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Federal Court of Australia |
COURT
IN THE FEDERAL COURT OF AUSTRALIACATCHWORDS
Restrictive Trade Practices - s.50 Trade Practices Act 1974 - acquisition of shares by a corporation - whether corporation in a position to dominate the Australian market for biscuits - whether acquisition of shares would, or would be likely to, substantially strengthen the power of the corporation to dominate that market - evaluation of degree of market power. Words and Phrases
- "dominate""acquisition" of shares - s.4(4) Trade Practices Act.
- "market"
- "acquire"
- "substantially"Option - whether grant of option over shares can involve a notional
HEARING
SYDNEYCounsel and Solicitors Mr. B.C. Oslington QCRespondents: Clayton Utz
for Applicant: Mr. M.Walton (17 April 1989 to
27 June 1989), Mr. D. Staehli
(28 June 1989 - present)
and Mr. M.R.J. Ellicott (24
July 1989 - present)
instructed by the Australian
Government SolicitorCounsel and Solicitors Mr. C.A. Sweeney QC and
for first and second Mr. P. Comans instructed by
Counsel and Solicitors for Mr. N.C. Hutley instructed by
third and fourth Minter Ellison
Respondents:
ORDER
1. Declare that the deemed acquisition of shares under the option agreement (Ex.AEN) contravenes s.50(1(b) of the Trade Practices Act 1974.2. Further declare that the third and fourth respondents were involved in the said contravention.
3. Order that, subject to any special order for costs already made, the respondents pay the applicant's costs of the proceedings to date.
4. Stand over for further argument the question of what further relief, if
any, ought to be granted.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
DECISION
The nature of the proceedings2. The applicant is the Trade Practices Commission ("the Commission"). The
second respondent, Arnott's Biscuits Limited ("Arnott's
Biscuits"), a
well-known manufacturer and supplier of biscuits, is a wholly owned subsidiary
of the first respondent, Arnotts Limited
("Arnotts"), a listed public company.
The fourth respondent, The Dickens Corporation Pty. Limited ("Dickens"), is a
wholly owned
subsidiary of the third respondent, Fledspac Pty. Limited
("Fledspac"). Nabisco Brands Pty. Limited ("Nabisco"), (now named Cereal
Foods
Pty. Ltd.), a wholly owned subsidiary of Dickens, is another well-known
manufacturer and supplier of biscuits.
The acquisition by Dickens of the shares in Nabisco
3. By an agreement dated 24 May 1988, Nabisco Inc., a New Jersey, U.S.A.,
corporation, agreed to sell all the shares in Nabisco to
Dickens. It was a
term of the agreement (cl.7.2) that Dickens acquired the right to use certain
trade marks but Dickens could only
use the trade mark "Nabisco" for a period
of 12 months (later extended to 31 December 1989). It was a further term of
the agreement
(cl.7.1) that Nabisco change its corporate name to a name that
does not suggest any relationship with the name "Nabisco". Fledspac
is
associated with a business carried on by the I.C.M. group of companies under
the business name of Best Foods, a well-known supplier
of cereal foods,
principally under the trade name "Uncle Tobys". Although the agreement
contemplated that a corporate name change
would take place (and, in fact, the
company's name is now Cereal Foods Pty. Ltd.) it will be convenient to
continue to refer to the
business carried on by the company as "Nabisco".
The current options to buy and sell the shares in Dickens
4. It appears that Best Foods' interest in acquiring the shares in Nabisco
was to secure its cereal business rather than its biscuit
operations. In
August 1988, negotiations took place between Best Foods and Arnotts with a
view to Arnotts' acquiring Nabisco's biscuit
business. By an agreement ("the
option agreement") entered into shortly after service of process in these
proceedings, in consideration
of the payment of one dollar, Fledspac granted
to Arnotts Biscuits an option to purchase from Fledspac "the shares" ("the
call option")
(cl.2). "(T)he shares" were defined as two one dollar ($1.00)
ordinary shares comprising the whole of Dicken's issued capital (cl.1).
Arnotts Biscuits granted to Fledspac a right to require it to purchase the
shares from Fledspac in consideration of the payment of
one dollar ("the put
option") (cl.3). The options may be exercised "at any time between 1 January
1990 and before 1 July 1993 or
on or between such earlier date or dates as
(the parties) may agree" (cl.4; cl.5). Completion shall take place within 14
days of
notice of the exercise of either option (cl.6). Fledspac may not grant
any further options (cl.8). Fledspac warranted that (i) there
were no
outstanding rights convertible into shares in Dickens "save only the right of
Arnotts (Biscuits) for the conversion of certain
advances made by Arnotts
(Biscuits) to (Dickens) into Convertible Notes by which Arnotts (Biscuits) may
take up (a certain number
of) $1.00 ordinary shares in the capital of
(Dickens)"; (ii) there were no other rights to take up shares in Dickens
(cl.9.1). Arnotts
Biscuits warranted that, if it converts its Notes into
shares prior to (i) completion of the transfer of shares pursuant to the
exercise
of either option or (ii) the expiry of the options, no further shares
in Dickens will be issued without the parties' agreement (cl.9.2).
Does the grant of the options constitute an "acquisition" of shares?
5. Is the grant of the options an "acquisition" of shares which could contravene s.50?
6. By s.4(4)(a) of the Act, a reference to the acquisition of shares shall be construed as a reference to an acquisition of any legal or equitable interest in the shares. The better view seems to be that the creation of an option over shares for value creates an equitable interest in the holder of the option (see Laybutt v. Amoco Australia Pty. Ltd. [1974] HCA 49; (1974) 132 CLR 57 per Gibbs J. at p 75 and the cases there cited; Broken Hill Pty. Co. Ltd. v. Trade Practices Tribunal [1980] FCA 91; (1980) 31 ALR 401 per Bowen C.J. at p 409; per Brennan J. at p 424; cf. Chan v. Cresdon Pty. Limited, High Court of Australia, 14 December 1989, per Mason C.J., Brennan, Deane and McHugh JJ. at pp 6-15; Heydon, Trade Practices Law at p 4539); and as to the operation of s.4(4) see S.A. Brewing Holdings Limited v. Baxt (1989) 87 ALR 134 per Von Doussa J. at pp 144-6).
7. In my opinion, by virtue of the option agreement, Arnotts Biscuits should
be deemed to have acquired the shares. Although the
consideration for the
option is expressed to be nominal ($1.00), it appears that value for the
option transaction was provided by
Arnotts' advance of substantial funds in
acquiring the Convertible Notes.
The issues arising on the pleadings
8. By its amended statement of claim, the Commission alleges contraventions
of s.50(1)(a), or, alternatively, s.50(1)(b)(ii) of the Act. By s.50(1)(a), it
is provided, relevantly, that a corporation shall not acquire, directly or
indirectly, any shares in the capital of a body corporate
if, as a result of
the acquisition, the corporation would be, or be likely to be, in a position
to dominate a market for goods. (By
s.4E of the Act, "market" means a market
in Australia and when used in relation to any goods, includes a market for
those goods and other goods that
are substitutable for, or otherwise
competitive with, the first-mentioned goods.) By s.50(1)(b)(ii), a corporation
shall not acquire, directly or indirectly, any shares in the capital of a body
corporate if, in a case where the corporation
is in a position to dominate a
market for goods, the acquisition would, or would be likely to, substantially
strengthen the power
of the corporation to dominate that market. By s.50(2),
where bodies corporate related to or associated with a corporation are
together in a position to dominate, the corporation is deemed
to be in a
position to dominate the market. By s.50(3)(a), a reference to a market for
goods shall be construed as a reference to a substantial market for goods in
Australia. By s.50(3)(b), a reference to dominating a market for goods shall
be construed as a reference to dominating such a market either as a supplier
or as an acquirer of goods in that market.
The case pleaded by the Commission
9. The material allegations in the Commission's amended statement of claim
are as follows.
The market pleaded
10. The Commission alleges: (a) that Arnott's Biscuits is the leading
Australian manufacturer of biscuits, supplying approximately
65 per cent of
Australian consumption of biscuits; (b) that Nabisco is a manufacturer of
biscuits supplying approximately 8 per cent
of Australian consumption of
biscuits; (c) that George Weston Foods Limited ("Westons") is a manufacturer
of biscuits supplying approximately
13 per cent of Australian consumption of
biscuits; (d) that there are approximately 26 other manufacturers and
importers of biscuits
in Australia, supplying, in total, approximately 14 per
cent of Australian consumption of biscuits ("the other suppliers"); (e) that
Arnott's Biscuits, Nabisco, Westons and the other suppliers supply biscuits,
of the value of approximately $600 million, to wholesalers
and retailers in
Australia, doing so in close competition with each other but not in close
competition with any other suppliers or
potential suppliers of biscuits or any
other products; (f) that accordingly, there is a market in Australia, being a
substantial
market, for the supply of biscuits to wholesalers and retailers
("the market"); (g) that Arnott's Biscuits, Nabisco and Westons are
suppliers
of biscuits in the market; and (h) that Nabisco and Arnott's Biscuits are
competitors in the market.
The effect of the option agreement pleaded
11. The Commission further alleges that Arnott's Biscuits and Fledspac have
executed the option agreement whereby Fledspac granted
to Arnott's Biscuits an
option to purchase the whole of the issued capital ("the said capital") of
Dickens ("the call option"); and
whereby Arnott's Biscuits granted to Fledspac
the right to require Arnott's Biscuits to purchase the said capital ("the put
option");
that upon exercise of the call option or the put option (i) Arnott's
Biscuits will directly acquire the said capital; (ii) Arnotts
will indirectly
acquire the said capital; (iii) Arnotts and Arnott's Biscuits will indirectly
acquire the said capital and Nabisco's
biscuit business; that, alternatively,
upon execution of the said agreement, Arnott's Biscuits acquired directly, and
Arnotts acquired
indirectly, a legal or equitable interest in the said capital
and Arnotts and Arnott's Biscuits thereby indirectly acquired the said
capital
and Nabisco's biscuit business. (By virtue of the operation of s.50(2), it is
now conceded by the Commission that it is not necessary to consider whether
there has been an "indirect" acquisition by Arnotts.)
The Commission's case pleaded
12. The Commission alleges that, as a result of either of these acquisitions,
Arnotts or Arnott's Biscuits is, or, alternatively,
both Arnotts and Arnott's
Biscuits are, or will be, or will be likely to be, in a position to dominate
the market (cf. s.50(1)(a) of the Act) by reason of the following: (a) Arnotts
and/or Arnott's Biscuits will supply approximately 73 per cent by volume of
biscuits in
the market; (b) Arnotts and/or Arnott's Biscuits will supply
approximately 100 per cent by volume of (i) dry cracker biscuits and
(ii)
flavoured snack biscuits in the market; (c) Arnotts and/or Arnott's Biscuits
will acquire Nabisco's production facilities, production
staff, and sales,
marketing and distribution facilities and staff; (d) by acquiring the brand or
product names of Nabisco's biscuit
products, Arnott's Biscuits will
substantially increase its range of biscuit products; (e) Arnott's Biscuits
will acquire the shelf
space occupied by Nabisco's biscuit products in retail
outlets; (f) Arnott's Biscuits will acquire the recipes and expertise of
Nabisco's
biscuit business; (g) Arnott's Biscuits will gain the ability to
integrate its own biscuit production facilities and operations with
those of
Nabisco, as well as the purchasing, sales, marketing, distribution and
management facilities and staff, achieving significant
economies of scale; (h)
Nabisco's biscuit products are the most similar in quality and type in the
market to those of Arnott's Biscuits;
(i) Nabisco has an aggressive pricing
policy and is the most effective competitor of Arnott's Biscuits; (j) apart
from Westons, Nabisco
is the only major manufacturer of biscuits in Australia
other than Arnott's Biscuits; (k) by lowering unit production costs, Arnott's
Biscuits will improve its ability to meet and eliminate competitive pricing
policies of its competitors; (l) Westons supplies biscuits
which are generally
of a lower quality and price than those of Arnott's Biscuits and Nabisco; (m)
the acquisition would leave only
Westons and a number of minor suppliers none
of which would have the range of products, the manufacturing base, the sales
and marketing
base, the distribution network or the financial ability to
compete effectively with Arnott's Biscuits; (n) Nabisco markets its biscuit
products with greater emphasis on the name of those products and the name of
the range of those products than on the name of Nabisco
itself, thus
facilitating adoption of its product range by another supplier; (o) upon the
acquisition: (i) it will be practically
essential for wholesalers and
retailers to acquire biscuits from Arnott's Biscuits; (ii) it will be possible
for Arnott's Biscuits
to dictate, to a significant degree, the price of its
products, its trading terms and its participation in promotional activities;
(iii) Arnott's Biscuits will be able to impose lower margins upon wholesalers
and retailers; (p) the acquisition will increase existing
barriers to entry,
in particular: (i) the acquisition of expensive, and difficult to obtain,
production facilities; (ii) the need
to train proficient production and
marketing staff and management; (iii) the need to spend substantially on
advertising to achieve
consumer interest; and (iv) the need to establish a
national distribution and warehousing network; (v) the difficulty in
persuading
wholesalers and retailers that products will sell in sufficient
volume to justify being given shelf space in retail outlets; (vi)
the payment
of wholesalers' and retailers' new product listing fees; (vii) the need to
take into account the failure of the great
majority of new biscuit products to
achieve sustained profitable levels of sale; (viii) the development costs of
new products; (q)
as a result of the acquisition: (i) Arnott's Biscuits will
not be significantly inhibited by its competitors in setting prices; (ii)
Arnott's Biscuits will be the price leader in the market; (iii) it will be
practically essential for wholesalers and retailers to
acquire biscuit
products from Arnott's Biscuits; (iv) Arnott's Biscuits will be able to offer
less favourable terms than its competition.
13. Alternatively, the Commission alleges that Arnotts or Arnott's Biscuits is, or alternatively, both Arnotts and Arnott's Biscuits are, already in a position to dominate the market (cf. s.50(1)(b) of the Act) by reason of the following: (a) Arnott's Biscuits has, and has had for at least three years, 65 per cent share of the market; (b) the market shares of its major competitors, Westons (approximately 13 per cent) and Nabisco (approximately 8 per cent), have not increased for at least the past three years; (c) Arnott's Biscuits has well established sales, marketing and distribution facilities which are superior to those of its competitors; (d) Arnott's Biscuits' name and products are popular and its brand names are well established; (e) Arnott's Biscuits supplies a substantially wider range of biscuit products than any of its competitors; (f) the shelf space allocated to Arnott's Biscuits is far greater than its competitors; (g) Arnott's Biscuits is a relatively highly profitable company with profits increasing over the last four years, whereas Weston's and Nabisco's operations have been conducted far less profitably; (h) no new entrant at a scale and range of production comparable to that of Arnott's Biscuits has been able to enter the market and sustain its entry since Nabisco entered 20 years ago; (i) there are considerable difficulties in importing biscuits: they can deteriorate when transported by sea over long distances and variations in exchange rates can pose risks; (j) Arnott's Biscuits sources significant quantities of its inputs such as flour through subsidiary companies which manufacture such inputs.
14. The Commission alleges that the acquisition as pleaded will, or will be
likely to, substantially strengthen the power of Arnotts,
or Arnott's
Biscuits, or both, to dominate the market (cf. s.50(1)(b)(ii) of the Act) for
the reasons already alleged; and that by reason of the foregoing, any such
acquisition by Arnotts and Arnott's Biscuits, or
either of them, will
contravene s.50(1)(a), or alternatively, s.50(1)(b), of the Act. It is further
alleged that Fledspac and Dickens, in requiring or permitting any such
acquisition will be, directly or indirectly,
knowingly concerned in or a party
to the contravention or will be aiding, abetting, counselling or procuring
Arnotts and Arnott's
Biscuits to contravene the Act. It is said, further, or
in the alternative, that Arnotts, in causing or permitting Arnott's Biscuits
to make the acquisition, will
be, directly or indirectly, knowingly concerned
in or party to the contravention or will be aiding, abetting, counselling or
procuring
Arnott's Biscuits to contravene the Act. The Commission seeks to
enjoin the exercise of the options.
The defences pleaded by the respondents
15. By their defences, the respondents have denied the substantial
allegations made in the amended statement of claim with the exception
of the
allegation that Arnott's Biscuits have acquired the shares by virtue of the
option agreement. No special defences are pleaded.
The case opened by the Commission
16. The Commission opened its case for relief as follows:
(a) Arnotts intends to acquire the biscuit division of Nabisco. Arnotts is
in a position to dominate the biscuit market and the
acquisition would, or
would be likely to, substantially strengthen the power of Arnotts to dominate
that market (s.50(1)(b)); alternatively, as a result of the acquisition,
Arnotts would be, or be likely to be, in a position to dominate that market
(s.50(1)(a))." The players in the market are manufacturers and importers of
biscuits in Australia on the one hand and retailers and wholesalers
of
biscuits in Australia on the other. Products such as bread, snack foods or
confectionery are not part of the biscuit market. However,
there is "some
blurring of the edges of some of those markets. . . (f)or instance, between
the biscuit and confectionery markets
there is some blurring between items
such as Tim Tams, an Arnotts' product, which are chocolate products. In the
snack food market
there might be some blurring between some crispy savouries
in the biscuit market and maybe some savoury products (are) sold in the
snack
food market." Tim Tams have been marketed both as a biscuit and as
confectionery. When marketed as a biscuit, Tim Tams are
larger in size than
Tim Tams as confectionery.
(b) The goods in the market are confined to biscuits and do not include
snack foods, confectionery or bread for these reasons: (1)
Arnotts itself has
both a biscuit division and a snack food division and each division is
conducted separately. (2) Arnotts' sales
representatives who solicit orders
from retailers in respect of biscuits do not handle snack foods. This is done
by sales representatives
employed by Arnotts to solicit orders for snack
foods. (3) Arnotts employ a person to assist retailers to stack their shelves
with
Arnott's biscuits. Arnotts retain a different person to assist with snack
foods. Nabisco adopts the same practice. (4) In supermarkets,
biscuits are
generally displayed in a "biscuit bar" which is separate from the areas where
bread, snack foods and confectionery are
displayed.
(c) Arnotts' dominance of the market was demonstrated by the following: (1)
Its large market share. (2) The fact that it is less
flexible with its trading
terms than other suppliers. (3) The evidence of retailers that, because of the
recognised popularity of
Arnotts, it is essential that they stock Arnotts'
biscuits. (4) Because of its market share and the revenue derived from that
market
share, Arnotts has the ability to spend far more on advertising and
promotion than its competitors, thereby enabling Arnotts to entrench
and
increase its popularity with consumers. (6) Arnotts has the ability, because
of its size and market share, to counter any new
competing biscuit product
quickly and efficiently; Arnotts has the ability to compete in quality by
introducing new brands and to
compete in price; Arnotts markets at the top end
of the range under the Arnotts' name; at the lower end of the range, Arnotts
markets
under the "Sunshine" brand; in this way, it is able to compete in the
full spectrum of the biscuit market. (7) Arnotts' dominance
of the market is
tempered by the competition it now receives from Nabisco and Westons. In the
cracker and flavoured snack segment
of the market, the only competition comes
from Nabisco; Arnotts reacts to innovative and new products introduced by
Nabisco, to price
reductions or "specials" of Nabisco and to Nabisco's
advertising campaign; retailers are able to use Nabisco's presence in the
market
place to obtain some leverage in negotiating terms with Arnotts; the
elimination of Nabisco as a competitor will give Arnotts more
shelf space in
retail stores, give Arnotts more revenue which can be used for advertising,
and give Arnotts a virtual monopoly in
the cracker and flavoured snack segment
of the market; and Arnotts' increased strength in the market place will make
it even more
difficult for the remaining manufacturers to compete or enter the
market place. (8) Barriers to a new entrant into the market are
substantial:
(i) the cost of establishing plant and equipment is enormous; (ii) because the
biscuit market is fully serviced by existing
players and the per capita
consumption of biscuits is falling, any new player, once he has spent the
money required for plant and
equipment, would have to obtain his market share
by taking part of the existing market from one of the existing players; (iii)
a
new player would need to persuade retailers to provide shelf space to
display its product and shelf space is at a premium; (iv) shelf
space is
keenly fought over by the three major players; (v) to obtain shelf space, a
new player would need to pay "line fees"; these
"fees" are paid either by
giving the retailer substantial discounts on biscuits sold or by making a
payment to the retailer for shelf
space; the importance of gaining shelf space
is not only to facilitate retail sales but also to enable the manufacturer to
promote
its product; (vi) a new player would need to spend enormous sums of
money on advertising and promotion; (vii) because of Arnotts'
market share and
the money which it has available to meet competition from any new player, it
is not likely that the new player will
obtain any significant market share;
(vii) apart from the three major manufacturers, there are only 26 other
players, most of them
known as "niche" manufacturers and none of which has
managed to obtain any significant share of the market; (viii) distribution and
merchandising represent an expensive barrier to entry; (ix) the three major
suppliers arrange for their representatives to attend
individual supermarkets
to take orders; these manufacturers also have a delivery service to the
individual stores and also have staff
in the stores to assist in stacking the
shelves, thus ensuring that the supplier obtains sufficient shelf space; in
order to compete
successfully, a new player would need to provide a similar
infrastructure for ordering, delivering and stacking shelves; most large
retailers have a central warehousing facility and, in theory, it might be
possible for suppliers of biscuits to deliver to such a
facility. But this
would not work in practice: biscuits, being perishable, have only a limited
shelf life; the more biscuits are
handled, the more likely they are to be
broken or damaged; the attendance of the manufacturer's representative at the
supermarket
is needed to ensure the proper presentation and promotion of the
product.
The construction of s.50
17. In order to construe s.50, it is necessary to consider what is meant when
the statutory provision speaks of the "domination" of a "market".
The meaning of "dominate"
18. An enterprise will be in a position to dominate a market when there is a
probability that the other enterprise or enterprises
in the market will act in
a way calculated not to affect adversely the dominant concern's short term
interests. Dominance, unlike
control, is not primarily concerned with the
formal relationship between entities but rather with their conduct towards
each other
within a particular market environment. If the size or strength of
a particular entity is such that, in practice, other entities
are unable or
unwilling actively to compete with it in a particular market, that entity is
dominant in that market. The dominant
position relates to a position of
economic strength enjoyed by an undertaking which enables it to prevent
effective competition being
maintained in the relevant market by affording it
the power to behave to an appreciable extent independently of its competitors,
its customers and ultimately of the consumers. Such a position does not
preclude some competition but enables the undertaking which
profits by it, if
not to determine, at least to have an appreciable influence on, the conditions
under which the competition will
develop and, in any case, to act largely in
disregard of it so long as such conduct does not operate to its detriment (see
Trade
Practices Commission v. Ansett Transport Industries (Operations) Pty.
Ltd. [1978] FCA 21; (1978) 32 FLR 305 per Northrop J. at pp 321 et seq.; United Brands
Company and Continental BV v. The Commission of the European Communities
[1978] EUECJ C-27/76; (1978) 1 CMLR 429 at p 461; Hoffmann-La Roche and Co. AG v. Commission of the
European Communities (1979) 1 ECR 461 at pp 520-4; Trade Practices Commission
v. Australia Meat Holdings Pty. Ltd. (1988) 83 ALR 299 per Wilcox J. at pp
327-8).
The meaning of "market"
19. In Queensland Wire Industries Pty. Ltd. v. The Broken Hill Proprietary Co. Ltd. [1989] HCA 6; (1989) 83 ALR 577, Mason C.J. and Wilson J. said (at p 582) that, after identifying the appropriate product level, it is necessary to describe accurately the parameters of the market in which the defendant's product competes: too narrow a description of the market will create the appearance of more market power than in fact exists; too broad a description will create the appearance of less market power than there is. Referring to the notion of substitution mentioned in s. 4E, Mason C.J. and Wilson J. said that this process of defining a market by substitution involves both including products which compete with the defendant's and excluding those which because of differentiating characteristics do not compete.
20. Deane J. said (at p 588) that "market" is not susceptible of precise comprehensive definition when used as an abstract noun in an economic context. It should be understood in the sense of an area of potential close competition in particular goods and/or services and their substitutes. Deane J. added that the economy is not divided into an identifiable number of discrete markets into one or other of which all trading activities can be neatly fitted. One overall market may overlap other markets and contain more narrowly defined markets which may, in their turn, overlap, the one with one or more others. The outer limits of a particular market are likely to be blurred: their definition will commonly involve assessment of the relative weight to be given to competing considerations in relation to questions such as the extent of product substitutability and the significance of competition between traders at different stages of distribution. While actual competition must exist and be assessed in the context of a market, a market can exist if there be the potential for close competition even though none in fact exists.
21. Dawson J., agreeing generally with Deane J., said (at p 591) that elasticities of supply and demand and the notion of substitution provide no complete solution to the definition of a market. A question of degree is involved - at what point do different goods become enough linked in supply or demand to be included in the one market - which precludes any dogmatic answer. The process is an inexact one, as the concept of sub-market illustrates.
22. Toohey J. (at p 599) pointed out that the introduction of s.4E followed a recommendation of the Swanson Committee that the definition of "market" be extended so as to "require that, in the determination of a 'market' for particular purposes, regard shall be had to substitute products, being products which have a reasonable interchangeability of use and which have high cross-elasticity of demand, i.e. where a small decrease in the price of a particular product would cause a significant quantum of demand for a similar product to switch to the product in question".
23. See also Australia Meat Holdings on appeal to the Full Court (1989) ATPR
40-932 per Davies J. at p 50,091; per Sheppard J. at p 50,097; per Pincus J.
at p 50,106.
"Market" is an instrumental concept
24. In Queensland Wire, Mason C.J. and Wilson J. said (at p 582):
"Defining the market and evaluating the degree of power25. In Re John Dee (Export) Pty. Ltd. (1989) ATPR 40-938, the Trade Practices Tribunal (Lockhart J., President, Professor Brunt and Mr. Fitzgerald said (at p 50,219):
in that market are part of the same process, and it is
for the sake of simplicity of analysis that the two are
separated."
"As is often said, 'the market' is an instrumentalThe process of evaluation of the degree of market power possessed by a firm said to be in a position to dominate a market
concept, designed to assist in the analysis of
processes of competition and sources of market power."
26. A claim that a firm is in a position to dominate a market calls for an evaluation of the degree of market power possessed by the firm.
27. In Queensland Wire, observations were made by the High Court on the processes of reasoning by which market power, and degrees of market power, may be evaluated. The matter there arose under s.46, and not s.50, but the observations made by the High Court throw light on the present question.
28. Mason C.J. and Wilson J. said (at p 583) that market power can be defined as the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product. The Chief Justice and Wilson J. referred (at p 583) to the necessity of considering potential competition in determining the degree of market power. The Chief Justice and Wilson J. said that courts have often looked to market share to determine degree of market power: ("The existence of such (monopoly) power ordinarily may be inferred from the predominant share of the market" (United States v. Grinnel Corp [1966] USSC 122; (1966) 384 US 563 at 571). But the Chief Justice and Wilson J. added that a large market share does not necessarily mean that there is a substantial degree of market power: ("the relative effect of percentage command of a market varies with the setting in which that factor is placed" (United States v. Columbia Steel Co. [1948] USSC 94; (1948) 334 US 495 at p 528 per Reed J.).
29. Mason C.J. and Wilson J. went on to say (at pp 583-4):
"A large market share may well be evidence of marketDeane J. said (at p 589):
power . . . but the ease with which competitors would be
able to enter the market must also be considered. It
is only when for some reason it is not rational or
possible for new entrants to participate in the market
that a firm can have market power . . . There must be
barriers to entry. As Professor F.M. Scherer has
written, 'significant entry barriers are the sine qua
non of monopoly and oligopoly, for . . . sellers have
little or no enduring power over price when entry
barriers are nonexistent' . . . Barriers to entry may be
legal barriers - patent rights, exclusive government
licences and tariffs for example. Barriers to entry
may also be a result of large 'economies of scale'.
Where the economies of scale in a market are such that
the minimum size for an efficient firm is very large
relative to the size of the market, it may be that
potential competitors will be dissuaded from entering
the market by the apprehension that only one firm would
survive."
"It is unnecessary to seek to identify the precise30. Dawson J. said (at p 591) that the term "market power" is ordinarily taken to be a reference to the power to raise price by restricting output in a sustainable manner. His Honour added (at pp 591-2):
structure and boundaries of what should be seen, for
the purposes of the present case, as what I have
described as 'the steel market'. Regardless of the
more precise definition of that market, BHP has a
substantial degree of power in it. It is responsible
for the production of 97 per cent of the steel produced
in Australia and supplies 85 per cent of the domestic
market for steel and steel products. There is no
present threat from imports. The only other Australian
producer of steel is Smorgon which is responsible for
only 3 per cent of local production and which
represents no real threat to BHP's dominance of the
entire local trade in steel and steel products."
"But market power has aspects other than influence upon31. Dawson J. said (at p 592) that the existence of barriers to entry may be conclusive in determining the relevant market and the degree of market power in it. In the context of s.46, the existence of significant barriers to entry into a market carries with it market power on the part of those operating within the market. Market power follows as a natural consequence of barriers to entry which are also a prerequisite to the establishment and maintenance of a monopoly. His Honour went on to say (at pp 592-3):
the market price. It may be manifested by practices
directed at excluding competition such as exclusive
dealing, tying arrangements, predatory pricing or
refusal to deal. . . The ability to engage persistently in
these practices may be as indicative of market power as
the ability to influence prices. Thus Kaysen and
Turner define market power as follows:
'A firm possesses market power when it can behave
persistently in a manner different from the behaviour
that a competitive market would enforce on a firm
facing otherwise similar cost and demand conditions.'
. . . Market power is thus the advantage which flows from
monopoly or near monopoly."
"The identification of barriers to entry helps both to32. Toohey J. (at p 604) was of the opinion that B.H.P. had dominant power in the steel products market due to the absence of competitors.
define the relevant market and to establish the
existence of market power. There is, of course,
vigorous debate in economic circles about what
constitutes a barrier to entry into a market. There
are those who would and those who would not accept that
the high cost of entry constitutes a barrier. Compare
Bain, Barriers to New Competition (1956); Bain,
Industrial Organisation, 2nd ed. (1968), with Stigler,
The Organisation of Industry (1968). However, it is
less important to arrive at a precise meaning than to
recognise the assistance given by the identification of
conditions, in the nature of barriers to entry, for the
purpose of defining the relevant market, measuring the
extent of market power and determining whether that
power has been exercised."
33. Other aspects of the construction of s.50 will be dealt with later.
The facts
34. Although there was little room for contest on the primary facts, the
parties were very much at issue on the inferences to be
drawn from the primary
facts. The volume of evidence adduced was enormous.
The general nature of the evidence called by the Commission
35. The Commission tendered a large body of evidence from documents
discovered by the respondents and from documents obtained on
subpoena from
Westons. The Commission also called many witnesses from the biscuit industry
and from the wholesale and retail grocery
trade (see Appendix 1).
The general nature of the evidence called by the respondents
36. Arnotts tendered evidence from three main sources. First, it called an expert economist. Secondly, Arnotts called a solicitor employed by the firm of solicitors acting for them in these proceedings to prove the purchase by the solicitor of many grocery items. Finally, Arnotts tendered a market research survey by Roy Morgan, commissioned by Arnotts shortly before the hearing of these proceedings commenced. No officer of Arnotts was called.
37. Nabisco called no evidence.
The significance of the failure by Arnotts and Nabisco to call any of their
officers to give evidence
38. As has been said, the Commission tendered many documents produced by the respondents on discovery. Many of these documents support the Commission's case. But neither Arnotts nor Nabisco called any witness from management and no explanation was offered to explain the failure to adduce this evidence.
39. Wigmore on Evidence, 3rd. ed. (1940) Vol. 2 s.285 p 162 states the
general principles in this area as follows:
"The failure to bring before the tribunal some circumstance,In Jones v. Dunkel [1959] HCA 8; (1959) 101 CLR 298 at p 321, Windeyer J., after citing this passage from Wigmore, added:
document, or witness, when either the party himself or his
opponent claims that the facts would thereby be elucidated,
serves to indicate, as the most natural inference, that the
party fears to do so, and this fear is some evidence that
the circumstance or document or witness, if brought, would
have exposed facts unfavourable to the party. These
inferences, to be sure, cannot fairly be made except upon
certain conditions; and they are also open always to
explanation by circumstances which make some other
hypothesis a more natural one than the party's fear of
exposure. But the propriety of such an inference in
general is not doubted."
"This is plain commonsense . . . . As Wigmore points outThe characteristics of a biscuit
(Evidence 3rd ed. (1940) vol. 2, ss.289, 290,
pp 171-180), exactly the same principles apply when a
party, who is capable of testifying, fails to give
evidence as in a case where any other available witness
is not called. Unless a party's failure to give
evidence be explained, it may lead rationally to an
inference that his evidence would not help his case."
40. The Macquarie Dictionary provides the following primary definition of
"biscuit".
"1. a. A stiff, sweet mixture of flour, liquid, shortening41. In Landau v. Goldwater (1976) 13 ALR 192, a Customs case, it was common ground that an imported milk chocolate wafer was a biscuit. Aickin J. said (at p 194):
and other ingredients, shaped into small pieces before
baking or sliced after baking. b. A savoury, unleavened
similar mixture, rolled, sliced and baked crisp."
"It was suggested in evidence that a biscuit was a42. In a submission to the Federal Government in 1985, Arnotts (writing on behalf of Arnotts, Westons and Nabisco) stated that biscuits "generally have certain common attributes which include: (a) wheat flour as the principal ingredient; (b) are prepared from a dough which is subsequently baked; (c) are low in moisture; (d) have minimum shelf life expectancy of three months."
product of the baking of unleavened flour with or
without sugar or flavouring material and there seemed
in substance to be no complaint about this definition
or perhaps description."
43. These proceedings were commenced in October 1988. It will be necessary,
in the first instance at least, to consider the position
as at that date. It
may also be necessary, in the context of determining what relief ought to be
granted, to consider the position
at a later point of time against this
background. As has been said, in May 1988, Best Foods agreed to acquire the
shares in Nabisco
and that, shortly thereafter, Best Foods negotiated with
Arnotts for the sale of the shares in Nabisco, leading to their entry into
the
option agreement soon after the commencement of the litigation. Since 1 July
1989, pending the determination of the Commission's
claims, Arnotts have
managed Nabisco's business pursuant to a temporary management agreement.
Volume and shares of biscuit manufacturers for 1985, 1986 and 1987
44. It is convenient, in the first instance, to consider the volume by weight and shares of biscuit manufacturers for the years 1985, 1986 and 1987.
45. The following chart shows the volume by weight and shares of each biscuit
manufacturer for those years:
CONFIDENTIAL46. The following chart shows the volume by weight and shares of biscuit manufacturers, expressed as a percentage, for those years:
CONFIDENTIAL47. The following chart shows the volume by weight and shares, expressed as a total, by reference to biscuit manufacturer:
CONFIDENTIAL48. In a report prepared by Arnotts' management in August 1988, the volume and market shares of the "Australian Biscuit Market" for the 12 months ended March 1988 and for the previous two years were stated as follows:
CONFIDENTIAL "Biscuit Industry Statistics" ("B.I.S.")49. For many years Arnotts, Westons and Nabisco have provided details of their biscuit operations to a firm of chartered accountants. That firm compiles statistics from the information supplied. The statistics are known as the Biscuit Industry Statistics ("B.I.S."). B.I.S. deal only with the operations of Arnotts, Westons and Nabisco. However, as at March 1988, for instance, this constituted 86.1% of the national total industry sales by volume. In certain segments, the percentage was as high as 90%. There is evidence that, in "dollar terms", the B.I.S. figures represented about 95% of biscuit sales in certain segments. The industry treats the B.I.S. figures as a reliable indicator of the relative performance of the leading members of the industry.
50. The B.I.S. national retail sales figures, by weight, for the years ended
31 December 1985, 1986, 1987 and 1988 were as follows:
CONFIDENTIALB.I.S. national retail sales for 1988
51. B.I.S. national retail sales statistics, by weight, for 1988 were as
shown in the following chart:
CONFIDENTIALB.I.S. retail sales by State for 1988
52. B.I.S. retail sales for each State, by weight, for 1988 were as shown in
the following chart.
CONFIDENTIALB.I.S. national retail sales by product category for 1988
53. B.I.S. national retail sales by weight for each product category for 1988
were as follows:
CONFIDENTIALB.I.S. retail sales in N.S.W. by product category for 1988
54. B.I.S. retail sales for New South Wales for each product category for
1988 were as follows:
CONFIDENTIALB.I.S. retail sales in Victoria by product category for 1988
55. B.I.S. retail sales for Victoria for each product category for 1988 were
as follows:
CONFIDENTIALB.I.S. retail sales in Queensland by product category for 1988
56. B.I.S. retail sales for Queensland for each product category for 1988
were as follows:
CONFIDENTIALB.I.S. retail sales in South Australia by product category for 1988
57. B.I.S. retail sales for South Australia for each product category for
1988 were as follows:
CONFIDENTIALB.I.S. retail sales in Western Australia by product category for 1988
58. B.I.S. retail sales for Western Australia for each product category for
1988 were as follows:
CONFIDENTIALB.I.S. retail sales in Tasmania by product category for 1988
59. B.I.S. retail sales for Tasmania for each product category for 1988 were
as follows:
CONFIDENTIALB.I.S. national category analysis for the 12 months ended 30 September 1989
60. B.I.S. national category analysis for the 12 month period from October 1988 to September 1989 for the three manufacturers was as shown in the confidential annexure marked "A" to these reasons.
61. B.I.S. national category analysis for the 12 month period from October 1988 to September 1989 for Arnotts was as shown in the confidential annexure marked "A" to these reasons.
62. B.I.S. national category analysis for the 12 month period from October
1988 to September 1989 for Nabisco was as shown in the
confidential annexure
marked "A" to these reasons.
B.I.S. national category analysis for the 12 month period from October 1988 to
September 1989 for Westons was as shown in the confidential
annexure marked
"A" to these reasons.
63. In the 12 month period ended 30 September 1989, Arnotts', Nabisco's and
Westons' national biscuits sales by weight, and the percentage
shares in the
respective product categories, were as shown in the confidential annexure
marked "A" to these reasons.
Biscuit industry management reports
64. The reports of management of Arnotts, Westons and Nabisco which were
tendered throw considerable light on the operations of the
Australian biscuit
industry. A great deal of documentary material of this kind was tendered by
the parties. I will refer to some
of the more significant of this material.
The facts described, and the opinions expressed, by management in these
reports were confirmed
by the evidence given by the witnesses called by the
Commission from the biscuit industry and the wholesale and retail grocery
trade.
Arnotts' management reports
Arnotts' "1987/1988 Marketing Plan"
65. In 1986, the management of Arnotts prepared a document entitled "1987/1988 Marketing Plan". The document dealt with "brand policy", "product mix", "packaging", "pricing policy", "trading terms", "sales and distribution", "promotional policy", "research", "market place measurement" and "national biscuit marketing objectives".
66. Under the heading "brand policy" the following was stated:
CONFIDENTIAL67. Under the heading "product mix" the following was stated:
CONFIDENTIAL68. Under the heading "packaging" the following, inter alia, was stated:
CONFIDENTIAL69. Under the heading "pricing policy", the following was stated:
CONFIDENTIAL70. Under the heading "trading terms", the following was stated:
CONFIDENTIAL71. Under the heading "promotional policy", the following was stated:
CONFIDENTIAL72. Reference was made to four main promotional activities: advertising, personal selling, sales promotion and publicity. Under the sub-heading "publicity", the following appeared:
CONFIDENTIAL73. Under the heading "research", the following was stated:
RESEARCH.74. Under the heading "market place measurement", the following was stated:
Marketing Research activities involves not only the
processing of internal and external data collection and
analysis designed to measure trends in the market place,
but also involves qualitative and quantitative analysis
that is specifically designed to enable us to make
effective marketing and advertising decisions and develop
marketing strategies.
On a regular basis it is important that we regularly
explore consumer needs and attitudes in the changing
marketing environment through all areas of the
"marketing mix".
Basically the following research vehicles are utilised
in measuring the market and in determining what are the
consumer needs and attitudes:
* Biscuit Industry Statistics (B.I.S.)
* A.C. Nielsen Pty. Limited
* Overseas Imports
* Warehouse Withdrawals
Note: In the near future scanning data will be
available from various sources.
* Consumer Taste Tests
* Consumer needs
* Consumer Attitudes
* Usage and purchase behaviour
* Company position and image.
CONFIDENTIAL75. Under the heading "national biscuit marketing objectives", the following was stated:
CONFIDENTIALReports of the General Sales Managers of Arnotts to Arnotts' General Manager, N.S.W. Division in late 1987 and 1988 dealing with "market conditions" and related matters
76. The General Sales Manager's report for the month of December 1987
described the trading activities of, inter alia, Westons and
Nabisco. Westons'
activities were the subject of this comment:
There has been very little apparent activity by this company in77. Nabisco was the subject of these, inter alia, comments:
December, which of course is fairly traditional. Certainly a lot of
their displays have been lost, mainly because of pressure from both
purely seasonal demands for display spots and also because of their
lack of a presence in the Cracker market. During this month they
released Golden Harvest, a plain sweet biscuit, not greeted with
much enthusiasm by either the market place or the Westons'
representatives.
During the month of December Nabisco again were able to under-cut78. In the report for June 1988, there was a discussion of the trading
the price of their savoury range in comparison to Arnott's on
organised promotions. They also commenced promoting their range
much earlier in the month. One example being a two week Gondola End
promotion retailing at 89 cents, a saving of 34 cents per packet,
from 30.11.87 through to Saturday 12.12.87 in all Super K outlets,
off-take was very good. Unsold stock was still available at the
price until after New Year.
Woolworths also ran a two week promotion of Nabisco savouries at 99
cents from W/C 15.12.87, a saving of 24 cents. Arnott's major
disappointments in promotional prices were found in Coles where our
savouries were promoted at $1.09 and Jewel where jatz retailed at
$1.07 during the last two weeks of December.
Apparently Nabisco still has plenty of stock to
get rid of, as Woolworths at Jesmond received 100 cases of stock
after Christmas, which they did not need, and on attempting to send
them back were given an extra 20 cents a packet to keep them.
Chocolate biscuits headed up most promotionsThe report then discussed the activities of several biscuit manufacturers.
during June with Westons (apart from Arnott's leading the field with
price. The whole Westons Chocolate biscuit range was featured in
Coles stores w/c 20th June for 89 cents packet, possibly the
cheapest retail for Chocolate biscuits that we have seen for 12
months or more.
Westons new lines for this season do not appear to
have the off take that has been experienced in previous years,
particularly when the consumer can purchase Arnott "Headliners" such
as Tim Tam, Mint Slice, Chocolate Monte, etc. for 99 cents. This
year, because we have had good promotions - particularly with
Franklins and Woolworths, we have made the opposition sit up and
take notice.
Having such a price advantage gives the
representatives something to bargain with at store level, especially
when negotiating for prime display positions, e.g. all Woolworths
stores supplied front end displays for the promotion and Franklins,
where possible gave us front Gondola End displays.
The new 'Carob' range of biscuits from
Nabisco and also their Chocolate biscuit
range have had a fairly poor result at the stage of the season,
although a notable chocolate promotion was in Clancy's w/c 24th June
where Nabisco Chocolate biscuits sold for 99 cents packet (a saving
of 36 cents packet.
I feel that Arnott's have had the best of it so far this
year with Westons taking a back seat first time for a long time.
79. Westons was first discussed. The report stated:
"As usual for this time of the year chocolates have80. In respect of Nabisco, it was stated:
received all the attention, but there does not seem to
be as much enthusiasm in the Westons camp as previous
years."
"Except for Conversation, Chips Ahoy and a few lines of81. Cadburys was the subject of this report:
Chocolate and the Natural Choice range things are very
quiet in all areas. . ."
This company is still very quiet compared to last year. Very little82. Players was reported to be "having a big push in all areas with their three new wafer lines."
promotional activity is reported, but they are still offering $3.60
a case off to a group of stores to sell at $1.2.
Cadburys are advertising on Franklins shopping trolleys,
which is a bit of a coup. This type of advertising
is keeping the consumer very much aware of their
image as a quality Chocolate biscuit. At times Arnott
representatives have been asked to point out where Cadburys biscuits
are layed into the shelves by consumers as a result of being
prompted by the sign.
83. The report for July 1988 offered the following general comments:
July was a very hard trading month for N.S.W. Trading Area and all84. In respect of Coles the following observations, inter alia, were made:
other States. Whilst it is difficult to determine a single reason
for the -9.3% achievement to budget result, general opinion is that
school holidays and Expo in Queensland extracted a large proportion
of normal food spending dollars from consumers.
After eight almost clear months of trading
since our last major strike, it is apparent
we have lost approximately 5% consumer franchise to pre-strike
periods. Considering the exceptional promotional activity mounted
during the five months period February to June 1988, the achievement
to budget result for that period was a disappointing -249,590
kilograms (-1.9%). Promotional expenditure for July 1988 was kept at
a high level (3.97%), however results were not forthcoming.
The expansion of generic products and house
brands, which are in direct conflict with our
major sellers, is also causing concern through loss
of biscuit bar space for our products and confusion to the
consumer who is offered "look alike" products at much lower prices.
CONFIDENTIAL85. Franklins was the subject of these comments:
CONFIDENTIAL86. "Market conditions" were then described under the sub-heading "Westons". It was stated:
CONFIDENTIAL87. In respect of Nabisco, it was stated that:
CONFIDENTIAL88. In respect of Cadburys it was stated that:
CONFIDENTIAL90. In respect of Players, it was stated that:
CONFIDENTIAL90. In the report for August 1988, the following general comments were made:
CONFIDENTIAL91. Market conditions were described as follows:
WestonsCommentary by Arnotts' Managing Director June 1988
Field Reports indicate there was no extraordinary
promotional activity during August.
Chocolate biscuits, 500 gram
Family Assorted and Assorted Creams and Ryvita range received most
attention.
Nabisco
Little to report since July other than the
appearance at clearance prices of Natural Choice Cookies and Carob
Coated products.
Cadburys
Retailers have reported that this brand
has not performed well this year. This is evident by the volume of
ageing stock in the trade and low price specials available so late
in the season.
Players
It appears Players has enjoyed a fairly
successful month. Wafers have been advertised and displayed well and
sales reported by our field personnel as fair to good.
92. The papers providing for the meeting of the Board of Directors of Arnotts
to be held on 10 August 1988 included a document entitled
"Managing Director's
Commentary June 1988". Several topics were dealt with. Under the heading
"Biscuits - Australia", the sales position
in all the States was summarised.
Reference was made to the B.I.S. "market share figures" for the 12 months
ended 30 June 1988 as
follows:
CONFIDENTIAL93. Under the heading "Biscuits - Confectionery - NZ", sales of biscuits were dealt with. Reference was also made to sales of confectionery. Under the heading "Snack Products", the results of operations described as "Arnott's Snack Foods", "Lips", "Siesta" and "Red Seal" were discussed. Reference was made to "(t)he basic Arnott's snack foods business".
94. It was the practice of Arnotts to provide the Board of Directors with
periodic "competitive activity reports". For instance,
with the Board papers
for the meeting to be held on 10 August 1988, there was such a report for the
month of June 1988. It reported
on the trading activities, in all States, of
Westons, Nabisco and "Others". The last category included Cadbury, Players and
"Generic".
This format was typical of these reports.
Arnotts' Competitive Activity Report July 1988
95. This report, in the usual format, was in the Board papers for the meeting to be held on 14 September 1988.
96. The following comments were made in respect of Nabisco:
NABISCOArnotts' Competitive Activity Report August 1988
Queensland:
There has been very little activity by the company since the take-over
was announced. Reports have it that the stores are complaining in
relation to a lack of service and the number of out of stocks from this
company. During the month of July, Franklins promoted the five
Nabisco Chocolate biscuit varieties at 85 cents, however, severe stock
problems have occurred as some stores reported ordering sixty cases,
only to receive five.
New South Wales
Nabisco continued concentration on their chocolate range.
Victoria/Tasmania
Nabisco's level of promotional activity continued to be fairly quiet in
stores this month with no activity on their choc coated range.
Premium 250g varieties received advertised support with S.S.W. 79 cents.,
Bi-Lo and Franklins 85 cents and S.E.Dickins and Foodmaster 99 cents.
Victoria/Tasmania cont. .
T.V. Advertising for Chips Ahoy continued this month as well as a new
promotion "Healthy, Wealthy and Wise". Prizes to the value of $100,000
and entry tokens in packets. Reports of combined biscuit and cereal
displays featuring this promotional theme have been reported.
South Australia
The majority of activity from Nabisco has been on Ritz, Table Water and
Flavoured Snack varieties although we have noted increased Chocolate
Biscuit promotions. The Carob varieties have not cleared from previous
promotions and problems with excess stock and expiry dates are evident
in major stores.
The trade has made mention of Nabisco's poor service and support at
store level since the Best Foods takeover.
Nabisco have recently informed the trade of a $100 minimum purchase
requirement for deliveries.
Western Australia.
Nabisco have commenced a new television campaign called "Healthy
Wealthy and Wise". This campaign includes a competition in which
participants can compete for $100,000 in prizes. Reports from the trade
indicate that Nabisco are giving little or no service. Fixture levels are
very low and in a number of cases, empty]
97. Nabisco was discussed as follows:
NABISCO:Arnotts "Trading Area Brief" on "Tim Tam Duo Bar and Handy Bag" (March 1986)
Queensland:
Promotional activity was very restricted for this company during August
with the only recorded promotion being on their Savoury Lines in
Franklins at $1.09. Trade reports continue regarding poor representation
i.e., no call in some major chain stores for up to three weeks.
New South Wales
Most stores in the Metro Area reported that they have not seen a
Nabisco representative for three weeks. Their stock levels in all major
outlets were very low.
Victoria/Tasmania
Activity continued to be very quiet with industrial problems obviously
affecting deliveries of promotional and shelf stock. Nabisco's In-A-
Biskit range received advertised support with S.S.W. 89 cents, Franklins
99 cents and Foodmaster and Supa Valu at $1.19.
Premium 250g varieties were promoted with Franklins 85 cents, S.E.
Dickins 95 cents, Tuckerbag 99 cents and Jewels at $1.03. Minor instore
activity at special prices ranging between 79 cents to $1.09 were
reported.
South Australia
Lack of service in stores is possibly due to the fact that Nabisco are
not replacing representatives who have sought other employment.
Western Australia
Nabisco are having problems supplying stock for their confirmed
promotions. The major activity centered around their Chocolate
Biscuits, Snack Range, Premium Range and Good Valu.
98. In March 1986, Arnotts' management prepared a "Trading Area Brief" for
these "Tim Tam" products. The Brief introduced the subject
as follows:
CONFIDENTIAL99. Under the heading "Market Information", the following appeared:
CONFIDENTIAL100. On the subject of "Store Placement", it was stated:
CONFIDENTIAL101. The Brief contained this summary:
CONFIDENTIALArnotts' "Notes on Tim Tam Bar" August 1986
102. In about August 1986, Arnotts' management prepared some "Notes on Tim
Tam Bar". The topic was introduced in this way:
CONFIDENTIAL103. The author then identified this problem:
CONFIDENTIAL104. The document then described an advantage and a disadvantage:
CONFIDENTIAL105. The document suggested this approach:
CONFIDENTIALArnotts' "Chocolate Biscuit Campaign - 1987"
106. In November 1986, Arnotts' management prepared a document entitled
"Chocolate Biscuit Campaign 1987". The following introductory
observations
were made:
1. INTRODUCTION.107. The campaign was described as follows:
There is no doubt that last year and in particular the
traditional season (February - September) was amongst
the most difficult in our experience of marketing and
selling chocolate biscuits.
There were a number of factors which influenced the
market place, the major areas being:-
(a) Sales Tax: In September 1985 the Federal Government
placed a 10% sales tax on chocolate biscuits. When
this was added to the wholesale price and in many
instances the retailer taking the opportunity to
improve margin then two price increases, the retail
price of chocolate biscuits rose by as much as 20%
in the market place over that of previous year.
(b) Economy: Whilst there is conjecture as to the exact
state of the economy it is fair to say that there has
been a general community perception that things have
not been buoyant.
This has not enhanced the sales of chocolate biscuits.
(c) Competitors: There is little argument that the
chocolate segment is the most competitive within the
industry and became even more so during 1986.
Hudsons continue to try to "crack" the market.
Generics have become more prevalent and Westons and
Nabisco are fighting to hold share, not to mention
imported varieties.
(d) Seasonal Conditions: By and large the weather early
in the 1986 season was not conducive to sales.
It was mid-May in most trading areas before the
weather became cool.
(e) Advertising: Unfortunately due to budget restrictions
we were asked to operate at television module levels
down some 20% on previous year during the season.
(f) Other: Many other factors such as co-operative
spending, retail shelf layouts, the fight for
merchandising space etc. have played their part.
1987 CHOCOLATE BISCUIT CAMPAIGN.Arnott's "Agency Brief" for "Salada - Reduced Salt" - May 1987
As expressed earlier in this brief we are coming out
of a difficult year compounded by many factors.
1987 will see an acceptance of many of these areas
by the consumer and should lead to a turnaround in
the segment.
The market is not going to be easy and will require
a major effort from both the marketing and selling
elements to ensure we gain our rightful share.
However, we are not going to be panicked into making
quick decisions affecting our long established and
successful direction.
Our campaign in 1987 will be directed to doing what
we do well even better, with the co-operation of all
concerned.
Our enormous strength is quality and a consistent approach
which the consumer recognises as uniquely Arnotts in terms
of respect and confidence. This formula will be continued
for the coming season.
The following details the major elements of the campaign.
108. In May 1987, Arnotts' management prepared an "Agency Brief" for a dry
cracker biscuit to be marketed under the name 'Reduced
Salt' Salada (release
date: January 1988). Under the heading "Dry Cracker Market" the following
appeared under the sub-heading "Situation":
CONFIDENTIAL109. Under the sub-heading "Market Opportunity", the following appeared:
CONFIDENTIAL110. Later in the document, the following appeared under the sub-heading "Conclusion":
CONFIDENTIALArnott's "Agency Brief" for "Arnotts Cracker and Savoury Segment" - Review 1987/Campaign 1988
111. In March 1988, Arnotts' management prepared an "Agency Brief" for
"Arnotts Cracker and Savoury Segment" - Review 1987/Campaign
1988. The
introduction was as follows:
CONFIDENTIAL112. Under the heading "Structure of the Market" the following appeared:
CONFIDENTIAL113. The brief then referred to the B.I.S. and said that three "competitors" (Arnotts, Nabisco and Westons) "account for around 90% of the market in volume terms and close to 95% in dollar terms."
114. The following conclusions were offered for dry crackers:
CONFIDENTIAL115. The following conclusions were offered for flavoured snacks:
CONFIDENTIALArnotts' "Cracker and Savoury Trading Area Brief" for the 1987 season
116. Earlier in 1987, Arnotts' management prepared a "Trading Area Brief" for
cracker and savoury biscuits. The Brief contained the
following introductory
remarks:
CONFIDENTIAL117. The Brief analysed statistics from the B.I.S. in respect of sales of dry crackers and flavoured snacks by Arnotts, Westons and Nabisco.
118. In 1988, Arnotts' management prepared a "Cracker and Savoury Trading
Area Brief". The following introductory remarks were made:
CONFIDENTIAL119. The "Brief" analysed the information contained in the B.I.S. in respect of the sales of dry cracker and flavoured snacks by Arnotts, Nabisco and Westons.
120. In August 1988, Arnotts' management prepared a report entitled "Sunshine
Biscuits in the 90's". The report contained an analysis
of the volume and
market shares of the "Australian biscuit market", including sales under the
"Sunshine" brand for the 12 months
ended March 1988 and for the previous two
years. Included in the report was the following observation:
CONFIDENTIALWestons' management reports
121. Westons' management also reported periodically on the activities of
other biscuit manufacturers, particularly Arnotts and Nabisco.
CONFIDENTIALWeston's "Business Plan" for "Biscuit Trading" for the years 1988/1989/1990
122. In late 1987, the management of Westons prepared a "Business Plan" for
"Biscuit Trading" for the years 1988/1989/1990. In the
introduction, the
following, inter alia, observations were made:
CONFIDENTIAL123. The "Business Plan" included a section entitled "Marketing - Biscuits retail". In that section, under the heading "Overview", the following introductory comments were made:
CONFIDENTIAL124. Under the sub-heading "Problems Confronting Westons Performance", the following was observed:
CONFIDENTIAL125. Under the sub-heading "Total Market Size and Growth Trends" the following appeared:
CONFIDENTIAL126. Later in the document (at p 13) under the heading "Business Plan" there was a sub-heading "Confectionery" and a further sub-heading "Wagon Wheels". The following, inter alia, appeared:
CONFIDENTIALNabisco's management reports
127. Nabisco's management also reported regularly on the trading activities
of other biscuit manufacturers, particularly Arnotts
and Westons.
Nabisco's "Post Analysis - Chocolate Biscuits 1987"
128. In 1987, Nabisco's management prepared a "Post Analysis - Chocolate Biscuits 1987".
129. In reporting on a "poor" performance, the analysis dealt with "pricing
structure" as follows:
Since 1984 both Nabisco and Westons have specialled Chocolate biscuitsUnder the sub-heading "Product Varieties", the following appears:
near the end of the season to retail at 99 cents and as low as 89 cents.
This practice has resulted in price sensitivity for Chocolate biscuits
creating a barrier to purchase at the normal retail price.
In September 1985 a 10% sales tax was placed on all biscuits, impacting
on Chocolate biscuits being the most expensive per gram.
Further to these pricing problems the economic recession has impacted
on household spending. Indulgent products like Chocolate biscuits
become the first taken out of the trolley when the shopping bill
is too high.
The strategy in 1987 was to endeavour to educate the consumer to
pay more for Chocolate biscuits by specialling at $1.29 to a minimum
of $1.19.
Unfortunately, in order to pick up volume this was not upheld and
99 cents specials reigned supreme.
Nabisco has the unfortunate position of being in no-mans land whenUnder the sub-heading "Competition" the following appears:
it comes to Chocolate biscuits.
Arnott has a strong franchise with premium priced, premium quality
product. Cadbury a new entrant in 1987 closely follows Arnott in
positioning.
Westons are the cheaper Chocolate biscuits with a value for money
positioning as well as a strong franchise with Chocolate Wheatens.
Nabisco does not fit in either position and has no strong franchised
products.
Chocolate biscuits are the most competitive category.Nabisco's "Fancy Assorted Marketing Plan 1987"
Of the three major manufacturers:
Arnott is market leader with 65% share;
Westons 25% and Nabisco 10%.
Additional to the big three are Cadbury who are expected to be
a strong presence over the next few years and Players representing
the cheapest end of the market i.e. - Gobb Stoppers for kids.
130. In July 1986, Nabisco's Biscuit Division management prepared a "Fancy
Assorted Marketing Plan 1987". Under the sub-heading "Share",
the following
appeared:
Both Nabisco and Weston have suffered share losses over the past131. The Plan stated the "Key Issue" as follows:
five years to the gain of Arnott.
Apr Point Change
1981 1982 1983 1984 1985 1986 '81-'85 '84-
Nabisco 12.2 10.3 13.8 12.1 10.1 9.6 (2.1) (2.0)
Arnott 71.6 72.3 66.9 69.8 76.3 76.6 4.7 6.5
Weston 16.2 17.4 19.3 18.1 13.6 13.7 (2.6) (4.5)
In terms of Nabisco's business, Fancy Assorted currently represents
9.2% of total volume, a downward shift from its position of 10.6%
in 1985. This is, in part, due to the category's poor performance
but also the increased emphasis on high priority categories such
as Dry Crackers, and Chocolates.
"How can Nabisco improve brand recognition and loyalty in the FancyNabisco's "Biscuit Marketing Plan - 1988"
Assortment category, given Arnotts firm stranglehold at the top end
of the market and Sunshine's revamped range which competes directly
with Weston at the lower end?".
132. In late 1987, Nabisco's management prepared a "Biscuit Marketing Plan -
1988". The plan reported on the performance of Nabisco's
biscuit division in
1987 as follows:
CURRENT YEARS PERFORMANCE133. Under the heading "Background" and under the sub-headings "The Market" and "Size", the following appeared:
Biscuit division will achieve 10,000 tonnes in 1987, representing
90% of budget and 99.6% of last year.
Growth in Nabisco's priority categories - Dry Crackers, Flavoured Snacks
and Cookies has been higher than planned, but has been counteracted
by significant volume losses in our Chocolate and Assortment business.
Market share is projected to be 9.0% (1986 9.2%), assuming a 2.0%
improvement in market volume in 1987, following four consecutive
years of decline, at an average rate of 1.0% per year.
The Market134. Under the sub-heading "Segment Shares" the following appeared:
Size:
Total Biscuit Market volume over the last 12 months has
been measured at 112,300 tonnes, an increase of 1.9%
over previous year, (12MMA June).
The total retail value of the Biscuit market is estimated
to be $450 million (Source: Retail World), which has
been declining each year until 1987, where it has improved
over 1986 levels. Consumption per head is 6.86kg, making
Australians the third largest per capita consumers of
biscuits in the world following U.K. and New Zealand.
The volume growth of the market in 1987 has been partly
attributed to the inability of the three major manufacturers
to effect price increases since June 1986, owing to the
Prices Surveillance Authority decision to monitor Biscuit
pricing.
The three major manufacturers account for approximately
92% of all biscuits sold, with a number of smaller companies
accounting for the other 8% (Players, Paradise, Generics).
Arnotts occupy a position of dominance in the market
with a volume share of over 75%, a dominance it holds
across all product categories with the exception of Chocolate
(58% share).
Market growth in Dry Crackers, Crispbreads and Fancy Non Assorted135. Under the sub-heading "Seasonality" the following appeared:
categories has been at the expense of the Chocolate and Cookie
categories, the hypothesis being that consumer interest
is increasing in healthier, better for you biscuits (Dry
Crackers, Crispbreads), rather than the more expensive indulgent
biscuits (Chocolate).
Whilst there is little seasonality in total Biscuit sales,136. Under the sub-heading "Trade Study" the following appeared:
sales by category are more seasonal with Chocolate consumption
heaviest during May-September, counteracted by heavier consumption
of Dry Crackers and Flavoured Snacks during the September/March
period.
It is believed the grocery trade in Australia would preferNabisco's Dry Cracker "Premium" Biscuit - 1988 Marketing Plan
to operate in a more competitive environment within the
biscuit market, which given Arnotts dominant market position,
is clearly not the case at present.
Trade margins on Nabisco tend to be higher than Arnotts
and Westons, as the trade adopt a more of a "loss leader"
approach with selected Arnotts and Westons lines.
137. In late 1987, Nabisco's management prepared a "Marketing Plan" for their
"Premium" dry cracker biscuit for 1988. The Plan stated
(at p 1) that the dry
cracker "segment" of the market in 1987 was estimated to be 20.9m. kilos
"representing 17.9% of the total biscuit
market". Under the sub-heading
"Competition", the following appeared:
Arnott's and Nabisco are the only two138. Under the title "Problems" the following, inter alia, was stated:
major manufacturers competing in this
market. Generic activity is limited to
cream crackers only.
Arnott's has 21 varieties, with SAO and
SALADA believed to be their largest selling
items. Dry Crackers account for 20.3%
of Arnotts total retail sales.
Nabisco competes with 10 varieties.
On shelf space for Nabisco products is severely limited.(It appears that in retail stores, biscuits are usually grouped together in "biscuit bars". Generally speaking, Arnotts biscuits are displayed together and are first in the traffic flow, occupying about 50% of the biscuit bar. Nabisco's biscuits are usually grouped together next, occupying about 10% of the biscuit bar. Weston's biscuits are then displayed, occupying about 15% of the shelf space. Imported and other brands are then displayed. Arnotts' sales representatives' "merchandising standards" include the following directions:
The cost of buying new space for new products is prohibitive.
This impacts on the launch of new PREMIUM varieties necessary
to achieve budgetted sales volumes. Slower selling lines
within the dry cracker segment are being reviewed with
deletion in mind.
"Arnotts should be first in flow as laid down in the139. According to the evidence of Mr. Simeone, Nabisco's Sales and Marketing director between 1986 and 1988, whose evidence I accept, Arnotts "single biggest strength was the extent of the facings, or shelf space, occupied by their products in the retail stores and the display of all biscuits in blocks by suppliers. Generally, Arnotts' biscuits were positioned first in the traffic flow in stores, with more than half of the total shelf space allocated to biscuits.")
Sales Manual.
Percentages lower than 50% of bar space are not an
acceptable standard.
House brands and others mixed with Arnotts is also not
acceptable."
140. In the middle of 1987, Nabisco's management prepared a "Marketing Plan" for flavoured snacks for 1988. The Plan stated (at p 3) that in 1986, the flavoured snacks "segment" represented 5.5% of "the total retail biscuit market" and that the segment would grow by 2.3% in 1987. It was said that Nabisco was "driving much of (the) growth in flavoured snacks".
141. Under the sub-heading "Swot Analysis", under the title "Strengths", the
following appeared:
* High market share within the segment (26.5%) for142. Under the title "Weaknesses", the following appeared:
1987, enabling potential economies of scale in
production.
* Adoption of a strongly competitive positioning
for 1987/1988 (strength of flavour) - on judgement.
* Nabisco enjoy excellent distribution of all varieties.
* Distinctive packaging enables:
- excellent on shelf presence;
- appetite appeal;
- ranging prominence;
* Our packaging is preferred over Arnotts giving
us a competitive advantage*.
* Use of consumer promotion and bonus packs has given
Nabisco a competitive edge over Arnotts.
5.2 WeaknessesThe imposition of sales tax on biscuits in 1985
* Nabisco's reliance on the last quarter for profit
recovery and sales targets makes us vunerable to
attack.
* Seasonality:
1985 52.9 (NAB) 45.0 (MKT)
1986 45.4 (NAB) 43.3 (MKT).
* High levels of trade spend over past years has
effected profitability.
* Lack of continuity in advertising approach and
media effort has resulted in low aided and unaided
awareness and a weaker brand franchise.
* Arnotts has a share advantage of 3:1 putting it
in a very dominant position.
* Unable to match or surpass Arnott's product superiority
in "post oven toppings" ie. BBQ and Spicy Tomato.
SOURCE: Quantum Research - Qualitative July 1987.
* Unable to get like with like shelving, weakening
our ability to compete head on.
* Pricing variations by account favour Arnotts by
1-3[/pkt, due to trade margins on Nabisco being
higher than Arnotts.
* Underdeveloped brand for Nabisco in Victoria.
143. As has been noted, a sales tax was imposed on biscuits in 1985. On 2
October 1985, an officer of Arnotts wrote to a senior member
of Arnotts'
management suggesting some arguments, in the form of a draft "submission",
which could be put to Government for the removal
of the tax. The memorandum
enclosing the submission stated, inter alia, the following:
We should press strongly, I feel, the arguments that the tax was not144. In the draft submission, under the heading "The Biscuit Market in Australia", the following was stated:
only arbitrary - in that biscuits are primarily a 'staple' food
product like any other and not a luxury - but also discriminatory. I
cannot see how the Government can counter these points with any
logic. The 'fall back' position would seem to be an acceptance of a
tax on chocolate biscuits but not on other biscuit categories, for
it would appear that the chocolate and confectionery lobby has been
successful.
The tax has only been looked at from the viewpoint of
our biscuit business. Another point to be put forward strongly is,
of course, that Arnotts, as a group, is caught in a three-way-bind
of taxes on biscuits, pet foods and snack foods and is, therefore,
singularly disadvantaged.
As well as using a professional lobbyist,
it may be worth considering employing a PR company that could
skilfully create a positive environment for us which even in the
long-term, could work to our advantage at government level. Similar
work should, perhaps, be done at the consumer level for I have a
feeling that there will be a limited awareness of this new tax. The
last thing we want is for the consumer to blame Arnott's for putting
up its prices.
We should, perhaps, also be considering undertaking
some research to ascertain consumers' attitudes to the concept of
close substitution on which the tax is based, their general
attitudes to the tax and the likely effect on their purchase
behaviour.
Australia has one of the highest per capita consumptions of biscuitsRetail
in the world. Biscuits are, therefore, very much part of the
Australian food consumption pattern and traditionally have been so.
In contrast to the situations in many overseas markets, biscuits, in
Australia, are regarded to a large degree by the consumer as being a
'staple' food item. In our marketing approach over the years we have
always regarded and treated them as such.
The 'staple' - and stable - nature of the biscuit market in this country
can be illustrated by the fact that our list of 15 national top-selling
varieties comprises products of considerable longevity which are regarded
and used mainly as basic food items by the consumer rather than as luxury
treats:
Product Category Date
1. Sao Dry Cracker *
2. Assorted Creams Sandwich/Fancy *
3. Family Assorted Plain Sweet *
4. Scotch Finger Shortbread *
5. Milk Arrowroot Plain Sweet c.1880
6. Jatz Dry Cracker 1950s
7. Tim Tam Chocolate 1950s
8. Salada Dry Cracker 1963
9. Barbecue Shapes Flav. Cracker 1960s
10. Milk Coffee Plain Sweet *
11. Mint Slice Chocolate 1950s
12. Monte Carlo Sandwich/Fancy 1920s
13. Ginger Nut Plain Sweet *
14. Shredded Wheatmeal Plain Sweet *
15. Spicy Fruit Roll Fruit 1920s
* Appears in 1906 price list.
Apart from Tim Tam and Mint Slice, two chocolate biscuit lines, it is
difficult to understand how any of the rest of these products could be
interpreted in any way as being a close substitute for chocolate or
confectionery.
The biscuit industry in Australia, led by Arnott's, has always been
characterised by the wide range of biscuits available to the
consumer, satisfying all sorts of tastes and usage occasions.
For example, in 1983-84, the journal
was split as follows:much
Volume Share %
Dry Crackers 16.6
Crispbread 6.3
Flavoured Crackers 4.8
Cookies 8.1
Plain Sweet 15.6
Shortbread 4.7
Sandwich-Fancy 12.9
Chocolate 12.5
Plain Sweet (assorted) 9.7
Sandwich-Fancy (assorted) 8.8
-----
100.0
These categories are not purely industry categories; they reflect very
the way consumers categorise and use biscuits themselves. To look quicklysweet
at each category in turn:
Dry Crackers: In this category we have a wide range of biscuits from Sao
and Salada, large crackers used primarily as bread substitutes,
through various wheat and seed products, to Jatz and Water
Cracker, small round crackers. These biscuits are used for
meals and light snack meals.
Crispbread: A biscuit category that was once very closely associated with
slimming and diets for women but which now has a broader
family usage as a bread substitute for meals and light snack
meals.
Flavoured Crackers: Small cracker biscuits with an intrinsic or applied
flavour. Positioned as an entertainment biscuit but sales
reflect a very general in-home consumption.
Cookies: Small, rough-textured biscuits, perceived as having 'natural'
ingredients and a 'home-made' taste and appearance. General
usage in home; served with tea, coffee or milk.
Plain Sweet (including Assorted): Various kinds of sweet and semi-sweet
biscuits used generally within the home, served with tea,
coffee or milk. Main consumers are larger families.
Shortbread: Biscuits of shortbread-type, very similar usage to plain
and cookies.sandwich,
Sandwich-Fancy (including Assorted): Various biscuits of the cream
fancy and wafer type used with tea, coffee and milk for generalalthough
family consumption and entertainment.
Chocolate: Basically biscuits coated or half-coated with chocolate
some varieties do have a kind of filling, e.g. Tim Tam andof
Mint Slice have cream fillings; Gaiety is a chocolate-covered
wafer biscuit. General use in the home and for entertaining.
Arnott's are represented fully in each of these biscuit categories.
It can be seen clearly that the wide diversity of biscuit types on the
Australian market and the broad appeal of biscuits across a whole range
as a whole group, are close substitutes for chocolate and confectionery.145. Under the heading "Chocolate Biscuits", the following was stated:
Most biscuit consumption in this country is part of a general food
consumption
pattern and would be regarded as such by the average consumer.
It is thought necessary to deal with chocolate biscuits as a separatevia
consideration. This is because chocolate biscuits, covered as they are in
chocolate, are the ones most likely to be classified as being close
substitutes for chocolate and confectionery.
Close substitutes they may be considered. However, it is worth pointing
out that our research indicates that chocolate biscuits and chocolate and
confectionery are viewed as being two distinct markets by consumers.
The research we have undertaken into the chocolate biscuit market - all
category on their own, as a special sort of biscuit that has littleparticular
relationship, either in attitudes or usage, to chocolate and
confectionery. In none of this research have
we ever heard the consumer talk in terms of chocolate
biscuits being a substitute for chocolate and confectionery.
We have also researched the chocolate confectionery market with
to be a well delineated, well entrenched one with a very definite productproducts.
segmentation and strong brand loyalty. Most heavy buyers, for example,
restricted their purchase choice to a small range of established
The researchers even concluded that it would be most difficult for a newthrough
product entry to establish itself in the market-place and to break
the strongly established habits of brand choice.enrobed
The heavy buyers of chocolate enrobed bars are persons for whom the
bar has become a fairly important means of 'treating' themselves. Theyfar
develop a strong habit in relation to the bars they buy.
The characteristics of the chocolate confectionery market - at least as
as chocolate-enrobed bars are concerned - bear, therefore, littleseparate
relationship
to those of the chocolate biscuit market. The chocolate enrobed bar
is a product for the individual and it is not generally shared. It is
eaten away from home.
There was, incidentally, in this particular research no mention by the
consumers of chocolate biscuits in the context of chocolate enrobed bars.
This perception by the consumer that chocolate biscuits and chocolate
confectionery are two distinct markets is reflected in the way they are
marketed. Chocolate enrobed bars are typically marketed in small packs
containing one bar; chocolate biscuits are marketed in 200g packs
containing, over a range of 13 of our lines, an average of 13 biscuits
per pack and, in the case of two other lines, 40 and 60 biscuits
respectively.
As a final point in arguing that the chocolate biscuit market is a
sales value of each.146. Under the heading "A Discriminatory Tax", the following was stated:
The 1983-84 sales of chocolate and confectionery are estimated by Retail
World to have been $926 million.
Sales of chocolate biscuits are estimated to be $60 million for the same
period.
This disparity in these sales values does little, it is submitted, to
support the concept of one category every being closely substituted for
the other by the consumer.
The broad nature of the biscuit market has been illustrated as has itswide
fundamental staple food value. Biscuits are clearly competitive with a
and frozen) and crispbread. None of these has had a wholesale sales taxto
imposed upon it.
That biscuits should be singled out to have a wholesale sales tax imposed
on them appears, therefore, to be discriminatory.
The tax will give an unfair advantage to our competitors who will be able
take advantage of lower retail prices.of
Two examples may suffice to illustrate what might be termed the 'breaking
the wholesale sales tax on biscuits.considerably
The positions of Sao and Salada as bread substitutes are clearly
established.
In the year 1984-85 we sold 17.7 million packets of or
513,000,000 individual
Sao biscuits and 8.2 million packets of or 147,000,000 individual Salada
biscuits.
These are very high sales in the Australian context. Sales rise
for both products whenever there is a bread strike.147. Under the heading "The Biscuit Market in the Future", the following was stated:
In one fell swoop, because of a 10 per cent tax, we shall have lost the
competitive position that we have built up against bread over the last
79 years.
We have in our range products that are like cakes - Honey
Jumble, Jaffa Cake,
Bolero - and products like pastries - Lattice and Raspberry Waffle. These
will be taxed while products of cake and pastry manufacturers, perhaps of
a similar nature, will not.
in the world, primarily because of its strict adherence to the philosophyprices
that 'There is no substitute for quality'. To make a superior product we
use the best quality ingredients and our costs and, therefore, retail
are more expensive but considers them worth the price.by
The price we recommend for our products is a fair one, accepted as such
both retailer and consumer. It is also one that is regarded as fair andincrease
reasonable in comparison with other food items.
The essential question, however, is whether an imposed 10 per cent
in the price of our biscuits will be acceptable to the consumer comparedalready
with alternative available foods which do not carry the impost. As
stated, we estimate a loss in sales of some $14.7 million in the year tomarket
come.
There is a serious risk of instability being created in the biscuit
on a long-term basis affecting our Company and all other local biscuitof
companies.
We have already seen in Australia a rapid growth in the level of imports
biscuits, increasing by 53.36 per cent in 1983 over 1982.local
12 Months to March (kgs)
Australian Bureau of Statistics
1982 1983 % Change
Total imported biscuits 4,048,000 6,208,000 + 53.36
These biscuits come from New Zealand, Denmark, Holland, West Germany and
Israel. From the retail prices of these products, which we estimate are
close to the cost of manufacture, it is obvious that most of them are
'dumped' or, at least, heavily export-subsidised.
The increase in the price of local biscuits and the inevitable consumer
resistance to this increase will undoubtedly accelerate the search by
retail chains for cheaper imported products which will further jeopardiseLetter written by Arnotts (on behalf of Arnotts, Westons and Nabisco) to the Treasurer concerning the imposition of sales tax dated 6 November 1985
the future of the local biscuit industry.
148. In a letter dated 6 November 1985, the Deputy Managing Director of
Arnotts wrote to the Treasurer on behalf of Arnotts, Westons
and Nabisco
saying that those firms manufactured and sold "more than 90% of the biscuits
consumed in Australia" and referring to
the announcement of the imposition of
the sales tax. The letter enclosed a submission but stated the following:
". . . . we accept the proposition that a minority of our149. In the submission, the following was stated:
products may stray close to the confectionery field,
and therefore request that your officers confer with
the Industry to re-classify the products that may be
taxable and to exempt the remainder."
"Biscuits" is a generic term which embraces a wide range of differentThere followed a statement of certain common attributes of biscuits to which reference has already been made in these reasons.
ingredient and analytical characteristics.
The Concise Oxford Dictionary defines biscuit - "Piece of usually
unleavened cake or bread of various materials usually crisp, dry,
hard and in small flat thin shape" or "Soft round cake-like scone".
Cassels English Dictionary defines biscuit "Thin flour-cake baked until
it is highly dried".
150. The "introduction" went on to state:
Biscuits generally have certain common attributes which include:151. Under the heading "Cracker Biscuits, Bread and similar Food Products", reference was made to the Model Food Legislation of the National Health and Medical Research Council and, in particular, to the definition of "bread" in the regulations made under that legislation. It was then stated:
(a) wheat flour as the principal ingredient;
(b) are prepared from a dough which is subsequently baked;
(c) are low in moisture;
(d) have minimum shelf life expectancy of three months.
Many biscuit types/varieties have traditionally been and are
today used
in parallel roles with other farinaceous staples, such as bread
and pasta
as they are similar in definition, composition, and dietary value.
Some varieties can validly be compared with processed breakfast foods.
Some biscuit types can be considered by composition and/or appearance
analagous to a number of bakery (cakeshop) speciality products, such
as jam tarts, mince tarts, etc.
There are several dietary categories.
A range of cracker/dry biscuits exists which are similar and in sometraditional
cases almost identical to the description of bread in the paragraph
above, except for minor (ingredient) differences such as the presence
of baking powders used as acidity regulators.
It is then clear that cracker/dry biscuits like bread, are cereal based
products, but with biscuits having a significantly lower moisture content
than bread, giving the former a much longer shelf life.
Food regulations specifically permit additions of vitamins and minerals
to crackers, thus recognising that they are used to fulfil basic
nutritional roles.
The characteristic flavours and textures of most crackers, like
bread, are produced by baking a flour/water/yeast fermented dough.152. Under the heading "Types of Crackers - 'Bread Alternatives'", the following was stated:
Biscuits, bread and cake are forms in which cereals are prepared ready
for consumption, others include porridge, unleavened ethnic bread,
bulgur, pasta products, and breakfast foods.
Bread and cracker biscuits are generally complemented with other foods
such as meat, cheese, etc.
A balanced diet consists of a selection of foods with complementary
nutrient composition. Some biscuits contain a wider range of ingredients,
e.g., seeds, cheese, etc., and may therefore be considered as prepared
foods; examples: Cheds, Cheese Shapes, Country Cheese, Sesame Wheat,
Clix - to be compared with bread, with butter, cheese, etc.
In may homes, crackers are substituted for bread, and with a longer
shelf life, exhibit a lower wastage in small households.
It should be noted that the compositional differences between bread
and may crackers, particularly on a moisture free (dry weight) basis
are minimal.
Soda Crackers (e.g. Salada, Premium)153. Under the heading "Some varieties can be compared with breakfast foods", the following was stated:
Soda Crackers are made using a traditional two-stage fermentation
process. Salada is presented in bread-slice size, with B group
vitamins and iron.
Cream Crackers (e.g. Sao)
Characteristically flaky and finely blistered: from a fermented dough
of flour, water, yeast, and shortening dough. The dough is laminated
prior to baking. A very popular cracker, it is eaten at any time of
the day with savoury or other spreads.
Savoury Crackers (e.g., Cheds, Savoury Shapes, or Nabisco Chicken in
a Biskit
There is a broad group of Crackers with significant quantities of
characterising ingredients, e.g., cheese, spices, savoury flavours
and other foods in their formulation. These are eaten "as is", or
with dips.
Water Biscuit-type Crackers
These are similar in composition to other plain Crackers.
Crispbread: Traditional and Extruded (e.g., Vita Weat, Cruskits, and
Rye Vita) Crispbreads are biscuits produced by specialised techniques.
Developments in extrusion cooking have led to extruded crispbreads.
These are broad, flat, and light in texture; and like soda and cream
crackers, provide interesting alternatives to bread.
It is important to note that Crispbreads, whether traditional or
extrude, are used as bread alternatives. Soda, Cream, Savoury,
and Water Crackers are similarly used and contain the same basic
ingredients as those products we choose to call Crispbreads.
QUESTION: Why have cracker biscuits, or indeed biscuits in general,
been singled out from cereal based, and other staple food
prodcuts, for wholesale sales tax imposition.?
We believe this to be an inequitable situation, discriminatory against
biscuits, which as a class, falls clearly within the spectrum and
composition of the cereal foods group. Biscuits contribute significantly
to both the diversity and convenience of the Group.
"Biscuits such as Shredded Wheatmeal, Home Wheat,154. Under the heading "A comparison of some bakery items and their biscuit equivalents", the following was stated:
Granita, Oatmeal and Currant Cookie, directly compare
with the muesli breakfast cereals. . . in nutritional
composition, i.e., protein, fat, sugar, starch, and
energy, the only difference being the addition of milk
to breakfast cereals prior to consumption. Compare
this with eating a cookie-style biscuit accompanied by
a cup of tea or glass of milk."
Many Bakery/Pastrycook items also produced in shop locations are very155. Under the heading "Sweet and Cookie-style biscuits", the following was stated:
similar in form and composition to biscuit products.
Many such bakery lines are produced on highly mechanised/automated
production lines, comparable to biscuit manufacture.
SWEET AND COOKIE-STYLE BISCUITS156. Reference was then made to biscuits used for particular dietary applications and to high protein milk biscuits.
The formulation of biscuits in this group are all based on flour, with
the addition of other food ingredients such as butter, sugar, oats,
dried fruits, milk powders, etc., to produce a convenient to use
and "ready to eat" food.
157. Under the heading "Biscuit and sugar confectionery" the following was
stated:
The N.H. and M.R.C. Standard for Confectionery states:The sense in which biscuit industry management refer, in their reporting, to Arnotts' "domination" of the Australian "biscuit market"
"Confectionery is the product made from sugar and/or glucose
syrup and/or other carbohydrate substances, permitted
colouring, wholesome foodstuffs, and permitted modifying
agents. . ." etc. . .
The proportion of sugar in biscuits, based on analysis of the present
range of products, (including the contribution from other ingredients
containing sugar, e.g., milk powder, dried fruits, jam, etc.,) is
summarised in Table 3.
The reference "Composition of Australian Foods" Q 0-180 for sweets
and candies (excluding Diabetic Chocolate), shows carbohydrate
(predominantly sugar for this category), between 44.6 and 99.5%,
with an average of 78.0%.
Clearly biscuits are not sugar confectionery.
158. In the management reporting of Arnotts, Westons and Nabisco, there are several references to the Australian biscuit "market". Although no witness was called from the management of Arnotts or Westons, it is reasonable to assume that industry management was intending to adopt the dictionary meanings of "biscuit" and of "market".
159. The dictionary meaning of "biscuit" has already been stated.
160. According to the Macquarie Dictionary, two of the definitions of
"market" are as follows:
"5. trade or traffic, esp. as regards a particular161. Management also referred to Arnotts' "domination" of the market. Again, it is reasonable to assume that it was intended to adopt the ordinary meaning of the word. The Macquarie Dictionary offers the following definitions of "dominant":
commodity. 6. A body of persons carrying on extensive
transactions in a specified commodity: the cotton
market."
"1. Ruling; governing; controlling; most162. The Macquarie definitions of "dominate" are as follows:
influential. 2. occupying a commanding position: the
dominant points of the globe. 3. main; major;
chief: steel production is the dominant industry in
Newcastle."
"1. to rule over; govern; control. 2. to tower(It is also reasonable to assume that when a member of the grocery trade spoke of Arnotts' "dominant" position, the ordinary meaning of "dominant" was adopted. For instance, in June 1989, management of Coles New World Supermarket, N.S.W., after reporting that the initial sales of their "Farmland" Biscuit range had been "most encouraging", observed:
above; overshadow. 3. to rule; exercise control;
predominate. 4. to occupy a commanding position."
CONFIDENTIAL
"These impressive figures show that although we have aConclusions to be drawn from the reporting of biscuit industry management
dominant market leader in Arnotts, there is always room
for a viable alternative, and in New World we now have
that alternative in Farmland Biscuits.")
163. Many important conclusions should, I think, be drawn from the reporting of biscuit industry management. As has been said, this evidence is consistent with the evidence as a whole and, in particular, is consistent with the testimony given by the many witnesses called by the Commission from the biscuit industry and the wholesale and retail grocery trade. Further, as has been noted, since neither Arnotts nor Nabisco called any member of management to give evidence, the inference is open that the evidence of the management of Arnotts, or of Nabisco, would not have assisted their defence of the Commission's case.
164. The conclusions which, in my opinion, should be drawn from the reporting
of the management of the biscuit industry are as follows:
1. There is a national biscuit industry of which the clear leader is Arnotts.
It is, by far, the largest manufacturer, its products
are of the highest
quality and it is the only manufacturer to produce the whole range of biscuits
available. Arnotts manufactures
the best selling product in each of the groups
which constitute the range of biscuits marketed in Australia. Westons and
Nabisco
are also large manufacturers of biscuits in terms of volume, but the
size of the operations of Westons and Nabisco, relative to Arnotts,
is small.
From time to time, Westons, Nabisco, Cadbury, Players, Paradise and generic
biscuits (or "house brands" of some of the
large retail chains) have offered
competition to Arnotts in certain areas in the short term. But no competitor
has even sought to
compete with Arnotts over its whole range and, even when
competition is offered in a particular product category, Arnotts is usually
able to move to "contain" the competition.
CONFIDENTIAL2. Arnotts' major brand in all trading areas is the "Arnott" brand. Arnotts has succeeded in marketing this brand so as "to equate products with a certain standard of quality in consumers' minds." Arnotts aims to give, and, it seems, has given, "meticulous" attention to the "Arnott" brand so as to "ensure competitive advantage in performance, function and value."
CONFIDENTIAL11. The biscuit industry markets a very high proportion of its biscuits through the major retail supermarket chains or through the large grocery wholesalers. Biscuits are usually grouped together in "biscuit bars" in which Arnotts' biscuits are first in the traffic flow and occupy about 50% of the bar. This confers a considerable marketing advantage upon Arnotts. It is very difficult, and very expensive, for a new entrant to the biscuit industry to obtain access to "facings", or shelf space, in biscuit bars in supermarkets. There are suggestions in the evidence that, on occasions, the retail chains have indicated interest in encouraging a new entrant (e.g. Players, Paradise) to provide competition to Arnotts, but Arnotts has been able, generally speaking, to maintain its position of first in the traffic flow, and occupying 50% of the biscuit bar. The strength of Arnotts' position in this respect has provided a considerable barrier to any new entrant to the biscuit industry.
CONFIDENTIAL15. Although the retail chains are a cause for concern for Westons, it appears that, on the whole, relations between Arnotts and the chains are mutually satisfactory. The history of the relationship between Arnotts and each of the chains, generally speaking, is consistent with an attitude of co-operation between them. Whatever power the chains may exercise over the smaller players, including Westons and Nabisco, the evidence indicates a recognition by Arnotts and by the chains that they need each other. There is no evidence that the chains have a "dictatorial" attitude towards Arnotts. This is consistent with their recognition of Arnotts' position as the clear leader of the biscuit industry. The management of one of the major retailers, Coles New World, actually described Arnotts as a "dominant market leader".
165. I turn next to consider the evidence particularly relied on by Arnotts.
The evidence given by the witnesses called by Arnotts
166. As has been said, Arnotts called no evidence from its management.
Arnotts did, however, call witnesses on the three topics already
mentioned. It
will be convenient to consider this evidence now.
The Roy Morgan survey
167. In March 1989, shortly before the hearing, and in contemplation of the
litigation, Arnotts commissioned The Roy Morgan Research
Centre Pty. Ltd. to
conduct a survey of consumer attitudes in certain areas. Pursuant to the
retainer from Arnotts and, it appears,
from other clients, Roy Morgan arranged
for 120 interviewers to interview a total of 1,200 members of the public and
to put a series
of questions to them on a wide range of topics, for instance,
marijuana, buying a car, State politics and smoking. One of the questions,
Q.21a, (drafted, it would appear, by Arnotts), asked the interviewer to put
the following to the members of the public being interviewed:
"21a Thinking now about things to eat between meals, or after168. Q. 24, (the responses to which Arnotts now relies upon, especially the response to Q.24(d) was as follows:
meals. (PAUSE) What, if any, things to eat between meals,
or after meals, can you think of? What other things to
eat between meals or after meals can you think of?
Any others? DO NOT AID] CIRCLE FOR ALL MENTIONED.
DRY BISCUITS, CRACKERS, CRISPBREADS . . . . . . . . . . . .1
FLAVORED SNACK BISCUITS OR SAVORY BISCUITS . . . . . . . .2
COOKIES OR SHORTBREADS, PLAIN SWEET BISCUITS
OR FANCY BISCUITS . . . . . . . . . . . . . . . . . . . . .3
CHOCOLATE COATED BISCUITS . . . . . . . . . . . . . . . . .4
POTATO CRISPS, CORN CHIPS, TWISTIES, ETC . . . . . . . . .5
RICE CRACKERS, RICE CAKES, BREAD STICKS,
PRE-PACKAGED 'TOAST' TYPE PRODUCTS . . . . . . . . . . . .6
BREAD, ROLLS, SANDWICHES, TOAST, CRUMPETS . . . . . . . . .7
CAKE, PASTRIES, BUNS, SLICES . . . . . . . . . . . . . . .8
MUESLI BARS, HEALTH FOOD BARS . . . . . . . . . . . . . . .9
CHOCOLATE COATED BARS, CHOCOLATES, BLOCK CHOCOLATE . . . 10
FRUIT . . . . . . . . . . . . . . . . . . . . . . . . . . 11
CHEESE . . . . . . . . . . . . . . . . . . . . . . . . . 12
NUTS . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ICECREAM . . . . . . . . . . . . . . . . . . . . . . . . 14
SWEETS/LOLLIES . . . . . . . . . . . . . . . . . . . . . 15
PRINT UNLISTED
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
CAN'T SAY . . . . . . . . . . . . . . . . . . . . . . . . XX
NONE . . . . . . . . . . . . . . . . . . . . . . . . . . VV"
(SURVEY RESPONSE OMITTED)169. It will be noted that the procedures contemplated that the interviewee would be shown a white card and a grey card.
170. The white card was as follows:
Chocolate coated bars, chocolates or block chocolate.10171. The grey card was as follows:
Muesli bars or health food bars. .
Cake, pastries, buns or slices. .8
Bread, rolls, sandwiches, toast or crumpets. .7
Rice crackers, rice cakes, bread sticks or
pre-packaged "toast" type products. .6
Potato crisps, corn chips, twisties, etc. .5
Chocolate coated biscuits. .4
Cookies or shortbreads,
plain sweet biscuits or fancy biscuits. .3
Flavored snack biscuits or savoury biscuits. .2
Dry biscuits, crackers or crispbreads. .1
Morning tea at home. .1172. Other questions were to be put to the interviewee but, for present purposes, it is not necessary to refer to them now. In the first instance, Arnotts called Mrs. Levine, a market research analyst employed by Roy Morgan, who supervised the conduct of the survey. Arnotts sought to tender, through Mrs. Levine, reports of the interviews carried out, together with a computerised analysis of the reports of interviews. Since the business records provisions of the Evidence Act 1905 did not apply, the tender had to be justified on common law principles. For the reasons I gave in writing on 1 September 1989, the tender was rejected.
Afternoon tea at home. .2
Before dinner at home. .3
After dinner at home. .4
Quick lunches at home. .5
Packed lunches for adults to take to work. .6
Packed lunches for children. .7
Parties with your friends. .8
Some other (Please describe)
173. Arnotts subsequently called three of the interviewers. I then exercised the discretion under 0.33 r.3(b) to admit the reports of the interviews.
174. The question remained of the admissibility of Roy Morgan's computer analysis of the results of the interview. For this purpose, on 14 September 1988, I appointed Mr. Eden Brinkley, a statistician employed by the Commonwealth in the Australian Bureau of Statistics, as a court expert for the purposes of 0.34 r.2 to provide a report on the question whether the computer analysis (a) provided a sound basis and (b) was based on proper and professional survey practices for drawing conclusions as to the views of the population of Australia on questions 21(a) to 25(c) set out in the survey questionnaire. Under cover of a letter dated 19 October 1989, Mr. Brinkley purported to report on the question referred to him. He raised a number of concerns about the questions and expressed a "somewhat qualified conclusion". The Commission objected to the tender of the "report" but, for reasons given in writing on 26 October, it was admitted into evidence. Mr. Brinkley was cross-examined. The Commission called evidence in reply from Dr. O'Toole, another statistician.
175. The Commission seeks to attack the survey on many grounds. It is said, on behalf of the Commission, that because none of the persons interviewed was called, little weight should be attached to the results of the survey. Further, the framing of the questions is criticised on several grounds. The reasons why, or the circumstances in which, food is, or is not, "available", as the interviewee is asked to assume in Q.24c and 24d, was not explored in the course of the survey. These could well be significant considerations. In any event, the word "available" is ambiguous and its use could well lead to complications. It was not made clear to the interviewee whether he or she was asked to assume that the product was not "available" for purchase or, rather, was not "available" in the person's home at that time. The Commission says that unless the interviewee, or at least a selection of the interviewees, is called and given an opportunity to explain his or her processes of reasoning in responding as he or she did, it would be unsafe to draw any particular conclusion from the answers noted by interviewers. (Other challenges were made to the survey but it is not necessary to refer to them now.)
176. I agree with the Commission's criticisms. The questions asked in the
interview could well require complicated answers. For instance,
assume a
question along the following lines:
"What would you have bought if this (your chosen) snackIt may then have been appropriate to frame the questionnaire as follows:
was not available?"
"I wouldn't have bought anything at allIn the absence of evidence from any of the interviewees, it would not be safe to give any real weight to the results of the survey.
I would have gone somewhere else that did have them
I would have bought something else".
177. As has been said, Arnotts called an economist, Dr. Williams. For the
separate reasons given at the time of publication of these
reasons, I have
concluded that Dr. Williams' testimony is inadmissible.
The evidence of Mrs. Symonds
178. Mrs. Symonds, a solicitor employed by Arnotts' solicitors, gave evidence that, during the course of the trial, she purchased from several retail outlets in Sydney many items of biscuits, snack foods, confectionery and breakfast cereals. More than one thousand items were tendered through Mrs. Symonds. The items were purchased in an endeavour to comply with an instruction, given to her by the solicitor with the conduct of Arnotts' defence, "to purchase biscuits and any like products".
179. It is not suggested that Mrs. Symonds has any experience in the biscuit industry. It is, however, suggested that weight should be given to her views as a consumer to indicate the range of processed foods available in this general area.
180. Accepting that Mrs. Symonds may be regarded as a consumer of processed foods, I am of the view that, because of Mrs. Symonds' professional association with Arnotts' defence of these proceedings, her evidence should be given little weight.
181. Even if this factor were not present, Mrs. Symonds' evidence was
necessarily limited in its scope. It cannot, for instance,
tell us the volume
of the trade in the products tendered, in what areas they are marketed and
over what period they have been marketed.
Without knowing these details, very
little could be inferred from Mrs. Symond's testimony.
Documentary evidence upon which particular reliance is placed by Arnotts
Market research reports tendered by Arnotts on the question of market
definition
182. Arnotts tendered very many market research reports commissioned by
suppliers of biscuits, including Arnotts, snack foods and
other products. The
reports were admissible by virtue of the business records provisions of the
Evidence Act. In no case was the
person who commissioned the report called.
Nor was the person who carried out the survey called. The persons whose views
were sought
in the course of the survey were not called. In these
circumstances, it would be unsafe to rely upon the opinions or conclusions
expressed in these reports. In my view, these are entitled to little weight.
Telex dated 16 April 1985 from the Commission to the Prices Surveillance
Authority
183. In April 1985, the Prices Surveillance Authority sought the comments of
the Commission on the question whether, inter alia,
biscuits should be
submitted to the Treasurer for possible declaration under the Prices
Surveillance Act 1983. (In fact, such a declaration
was made in 1986.) Mr.
H.R. Spier, First Assistant Commissioner replied as follows:
"IN TPC EXPERIENCE THE THREE COMPANIES FIERCELYIn my view, this very general expression of opinion by Mr. Spier is entitled to little weight in the absence of any details to support the process of reasoning by which he arrived at his conclusions. There is no reason to suppose that Mr. Spier was himself an expert who was qualified to speak of the operations of the biscuit industry. Rather, it is reasonable to assume that the views of Mr. Spier, and of the Commission, were very much dependent upon industry sources.
COMPETE FOR THE AVAILABLE MARKET. SHELF SPACE IN
SUPERMARKETS IS THE FIRST ASPECT OF THAT
COMPETITION. IT IS CLEAR THAT ARNOTTS HAVE THE
LARGEST SHARE BUT THE TPC WOULD NOT SEE THEM AS
DOMINANT AT PRESENT BECAUSE OF THE EXISTENCE IN
THE MARKET OF NABISCO AND WESTONS (BOTH LARGE
MULTI-NATIONALS). SHOULD ARNOTTS AND ONE OF THE
OTHERS SEEK TO MERGE THE TPC WOULD PROBABLY SEE
THE NEW ENTITY AS DOMINANT.
AGAIN, THE POWER OF THE RETAILERS CANNOT BE
OVERLOOKED AND THE FACT THAT BISCUITS ARE A
DISCRETIONARY PRODUCT MEANS THAT IF THEY BECOME
TOO DEAR CONSUMERS WILL MOVE TO SUBSTITUTES.
THE TPC CANNOT SUPPORT BISCUITS BEING THE SUBJECT
OF SURVEILLANCE. . ."
184. Arnotts relies upon observations made in a letter to the Authority dated
6 April 1987 written by Mr. J.V. McKeown, First Assistant
Commissioner, as
follows:
"(In 1985) the Commission did undertake some limited185. It is apparent from the terms of the letter that Mr. McKeown's views were tentative only. They were also very much dependent upon industry sources, the details of which are not known. In the circumstances, Mr. McKeown's opinions are entitled to little weight.
enquiries as to the structure of the industry given the
combined market share of the proposed joint venture
participants. Market share information obtained gave
the following market shares for the biscuit market.
Arnotts 65-67%
Nabisco 9%
Westons 13% Imports around 5% Others 8%
(probably less now)
There were indications (from statements made by
Bond/Nabisco) that market shares were relatively static
in total but may vary substantially between categories
of biscuits. The enquiries also indicated that at the
time the biscuit market in Australia was not marked by
growth. Pricing at the wholesale level was seen as
competitive with manufacturers having regard to each
others' prices, and the market power of supermarket
buyers also kept prices competitive.
The Commission also looked closely at the 1986 merger
of Fielder Gillespie Ltd/Allied Mills Ltd and the
Goodman Group Ltd in which there was an involvement of
Arnott's Ltd. However, in its enquiries into that
merger the Commission concentrated on retail packs of
edible oils and fats (including margarine), the market
where it saw undue market dominance resulting from the
merger.
Any information the Commission does have as to the
structure of the biscuit industry is primarily
dependent on known industry sources, which you will no
doubt take into account (e.g. the Aust. Retail World
Annual Report and Foodweek sales estimates attached).
The Arnotts group has been the predominant supplier of
biscuits in Australia since the late 1960's when it
successfully beat Nabisco and George Weston to get
control of the best known local biscuit makers in each
state. But even without the benefit of recent market
enquiries any competition analysis would need to
consider the power of the major retail groups within
the food retailing area and the possible countervailing
power such groups may have on local biscuit suppliers,
including Arnotts Ltd. Supermarket business apparently
represents some 90% of the biscuit trade with the top
four chains representing some 75% of that 90%.
The above response is brief; however as indicated the
Commission has had little recent close involvement with
the Australian Biscuit industry and for this reason I
think I can offer little more to assist your enquiry."
186. Arnotts rely upon a media release issued on behalf of the Commission in
July 1988 as follows:
"On current information the Trade Practices Commission187. The views expressed by Mr. Spier should, in my opinion, be given little weight for present purposes. His views were very generally expressed and were not addressed to the biscuit industry, but rather to the "Australian processed food markets". We do not know, and cannot evaluate, the sources of his information. No details were given to enable an assessment to be made of the merit of his opinion.
sees no need to intervene in the proposed takeover by
Goodman Fielder Wattie Ltd. of Rank Hovis McDougall PLC
of the UK.
First Assistant Commissioner Hank Spier said today the
Commission had examined the likely implications for
Australian processed food markets of a successful bid.
Present indications are that it would not put Goodman
in a position of dominance in the total Australian
processed food market.
There are a number of other substantial companies and a
large number of smaller operators in the market.
Moreover, the buying power of the supermarket chains is
a significant countervailing force in the market.
However Mr. Spier said the Commission would closely
monitor progress of the takeover bid for developments
which might affect its initial assessment."
188. Reliance is placed by Arnotts upon a letter dated 28 September 1988
written by Weston to the Commissioner. The background to
the letter was a
report in the "Sydney Morning Herald" dated 24 September 1988 as follows:
"TPC WARY OF NABISCO SELL-OFF TO ARNOTTS189. By letter dated 28 September 1988, Mr. Robert J. Kelly, secretary of Westons, wrote to the Chairman of the Commission as follows:
By Eric Ellis
MELBOURNE: ICM Australia's planned disposal of its
recently acquired Nabisco biscuit brands to the biscuit
market titan, Arnotts Ltd. was in limbo yesterday as
the Trade Practices Commission expressed 'concerns'
about the mooted deal.
'I'll be very surprised if this one gets through,' a
leading food industry analyst said.
'Any deal that puts one company in control of 80 per
cent of a market is very much a line-ball affair,' she
said.
The TPC yesterday confirmed it had launched a 'very
detailed investigation' of the deal, under the
anti-monopoly provision of the Trade Practices Act,
section 50.
'The commission has obvious concerns about the proposed
arrangement and its likely effect on the market,' a TPC
spokesman said.
Arnotts already has a stranglehold on the $550 million
Australian biscuit market, boasting a 67-70 per cent
stake which would jump to 75-80 per cent if the Nabisco
deal was consummated.
The proposed deal has also fallen under the scrutiny of
the Foreign Investment Review Board, given that the
US-based Campbells Soups group has a 30 per cent stake
in Arnotts.
The UK-controlled George Weston group, controlling some
13-15 per cent of the biscuit market, is understood to
have expressed private unofficial concerns to the TPC
about the deal and to be preparing an official
submission.
Industry analysts feel much would seem to depend on the
interpretation of the Australian market, which could be
segmented into separate chocolate, savory and sweet
biscuit markets, thus diluting Arnotts' domination.
ICM Australia, formerly known as the Intercity Mills
group, is controlled by the secretive Shears family and
is best known for its breakfast cereals operations, in
particular the Uncle Toby's porridge lines.
ICM acquired Nabisco Australia in May in a $50 million
all-or-nothing deal from the RJR Nabisco group of the
US. That deal included Nabisco's biscuit, nut and
cereal lines. It sold the Planters nut division to
Amatil Ltd in June."
"I refer to a recent article by Eric Ellis headed 'TPC190. In my opinion, the letter is of little assistance in the resolution of the issues in these proceedings.
wary of Nabisco's sell-off to Arnotts' which appeared
in the Sydney Morning Herald (September 24, 1988). The
article purports to attribute certain views to the
George Weston Foods Group.
In the light of this publicity the Board of George
Weston Foods Limited has instructed me to inform the
Commission that the Company does not hold the views
attributed to it in the article.
In fact the Board is of the view that there would be no
significant competitive change in those areas in which
the Company competes with Arnotts Limited."
CONFIDENTIALThe response by Coles Myer Ltd. to the Commission's questionnaire
191. In October 1988, the Commission sought the response of Coles Myer Ltd.
to a number of questions thought to arise out of the
proposed acquisition of
Nabisco by Arnotts. Questions 1 and 2 were as follows:
"1. Is there a market for biscuits?192. By letter dated 20 October 1988, Mr. K.L. Irvine, company secretary of Coles Myer, replied to these questions as follows:
2. Are there segments within that market?"
"1 and 2. Yes. However, if substitutability is an193. It is difficult to attach much weight to this comment. Some officers of the Coles Myer group were called by the Commission and cross-examined by the respondents but Mr. Irvine was not called. Although he was company secretary, we do not know his own experience in the trade itself nor do we know what facts or reasoning he had in mind. In making these assertions in such general terms, no attempt is made to address the question of "substitution" in any specific or concrete way. Some further comments made by Mr. Irvine in the letter, to which reference will be made shortly, confirm the suspicion that Mr. Irvine did not have any specific sources of information.
important criteria as to whether or not a market
exists, a separate market for biscuits may not exist."
194. Question 3 was as follows:
"3. To what extent are other products substitutableMr. Irvine's response was:
for biscuits?"
"3. Biscuits are often used as a 'snack' food195. The comments made in respect of Q.'s 1 and 2 apply here also.
therefore any other product category used for
'snack' purposes is substitutable."
196. Question 4 was as follows:
"4. Are other snack products marketed in directMr. Irvine's response was:
competition?"
"4. Yes."197. The comments made in respect of Q.'s 1 and 2 apply here also.
198. Question 5 was as follows:
"5. To what extent do you believe that consumers takeMr. Irvine's response was:
into account other products as possible
alternatives when considering a biscuit
purchase?"
"5. Quite a large extent, but we do not have any199. The comments made in respect of Q.'s 1 and 2 apply here also.
specific information in this area."
200. Question 6 was as follows:
"6. What influences the degree of substitution?"Mr. Irvine's response was:
"6. Advertising, packaging and marketing techniques201. The comments made in respect of Q.'s 1 and 2 apply here also.
and the nature of the alternative product."
202. Question 7 was as follows:
"7. To what extent is there substitution between oneMr. Irvine's response was:
segment and another?"
"7. We have not carried out consumer research in this203. Question 11 was as follows:
area and cannot answer the question."
"11. Brand importance -Mr. Irvine's response was:
- how important are brand names for promotion
purposes?
- is it important to you that a supplier has a
range of brands?"
"11. - Very important.204. The comments made in respect of Q's. 1 and 2 apply here also.
- Yes."
205. Question 12 was as follows:
"12. How important are generics - why/why not? FromMr. Irvine's response was:
whom do you purchase generics?"
"12. Very important strategically. To be competitive206. The comments made in respect of Q's. 1 and 2 apply here also.
in the market place. We purchase generics from
Paradise Foods, Players Biscuits and Biskex."
207. Question 13 was as follows:
"13. Are imports significant - why/why not?"Mr. Irvine's response was:
"13. Biscuits are imported mainly for seasonal events,208. Question 15 was as follows:
i.e., Christmas time, but the majority of our
purchases are supplied by Australian
Manufacturers."
"15. How important (vigorous) are smaller manufacturersMr. Irvine's response was:
as competitors?"
"15. Small manufacturers must compete vigorously for209. The comments made in respect of Q.'s 1 and 2 apply here also.
their place in the market. They can be important
because they offer the opportunity to develop
boutique ranges."
210. Question 16 was as follows:
"16. What concerns would you have if smallerMr. Irvine's response was:
manufacturers disappeared?"
"16. Small manufacturers have their place in the211. The comments made in respect of Q.'s 1 and 2 apply here also.
market. At times they are very innovative, e.g.
introduction of boutique ranges and develop new
opportunities for their market segment."
212. Question 17 was as follows:
"17. How difficult would it be for a new entrant toMr. Irvine's response was:
get into the market -
- is there a high degree of brand loyalty
(reinforced by advertising)?
- any costs in a manufacturer getting
his products onto the shelf?
- how big a problem is availability of shelf
space?
- would new entrant be required to spend
significantly on promotion and merchandising?
- is it easier for established manufacturer to
distribute his products?
- how easy is it for a manufacturer to move from
manufacture of one biscuit to another?"
"17. The success of a new entrant into the marketThis response appears not to be controversial.
place is determined by management expertise,
marketing expertise, quality of product,
positioning of product, and financial resources.
- Yes.
- Most manufacturers experience costs in getting
new lines on to the shelf, e.g. manufacturing
costs, transport costs, media advertising
costs, promotional activity costs,
representative wage and administration costs
or brokerage fee costs.
- Shelf space in a Supermarket is extremely
valuable and must be utilised to the full.
There are always many more products available
than shelf space.
- The Grocery industry is very competitive and
as such, all manufacturers must market their
product to suit the competition they will
face. There is no point in retailers
accepting products that are not so supported
as they will not sell.
- Not necessarily.
- Unable to comment on manufacturing
techniques."
213. Question 18 was as follows:
"18. How would a manufacturer improve his marketMr. Irvine's response was:
share?"
"18. By actively marketing his product."214. The comments made in respect of Q.'s 1 and 2 apply here also.
215. Question 19 was as follows:
"19. How do suppliers compete with each other - whatMr. Irvine's response was:
does each of them offer in discounts and
promotional expenditure as, say, a percentage of
price?"
"19. Suppliers compete with each other by many and216. The comments made in respect of Q.'s 1 and 2 apply here also. Further, Mr. Irvine's response should be read against the background of the description of Arnotts, already referred to, by the management of Coles New World, as "dominant market leader", given in June 1989. Shortly before this, in May 1989, the management of Coles New World had reported that they were "in no doubt. . . as to the difficulty of taking on Arnotts" in launching "Farmland" cookies. Earlier, in January 1989, Coles New World management reported that the "Farmland" launch would be most exciting "but realistically it is also going to be a difficult task to successfully take on Arnotts."
varied marketing means in a twelve month
financial period. The techniques used are
different and varied depending on product type
and competition activity in the market place.
Discounts and promotional activity are as varied
as the marketing activity again dependent on
competition and marketing strategy."
217. At the end of his letter, Mr. Irvine added the following observation:
"I would also add that the Commission should note that218. In the circumstances, except in non-controversial areas, the opinions expressed in the letter should be given little weight.
we do not have available consumer research as it is
normally the practice of manufacturers to conduct same
and not the practice of retailers."
219. It is submitted on behalf of Arnotts that it should be inferred that Arnotts may encounter competition from another, confidential, source. The identity of the potential competitor suggested is mentioned in confidential exhibit 85 and the principal reasons why Arnotts contend that the inference should be drawn are stated in Arnotts' confidential submission being tab 7 in vol. 5 of Arnotts' written submissions. Arnotts does not contend that the party in question has actually commenced to manufacture and supply biscuits in Australia. But Arnotts argues that it should be inferred from the evidence tendered that this party may launch its products here "at any time".
220. In my opinion, the evidence before me does not permit this inference to
be drawn. There is no evidence, either direct or circumstantial,
that the
party in question proposes, or, for that matter does not propose, to launch
its products in Australia at this stage. The
evidence simply does not permit
the making of any conclusions, one way or the other, as to the intentions, if
any, of that party
in this area.
The first issue: Is there a market for biscuits and, if so, is Arnotts in a
position to dominate that market?
221. In my opinion, the evidence demonstrates, first, that there is in Australia an area of "close competition" in the supply of biscuits and, secondly, that there is a "market" for biscuits in the sense explained in the authorities. It is clear that the market is a substantial one. The "product" market is biscuits and the "geographical" market is Australia. For present purposes, the relevant "market" may be described as a national market for the supply of biscuits.
222. Further, in my opinion, Arnotts is, in the sense explained in the
authorities, in a position to "dominate" that market. Arnotts
has had, for
many years, a very large market share. True, Arnotts has some competition in
the supply of biscuits, but not much. The
evidence shows that the members of
the biscuit industry and the members of the grocery trade, being the "players"
in the market,
act upon the belief that Arnotts is in a position to exercise,
and does exercise, from time to time, a commanding influence in the
market.
The evidence establishes that the size and strength of Arnotts is such that,
in practice, other entities are unable or unwilling
to offer any significant
competition to Arnotts in the biscuit market in the medium or long term. Even
in the short term, there is
an obvious reluctance to meet Arnotts "head-on" or
directly. Instead, other suppliers of biscuits seek to find "gaps" or "niches"
in the market. All of this conduct is an indication that Arnotts holds a
commanding influence in the market.
The second issue: can it be said that Arnotts' acquisition of the shares in
Nabisco would, or would be likely to, substantially strengthen
Arnotts' power
to dominate the national biscuit market?
223. It is convenient to deal first with the meaning of "substantially" where
used in s.50(1)(b)(ii).
The meaning of "substantially" in s.50(1)(b)(ii)
224. In my opinion, where used in s.50(2)(b)(ii), the adverb "substantially"
suggests a degree of strengthening of power that is "real or of substance and
not insubstantial or nominal"
(see Tillmanns Butcheries Pty. Ltd. v.
Australasian Meat Industry Employees' Union [1979] FCA 84; (1979) 42 FLR 331 per Bowen C.J.
at pp 338-9; per Deane J. at p 348; R. v. Hudson (1985) 63 ALR 257 at p 270).
225. In my view, Arnotts' acquisition of Nabisco would, or would be likely
to, substantially strengthen Arnotts' power to dominate
the national biscuit
market. Several considerations support this conclusion.
Nabisco's market share
226. For one thing, Nabisco has approximately 8% of the total Australian
biscuit market and approximately 9% of the B.I.S. share.
For another, in two
important segments of the market, dry crackers and flavoured snacks, Nabisco
is Arnotts' only competitor. It
will be recalled that in the March 1988
"Agency Brief" for "Arnotts Cracker and Savoury Segment", Arnotts' management
said that these
segments were "vitally important" to Arnotts because of "sheer
volume" and the "growth rates being achieved disproportionately to
the total
biscuit market." Many of the witnesses from the retail trade said, and I
accept their evidence, that, in their view, if
Arnotts had no significant
competitor in these segments of the market, Arnotts' power to bargain with
retailers, in these areas at
least, would be considerably enhanced.
Economies of scale
227. Another consideration is that it appears that Arnotts will gain
economies of scale from the acquisition of Nabisco. By letter
dated 21
September 1988, Mr. A.S. Dawson, Arnotts' managing director, wrote to Mr.
David Fawcett, managing director of Foodland Associated,
Kewdale, W.A., as
follows:
"This is to confirm my telephone advice to you today(It may be noted that "international competitiveness" is not a matter which can be taken into account as a defence to proceedings alleging a contravention of s.50.)
of Arnotts' application to the Trade Practices
Commission to purchase the biscuit business of
Nabisco Brands. I was very disappointed to hear
from you that the relationship between Foodland and
Arnott Mills and Ware is not all it should be. I will
ensure that our people do all they can to put it
right.
You expressed the general objection that the grocery
business is ending up in too few hands. I can
appreciate that point of view. However from
Arnotts' perspective we are only a fraction the size
of Nabisco and Westons when you consider their
global biscuit business. We are now attempting to
compete in more international markets and if we can
gain economies of scale in our Australian production
facilities then we can be more competitive
internationally. The Australian market is so small
in comparative terms that to be only a reasonable
size player in the global market almost means by
definition that you have to be a large player in the
Australian market.
I can assure you that we would like growth in the
Australian market and one does not get growth by
abusing a strong market share position. . . "
228. The considerations mentioned, viewed against the background of the
failure by Arnotts or Nabisco to call any evidence from management,
support
the conclusion that the acquisition of Nabisco would, or would be likely to,
strengthen Arnotts' power to dominate the Australian
biscuit market and would,
or would be likely to, strengthen Arnotts' power to do so to a degree that was
real and of substance and
was not insubstantial or nominal; that is to say, to
strengthen that power substantially.
Conclusions on the commission's claim that there has been a contravention of
s.50(1)(b)
229. For these reasons, I conclude that Arnotts is in a position to dominate the market in Australia for biscuits and that the acquisition of the shares in Nabisco by Arnotts would substantially strengthen the power of Arnotts to dominate that market. It follows that the deemed "acquisition" of shares under the option agreement contravenes s.50(1)(b).
230. Given that the option agreement was entered into after the service of process in these proceedings, it must also follow that Fledspac and Dickens were "involved" in the contravention within the meaning of s.75B(1) of the Act. It should be noted that counsel for Fledspac and Dickens argued that I should find that his clients were not so "involved". In my view, the argument is without any substance.
231. It further follows that any actual (as distinct from the deemed or notional) acquisition of the shares, by virtue of the exercise of any option granted by the option agreement, would also contravene s.50(1)(b).
232. I propose to grant declaratory relief accordingly.
Further relief
233. I will now hear the parties on the question of what further relief, if
any, ought to be granted. Specifically, the parties will
be given an
opportunity to be heard on the questions, first, whether a declaration should
now be made pursuant to s.81(1A) of the
Act declaring the deemed acquisition
of shares to be void; and, secondly, whether injunctive relief should be
granted to restrain
the future exercise of any of the options. It should be
noted that, at present, the status quo is preserved by undertakings.
Costs
234. The respondents must pay the costs of the proceedings to date, except where a special order for costs has already been made.
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