Competition Bureau statement regarding the merger between Heinz and Kraft

Position statement

OTTAWA, June 17, 2015 — This statement summarizes the approach taken by the Competition Bureau in its review of the proposed merger between H.J. Heinz Company (Heinz) and Kraft Foods Group (Kraft) pursuant to an agreement and plan of merger announced on March 25, 2015. Following the completion of the merger, the newly combined company will be 51% owned by current Heinz shareholders, 3G Special Situations Fund III and Berkshire Hathaway Inc., and 49% owned by former Kraft shareholders.

On June 10, 2015, the Bureau issued a No Action Letter to Heinz and Kraft (the Parties) indicating that the Commissioner of Competition does not, at this time, intend to make an application under section 92 of the Competition Act in respect of the proposed merger.

In reaching its conclusions in this matter, the Bureau's review of the proposed merger included interviews with a wide range of market participants, including consultations with foreign antitrust officials, the review of the Parties' internal company records, and econometric analyses of industry data.

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Background

Heinz and Kraft are two leading food and beverage companies that operate in both the retail and foodservice channels in Canada. Heinz and Kraft’s retail channel consists of sales to supermarkets, pharmacies, convenience stores, mass merchandisers and club stores. Heinz and Kraft’s foodservice channel consists of sales to restaurants, food distributors, and other institutions such as schools and hospitals.

Heinz's principal products include ketchup, condiments and sauces, frozen food, soups, bean and pasta meals, infant nutrition and other food products. Kraft's primary business segments include cheese, meats, peanut butter, beverages, coffee, packaged dinners, refrigerated meals, snack nuts and dressings. Competitive overlap between Heinz and Kraft in Canada is limited to the production and supply of condiments, sauces and dressings.

Analysis

More specifically, the Parties overlap with respect to dips, pizza sauce, viscous dressings (mayonnaise and spoonable dressings), tartar sauce, table syrup, barbecue sauce and pourable salad dressing. For each of these overlapping product categories, the Bureau determined that:

  • the Parties are not each other's closest competitors, as they produce differentiated products;
  • there would be sufficient effective remaining competition; and/or
  • barriers to entry or expansion are low.

As a result of a higher degree of concentration for barbecue sauce and pourable salad dressing, the Bureau conducted econometric analysis with respect to these two products. As such, the remainder of this statement will summarize the Bureau's review relating to barbecue sauce and pourable salad dressing in each of the retail and food service channel.

Retail

Heinz and Kraft each sell branded barbecue sauces and pourable salad dressings in Canada. Kraft sells barbecue sauce under the Kraft and Bull's-Eye brands; Heinz sells barbecue sauce under the Diana brand. Kraft sells shelf-stable pourable salad dressings under the Kraft brand; Heinz sells refrigerated salad dressings under the Renée's Gourmet brand.

In order to assess the degree of substitutability between the Parties' brands of barbecue sauce and pourable salad dressing, the Bureau used econometric techniques to estimate own-price and cross-price demand elasticities for both categories of products. The own-price elasticity measures the extent to which changes in the price of a product affect demand for that product. The cross-price elasticity between two products measures the extent to which consumers are willing to substitute between those products. The Bureau then relied on these elasticity estimates to simulate the effects of the proposed merger. This analysis demonstrated that the Heinz and Kraft brands of barbecue sauce and pourable salad dressing are highly differentiated products.

As its primary approach for estimating demand, the Bureau implemented an Almost Ideal Demand System–a model of demand frequently used in antitrust due to its ability to accurately capture the substitution patterns in a market.Footnote 1 The Bureau's demand estimates from this model failed to identify a positive cross-price relationship between the Renée's Gourmet and Kraft brands of pourable salad dressings, indicating limited substitutability between the Parties' products. This finding was corroborated by the Bureau's review of the Parties' internal documents and interviews with market participants, which demonstrated that shelf-stable and refrigerated salad dressings appeal to distinct consumer preferences. The finding was also supported by the products' differing price points and differing locations within retail stores.

Similarly, for the retail sale of barbecue sauces, demand estimation yielded low cross-price elasticities, indicating that there is not a material degree of substitution occurring between the Parties' brands. A merger simulation using these elasticity estimates confirmed that the loss of the limited rivalry that currently exists between the Parties is unlikely to result in material anti‑competitive effects. In short, the Parties' respective barbecue sauces are marketed to different tiers of consumers, each with a distinct flavour profile, price point and end use. Furthermore, the Bureau found that barriers to entry in respect of the production and supply of barbecue sauce are low and that there have been several recent entrants.

Foodservice

The foodservice sale of barbecue sauce and pourable salad dressing is fragmented, consisting of several effective competitors. There is lower importance placed on brand recognition in the foodservice sector given that the brand name is not in the forefront of the end-consumer's mind. As such, in addition to several effective branded competitors, large scale distributors have been successful in promoting their own distributor labels in direct competition with branded barbecue sauces and pourable salad dressings, such as those produced by Heinz and Kraft.

There have been several new entrants in respect of barbecue sauce in the foodservice channel that could constrain an attempt to increase prices as a result of the proposed merger. As in the retail channel, the new entrants are an indication that barriers to entry in respect of barbecue sauce are low in the foodservice channel.

With respect to pourable salad dressings, in contrast to the retail channel, end consumers are not typically aware of whether their salad dressing is shelf stable or refrigerated. As such, the Bureau's review found that there is little end consumer preference between the two, and several effective competitors remain in both segments.

For foodservice customers, barriers to switching suppliers are low and there are many alternative suppliers they could switch to in the event of a decrease in the level of service or a material price increase by the merged entity.

Conclusion

Given the differentiation between the Parties' brands, effective remaining competition and low barriers to entry, the Bureau concluded that the transaction is unlikely to result in a substantial lessening or prevention of competition with respect to the retail or foodservice sale of condiments, sauces and dressings in Canada.

The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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