Competition Policy Newsletter

Procter & Gamble/Gillette: the role of economic analysis in Phase I OPINIONS AND COMMENTS cases Kamila KLOC-EVISON, unit B-3, Oliver KOCH, unit E-3, Helena LARSSON HAUG, unit D-4, Christian ROQUES, unit E-1 and Stefan SIEBERT, unit D-4, all Directorate-General Competition

In July 2005, the European Commission has kets. The overlaps concerned the oral care sec- approved, subject to conditions, the acquisition of tor (markets for toothbrushes, toothpaste, dental Gillette by Procter & Gamble. The merger creates floss, mouthwashes, whitening preparations), the one of the world’s biggest consumer goods produc- personal care sector ( antiperspirants/deodorants, ers with a combined turnover of roughly € 50 bil- shaving formulations, male fragrances, shower lion. Although the companies are active in many gels) and small household appliances. However, markets, the Commission’s investigation showed the only significant overlap appears in the markets that their activities overlap to a limited extent, for toothbrushes. mainly in the oral care sector. However, since the merger combines two leading global producers of a) From simple manual to High Tech: branded consumer goods, the Commission exam- Toothbrush market definitions ined carefully potential anticompetitive effects arising from the parties’ large combined products The product market definition for toothbrushes has portfolio. The market investigation has, however, been subject to an extensive market investigation. shown in this particular case that even after the The Commission has previously considered the rel- transaction the parties would not be in a position evant product market for manual toothbrushes as to dictate conditions on retailers to the detriment separate from powered brushes (i.e. rechargeable of the consumers. The only remaining competition and battery driven toothbrushes), however left the concern in the sector of battery toothbrushes could exact product market definition open. According be solved by the parties’ commitment to divest of to the parties the market for toothbrushes should Procter & Gamble’s battery toothbrushes business. be divided into two different product markets: on The case is a good illustration of the importance the one hand the market for manual and battery of economic analysis in conglomerate mergers and toothbrushes and on the other hand the market for discusses for the first time the notion of category rechargeable toothbrushes. captainship/management . The Commission’s investigation showed, however, 1. Introduction that manual toothbrushes exert only negligible competitive constraints on the other toothbrushes Procter & Gamble (‘P&G’) is well-known for its markets. Manual toothbrushes were therefore branded products, in particular in the field of assessed separately from battery and rechargeable household, beauty, baby and family care prod- toothbrushes. Regarding the market(s) for battery ucts. P&G’s brands include ‘Ariel’, ‘Pringles’, ‘Oil of and rechargeable toothbrushes, a number of argu- Olay’, ‘Tampax’, ‘Always’, ‘Pampers’, ‘Fairy’, ‘Head & ments militate in favour of two separate relevant Shoulders’ or ‘Pantene’. Gillette is a multinational markets. Most customers said that they would manufacturer of consumer products, offering not switch to stocking rechargeable toothbrushes blades and razors, oral care products and batter- if prices of battery toothbrushes were increased ies, under brand names such as ‘Gillette’, ‘Oral B’ significantly. Furthermore, brushing efficiency of or ‘Duracell’. After the merger the combined entity rechargeable brushes seems to be superior to bat- would own 21 brands with a turnover of more than tery brushes (mainly because battery brushes lose one billion dollars. power over their lifetime). After the transaction, Gillette will become a However, since the rechargeable market is split wholly–owned subsidiary of P&G. between low end and high end (premium) prod- ucts, the separation between battery and recharge- 2. Possible dominance?: The able toothbrushes markets is blurred. On the investigation of horizontal concerns demand side there is no difference between the low end rechargeable and the battery toothbrushes Although both companies are active on a large as prices are similar. Gillette (being rather on the number of markets, their activities overlap only premium battery market) has an average price on a relatively limited number of product mar- for battery toothbrushes at € 10 (varying between

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5 and 20 according to the quality and the Mem- parties would hold high market shares with sig- ber States). The low end rechargeable toothbrushes nificant increments in a large number of Member are priced from € 20 whilst the top end recharge- States. In the case of a combined powered tooth- able are priced between € 100 and 150. This con- brushes market, the merger would combine the tinuum of prices between high end batteries and clear market leader with the current number 3 in low end rechargeable is reinforced by the fact that most markets and eliminate a credible competitor these toothbrushes are sold together in the same to the market leader. In the case of separate mar- category product mainly on the same shelves, and kets, the merger would combine the current num- are difficult to distinguish for the end consumers ber 2 and 3 in the battery toothbrushes market, (similar appearance, both types having replaceable eliminating a potential entrant to the rechargeable head-ends). toothbrushes market.

However, the Commission has decided to leave From a dynamic point of view, the relative strength it open whether battery and rechargeable tooth- of the parties in the market is further corroborated brushes belong to the same product market or if by the fact that the parties have increased sub- a joint product market for powered toothbrushes stantially their EEA-wide share over the last two has to be defined, since no competition concerns years (from [25-35]% in 2002 to [45-55]% in 2004 would occur under either market delineation. in a hypothetical battery market and from [45-55] to [65-75]% in a powered toothbrushes market) b) Geographic market definition: Markets while their main competitors have lost market are still national shares during this period.

The market investigation has confirmed that Euro- Moreover, competitors have reported that the bar- pean retailers still negotiate on a national level with riers to enter the market for powered toothbrushes the national sales representatives of their respective are high compared to other consumer goods. This suppliers. Even bigger retailers do not negotiate is not only because Gillette and P&G hold a large with suppliers from another Member State or even number of important patents for powered tooth- on a European-wide basis. The Commission has brushes and have good access to the shelves of the therefore decided to define national toothbrushes retailers, but also because any new entrant to the markets. This market delineation is further cor- oral care market needs to establish a good reputa- roborated by substantially different market shares tion for its products in order to be successful on and significant price differentials between different the powered toothbrushes market. The market Member States (e.g. for battery toothbrushes with investigation has shown that building a competi- prices for the same product from € 1.8 to € 8.2 and tive brand image implies not only significant pro- an average price difference of around 30% between motion costs, but establishing good relations with Member States). Similarly, P&G’s and Gillette’s European dentists whose recommendation is, pricing policy is set at a national level. The market according to the market test, a key factor for the investigation has also confirmed that consumer success in the powered toothbrushes market. preferences are still diverging between different Member States (e.g. Southern countries being less The competitive concerns are not limited to the technology driven than Northern countries). As a horizontal overlaps in the parties’ battery tooth- result, the main competitors’ sales strategy varies brushes activities. It will also strengthen Gillette’s in different Member States, and toothbrushes are position on the rechargeable segment/market. sold under many different brand names in differ- Many competitors have explained that the battery ent Member States. segment can be regarded as an ‘entry segment’ to the more profitable rechargeable toothbrush business, c) Competition concerns: Parties since it helps acquiring the necessary knowledge dominating power brushing in Europe? on rechargeable toothbrushes. The parties’ ability to offer the full range of both low-end and high- P&G is currently only active in the production of end powered toothbrushes and to use the ‘Oral B’ battery toothbrushes sold under the brand name brand name for low-end products will strengthen ‘SpinBrush’ and the co-brands ‘Blend-a-Dent’, their position on the battery segment. This could ‘Blend-a-Med’, ‘Blendi’, ‘Crest’ or ‘AZ’. Gillette pro- deter new entrants to the battery market, which duces the full range of powered toothbrushes (bat- would, subsequently, also deter new entrants to the tery and rechargeable products) under the ‘Oral B’ rechargeable market (since the battery market is brand. seen as entry segment for the rechargeable market On a combined market for powered toothbrushes which has even higher barriers to entry). Indeed, (battery and rechargeable toothbrushes) as well market entry to both, battery and rechargeable as on a separate battery toothbrushes market, the toothbrushes could become more difficult after the

44 Number 3 — Autumn 2005 Competition Policy Newsletter

merger, since a new entrant would have to com- motions have been mentioned by complainants as OPINIONS AND COMMENTS pete with a ‘full-liner’ who offers the full range of one possibility to enhance the parties’ presence on products with a well-established brand name. the shelves. Regarding in particular pure bundling, anticom- d) The solution: SpinBrush divestiture petitive conglomerate effects are more likely to In order to solve the competition problems iden- arise when the two merging parties offer goods tified above, P&G committed to divest its entire which are highly complementary in demand. The SpinBrush toothbrushes business in the terri- broad range of products offered by the parties can- tory of the EEA. P&G committed also to grant a not be regarded in general as complementary in two-year licence for the co-brands used on these demand. toothbrushes (‘Crest’, ‘Blend-a-dent’, ‘Blend-a- In terms of bundling rebates, the parties submitted Med’, ‘Blendi’ and ‘AZ’) and not to re-introduce data demonstrating that rebates granted by them the licensed brands in the countries for which to smaller or larger retailers or even among same the license has been granted within a period of at size retailers do not vary significantly within the least four years after the termination of the license same Member State. The market investigation has agreements. As the commitment covers the whole shown that P&G grants rebates predominantly of Procter & Gamble’s battery toothbrush busi- based upon concepts such as a ‘mixed truck-load’ ness, it eliminates the competition problems on rebate scheme (the customer will benefit of the the markets for powered toothbrushes (battery highest rebate only if it purchases from the most and/or rechargeable toothbrushes). productive factory of the parties with the lowest cost of transport). The parties and some retailers 3. Foreclosure possible? reported that incentive bonuses to introduce new The investigation of non-horizontal products are at present relatively limited compared concerns (bundling, category to the overall rebates granted. Since the parties management) have already a large portfolio today, this situation is not likely to change in the future. Moreover, Given the large number of well-known brands the retailers have indicated that even in the case both parties are able to offer after the merger, of increased margins for branded products they the Commission has also carefully investigated would not consider to stop selling private label whether anticompetitive ‘conglomerate effects’ can products, with which they can achieve even higher be expected as a result of the merger. It focused, in margins than with branded products. particular, on the possibility of foreclosure of com- petitors to the detriment of the end consumer. The In terms of bundling promotions, the retailers con- market investigation covered i.a. potential compe- firmed that cross-promotions are mainly organised tition problems that might occur as a result from in the same product category (for example washing offering bundled products, rebates or promotions. powder plus softener and usually on a ‘buy one get The Commission has also examined whether the another one’ basis). Indeed, it does not make sense parties’ involvement in the retailers’ management economically to combine promotions between of shelf allocation decisions (‘category manage- the whole variety of many differentiated prod- ment’) might enable them to obtain control over ucts offered by the parties (e.g. between feminine their customers’ shelves, thereby causing harm to care and male wet shaving). Moreover, the risk of competitors and consumers. anticompetive effects is mitigated by both the exis- tence of strong competitors as well as countervail- a) Foreclosure through bundling ing buyer power of the main customers. Indeed, there is significant competition between The Commission has examined whether the other branded product suppliers having a suf- merger would enable the parties to impose weak ficiently broad product range. Therefore retailers brands on their customers, to foreclose competi- are not dependant on one single company with a tors from access to the retailers’ limited shelf space broad product portfolio. Furthermore, retailers are or to hinder entry of new products into the market, able to exercise significant countervailing buyer using bundling practices. In particular, the Com- power. mission has investigated whether the parties might be able to oblige their customers to buy ‘weak’ Retailers can exert pressure on the parties by products together with a strong ‘must stock’ prod- threatening to change supplier, to start/extend uct (‘pure bundling’) or if they grant better condi- private labels sales or by sponsoring new entry tions for the joint purchase of bundled products through active in-store promotion. The present (‘mixed bundling’). In particular rebates (rebates case has shown that private-label products are del- across-the-board and incentive bonuses) and pro- isted less often than the parties’ branded products.

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Since retailers know the prices of the goods offered b) Foreclosure through category by the parties, they have the advantage of being in management a position to fix the prices for their own private labels in reaction to the producers of branded The Commission has examined if the policy of cat- products. In contrast, these producers are not able egory management or ‘category captainship’, might to readjust their prices to the retailers’ private label facilitate anticompetitive behaviour of the parties prices. Therefore, the retailer has the capacity to post-merger. counteract efficiently any significant price change Category management is a management policy of the leading brands with its own private labels, associating suppliers and retailers in order to whilst the parties suffer from an asymmetry of enhance business results of product categories on a information vis-à-vis prices for private labels. store-by-store basis. The idea of category manage- ment was presented to the food industry in mid- Moreover, retailers perform an important ‘gate- 1990s and gradually extended to broader category keeper’ function for suppliers since they serve of consumer goods. WalMart was the first retailer as a ‘one-stop-shop’ for the parties’ products. If introducing a demand driven policy that followed a retailer refused to carry a brand of the parties, closely customers’ needs and habits. It allowed the brand would risk disappearing from the cus- WalMart to optimise the so called stock-shelves tomers’ awareness. As a consequence, it would be cycle, thereby reducing its capital costs. While gro- detrimental to a leading brand of the parties to be cers had first turned to external consultants, they excluded from a major retailer for a longer period, started soon to ask their suppliers for (free) advice as it would entail significant losses in customer on how to improve the assortment of their prod- awareness, whilst the costs would be relatively ucts in order to better meet customer demand and minor for the retailer (whose sales with this brand to increase sales. represent only a small fraction of its turnover). It should also be noted that the parties’ overall sales At present, category management focuses on represent on average not more than 2% of the several main pillars, namely efficient assortment retailers’ sales, while for the parties certain retail- (e.g. what products or type of products should be ers represent 10% and more of the sales in a given stocked), efficient shelving (e.g. how to lay out the country. assortment on the shelves and to find the ideal number of brands and quantities of these brands). Sometimes it includes also recommendations on Most retailers protect their bargaining position efficient pricing (how to price the assortment in through a ‘multiple sourcing’ strategy. Such a strat- accordance with the profile of the target shopper) egy reduces the risk that the retailer becomes and efficient promotion (how frequently to pro- dependent on a particular supplier and allows for mote the category of products). more cost-effective switching to other suppliers. Retailers indicated that they will never renounce to A particular form of category management is also a multiple sourcing strategy and to the ownership generally labelled as ‘category captainship’, since in of own private label products that compete with the beginning of category management (), retail- branded ones. Also, they have largely confirmed ers determined one so-called ‘category captain’ to that margins they achieve from private labels are offer ‘exclusive’ advice during a given period. Cate- higher than in case of branded products. Retailers gory management is offered by leading suppliers as indicated that they would delist any brand that is a free service to retailers. In practice, the task of a not performing well including the parties’ brands. category captain is to provide retailers with infor- Regardless of the fact that delisting products of mation on product and shopper habits in relation important suppliers might entail a risk of losing to a specific category as defined by the retailer. This customers and entail costs, the market investiga- will be done regularly upon request of the retailer tion has shown that, the retailers’ delisting policy (e.g. every year, two years). A category manager applies also to P&G’s or Gillette’s so called ‘must will provide a detailed study (the so-called ‘plan- stock’ brands. o-gram’) on how to ideally place and assort the products on the shelves. The retailer can then turn As a conclusion, the transaction is not likely to lead to follow the category manager’s advice. He can, to foreclosure of competitors as a result of bundling however, also follow the advice of other key advis- non-complementary products. This conclusion ers, such as independent consultants. It is up to the is also corroborated by the Commission’s market investigation, which confirmed that the previous (1) Today, many retailers do no longer rely on the exclusive advice of one single supplier but engage more than one merger of P&G and Wella has not resulted in any supplier in their category management strategy, in par- anticompetitive practices arising from the parties’ ticular through submitting the proposals of the category enlarged portfolio. manager to other competitors for review.

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retailer to apply the agreed recommendations in ‘recommendation-level’. () It is also true after OPINIONS AND COMMENTS its stores; there is no intervention of the category implementation of the plan-o-gram, though pri- captain in the shelves to physically place its prod- vate labels benefit more than leading brands. This ucts or its competitors’ products, and the retailer shows that the retailers favour their own private is solely responsible for placing products on the label products even more than foreseen in the ‘rec- shelves. The effects of plan-o-grams on margins ommendations’, thereby reducing the benefits by and sales are regularly reviewed by the retailers. the leading brands. Some third parties mentioned the possibility that Moreover, as concerns the possibility that category a category manager could favour its own products, managers could provide ‘biased’ recommendations either without any knowledge of the retailer or with to retailers, the market investigation has shown the agreement of the retailer. This could enable the that there is no significant information asymme- category manager to better place its products on try between retailers and suppliers which could be the shelves thereby increasing its overall output abused. While ten or fifteen years ago retailers did in one category to the detriment of its competi- not have sufficient data to verify the category man- tors. The category management position might as ager’s proposal, most retailers have very sophisti- well lead to a reduction of brands and therefore of cated sales and customer data nowadays. customer choice which could ultimately result in rising prices. Another potential concern with cate- Another potential concern with category manage- gory management for the Commission was that in ment for the Commission was that in some cases some cases large retailers with strong private-label large retailers with strong private-label presence presence may share an interest with the parties in may share an interest with the parties in exclud- excluding other manufacturers of branded goods. ing other manufacturers of branded goods. Such exclusionary practices require a credible commit- The Commission has investigated whether the ment by the retailer not to carry other suppliers’ transaction could allow P&G and Gillette to products. By way of example, the retailer can pur- increase their involvement as category managers chase the full-line from the parties and contractu- in the oral care sector to the detriment of the con- ally commit to pay damages if he carries brands sumer. While up to the merger both parties did from other suppliers. Alternatively, when the par- not offer the full range of oral care products (Gil- ties are category managers, the retailer may forego lette being weak in toothpaste and P&G in tooth- a discount if he fails to follow the parties’ recom- brushes), the combination of the parties’ product mendations. However, as it was shown above, the portfolios will make them more eligible as category market investigation has shown that retailers often managers in the oral care sector post-merger. deviate from the recommendation of their cat- egory manager. Furthermore, exclusivity contracts The Commission tested therefore in its enquiry are not prevalent in the product categories affected the impact of existing category management by by the merger where multi-sourcing is the norm the parties vis-à-vis competitors’ overall sales and and only underperforming brands get delisted. prices. It compared the evolution of market shares and sales of P&G, Gillette and their competitors Indeed, most of the parties’ competitors and some in cases in which the parties were category cap- of the retailers, through their private labels, pro- tains and when they were not. Furthermore, the vide a full range of oral care products, sometimes Commission examined the evolution of prices in similar or even broader than the parties’ range, product categories as well as the evolution of the which prevents the parties from forcing retailers number of competitors and brands on the shelves to buy a full line of their own branded products. and whether delisting of competitors’ brands hap- The Commission’s market investigation has dem- pened when the parties were category captains. onstrated that most of the retailers are willing to The Commission considered as well possible keep at least one competitor and one private label ‘mitigating’ circumstances, e.g. whether and to brand alongside the leading brand. Retailers have what extent the plan-o-gram was implemented or applied a similar multiple sourcing strategy in the whether parties had lost the position as category case of the merger between P&G and Wella, in manager in the past. which the parties’ combined market shares were even higher than in the present case. Therefore According to the answers to the investigation, it retailers will be able to defend their private label appears that the main beneficiaries of category market shares against parties’ recommendations in management are brands that sell well not neces- favour of their own brands. sarily those of category captains, as well as private labels, and that the relative losers are the remain- (1) Recommendations are the result of an agreement between ing competitors (i.e. those supplying non-leading suppliers and the retailers upon the plan-o-gram before brands). This is especially true at the so-called its implementation.

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Moreover, a category manager cannot prevent its reflects end-consumers’ demand and possibly not, own products from being delisted. Indeed, custom- as in the past, the willingness of a supplier to pay ers have confirmed that P&G and Gillette ‘must listing fees. As category management is based on stock’ brands have in some cases been delisted at shoppers’ habits, it leads as well to higher customer the time when these two undertakings were cat- satisfaction as it meets better demand expectation. egory captains. If products of competitors were Furthermore, category management allows retail- actually delisted, this was due to their underper- ers to achieve economies of scale as it reduces formance and not to the mere recommendation of stocks and ensures that the optimal quantity of the category manager. products is presented timely and directly on the shelves. Finally, category management enables Regardless of the actual impact of category suppliers to achieve economies of scale through ­management, already the hypothesis that the more efficient promotion as the suppliers are able ­parties would be more often eligible as category to better anticipate the demand and to tailor their managers post-merger was only supported by a promotion. part of the customers. Even if the merged entity might be more eligible as category captain than In conclusion, category management policy would before, nothing indicates that the parties would be seen as providing an advantage to the brands have a more important role in category manage- that meet the shoppers’ needs (best selling brands ment than their main competitors, especially tak- in general). Although an abuse of the position as ing into account that their current position in cat- category manager cannot be excluded in some egory management is relatively modest given their cases () when it might lead to foreclosure vis-à- incomplete product portfolio in the oral care sec- vis competitors, category management may also tor. be largely pro-competitive, as it makes it easier for retailers to stock the most demanded brands Moreover, the market investigation has shown that and easier for consumers to find them in sufficient category management does not lead to the elimi- quantities on the shelves. nation of competitors. In addition category man- agement is likely to be beneficial for both retailers and consumers. The market investigation for the 4. Conclusion products in question in this case has shown that This case shows that even in the limited time of the overall sales in a given category increased as a a first-phase procedure, the Commission is ready result of the implementation of category manage- to launch an extensive and thorough investigation ment (e.g. by allowing retailers to better compare that addresses both horizontal as well as non-hori- best practices in the retail sector, better place- zontal competition concerns in order to clarify the ment of products which meet better the shop- likelihood of potential competition harms as soon pers’ demand). In addition, category management as possible. In particular the investigation of the tends to reduce listing fees, which are favourable various questions related to the non-horizontal to larger suppliers. Indeed, category management effects of the merger required a careful economic represents a management policy according to analysis which was carried out in close coopera- which shelf allocation decisions tion with the Chief Economist Team.

(1) See Ruling of the US Supreme Court in Conwood Co. v United States Tobacco Co (2003).

48 Number 3 — Autumn 2005