MERGER CASE IN LITHUANIA ALCOHOLIC BEVERAGES MARKET
by Aleksandras Jakiûnas
Head of Concentration Division
Competition Council, Lithuania
OECD workshop, Tallinn, 2004 05 25-26
MINERALINIAI VANDENYS/ STUMBRAS
On 22.03.2003 the Competition Council received a notification on proposed concentration pursuant to Article 10 of the Competition Law by which Mineraliniai Vandenys intend to acquire 100% of shares of Stumbras by way of privatization.
The total turnover of the economic entities participating in the concentration exceeds the limits established by Article 10 of the Competition Law of the Lithuanian Republic on Control over Concentration.
Mineraliniai Vandenys is engaged in the following activities: wholesale trade of alcoholic beverages and tobacco products.
Mineraliniai vandenys is subsidiary of the Concern “MG BALTIC”. The Concern MG BALTIC is holding company of a group whose principal business activities are production and distribution of mineral water, soft drinks and wine (Birstono mineraliniai vandenys). It also has interest in hotels, publishing (ELTA) and financial investment, retail trade.
Stumbras is company which principal activities are the production and distribution of spirits. It manufactures a range of spirits covering all the main internationally-recognized spirit types. Besides, Stumbras owns over 10% shares of Artrio-2 which operates as alcoholic beverages distributor.
Relevant product market
Alcoholic beverages are described as beverages whose contain > 1% elhyl alcohol. All alcoholic beverages differ of its strenght, taste, aroma. Spirits are produced by the distillation - heating and condensation - of fermented fruits or cereals with water to yield a strong yet palatable alcohol. The distillate may then be matured in bulk and/or blended with other alcohols or other flavourings before bottling. So, alcoholic beverages are produced : 1) by the distillation; 2) by the fermentation (breer, wine, mead); 3) by blend with water (vodka) or sugar, starch syrup, alcohol juice and other (liqueur, ratafia) and 4) by blend with non alcoholic beverages (e.g. juice) (grog, cocktail). According to strenght, taste, peculiarity of produce and consume, state regulation (it is sustaining that strong alcoholic beverage is above 22% elhyl alcohol) all alcoholic beverages are grouped into strong and weak alcohols markets.
Company Stumbras is specialized in strong alcohols market, whereas Mineraliniai vandenys imports and stong, and weak alcoholic beverages, also operates as wholesaler including and realization of products of Lithuanian alcohols producers (included Stumbras). The concentration affected market is briefly described as market of strong alcoholic beverages (22-50% elhyl alcohol). In view of consumer demand, all spirits coul be various grouped - for example, ‚brown‘ and ‚white‘ spirits (that is separating whiskey, brandy and so forth on the one hand from gin, vodka and so forth on the other); separate markets for each spirit of the same general type, such as gin, whisky, brandy, vodka, rum, tequila and flavoured spirits; further segmentation by origin/quality, especially for wiskey (separating, for example, Scotch whisky from other types); and, finally, subdividing each (narrow) spirit type by price/quality and brand. Principally due to price/taste and brand distance between Lithuanian and foreign brandies (especially for vodka) it was concluded that Lithuanian and foreign alcoholic beverages constitute separate product markets. It most of the main spirit types there is a wide range of products available at different prices. For example, the wholesale prices of vodka, produced in Lithuania, range from 14LTL to 59 LTL per litre, whereas for imported vodka - to 225 LTL.
Relevant geographic market
Spirits are characterized by low transport costs, any restrictions for transportation for long distance. In the all territory of Lithuania the players of the strong alcoholic beverages market face with the same competition conditions. However, for the possibility to import alcoholic beverages for importers is required to obtain a licensee which costs about 80000 LTL. Besides, the trade of alcoholic beverages herewith importation is regulated by the Law on Alcohol Control. As a result of fulfilment conditions according to the mentioned law the prices of imported spirits become higher than prices of domestic alcoholic beverages. Accordingly, still exists payment of duty. From Latvia and Estonia spirits can be shipped across borders without payment of duty, but done analysis shows that the share of spirits from these countries amounts a small part within the total amount of alcoholic beverages in Lithuania. The same situation is in Latvia and Estonia. And finally, even among the internationally recognized types, consumption varies significantly between countries, both as regards the type of spirit and in terms of brands. Consumers, as a rule, prefer domestic brands and trade marks.
In the view of the above, the Competition Council considers that the relevant geographic market in this case is defined as a territory of Lithuania.
The production of strong alcoholic beverages in Lithuania is characterised by a statutory monopoly of the state Alcohol Monopoly accordingly the Law on Alcohol Control. That means: only State‘s controled (State ownwrship over 2/3 shares of company) companies have right to produce alcoholic beverages above 22°. Advertising of alcoholic beverages is forbidden by law in Lithuania.
Now, there are 4 producers of strong and weak alcoholic beverages. They all are under privatization. Liberalisation process is in progress in Lithuania.
In the previous case it was concluded that Stumbras has dominant position in strong alcoholic beverages market. It was a case of abuse of dominant position related (concerning) rebates and advertising payments. Stumbras holds an aproximally 50% market share. The other producers (3) and importers (4) each hold 5-10 % market share.
Mineraliniai Vandenys holds a 3% of strong Lithuanian alkoholic beverages market share. Taking into account the market definition given above, horizontal overlap of the activities of the parties does not lead to the creation or strengthening of a dominant position. Otherwise, after liberalisation of strong alcoholic beverages market in Lithuania, it will be law entry barriers to this market. Some producers of law alcoholic beverages and non-alcoholic beverages can start to produce strong alcoholic beverages without large additional costs. Besides, countervailing buyer power (retailers and independent wholesalers)is likely to be sufficient to prevent the reinforcement of a dominant position. In the other hand, possible portfolio effects (Stumbras is the leading producer of strong alcoholic beverages and Mineraliniai Vandenys is the leading wholesaler) can arise the market power of undertakings (post-merger) and will lead the possibility to conclude between competitors through the ownership in the other wholesaler Artrio-2. After this statment the parties have undertaken to divest the owning shares of Artrio-2 within a set time period.
On the basis of above, the Competition Council concludes that the commitment given by the parties is sufficient to adress the competition concerns raised by this concentration. The Competition Council has decided to allow to implement notified concentration subject to the condition of full compliance with the commitment made by the parties in their undertaking.
The Competition Council of Lithuania