Problem solving

WheatMax Limited has just acquired a competing ready-to-eat cereal manufacturer, Fruit Wheats Pty Ltd, giving the merged entity a market share of 55% in the ready-to-eat cereal market. Prior to the acquisition, FruitWheats had a market share of 15%. Apart from WheatMax there are three other manufacturers of ready-to-eat cereals, Cracklin’ Rice with 15% of the market; FruitNuts with 15% of the market; and OatBran Surpirse with 15% of the market.

Most firms in the industry make a wide variety of other snack goods, cakes, pastries and biscuits. The same equipment used for manufacturing processes such as flaking, puffing, extruding, granulation and shredding ready-to-eat cereals can also be used in making snack foods, cakes, pastries and biscuits.

FruitWheats was in decline before the acquisition due to a number of factors including the consumer movement to new, tastier and more complex products, lack of effective advertising, lack of successful product innovations and quality problems.

Ready-to-eat cereal manufactures sell their cereals to retailers not to consumers. Retailers typically classify ready-to-eat cereals in one category with hot cereals, such as porridge, granola and other instant breakfast products.

Retailers buy large amounts of ready-to-eat cereals (80-90%) pursuant to discounts that cereal manufacturers regularly offer as incentives to retailers. The retailers decides independently how and when to pass on trade deal savings to its customers. Shelf space is generally restricted to a few leading brands who are prepared to offer the best deals.

Advertising is vital to induce consumers to try new ready-to-eat cereals, and to continue buying established products.

The Australian Competition and Consumer Commission has formed the view that the acquisition will substantially lessen competition in the ready-to-eat cereal market and has applied to the Federal Court for an order for divestiture under s 81 of the Competition and Consumer Act 2010 (Cth).
Prepare a submission to the Court on behalf of WheatMax seeking to persuade the Court that the acquisition is unlikely to produce anti-competitive effects.

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