=Carbonated Drinks: A report on the supply by manufacturers of carbonated drinks in the United Kingdom

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On 25 April 1990 we were asked to investigate the supply of carbonated drinks by manufacturers of such drinks (see Appendices 1.1 and 1.2). We use the term carbonated drinks as including syrups supplied for making up such drinks but excluding mineral water, alcoholic drinks and low-alcohol and non-alcoholic beer.

Demand for carbonated drinks has been rising. In 1989 about 4,000 million ready-to-drink litres (RTDL) of carbonated drinks, worth over £1,300 million at manufacturers' prices, were sold in the United Kingdom. The largest supplier is Coca-Cola & Schweppes Beverages Ltd (CCSB), a joint venture formed in 1987 by Cadbury Schweppes plc (Cadbury Schweppes) and The Coca-Cola Company (Coca-Cola) to bottle and sell their respective brands. CCSB supplies about 43 per cent by value (36 per cent by volume) of the market. Of these sales over three-quarters were sales of brands owned by Coca-Cola. Colas are the most important flavour of carbonated drink and the Coca-Cola brand itself accounts for over a quarter of total sales by value of carbonated drinks. We found that CCSB, having more than 25 per cent of the market, met the statutory criterion for being a scale monopolist.

The second largest supplier, roughly half the size in terms of carbonated drinks sales, is Britvic Soft Drinks Ltd (Britvic). It supplies about 22 per cent by value (20 per cent by volume) of the market. Britvic is a joint venture between three national brewers, Bass PLC (Bass), Allied-Lyons plc (Allied-Lyons) and Whitbread PLC (Whitbread) together with PepsiCo Inc (Pepsi). The largest supplier in Northern Ireland, which has franchise arrangements with Coca-Cola, is Coca-Cola Bottlers (Ulster) Ltd (CCBU). We found that a statutory complex monopoly situation existed because CCSB, Britvic and CCBU had entered into exclusive arrangements in the leisure trade and CCSB and Britvic placed restrictions on the brands that could be sold through their can-vending machines.

There are almost 100 other manufacturers of carbonated drinks, of which 12 have market shares in value terms of between 1 and 6 per cent. The rest mostly manufacture for local markets and account for about 4 per cent of the market in value terms between them.

`Take-home' outlets (such as grocers, off-licences and confectioners, tobacconists and newsagents (CTNs)) account for a large proportion-some 80 per cent by volume-of sales of carbonated drinks. Generally we found that a wide range of products was available in the take-home trade. Colas and lemonade are the most popular flavours but there are numerous others. There is also a wide choice of both brands and own-label products and a range of package types. We found that competition was generally effective.

Leisure trade outlets include pubs, fast-food restaurants, clubs and leisure centres. We found that the number of suppliers was much more limited, with CCSB and Britvic accounting for a high proportion-possibly 90 per cent or more-of sales. Most of the complaints we received about competition related to the leisure trade. We have identified a number of facts which operate against the public interest in the way manufacturers deal with their customers in the leisure trade. Some of these are confined to CCSB. Others relate to CCSB, Britvic and CCBU and arise from the complex monopoly situation as well as, in the case of CCSB, the scale monopoly.

The scale monopoly

We found that CCSB had placed a number of restrictions on certain of its distributors to the licensed part of the leisure trade (including pubs) as a condition for their receiving special terms. We found these restrictions (which related to the persons to whom distributors could sell, the range to be carried, and the sale of competing products) to be anti-competitive in effect and likely to lead to higher prices and, in some cases, reduced choice. CCSB told us that it had recently decided to terminate certain of its arrangements with its distributors, and it has already changed some of them. We recommended that CCSB should not include such restrictive provisions in any of its agreements with distributors.

We also found that CCSB had been acquiring dispense operations, in some cases eliminating the distributors' own-label products. We concluded that such acquisitions were likely to reduce competition and we recommended that in future CCSB should only make such acquisitions if the Office of Fair Trading (OFT) has received prior notification and has indicated that it envisages no objections on competition grounds.

The complex monopoly situation

Sales under exclusive agreements account for about 30 per cent by volume of CCSB's sales to the leisure trade, almost 15 per cent of Britvic's-including 6.5 per cent under an agreement with Allied Breweries Ltd (Allied)-and 2.5 per cent of CCBU's. CCSB probably supplies over half the total sales by value to the leisure trade. Britvic and CCBU between them account for most of the remainder of sales. We were concerned that exclusive agreements restricted access to the outlets involved by competing manufacturers. Although such agreements may be initiated by the leisure outlet, as the carbonated drinks companies argued, their effect is anti-competitive and we found that they were likely to make choice more restricted and, over time, result in prices higher than would otherwise be the case. We recommended that no provision of exclusivity should be included in agreements for supply of carbonated drinks so that smaller and new suppliers would be better able to compete on their merits for access to outlets and so that there would be greater responsiveness to consumer choice.

Both CCSB and some smaller manufacturers complained to us that the managed houses and restaurants of Britvic's shareholders were foreclosed to CCSB and other competitors, and CCSB said that it was hard to get access to the tenanted estates of Britvic's brewer shareholders. We considered that the shareholding relationships of Bass, Allied-Lyons, Whitbread and Pepsi with Britvic did indeed make it very difficult for other carbonated drinks manufacturers to supply the outlets owned by these companies. We found it hard to see an effective means of encouraging greater competition for supply to these managed outlets while the shareholding connections remain, but our recommendation would mean that the exclusivity in the agreement between Allied and Britvic would have to be ended. It would, in our view, be disproportionate to consider divestment of the carbonated drinks interests of the brewers concerned. We expected, however, that the Order made by the Secretary of State for Trade and Industry, following the MMC's report on The Supply of Beer, preventing the tenants of pubs owned by brewers being required to buy soft drinks from a particular source, together with the general changes currently occurring in the pub trade (partly as a result of the Orders made following the MMC's report), would in time lead to greater access for different carbonated drinks suppliers.

Increasingly, sales of carbonated drinks in the leisure trade, particularly on licensed premises, have been from dispense machines (where the product is diluted and carbonated at the time of sale). Sales of canned carbonated drinks from vending machines have also grown rapidly as the number of machines has expanded. We investigated the tying of drinks sold through dispense or vending machines by the carbonated drinks manufacturer which supplied the equipment. On balance we concluded in each case that the practice was not against the public interest. In both cases, however, the effect of our recommendation on exclusive agreements would be that carbonated drinks manufacturers could not prevent outlets from having further dispense equipment or can-vending machines if they chose to do so.

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