Last week, the Serbian Commission for Protection of Competition (“Commission”) released two decisions involving the two biggest producers and wholesalers of ground coffee in Serbia – Atlantic Group (“Atlantic”) and Strauss Adriatic (“Strauss”). One decision marked the end of the Commission’s antitrust investigation imposing penalties on Atlantic and Strauss, issued on December 29, 2023 (“Antitrust Decision”), and the other one is the merger control ruling conditionally approving Atlantic’s acquisition of Strauss, issued on February 28, 2024 (“Merger Decision”).
Atlantic is a part of Atlantic Group, a Croatian multinational company whose business operations include the production, development, sales and distribution of consumer goods with simultaneous market presence in over 40 countries around the world. Strauss is a part of Strauss Group, an Israeli manufacturer and marketer of consumer foods, sold through retail stores with more than 15,000 employees worldwide, and is active in more than 20 countries. The two companies collectively hold over 70% share of the overall coffee market In Serbia and are faced with much smaller competition from local coffee producers and imports.
By the Antitrust Decision, the parties were found in breach of Competition Law in the form of a concerted practice, whereby the parties agreed and aligned their business strategies via direct or indirect exchange of information regarding the pricing policy and future wholesale prices of ground coffee in Serbia, thereby concluding a restrictive agreement. The parties have used public announcements to signal the behaviour about future pricing policy and other supporting mechanisms such as market monitoring and resale price maintenance. The antitrust proceeding resulted in the imposition of fines for both parties, in the amount of approx. EUR 1.6 million for Atlantic and EUR 400,000 for Strauss.
Concurrently with the antitrust investigation, Atlantic filed a merger notification concerning their proposed acquisition of Strauss. Following an in-depth proceeding that lasted for more than eight months, the merger approval was granted subject to conditions. Namely, the Commission noted in its decision that post-transaction the parties will have a joint market share of at least 70-80% on the market of production and wholesale of traditional (domestic) ground coffee. Therefore, the deal is subject to both structural and behavioural remedies – Atlantic will have to divest its production operations located in the municipality of Surcin (Belgrade) and is subject to several other obligations in the next five years.
We have outlined below the most interesting aspects of both, Antitrust Decision and Merger Decision.
Atlantic/Strauss Antitrust Decision
The Commission found that Atlantic, occupying roughly half of the total market, and Strauss, occupying roughly 1/3 of the total market, were in breach of the Competition Law in the form of a concerted practice on the market that effectively functions as a duopoly. Particularly, the parties agreed and aligned their business strategies via direct or indirect exchange of information regarding the pricing policy and future wholesale prices of ground coffee in the Republic of Serbia, thereby concluding a restrictive agreement.
During the investigation, the Commission found evidence of both, a direct exchange of competitively sensitive information between the legal representatives of the two companies, and an indirect exchange through the dissemination of signals and messages via the media. As a result, the Commission imposed fines on both parties, totaling approximately EUR 1.6 million for Atlantic and EUR 400,000 for Strauss.
- What triggered the antitrust investigation?
The Commission launched an investigation against Atlantic and Strauss in 2021 after a market study in food markets revealed a significant positive correlation in the wholesale prices of their coffee brands (between 0.86 and 0.99). Another factor prompting the investigation was a statement by Strauss’ director indicating that 90% of the final product’s price comprises the cost of raw coffee. Observing fluctuations in raw coffee prices and comparing them with retail prices of roasted coffee in Serbia, the Commission noted discrepancies and frequent price movements in opposite directions. With Atlantic and Strauss holding approximately 80% market share, the Commission concluded that this market possesses the structure that facilitates coordination between the competitors. Consequently, on September 14, 2021, the Commission initiated a formal investigation, conducting simultaneous dawn raids on Atlantic and Strauss’s premises.
- Direct contacts between competitors and market signalling via media as evidence of market collusion
The Commission identified several phases in the cooperation and market conduct of Atlantic and Strauss. Specifically, the period spanning from 2012 to 2014 is characterised as a “price war” during which both parties consistently and intensively reduced prices to compete for customers. During the dawn raid, internal emails of Atlantic revealed the strained relations with Strauss due to differing views on pricing policy. Internal emails of Strauss, on the other hand, showed examples of statements emphasising the desire to avoid a price war with Atlantic at all costs.
From 2015 to 2021, there have been three price increases in the relevant market and the Commission has found evidence of collusion in the price increase in all three instances. Between these increases, the parties colluded to maintain price stability in the market.
During the dawn raid, the Commission identified the direct communication between employees of Atlantic and Strauss regarding the new pricing strategy concerning the 2015 price increase. Additionally, evidence of the exchange of new pricelists between competitors prior to their implementation was found. Furthermore, the same communication revealed that relevant individuals from Atlantic and Strauss met in 2016 to jointly review data from Nielsen reports on sales performance for the previous month. Subsequently, Atlantic made a public statement in an interview explicitly stating that a significant price drop should not be expected. As a result of this meeting, the price of C coffee (Strauss) was reduced in the subsequent month to align with the price of Bonito coffee (Atlantic), without any further escalation of price decreases or a price war.
The price increases in 2017 and 2021 were marked by face-to-face meetings between competitors and the use of media to signal price strategies. After the increase in raw coffee prices on the global market in 2017, the Commission observed a pattern of exchanging signals between the parties via the media. Initially, the responsible person from Atlantic publicly stated that a price increase was “inevitable” and shortly thereafter Strauss echoed a similar sentiment. Following these media announcements regarding the “inevitable” price increase, the actual increase in February 2017 was approximately 11.5%. According to the evidence uncovered, within a little over ten minutes of receiving the pricelist from Atlantic via email, Strauss’ employee informed the group representative via WhatsApp that “Atlantic sent the pricelist so that we have 11.5 as agreed”. Subsequently, Strauss Adriatic adjusted its own price list to mirror the price list of Atlantic.
The pattern of media signalling established in 2017 recurred during the price increase in 2021. Once more, the announcement of the price increase was made through the media, this time by Strauss, signalling to the market their readiness to increase prices. Shortly after, there was a response in the form of a media statement from Atlantic. Of particular scrutiny by the Commission was the fact that the article featuring Atlantic’s statement about the inevitability of price adjustments was a paid media statement, presented as a simulated interview with responses to the journalist’s questions.
- Economic analyses
The Commission conducted high-level statistical analyses of raw and ground coffee prices, in support of its findings of concentred practice between Atlantic and Strauss. These analyses, along with email correspondence from dawn raids and media signaling patterns, served as evidence of collusion.
The Commission analysed the correlation between various price factors in the period from 2015 to 2022: (i) raw coffee prices on the world market and import prices of Atlantic and Strauss; (ii) wholesale prices of ground coffee of Atlantic and Strauss, (iii) retail prices of their brands per retailers; (iv) the relationship between wholesale and retail prices with raw coffee prices.
The analysis revealed that, while import prices mirrored global prices of raw coffee, this consistency was not observed at wholesale and retail levels. Specifically, wholesale and retail prices did not reflect raw coffee price fluctuations on a global level suggesting they were not influenced by it.
Furthermore, the analysis demonstrated significant correlation between the wholesale prices of Atlantic and Strauss and nearly identical retail prices across their brands at different retailers. This led the Commission to conclude that Serbian ground coffee prices were determined by factors other than prices of raw coffee (even though this is an essential input for ground coffee price calculations), indicating that a commercial decision was made. For comparison, as a response to the statement of objection, both Atlantic and Strauss claimed they independently set prices based on their expenses.
- Exchange of information during the negotiations regarding Atlantic’s potential acquisition of Strauss in 2017
Before Atlantic’s acquisition of Strauss in 2024, there were several unsuccessful negotiation attempts for the same acquisition. Evidence collected during the dawn raid suggests that during 2016 and 2017, Atlantic and Strauss met multiple times to discuss the potential acquisition and explore other scenarios of cooperation, including forming a joint venture.
The Commission assesses that communication regarding a potential transaction between 2016 and 2017 is not prohibited, but it was considered in the context of exchanging commercially sensitive information which could potentially facilitate coordinated behaviour among competitors regarding pricing.
In this context, the Commission has identified email correspondence concerning a proposed transaction, which includes emails suggesting that the parties exchanged commercially sensitive data. This information pertained to the utilization of production capacities, exchanged prior to direct negotiations or knowing for certain that the communication would lead to a potential transaction. Additionally, it involved discussions about views and expectations regarding future pricing policies.
This is the first time that the Commission scrutinised information exchange during M&A negotiations, underlining the imperative for higher compliance with competition law during M&A transactions among competitors.
- Use of the EU procedural rules for dawn raids conducted by the Commission
Atlantic objected to the evidence gathered during the dawn raid arguing that their lawyers were not present when the Commission reviewed the email correspondence. This objection was grounded in the established practices of the EU Commission and the EU Court, advocating for the presence of lawyers during such reviews.
The Commission responded to these objections by highlighting that the Stabilisation and Association Agreement (“SAA”) entered into between Serbia and the EU obliges Serbia to harmonize with the substantive law of the EU. However, regarding the procedural aspect of dawn raids, the Commission clarified that it is not bound to adhere to EU practices. On the contrary, the Commission is prohibited from doing so, as it would contravene the procedural rules outlined in the Serbian Law on Administrative Procedure and the Competition Law.
Accordingly, this implies that the Commission will adhere to local procedural rules regarding matters pertaining to competition law investigations as well.
Atlantic/Strauss Merger Decision
The Commission conditionally approved Atlantic Group’s acquisition of Strauss after an almost nine-month long in-depth investigation. Following this decision, the two largest coffee producers in Serbia will merge into one.
The antitrust investigation coupled with the parties’ significant joint market share post-transaction (at least 70-80%) heavily influenced the merger control proceedings. The transaction is subject to both structural and behavioural remedies. Atlantic will have to divest its production operations in the municipality of Surcin (Belgrade) and comply with various other obligations over the next five years including reporting obligations and limitations on private label contract manufacturing.
The parties announced closing of the transaction on 1 March 2024, but its finalisation awaits fulfillment of the imposed remedies.
Please find below the detailed description of remedies imposed:
- Divestment obligations
Atlantic is obliged to divest its business operations related to coffee processing and production of coffee products in the production plant of this company located at Surčinska 6, Belgrade by investing reasonable efforts to:
- divest the factory, land, equipment and machinery that is necessary for conducting the said business operations;
- put in place all necessary measures to ensure that no flow of confidential information about the subject matter of the divestment exists between Atlantic and its affiliates on the one hand and the subject matter of the divestment, on the other;
- take an active role in divesting the business by applying reasonable efforts;
- refrain from actions that may significantly adversely affect the operation of the subject matter of disinvestment, in accordance with good business practice and to minimize the risk of losing the competitiveness potential of the subject matter of disinvestment, until its disinvestment,
- keep separate the subject matter of disinvestment, on the one hand, and the remaining business activities of Atlantic/Struss company on the other,
- divest the said business operations to the buyer who cumulatively fulfills the following conditions:
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- is not an affiliated company to Atlantic,
- is an actual or potential competitor to Atlantic,
- has financial resources on the basis of which he will be able to operate on the market, and
- received approval from the Competition Commission if such an approval was required.
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- Appointment of sales and supervisory officers for divestment purposes
Atlantic has to inform the Commission, within the given deadline, about the activities undertaken in connection with the divestment of the business, including providing the information on the sales officer who will be in charge of implementing the divestment and the supervisory officer who will be in charge of overseeing business management and preserving the viability of the subject matter of the divestment subject until the divestment occurs. Several conditions have been defined in relation to who these two officers can be and ultimately only after the Commission approves the company’s proposal, they can be appointed. Both officers have regular reporting obligations to the Commission.
- Divestment deadlines
Atlantic has 18 months from the date of the decision on the appointment of sales and supervisory officers to divest, i.e. to employ reasonable efforts to divest, the said business operations at a price that is not minimal and which Atlantic considers appropriate. If unsuccessful, upon a reasonable request the Commission may approve an additional 6 months for the divestment to occur at the price offered by the buyer (i.e., Atlantic will not be able to determine the minimal price).
- Prohibition of re-acquisition of the divested business operations
Five years after the successful divestment, Atlantic is not able to re-acquire the sold business operations or influence them in any manner.
- Reporting on sales policy
Once a year (or more frequently if needed), for five years following the Merger Decision, Atlantic will report to the Competition Commission about its sales policy including submitting the data on sales channels, customer categorisation, rebate policy and other general terms of business.
- Reporting on production capacities
Every six months, for five years following the Merger Decision, Atlantic will report to the Commission about various aspects of its production output and capacities.
- Limitations regarding contract manufacturing for private labels
Atlantic commits to not renewing current contracts for coffee production for other market participants once the current contracts expire. This applies to agreements made with companies for the production of private brands of coffee. Furthermore, for five years starting from the day of the Merger Decision, the company will refrain from entering into new contracts for coffee production for other market participants.
The information in this document does not constitute legal advice on any particular matter and is provided for general informational purposes only.
By Bojan Vuckovic and Bojana Miljanovic Hussey, Partners, Mladen Vujic, Senior Associate, and Sanja Dedovic, Associate, Karanovic & Partners