believe that behavioural remedies alone (either individually or collec-
tively) would be sufficient to address the competition concerns arising from the merger. Termination of
the distribution arrangements would hinder market access for those brewers not operating their own dis-
tribution networks (ie all except Interbrew and S&N), while leaving the two leading brewers unaffected.
However, coupling the divestiture remedy with a prohibition on cross-supplies between major brewers
would have the effect of preventing the major suppliers from using their portfolio power to be able to
provide a complete package independent of other suppliers, and would go some way towards redressing
the balance.

   6.332. Unique said, to summarize:

   (a) overall market share was a fundamental concern;

   (b) as was the greater level of market penetration in the draught beer market;

   (c) the proposed integration of Stella Artois (number one premium lager) and Carling (number one
       standard lager), would come at a time when there was evidence of growing dominance of brands
       and continued growth in lager against a decline in most other types of beer;

   (d) the inability of new entrants to make inroads into the on-trade beer market, particularly in the
       case of draught beer, suggested that controls continued to be exerted on the market by ancillary
       factors such as distribution and cellar services; and

   (e) it was concerned about complete dominance in on-trade distribution which would result because
       of limited capacity elsewhere in the market to provide credible competitive alternatives.

    6.333. Unique said that so far as the Remedies and Issues Statement was concerned (see Appendix
2.2), it was of the view that the merger should be rejected altogether. However, should the CC be minded
to make recommendations short of a complete rejection, Unique considered that requirements not to
hinder competition in any way (possible remedies (g) to (i)) would require continued monitoring which
would not be practicable and was subjective. Any remedy should be structural and should provide a
once-and-for-all solution to the serious competition concerns that arose out of the merger.

    6.334. Unique said it agreed that the merger of the Tradeteam and Interbrew distribution operations
under the continued control of Interbrew would cause it concern. However, it was not sure what the
divestment of one or both of these distribution operations would achieve. It would not touch any of the
other problems identified, such as those resulting from consolidation and market power at the brand level
and reduced consumer choice. Divestment of one of the distribution businesses would not be sufficient to
meet the adverse impact on distribution overall, as Interbrew would be able to grow its remaining
distribution business to replace the divested one.

    6.335. In most distribution markets, logistics companies had long since taken the lead in driving
efficiencies. However, apart from Tradeteam, many logistics operations had considered themselves
unable to make inroads into the on-trade delivery business. This was because of the unique nature of
draught beer delivery, requiring dedicated trucks and a specialist workforce. The power of the national
brewers was such that they could use their market power and their vertically-integrated structures to exert
considerable control over who was able to market their products and at what price. It was therefore
unlikely that an independent distribution business could survive in this market, irrespective of owner,
without the patronage of one of the national brewers providing them with a critical mass of deliveries.
Forced sale of one or both of the Bass and Whitbread distribution businesses could damage these
businesses irreparably and reduce competition in distribution overall.

    6.336. Unique said that (f) (Termination of the supply agreements with the retained estates of Bass
and/or Whitbread) was impractical, and the only beneficiary of such a remedy would be S&N, which
were likely to be the only other brewer with the capacity and distribution network to provide the volume
required by these estates. This would simply move market share from the prospective market leader to
the current market leader. However, this remedy was virtually impossible to impose. Customers of the
Bass and Whitbread pubs would wish to continue to buy Bass and Whitbread (now Interbrew) brands.


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    6.337. Unique said that (c) (The suggestion that Interbrew should be required to sell such brands
and infrastructure as would be sufficient to allow another participant into the market) was more
compelling. This was achievable but could work only if the divestment were of a key brand such as
Carling or Stella Artois. Unique considered the sale of the licence for Stella Artois to be highly unlikely
and fraught with complications. However, if Carling were sold with its associated brands, together with
the relevant brewing capacity and logistics (Tradeteam), this would be a tradable asset from which a new
market entrant or an existing smaller player could build a competitive franchise. Interbrew would still be
able to develop one of its own brands as a standard lager as a competitor to Carling which would allow
greater competition in standard lager, the largest sector of the beer market.


Town & Country Inns plc
    6.338. Town & Country Inns plc (Town & Country) said that it would like to register its support for
the Interbrew/Bass merger. Currently, Town & Country bought beer from three suppliers: Stoodi Bakers
in Birmingham, Broad Street, and Bass and Interbrew. This inevitably meant that there was an overlap in
the purchasing and stock management processes it managed. For Town & Country, the merger would
simplify the duplication, save resources and give it easier access to the brands its customers wanted. The
commercial pressures on small pub operators was intense. The prospect of a merger that would help
operators like Town & Country run its business more efficiently was to be welcomed.


J D Wetherspoon plc
    6.339. J D Wetherspoon plc (Wetherspoon) said that it had about 400 pubs and was growing at about
35 per cent a year. It was opening pubs of about double the size of the typical managed house.
Wetherspoon said that it was trading off a 62 per cent gross margin whilst its major competitors were
trading off about 71 per cent.

    6.340. Wetherspoon said that it had obtained excellent buying terms from the main and regional
brewers. It did not think the merger would greatly affect Wetherspoon as it had the highest average sales
per pub. However, if the number of brewers fell to two there might be a possibility of collusion.

    6.341. Wetherspoon said that Stella Artois was an example of a ‘must stock’ brand. In the draft lager
market, which was the biggest market, it was unlikely that any of the regional brewers could produce a
competing brand. Wetherspoon said that its strategy was to focus on the big-selling brands and to sell
them relatively cheaply. Wetherspoon said that it was reasonably relaxed about the merger but would be
less so if the number of main brewers fell to two.

    6.342. Wetherspoon said that, with regard to the Issues and Remedies Statement (see Appendix 2.2),
the recent announcement by Whitbread that it was to sell its 3,000 pubs, presumably without their tie,
would have an impact on option (f), but ultimately Wetherspoon hoped that Interbrew would be forced to
sell either of their acquisitions in toto or sufficient brands and capacity as to allow the creation of a
competitive fourth brewer/wholesaler in the UK market.


Whitbread PLC
    6.343. Whitbread did not believe the merger to be against the public interest. Although the merged
entity would have a market share in the supply of beer of over 30 per cent in the UK, it would own no
pubs. It would, therefore, have no assured distribution of the type enjoyed by S&N. Whitbread believed
that it was the conjunction of a substantial share of production with pub ownership that had the potential
to create undue power.

    6.344. Whitbread said it could not be argued that supply contracts between brewers and on-trade
retailers were analogous to tied house supply. Typically, such contracts were neither exclusive nor long
term, unlike the arrangements associated with pub ownership. Whitbread added that Interbrew/Bass
would have different interests from S&N and over time this would create a tension which would work in
the public interest. Far from being against the public interest, the merged company would have the
opportunity, through integration, to generate synergistic cost savings which, given the existence of strong


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on- and off-trade retailers, could flow in part to the retail sector. That would be to the potential advantage
of consumers.

    6.345. There was some evidence that the supply side was evolving into a situation where there were
few volume suppliers and a number of niche suppliers, for example Guinness, Budweiser and Heineken.
Within this structure, in Whitbread’s view, the existence of two volume suppliers did not present a risk
so long as the power of suppliers was balanced by sizeable retailers which had the ability and freedom to
balance their demand between the suppliers. In this regard, Whitbread did not see the manufacturing and
branding concentration as critical, balanced as it was by the niche suppliers. However, the ability of the
volume suppliers to control distribution and technical services should be viewed with caution as such
practices could potentially impact on retailers’ abilities to balance demand between suppliers.

   6.346. Whitbread said it understood that some third parties might be making representations
concerning the supply arrangements in relation to both the Interbrew/Whitbread and the Interbrew/Bass
mergers to the effect that these were contrary to the public interest and should be mitigated by a
reduction in the length or strength of the supply contracts. Whitbread made no comment on such
suggestions other than to say that, if any remedy in this area were to be sought, this should only be made
on an equal basis. To do otherwise would lead to distortions in competition in the on-trade which could
impact on the public interest.


White Rose Inns plc
     6.347. White Rose Inns plc (White Rose) said that it was not opposed to the merger of Interbrew and
Bass. White Rose operated 44 pubs in Yorkshire. It bought products made by all four major UK-based
producers, Carlsberg-Tetley, Scottish Courage, Bass and Whitbread. It also bought products from smaller
brewers. The merger of Bass and Whitbread into Interbrew was unlikely to affect its customers or change
its existing excellent business relationships.

   6.348. The merger in isolation would not negatively affect prices, variety or quality of products.
White Rose said that it could not support the view that larger and more successful companies auto-
matically meant high prices, less variety and poorer quality products.

   6.349. White Rose said that it had not been opposed to the proposed merger of Carlsberg-Tetley and
Bass which had been found to have adverse effects by the CC and blocked by the DTI in 1997. The
Carlsberg-Tetley/Bass merger would have been less monopolistic than the current merger of Interbrew,
Whitbread and Bass. White Rose said that, if the Government wished to support the UK beer market, it
should concentrate on beer duty harmonization and the reduction of bureaucracy and red tape.


Trade associations and allied organizations

Brewlab
    6.350. Brewlab said it considered that the merger would have a negative effect on the brewing
market and should not be permitted. It believed that competition would be increasingly limited as the
merged body would control around 40 per cent of the UK beer market. As such it would be likely to
concentrate on a limited number of international brands and reduce its portfolio to products. More
important, there was likely to be a reduction in the choice of brands from other breweries appearing for
sale.

    6.351. Greater control was likely to lead to reduced competition and to allow prices to remain high
or to rise—despite a saving in costs as production became more concentrated in large breweries. It was
also possible that distributors would be restricted to handling one company’s goods as inducements and
discounts excluded other producers or as distributors were purchased to service the newly-formed
company. This would further exclude products of other breweries from the marketplace and induce a
spiral of decline. It was important to limit the vertical integration of such a move and avoid the industry
becoming controlled by distributors, as in the USA and Canada.

    6.352. The effect of a merger on research and development could be severe with the focus of these
activities being set towards more international brands. As such, there was a serious prospect of a terminal


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decline in the character and quality of traditional British beers. This would certainly be against the
regional food varieties scheme promoted by MAFF. If such a merger were to be allowed, Brewlab
believed, it was crucial that the new company be obliged to offer its retail outlets a beer choice from
independent breweries as in the guest beer allowance provision. Difficulties in administration might be
encountered if this provision were conducted on an individual basis but the recent ‘approach to market’
scheme developed by the Society of Independent Brewers offered a streamlined way of providing guest
beers suitable for a large distribution system. It would be desirable to insist that future research and
development were conducted in the UK either on brewery sites or through liaison with universities and
other bodies.

    6.353. In summary, Brewlab believed that any merger would be to the disadvantage of the British
brewing industry, despite the commercial benefits to the companies involved. A merger might allow the
new company to be more proficient in international trade but the effect on the overall brewing industry
and range and character of British brands could be negative in the long term. British beers had an
international reputation but deserved to be preserved for times when they could be more successfully
promoted for greater national and international demand.


British Entertainment & Discotheque Association Ltd
    6.354. The British Entertainment & Discotheque Association Ltd (BEDA) said that BEDA was the
trade association for the late-night entertainment industry, representing over 900 members across the
country. BEDA members included the main corporate operators, as well as the National Union of
Students Services Ltd and several hundred independent operators and small companies.

    6.355. BEDA members were concerned that any further consolidation of the brewing industry could
have negative consequences for their businesses. Should the Interbrew/Bass deal proceed, the market for
the supply of beer in the UK could become a duopoly with S&N. The consequence, of this reduction in
the number of suppliers would most likely be: an increase in costs for venues as dominant suppliers
increased the price of products in order to exploit their market position to maximize profit margins; a
consequent increase in cost for the consumer, as retail prices rose to reflect wholesale increases; and less
consumer choice as rationalization by dominant suppliers led to the withdrawal of less profitable brands.

    6.356. The late-night entertainment industry would be particularly sensitive to these changes in
market conditions given the small market share held by large operators. Home Office figures suggested
that there were around 4,000 late-night venues in the UK, of which 2,500 were nightclubs. Of this 2,500,
only around 30 per cent were owned by large commercial operators. It was therefore accepted that
between two-thirds and three-quarters of venues were small companies or independent owner/operators.
These companies were not able to negotiate the types of discounts available to large leisure chains, nor
were they easily able to absorb the price increases that were expected to occur should the acquisition
proceed. BEDA members had benefited from the existence of competition in the beer supply sector.
BEDA was concerned that the level of competition might fall dramatically and that its members and
customers could lose financially as a result.


Campaign for Real Ale Limited
   6.357. The Campaign for Real Ale Limited (CAMRA) said that, in general, it opposed all takeovers
and mergers in the brewing and pubs industries which could not be shown to offer clear benefits to
consumers. Although it did not recommend prohibition of the merger, CAMRA believed that the
proposed merger was against the public interest because:

   (a) reduced competition in brewing might lead to portfolio reductions and less choice for consumers;

   (b) premium pricing strategies might lead to increases in retail prices for beer;

   (c) consolidation might lead to the closure and loss of one or more brewery plants with subsequent
       job losses and negative effects on local economies;

   (d) lack of vertical integration might lead to brand losses because of the promotion of a small
       number of key lager and keg beer brands;

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   (e) likely concentration in international lager and keg brands might further erode investment in and
       the development of the UK cask ale market; and

   (f) there would be an increase in concentration in the ownership of national ale and lager brands.

    6.358. CAMRA said that, should the acquisition be allowed, Interbrew would have approximately
32 per cent of the UK beer market following the takeover of Whitbread in June 2000. This would make it
the largest UK brewer and the second largest brewer in the world. The UK market would be dominated
by two companies, Interbrew and Scottish Courage, which would have about 30 per cent of the UK
market. The Interbrew acquisitions and the recent acquisition of Kronenbourg by S&N represented an
unprecedented step towards the globalization of the UK beer industry. The structural changes in the UK
beer market during the 1990s had been alarming and there was no doubt that, in the fallout of the Beer
Orders, power in the market had largely been transferred from the national brewers to the larger non-
brewing retail groups.

    6.359. Wholesaling and distribution were largely controlled by the national brewers (Scottish
Courage, Carlsberg-Tetley and Bass/Tradeteam), and the practice of discounting wholesale beer prices to
attract pub chain supply contracts was rife. Larger pub chains like Punch Tavern and Unique had devel-
oped strong buying power through size and geographic spread and discounts of £50 a barrel of beer were
common. The consolidation in wholesaling and distribution had served to deny access to the market to
small and medium-sized brewers which, with smaller operations, could not offer the necessary discounts
or brand strength. The Interbrew acquisition of Bass Brewers threatened to alter once more the dynamics
of the beer market, transferring power back from the non-brewing pub retail groups to the biggest
brewers.

    6.360. Interbrew had made it clear that the discounting of wholesale beer prices through its
distribution channels was likely to end. Scottish Courage had already announced in the trade media that it
too intended to end discounting. CAMRA believed that this was a direct result of consolidation in
wholesaling and distribution. The likely effect was that market power would revert to the big brewers, all
of which had spent heavily in recent years to establish a small range of ‘must stock’ beer brands.
CAMRA believed that this could have serious knock-on effects throughout the industry. Firstly, non-
brewing pub chains would have significantly less scope to meet consumer’s demands for choice and fair
prices. The shift of power from the pub to brewing sector was likely to lead to the re-emergence of
restrictive practices in the industry, notably, exclusive beer supply arrangements. Second, several non-
brewing pub chain businesses made profit not just from extracting rent from lessees and tenants, but also
from buying beer stocks at discounted rates and selling them on to tied pubs at a profit. Although con-
sumers rarely benefited from this practice, if discounting came to an end, the effect on such companies
could be devastating, as a major route to profit would be removed. This could have knock-on effects on
consumers through higher prices and less investment in pub estates.

   6.361. Third, it was likely that larger pub chains would pursue growth strategies to maintain market
power. This would leave the pubs market in fewer hands and reduce consumer choice. There was already
press speculation that Bass was preparing a major sell-off of pubs in its unbranded managed estate.

    6.362. CAMRA understood that Interbrew had a global strategy of premium pricing. It had, in other
markets around the world, transformed the performance of its brands through premium positioning and
pricing. Stella Artois was an example of how it had achieved this in the UK. CAMRA believed that there
was a danger of applying premium pricing strategies to all national beer brands in a company with such a
large market share. It believed that Interbrew could increase the average retail price of beer in the UK,
which would reduce over demand, particularly in the on-trade. While it was possible that other large
players in the market might continue to discount their beers, CAMRA believed that they were far more
likely to ‘follow the leader’.

    6.363. The global development of Interbrew and Scottish Courage in 2000, and Carlsberg Tetley in
the mid-1990s, meant that there were no longer ‘national’ UK brewers. As Interbrew and Carlsberg-
Tetley did not own pubs, they were not covered by the Beer Orders, which applied only to vertically-
integrated companies. The Beer Orders legislation was therefore largely irrelevant in today’s market.
However, CAMRA recommended that the Beer Orders be left in place as they would continue to act as a
deterrent to growth from other sectors of the industry. For example, it was likely that certain regional
brewers, such as Greene King and Wolverhampton & Dudley, would extend their pub estates should the
Beer Orders be revoked. This would lead to further consolidation in pub retailing and to reduced choice
for consumers.

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   6.364. For example, if the Bass takeover were allowed, Carlsberg-Tetley would become a weak
competitor to Interbrew and Scottish Courage. It was quite possible that it might seek a partnership or
merger with a large pub chain, an arrangement which could benefit both parties through exclusive supply
and reduction of access to other brewers. It was also possible that S&N would seek to develop market
share through the expansion of its pub estate. While it was unlikely that Interbrew itself would seek to
purchase pubs, it was possible that it would respond through establishing exclusive supply arrangements
with pub chains.

    6.365. Great Britain’s 350 small brewing enterprises collectively had between 1.5 to 2 per cent of the
total beer market. Most companies started and developed because of the guest beer provision and the
renewed interest in cask ales during the early 1990s. The reduction of the number of pubs eligible to
stock guest beers, and consolidation in pub retailing, had largely excluded those companies from the
market and they now relied on securing free-trade accounts in their own locality or through the
distribution of their beers through specialized beer agencies. Most had found it impossible to be featured
regularly on pub chain lists because of their inability to discount their products and to supply
appropriately large quantities of beer. CAMRA believed that, through consolidation in wholesaling and
distribution, the Interbrew acquisition of Bass would further reduce access to market for these
companies. Other than a desire to meet limited consumer demand for a choice of specialist beers, there
was no reason why Interbrew should open up its distribution channels to competitors.

    6.366. The same applied to medium-sized companies including long-established family brewers.
Several of these companies had worked hard to establish ale brands on the national stage through
distribution links with Bass/Tradeteam and Whitbread. It was quite possible that they would become
excluded from this market, which would seriously threaten their future performance and would
undoubtedly reduce consumer choice. CAMRA recommended to the OFT during its recent review of the
Beer Orders in 2000 that the guest beer provision be extended to non-brewing pub chains. However, it
understood that the legislative route to this end was complex and it would not support a full referral of
the industry to the CC as it believed this would not be of benefit to independent brewers or consumers.

    6.367. CAMRA said that consumer choice in independent beers could be maintained in local
markets through pub chains allowing their lessees to buy one beer from a supplier of their choice outside
the tie. It believed that this arrangement would benefit all parties by enabling publicans with an interest
in independent cask ales to develop a competitive advantage in their areas and thus build a more
successful business.

    6.368. While the majority of the brewing plants Interbrew would inherit from Bass (and Whitbread)
were operating close to capacity at present, past experience demonstrated that consolidation eventually
led to brewery closures as brands were axed and production and distribution networks were made more
efficient. Several Interbrew plants were major employers in their areas and their closure would be a
devastating blow for these communities. It was likely that the joint portfolios of Whitbread and Bass
would be reduced to remove brand clashes. There were several brand clashes in the two portfolios and it
was unclear what would happen to popular brands such as Worthington, Flowers, Hancocks, Carling
Premier and Stones. As Interbrew did not own any pubs and (it would appear) intended to end
discounting, its only route to market was through the establishment of powerful brands. While this might
be welcomed by premium brands such as Draught Bass, it also meant that smaller brands in the portfolio
would receive little promotional attention and would eventually be axed.

    6.369. Interbrew maintained that Interbrew UK (Whitbread) and Bass Brewers would continue to
operate as separate divisions, but it was difficult to imagine that the two would operate with conflicting
portfolios. CAMRA also believed that several beers in the Bass (and Whitbread) portfolios had lost much
of the distinctiveness and quality they had once possessed, as recipes had changed to meet the perceived
needs of a national market. CAMRA would like to see research on consumer views on these products
undertaken by Interbrew with the objective of returning certain key beers to their former glory.

   6.370. While Interbrew did not own any pubs in the UK it would inherit important supply agree-
ments from both Whitbread and Bass. Some of the pub chains had now merged but the total number of
pubs added up to a considerable share of the on-trade market.

   6.371. While CAMRA opposed the takeover in principle, it recognized that Interbrew might be the
best suitor for Bass Brewers. If the takeover did not proceed, it was difficult to predict what would
happen to Bass Brewers. Bass had made it clear that it wished to dispose of its brewing interests and the


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parties which had shown an interest in the business were global companies which CAMRA believed
were not as well placed as Interbrew to develop Bass Brewers.

    6.372. While CAMRA believed that any merger at this level was likely to operate against the public
interest, CAMRA did not believe that the proposed takeover of Bass Brewers by Interbrew should be
blocked by the UK authorities. Furthermore, it saw no benefits to the public interest of forcing Interbrew
to divest any existing beer brands in the Bass (or Whitbread) portfolios. However, it strongly believed
that, in order to maintain a reasonable degree of competition and consumer choice, several safeguards
should be imposed before the merger were allowed to proceed.

   6.373. CAMRA recommended the imposition of the following safeguards:

   (a) Interbrew should not be allowed to purchase any retail outlets in the UK for a fixed period.
       CAMRA suggested that ten years might be a suitable term.

   (b) Interbrew should not be allowed to purchase any further UK breweries or to increase market
       share through brand acquisition or other arrangements.

   (c) Interbrew should be required to give small and medium-sized brewers access to its distribution
       channels in order to maintain consumer choice and a vibrant and competitive brewing industry.

   (d) Clearly, the details of such an arrangement needed to be carefully considered, but it proposed that
       Interbrew should be asked to include a certain number of beers from independent brewers at any
       one time.

   (e) Interbrew should not be allowed to secure exclusive beer supply arrangements with pub
       companies above a certain size. It proposed that 500 pubs would be a suitable limit.

   (f) Interbrew should be required to demonstrate its commitment to Great Britain’s brewing heritage
       by continuing the production and promotion of its existing cask ale brands.

    6.374. CAMRA said, with regard to possible remedies (see Appendix 2.2), it did not consider that
the merger should be blocked entirely or in any particular geographic markets. Given the lack of
investment and development of Bass Brewers by Bass in recent times, it believed that Interbrew was
better placed to invest in the business. It would, however, support the divestment of the Whitbread
brewing business, either with or without the rights to the Stella Artois brand, if the Whitbread brewing
business would then operate as an independent brewer with a commitment to a long-term future in
brewing. CAMRA supported as a possible remedy the divestment of such brands and associated brewing
and wholesaling capacity as would enable the creation of a competitive fourth brewer/wholesaler but
only if the company were entirely separated from existing national or global companies. CAMRA
believed that the divestment of the wholesaling and distribution businesses of Bass and/or Whitbread
would be effective in reducing the market power of Interbrew and would promote competition in the
market. It believed that smaller and medium-sized brewers were likely to have improved access to the
market if the larger wholesalers were separated from the leading brewers. CAMRA supported the
divestment of the Interbrew/Bass interests in Tradeteam and the renegotiation of the supply contact with
Tradeteam on an arm’s length and non-preferential basis if it resulted in the independent operation of
Tradeteam.

    6.375. CAMRA supported the termination of the supply agreements with the retained estates of Bass
and/or Whitbread as they represented a threat to consumer choice and might serve to reduce access to
market for small and medium-sized brewers. It supported a requirement not to discriminate in pricing at
the brewing level, that is, to avoid differentials not justified by cost differences between sales to
wholesalers and direct sales to retailers. It would support a requirement not to discriminate in pricing at
the wholesaling level, that is, to avoid differentials not justified by cost differences between sales of
Interbrew beers and sales of competitors’ beers. CAMRA also supported a requirement not to engage in
full-line forcing at both brewing and wholesaling levels, that is, not to require, or induce through
differential terms, the purchase of a full range of Interbrew products as a means of maintaining consumer
choice.

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Cask Marque
   6.376. Cask Marque said that its aim was to improve and promote the quality of cask beer served in
pubs and clubs throughout the country. It had 26 members made up of brewers and pubcos, which took
varying stances with regard to the merger of Interbrew and Bass. Cask Marque was in a position to
represent their interests only with regard to quality of beer in trade and associated issues. Cask Marque
was a standard for the quality of cask beer in the glass as it was served to the customer in pubs and clubs.
Any licensee awarded Cask Marque certification had been independently assessed and had achieved an
exacting standard for each of the cask ales being served across the bar.

    6.377. The setting of the standard had helped to revolutionize the investment by brewers and pub
chains in their cellars and/or cellar equipment, to focus licensees on quality control and best practice and
to stimulate consumer interest in, and understanding of, cask beer. The promotion of this standard,
together with the communication of the virtues of cask beer, went hand in hand.

    6.378. In order to support the promotion of the standard and communications about cask beer, Cask
Marque was in the process of formulating a series of recommendations with regard to: training; quality
controls through the supply chain, from packaging to bar top; and marketing. Cask Marque neither
favoured nor opposed the merger of Bass and Interbrew but it urged the CC to recognize the symbiotic
relationship between cask beer and the British pub. The survival of the local pub was dependent, to a
very large extent, on the provision of cask beer, and the maintenance of choice throughout the UK.

    6.379. A company the size and stature of Bass or Interbrew helped determine the markets and
therefore impacted considerably on the rest of the industry. The company’s investment in cask ale as a
product category was essential not just for the survival of cask ale but for the survival of the local pub.
Cask Marque urged the CC to consider how best to secure the company’s commitment to cask beer. It
would like to see measures put in place to ensure: that the company promoted choice and quality of cask
brands; that it invested in the product category; and that it increased the proportion of its overall
marketing spend spent on cask. Clearly, Cask Marque would welcome Interbrew’s membership of and
commitment to Cask Marque, as an indication of its intent.



Federation of Licensed Victuallers Associations
    6.380. The Federation of Licensed Victuallers Associations (FLVA) said that it represented self-
employed licensees. The FLVA said that it did not think the customer would benefit from Interbrew’s
acquisition of Bass. The merger would no doubt put more pressure on Carlsberg-Tetley whose
distribution network supplied many of the large pubcos with a selection of national and regional beers.
Bass’s distribution system would ensure that the merged entity dealt with all Bass’s and Whitbread’s
portfolio and could lead to Carlsberg-Tetley’s distribution network being unviable, to the detriment of
many regional breweries and their customers.

    6.381. It had been reported that Interbrew would reduce its wholesale discounting. Whilst the
FLVA’s members would welcome a reduction in the discounts, the FLVA wondered how this would
affect the viability of pubcos and licensees. A large reduction in discounts would lead to closures and
higher prices.

    6.382. If the takeover were allowed, Interbrew should have to follow the same guidelines as Courage
when it took over the Grand Metropolitan Brewery in 1990. Unlike Courage, Interbrew did not own pubs
but it did have supply agreements which would need to be greatly reduced to ensure the survival of the
regional companies. The FLVA also wondered whether Interbrew would retain all the beers it would
have in its enhanced portfolio.

    6.383. When the Beer Orders introduced guest beers into national brewery outlets, giving licensees
the right to chose, this had enabled regional breweries to market their beers in many areas they had been
excluded from in the past. Many pubco licensees had had that right withdrawn. The FLVA said this was
no doubt partly responsible for a reduction in the number of smaller breweries. The FLVA was also
concerned as to how Bass would dispose of its assets in brewing now that it had decided to leave the
brewing industry.


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International Brewers’ Guild
    6.384. The International Brewers’ Guild said that it was not in a position to support any merger but it
did support the continued production of beer within the UK. This in turn would help safeguard jobs and
maintain the high standard of brewing.



The Maltsters Association of Great Britain
    6.385. The Maltsters Association of Great Britain (Maltsters Association) said that it wrote in
support of the merger. There should be no detriment to competition in the area in which the enlarged
group would be operating and, indeed, the merger might assist Bass with its competitiveness. The merger
was unlikely to have much effect on the price of malt as this was more related to supply and demand and
the European and world position, rather than individual brewing companies. Both Bass and Interbrew
were committed to their brands and there should be no concern about any reduction in product quality.

    6.386. Bass had been strongly involved in brewing industry research and development, particularly
through its membership of Brewing Research International (BRI) at Redhill, Surrey. Although the BRI
was an international organization, Interbrew had never chosen to be a member of it. However, the
Maltsters Association was encouraged by the news that the merger would mean no change in the
involvement and membership of Bass in the BRI. The withdrawal of Bass from the brewing industry’s
research and development work at the BRI would have been a cause for concern. Bass Malting Ltd, a
wholly-owned subsidiary of Bass, was a member of the association. The Maltsters Association said that
it had spoken to the management of Bass Malting Ltd about the merger and had detected nothing but
enthusiasm for the future. Bass Malting Ltd considered the merger to be a positive change and that
feeling had been reflected in other comments within the industry. The Maltsters Association said that it
supported the Interbrew/Bass merger.



Society of Independent Brewers
   6.387. The Society of Independent Brewers (SIBA) said that, given the likelihood that Interbrew
would dispose of or axe one or two brands (probably ales), and given that there were regional variations
between the concentrations of the Whitbread and Bass estates, it followed that there must be some
product substitution by existing brands, leading to a greater homogenization of brands offered and a
reduction in the regional diversity of beer offerings.

    6.388. In a market already distorted by the tied system and discounts, increased economies of scale
accruing to the new merged entity would render it increasingly unattractive for wholesalers and distri-
butors to offer a significant portfolio beyond those attracting the greatest discounts. This meant that
wholesalers and distributors seeking to remain competitive would have a positive incentive to delist
those products for which there might be demand but which carried reduced margins. This would damage
the prospects of small brewers and reduce consumer choice. If the merged entity passed on any cost
savings to its customers, there would be a pressure on pub operators which were not its customers to
match these savings. This could only be done by requiring retailers to stock ever fewer products.

    6.389. SIBA did not anticipate much increase in the wholesale prices received by the brewer and
retail prices paid by the consumer. Many brewers had been unable to increase their wholesale prices for
several years, while consumers had seen the price of beer rise ahead of the RPI for nearly two decades. It
was likely that, with increased monopoly power, the merged entity would be able to appropriate any cost
savings directly as profit, with little external pressure to pass on cost savings to consumers.

    6.390. To the extent that Bass had lost the commitment to brewing that was its raison d’être, and
Interbrew was a committed brewing concern, the SIBA was tempted to welcome it into the UK market. It
believed that there might be several positive consequences of its entry to the UK market, not least by
acting as a sea anchor against the trend of the City of London to denigrate profitable brewing activities.
However, the SIBA said it recognized that any concentration of the market gave cause for concern, not
least because the long-term future of Carlsberg-Tetley, whose survival was dependent upon the renewal
of time-limited supply contracts, might well be affected by this merger.


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    6.391. Mr Hugh Osmond of Punch had already expressed his displeasure at the merger. His concern
was that his ability to use the largest suppliers which could maximize the discounts he took as a fee for
allowing them to sell to his tenants would be reduced. From the SIBA viewpoint, this would not be a bad
thing, for it would diminish the effect of the discount system that distorted the market in favour of fewer
brands as a result of the tendency of the industry to overcapacity.

    6.392. The SIBA contended that, because certain potential scenarios were against the public interest,
there was a case for requesting safeguards to be put in place. The SIBA’s preferred safeguard would be
the extension of the guest beer provision to all tenanted/leased pubs. However, it appreciated that such a
measure had been considered in the recent OFT review of the Beer Orders but thought it likely that it
would be rejected.


The Association of Licensed Multiple Retailers
    6.393. The Association of Licensed Multiple Retailers (ALMR) said that it had been formed in 1992
specifically to represent the interests of those companies that owned five or more pubs or bars. Currently,
100 companies were in membership. These companies were neither brewers nor individual tenants, but
included multiple operators which managed their own outlets, as well as pubcos which leased on their
properties. Between them, its members owned and/or operated 19,676 premises.

    6.394. In contrast to previous consolidations within the industry, this merger would have a direct and
significant impact on all three levels of the beer industry—namely, production, distribution and retailing.
The ALMR believed that the proposed merger between Interbrew and Bass would have a direct effect on
all three markets. Taken in conjunction with the recent acquisition of Whitbread’s brewing interests by
Interbrew, it could only lead to further concentration at production and distribution level, with significant
foreclosure effects.

    6.395. The acquisition of Bass by Interbrew would result in a highly-concentrated market for the
production of beer in the UK. The ALMR had consistently argued that the concentration of supply had
proceeded too far from the situation in 1989 when there were six major brewers. If approved, this merger
would result in two major companies controlling, between them, 60 per cent of the domestic on-trade
beer market. This would isolate and weaken Carlsberg-Tetley as an effective third force. The remaining
regional brewers had a small share of the total market. Only one had more than 1 per cent of the domestic
on-trade market and future growth was inhibited by the strength of the nationals in the wholesale market.
Interbrew would also have a market share of above 40 per cent in the Midlands, Scotland and the North-
West. Particular concerns arose in the Scottish market, where the two major companies would control in
excess of 70 per cent of the on-trade market. The merged entity would have a strong portfolio of both
premium and standard lagers, as well as ales. At present, no brewer had control of the full range of
brands but the combination of the brewers of Stella Artois, Carling, Boddingtons Bitter and Draught Bass
would give Interbrew dominance.

    6.396. Smaller brewers and importers relied on the current national brewers for the delivery of the
majority of their beers. The merged Bass-Interbrew would have an estimated market share of 44.6 per
cent of the bulk distribution of beer into the UK on-trade market. The proposed merger would reinforce
the existing stranglehold enjoyed by the major brewers over the supply chain, and would result in market
foreclosure. Moreover, pubcos and tenants now faced the prospect of having only one supply contract
where previously they could have negotiated better prices as a result of having two competing suppliers.

    6.397. The merged company would have a strong market share in both the production and
distribution of beer supplied to the UK on-trade market. It would also inherit long-term supply
agreements from both Whitbread and Bass, accounting for an estimated 12 per cent of the on-trade
market by number of outlets and an estimated 15 per cent by volume. The ALMR believed that the
market following the merger would have strong tendencies towards oligopoly, if not a duopoly. The two
major brewers would enjoy similar market shares and strong brand portfolios. In a static market, with
high barriers to entry and highly transparent pricing, they would be expected to enjoy a position of
collective dominance. Care would need to be taken to ensure that this position was not abused at the
expense of their smaller competitors, the retail network and ultimately the consumer.

    6.398. The ALMR believed that the merger would make financial sense only if Interbrew ration-
alized brands to achieve production and sales efficiency. Carling Premier, Grolsch, Worthington and


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Whitbread Best were the most likely casualties. The already strong brands of Stella Artois and Carling
would become stronger, reinforced by marketing and promotional spend. Kronenbourg and Fosters, both
owned by Scottish Courage, were the only brands likely to compete in the lucrative lager category. The
weakened position of Carlsberg-Tetley and the low levels of market penetration by regional brewers
would be insufficient to counteract these effects.

    6.399. It was inevitable that the newly-reduced number of brewers would concentrate their discount
and promotional support on the major customers with significant buying power. These customers would
be the major supermarket chains and the largest of the licensed retailers (brewery owned and managed or
independent). These large chains would still have the opportunity to undercut the competition at retail
level and thus the gap between the large and the small would grow wider. There were therefore serious
concerns for the viability of the small independent retailer-publican or grocer.

    6.400. The competition between brewers had been fierce and had resulted in deals that had allowed
retailers to keep bar prices down. Any contraction of the choice of suppliers would inevitably reduce
competition between brewers and the wholesale prices would inevitably increase. Pressure on retail
margins would lead to higher prices for customers. Strong competition between brewers had allowed
retailers to retain profit margins sufficient to invest in their business. Increased pressure on margins
would affect not only profitability but also the quality and diversity of outlet available to consumers.

    6.401. The ALMR believed that the proposed merger was against the public interest. It would lead to
the emergence of a dominant player in the market, the creation of a potential oligopoly and market
foreclosure in the wholesale distribution of beer. More significantly, it would restrict the ability of
licensed retailers to meet the needs of their customers, imposing higher costs and reducing consumer
choice of both brands and outlets. The ALMR believed that the merger should not be allowed to proceed.

    6.402. In response to the Issues and Remedies Statement (see Appendix 2.2), the ALMR said that
the recent announcement by Whitbread that it was to sell its 3,000 pubs would have an impact on option
(f) (Termination of the supply agreements with the retained estates of Bass and/or Whitbread), but
ultimately the ALMR hoped that Interbrew would be forced to sell either of its acquisitions or sufficient
brands and capacity as to allow the creation of a competitive fourth brewer/wholesaler in the UK market.


The International Centre for Brewing and Distilling
    6.403. The International Centre for Brewing and Distilling (ICBD) said that, whilst it regretted the
fact that a large proportion of the British brewing industry would now be controlled by brewing interests
outside the UK (not forgetting that Interbrew had already this year acquired the brewing interests of
Whitbread), this was an inevitable consequence of ill-conceived government action in the past. The Beer
Orders, as envisaged when they were conceived some ten years ago, had been a failure. It was thought
that many pubs would be owned by individual landlords and this would therefore create a large number
of independently-owned small businesses. However, most of the pubs in the country were now owned by
investment houses, the largest being Nomura, a Japanese investment bank, which owned over 5,000
pubs, and another investment house, Punch, which owned over 4,000 pubs. In addition, the refusal of the
DTI in 1997 to approve the acquisition by Bass of Carlsberg-Tetley had made it inevitable that Bass
would eventually be acquired by foreign interests. This development had been accentuated by the fact
that Whitbread and Bass had both lost interest in being brewers, preferring to concentrate on the retailing
of alcoholic beverages through their ownership of hotels, pubs and leisure centres.

    6.404. The ICBD said that, over the past ten years, it had seen the major brewing companies in the
country down-sizing their research departments. The brewing research that was conducted in the country
at the present time was carried out at ICBD and at the Brewing Research International at Nutfield,
Surrey. Through its recent acquisition, Interbrew now had six technical centres worldwide: two in this
country (Whitbread and Bass), one in Belgium, one in Canada, one in Korea and one in Mexico. No
doubt it would wish to rationalize the situation and a further downsizing of technical effort in this
country was likely to occur. The ICBD felt that, compared with countries such as Japan, the level of
research and development in the field of alcoholic beverages in this country had become poor and this
would be exacerbated in the future unless corrective action were taken. The ICBD therefore proposed
that one of the conditions permitting the acquisition of Bass by Interbrew should be that Interbrew be
required to maintain a viable research and development operation in this country.


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The Scottish Licensed Trade Association
    6.405. The Scottish Licensed Trade Association (SLTA) said that it was the only official body which
represented the views and interests of all sections of the licensed trade industry in Scotland, including
pubs, hotels, restaurants and off-sales. With over 2,500 members, the association was recognized as the
largest representative body for the licensed trade in Scotland and was consulted by government, national
boards and local authority bodies when the interests of the trade were under investigation.

    6.406. With regard to the competitive position in Scotland, the merger would not basically affect the
overall position. Should a disposal of Tennents, Bass’s arm in Scotland, be necessary, the purchaser
would end up with a similar share of the Scottish market, and perhaps more if that company already
brewed in this country. For a number of years, the focus of the brewing companies had been directed to
developing their individual retail estates more than their brewing division. Both Bass and Whitbread had
ceased to be brewing companies. It was well known that brewing was core business for Interbrew and
this could have only a positive outcome in maintaining and further developing Scottish beer brands.

   6.407. It was the SLTA’s view that the increasing buying power of the major multiple retailers had
had a serious impact on the brewing industry and the independent retailer. The SLTA hoped that the
commitment of Interbrew to local brands would assist in diminishing the negotiating position of the
multiple retailers.


Government departments and councils

East Staffordshire Borough Council
   6.408. East Staffordshire Borough Council (the Council) said that in Burton upon Trent the Council
was acutely aware of the consolidation in brewing and pub retailing. It was, however, behind the merger
as being a genuine opportunity to secure benefits for the area. Burton was ‘Britain’s brewing capital’
with the Bass brewery the largest in the UK, employing 1,700 people locally and generating significant
economic benefits for the region.

    6.409. The Council said that it had experienced the disapproval of the proposed merger of Bass
Brewers and Carlsberg-Tetley and, despite Bass saving the Carlsberg-Tetley brewery from closure, there
had been considerable job losses as Carlsberg-Tetley was forced to restructure. From meetings the
Council had had with representatives from Interbrew and Bass, it believed that Interbrew’s commitment
to brewing and its interest in developing Bass Brewers would enhance the brewing industry and tradition
in the area. The Bass Museum, located in Burton, was the only national collection of brewing objects and
an important part of the local economy as a visitor attraction; there was tremendous potential under
Interbrew’s ownership to build this into an international centre of brewing heritage.

    6.410. The Council believed that Interbrew’s philosophy of broadening consumer choice by both
supporting local brands and introducing new beers to the UK market, if appropriate, would be essential
to help Burton (and other breweries) maintain viable volumes at a time when beer consumption was in
decline. It also believed that cost benefits from the merger should help the commercial viability of UK
brewing as well as help keep down prices to consumers. However, the role of pubcos in setting final
prices to consumers should not be overlooked.


Ministry of Agriculture, Fisheries and Food
    6.411. The Ministry of Agriculture, Fisheries and Food, the sponsor for the food and drink industries
in England, said that, to the extent that the acquisition severed the vertical ownership links between
Bass’s brewing and retail operations, it was to be welcomed. However, it was concerned that the
acquisition came close to creating a duopoly and careful thought needed to be given as to the possible
effects on competition within the sector as a whole as a result of increased concentration at a national
level. A judgement would need to be made between encouraging a competitive market for producers and
consumers and ensuring a viable UK brewing industry. The acquisition of Bass might also lead to a
further concentration of the wholesale and distribution market and it would be necessary to ensure that
any long-term competitive balance was not upset as a result.


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Scottish Executive
    6.412. The Scottish Executive said that it noted that the OFT and third parties had highlighted the
significant concentration and market share the acquisition might bring to the brewery market in Scotland.
The Scottish Executive was concerned that the acquisition could lead to figures of 55 per cent for supply
of lager to the on-trade sector and 70 per cent for both the on- and off-trade sectors in Scotland,
compared with 38 and 60 per cent respectively for the UK as a whole. These figures could lead to a
duopoly situation and therefore careful thought needed to be given not just to the effect on competition in
the UK nationally but also on a regional basis.

    6.413. The Scottish Executive was also concerned about the future of Tennents’ Wellpark brewery
in Glasgow, which employed over 400 employees. Reports suggested that, if the acquisition were to go
ahead, the Tennents brand, which dominated the Scottish market and had annual sales of £300 million,
and profits of £20 million, would have to be sold off to clear regulatory hurdles. The Scottish Executive
said that it would be concerned if this led to job losses in Glasgow.


Trade unions

Amalgamated Engineering and Electrical Union and the General Municipal
Boilerworkers and Allied Trades Union
   6.414. The Amalgamated Engineering and Electrical Union (AEEU) and the General Municipal
Boilerworkers and Allied Trades Union (GMBU) told us that they both welcomed the acquisition of
WBC and Bass Brewers by Interbrew. They believed that Interbrew was committed to investing and
developing their brewing operation in the UK, demonstrating its public commitment.

    6.415. Both the AEEU and the GMBU were concerned that the CC might consider it appropriate for
Interbrew to divest itself of a number of its brands post-merger. They believed that such a restriction
would seriously impact on the company’s ability to maintain market shares, resulting in possible loss of
employment of their members.

   6.416. The AEEU and the GMBU believed that Interbrew was one of only two major brewers which
were committed to maintaining a brewing capacity as a major part of their business strategy.


Transport and General Workers’ Union
    6.417. The Transport and General Workers’ Union (T&G) said that it represented 85 per cent of
workers in the brewing industry, including the workers in Interbrew UK (formerly the WBC) and Bass
Brewers. It also represented a similar proportion of the workers involved in beer distribution. The Food
Drink and Tobacco trade group of the T&G held regular meetings of senior shop stewards in all the
national brewery companies, including Interbrew UK and Bass Brewers. It was the view expressed by
the Interbrew and Bass shop stewards in these forums that provided the basis for the T&G’s position on
the Interbrew/Bass merger.

   6.418. The T&G had been consistently opposed to the growth of monopoly in the UK brewing
industry, believing that it reduced consumer choice, competition and employment in the industry. UK
competition law (the FTA) instructed the competition authorities to consider the employment aspects of
any merger. The T&G was aware that, in this case, the merger had been referred back from the European
Commission to the CC and therefore the European criteria applied. These did not include the
employment impacts of the merger but it believed that the CC should also take into account the
requirements of UK law and consider the employment impact of mergers generally.

    6.419. The T&G believed that the Interbrew takeover of Bass Brewers was the best of the available
options in terms of protecting employment in the company. It accepted that there would be some job
losses as a result of the merger but not as many as there would be if the companies were broken up. Its
members in Bass and Interbrew were in favour of the merger proceeding without any forced sale of
breweries or brands.


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    6.420. The 1989 Beer Orders were designed to limit the tie between breweries and their retail
estates. In doing so, they had fundamentally changed the balance of forces in the industry, leading to the
emergence of large pub companies that had now become more powerful than the brewers. The separation
of production and retail had been exacerbated by globalization of the brewing industry. This had forced
large domestic brewers such as Whitbread and Bass to make a choice between production of beer or
being a retail/service-based company. Both had now chosen the latter. In 1989 the T&G had predicted
that, if the Beer Orders were enforced, there would be massive job losses in the industry, that major
companies would be forced out of the industry, that large, powerful pubcos would dominate the industry.
It had also said that beer prices would rise and that consumer choice would become more restricted. The
T&G had said at the time that the Beer Orders would create a more anti-competitive situation than
existed before and had been proved correct.

    6.421. The T&G said that the major multinational breweries were intent on developing international
brands. If the merger were to be allowed, the obvious global brands were Stella Artois (from Interbrew)
and Bass. There were other brands that the merged company would want to develop, such as Carling and
Boddingtons. However, there were also a significant number of domestic brands and varieties which the
merged company would continue to produce for the foreseeable future. The separation of brewing and
retail had left the brewers in a weakened situation in terms of dictating consumer trends. While the
development of global and national brands was an important part of breweries’ current strategies, the
retailers now moderated that to an extent. The merger would result in a smaller number of national
brewers but the regulatory framework which was established nine years ago had determined the trend
towards concentration.

    6.422. Regional brewers had lost market share as a result of the Beer Orders, although some had
established successful niches through distribution and licensing arrangements with the majors. Ruthless
discounting was a major threat to the smaller brewers but public statements from Interbrew suggested
that it did not wish to follow that policy. The brand portfolios offered to retailers by the merged company
might ultimately be more restricted than those of the two companies added together but this was not a
realistic comparison. Retailers essentially made a choice about their prime supplier. A slightly restricted
portfolio of the merged company would therefore still be wider than the realistic choice open to retailers
from either of the existing companies.

    6.423. At the time of the Beer Orders in 1989 the six largest brewers supplied 78 per cent of the UK
beer market. The four largest now supplied 84 per cent of the market. Both Scottish Courage and Bass
Brewers were already technically in a monopolistic situation. However, there had been a fundamental
shift in power from the producers to the retailers, and production had become increasingly globalized.
Any domestic study of competition therefore needed to look at the whole of the industry, including
production, wholesaling, distribution and retail, while any analysis of beer production had to look at the
industry in a global context. So, while the merger appeared to encourage a duopoly, this was no different
from other industries, including those in food and drink, where production was globalized and there was
a clear separation of production and retail.

    6.424. Distribution and wholesaling were becoming increasingly important in terms of employment,
as production became increasingly automated and concentrated. A monopoly within these areas was
different from that within production. The outsourcing of Bass’s distribution to their joint venture with
Exel Logistics, Tradeteam, had been a way of attacking the terms and conditions of workers, not just in
Tradeteam but in beer distribution generally, by tendering for their work at low prices.

    6.425. The T&G would be concerned about any merger of the Bass and Whitbread distribution
systems under one contractor, because of the enormous distorting power this would have over the beer
distribution market. Other large companies, whether they be producers or retailers, had a mix of
contractors and in-house distribution that provided internal competition within a monopolistic company
and prevented the emergence of dangerously anti-competitive monopolies within a sector (beer
distribution) that was necessarily regional or national by nature.

   6.426. The nature of supply agreements had changed fundamentally in the last three years. The Beer
Orders did not take full effect until 1992, and at that time the breweries signed up many of their
customers to five-year agreements. There were therefore many agreements that ended around 1997. This
was followed by consolidation in the retail sector and the increasing separation of production and retail.
This had led to a fundamental shift in the balance of power around supply contracts, not just in the last


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nine years, but in the last three in particular. The competition issues were therefore different from those
at the time of the Beer Orders or even at the time of the proposed Bass/Carlsberg-Tetley merger in 1997.

    6.427. The T&G said that, in its submission to the DTI on the Review of the Beer Orders in March
2000, it had argued for a limit of 2,000 outlets for any one pubco. This was the limit that applied to
breweries (with certain caveats) and it believed that it should apply to pub companies, including
Whitbread and Bass, in order to safeguard the position of regional breweries in particular. At the present
rate of development it was likely that one or two pubcos would be in technically monopolistic situations
within the next few years. Already the pubcos had enormous power over the breweries, and the switching
of the prime supply contract of one of these pub companies to another brewer could utterly destroy even
a large brewery company, with the loss of many thousands of jobs. The CC therefore had a responsibility
to ensure a balance of power between the sectors of the industry that would stand the test of time.

    6.428. The T&G said that it had argued against the merger of Bass and Carlsberg-Tetley. It did so on
the grounds that, although there would be some job losses if the merger did not go ahead, there would be
far more jobs lost if it went ahead. The T&G said it was now arguing that the merger of Interbrew and
Bass Brewers should be allowed to go ahead on the same basis: namely that it was the lesser of two evils,
and that job losses would be even greater if the merger were prohibited or if there were too many
conditions placed upon it. In each case it based its position on a pragmatic assessment of the options at
the time, and looked to secure the best possible option for its members in the industry. Although the
Bass/Carlsberg-Tetley inquiry was only three years ago, there had been significant developments in the
structure of the UK beer market and the global beer industry and these needed to be borne in mind when
reaching a decision about the desirability or otherwise of the merger. The T&G said it supported the
proposed merger on the grounds that it provided the best available option for its members in both the
affected companies.


Others

Mr C N Broom
    6.429. Mr C N Broom said that he supported the acquisition of Bass Brewers by Interbrew, provided
Interbrew honoured all terms and conditions, including any redundancy terms each employee would have
been given under Bass ownership.

   6.430. For Bass Brewers to move forward into world markets, to grow, to create more wealth in this
country, was an opportunity that Bass Brewers had been starved of under Bass. Mr Broom said that, if
jobs were lost, employees should be given every help from ‘your government’.


Mr D J Cheadle
    6.431. Mr D J Cheadle, writing to Mrs Christine Russell MP, said it was his belief that the
acquisition of Bass brewers by Interbrew would create more competition in the market place, thus
affording the consumer better choice and possibly more competitive prices. As an employee of Bass
Brewers, Mr Cheadle felt that the ethos of the merged entity would offer more job security and better
career development for all. If the merger were allowed, the merged entity would have a similar market
share to that of S&N, but, unlike its competitors, the merged entity would not possess any tied estates.


Councillor Andrew Coulson
   6.432. Councillor Andrew Coulson said that he wrote on behalf of Birmingham City Council to
support the proposed acquisition of Bass Brewers by Interbrew. He said that it provided the best hope for
continuing employment at Cape Hill Brewery in Birmingham. It also offered the best chance of
preserving the brand name Bass and opened up increased possibilities in export markets. The combined
company would be a specialized brewer. Its current strategy was based on promotion of a wide range of
medium-scale regional brewers and he saw no reason for this strategy to change. Hence the support of
CAMRA for the bid.


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    6.433. All the indications were that Bass was less interested in brewing than in diversification into
hotels, restaurants, pubs etc and hence not fully willing to invest in the breweries. The merger was thus
the best means of improving productivity and competitiveness in the UK brewing industry as a whole.


Ms Janet Dean MP
    6.434. Ms Janet Dean, the MP for Burton, said that she wished to support the takeover of Bass
Brewers by Interbrew because of the importance of Bass Brewers to the town of Burton upon Trent. She
said there was general agreement in her constituency that the Interbrew offer would provide a good deal
for Burton upon Trent and those employed in brewing in the town.

   6.435. Ms Janet Dean said that, while she accepted that it was important to ensure fair competition
and to make sure that consumers were protected, she hoped that the likely impact on jobs in the brewing
industry would be given equal consideration.


Mr Simon M Gibson
   6.436. Mr Simon M Gibson said that the merger of Bass Brewers with Interbrew, which itself had
merged with Whitbread in 1999, would create a duopoly within the brewing trade, giving the combined
Bass/Interbrew company 30 per cent of the market and Scottish Courage another 30 per cent.

    6.437. The power of Bass/Interbrew and Scottish Courage would be sufficient to remove other
brewers from the market, either by further purchases, or by setting prices such that they were unable to
compete. Whilst accepting the economic principles of competition, he felt that collusion between the two
brewers to increase prices was an option which could not be ignored. The merger was also likely to result
in a reduction in product lines.


Mr Jeffrey B Gilbert
    6.438. Mr Jeffrey B Gilbert said that he wished to support the acquisition of Bass Brewers by
Interbrew. He said, as an employee of Bass Brewers, he was aware of the present state of the drinks
market in the UK. It was being weakened by the continued and increasing traffic in illegal importation of
drinks from the Continent, something that would not change until the Government tackled the issue of
excessive duty payable in the UK compared to France and elsewhere throughout Europe. In the
meantime, the UK drinks industry needed strong, global brewers which would bring to the market the
variety of choice of brands that an increasingly demanding public wanted. Only in this way could the
industry reverse the long-term decline in sales and revenue—which in turn would protect and possibly
enhance employment opportunities for so many people in this country, something which the bootleggers
were undermining on a daily basis. Together, Interbrew and Bass Brewers would become the global
player the UK industry needed.


Mr Antony Hicks
    6.439. Mr Antony Hicks, writing to the Rt Hon Gerald Kaufman MP, said that he currently worked
for Bass Brewers and believed that an unhindered purchase by Interbrew was the only way forward.
Under Bass, Bass Brewers had been starved of investment; but under Interbrew, it would have
opportunities for development. There would be a greater level of competition in the marketplace and
consumers would benefit from a wider choice of beers. The workforce at both Bass Brewers and a WBC
would have greater scope for development and job security. The management, staff and trade unions at
Bass Brewers all believed that the Interbrew deal offered the best opportunity for future success.


Mr Martyn Jones MP
    6.440. Mr Martyn Jones, the MP for Clwyd South, said that he was writing to oppose the merger as
it would be harmful for the brewing industry. Mr Jones said that, as someone who had worked in the


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brewing industry for 19 years, he was aware of the problems and how the 1989 report had had a
detrimental effect on employment and choice in the industry. He felt that this further conglomeration,
which would create a 31 per cent share of the market, would accelerate the process of choice reduction
and job reduction in the industry.

   6.441. The problem was not merely that it would create a brewing concern with 31 per cent of the
brewing market but that there would also be a duopoly in the market. Interbrew and Bass would have,
with S&N, market shares of between 51 and 80 per cent of the main product sectors within the pub trade,
mainly ales and lager. The combination of Carling and Stella Artois would lead to a great reduction in
choice. Regional brands such as Wrexham Lager would decline. The disincentive for variety followed
from the fact that Interbrew and S&N would tie up large volumes of on-trade business and Interbrew also
had significant trade which was tied to loans. This situation also applied to the distribution system, which
would have a greater effect than mere possession of 31 per cent of the market in that Interbrew and S&N
would exercise considerable control over it. There was bound to be rationalization of production which
would lead to job losses as had been the experience of the Belgian beer market.


Dr John Marek MP
   6.442. Dr John Marek, the MP for Wrexham said that he believed there had been too much
concentration in the industry and that he shared the view that the merger would accelerate the process of
choice reduction and job reduction in the industry.


Mr David Marshall MP
   6.443. Mr David Marshall, the MP for Glasgow Shettleston and Chairman of the Select Committee
on Scottish Affairs, said that he had met Angus Meldrum, Managing Director of Tennent Caledonian
Breweries, and trade union shop stewards to find out more about the Interbrew acquisition of Bass
Brewers, which owned Tennents, and which was located in the adjoining Springburn constituency and
employed a number of his constituents.

    6.444. Mr Marshall said that he wished to offer his unreserved support for the merger. It was clear
from talking to management and shop stewards that joining Interbrew offered the best possible future for
the company, its parent Bass Brewers, their employees and their customers. Mr Marshall said he was
aware of the submissions which the CC had already received from the Springburn constituency MP, The
Honourable Michael Martin, Speaker of the House of Commons, and William Morris of the T&G,
amongst others. He agreed wholeheartedly with their support for Interbrew purchasing Bass Brewers
with no divestment of brands or brewing. The competitive position in Scotland would not be
significantly affected by Interbrew’s purchase. The forced sale of any brands or breweries would be
detrimental to the future of the company and would result in significant job losses. For a long time now,
Bass Brewers had suffered from being part of a parent company which was not committed to brewing.
Joining Interbrew, a global firm whose focus was on beer, would therefore be good for the business,
investment and its workforce.

    6.445. Mr Marshall said that he had been informed that distribution was a potential issue that would
be reviewed by the CC. As a former Transport Select Committee Chairman, and after discussing the
situation with Tennents, he believed that, in this case, distribution was not a barrier to competition. There
were a number of accessible routes to market, and brewery-owned operations did not discriminate
against third parties.

    6.446. The beer market was in decline and the market power of national pub retailers was putting
real pressure on the brewing sector to the point where margins, investment and jobs were at risk. That
was why brewery consolidation was a good thing and necessary. Mr Marshall said he believed that
joining Interbrew would bring many benefits to Bass Brewers but, more importantly, to Tennent
Caledonian Breweries in Scotland and to the local workforce which was spread throughout the greater
Glasgow area, where unemployment was still unacceptably high. Indeed, both Springburn and
Shettleston were among the constituencies with the highest unemployment levels in both Scotland and
the UK. He said that, if the merger did not go ahead, the future of the Tennents brewery in Glasgow
would be at risk.


                                                    217
Mr Michael J Martin MP
    6.447. Mr Michael J Martin, the MP for Glasgow Springburn, said that he had recently visited
Tennent Caledonian Breweries in his constituency. Tennents was at the moment owned by Bass. The
trade unions and management had expressed the very strong opinion that the acquisition by Interbrew
should go forward. Tennent had outlined several reasons, but the main reason was that Interbrew
specialized in the brewery industry whereas it had been felt for many years that Bass tended to diversify
into hotels and other non-related fields.

    6.448. Mr Martin said that he had been the MP for the brewery for over 17 years and had found
Tennents to be an excellent employer; industrial relations had always been excellent. He believed that the
takeover would be in the best interest of the brewery, which lay in an area of high unemployment. As
Interbrew had other brands in circulation, there was a possibility that the brewery could gain some
additional jobs because of the merger.


Mr Paul Martin MSP
    6.449. Mr Paul Martin, MSP for Glasgow Springburn, said that Tennent Caledonian Breweries,
which were currently part of Bass Brewers, ran a brewery in his constituency. He asked the CC to note
his support for the acquisition by Interbrew. He believed that it would be in the best interests of the
workforce and Tennents.

   6.450. Mr Paul Martin said that it had been made clear by the Managing Director of Tennent
Caledonian Breweries that the acquisition would not affect the competitive position in Scotland and he
agreed with this view. Both trade unions and management supported the proposed acquisition because
they believed that it offered a strong prospect of job security for the 430 employees within the
organization and to others outside the organization who relied on Tennents for employment.

    6.451. Mr Paul Martin drew attention to the fact that his constituency had the second highest
unemployment figure in Scotland. Tennent Caledonian Breweries was essential to the economy of his
constituency and every effort should be made to ensure that it had the backing of an organization such as
Interbrew. Interbrew had an excellent track record for marketing and focusing purely on the brewing
industry. He understood that Interbrew should create a number of opportunities for Tennents that were
unlikely to occur with Bass.


Mr Ken Peet
   6.452. Mr Ken Peet said that he had held the licence for The Railway pub for nearly eight years.
During that period he had had to meet the costly burden of legislation on the minimum wage, working-
time regulations, improved environmental conditions, safety regulations and a series of price increases
from the brewers. Retail prices had inevitably risen and on-trade consumption had fallen. Mr Peet said he
was one of a majority of publicans whose business had suffered as a result of these events.

    6.453. He said that he was concerned at the effect of the Interbrew takeover of Bass and Whitbread
and its consequent domination of the UK beer market. He understood that the Secretary of State for
Trade and Industry had referred the takeover to the CC. He hoped that the CC was aware of the concerns
of publicans that the merger would result in lower wholesale prices, that brands should be maintained
and that the fragile on-trade sector of the market should be preserved. Pubs such as his provided a
meeting place for people from contrasting backgrounds and allowed for open discussion of vital issues
and were an essential feature of social life in the country and should be preserved at all costs. Many pubs
were closing as a result of higher costs, including rents and business rates, and falling turnover. Bass and
Whitbread had already made their position clear by putting their pubs on the market. There was no doubt
that they would encourage volume sales of their products through the supermarkets for consumption at
home at the expense of on-trade.

    6.454. Mr Peet said he hoped that the CC would include measures that would improve the competi-
tive edge of the on-trade. Mr Peet said he was concerned that even good pubs were closing and that this
would inevitably damage the social fabric of the country.


                                                    218
Mr Kevin Rhodes
    6.455. Mr Kevin Rhodes, writing to Mr R Shepherd MP, said that he had been an employee of Bass
for the past 19 years, during which time he had seen government interference in the brewing industry,
which had done very little for the consumer, but had led to significant change and uncertainty for the
people employed. In Mr Rhodes’ view, another defining point in this history had been reached. He
considered that rejection of the deal would be folly and would throw the industry into further confusion,
causing further unnecessary stress to the employees of Bass Brewers. The situation was similar to the
failed Bass/Carlsberg-Tetley bid of 1996, which continued for 12 months with employees unsure of their
future employment. The takeover should be allowed to go ahead for the following reasons:

   (a) Industry consolidation was inevitable. There were far too many beer and alcoholic drinks already
       in the market. Rationalization would continue, with the consumer deciding which brands would
       survive.

   (b) Interbrew had already demonstrated that it was committed to brewing, unlike Bass, whose
       interests were in hotels and pub retailing. Bass had over 200 years of brewing history which
       Interbrew respected and wished to exploit. Export opportunities for British beers could be
       created.

   (c) After the acquisition Interbrew would have a 32 per cent market share, but this was considerably
       smaller than the market leader had in many other UK industries, and indeed in other brewing
       markets around the world. The consumer would still have plenty of choice.

   (d) Interbrew would have no tied pub chain of its own, and therefore no guaranteed markets. It
       would need to rely on negotiating new supply contracts in the open marketplace.

   (e) The vast majority of Bass Brewers’ employees saw no valid reason for the deal not to be
       approved.


Mr K Robinson
   6.456. Mr K Robinson, writing to Mrs Ann Winterton MP, stated that he had a positive view of the
acquisition, as a Bass Brewers’ employee. In his view, there were positive benefits for individual
employees and also for the brewing industry and for Bass Brewers as a major employer across the
country. The positive and worthwhile aspects of the acquisition were as follows:

   (a) Interbrew intended to produce the widest possible range of beers as competitive prices.

   (b) Since Interbrew had no tied pub chain, it had an interest in selling beer at competitive prices and
       offering increased brand choice and enhanced product quality.

   (c) Interbrew wanted to introduce new tastes to UK beer consumers.

   (d) Economies of scale would ease the upward pressure on prices.

   (e) Bass Brewers would be the single biggest business unit in the Interbrew family.

   (f) Interbrew intended to make Bass Brewers the most successful brewer in the UK.

   (g) Interbrew intended to use its global structure to expand the marketplace for Bass products around
       the world.

   (h) The management, employees and trade unions at Bass Brewers believed that the Interbrew deal
       offered the best opportunity for future success of the business.


Dr Tom W Young
   6.457. Dr Tom W Young said that, with regard to the Interbrew/Bass merger, he saw no particular
impact on competition within the geographic and product markets of beer. Interaction between the

                                                  219
various interests would be affected but he could not see that these must of necessity be detrimental.
Similarly, he expected no significant impact on prices and anticipated that, while there might be some
reduction in variety, distinctive Bass products would be maintained and quality could be improved. This
view was based upon the opinion that Interbrew would be fully committed to beer production as its
primary business.

    6.458. It was difficult to assess the impact on research and development. Bass had contributed
significantly to scientific and technological advance in the brewing industry (UK and worldwide), not
only through their support of the BRI (at Lyttel Hall, Redhill) but also through in-house developments
and involvement in the European Brewing Convention. Bass had also supported local sections of the
Institute of Brewing and Incorporated Brewers’ Guild, both of which were organizations of benefit to
employees of the brewing industry. Through dissemination of information in local lectures and through
their published journals, both organizations facilitated the broader education (and training) of brewers.
There was no obvious reason why Interbrew would not assume these activities but the CC might wish to
examine this aspect with respect to seeking safeguards.

   6.459. Dr Young said he believed that the public interest would be well served by the proposed
merger. Interbrew had a reputation for commitment to the brewing of quality beers. In principle this
commitment should maintain both consumer choice and the quality of beer.


Mr Iain Wright
    6.460. Mr Ian Wright said that, as the licensee/proprietor of a free house for 24 years, the claims by
some people that Interbrew’s purchase of Bass Brewers would lead to reduced brand choice did not
reflect the views of licensees like himself. He said that he was among those who believed the deal would
give him better access to a wider range of products. A number of beers, particularly packaged products
that he could currently only obtain from a third party would be more available. He said that the right
brands—the ones that drinkers wanted—were the lifeblood of any outlet.

    6.461. As Interbrew did not own any pubs, the acquisition ended the link with brewing and retailing,
and he would not be competing in the retail sector with his supplier, which he was at present. He also
believed that the deal would lead to more investment and support being put into brands as a result of the
savings made through the integration of Bass and Whitbread. This could only be good news for publicans
like himself.


A constituent of Mr Patrick McLoughlin MP
   6.462. A constituent of Mr Patrick McLoughlin MP wrote to support the merger on the following
grounds:

   (a) Interbrew was a brewing company, and would focus investment solely in the brewing industry,
       enabling Interbrew to become world class.

   (b) Interbrew planned to produce the widest possible range of beers at competitive prices.

   (c) As Interbrew had no tied chain, it was in its interest to sell beer at competitive prices, offer
       increased brand choice and enhance product quality.

   (d) Interbrew would introduce new tastes to UK consumers, giving them more choice.

   (e) The economies of scale that would accrue because the combination of the businesses would ease
       the upward pressure on prices.

   (f) Bass Brewers would be the single biggest business unit in the Interbrew family.

   (g) Interbrew intended to make Bass Brewers the most successful brewer in the UK and to use its
       global structure to market Bass products around the world.


                                                   220
   (h) The management, staff and trade unions at Bass Brewers believed the Interbrew deal would offer
       the best opportunity for future success.



P A GEROSKI (Chairman)

T S RICHMOND

DAME H SHOVELTON

J D S STARK

 P A BOYS (Secretary)

5 December 2000




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