INTERNATIONAL COMPETITION NETWORK
Merger Working Group
Energy Drink Merger
Hypothetical Case Documents
ICN Merger Workshop, 10-11 March 2009, Taipei
Introduction
The merger between Fantasy Beverage and Just Energy is announced in
December 2008 and the final decision of the Competition Authority is
expected by mid April 2009.
The table below summarises developments in the energy drink market since
2002.
2002
Just Energy
Fantasy
Star Group
Meta
Beverage
Inter.
…
2004
2005
2006
2007
2008
2009
Dec:
merger
with
Fantasy
Thrive
introduced
Joy Energy
acquired
Dec:
merger
with Just
Energy
Emerge
introduced
Astro
introduced
mid year
ShaolinZing
introduced
spring
EverBev
Group
FastMarts
Tilt
introduced
Own label
introduced
late the year
Bom Dia
entered in
Jan; by Oct
7% mkt
share
Pure Beverages
Super
Convenience
4Q: expected
to enter
ExtraGrocery
Planning to
enter
Other Private
Labels
ICN Merger Workshop, 10-11 March, 2009
Entered
Index of Materials
No.
Hypo Case Documents
Page
1
Background News Article on Industry
1
2
Fantasy Press Release
3
3
News Article on Transaction
4
4
Party White Paper for Initial Meeting with Agency
6
5
Excerpt from Fantasy Annual Report
12
6
Fantasy Initial Synergies Memo
14
7
Fantasy Board Presentation on Transaction
15
8
Just Energy Strategic Plan
19
9
Just Energy Analysis of Bom Dia Launch
27
10
Memo Summarizing Just Energy Meeting with Staff
28
11
Fantasy Sales Document
31
12
Fantasy E-mail, Market Update
33
13
Fantasy E-mail, Pricing
34
14
Market Share Chart
36
15
Bom Dia Kick-Off Presentation
37
16
Pure/Bom Dia Business Strategy Update
41
17
Agency Memo Summarizing Pure/Bom Dia Interview
43
18
Agency Memo Summarizing SportAde Interview
46
19
Agency Memo Summarizing Star/Astro Interview
49
20
Agency Memo Summarizing EverBev Interview
52
21
Agency Memo Summarizing ExtraGrocery Interview
54
22
Agency Memo Summarizing SuperConvenience Interview
55
23
SuperConvenience E-mail
57
24
Economists R Us Presentation
58
ICN Merger Workshop, 10-11 March, 2009
i
Background News Article on the Industry
________________________________
________________________________
The Beverage Journal
Special Report on Energy
Drinks
July, 2008
________________________________
________________________________
Revved Up
Drinks for the on-the-go lifestyle
Energy drinks have reached
international phenomenon status.
The multi-billion dollar energy drink
market is the hottest segment in the
beverage sector since bottled water.
The first mass-marketed energy drink
appeared eight years ago, and the
category has been booming since.
Energy drinks are non-alcoholic
beverages intended to provide a quick
burst of energy to the customer. They
are designed to increase a user’s
mental alertness and physical
performance by the addition of
vitamins, complex sugars, herbal
supplements, and their primary active
component: caffeine.
One of the earliest entrants into the
category was reportedly developed
from a tonic recipe discovered in
Thailand by entrepreneur Aaron
Gordon. He packaged his fizzy
caffeinated beverage in a can and
parleyed it with astute marketing,
good distribution and a bit of good
luck into today’s leading brand of
energy drinks: Thrive!
ICN Merger Workshop, 10-11 March, 2009
Doc. No. 1
Although still a niche product,
energy drinks sales growth has
outperformed all other beverage
categories. Sales of energy drinks
have gone from just 30 million in
2000 to a projected 3 billion for this
year. That’s over 50 percent growth
in the last year alone. Sales are
expected to hit 10 billion in three
years. Analysts attribute such
phenomenal growth to one company
– Just Energy Inc. – the first company
to mass market energy drinks in
convenience stores, offering
consumer friendly packaging and
flavours that helped spark interest.
Thrive’s success has spurred plenty of
competition. Emerge and Astro are
other popular brands, with the list of
contenders growing each year. The
category growth has attracted a lot of
entrepreneurs, but to be successful, a
brand needs good distribution and
store support through shelf space,
items possessed by the large beverage
producers. Industry analysts predict a
coming shakeout in the number of
players and products.
Most energy drinks are made from a
mixture of ingredients that include
high caffeine content, energizers like
guarana, and functional compounds
such as taurine and ginseng. The key
customers are young adults,
traditionally a group that goes for
new beverages, and the newness
factor of energy drinks has attracted
them. Energy drinks are not bought
for taste or refreshment; rather
customers are looking for results –
and energy drinks deliver on the
promised energy boost. This is part
of an overall trend: beverages
offering functional benefits are
growing 3 to 4 times faster then
conventional refreshment beverages.
1
Background News Article on the Industry
Doc. No. 1
Though the growth of energy drinks
has largely been at the expense of
soft drinks, per capita consumption
still is only about 2 percent of soft
drink consumption. Energy drinks are
currently purchased by less than 10%
of households. “Energy drinks really
aren’t much of a threat to the soft
drink industry,” says Herman Gupta,
a beverage industry analyst, “but
large beverage companies have
taken notice, with plans to enter the
booming market with new hybrid
soda/energy drinks and
acquisitions.”
The energy drink category is still
young and as it continues to grow new
product introductions have looked to
stand out by offering more than just
energy. Many of the newest energy
drinks to hit the market are healthier
versions – higher in vitamins or
minerals, lower in sugar, and made
with more natural ingredients,
especially juices.
The Beverage Journal
ICN Merger Workshop, 10-11 March, 2009
2
Fantasy Press Release
Doc. No. 2
PRESS RELEASE OF 6 DECEMBER 2008
FANTASY ANNOUNCES ACQUISITION OF JUST ENERGY
Fantasy Beverage Co. today announced that it will acquire Just Energy Inc. for 500
million. Just Energy is a leading producer of energy drinks with over 2 billion in
sales in 2007. Just Energy sells energy drinks under the Thrive brand name. The
Just Energy acquisition will expand Fantasy’s beverage portfolio and its presence in
the market for energy products.
“Thrive is the leading brand of energy drinks,” said Michael Owens, president of
Fantasy. “Thrive helped create the current demand for energy drinks by bringing its
product to convenience and grocery stores.” Sales of energy drinks have taken off in
recent years, growing from 30 million in 2000 to an expected 3 billion this year,
driven largely by Thrive’s success.
“The acquisition of Thrive will allow Fantasy to increase demand for energy drinks,”
said Katie Zhang, Fantasy’s Vice President of Marketing. “Fantasy’s relationship with
convenience stores and other retailers will enable the company to expand the
distribution of Thrive and provide consumers with more choices and better products.
The combined company will be better positioned to win new consumers of energy
drinks in the highly competitive market for functional beverages and other
alternatives to soft drinks.”
The combination of Fantasy and Just Energy will create cost synergies from the
integration of common marketing, manufacturing, and business processes. Fantasy
estimates the savings efficiencies from combining operations to total about $90
million annually.
Just Energy was created in 2000 by product innovator Aaron Gordon. Gordon,
credited with starting the energy drink ‘craze’, founded Just Energy after travelling
through parts of the far east. Just Energy’s Thrive is the top selling and fastest
growing energy drink on the market.
Fantasy is the nation’s leading distributor of bottled water. Fantasy had revenues of
approximately $7.5 billion last year.
ICN Merger Workshop, 10-11 March, 2009
3
News Article on the Transaction
Doc. No. 3
=================================================================
Business This Week
The Business Courier, Friday 8 December 2008
=================================================================
FANTASY TO ACQUIRE JUST ENERGY INC., MAKER OF THRIVE
ENERGY DRINK
Brendan McNamara, Business Correspondent
Fantasy Beverage Co. yesterday announced that it will acquire
competitor Just Energy Inc. for $500 million. Just Energy
was founded in 2000 by energy drink innovator Aaron Gordon.
Just Energy has gained prominence in recent years with its
“Thrive” line of drinks. Thrive was the first mass marketed
energy drink and has spurred a dramatic increase in the
popularity of energy drinks.
Fantasy, the largest bottled water producer in the country,
introduced Emerge, its own line of energy drinks nearly two
years ago. While Thrive still leads the energy drink
business with a nearly 70% market share, Emerge has been an
increasingly significant competitor to Thrive, capturing 15%
of the market in less than two years.
Fantasy contends that the acquisition of Just Energy will
enable it to be a more effective competitor against beverage
giants such as Coca-Cola and Nestle. “The acquisition of
Thrive will allow Fantasy to increase demand for energy
drinks,” said Katie Zhang, Fantasy’s Vice President of
Marketing. “Fantasy’s relationship with convenience stores
and other retailers will enable the company to expand the
distribution of Thrive and provide consumers with more
choices and better products. The combined company will be
better positioned to win new consumers of energy drinks in
the highly competitive market for functional beverages and
other alternatives to soft drinks.”
Analysts, however, suggested the most significant benefit for
Fantasy could well be the market share gains it will attain
in energy drinks. “Fantasy would control over 80% of energy
drink sales, allowing the company to focus on expanding the
market rather than wasting money on costly competition
between Emerge and Thrive,” said Jerry Bolek, at Veritage
International Analysts. Even with dozens of brands, the top 3
ICN Merger Workshop, 10-11 March, 2009
4
News Article on the Transaction
Doc. No. 3
or 4 energy drinks make up the bulk of category sales and are
gaining share.
The company predicted the transaction will face little
opposition from government regulators. “We can show that this
transaction is only profitable if we can expand the consumer
base for energy drinks,” Zhang noted. “It would make no
sense to raise prices or introduce fewer new products when
the market is doubling every other year and we’re trying to
convince consumers to try energy drinks. We’re confident
that the government will see that this acquisition is good
for business and good for consumers.” She also noted that
beverage giant Pure Beverages introduced an energy drink,
“Bom Dia”, on a national basis earlier this year and the
combined company will continue to face intense competition
from Pure and various other energy drink producers.
ICN Merger Workshop, 10-11 March, 2009
5
Party White Paper for Initial Meeting with Agency
Doc. No. 4
FANTASY BEVERAGE PROPOSED ACQUISITION OF JUST ENERGY
WHITE PAPER SUBMITTED BY PARTIES
22 December 2008
Category Growth and New Entrants Will
Continue To Define Competition in the
Sale of Energy Drinks
&
ICN Merger Workshop, 10-11 March, 2009
6
Party White Paper for Initial Meeting with Agency
Doc. No. 4
Introduction
Both Fantasy and Just Energy are active in the development, production and
distribution of energy drinks. Energy Drinks are designed to provide a quick
burst of energy to the customer, an alternative to sodas and various other
drinks for active consumers. It is, therefore, a product competing with sports
drinks, fortified waters, ready-to-drink coffee and tea, and carbonated soft
drinks in the market for non-alcoholic beverages. Of all the major functional
beverages, energy drinks constitute the second largest segment with a share
of about 35% of the overall market. The market for non-alcoholic beverages is
driven by more perceivably healthy drink options. Growth within the beverage
market is attributed to a shift away from carbonated soft drinks to products
like juices, sports and energy drinks, particularly among young people.
Competition to obtain shelf-space with retailers for a particular product is
based primarily on expected or historical sales performance of the product
compared to its competitors. Also, in some cases, companies pay fees to
retailers to obtain shelf-space for its energy drinks. Competition for sales is
based on many different factors, including brand recognition, price, taste
preferences and quality. Consumer demand for functional beverages such as
energy drinks has grown rapidly in recent years. While Just Energy has a
leading position in the energy drink segment, energy drinks compete with
many other beverages for consumer sales.
The merger of Fantasy and Just Energy will not have any adverse competitive
effects in markets in which energy drinks compete. Explosive growth has
attracted significant entry and will continue to do so.
There are three primary reasons why the agency should end its inquiry:
A.
Any Plausibly Defined Market Must Include - At a
Minimum – Both Energy Drinks and Other Functional
Beverages
Internal Fantasy marketing studies show that energy drinks compete with
sports drinks, enhanced or fortified water, and increasingly, other functional
beverages like ready-to-drink teas and coffee. Such functional drinks share
similar benefits of vigor, hydration, and endurance. A recent internal study
shows that 86% of energy drink buyers were first time users. Of that, 72%
switched from soft drinks, but others shifted from sports drinks and juices.
The study also shows that some energy drink users switched to sports drinks
and juices. Moreover, the demand elasticity for energy drinks alone is – 5.75,
which is highly indicative that a market consisting of only energy drinks is too
narrowly defined.
Alternately, energy drinks compete with all functional beverages. IRI defines
and tracks a category known as “Functional Beverages,” which includes energy
drinks, sports drinks, and enhanced water. IRI data shows that over time the
prices of sports drinks have fallen in reaction to competition from energy
drinks. For the twelve weeks ending December 31, 2000, the average price of
sports drinks was 3.05 per liter. For the twelve weeks ended December 31,
2005, it was 2.6 - about 15% reduction. This coincides with the emergence of
ICN Merger Workshop, 10-11 March, 2009
7
Party White Paper for Initial Meeting with Agency
Doc. No. 4
energy drinks, introduced by Just Energy in 2002. Price correlation studies
between the entry of energy drinks and other functional beverages further
illustrate that energy drinks constrain the prices of other functional beverages.
Energy drinks and sports drinks are sold alongside each other at convenience
and grocery stores. Energy drinks and other functional beverages are both
advertised in comparison to soft drinks and positioned as healthier options.
Customers of energy drink producers are mostly large convenience store and
grocery chains, and are sophisticated purchasers. These customers are well
aware of the supply sources that are readily available, including firms that
could enter or expand in any given country. The slotting fees also demonstrate
buyer power of the customers. Before being able to introduce a new energy
drink on the shelf, retail chains grant the producer test status for some weeks
against large promotional fees. If the product is accepted, stores often
demand slotting fees. Since the main markets for functional beverages are
competitive, the merged entity will not be in the position to set prices anticompetitively without taking the risk that the customers will switch to other
suppliers. These chains, therefore, have enormous buyer power.
In sum, objective IRI data as well as real market placement of energy drinks
show that any plausibly defined market cannot be limited to energy drinks. At
a minimum, the relevant market is functional beverages – of which the
combined share of Fantasy and Just Energy would be less than 35%. Further,
market data and competition suggest an even broader relevant market of
value added beverages such as ready-to-drink teas and juices – of which the
combined share would be far less than 20%. The modest combined shares of
any plausibly defined market obviate any competitive concerns.
B.
Current Projections of Continued Growth In Demand for Energy
Drinks Demonstrate that Growth is Sustainable
Competition is fierce and will become even fiercer in the future since the
energy drink segment is growing rapidly. Recent statistics show energy drink
sales have jumped to 3 billion – up almost 50% from just over a year ago.
Current estimates are that energy drink sales will hit 10 billion in three years.
This growth is part of an overall trend that is attracting new entry into lifestyle
segments of the food and beverage industries by large firms such as Pure,
Nestle, and Pepsi. Such spectacular growth and new entry across all health
and lifestyle segments demonstrates that increased demand for energy drinks
is not a fad driven by the specific energy boosting benefits of energy drinks.
The target customer of energy drinks is more likely to venture out and try new
products.
Energy drink sales in convenience stores and supermarkets have grown
exponentially since Thrive was introduced. Then, Thrive was the only energy
drink mass marketed and sold in most areas and it competed with relatively
few functional beverage alternatives. As of late last year, IRI reported 49
different functional beverage brands sold in retail stores, of which 16 are
energy drinks (both brand and private label).
In sum, the explosive growth of energy drinks, and the continued expansion of
its consumer base, facilitates continued expansion and new entry.
ICN Merger Workshop, 10-11 March, 2009
8
Party White Paper for Initial Meeting with Agency
C.
Doc. No. 4
Explosive Growth Has Supported Continued Expansion and
Successful New Entry
A number of new products are expected to be introduced on the market. The
internationally operating manufacturer Pure has just this year successfully
introduced a new product on the market, Bom Dia. Pure was able to take
away 7-8% market share from the parties to the proposed merger within 10
months. Moreover, Pure will hit the market with a whole range of new flavors
of energy drinks. In addition, Pangea Beverages will most likely launch an
energy drink by next year. Both products compete directly with a Emerge and
Thrive.
In addition, the vast majority of all energy drinks will soon lose their brand
premium and will thus be attacked from private labels brands. The leading
national convenience chain FastMarts introduced its own brand in late 2006
and was able to gain immediately a share of almost 10% of energy drinks sales
in its stores. The convenience chain Super Convenient is in the process of
negotiating with a producer production of a private label. Hence, the combined
entity will face vigorous competition from both other energy drink producers
and large chains offering sufficient supply alternatives to the final consumer.
Private label energy drink was introduced last year in most areas tracked by
IRI.
There are at least four energy drink brands with national exposure. Thrive is
sold in every metropolitan area tracked by IRI; Emerge (all but four); Bom Dia
(65% coverage); and Star Energy’s Astro (60% coverage). Meta’s energy drink
is in 45% and EverBev’s Tilt energy drink is in almost 40% of the IRI areas.
As entrants Astro, Tilt, Meta, Emerge, and most recently, Bom Dia all
introduced energy drinks; and many more followed (including private label),
Just Energy reacted by cutting prices and increasing promotions and
advertising. Thrive’s national average price was rising prior to the new entries
and reached an apex in mid-2005. In response to the new entries since then,
Thrive slashed its prices such that its average volume price today is nearly
30% less than its peak.
Today, virtually every store selling Emerge also sells at least two other energy
drinks – and among leading retailers, many carry four or more different energy
drinks (including their own private label) in their refrigerated sections. There
are several major energy drink brands that compete with Thrive and Emerge:
a) Astro: StarBev’s Astro brand energy drink was introduced in mid 2005.
In the second quarter of last year, Astro sales grew 15%, and it was
picked up in 1,300 new stores. Two years after its introduction, Astro
accounted for over 4% of all sales, and is growing rapidly. Though its
entry into energy drinks has been modest, Star has the incentive and
financial backing to suceed.
b) Bom Dia: Pure Beverages’ entry, Bom Dia, already has experienced
considerable success. For example, it out sells Emerge in several
metropolitan areas in the East. In just three short months after its
introduction, its sales exceeded many established energy drinks. Pure
appears to be committed for the long haul, as it recently announced a
new processing facility. In terms of energy drink producers, Pure has
an unrivaled financial backing. Fantasy expects Bom Dia to rollout
ICN Merger Workshop, 10-11 March, 2009
9
Party White Paper for Initial Meeting with Agency
Doc. No. 4
nationally and continue to grow - quickly.
c) MetaBev: MetaBev International is a $25 billion beverage company
based in Hong Kong. MetaBev has sold its established products since
1985. Its energy drink, Shaolin-Zing was introduced in Spring 2005
using a new production facility.
Its total sales for the initial four months in 2006 exceeded all
competitors except Thrive. It has a major presence in the West where
its sales are comparable to Emerge. In its annual report last year,
MetaBev announced its commitment to grow its energy drink, stating
that, “to enlarge and ensure Shaolin-Zing market share, it is necessary
to continue expanding into the mainstream channels and investing in
marketing.” Meta has the capacity at its new facility and the financial
wherewithal of its parent to grow its energy drink sales.
In addition, the spectacular demand for energy drinks has not gone unnoticed
by very large beverage companies – reports are that PepsiCo and Pangea
Beverages are considering new energy drinks and could easily replicate
Fantasy’s success with its energy drink.
Barriers to entry are low. Common energy drink ingredients are commodities
traded worldwide. Although a specialized and highly sophisticated facility is
necessary for production, the cost is relatively moderate. A modern facility
costs about $30 million. Beverage companies that produce soft drinks or tea
would require only little additional equipment to extend their business into
energy drinks. Most drink production lines can be converted into a line capable
of producing energy drinks for a total investment of less than $3 million, and
new production lines are $5-10 million. That barriers to entry are low is
demonstrated by the recent entries to the market.
In sum, there are numerous established competitors, new and growing
entrants, and other potential entrants, all of whom have the incentive and
resources to vigorously compete nationally with Fantasy and Just Energy.
D.
There is Plenty of Capacity Available to Support Expansion and
Entry.
Significant capacity exists, or has been recently added, to accommodate
substantial increased energy drink production and new entry. While we cannot
provide comprehensive information of all available capacity given the dizzying
rate at which capacity has been added in recent years, it is evident that there
cannot be any sustainable capacity shortage. Additional capacity also can be
added quickly and for minimal cost.
Most beverage producers easily could produce energy drinks with minimal
expenditure. The equipment used to produce energy drinks can be used with
few modifications to produce sodas or other beverages. None of the plant
costs are sunk given the ability to produce other beverages. Indeed, Fantasy
went from initial concept to shelf store in less than eight months. It cost
Fantasy about $2.5 million in product and packaging development, consumer
research, brand support and other costs to introduce Emerge. Additional
storage and facility upgrades at four sites only cost $12.8 million to handle the
additional capacity for energy drinks production. New production equipment
cost 5 million per line. Advertising and promotion costs were less than 4.5
ICN Merger Workshop, 10-11 March, 2009
10
Party White Paper for Initial Meeting with Agency
Doc. No. 4
million in the first year. Other energy drink producers have introduced their
product in six to twelve months.
Complete product development and production at a greenfield plant capable of
producing multiple sizes of energy drinks could be engineered in less than 18
months at a cost under $30 million. The costs of entry could be further reduced
by simply adding capacity to an existing facility. Such conversion can be done
at little to no cost, as experienced with Emerge. A total line of new equipment
needed for energy drink production can be purchased for under 10 million
(includes storage capacity that may already be available at an existing facility).
Used processors and equipment are readily available for much less. Of course,
an entrant could dramatically reduce its costs by entering into a co-pack
arrangement with established beverage companies – many of which are readily
available. There is plenty of capacity, and it is continuing to expand as more
processors are catching on to the popularity of energy drinks.
Conclusion
Though it is apparent that the announced merger does not harm competition,
the combination of Fantasy and Just Energy will actually create cost synergies
from the integration of common marketing, manufacturing and business
progress. Fantasy estimates these savings to total about $60 million annually.
We are willing to provide a more detailed analysis of efficiencies, if requested.
In summary, it can be concluded that due to vigorous competition in the
energy drink segment between large suppliers, the easy substitution of energy
drinks by other functional beverages and the concentration of market power on
the buyers’ side which includes private label energy drinks, the transaction will
not lead to competitive concerns.
ICN Merger Workshop, 10-11 March, 2009
11
=================================================================
Excerpt from FANTASY BEVERAGE GROUP ANNUAL REPORT 2007
=================================================================
INDUSTRY OVERVIEW
The beverage industry is a mature industry that has traditionally been characterized by slow
to flat growth, low profit margins, fragmentation and excess capacity. Excess capacity has
resulted from the development of more efficient manufacturing techniques, and slow growth
in the demand for traditional beverages such as soft drinks. For the last several years, the
beverage industry has been in the process of consolidating, which has tended to lower costs
and raise efficiencies. We believe that innovation will become increasingly important as
processors seek to increase consumption, sales and margins through product differentiation
and branding.
In contrast to the staid nature of the overall beverage industry, certain ‘value-added’
segments, known as ‘lifestyle beverages’ such as fortified water and energy drinks have become
increasingly visible. While such beverages still amount to only a fraction of non-alcoholic
beverage sales, they are experiencing unprecedented growth and generally have higher profit
margins. They are driven by different demand from customers, based primarily upon brand
image and purchased by individuals for a purpose (i.e., energy boost, rehydration). This
category appears to be able to sustain higher prices; as such customers are willing to pay more
for the perceived benefits. Such drink segments are increasingly becoming important to our
beverage portfolio and will represent the bulk of our growth in the future.
BUSINESS SEGMENTS
The bulk of our business – over 80% – is the sale of bottled water. More recently, our
specialty beverage division has developed a line of enhanced water with nutrients and vitamins.
In 2006, the specialty division introduced an energy drink and in 2007 we acquired a ready-todrink tea company. Such moves underscore Fantasy’s commitment to high-growth beverage
categories and expanding our product portfolio.
Fantasy Beverage operates its business in a generally decentralized manner organized by
geographic region (ie., separate regional management structures). Our 16 plants give us a
strong presence in each region of the country. Fantasy sells its products through regional sales
forces to a wide variety of retail customers including convenience and grocery stores.
Speciality beverages are increasingly sold on a national basis to a wide variety of retail outlets.
DISTRIBUTION
Fantasy Beverage delivers most of its products directly from its plants or distribution
warehouses to its customers (retail chain stores or warehouses) in trucks that we own or lease.
We believe that we have one of the most extensive direct store delivery systems in the country,
with over 3,500 delivery routes. Major economies have been actualized in recent years through
consolidation of distribution branches and routes.
ICN Merger Workshop, 10-11 March, 2009
12
COMPETITION
Our businesses are highly competitive. We have many competitors competing for both
shelf space with retailers and for customers for each of our major products and geographic
areas. Competition in our businesses is based primarily on: service, price, brand recognition,
quality, taste preference, and breadth of product line.
The Company’s business is highly price competitive with relatively low operating margins,
consistent with other beverage companies. The Company's business operates in a number of
different geographical areas. In these areas, the Company competes against national, regional
and local companies. In certain markets, some supermarket chain stores have their own
product processing plants. There are usually a number of competitors in each major market
and product class. Competitive conditions in each market vary, but the Company does not
believe it has any material competitive advantage in any of its major markets or product classes.
ICN Merger Workshop, 10-11 March, 2009
13
Fantasy Initial Synergies Memo
Doc. No. 6
[deal-related document provided by the merging parties]
Memorandum
To: Michael Owens, CEO, Fantasy
From: Emma Chen, VP for Strategic Development; David Roy, Acquisitions
Date: 2 October 2008
Subject: Project Strive – Synergies
Last week, you asked us to come up with a figure for expected synergies
from an acquisition of Just Energy. The Just Energy purchase gives us the
strongest brand name in energy drinks and enhances our own growing beverage
portfolio. We need to move quickly and seize the rare opportunity to acquire a
market leader – before one of the major beverage companies steps in. Due to the
fast pace, due diligence is only now beginning.
While there has been no effort to date to study all production and
distributional synergies we can expect from the acquisition of Just Energy, based
upon our past experiences in integrating acquisitions – the Joy Energy fiasco
excepted – I believe we can expect to see significant savings.
There has, of course, been little chance to properly quantify the savings.
We can likely expect savings of the following types:

Increased production utilization and run times

Reduced purchasing costs

Elimination of duplicative corporate overhead and related expenses

Reduced payments for promotions/shelf allowances

More efficient utilization of branches

Optimization of combined route structure
The bulk of any production consolidation savings will be driven by the
only significant overlap production – energy drinks. Given the expected growth
in the market, plant closures do not appear the answer. Sharing of production
techniques, aligned distribution systems and combined purchasing will produce
most of the savings to be had. Also, controlling the two significant brands in
energy drinks could make our current fight to preserve shelf space easier,
perhaps leading to reduced payments to retailers.
At this stage, based upon an analysis Emile put together (final numbers to
come), an expected savings of about 60M a year appears achievable. Numbers
aside, the acquisition appears a perfect fit, and gives us the best name brand in
energy.
Emma
ICN Merger Workshop, 10-11 March, 2009
14
Fantasy Presentation to Board
Doc. No. 7
[deal-related document provided by the merging parties]
Strictly Confidential
Project Strive
Presentation to the Fantasy Board of Directors
Acquisition Analysis
15 November 2008
Target Overview
Just Soy Inc.
Founded in 1990 by Claudio Gordon
Leading Producer of Soy Products
#1 Refrigerated Soymilk seller
→Thrive!: 70+% of category sales
→First company to mass market soymilk via grocery stores
Sells a range of soy-based health products
Excellent grocery store distribution
_
ICN Merger Workshop, 10-11 March, 2009
15
Fantasy Presentation to Board
Doc. No. 7
Industry Overview
Energy Drinks
3 billion in sales last year
Energy Drink Booming Market Growth
Sales estimated to have grown at least 50% per year
since 2002
Thrive’s push largely responsible for growth
Rapid growth attracting entry of major beverage
companies
Industry Overview (cont=d)
Soymilk
Market growth is fueled by
Health & trend consciousness
Lactose intolerance
Thrive and FantaSoy are Top Two Brands
 “Ambrosia” brand soymilk, recent entrant from
Elysium
→Increasingly significant presence, especially in the West
Numerous smaller labels compete
As in Fluid Milk, Large Grocery Chains are
Primary Outlet
ICN Merger Workshop, 10-11 March, 2009
16
Fantasy Presentation to Board
Doc. No. 7
Current Competitive Trends
Soymilk
Wide-Scale attempts to establish Consumer Use
of Soy in diet
New Entrants spending to introduce
Deep Pocket, test market advertising to
determine size of market opportunity
Growing Private Label interest in Soymilk
Soymilk Opportunity
Competitive Advantages of Just Soy
First Mover Advantage
Ability to set price and quality standards
Spends less to place in retail and sustain #1 position
It is the household brand, synonymous with the
product
Good Geographic, Manufacturing & Distribution
Plan = Economic Advantage
Broad Category Presence supports Just Soy
brand Leadership and Credibility Position
ICN Merger Workshop, 10-11 March, 2009
17
Fantasy Presentation to Board
Doc. No. 7
Transaction Rationale
Project Strive
Strengthens our position in energy drinks
Increases access to shelf space with large customers
Expands production capacity
Gives Fantasy control of the leading brand name
Combination of Emerge and Thrive allows more
leeway to set market pricing
Complements Fantasy’s stable of beverages
Transaction Rationale (cont=d)
Project Strive
Better positioned to battle Elysium’s recent entry
into soymilk
Produces a company more able to battle the
Major Beverage Companies (e.g., Coca-Cola,
Nestle) for a greater share of overall beverage
consumption
Builds a superior platform for innovation
Soymilk growth counters declining fluid milk sales
Generates Significant Efficiencies
40M in annual cost savings from combining facilities
ICN Merger Workshop, 10-11 March, 2009
18
Just Energy Strategic Plan
Doc. No. 8
[obtained pursuant to document request made to merger party Just Energy]
ICN Merger Workshop, 10-11 March, 2009
19
Just Energy Strategic Plan
Doc. No. 8
Soyfoods Trends




Significant market growth with introduction in
mass grocery chains, and consumer-friendly
forms (ie., refrigerated soymilk)
Health claims say: ‘Eat more soy!’
Soy is a renewable resource - an
environmental and healthy lifestyle choice
Increase in lactose intolerant consumers
ICN Merger Workshop, 10-11 March, 2009
20
Just Energy Strategic Plan
ICN Merger Workshop, 10-11 March, 2009
Doc. No. 8
21
Just Energy Strategic Plan
Doc. No. 8
Facilities Issues

10 Just Soy plants across country



Distribution costs may vary significantly due
to capacity issues and distance
Considering new facilities to round out
coverage


Regional distribution routes
Desire to fill gaps in Midwest, Southeast
Capable facility cost 25-40M, 18-24 months

Rumored that Elysium’s facility cost between 4050M, with addition of plastic bottling capability
The Competition

Traditional Grocery Chains


Soon to Enter


Fantasy Dairy, Private Label, StarSoy,
EverSoy
Elysium Foods, Pangea Foods(?)
Natural Products Markets

StarSoy, MetaSoy, EverSoy, House of
Health
ICN Merger Workshop, 10-11 March, 2009
22
Just Energy Strategic Plan
Doc. No. 8
Current Competitive Trends
Soymilk





Extensive attempts to establish consumer
usage of soy in diet
Plethora of potential new entrants willing to
spend on slotting fees and introductions
Deep pocket, test market advertising to
determine size and vulnerability of our market
dominance
Introduction of more flavors of soymilks
Broad-based private label interest in soymilk
Major Competitors

Fantasy Dairy




Poor entry into segment with Joy of Soy, de-listing
at some retail customers
Reformulation and repackaging aimed at us,
appears more promising — recently became #2
brand behind Thrive
Revenues: only 60M but they tie up the shelf
Fantasy is #1 milk producer with strong financial
backing. Most important competitive threat todate in soymilk.
ICN Merger Workshop, 10-11 March, 2009
23
Just Energy Strategic Plan
Doc. No. 8
Major Competitors (cont’d)

MetaSoy




Largest soymilk producer in the world (based in
Asia)
Traditionally the primary competitor to Just Soy
(makes identical products), but presence has
waned with introduction of competing soymilk
brands, now only regional strength
Slow to migrate to grocery store business,
continues to focus on natural foods outlets
Lack of focus/commitment in our market
ICN Merger Workshop, 10-11 March, 2009
24
Just Energy Strategic Plan
Doc. No. 8
Potential Competitiors

Elysium Foods, brand to launch soon




New facility with plastic bottle capability
Unique extraction process - taste remains to be
seen
Deep pocket potential
Pangea Foods



Rumors that Pangea has done soymilk research
and testing
Possible introduction next year?
Rumors about adding soy products - “Soy Twist”
soy products with fruit flavors
Thrive’s Competitive Advantage
Barriers to Entry





First to market yielded dominant share
Best geographic production and distribution
plan
Investment to slot and place new soy line
nationwide is 35-45M
Advertising commitment now at 30M to keep
up with FantaSoy
Broad soy-category presence supports brand
leadership position
ICN Merger Workshop, 10-11 March, 2009
25
Just Energy Strategic Plan
Doc. No. 8
Competitive Threats


Large food companies who can invest in
losses for 2-3 years (Elysium, Pangea)
Market degenerates to commodity due
to private label dominance, lack of
branding
Branding the Category

First mover advantage





Second and Third to Market, late-comers


Able to set price and quality standards
Spend less for shelf space and sustain #1 position
Become household brand
Can leverage brand into other products
Must spend to keep up
Early life cycle of category may require
additional investment to fend off many new
entrants
ICN Merger Workshop, 10-11 March, 2009
26
Just Energy Analysis of Bom Dia Launch
Doc. No. 9
[obtained pursuant to document request made to merger party Just Energy]
*******************************************************************************************************
To: Aiden Mori, Marketing Director, Just Energy
From: Aaron Gordon
cc: Thrive Management Team
Date: 9 January 2008
Subject: Pure Announces Entry into Energy Drink Market
*******************************************************************************************************
Aiden,
Pure just announced that they plan to introduce a new line of energy drink called “Bom
Dia” at the beginning of next year. I think this is our worst nightmare realized: another
major beverage company recognizing the potential of energy drinks.
They will
undoubtedly bring to bear all of their marketing and technological might. This will be an
extraordinarily challenging time for us.
The last major entrant into this segment was bottled water behemoth Fantasy. Fantasy
flopped dramatically at first with its acquisition of Joy Energy, thanks to their complete
ignorance of the functional beverages, demonstrating that all energy drinks are not created
equal. It seems unlikely that Pure will make the same mistakes. Fantasy has shown
increasing strength since they introduced a reformulated “Emerge” product that is basically
a Thrive knock-off. Our pre-eminent position in energy drinks is now under attack from two
formidable companies. (I don’t see the many fringe producers as our competition.)
I want a report from you by the end of the week on our response to Pure’s entry. Put
together a team to address this ASAP – it’s top priority here to determine:

Will we need to do more advertising and promotions?

Will this force us to spend more on slotting fees?

How can we convince retail stores that carrying yet another brand of energy drink
will just be confusing to the customer? (Could we even sign ‘exclusive’ distribution
agreements with some grocery stores?)

Should we introduce new flavours or packaging?

Are there other such possible entrants (large beverage companies)?
Let’s also focus on how we can increase demand for energy drinks overall so that even if
we lose a couple points market share, our sales will continue to increase substantially.
ICN Merger Workshop, 10-11 March, 2009
27
Agency Memo Summarising Just Energy Meeting
Doc. No 10
The Competition Authority
INTERNAL MEMO
To:
Fantasy/Just Energy Merger File
From:
Merger Branch, Retail and Wholesale Unit
Subject:
Meeting with Just Energy
Date:09 Jan 2009
Today, staff met with Aaron Gordon, founder, President and CEO of Just Energy and
his counsel.
Approximately 7 years ago, Just Energy introduced its ‘Thrive’ brand energy drink. Mr.
Gordon came up with the concept of an energy boosting drink as an alternative to
sodas in 2000 and became the first to mass market the idea.
Just Energy currently covers approximately 94% of the convenience stores and
supermarkets in the country. This information is obtained from IRI, the Information
Request Institute, based on the number of times a product is scanned using the UPC
code. Just Energy relies on IRI data to track market trends, Thrive’s performance, and
the presence of its competitors. Specifically, Just Energy follows IRI’s energy drink,
sports drinks, and overall non-alcoholic beverages reports. According to Mr. Gordon,
Just Energy has been growing exceptionally fast over the last 2 to 3 years. Mr. Gordon
attributes this growth primarily to Just Energy’s Thrive quality product and brand
reputation.
When asked about competitors, Mr. Gordon mentioned sports drinks, soft drinks and
other functional beverages, and energy drink producers, Fantasy, Pure, Star, Meta, and
others.
Sodas: Mr. Gordon considers carbonated soft drinks as a competitor. He noted that
soda has some of the same ingredients, including an emphasis on caffeine, and is sold
alongside energy drinks. Price wise, energy drinks are approximately 50% to 75%
higher.
Sports Drinks and other functional alternatives: Mr. Gordon sees sports drink producer
SportAde as a direct competitor to energy drinks. According to the IRI, sports drinks,
energy drinks and fortified water are considered ‘functional beverages’. The national
market share for Just Energy’s Thrive product in the functional beverage category is
approximately 28% with Fantasy’s share at approximately 4%.
He mentioned
Craveade as another sports drink competitor.
Energy Drinks: Gordon identified Fantasy’s Emerge, Pure, MetaBev, Star/Astro, and
ICN Merger Workshop, 10-11 March, 2009
28
Agency Memo Summarising Just Energy Meeting
Doc. No 10
other regional brands as competing energy drink producers. While he noted that
Fantasy is second to Just Energy in sales, he considers Pure’s Bom Dia brand, a recent
entrant, as his company’s biggest threat due to their beverage reputation and financial
capability as a large corporation.
Just Energy owns two processing facilities for the drink formula production – highly
sophisticated facilities that cost about 5 million. This produces a mix that is then
transported to regional plants capable of producing energy drinks. This other portion
of production is done at 6 facilities spread across the country. Mr. Gordon chooses the
production facilities based on geography. Geographic desirability is important because
it is most cost effective in terms of manufacturing, processing, and distribution. The
cost of transportation over long distances would ruin gross margins. A facility’s
capacity is important to ensure high quality. Operating at or close to capacity can
dilute the quality of the product.
It is important to be able to manufacture in several parts of the country to be
competitive. Gordon estimates the maximum distance for delivery at about 800-1100
km. Distribution is not necessarily based on distance, but rather more on population
density to get as close to metropolitan areas in order to achieve big savings. Currently,
the majority of Thrive shipments are less than 400 km.
Mr. Gordon’s original strategy was to line up with major beverage producers because
of their existing infrastructure. Other beverages, such as carbonated soft drinks, use
similar production equipment as energy drinks. Just Energy was only able to find two
small local beverage producers that would produce its energy drink in the early days of
the company, before its popularity started to grow. With little interest in partnering
with Just Energy from established beverage companies in the early 2000s, Just Energy
began to pursue its own growth strategy, and built its own facilities. Just Energy
ended its production contracts in 2004, when it began to produce all of its own product.
Based on his past experience with outsourcing, Gordon believes that a small energy
drink producer that has a good recipe could partner with an established beverage
company for production. He believed that due to the popularity of energy drinks,
traditional beverage companies would be more likely to partner with a promising startup than when he began. Today, he estimated the cost of product development and a
capable new production facility at approximately 40 to 50 million, taking about 18 to
24 months to complete. The cost to convert a production line to energy drink
production is much less; he guessed approximately 5 to 10 million and 6 months.
Just Energy estimates it has about 75% of the current production capacity for energy
drinks, but noted that competitors are adding several new plants and that some
beverage companies could substitute energy drink production on equipment currently
used for other specialty beverages.
Just Energy tracks energy drink sales through IRI data. Thrive’s approximate market
share is between 65% and 70%. Fantasy’s market share of its energy drink, Emerge,
ICN Merger Workshop, 10-11 March, 2009
29
Agency Memo Summarising Just Energy Meeting
Doc. No 10
is between 13% and 16%, but had reached as high as 20% nationally in late 2007.
Emerge was introduced in January 2006. Bom Dia is an up-and-coming entrant with
the third largest share of sales currently (more than 5%). As large, established
beverage companies, Fantasy and Pure were able to use their production and
distribution capabilities to place product out on the market very effectively and quickly.
However, according to Mr. Gordon, Fantasy’s first foray into energy drinks -- Joy
Energy (which they acquired in 2004) was a failure. Joy tasted “very bad”, which when
coupled with their complete inexperience in marketing an energy drink, resulted in a
disaster.
After eliminating the brand, Fantasy’s second attempt, Emerge, was
“virtually indistinguishable” from Thrive. Emerge has been growing exponentially, but
Thrive remains the undisputed market leader.
ICN Merger Workshop, 10-11 March, 2009
30
Fantasy Sales Document
Doc. No. 11
[obtained pursuant to document request made to merger party Fantasy]
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
TO: Sales & Marketing Group – Energy Drink, Regional Managers
FROM: Nigel Khan, VP Sales
DATE: 10 April 2008
SUBJECT: Emerge Quarterly Sales Highlights
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Update on recent market events:
North Division:
Bestmarts chain: We had heard they were in talks with Pure to produce a private
label energy drink for their stores. We asked their purchasers, but they didn’t
reveal any definite plans. Be aware of convenience chains looking to sell their own
private label energy drinks, we need a strategy to combat this new threat.
GroceryCo has lifted us from ‘test trial’ status to full purchasing status -- Emerge
will be placed alongside Thrive and Astro. Regarding new Emerge business at the
GroceryWay chain, like most bids, the proposal they have asked for is very detailed,
came on short notice and encompasses all 5 of their northern and eastern divisions.
We have a 50/50 chance to gain the number two slot on the shelf (#1 is Thrive),
displacing Astro. Our beverage package, with bottled water and teas, is the key -smaller producers can’t match it.
West Division:
Western Division reports losses to Meta Energy at a medium chain (reduced our
shelf space) and a 60-store natural foods outlet (totally displaced) -- apparently
reports of their demise were a bit early. Meta still not a threat at large chains.
Thrive has countered our recent success in this region with competitive everyday
pricing in many markets. The West is seeing 2.19 per half litre on Thrive. (Meta
remains higher priced, hasn’t expanded much from strength in West -- what are
they doing with that brand?) Our message is that we are not selling on price, but
quality and turns.
Rumors. . . Western Division reports that Pure is in talks with major chains to place
their new energy drink – will this displace Emerge? How can we counter this
threat?
East Division:
Thrive pricing continues to be inconsistent. I got a report that a large customer
grocery chain has Thrive priced at 1.89 per half litre while we are at the 2.18
suggested retail price. This is a troublesome gap. We need to convince the
accounts that low-balling the retail is not a good idea in the segment and is actually
ICN Merger Workshop, 10-11 March, 2009
31
Fantasy Sales Document
Doc. No. 11
taking money out of the category that does not need to be thrown away. This isn’t
soda -- customers will pay the premium.
MarketSmart grocery: Pricing cost us this account. Emerge was priced at 2.39
whereas Thrive and Astro are priced at 1.99. We need to be more price competitive
with our chief rival.
Overall: This is the first quarter with beverage behemoth Pure in the market. Their
Bom Dia brand was introduced in select metro areas in January to much fanfare,
and we see they have been very aggressive in getting new accounts. Their ability
to get trial runs at stores is enviable, as they have a good reputation in other
beverages. It is harder to decipher their pricing strategy – unclear whether they are
positioning themselves as unique with their innovative plastic bottles and single
serve containers (and thus priced at a premium) or whether they are taking on
market leader Thrive. It was much easier to read the landscape when it was just
Thrive and us. Look for them to continue to make waves as they roll the product
out elsewhere in the country. Bom Dia appears here to stay.
ICN Merger Workshop, 10-11 March, 2009
32
Fantasy E-mail: Market Update
Doc. No. 12
[obtained pursuant to document request made to merger party Fantasy]
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
TO: Sales & Marketing Group – Energy Drink, Regional Managers
FROM: Nigel Khan, VP Sales
CC: Maria Del Piero, Marketing director
DATE: 25 August 2008
SUBJECT: Energy Drink Market
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
In the first six months of 2008, Emerge’s sales reached almost 220 million. Despite
these favorable results there are some concerns that we are not doing as well as
our competition.
Observations from most recent market review of the energy segment:
YTD Retail Sales
Emerge: 218M
Thrive: 1B
Energy Share
Emerge: 16%
Thrive: 71%
1. On the leading half litre item, Emerge is priced about 6% higher than Thrive
nationally.
2. Thrive’s average price per half litre has declined since January: 2.05 to 1.95, an
aggressive response to our more aggressive marketing campaign launched in
first quarter of this year.
3. The leading energy drink brands, Emerge and Thrive, are key to the success in
the functional segment; outpacing sports drinks and all other energy drink
brands in growth rates. Energy’s household penetration is 12% compared with
35.6% for sports drinks.
4. We need to get IRI data from each of your markets. Please obtain the following
information by market: category trends, brand sales ($, units), account specific
sales for your larger accounts, ACV by brand, $ sales per point of distribution,
and retail pricing.
Also, carefully review your pricing vs. your competition. We are still in the infancy
of a fast growing segment and though we are ahead of projections we need to be
acutely aware of our competition and how our accounts view our success.
ICN Merger Workshop, 10-11 March, 2009
33
Fantasy E-mail: Pricing
Doc. No 13
[obtained pursuant to document request made to merger party Fantasy]
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
TO: Sales & Marketing Group – Energy Drink, Regional Managers
FROM: Nigel Khan, VP Sales
CC: Maria Del Piero, Marketing director
DATE: 20 September 2008
SUBJECT: Energy Drink Market
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Looking over some of the recent market intelligence – particularly our pricing vis-avis Thrive, we cannot forget we are operating in a market in its infancy. While we
are close, it appears we are consistently about 5-8% above Thrive, and I wonder if
our strategy of a pricing premium is justified. As you recall, from last year’s pricing
evaluation, we determined that an excessive price increase could prompt some
stores to decline to stock Emerge, given that there were other choices available.
Thrive is uniquely positioned as the first-mover, and thus has the advantage of
widespread familiarity and consumer awareness. Emerge is not in such a position.
Rather, we must fight for shelf-space along with the many others newcomers. We
do not have the luxury to price above our competitors, and indeed, with Thrive
holding the line, we have little choice but to follow. This gives our customers
tremendous leverage. Only Thrive is immune from this threat that keeps prices
competitive.
Taking a leadership role in energy drink pricing does not come without risk to the
growth engine of our brand. We cannot afford to slow our growth at a time when
the market is exploding as more customers become familiar with energy drinks.
We must hold the line on prices until we can establish Emerge’s brand name as on
par with market leader Thrive. Precedent has been set via major stores in the past
dropping or threatening to drop a product due to pricing. (Remember our
experience with Joy Energy – we raised prices too soon, and Thrive ate us alive.)
The risks are material that certain stores may decide to stop stocking Emerge. Our
relatively smaller market share and customer recognition puts Emerge at greater
risk of store rejection if our prices rise above competitive levels.
The good news, however, is that with our extensive experience in water, and
commitment to marketing, customers should gravitate to the Fantasy name in
energy drinks. This is where we have an advantage over the smaller, energy drink
only producers, and why we are uniquely situated to challenge Thrive. We need to
redouble our customer acceptance efforts before another large company with a
name brand known in beverages enters.
For now, I believe we must match the discounts offered by Thrive. They appear to
still be pricing to expand the category. If we do not follow, Emerge will be severely
disadvantaged with larger retailers.
Where we cannot match Thrive, we need to emphasize to our chain store
ICN Merger Workshop, 10-11 March, 2009
34
Fantasy E-mail: Pricing
Doc. No 13
customers that dropping Emerge would substantially consolidate their energy drink
offerings and limit the choice of customers. Dropping Emerge would only give
greater market power to Thrive, enabling future price increases for consumers, but
more importantly for the stores, the ability of Thrive to lower or eliminate the slotting
fees it pays.
I want to meet as a group next week to come up with ways to be more aggressive.
ICN Merger Workshop, 10-11 March, 2009
35
Market Share Chart
Doc. No. 14
[Staff has obtained the following sales shares information for energy drinks based upon
convenience store scanner data. The data is provided nationally, and for 4 defined
regions. Staff created the table based upon best information accumulated during the
investigation.]
Most recent data (November 2008)
Thrive
Emerge
Meta
Star/
Astro
Ever/
Tilt
Bom Dia
Others
66%
15%
2%
4%
1%
7%
5%
North
66%
13%
1%
6%
3%
5%
6%
East
68%
14%
0%
7%
0%
9%
2%
West
58%
17%
8%
0%
0%
13%
4%
South
56%
32%
2%
5%
0%
0%
5%
Market
Area
Total
Country
Data from 10 months ago (about the time of Bom Dia’s entry)
Thrive
Emerge
Meta
Star/
Astro
Ever/
Tilt
Bom Dia
Others
71%
17%
2%
4%
1%
.5%
4%
North
74%
12%
1%
7%
4%
0%
2%
East
73%
19%
0%
6%
0%
2%
3%
West
67%
17%
8%
0%
0%
3%
6%
South
56%
35%
2%
4%
0%
0%
3%
Market
Area
Total
Country
ICN Merger Workshop, 10-11 March, 2009
36
Bom Dia Kick-off Presentation
Doc. No. 15
[obtained pursuant to document request made to competitor Pure Beverages]
Bom Dia Kick-off
Taking the Energy Segment by Storm
Pure Beverages, Inc.
10 January 2008
The Right Time
IS NOW!
Energy Category in its infancy
Category growth is exploding
Sales have outpaced projections every year -- we
could be looking at a 10 BILLION market in 3 years
Pure is on the sidelines
Project Power yields Bom Dia just 8 months from
concept to store shelf!
Uncluttered - Thrive alone has significant
market presence
Health trend entering category– juices, healthy
additives, unsweetened
ICN Merger Workshop, 10-11 March, 2009
37
Bom Dia Kick-off Presentation
Doc. No. 15
Beverage Market Segments
% of volume
Soft Drinks
Bottled Water
Fruit Bevs
Sports Drinks
RTD Tea
Energy Drinks
Enhanced Water
RTD Coffee
48
29
13
3
3
2
1.5
.5
‘06-’07 growth
-4
+6
-3
+2.5
+12
+48
+36
+3
Project Soy
Ambrosia brand soymilk
8 months from concept to production
State-of-the-art production facility
Unique packaging; most flavors
50M in total expenses
Launched in the East and West metropolitan
areas, nationwide presence by mid-next year
ICN Merger Workshop, 10-11 March, 2009
38
Bom Dia Kick-off Presentation
Doc. No. 15
Concept
Position against Thrive
Thrive created category as renegade, imageconscious product and dominates energy sales
Position Bom Dia as a more healthy, mainstream
alternative
Pull new users into the expanding category with our
brand image
Goal of 5% market share in one year; #3
position in a cluttered segment
Goal of 20% in two years; #2 brand
Raising the Bar for Soymilk
Quality Ingredients
Made with organic soybeans
GMO free
Clean ingredients
More Flavors than currently available from other brands
Original, Vanilla, Chocolate, Coffee, Banana, Strawberry,
Mixed Berry and maybe more. . .
ICN Merger Workshop, 10-11 March, 2009
39
Bom Dia Kick-off Presentation
Doc. No. 15
Press Release
Excerpts
“Bom Dia energy drink combines popular and
great-tasting flavors with healthy benefits – a winwin combination.”
“As part of one of the nation’s most respected
beverage producers, we have a responsibility to
our customers to stay current. Bom Dia continues
the Pure tradition of providing the finest, healthiest
products available.”
Competition
Just Energy’s Thrive brand created category
Thrive commands a dominant share, all others
scrambling to keep up C and are failing
Fantasy has achieved modest success
Only other competitor of significant size
Our short term goal we can meet and surpass
We have the know-how and money to challenge
the market leaders; our overall beverage structure
and brand name is key advantage
We can take significant market share
ICN Merger Workshop, 10-11 March, 2009
40
Pure/Bom Dia Business Strategy UpdateDoc.
No. 16
[obtained pursuant to document request made to competitor Pure Beverages]
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
To: Pablo Ruiz, President, Pure Beverages
From: Padma Park, Pure Director of Marketing
Date: 13 October 2008
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Subject: Re: Bom Dia Business Strategy Update
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Background
We launched our energy drink, Bom Dia, nine months ago. Pure saw this is as a
complement to it juice beverage business. With its exponential growth, energy
drinks have the potential to be a category leader in our portfolio of beverages
within 3 years. Pure saw an excellent opportunity to participate in a market
segment experiencing exponential growth and with a different target
demographic than its juice business.
The new Bom Dia has been a dramatic success. We are even outselling Emerge in
a several metropolitan areas. Our initial launch has concentrated the segment’s
most robust markets, major urban areas. Early next year we hope to role out the
product on a national basis, with full national coverage expected by mid-next
year. Some of the larger chains demand such coverage, and purchase on a
national basis. We are currently at a disadvantage with such accounts, and have
had little success when bidding against Thrive or Emerge.
In an innovative move for an energy drink, Bom Dia is sold in plastic containers,
rather than the traditional aluminium cans. We think there is a limit to how many
brands a store will carry, and our initial strategy is to displace Emerge from a
number of chains. Barring that, we will have to convince stores both that our
product is superior and preferred by customers, and that given the premium price
commanded by energy drinks, there is plenty of room for Bom Dia even if they
decide to carry Emerge. (Thrive, as the market leader and best-known brand
name can get shelf space at will.) Our initial sales numbers have outpaced even
our most optimistic outlooks -- we are some 50% over January estimates. We
appear to be taking share from both Thrive and Emerge in the markets where we
go head-to-head.
Competition
Thrive, made by independent beverage company Just Energy, is the undisputed
market leader. Just Energy created the energy drink segment and has spurred
growing demand through aggressive spending on advertising and promotions.
ICN Merger Workshop, 10-11 March, 2009
41
Pure/Bom Dia Business Strategy UpdateDoc.
No. 16
Fantasy Beverage introduced its Emerge energy drink about two years ago, after
their failed attempt to revive the Joy brand. In trying to distinguish Joy from Thrive,
the market leader, they employed an entirely different manufacturing process and
used very distinctive packaging. This turned out to be a strategic miscalculation,
however, as the product tested poorly against Thrive. Emerge, in contrast, has met
with modest success with a modified manufacturing process that resulted in a
taste and packaging much more similar to Thrive.
There are a number of other companies that make energy drinks, such as Meta
Beverages, Star, and EverBev. We are generally not very concerned about
these small firms, as they seem ill positioned to achieve a truly national presence.
In most parts of the country, however, there are a couple of brands that are
fairly significant competitors in that region. The trend, however, seems to be
towards national brands supported by large beverage conglomerates.
Finally, there are constant rumours that any number of other major beverage
companies are interested in getting into this market. It’s too early to tell whether
any of these rumours will pan out, but we need to keep a close eye on the
situation to make sure we are not overtaken from beyond while we’re focusing
our energies on Thrive. Perhaps the most credible rumour about entry is that
Pangea Beverages, our competitor across a range of beverages, is considering
entry next year.
Even though our product has proven to be successful everywhere it is sold, Thrive is
not standing by idly while we gobble up their market share. A number of
convenience chains that we have talked to recently have said that Thrive is
stepping up its promotions and advertisements in response to our success.
- Padma
ICN Merger Workshop, 10-11 March, 2009
42
Agency Memo Summarising Pure/Bom Dia Interview
Doc. No. 17
The Competition Authority
INTERNAL MEMO
To:
Fantasy/Just Energy Merger File
From:
Merger Branch, Retail and Wholesale Unit
Subject:
Interview with Pure Beverages
Date: 17 Jan 2009
Staff participated in a telephone conference with Ms. Padma Park of Pure, and
her counsel Helene Riise. Park is the VP responsible for launching Bom Dia. He
has been with Pure for nine years, in a variety of roles. Pure is a major
beverage conglomerate with a line of juices and ready-to-drink teas.
Overview of Bom Dia Project
Park is responsible for establishing an energy drink. She oversees every aspect
of the business, including R&D, manufacturing, marketing, and sales. The only
product produced by the Bom Dia division is an energy drink. This is available
in 500ml and 250 ml containers in various flavors. All of the products are
packaged in plastic.
Pure decided to produce an energy drink product due to the rapid growth of
the category. It was seen as having mainstream potential, and that the
category might grow to 10 billion in a few years. The decision to produce an
energy drink was made fairly quickly. The following were steps taken over 20
months: equipment ordering and delivery, product formulation, packaging
format, importing filling equipment, staffing the new subsidiary, accessing the
infrastructure of both companies, building offices.
Park noted that they were doing very well with a strong start and is very
optimistic about the further developments, capturing more than 6% of energy
drink sales in its first 9 months. Staff told Pure that it intended to send an
information request to obtain the company’s key competition and business
planning documents.
Processing
Pure has proprietary production technology. Pure emphasizes that the choice of
a proprietary technology was not obvious at all. They eventually decided to go
this route because they already owned patents relating to juice and tea
production. Little work was needed to expand their technology to energy drink
processing. Park is however of the opinion that holding a proprietary
technology is not mandatory. According to Park, access to technology is far
less crucial than having the right strategic position, in particular with respect to
the taste of the drink, its packaging, and its brand image.
ICN Merger Workshop, 10-11 March, 2009
43
Agency Memo Summarising Pure/Bom Dia Interview
Doc. No. 17
While Pure looked at many options for production, they decided on using one
site in the middle of the country. The location was ideal for a national rollout.
Additionally, the cost of having multiple plants was an issue. Five lines are
used to produce different sizes of products; the lines are dedicated to energy
drinks as well as to particular sizes. The production lines took less than one
year to be delivered from the time they were ordered.
The decision of building a new plant was mainly driven by the lack of available
room in their existing plants and the high level of utilization of their production
lines. However, other producers could decide to rely on their existing logistics
by installing the new production lines at the same location as their other
beverage lines. They could even easily use existing beverage filling lines with
low utilization rates. The adaptation costs are limited and switching from other
beverage alternatives to energy drinks can be achieved in hours. It has just to
be ensured that the filling line is properly washed so that there is no trace of
one product in the other. Park believes in particular that soda producers could
easily and quickly switch to the production of energy drinks.
Cost of Entry
In order for Pure to enter the business, they spent the following:
20-24M to set up production and processing lines (approx. 4.5 million per line)
25M for the facility
4-6M in a bottle-maker agreement
10-12M in development and first year administrative costs
8-9M in advertising
Additionally, slotting fess for shelf space range between 750 thousand and 1
million per product. Thus, it would cost approximately 5 million for coverage
on all Bom Dia’s sizes/flavors.
Bom Dia Rollout
The rollout began in large metro areas. They started selling the product to
retailers almost one year ago. So far, the product is only in convenience stores,
not supermarkets. These areas were chosen for two reasons. First, they were
areas where the energy drink market could develop the fastest due to
acceptance of new ideas. Secondly, it was more manageable for existing
accounts that Pure had. There are refrigerated distribution centres in each
area. Bom Dia uses Pure trucks for shipment, and has access to Pure
refrigerated distribution centres.
The capacity at the plant is sufficient for a national launch, given the category
size and projected growth. This takes into account the projected success of
Bom Dia. The equipment is very efficient.
ICN Merger Workshop, 10-11 March, 2009
44
Agency Memo Summarising Pure/Bom Dia Interview
Doc. No. 17
The national rollout is well underway. Park said they wanted first to make sure
the product was being properly produced. The plant is new, and it was the first
time they have manufactured the bottles and the product. Additionally, they
wanted to gauge the reactions of their accounts, and use the limited rollout as
a lead market. National rollout will likely continue through next year.
Market Competition
Bom Dia sees Just Energy as the key competitor, though Emerge is also
significant. However, there are a lot of players as the market is rapidly
growing. Park noted that food giant Pangea is rumoured to be interested in
getting into the business.
Park considers that the presence of sports drinks and other functional
alternatives should not be underestimated either: the quick expansion of Bom
Dia following its recent launch can partly be explained by the fact that a part of
the customers consuming alternatives such as SportAde have turned to Bom
Dia. Park observed that the fidelity of sports drink customers was not very high
and that the they were strongly attracted by new products.
However, Park believes that SportAde is now reacting as evidenced by its
recent launch of new advertising campaigns. Park also expects SportAde to
introduce new products, positioned against energy drinks, by the end of the
year. According to Park, the fierce competition between the various types of
functional beverage alternatives and the wave of new products it generates is
one of the reasons explaining the strong growth rate of both energy drinks and
other purpose-driven beverages. For instance, he explained that Pure is
considering a hybrid ‘energy juice’ that mixes energy drink benefits with
popular juice flavours.
Concerns about the Proposed Transaction
When asked about possible merger concerns, Park noted that the largest
energy drink processor would control over 80% of sales. However, he believes
that other drink alternatives exercise a high constraint on energy drinks as
they share many of the same customers and the same shelf space. He believes
that this will increase competition between energy drinks and other
alternatives since it will force Pure and SportAde to react quickly and develop
new products. The higher margins on this market is already very attractive.
Irrespective of the merger, it is very likely that new products will be introduced
by new entrants in functional beverages. As an example, he mentioned
industry buzz about ‘energy shots’ – small, energy boosting beverages (just
50-100ml) to be introduced later in 2009. Barriers to entry in this sector are
low. New entrants can appear at short notice and gain significant market
shares within a short period of time, as evidenced by Bom Dia.
ICN Merger Workshop, 10-11 March, 2009
45
Agency Memo Summarising SportAde Interview
Doc. No. 18
The Competition Authority
INTERNAL MEMO
To:
Fantasy/Just Energy Merger File
From:
Merger Branch, Retail and Wholesale Unit
Subject:
Interview with SportAde
Date:19 Jan 2009
Staff participated in a telephone conference with Claude Henry, Vice President of
Marketing for SportAde. The conversation focused mainly on the issue of product
market definition for energy drinks and the possibilities of entry.
What is SportAde?
SportAde is the top selling sports drink, with over 2.5 billion in sales. SportAde is a
national brand, and is typically shelved at convenience, grocery, and massmerchandising stores. SportAde is priced about 35-50% less than energy drinks.
SportAde is typically sold in both litres and half liters (energy drinks are generally sold
in smaller sizes). According to IRI, sports drinks account for about half of the
“functional beverages category” (includes energy drink and enhanced water), and
SportAde, accounts for about 60% of sports drinks sales. The next largest sports drink,
CraveAde had 550 million in business last year.
SportAde competes only marginally with energy drinks
According to Henry, if SportAde increased prices, he thought it unlikely that many of
its customers would switch to energy drinks. He noted that there would be some
switching to private-label sports drinks and enhanced water. A variety of producers
make private label, including SportAde and others.
Henry noted that if energy drinks increased their prices, it would be difficult to tell
what would happen. In order to get an accurate read on the energy drink segment,
one would have to wait until it stabilizes somewhat. Given the growth of the category,
it would be impossible to tell what percentage of consumers is switching. However, he
believes that energy drinks are drawing some customers away from SportAde,
although he has only indirect evidence. SportAde was growing between 13-14%
annually in the late 1990s, but this growth slowed down to 5% after the year 2002
(3% today) which coincides with the introduction of energy drinks.
In his view the slowdown in growth can be explained mostly by the advent of new
competitors such as CraveAde and private label sports drinks, but also by a certain
market saturation. SportAde and sports drinks have been around for a while, and are
well known. The energy drink boom, on the other hand, has been fueled by consumers
looking for the next trend. However, it cannot be excluded that a part of the slowdown
in sports drink growth can also be explained by the introduction of energy drinks.
ICN Merger Workshop, 10-11 March, 2009
46
Agency Memo Summarising SportAde Interview
Doc. No. 18
Therefore, there is probably some competition between the two products, and
SportAde has introduced promotions targeted at energy drink users and reduced prices
in some areas.
The results so far are at best inconclusive. According to Mr. Henry, SportAde and
energy drinks are not the closest competitors, but rather compete at the margins.
Energy and sports drinks address different functions: an immediate sugar and caffeine
fueled energy boost versus replenishing hydration and nutrients. The spectacular
growth rates energy drinks currently enjoy are driven mostly by its trendiness.
SportAde sees its core-competences and core market as different than energy drinks,
though acknowledges that there are plans for hybrid drinks that combine energy
boosts with nutrients.
Difficulty of Entry
Mr. Henry admitted, however, that SportAde considered entering the energy drink
market at one point. Adding a high margin product with some overlapping properties
would have an opportunity to increase the product range and reap synergies.
According to him there are three steps for a successful entry:
1
2
3
cost-effective processing
sales force with speciality beverage experience
advertising and promotion campaign
While SportAde clearly has a well established sales force and would also have enough
cash to finance the necessary campaign to introduce its brand, the first step turned out
to be the project killer. Mr. Henry stated that it was much easier for his company to
formulate a sports drink than create an energy drink that differentiated itself from the
competition. SportAde’s research and development department estimated that it would
cost them at least two years and around 20 million dollars to get the desired results,
so they shelved the idea of an energy drink. Though the project was feasible, the
company ultimately decided that the addition of an energy drink might take away from
the nutritional image of its SportAde line.
In addition, entry will become more difficult the later it occurs. Entry has been
relatively easy in the first years after the introduction of energy drinks because
customers had not developed any preference yet and were tempted to switch from one
product to another. Customers are now much more loyal to the brand of their choice.
New entrants would find it more difficult to poach customers from Just Energy and
Emerge, which are seen as the best references in this field. This is evidenced by the
relatively modest results achieved by Pure with its new Bom Dia brand.
Lastly, he noted that the refrigerated beverage section is very expensive for stores.
The following chart shows average number of products carried in each store nationwide
for SportAde and energy drinks, and the average number of products held by SportAde,
Thrive, and Emerge. Any discrepancies in the numbers are due to IRI’s rounding
methods.
ICN Merger Workshop, 10-11 March, 2009
47
Agency Memo Summarising SportAde Interview
Doc. No. 18
Date
Avg.
SportAde
SKUs/store
Avg. energy
SKUs/store
Avg. Thrive
SKUs/store
Avg. Emerge
SKUs/store
March 2005
6.2
4
3.5
Not Present
June 2006
6.5
7.2
4.5
2.0
September
2007
6.7
11.5
6.8
3.0
Private labels and other brands have made a dent in the sports drink market
(approximately 10% of sales), so an argument could be made that the same could
happen in energy drinks if capacity and shelf space were available. Henry did not see
how a small player or new entrant could effectively get into the market, since
additional entry into the category would be difficult due to shelf space concerns. Henry
did not know how the entry of private label energy drinks had affected pricing, though
he did note that SportAde is able to maintain a pricing premium of 10-20% over its
private label alternatives.
SportAde as a Possible Parallel for Thrive
In the 1990s, SportAde was the first and only sports drink. Now, due to marketplace
expansion, there are many sports drinks. When asked if SportAde’s history would
parallel what could happen with Thrive (move from dominant market share to being
less dominant as new players enter), Henry noted that there is a finite amount of shelf
space in the beverage case. A newcomer’s success is dependent on the ability to exert
market power and already having a significant presence in beverages. Even PureBev,
with its portfolio of juice drinks has relatively poor shelving to date for its Bom Dia
drink. So far they have not been making a major dent in the market that Henry
noticed. However, Henry pointed out that it is impossible to say whether Bom Dia will
stick in the market yet.
Merger: Mr. Henry believes that the proposed takeover of Just Energy would enable
Fantasy to control the market for energy drinks. Fantasy is already today a
heavyweight in bottled water and will be able to fence off other producers of energy
drinks. According to him prices for energy drinks likely will go up post merger. In
addition, Henry thinks that should the merger be cleared, it could only be on the
condition that production assets and a brand be divested prior to completion.
ICN Merger Workshop, 10-11 March, 2009
48
Agency Memo Summarising Star/Astro Interview
Doc. No. 19
The Competition Authority
INTERNAL MEMO
To:
Fantasy/Just Energy Merger File
Date:24 Jan 2009
From:
Merger Branch, Retail and Wholesale Unit
Subject:
Interview with StarBev regarding the Fantasy/Just Energy merger
Staff interviewed Mark Wu, President of Star Beverages and Thomas Basso, VP of Sales
at Star. Star introduced its Astro brand energy drink in mid 2005 as a test market
product. Astro now has a 4% share and is growing; Star is looking to establish
partnerships with traditional beverage producers across the country to produce and
distribute the product effectively nationwide.
Market Shares
According to Mr. Wu, the energy drink market shares for January 2008 were:
Product
Market Share
% (Units)
Market Share
% (Revenue)
Thrive (Just Energy)
70.9
65.3
Emerge (Fantasy)
17.4
21.6
Astro
4.1
4.9
Shaolin-Zing (MetaBev)
2.5
2.8
Tilt (EverBev)
1.4
1.7
Others
3.6
3.6
These figures are MarketTracker data, which is gathered from store scanners.
He was also able to provide dollar share figures for a recent 4-week period which
revealed Bom Dia’s entry into the market:
ICN Merger Workshop, 10-11 March, 2009
49
Agency Memo Summarising Star/Astro Interview
Product
Doc. No. 19
Market Share (revenue)
Thrive (Just Energy)
66.8
Emerge (Fantasy)
14.8
Bom Dia
6.8
Astro
4.3
Meta
2.2
Ever
1.2
Wu further stated, as of 3 months ago, according to his market data that Bom Dia is
present in 38% of national accounts; Thrive is present in 94% of national accounts;
Emerge is present on shelves in 68% of national accounts, and Astro is present in 21%
of accounts. He noted that in 40% of supermarkets across the country, only 2 or 3
brands of energy drinks are present on store shelves.
Effects on Star and the Market
Because of the lack of capacity at Star’s two plants, they have had to turn down offers
from some large chains because they are unable to supply them. This results in a
significant loss of potential income for Star.
Star noted that major convenience stores all want efficiencies. Thus if a water supplier
such as Fantasy is able to provide a wide array of beverage products to a chain at a
low price, they are more attractive as a filler of shelf space than other individualized
suppliers. Mr. Wu stated that he was concerned that Fantasy will be able to take the
power of their distribution system, range of other beverage products and Just Energy’s
market share and know-how to dominate the store shelves and push out smaller
competitors.
Expansion options for Star
Because of capacity constraints, Star has had to turn down requests for its product.
Currently, Astro is produced at 2 locations. Star is speaking with two prospective
suppliers, two beverage producers that do not currently produce energy drinks in the
hopes that they will be able to partner with Star and expand its sales and geographic
reach. This approach may also lead to private label production for major chains.
Traditional beverage companies have plenty of excess capacity. However, not all of
their equipment cannot be used to produce energy drinks. In order to switch such a
line to energy drinks, production requires 4.5 million minimum.
Since the Fantasy/Just Energy merger was announced, Mr. Wu said that he has
received two phone calls from beverage producers who do not currently make energy
ICN Merger Workshop, 10-11 March, 2009
50
Agency Memo Summarising Star/Astro Interview
Doc. No. 19
drinks interested in talking about possible production agreements. One of the
producers said it had received an inquiry from a supermarket wanting to obtain a
private label energy drink.
Wu noted that the earliest that Star could increase its output by 50% would be in 810 months or possibly a year, which could be done by adding 2 new lines. In order
to double production, Star would have to find another location.
Processing and marketing
Star noted that energy drinks compete to a certain extent with sodas. However the
bulk of consumers that buy energy drinks do so for the level and length of energy
boost offered, something that, although caffeinated, very few sodas can match.
Staff asked if a 5% increase in the price of energy drinks would cause drinkers to
switch to sodas. Star noted that a 5-10 percent raise in price would not lead to any
price resistance, but that a 25-50% increase probably would.
Shipping
Star noted that there is a drastic difference in price between what it costs Fantasy to
ship a case of drinks and what it costs for Astro. On average it costs Star about three
times as much because the shipments are made primarily for energy drinks and have
to travel much further. Star ships its product only once a week while Fantasy will be
able to ship daily, giving them a competitive advantage.
Bom Dia’s Entry
When asked about Bom Dia’s entry, Star replied that it is too soon to tell. In a year,
they might be able to offer an opinion. Wu did note that the product itself seems out
of place for the target audience of energy drinkers, and that he has his doubts about
the ‘all-natural’ approach they are taking and the different ingredients they are using.
They do however have a plastic bottle, which is new and innovative for the market.
Conclusions and Final Remarks
They noted that the top two brands will have an 80+% market share and will have the
ability to control store shelves as well as distribution outlets. Star noted that they are
concerned about this merger. They have not yet submitted any written opposition but
have talked to their counsel about it. He noted that the merger might be an
opportunity for Star to gain business as stores might look for another supplier.
ICN Merger Workshop, 10-11 March, 2009
51
Agency Memo Summarising EverBev Interview
Doc. No. 20
The Competition Authority
INTERNAL MEMO
To:
Fantasy/Just Energy Merger File
From:
Merger Branch, Retail and Wholesale Unit
Subject:
Interview with EverBev
Date:26 Jan 09
Staff interviewed Stu Payne of EverBev. EverBev and its Tilt brand energy drink are is
owned and produced by The Ever Concept Group, a small natural beverage company
that is mainly active in the Northern and central parts of the country. Tilt was
introduced in 2006. It was first sold through the retail outlets that sell other EverBev’s
products.
Ever’s energy drink has nation-wide approximately a 1-2% share. However, in their
view, that was not representative of its actual strength as it has sales only in the
northern and central part of the country. In these areas, its shares amount to 3-4%.
They are planning to expand to other regions as they see the market for energy drinks
continuing to expand.
Ever is in dispute with Fantasy: Fantasy argues that Ever is using technology used in
the processing of energy drinks that was licensed to it on an exclusive basis. The
dispute is currently in litigation. Payne claimed that the uncertainty surrounding the
licensing dispute has slowed expansion plans at Ever. He claims that the supplier of
their original processing equipment has declined to make Ever additional machines
because of the dispute.
Ever has some capacity available and has agreed to produce own-label energy drinks
for some regional retail chains.
Barriers to entry
Payne explained that in his view there are significant barriers to entry to the market.
First, in order to produce energy drinks with a genuine taste, one needs to use
technology that is not widely available in the marketplace. In addition, creating a
successful formula and establishing a brand image is difficult in the cluttering
category– many new drinks are introduced each year and end up with negligible sales.
Second, shelf space available to energy drinks is limited in general to two or three
brands and tends to be captured either by established brands or by integrated
beverage companies. Thirdly, one needs to use a dedicated refrigerated distribution
system to ship to retail outlets. In his view only major beverage companies could
enter the market as long as they would get access to the technology and know-how.
ICN Merger Workshop, 10-11 March, 2009
52
Agency Memo Summarising EverBev Interview
Doc. No. 20
Relevant market
EverBev does not view energy drinks as competing with other functional beverages or
sodas. They explain that consumers look to energy drinks for a specific purpose
(energy boost) generally not available in other beverages. Once consumers have
started to drink energy drinks, they are very unlikely to switch back to sodas or other
drinks when they want an energy boost. When asked about other functional beverages,
they explained that they don’t offer the same specific benefits. Indeed, the choice for
energy drinks is by consumer preference for a burst of energy – not taste or
refreshment. Ever excluded that any significant part of consumers would stop
purchasing energy drinks if the market price would go up by say 5 to 10%. When
asked whether that would affect the growth rate of the market, they replied that it was
not obvious as new consumers turn to energy drinks for their promised energy burst.
Effects on EverBev and the Market
EverBev is concerned that the already limited access to shelf space will be even more
limited after the merger. Ever considers that competition at the moment only takes
place between Emerge and Thrive. They explained that the recent launch of Bom Dia
was not a market-changing success. Ever’s real worry is that they may lose their
place on the shelf to Fantasy: they said that it has been hard enough to get into
convenience stores before this merger and, if the merger is approved, they can see
many stores just taking the Thrive and Emerge brands, alongside their own private
label. When asked whether Bom Dia may replace Emerge in the competitive landscape,
they replied that their tastes and brand image were so different that it was unlikely. If
Emerge and Thrive are combined in the same hands it is likely that prices will go up.
They likely would follow such an increase due to their higher production and
transportation costs. Payne also believes that Fantasy already has a formidable
bargaining power vis-à-vis grocery chains that limits their access to shelves.
Payne was willing to give his views on possible remedies. He argued that barriers to
entry should be lowered by forcing the merging parties to licence their technology to
third parties. He also mentioned that the best outcome would be to see that merger
prohibited.
ICN Merger Workshop, 10-11 March, 2009
53
Agency Memo Summarising ExtraGrocery Interview
Doc. No. 21
The Competition Authority
INTERNAL MEMO
To:
Fantasy/Just Energy Merger File
Date:31 Jan 09
From:
Merger Branch, Retail and Wholesale Unit
Subject:
Interview with ExtraGrocery on the energy drink retail category and
customer perception of competition in category
Staff spoke with Stanley Rubrick, Purchasing Manager for beverages. Extra is a large,
national grocery chain.
Energy Drinks
Overall, Extra sells Thrive, Emerge, Astro, Meta, Tilt and Bom Dia. However, no Extra
store sells all these brands at a single store. For example, no store outside the North
and central regions sells Tilt. Each division retains their autonomy to decide which
brand has access. There are 12 such geographic-based divisions across the country,
each with beverage managers. Rubick may bar some products and recommends others.
At the moment, a typical Extra store stocks four brands of energy drinks. This usually
includes a national brand (always Thrive and usually Emerge), and regional brands
such as Astro or Tilt. They are beginning to offer Bom Dia in some stores as a trial
period. He considers energy drinks to be just one of the many beverage alternatives
to soda and that consumers may switch from one alternative to the other.
When asked about substitutability between functional beverages and energy drinks,
Rubrick explained that he believed they there is some substitution between SportAde
and energy drinks. He pointed to the fact since the emergence of energy drinks,
SportAde’s sales had stabilised. He actually expects that SportAde will come soon with
new products aimed at gaining back sales from energy drinks. Though he has not
studied it closely, he suggested that the new lines of enhanced waters likely share
overlapping customers with energy drinks.
Extra is planning to launch its own private label brand of energy drink. It has entered
in exclusive negotiations with Emerge. Their negotiations are now focussing on prices.
Merger
Rubrick notes that there is some brand loyalty in the market and therefore it is likely
that the combined Fantasy/Just Energy will continue to offer two brands. He
acknowledges that the merger will lead to a short term reduction of choice among
nationwide brands from two to one. However, he believes that prices will not go up as,
first, grocery chains like his will put competitive pressure by offering private label
products and, second, grocery chains like Extra would then be able to turn to Bom Dia
to replace Emerge if the merged entity would try to increase prices. Finally, customers
are aware that there exist other beverage alternatives.
ICN Merger Workshop, 10-11 March, 2009
54
Agency Memo Summarising Super Convenience Interview
Doc. No. 22
The Competition Authority
INTERNAL MEMO
To:
Fantasy/Just Energy Merger File
Date:02 Feb 09
From:
Merger Branch, Retail and Wholesale Unit
Subject:
Interview with Super Convenience (“SuperC”) on the energy drink retail
category and customer perception of competition in category
SuperC is a large, national convenience store chain. Ms. Hooper is the Category
Development Manager for Super Corporate Brands, which include all ‘value-added
beverages’. Her duties include marketing to develop new products for retail sales. Ms.
Hooper has final responsibility for SuperC’s private label beverage business.
Energy Drinks
Overall, SuperC sells Thrive, Emerge, Astro, Meta, Pep (apparently a small brand sold
in the Northeast), and Bom Dia. However, no SuperC store sells all these brands – the
offerings vary across stores. Deciding which brand has access is left to each division.
There are 8 geographic-based divisions across the country with beverage managers.
The vendors for energy drinks call on the managers, who then decide which brands get
stocked.
A typical SuperC store stocks three or four brands of energy drinks. This usually
includes a national brand (Thrive and/or Emerge), and several regional brands (such
as Bom Dia or Astro). In the future, SuperC hopes to carry a private label brand as its
fourth option. However, it is ultimately up to each division’s discretion when deciding
on which brands are in the store. Thrive usually receives the most facings (or shelf
space), for, as she explained, Just Energy made energy drinks a mainstream drink.
She believes just about every SuperC store sells Thrive. They created the category and
are the only one with extensive customer recognition. She said that if your store
offers energy drinks, it has to start with Thrive. Emerge is the next likely brand on any
store’s shelf, as Emerge has become the second national brand. She cited areas in the
Midwest where Emerge actually outsells Thrive. Bom Dia pitched their product earlier
this year, and SuperC bought some for test runs in certain markets.
Private Label
Currently, SuperC does not have a private label energy drink. However, due to the
explosive growth in the category, they are trying to find a vendor who will produce the
right product for the right price. She thinks there is a large untapped market and if
SuperC can get in with its own private label, they could probably attract more
customers to the product and share some of the explosive growth that the major
brands have seen.
ICN Merger Workshop, 10-11 March, 2009
55
Agency Memo Summarising Super Convenience Interview
Doc. No. 22
SuperC has been looking for a vendor. They receive product submissions from vendors,
which are rated by quality and price. Most of the submissions have been “okay” as far
as the quality goes, but the “major block” in the process has been the price. Currently,
SuperC has a product they like and are interested in, but it is too expensive. Hooper
admitted that they had no idea a year ago that it would be as difficult to bring in an
acceptable private label.
th
The expected time for SuperC’s private label product is around the 4 quarter of this
year. SuperC is in negotiations with another beverage company to entice them to
expand to energy drink production. If nothing works out between them, they will keep
looking for another vendor. The tentative price recommendation for the private label
product is 15% to 20% lower than the branded product. Hooper considers the private
label product as a competitor of the branded product, especially in competing for shelf
space. She also thinks that the more energy drink products that are added, the more
they will sell, but they haven’t “reached category saturation yet”.
Merger
Ms. Hooper is guessing that Fantasy and Just Energy will try to drive out small fringe
players and own the segment, but she does not know how successful they will be. She
also thinks that Fantasy will try to retain separate brands. She hopes SuperC will be
well positioned with its private label product by the end of 2009, being able to offer an
alternative to the dominant brands. Staff is preparing a limited information request for
SuperC’s documents relating to vendor selection.
ICN Merger Workshop, 10-11 March, 2009
56
[obtained pursuant to document request to customer SuperConvenience]
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
To: Melissa Hooper, Category Dev. Manager
From: Tim Pappas Campbell
Date: 14 June 2008
Subject: Energy Drink Market
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Melissa,
PureBev recently approached us with a request to carry their new line of Bom Dia energy drinks. This
led me to think a bit about this market, so I thought I’d pass on my take on the current situation.
Currently, we feature Just Energy’s Thrive line of energy drinks at our stores. We have carried Thrive
from its introduction, and it has been a very successful product. They created the current everincreasing popularity of energy drinks, and are the undisputed category leader. (Three years ago, we
dropped Meta after a long history of disappointing results with their product, which simply does not sell
well at mainstream stores.)
Last week, Bom Dia asked me what it would take for us to carry them. I then talked to Just Energy and
Emerge to gauge their current attitude to the market. Just Energy recognized the threat of Bom Dia and
said they will respond through aggressive discounting and slotting fees if we agree to stick with Thrive
as our premier brand and leave Bom Dia off the shelf. (We buy a lot of products from Pure, however, so
it may be in our interest to give them some shelf space for a limited period of time even if Just Energy’s
proposal would otherwise be enticing.) Emerge, which we carry at most of our stores as a solid #2
brand, oddly seemed unconcerned by Bom Dia. They seem to be focusing all their efforts on stealing
share from Thrive. This seems counterproductive to me – the industry is growing so quickly that there is
plenty of room for everyone. Every time we add more energy drinks – including when we added Emerge
itself – we see even greater gains in energy sales. While there’s obviously a limit to how far we can go
– we’re not going to carry as much energy drinks as soda, for example – I don’t think we’re there yet. My
initial feeling, therefore, is that we should seriously consider adding Bom Dia to our lineup.
I also think we need to start looking into private label energy drinks. While there is no track record of
private label success in this industry, demand is growing so fast I really think we need to get a piece of
the market. I recommend we start talking to beverage companies to explore adding private label. I also
recommend we continue discussions with Bom Dia (while hearing out Just Energy’s offers) and consider
adding shelf space for energy drinks.
ICN Merger Workshop, 10-11 March, 2009
57
Economists R Us Presentation
Doc. No. 24
The Transaction
Fantasy Dairy is to purchase Just Soy Inc. for 300 Million
The Parties
Fantasy Dairy: Nation’s leading processor and distributor
of fresh milk and other dairy products. Also active in
“milk alternative”. Entered soymilk production 2 years
ago (Fantasoy).
Just Soy: #1 soymilk company. Aside from soymilk, also
produces a range of soy-based health products.
2
ICN Merger Workshop, 10-11 March, 2009
58
Economists R Us Presentation
Doc. No. 22
Executive Summary
The proposed merger is pro-competitive:
Market shares are sufficiently small to annul any
competitive concerns
The elasticity of demand indicates that market power
is non-existent, so prices cannot rise
Entry is inexpensive and timely
Several companies are poised to enter
Significant efficiencies will be realized, leading to
lower prices
3
ICN Merger Workshop, 10-11 March, 2009
59
Economists R Us Presentation
Doc. No. 22
Product Market
Functionality and Substitutability
Milk, Soymilk and other milk alternatives all serve the
same function, and are used for identical purposes. They
also compete for shelf space
While some consumers of milk alternatives are lactose
intolerant, and thus will not substitute to milk as a result
of a price increase, others are not
Based on a survey we conducted, over 70% of
soymilk consumers are not lactose intolerant.
HENCE:
Proper Market Definition: Milk and Milk Alternatives
6
Product Market
90
Milk Alternatives
80
70
Market share
Numilk, etc.
60
50
Soymilk
40
30
Others (organic,
ricemilk, etc.)
20
10
0
Soymilk success came at expense of other milk
alternatives!
7
ICN Merger Workshop, 10-11 March, 2009
60
Economists R Us Presentation
Doc. No. 22
Market Shares
In narrowly defined milk substitute market
NuMilk
Thrive
DairyEase
FantaSoy
RiceMilk
Ambrosia
Others
Market
Share
36%
26%
6%
5%
4%
2%
21%
Pre-merger HHI = 1443
Change in HHI =
260
Post-Merger HHI = 1703
With wider market definition
(including milk) post-merger
HHI less than 500 and change
less than 100.
9
Presentation Overview
Competitors can easily expand production
Most current competitors produce well below capacity
Ease of entry: Firms poised to enter market
Low cost of entry, consumers willing to switch
Strong countervailing buyer power
Supermarkets do not accept price increases
Significant efficiencies
Cost savings will be passed on to consumers
4
ICN Merger Workshop, 10-11 March, 2009
61
Economists R Us Presentation
Doc. No. 22
Overly narrow market definition
assumed
The competition authority’s view:
Market is defined nation-wide
Market includes soy milk only,
but excludes milk and even milk alternatives
Structure of national soy milk “market”:
69% Just Soy’s Thrive
15% Fantasy Dairy’s FantaSoy
7% Elysium’s Ambrosia
4% StarSoy
2% MetaSoy
1% EverSoy
2% Others
2
Ease of Expansion
 Most competitors are producing well below capacity
Capacity Utilization
Ambrosia
35%
MetaSoy
33%
StarSoy
92%
EverSoy
53%
 Ambrosia sales rapidly increasing
 MetaSoy – largest producer of soymilk in world
 In addition, cost of expansion minimal – 1.2-1.5 MM
Competitors would supply any decrease in output by merging parties
5
ICN Merger Workshop, 10-11 March, 2009
62
Economists R Us Presentation
Doc. No. 22
Ease of Entry
Cost of Entry
Soybean Processing Plant
Production Line
8MM
5MM
Timely entry – about 6 months from inception to
production
Numerous companies that can enter quickly (rumored
entries: Pangea Foods, PepsiCo)
Fantasy entered in 8 months, at a total cost of 8.5MM!
6
Ease of Entry
Market Penetration
Consumers have demonstrated willingness to switch
between products
Switch from other lactose-free milk to soymilk
Speedy penetration of FantaSoy and Ambrosia:
FantaSoy – captured 15% of soymilk sales in its
first year!
Ambrosia – captured 7% of soymilk sales in its first
nine months!
12
ICN Merger Workshop, 10-11 March, 2009
63
Economists R Us Presentation
Doc. No. 22
Strong Buyer Power
Supermarkets do not accept any price increases
Supermarkets highly concentrated: Top 4 supermarket
chains have more than 70% market share
Battle for shelf space: Suppliers even have to pay fees for
shelf space
Supermarkets would de-list supplier when attempting to
raise prices
Trend towards private labels: Supermarkets threaten to
replace external supplier by own private label when not
supplying at low prices
8
Efficiencies
Savings estimated at over 40MM per annum!
Savings from:
Increased production utilization
Reduced purchasing costs
Elimination of Overhead
Reduced payments for promotions
More efficient utilization of branches
Reduced shipping costs due to more optimal route structure
Cost Savings will undoubtedly be passed on to
consumers leading to lower prices
14
ICN Merger Workshop, 10-11 March, 2009
64