Abstract
This article uses the Coca-Cola Company/Coca-Cola Beverages Africa merger to illustrate the important role that competition policy should continue to play in the regional and continental integration agenda. The case provides an illustrative example that the structure and reach of firms play a pivotal role in the dynamics of value chains, as well as on the extent to which market power can potentially be exerted within and across countries. Competitive rivalry is necessary for innovation and lower prices, but the playing field needs to be leveled in order for entrants and smaller rivals to make and realize investments, build capabilities, and participate effectively. Competition reforms that take a bottom-up approach and account for the varying levels of development of countries play an integral role in opening up markets for entrants and small rivals, which in turn allow for the objectives of the African Continental Free Trade Area to be realized.
I. Introduction
A. Background
The shift toward globalization and an acute focus on regional integration over the past several decades has been instrumental for firms across the world in moving to supply customers in various regions. 1
This massive shift in firm behavior has meant mounting importance on the need to take a regional (and continental) view of firm activity. This is compounded by the fact that competitive dynamics depend on various issues such as location of production, location of consumption, and logistics infrastructure. Taken together, these issues have an impact on the reach of firms and the degree to which market power can be exercised. 2
The issue of competition policy as a tool to facilitate regional integration has been part of the African regional integration policy discourse for at least the last three decades. More recently, Fox and Bakhoum argue for competition law and policy in sub-Saharan Africa that considers inclusive growth and development by emphasizing that competition law must be part of a major development agenda, used as a tool to facilitate development rather than to protect producers and local champions. 3
Regional, and now continental, integration has (through the African Continental Free Trade Area [AfCFTA]) again come to the fore in relation to Africa’s development agenda; with great emphasis on the enhancement of competitive markets, diversification, and the development of strong regional value chains. By seeking to remove tariffs of 90% of goods, open up trade services, enhance competitiveness, and address a range of nontariff barriers, the AfCFTA has remarkable potential to spur industrialization and growth. 4 Better harmonization and coordination of trade across the continent embraces remarkable benefits for individuals and businesses, including enormous opportunities for small and medium enterprises across various value chains through the potential for greater scale, accessing inputs as well as accessing markets. 5 The AfCFTA therefore brings together key matters that are integral in Africa’s development agenda, and a robust competition policy forms part of this.
It is important, however, to appreciate that as the Agreement begins to achieve its objectives and integration increases and deepens, so will the cross-border effects of anticompetitive and restrictive practices. Anticompetitive arrangements across the continent have the danger of limiting the benefits of the AfCFTA because they can affect economic participation and inclusion of smaller, marginalized groups. Furthermore, as different countries on the continent are at different stages of adoption and implementation of competition reforms, the benefits of intraregional and intracontinental trade are likely to accrue differently. 6 This makes a robust competition policy increasingly important for the integration of markets and realization of the AfCFTA objectives.
Negotiations under the AfCFTA Agreement are grouped into phases. Phase II of the negotiations (which are expected to commence in the second half of 2021) includes negotiations on investment, competition policy, and intellectual property. 7 Article 5 of the Agreement stipulates that developments in competition policy will build on existing institutions, mainly through cooperation. This provides an opportunity for different competition experiences to be leveraged for the development of a rigorous AfCFTA competition policy.
The competition landscape in Africa is shaped by several influences including economic, cultural, historical, and governance factors, giving rise to numerous competition enforcement institutions both at national and regional level that have developed over time. 8 This has meant that enforcement outcomes have been varied across markets. From a regional enforcement perspective, there are a number of enforcers such as the COMESA Competition Commission (CCC), the ECOWAS Regional Competition Authority, and the recently established East African Competition Authority (EACA). Valuable lessons can be drawn from these institutions in the process of negotiations by leveraging their expertise and capacity. This means taking a holistic approach to the negotiations on competition policy, recognizing that the numerous institutions and structures can contribute to the continent wide competition reforms in varying capacities, given that some institutions are relatively younger than others.
While there is great value in coordination and cooperation between already existing institutions for the benefit of Phase II of AfCFTA negotiations, the need to continue to develop capacity and expertise in existing institutions should not be underemphasized. Given that the AfCFTA Phase II negotiations on competition policy depend on cooperation through these institutions, this article uses The Coca-Cola Company(TCCC)/Coca-Cola Beverages Africa (CCBA) merger to illustrate the important role that regional competition authorities such as the CCC and EACA will continue to play during negotiations and beyond. This article therefore puts forward that robust competition reforms, even at the national and regional level, remain necessary in light of the AfCFTA Agreement.
The TCCC/CCBA merger provides an illustrative example that the structure and reach of firms play a pivotal role in the dynamics of value chains and how they are governed, as well as on the extent to which market power can be explicitly or implicitly exerted within and across countries. Furthermore, competitive rivalry is necessary for innovation and lower prices, but the playing field needs to be leveled in order for entrants and smaller rivals to make and realize investments, build capabilities, and participate effectively. 9 Competition reforms that take a bottom-up approach and account for the varying levels of development of countries play an integral role in opening up markets for entrants and small rivals which in turn allows for the objectives of the AfCFTA to be realized. 10
B. Study Objectives
The three main objectives of this study include: assess key issues to consider in regional merger enforcement illustrated by TCCC/CCBA merger; highlight the critical role played by regional competition enforcement insofar as the AfCFTA agreement is concerned; and underscore key competition policy considerations relevant to AfCFTA negotiations.
II. The Beverage Value Chain: Opportunities for Regional Competitive Rivalry
Given that the TCCC/CCBA merger concerned the nonalcoholic beverages industry, 11 this section gives a brief overview of some of the key elements of the beverages value chain and pinpoints key issues relevant for consideration for industrial and competition policy for competitive rivalry at a regional level.
There are a number of segments within the beverages value chain for both carbonated soft drinks (CSDs) and beer (Figure 1). In the case of CSDs, the owner of the beverage will manufacture beverage concentrates which in many instances are trademarked. In some cases, beverage owners will then use the concentrates to manufacture CSDs and carry out in-house bottling activities, upon which they will be distributed to various geographic territories to service customers and retail outlets. In other cases, the manufactured concentrates will be sold to third party bottlers and distributors, upon which the beverages are mixed, bottled, and distributed to retailers. On the other hand, beer manufacturers brew their own beer, then either carry out in-house distribution activities or use third party distribution capabilities.
The classic beverages value chain for beer and carbonated soft drinks. Source: Compiled by author.
Importantly, there are no significant capability differences between bottling CSDs and bottling beer beverages. Therefore, a beer brewer is capable of bottling CSDs as a third party bottler. Over time, brewers have adopted this business model. Therefore, while CSD manufacturers and beer brewers do not compete at the upstream manufacturing and brewing levels, as well as the downstream retail level as they target different consumer groups, they are direct competitors at the bottling and distribution level of the value chain.
Capabilities in bottling and distribution typically require large capital outlays, and access to these activities is imperative in order to access markets. This is in addition to marketing, access to retail space, and appealing to consumer taste being an integral part of success in the value chain. Given these important links between the different segments within the value chain, well-known brands will typically possess a degree of power as they have capacity for their own bottling and distribution activities, while also being the must stock brands for third party bottlers, retailers, and distributors. This then also gives them better negotiating power regarding retails space in stores and over contracting terms with third party bottlers and distributors. 12
Over the past thirty years, the value chain has rapidly evolved to meet changing consumer trends, adapt to changes in technology and for manufacturers to remain competitive through cutting costs. Some of these changes in trends have included customers electing for off-site consumption and growth in third party logistics services, leading to significant growth in the use of third party services particularly in relation to bottling and distribution, as well as changing in packaging of beverages. 13
The beverage value chain has thus evolved to allow for more players in segments such as bottling and distribution, meaning firms do not have to be fully integrated in the value chain in order to participate. However, given the interdependency between well-known beverage brands and bottling and distribution, larger firms will typically have easier access to third party bottling and distribution because of their scale and because of having more recognizable brand names for the consumer. Therefore, while opportunities exist for more participation in distribution and bottling, the important links throughout the value chain typically raise barriers to entry in upstream manufacturing.
The nature of the beverage value chain therefore means that there where there are few manufacturers of CSD concentrates or brewers of well-known competitive beers, there is potential for significant market power stemming from upstream segments of the value chain. In addition, this could manifest into high structural and strategic barriers, where the costs of potentially as-efficient rivals could be raised.
These issues have the potential to become more pronounced when considering the regional reach and scope of firms in light of regional integration and globalization. Larger firms spanning across a region through investments and other long-term commitments is indicative of trade favoring productive efficiency and consistent with vertical coordination as a strategy for managing value chains that extend across border. 14 In the same vein, however, vertically oriented firms taking leading roles in regional trade patterns also generate concerns about competition and market power. 15 Therefore, while regional and global expansion activities are beneficial for growth and development through the transfer of skills and capabilities, they can also open up scope for strategic behavior that allows for the protection of industry rents, to the detriment of smaller effective rivals.
Smaller productive firms need to have genuine avenues of growth in order for broad-based growth to be achieved. 16 Prospects of this growth have become more promising in light of production linkages as a result of regional economic communities, with opportunities for more competitive rivalry. The beverages industry in East Africa, through the TCCC/CCBA Africa merger, is a rich example of how regional linkages provide opportunities for challenger firms, with significant entry activities in the upstream market and in adjacent markets, prior to the merger. However, the regional reach of the merging parties, demonstrated through strategic acquisitions and a history of anticompetitive practices, displays that there is a role to be played by regional industrial and competition policies for dynamic rivalry to be harnessed. This is more so because of the fact that the beverage industry is characterized by features that make it susceptible to high structural and strategic barriers to entry. The AfCFTA is therefore a fitting vehicle for coordination of targeted policies that address the prominent power dynamics within value chains and across countries.
III. The Cola-Cola Company/Coca-Cola Beverages Africa Merger: An Overview
The merger between TCCC and CCBA was notified to relevant competition authorities across Africa between 2015 and 2016 and was assessed at a regional level by the CCC. The case involved the consolidation of bottling activities between TCCC, Gutsche Family Investments (GFI), and SABMiller (a beer producer which is now part of AB InBev), to create a new entity: CCBA. In the proposed merger, the merging parties stipulated that ownership in CCBA would be divided between TCCC, GFI, and SABMiller according to 15%, 35%, and 50%, respectively.
Premerger, in East Africa, TCCC-branded beverages dominated the industry to a greater extent than globally, with significant competition only being imposed by PepsiCo. 17 However, the nonalcoholic beverage industry across the East African region began to see the emergence of local manufacturers from the early 2000s, such as Kevian Kenya, MeTL Group, and Bakhresa (Table 1).
Main Beverage Manufacturers Premerger.
Source: Compiled by author.
Bottling operations by TCCC (which is to a large extent a concentrate manufacturer) were organized in such a way that there were TCCC authorized third party bottlers across Africa. With the exception of Coca-Cola Sabco Limited (Sabco) located in South Africa of which TCCC had 20% ownership, TCCC did not have any ownership or control of authorized bottlers in East Africa. Independent TCCC-authorized bottlers were located across the eastern region with the largest ones carrying out bottling and distribution activities in Kenya, Rwanda, Tanzania, and Uganda. Following the merger, CCBA went on to acquire five additional bottling plants across the region. This resulted in CCBA owning and controlling approximately 40% of the major bottlers across the region (Table 2).
Nonalcoholic Beverages Manufacturers Market Shares by Country Postmerger, 2018.
Source: Standard Bank (2019) and authors’ calculations.
Following the merger, CCBA acquired Coca-Cola Kwanza in Tanzania which commanded ∼40% of the soft drinks bottling market 18 as well as Tanzanian Nyanza Bottling Company and Century Bottling in Uganda. Reports indicate that Almasi Beverages, Equator Bottlers, and Nairobi Bottlers were Kenya and Uganda’s leading bottlers, with an estimated combined market share of ∼70%. 19 After the approval of the TCCC merger, CCBA also proceeded to acquire all three of these capabilities, leaving Coastal Bottlers as the only major independent bottler in Kenya. 20 In Uganda, PepsiCo bottler CBL leads the bottling segment with ∼50% of market bottling activities through being the sole bottler for PepsiCo.
It is important to note that TCCC’s local competitors are also manufacturing conglomerates that were large-scale consumer goods manufacturers that built capabilities to branch into the nonalcoholic beverages market at the local level. MeTL, Bakhresa, Hariss International, and Motisun all manufactured other FMCG products before establishing their beverage brands from as early as 2001. Entry by these rivals was thus to a large extent supported by their ability to leverage their other manufacturing activities where capabilities in food production had been built, which has been a common theme generally among African food manufacturing multinationals in the region. 21 These entrants were able to contest the CSDs market through leveraging changing consumer demands such as introducing polyethylene terephthalate packaging to appeal to off-site beverage consumption. Challenger firms were therefore quick to respond to changing consumer preferences as described above.
The merger (and subsequent mergers) resulted in significant portions of national bottling capabilities being owned by TCCC and SABMiller, two leading beverage manufacturers with leading market shares in more than one country in the East African Community (EAC). TCCC, though CCBA, was therefore able to strategically expand its reach across the region over a what was a contestable market across the region. While this is not anticompetitive in itself, the discussion below will highlight why regional merger assessment was required within the EAC, in addition to assessments carried out by relevant institutions across the continent.
IV. Lessons for Regional Merger Enforcement
This section discusses three topics of interest emerging from the TCCC/CCBA merger that magnify the importance of regional competition enforcement. Regional integration has contributed to the increasing ability of firms to serve customers across borders. This brings into perspective that as integration across regions deepens, so will the scope and reach of firms. In addition, further integration of markets, together with globalization, has resulted in the consolidation of capabilities and economic activities within and across industries resulting in cross-ownership. While there are some welfare benefits that can accrue as a result of cross-ownership such as enhanced innovation in a vertical industry, trade-offs may prevail in instances where market consolidation also has horizontal aspects, 22 such as in the TCCC/CCBA merger.
Studies have indicated that firm conduct can be exported across borders and that regional enforcement needs to be cognizant of this conduct both at a national and regional level. 23 The TCCC/CCBA merger shows that enforcement needs to be cognizant of this during merger assessment. Furthermore, while the regionalization process means that there will be winners and losers, where highly productive firms will have scope to grow and relatively unproductive firms will either increase productivity or shrink, the playing field needs to be leveled even in terms of policy, for relatively smaller but productive firms to effectively challenge markets and become efficient rivals.
A. Regional Scope and Cross-Ownership of Firms
Ownership relations, strategic partnerships, and distribution arrangements play a significant role in the process of firms becoming more internationalized. Therefore, a regional perspective on firm decision making, such as through their location of production and investment, is necessary. 24 Firms seeking to increase their market power, whether through collusion or abuse of monopoly power, are likely to be better able to do so in smaller national markets. This is why a merger such as the TCCC/CCBA merger, which affected a region with small open economies, is particularly important in terms of the regional integration agenda.
The reach of the merging parties, TCCC and SABMiller, and the ownership structure of CCBA is of significant importance in terms of regional assessments as they can serve to maintain power interests which can have significant influences on how a country develops. 25 TCCC is a global company and brand that markets, manufactures, and sells beverage concentrates and syrups and typically generates revenues by selling concentrates and syrups to authorized bottling partners. 26 TCCC had brand presence in all East African countries at the time of the notification of the merger, along with third party bottling activities in each EAC member state through authorized third party bottlers.
SABMiller on the other hand is a multinational brewing company and up until 2016 was the world’s second largest brewer. 27 From 2016, SABMiller formed part of AB InBev, which from that merger became the world’s largest beer brewer. At a global level, AB InBev, Castel, Diageo, Heineken, and Carlsberg are the leading beer producers. When narrowing down to the African market, these players are also present. Importantly, these producers maintain dominance through strategic alliances across the continent. 28
Both TCCC and SABMiller are global in scope and extend their reach to even the most remote locations through strategic partnerships. TCCC, for instance, currently has approximately 225 bottling partners worldwide and a combined 900 bottling plants between its own bottling plants and third party bottling plants across the globe. 29 SABMiller’s ownership structure and investment interest are also important. In 2001, SABMiller has a 20% stake in Castel’s (the world’s fourth largest beer producer) African operations while Castel has held a 38% stake in SABMiller’s African interests. In 2020, AB InBev, the leading global brewer which SABMiller is now owned by, reported interests in Castel’s global operations amounting to US$3.6 billion. 30 Similarly, East African Breweries, a subsidiary of Diageo, traded 20% of their shares of its local subsidiary, Kenya Breweries, for a similar proportion in Tanzania Breweries, a subsidiary of SABMiller International. 31
These interests have been argued to be a way to increase investment opportunities. Importantly, these agreements come with preemptive rights over each other’s African beverage operations whereby each has first rights to buy each other’s operations if put up for sale. 32 This has important implications for market power. The challenge with having the same investors in competing firms is the potential for collusion. Investors typically have access to information on the entity in question that would not have been otherwise accessible. This can enable them to take part in parallel exclusion or cumulative foreclosure.
The benefits of cross ownership have been extensively documented. It has been found that when firms have highly concentrated ownership, the impact of institutional investor cross-ownership on innovation is highly pronounced, particularly when knowledge sharing is involved. 33 Fanti finds that an increase in cross-ownership can increase total surplus despite there being a more “collusive” downstream quantity choice and socially inefficient. 34 However, input prices can be more reduced when competition is in strategic complements and products are not too differentiated and therefore the input price can outweigh the collusive effect. 35
In the case of SABMiller, Castel, and Diageo, however, their downstream products impose direct competition on each other in the beer industry. Collaboration and cooperation through their investment interests can form part of an uneasy triangle of industrial interrelationships with competition. 36 Bearing in mind that beer brewers have the capabilities to bottle CSDs and beer interchangeably, the consequences of the investment relationships created prior to the TCCC/CCBA merger and after are that the interests of large CSD manufacturers and beer brewers can be served to the detriment of smaller, local manufacturers with capabilities. This can be done both vertically, where access to innovative bottling and distribution facilities can be thwarted, while the merger itself creates a consolidation of capabilities in a horizontal manner, where an efficient competitor is removed from the bottling segment of the value chain. Given the reach of the merging parties, the effects of this were potentially regional in scope, thus deserving assessment by regional authorities.
B. History of Anticompetitive Conduct
Competition concerns in the beverages industry have historically arisen in the distribution and retail segments of the value chain. This is generally because dominant producers heavily invest in marketing and distribution of their brands, which can be used to exclude competitors from access to distribution networks and retail facilities. 37
Cases in various jurisdictions have investigated the behavior of both TCCC and SABMiller, accused of strategically excluding rivals through means such as exclusive contracts. In the European Union, agreements between TCCC and its distributors and retailers included exclusive arrangements, rebates, and tying practices which effectively restricted retailers from selling competing CSDs. 38 TCCC has historically also provided free coolers and fridges to retailers and was found to restrict retailers from stocking competing CSD brands. 39 This heavily restricts the ability of lesser known brands to compete, especially when they have far fewer capital outlays than global giants to provide technical sales, marketing, and equipment assistance to retailers and throughout a distribution network. As a result, global brands such as TCCC are able to restrict entry and participation in the upstream concentrate manufacturing segment by restricting access in the downstream distribution and retail segment. This situation is again exacerbated when drinks brands such as Coca-Colas are well-known must-stock brands, and retailers cannot forgo stocking these drinks, unlike entry brands.
African beer markets have in addition to investigations of exclusive arrangements, also been privy to market allocation accusations. In 2014, South Africa’s Competition Tribunal investigated accusations against SABMiller for price discrimination again its distributors. 40 SABMiller was accused of price discriminating against “appointed distributors” and “independent distributors.” Appointed distributors were granted exclusive territories to distribute SABMiller’s products of which they would receive a distribution fee. Independent distributors were neo eligible for a distribution fee or discount, which meant they could not make sufficient margins off SABMiller products as they would receive retail prices. 41 The case against SABMiller was dismissed, as the case was only made regarding intrabrand competition which only accounted for 10% of distribution activities. The Tribunal’s findings were hinged on that vertical restraints which only affect intrabrand competition do not raise many welfare problems. 42
In 2009, East African Breweries, a subsidiary of Diageo, traded 20% of their shares of its local subsidiary, Kenya Breweries, for a similar proportion in Tanzania Breweries, a subsidiary of SAB International. 43 This ultimately resulted in Kenya Breweries and Tanzania Breweries allocating the Kenya and Tanzania markets, respectively, as they both exited the other market akin to the SAB-Castel and the Phoenix/ Stag arrangements. 44 The agreement not only resulted in job losses but led to the elimination of competition in both markets, and the end of a price war that had kept prices stagnant for five years. 45
Indicative of the problems market allocations and restrictive practices impose on regions in Africa is the recent launch of investigations by the CCC on AB InBev, Castel, Diageo, and Heineken for possible market allocation and territorial restrictions in the COMESA common market. 46 This comes after the CCC has made observations that the manufacturers have market allocation arrangements among themselves and/or territorial restrictions in their distribution agreements with third party independent distributors. 47 The cases that have been described above along with strong strategic alliances presented through the TCCC/CCBA merger and the regional and global reach of the firms in question bring forth a strong need to assess conduct at a broader regional level. The recent launch of investigations by the CCC is in a preliminary manner evidence of the important role that regional enforcement plays, of which strong benefit for the AfCFTA more broadly are likely to accrue in the months to come.
C. The Role of Effective Rivals and Entrants
Growth and development through regional integration depend to a large extent on companies’ ability and willingness to make long-term investments for the purpose of increasing productive capacities. 48 If a few large, dominant firms, facing no threat to their market positions, are able to extract supra-competitive profits without making the requisite investments, then the regional scope of these firms can dampen competition and undermine growth and investment across the region as a whole. 49 The entry of rivals, including those from across borders, is therefore critical, as it imposes competitive discipline on the incumbent firms with market power, and the extent of barriers to entry is determinative of the resultant competitive rivalry within markets. 50
In TCCC/CCBA merger, entry in the beverages market took place through the ability of local firms leveraging their other manufacturing activities where capabilities in food production had been built. There are very strong parallels that can be drawn between the local rivals that emerged in Tanzania and Uganda. The Bakhresa Group (Tanzania), Hariss International (Uganada), MeTL Group (Tanzania), and Motisun Group (Tanzania) are all family owned businesses that were established in a single enterprise domain from where they created competitive advantages. 51 Importantly, these firms had to vertically integrate in order to realize efficiencies and become competitive, which has been found to be a critical and necessary part of the evolution of the business strategy of African firms in food production. 52
This is an important issue for national and regional competition authorities and policy makers as it indicates that there is a need for policy to reduce constraints faced by emerging firms in order to enable their entry and growth through various investment incentives where possible. For competition policy specifically, a regional view of productions activities and well as location of consumption is important to understand whether competition can be substantially lessened. For the AfCFTA more generally and further negotiations, the role of effective rivals shows that not only are regional assessments important but that the coordination of competition and industrial policies needs to be sufficient for the AfCFTA Agreement to bear fruit.
V. Conclusion
Markets throughout Africa have developed in highly dynamic ways in recent years; yet despite the general regional and continental integration benefits that African states will enjoy, countries that are more advanced in terms of competition reform adoption unlock more exports and growth. 53 The findings of this article therefore contribute to literature that advocates for African development through proactive strategies, calling upon countries to advance their regional integration approach through a coordinated approach to opening up markets. 54
This agenda is in essence harnessed by the AfCFTA Agreement, and the findings of this article provide some key lessons for the ongoing AfCFTA negotiations and beyond. TCCC/CCBA highlights the ongoing need for competition enforcement at the regional and continental level. Through the merger, we see that the scope and reach of firms in light of regional integration and globalization have meant that firm activities, investments, and strategic links transcend national borders. Firm activity, and even their transgressions, in some cases does not fall neatly within national borders, as previous conduct of the merging parties has shown. These are the elements of the merger that a national competition authority could easily overlook during a competition assessment.
The merger also illustrates that a company can grow, leveraging on its strength in different countries, with such strength not necessarily being imminent to a national competition authority. CCBA is an entity that was created purely out of the strategic links of TCCC and SABMiller and to date a presence in over ten African countries. The strength in capabilities of CCBA compounded by its links to the beer beverage industry is one that would be difficult to map out by a national competition authority. This is again where a regional competition authority, even though its ability to coordinate with numerous national authorities, becomes important.
Ultimately, the merger shows that coordination between national authorities and regional authorities is vital in order for the benefits of competition reforms to accumulate. This is more so the case given that there are differences in competition enforcement across the continent given that some African countries do not have active competition laws, while others are not adequately capacitated. 55 These issues are therefore relevant for the development of a robust and well-coordinated competition policy falling under the AfCFTA Agreement.