Trade Practices Commission v Arnotts Ltd

Re: TRADE PRACTICES COMMISSION
And: ARNOTTS LIMITED; ARNOTT'S BISCUITS LIMITED; FLEDSPAC PTY LIMITED and THE
DICKENS CORPORATION PTY LIMITED
No. G1316 of 1988
FED No. 15
Restrictive Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Beaumont J.(1)

CATCHWORDS

Restrictive Trade Practices - s.50 Trade Practices Act 1974 - acquisition of shares by a corporation - whether corporation in a position to dominate the Australian market for biscuits - whether acquisition of shares would, or would be likely to, substantially strengthen the power of the corporation to dominate that market - evaluation of degree of market power.

Words and Phrases

- "dominate"

- "market"

- "acquire"

- "substantially"

Option - whether grant of option over shares can involve a notional "acquisition" of shares - s.4(4) Trade Practices Act.

HEARING

SYDNEY

#DATE 31:1:1990

Counsel and Solicitors Mr. B.C. Oslington QC
for Applicant: Mr. M.Walton (17 April 1989 to

27 June 1989), Mr. D. Staehli (28 June 1989 - present) and Mr. M.R.J. Ellicott (24 July 1989 - present) instructed by the Australian Government Solicitor

Counsel and Solicitors Mr. C.A. Sweeney QC and
for first and second Mr. P. Comans instructed by Respondents: Clayton Utz

Counsel and Solicitors for Mr. N.C. Hutley instructed by
third and fourth Minter Ellison
Respondents:

ORDER

1. Declare that the deemed acquisition of shares under the option agreement (Ex.AEN) contravenes s.50(1(b) of the Trade Practices Act 1974.

2. Further declare that the third and fourth respondents were involved in the said contravention.

3. Order that, subject to any special order for costs already made, the respondents pay the applicant's costs of the proceedings to date.

4. Stand over for further argument the question of what further relief, if any, ought to be granted.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

The nature of the proceedings

These are proceedings brought under s.80 of the Trade Practices Act 1974 ("the Act") in which injunctions are sought to restrain the acquisition of shares in circumstances which, it is alleged, constitute a contravention of s.50 of the Act. By that provision, certain mergers and other acquisitions are prohibited.

The parties

The applicant is the Trade Practices Commission ("the Commission"). The second respondent, Arnott's Biscuits Limited ("Arnott's Biscuits"), a well-known manufacturer and supplier of biscuits, is a wholly owned subsidiary of the first respondent, Arnotts Limited ("Arnotts"), a listed public company. The fourth respondent, The Dickens Corporation Pty. Limited ("Dickens"), is a wholly owned subsidiary of the third respondent, Fledspac Pty. Limited ("Fledspac"). Nabisco Brands Pty. Limited ("Nabisco"), (now named Cereal Foods Pty. Ltd.), a wholly owned subsidiary of Dickens, is another well-known manufacturer and supplier of biscuits.
The acquisition by Dickens of the shares in Nabisco
By an agreement dated 24 May 1988, Nabisco Inc., a New Jersey, U.S.A., corporation, agreed to sell all the shares in Nabisco to Dickens. It was a term of the agreement (cl.7.2) that Dickens acquired the right to use certain trade marks but Dickens could only use the trade mark "Nabisco" for a period of 12 months (later extended to 31 December 1989). It was a further term of the agreement (cl.7.1) that Nabisco change its corporate name to a name that does not suggest any relationship with the name "Nabisco". Fledspac is associated with a business carried on by the I.C.M. group of companies under the business name of Best Foods, a well-known supplier of cereal foods, principally under the trade name "Uncle Tobys". Although the agreement contemplated that a corporate name change would take place (and, in fact, the company's name is now Cereal Foods Pty. Ltd.) it will be convenient to continue to refer to the business carried on by the company as "Nabisco".
The current options to buy and sell the shares in Dickens
It appears that Best Foods' interest in acquiring the shares in Nabisco was to secure its cereal business rather than its biscuit operations. In August 1988, negotiations took place between Best Foods and Arnotts with a view to Arnotts' acquiring Nabisco's biscuit business. By an agreement ("the option agreement") entered into shortly after service of process in these proceedings, in consideration of the payment of one dollar, Fledspac granted to Arnotts Biscuits an option to purchase from Fledspac "the shares" ("the call option") (cl.2). "(T)he shares" were defined as two one dollar ($1.00) ordinary shares comprising the whole of Dicken's issued capital (cl.1). Arnotts Biscuits granted to Fledspac a right to require it to purchase the shares from Fledspac in consideration of the payment of one dollar ("the put option") (cl.3). The options may be exercised "at any time between 1 January 1990 and before 1 July 1993 or on or between such earlier date or dates as (the parties) may agree" (cl.4; cl.5). Completion shall take place within 14 days of notice of the exercise of either option (cl.6). Fledspac may not grant any further options (cl.8). Fledspac warranted that (i) there were no outstanding rights convertible into shares in Dickens "save only the right of Arnotts (Biscuits) for the conversion of certain advances made by Arnotts (Biscuits) to (Dickens) into Convertible Notes by which Arnotts (Biscuits) may take up (a certain number of) $1.00 ordinary shares in the capital of (Dickens)"; (ii) there were no other rights to take up shares in Dickens (cl.9.1). Arnotts Biscuits warranted that, if it converts its Notes into shares prior to (i) completion of the transfer of shares pursuant to the exercise of either option or (ii) the expiry of the options, no further shares in Dickens will be issued without the parties' agreement (cl.9.2).
Does the grant of the options constitute an "acquisition" of shares?
Is the grant of the options an "acquisition" of shares which could contravene s.50?
By s.4(4)(a) of the Act, a reference to the acquisition of shares shall be construed as a reference to an acquisition of any legal or equitable interest in the shares. The better view seems to be that the creation of an option over shares for value creates an equitable interest in the holder of the option (see Laybutt v. Amoco Australia Pty. Ltd. (1974) 132 CLR 57 per Gibbs J. at p 75 and the cases there cited; Broken Hill Pty. Co. Ltd. v. Trade Practices Tribunal (1980) 31 ALR 401 per Bowen C.J. at p 409; per Brennan J. at p 424; cf. Chan v. Cresdon Pty. Limited, High Court of Australia, 14 December 1989, per Mason C.J., Brennan, Deane and McHugh JJ. at pp 6-15; Heydon, Trade Practices Law at p 4539); and as to the operation of s.4(4) see S.A. Brewing Holdings Limited v. Baxt (1989) 87 ALR 134 per Von Doussa J. at pp 144-6).
In my opinion, by virtue of the option agreement, Arnotts Biscuits should be deemed to have acquired the shares. Although the consideration for the option is expressed to be nominal ($1.00), it appears that value for the option transaction was provided by Arnotts' advance of substantial funds in acquiring the Convertible Notes.
The issues arising on the pleadings
By its amended statement of claim, the Commission alleges contraventions of s.50(1)(a), or, alternatively, s.50(1)(b)(ii) of the Act. By s.50(1)(a), it is provided, relevantly, that a corporation shall not acquire, directly or indirectly, any shares in the capital of a body corporate if, as a result of the acquisition, the corporation would be, or be likely to be, in a position to dominate a market for goods. (By s.4E of the Act, "market" means a market in Australia and when used in relation to any goods, includes a market for those goods and other goods that are substitutable for, or otherwise competitive with, the first-mentioned goods.) By s.50(1)(b)(ii), a corporation shall not acquire, directly or indirectly, any shares in the capital of a body corporate if, in a case where the corporation is in a position to dominate a market for goods, the acquisition would, or would be likely to, substantially strengthen the power of the corporation to dominate that market. By s.50(2), where bodies corporate related to or associated with a corporation are together in a position to dominate, the corporation is deemed to be in a position to dominate the market. By s.50(3)(a), a reference to a market for goods shall be construed as a reference to a substantial market for goods in Australia. By s.50(3)(b), a reference to dominating a market for goods shall be construed as a reference to dominating such a market either as a supplier or as an acquirer of goods in that market.
The case pleaded by the Commission
The material allegations in the Commission's amended statement of claim are as follows.
The market pleaded
The Commission alleges: (a) that Arnott's Biscuits is the leading Australian manufacturer of biscuits, supplying approximately 65 per cent of Australian consumption of biscuits; (b) that Nabisco is a manufacturer of biscuits supplying approximately 8 per cent of Australian consumption of biscuits; (c) that George Weston Foods Limited ("Westons") is a manufacturer of biscuits supplying approximately 13 per cent of Australian consumption of biscuits; (d) that there are approximately 26 other manufacturers and importers of biscuits in Australia, supplying, in total, approximately 14 per cent of Australian consumption of biscuits ("the other suppliers"); (e) that Arnott's Biscuits, Nabisco, Westons and the other suppliers supply biscuits, of the value of approximately $600 million, to wholesalers and retailers in Australia, doing so in close competition with each other but not in close competition with any other suppliers or potential suppliers of biscuits or any other products; (f) that accordingly, there is a market in Australia, being a substantial market, for the supply of biscuits to wholesalers and retailers ("the market"); (g) that Arnott's Biscuits, Nabisco and Westons are suppliers of biscuits in the market; and (h) that Nabisco and Arnott's Biscuits are competitors in the market.
The effect of the option agreement pleaded
The Commission further alleges that Arnott's Biscuits and Fledspac have executed the option agreement whereby Fledspac granted to Arnott's Biscuits an option to purchase the whole of the issued capital ("the said capital") of Dickens ("the call option"); and whereby Arnott's Biscuits granted to Fledspac the right to require Arnott's Biscuits to purchase the said capital ("the put option"); that upon exercise of the call option or the put option (i) Arnott's Biscuits will directly acquire the said capital; (ii) Arnotts will indirectly acquire the said capital; (iii) Arnotts and Arnott's Biscuits will indirectly acquire the said capital and Nabisco's biscuit business; that, alternatively, upon execution of the said agreement, Arnott's Biscuits acquired directly, and Arnotts acquired indirectly, a legal or equitable interest in the said capital and Arnotts and Arnott's Biscuits thereby indirectly acquired the said capital and Nabisco's biscuit business. (By virtue of the operation of s.50(2), it is now conceded by the Commission that it is not necessary to consider whether there has been an "indirect" acquisition by Arnotts.)
The Commission's case pleaded
The Commission alleges that, as a result of either of these acquisitions, Arnotts or Arnott's Biscuits is, or, alternatively, both Arnotts and Arnott's Biscuits are, or will be, or will be likely to be, in a position to dominate the market (cf. s.50(1)(a) of the Act) by reason of the following: (a) Arnotts and/or Arnott's Biscuits will supply approximately 73 per cent by volume of biscuits in the market; (b) Arnotts and/or Arnott's Biscuits will supply approximately 100 per cent by volume of (i) dry cracker biscuits and (ii) flavoured snack biscuits in the market; (c) Arnotts and/or Arnott's Biscuits will acquire Nabisco's production facilities, production staff, and sales, marketing and distribution facilities and staff; (d) by acquiring the brand or product names of Nabisco's biscuit products, Arnott's Biscuits will substantially increase its range of biscuit products; (e) Arnott's Biscuits will acquire the shelf space occupied by Nabisco's biscuit products in retail outlets; (f) Arnott's Biscuits will acquire the recipes and expertise of Nabisco's biscuit business; (g) Arnott's Biscuits will gain the ability to integrate its own biscuit production facilities and operations with those of Nabisco, as well as the purchasing, sales, marketing, distribution and management facilities and staff, achieving significant economies of scale; (h) Nabisco's biscuit products are the most similar in quality and type in the market to those of Arnott's Biscuits; (i) Nabisco has an aggressive pricing policy and is the most effective competitor of Arnott's Biscuits; (j) apart from Westons, Nabisco is the only major manufacturer of biscuits in Australia other than Arnott's Biscuits; (k) by lowering unit production costs, Arnott's Biscuits will improve its ability to meet and eliminate competitive pricing policies of its competitors; (l) Westons supplies biscuits which are generally of a lower quality and price than those of Arnott's Biscuits and Nabisco; (m) the acquisition would leave only Westons and a number of minor suppliers none of which would have the range of products, the manufacturing base, the sales and marketing base, the distribution network or the financial ability to compete effectively with Arnott's Biscuits; (n) Nabisco markets its biscuit products with greater emphasis on the name of those products and the name of the range of those products than on the name of Nabisco itself, thus facilitating adoption of its product range by another supplier; (o) upon the acquisition: (i) it will be practically essential for wholesalers and retailers to acquire biscuits from Arnott's Biscuits; (ii) it will be possible for Arnott's Biscuits to dictate, to a significant degree, the price of its products, its trading terms and its participation in promotional activities; (iii) Arnott's Biscuits will be able to impose lower margins upon wholesalers and retailers; (p) the acquisition will increase existing barriers to entry, in particular: (i) the acquisition of expensive, and difficult to obtain, production facilities; (ii) the need to train proficient production and marketing staff and management; (iii) the need to spend substantially on advertising to achieve consumer interest; and (iv) the need to establish a national distribution and warehousing network; (v) the difficulty in persuading wholesalers and retailers that products will sell in sufficient volume to justify being given shelf space in retail outlets; (vi) the payment of wholesalers' and retailers' new product listing fees; (vii) the need to take into account the failure of the great majority of new biscuit products to achieve sustained profitable levels of sale; (viii) the development costs of new products; (q) as a result of the acquisition: (i) Arnott's Biscuits will not be significantly inhibited by its competitors in setting prices; (ii) Arnott's Biscuits will be the price leader in the market; (iii) it will be practically essential for wholesalers and retailers to acquire biscuit products from Arnott's Biscuits; (iv) Arnott's Biscuits will be able to offer less favourable terms than its competition.
Alternatively, the Commission alleges that Arnotts or Arnott's Biscuits is, or alternatively, both Arnotts and Arnott's Biscuits are, already in a position to dominate the market (cf. s.50(1)(b) of the Act) by reason of the following: (a) Arnott's Biscuits has, and has had for at least three years, 65 per cent share of the market; (b) the market shares of its major competitors, Westons (approximately 13 per cent) and Nabisco (approximately 8 per cent), have not increased for at least the past three years; (c) Arnott's Biscuits has well established sales, marketing and distribution facilities which are superior to those of its competitors; (d) Arnott's Biscuits' name and products are popular and its brand names are well established; (e) Arnott's Biscuits supplies a substantially wider range of biscuit products than any of its competitors; (f) the shelf space allocated to Arnott's Biscuits is far greater than its competitors; (g) Arnott's Biscuits is a relatively highly profitable company with profits increasing over the last four years, whereas Weston's and Nabisco's operations have been conducted far less profitably; (h) no new entrant at a scale and range of production comparable to that of Arnott's Biscuits has been able to enter the market and sustain its entry since Nabisco entered 20 years ago; (i) there are considerable difficulties in importing biscuits: they can deteriorate when transported by sea over long distances and variations in exchange rates can pose risks; (j) Arnott's Biscuits sources significant quantities of its inputs such as flour through subsidiary companies which manufacture such inputs.
The Commission alleges that the acquisition as pleaded will, or will be likely to, substantially strengthen the power of Arnotts, or Arnott's Biscuits, or both, to dominate the market (cf. s.50(1)(b)(ii) of the Act) for the reasons already alleged; and that by reason of the foregoing, any such acquisition by Arnotts and Arnott's Biscuits, or either of them, will contravene s.50(1)(a), or alternatively, s.50(1)(b), of the Act. It is further alleged that Fledspac and Dickens, in requiring or permitting any such acquisition will be, directly or indirectly, knowingly concerned in or a party to the contravention or will be aiding, abetting, counselling or procuring Arnotts and Arnott's Biscuits to contravene the Act. It is said, further, or in the alternative, that Arnotts, in causing or permitting Arnott's Biscuits to make the acquisition, will be, directly or indirectly, knowingly concerned in or party to the contravention or will be aiding, abetting, counselling or procuring Arnott's Biscuits to contravene the Act. The Commission seeks to enjoin the exercise of the options.
The defences pleaded by the respondents
By their defences, the respondents have denied the substantial allegations made in the amended statement of claim with the exception of the allegation that Arnott's Biscuits have acquired the shares by virtue of the option agreement. No special defences are pleaded.
The case opened by the Commission
The Commission opened its case for relief as follows:
(a) Arnotts intends to acquire the biscuit division of Nabisco. Arnotts is in a position to dominate the biscuit market and the acquisition would, or would be likely to, substantially strengthen the power of Arnotts to dominate that market (s.50(1)(b)); alternatively, as a result of the acquisition, Arnotts would be, or be likely to be, in a position to dominate that market (s.50(1)(a))." The players in the market are manufacturers and importers of biscuits in Australia on the one hand and retailers and wholesalers of biscuits in Australia on the other. Products such as bread, snack foods or confectionery are not part of the biscuit market. However, there is "some blurring of the edges of some of those markets. . . (f)or instance, between the biscuit and confectionery markets there is some blurring between items such as Tim Tams, an Arnotts' product, which are chocolate products. In the snack food market there might be some blurring between some crispy savouries in the biscuit market and maybe some savoury products (are) sold in the snack food market." Tim Tams have been marketed both as a biscuit and as confectionery. When marketed as a biscuit, Tim Tams are larger in size than Tim Tams as confectionery.
(b) The goods in the market are confined to biscuits and do not include snack foods, confectionery or bread for these reasons: (1) Arnotts itself has both a biscuit division and a snack food division and each division is conducted separately. (2) Arnotts' sales representatives who solicit orders from retailers in respect of biscuits do not handle snack foods. This is done by sales representatives employed by Arnotts to solicit orders for snack foods. (3) Arnotts employ a person to assist retailers to stack their shelves with Arnott's biscuits. Arnotts retain a different person to assist with snack foods. Nabisco adopts the same practice. (4) In supermarkets, biscuits are generally displayed in a "biscuit bar" which is separate from the areas where bread, snack foods and confectionery are displayed.
(c) Arnotts' dominance of the market was demonstrated by the following: (1) Its large market share. (2) The fact that it is less flexible with its trading terms than other suppliers. (3) The evidence of retailers that, because of the recognised popularity of Arnotts, it is essential that they stock Arnotts' biscuits. (4) Because of its market share and the revenue derived from that market share, Arnotts has the ability to spend far more on advertising and promotion than its competitors, thereby enabling Arnotts to entrench and increase its popularity with consumers. (6) Arnotts has the ability, because of its size and market share, to counter any new competing biscuit product quickly and efficiently; Arnotts has the ability to compete in quality by introducing new brands and to compete in price; Arnotts markets at the top end of the range under the Arnotts' name; at the lower end of the range, Arnotts markets under the "Sunshine" brand; in this way, it is able to compete in the full spectrum of the biscuit market. (7) Arnotts' dominance of the market is tempered by the competition it now receives from Nabisco and Westons. In the cracker and flavoured snack segment of the market, the only competition comes from Nabisco; Arnotts reacts to innovative and new products introduced by Nabisco, to price reductions or "specials" of Nabisco and to Nabisco's advertising campaign; retailers are able to use Nabisco's presence in the market place to obtain some leverage in negotiating terms with Arnotts; the elimination of Nabisco as a competitor will give Arnotts more shelf space in retail stores, give Arnotts more revenue which can be used for advertising, and give Arnotts a virtual monopoly in the cracker and flavoured snack segment of the market; and Arnotts' increased strength in the market place will make it even more difficult for the remaining manufacturers to compete or enter the market place. (8) Barriers to a new entrant into the market are substantial: (i) the cost of establishing plant and equipment is enormous; (ii) because the biscuit market is fully serviced by existing players and the per capita consumption of biscuits is falling, any new player, once he has spent the money required for plant and equipment, would have to obtain his market share by taking part of the existing market from one of the existing players; (iii) a new player would need to persuade retailers to provide shelf space to display its product and shelf space is at a premium; (iv) shelf space is keenly fought over by the three major players; (v) to obtain shelf space, a new player would need to pay "line fees"; these "fees" are paid either by giving the retailer substantial discounts on biscuits sold or by making a payment to the retailer for shelf space; the importance of gaining shelf space is not only to facilitate retail sales but also to enable the manufacturer to promote its product; (vi) a new player would need to spend enormous sums of money on advertising and promotion; (vii) because of Arnotts' market share and the money which it has available to meet competition from any new player, it is not likely that the new player will obtain any significant market share; (vii) apart from the three major manufacturers, there are only 26 other players, most of them known as "niche" manufacturers and none of which has managed to obtain any significant share of the market; (viii) distribution and merchandising represent an expensive barrier to entry; (ix) the three major suppliers arrange for their representatives to attend individual supermarkets to take orders; these manufacturers also have a delivery service to the individual stores and also have staff in the stores to assist in stacking the shelves, thus ensuring that the supplier obtains sufficient shelf space; in order to compete successfully, a new player would need to provide a similar infrastructure for ordering, delivering and stacking shelves; most large retailers have a central warehousing facility and, in theory, it might be possible for suppliers of biscuits to deliver to such a facility. But this would not work in practice: biscuits, being perishable, have only a limited shelf life; the more biscuits are handled, the more likely they are to be broken or damaged; the attendance of the manufacturer's representative at the supermarket is needed to ensure the proper presentation and promotion of the product.
The construction of s.50

In order to construe s.50, it is necessary to consider what is meant when the statutory provision speaks of the "domination" of a "market".
The meaning of "dominate"
An enterprise will be in a position to dominate a market when there is a probability that the other enterprise or enterprises in the market will act in a way calculated not to affect adversely the dominant concern's short term interests. Dominance, unlike control, is not primarily concerned with the formal relationship between entities but rather with their conduct towards each other within a particular market environment. If the size or strength of a particular entity is such that, in practice, other entities are unable or unwilling actively to compete with it in a particular market, that entity is dominant in that market. The dominant position relates to a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained in the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers. Such a position does not preclude some competition but enables the undertaking which profits by it, if not to determine, at least to have an appreciable influence on, the conditions under which the competition will develop and, in any case, to act largely in disregard of it so long as such conduct does not operate to its detriment (see Trade Practices Commission v. Ansett Transport Industries (Operations) Pty. Ltd. (1978) 32 FLR 305 per Northrop J. at pp 321 et seq.; United Brands Company and Continental BV v. The Commission of the European Communities (1978) 1 CMLR 429 at p 461; Hoffmann-La Roche and Co. AG v. Commission of the European Communities (1979) 1 ECR 461 at pp 520-4; Trade Practices Commission v. Australia Meat Holdings Pty. Ltd. (1988) 83 ALR 299 per Wilcox J. at pp 327-8).
The meaning of "market"
In Queensland Wire Industries Pty. Ltd. v. The Broken Hill Proprietary Co. Ltd. (1989) 83 ALR 577, Mason C.J. and Wilson J. said (at p 582) that, after identifying the appropriate product level, it is necessary to describe accurately the parameters of the market in which the defendant's product competes: too narrow a description of the market will create the appearance of more market power than in fact exists; too broad a description will create the appearance of less market power than there is. Referring to the notion of substitution mentioned in s. 4E, Mason C.J. and Wilson J. said that this process of defining a market by substitution involves both including products which compete with the defendant's and excluding those which because of differentiating characteristics do not compete.
Deane J. said (at p 588) that "market" is not susceptible of precise comprehensive definition when used as an abstract noun in an economic context. It should be understood in the sense of an area of potential close competition in particular goods and/or services and their substitutes. Deane J. added that the economy is not divided into an identifiable number of discrete markets into one or other of which all trading activities can be neatly fitted. One overall market may overlap other markets and contain more narrowly defined markets which may, in their turn, overlap, the one with one or more others. The outer limits of a particular market are likely to be blurred: their definition will commonly involve assessment of the relative weight to be given to competing considerations in relation to questions such as the extent of product substitutability and the significance of competition between traders at different stages of distribution. While actual competition must exist and be assessed in the context of a market, a market can exist if there be the potential for close competition even though none in fact exists.
Dawson J., agreeing generally with Deane J., said (at p 591) that elasticities of supply and demand and the notion of substitution provide no complete solution to the definition of a market. A question of degree is involved - at what point do different goods become enough linked in supply or demand to be included in the one market - which precludes any dogmatic answer. The process is an inexact one, as the concept of sub-market illustrates.
Toohey J. (at p 599) pointed out that the introduction of s.4E followed a recommendation of the Swanson Committee that the definition of "market" be extended so as to "require that, in the determination of a 'market' for particular purposes, regard shall be had to substitute products, being products which have a reasonable interchangeability of use and which have high cross-elasticity of demand, i.e. where a small decrease in the price of a particular product would cause a significant quantum of demand for a similar product to switch to the product in question".
See also Australia Meat Holdings on appeal to the Full Court (1989) ATPR 40-932 per Davies J. at p 50,091; per Sheppard J. at p 50,097; per Pincus J. at p 50,106.
"Market" is an instrumental concept
In Queensland Wire, Mason C.J. and Wilson J. said (at p 582):

"Defining the market and evaluating the degree of power in that market are part of the same process, and it is for the sake of simplicity of analysis that the two are separated."

In Re John Dee (Export) Pty. Ltd. (1989) ATPR 40-938, the Trade Practices Tribunal (Lockhart J., President, Professor Brunt and Mr. Fitzgerald said (at p 50,219):

"As is often said, 'the market' is an instrumental concept, designed to assist in the analysis of processes of competition and sources of market power."

The process of evaluation of the degree of market power possessed by a firm said to be in a position to dominate a market

A claim that a firm is in a position to dominate a market calls for an evaluation of the degree of market power possessed by the firm.
In Queensland Wire, observations were made by the High Court on the processes of reasoning by which market power, and degrees of market power, may be evaluated. The matter there arose under s.46, and not s.50, but the observations made by the High Court throw light on the present question.
Mason C.J. and Wilson J. said (at p 583) that market power can be defined as the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product. The Chief Justice and Wilson J. referred (at p 583) to the necessity of considering potential competition in determining the degree of market power. The Chief Justice and Wilson J. said that courts have often looked to market share to determine degree of market power: ("The existence of such (monopoly) power ordinarily may be inferred from the predominant share of the market" (United States v. Grinnel Corp (1966) 384 US 563 at 571). But the Chief Justice and Wilson J. added that a large market share does not necessarily mean that there is a substantial degree of market power: ("the relative effect of percentage command of a market varies with the setting in which that factor is placed" (United States v. Columbia Steel Co. (1948) 334 US 495 at p 528 per Reed J.).
Mason C.J. and Wilson J. went on to say (at pp 583-4):

"A large market share may well be evidence of market power . . . but the ease with which competitors would be able to enter the market must also be considered. It is only when for some reason it is not rational or possible for new entrants to participate in the market that a firm can have market power . . . There must be barriers to entry. As Professor F.M. Scherer has written, 'significant entry barriers are the sine qua non of monopoly and oligopoly, for . . . sellers have little or no enduring power over price when entry barriers are nonexistent' . . . Barriers to entry may be legal barriers - patent rights, exclusive government licences and tariffs for example. Barriers to entry may also be a result of large 'economies of scale'. Where the economies of scale in a market are such that the minimum size for an efficient firm is very large relative to the size of the market, it may be that potential competitors will be dissuaded from entering the market by the apprehension that only one firm would survive."

Deane J. said (at p 589):

"It is unnecessary to seek to identify the precise structure and boundaries of what should be seen, for the purposes of the present case, as what I have described as 'the steel market'. Regardless of the more precise definition of that market, BHP has a substantial degree of power in it. It is responsible for the production of 97 per cent of the steel produced in Australia and supplies 85 per cent of the domestic market for steel and steel products. There is no present threat from imports. The only other Australian producer of steel is Smorgon which is responsible for only 3 per cent of local production and which represents no real threat to BHP's dominance of the entire local trade in steel and steel products."

Dawson J. said (at p 591) that the term "market power" is ordinarily taken to be a reference to the power to raise price by restricting output in a sustainable manner. His Honour added (at pp 591-2):

"But market power has aspects other than influence upon the market price. It may be manifested by practices directed at excluding competition such as exclusive dealing, tying arrangements, predatory pricing or refusal to deal. . . The ability to engage persistently in these practices may be as indicative of market power as the ability to influence prices. Thus Kaysen and Turner define market power as follows: 'A firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions.' . . . Market power is thus the advantage which flows from monopoly or near monopoly."

Dawson J. said (at p 592) that the existence of barriers to entry may be conclusive in determining the relevant market and the degree of market power in it. In the context of s.46, the existence of significant barriers to entry into a market carries with it market power on the part of those operating within the market. Market power follows as a natural consequence of barriers to entry which are also a prerequisite to the establishment and maintenance of a monopoly. His Honour went on to say (at pp 592-3):

"The identification of barriers to entry helps both to define the relevant market and to establish the existence of market power. There is, of course, vigorous debate in economic circles about what constitutes a barrier to entry into a market. There are those who would and those who would not accept that the high cost of entry constitutes a barrier. Compare Bain, Barriers to New Competition (1956); Bain, Industrial Organisation, 2nd ed. (1968), with Stigler, The Organisation of Industry (1968). However, it is less important to arrive at a precise meaning than to recognise the assistance given by the identification of conditions, in the nature of barriers to entry, for the purpose of defining the relevant market, measuring the extent of market power and determining whether that power has been exercised."

Toohey J. (at p 604) was of the opinion that B.H.P. had dominant power in the steel products market due to the absence of competitors.
Other aspects of the construction of s.50 will be dealt with later.
The facts
Although there was little room for contest on the primary facts, the parties were very much at issue on the inferences to be drawn from the primary facts. The volume of evidence adduced was enormous.
The general nature of the evidence called by the Commission
The Commission tendered a large body of evidence from documents discovered by the respondents and from documents obtained on subpoena from Westons. The Commission also called many witnesses from the biscuit industry and from the wholesale and retail grocery trade (see Appendix 1).
The general nature of the evidence called by the respondents
Arnotts tendered evidence from three main sources. First, it called an expert economist. Secondly, Arnotts called a solicitor employed by the firm of solicitors acting for them in these proceedings to prove the purchase by the solicitor of many grocery items. Finally, Arnotts tendered a market research survey by Roy Morgan, commissioned by Arnotts shortly before the hearing of these proceedings commenced. No officer of Arnotts was called.
Nabisco called no evidence.
The significance of the failure by Arnotts and Nabisco to call any of their officers to give evidence
As has been said, the Commission tendered many documents produced by the respondents on discovery. Many of these documents support the Commission's case. But neither Arnotts nor Nabisco called any witness from management and no explanation was offered to explain the failure to adduce this evidence.
Wigmore on Evidence, 3rd. ed. (1940) Vol. 2 s.285 p 162 states the general principles in this area as follows:

"The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party. These inferences, to be sure, cannot fairly be made except upon certain conditions; and they are also open always to explanation by circumstances which make some other hypothesis a more natural one than the party's fear of exposure. But the propriety of such an inference in general is not doubted."

In Jones v. Dunkel (1959) 101 CLR 298 at p 321, Windeyer J., after citing this passage from Wigmore, added:

"This is plain commonsense . . . . As Wigmore points out (Evidence 3rd ed. (1940) vol. 2, ss.289, 290, pp 171-180), exactly the same principles apply when a party, who is capable of testifying, fails to give evidence as in a case where any other available witness is not called. Unless a party's failure to give evidence be explained, it may lead rationally to an inference that his evidence would not help his case."

The characteristics of a biscuit

The Macquarie Dictionary provides the following primary definition of "biscuit".

"1. a. A stiff, sweet mixture of flour, liquid, shortening and other ingredients, shaped into small pieces before baking or sliced after baking. b. A savoury, unleavened similar mixture, rolled, sliced and baked crisp."

In Landau v. Goldwater (1976) 13 ALR 192, a Customs case, it was common ground that an imported milk chocolate wafer was a biscuit. Aickin J. said (at p 194):

"It was suggested in evidence that a biscuit was a product of the baking of unleavened flour with or without sugar or flavouring material and there seemed in substance to be no complaint about this definition or perhaps description."

In a submission to the Federal Government in 1985, Arnotts (writing on behalf of Arnotts, Westons and Nabisco) stated that biscuits "generally have certain common attributes which include: (a) wheat flour as the principal ingredient; (b) are prepared from a dough which is subsequently baked; (c) are low in moisture; (d) have minimum shelf life expectancy of three months."
The Commission's claim that Arnotts is in a position to dominate the market for biscuits in Australia and that its acquisition of the shares in Nabisco would, or would be likely to, substantially strengthen Arnotts' power to dominate that market
These proceedings were commenced in October 1988. It will be necessary, in the first instance at least, to consider the position as at that date. It may also be necessary, in the context of determining what relief ought to be granted, to consider the position at a later point of time against this background. As has been said, in May 1988, Best Foods agreed to acquire the shares in Nabisco and that, shortly thereafter, Best Foods negotiated with Arnotts for the sale of the shares in Nabisco, leading to their entry into the option agreement soon after the commencement of the litigation. Since 1 July 1989, pending the determination of the Commission's claims, Arnotts have managed Nabisco's business pursuant to a temporary management agreement.
Volume and shares of biscuit manufacturers for 1985, 1986 and 1987
It is convenient, in the first instance, to consider the volume by weight and shares of biscuit manufacturers for the years 1985, 1986 and 1987.
The following chart shows the volume by weight and shares of each biscuit manufacturer for those years:
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The following chart shows the volume by weight and shares of biscuit manufacturers, expressed as a percentage, for those years:
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The following chart shows the volume by weight and shares, expressed as a total, by reference to biscuit manufacturer:
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In a report prepared by Arnotts' management in August 1988, the volume and market shares of the "Australian Biscuit Market" for the 12 months ended March 1988 and for the previous two years were stated as follows:
CONFIDENTIAL "Biscuit Industry Statistics" ("B.I.S.")
For many years Arnotts, Westons and Nabisco have provided details of their biscuit operations to a firm of chartered accountants. That firm compiles statistics from the information supplied. The statistics are known as the Biscuit Industry Statistics ("B.I.S."). B.I.S. deal only with the operations of Arnotts, Westons and Nabisco. However, as at March 1988, for instance, this constituted 86.1% of the national total industry sales by volume. In certain segments, the percentage was as high as 90%. There is evidence that, in "dollar terms", the B.I.S. figures represented about 95% of biscuit sales in certain segments. The industry treats the B.I.S. figures as a reliable indicator of the relative performance of the leading members of the industry.
B.I.S. national retail sales for 1985, 1986, 1987 and 1988
The B.I.S. national retail sales figures, by weight, for the years ended 31 December 1985, 1986, 1987 and 1988 were as follows:
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B.I.S. national retail sales for 1988
B.I.S. national retail sales statistics, by weight, for 1988 were as shown in the following chart:
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B.I.S. retail sales by State for 1988
B.I.S. retail sales for each State, by weight, for 1988 were as shown in the following chart.
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B.I.S. national retail sales by product category for 1988
B.I.S. national retail sales by weight for each product category for 1988 were as follows:
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B.I.S. retail sales in N.S.W. by product category for 1988
B.I.S. retail sales for New South Wales for each product category for 1988 were as follows:
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B.I.S. retail sales in Victoria by product category for 1988
B.I.S. retail sales for Victoria for each product category for 1988 were as follows:
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B.I.S. retail sales in Queensland by product category for 1988
B.I.S. retail sales for Queensland for each product category for 1988 were as follows:
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B.I.S. retail sales in South Australia by product category for 1988
B.I.S. retail sales for South Australia for each product category for 1988 were as follows:
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B.I.S. retail sales in Western Australia by product category for 1988
B.I.S. retail sales for Western Australia for each product category for 1988 were as follows:
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B.I.S. retail sales in Tasmania by product category for 1988
B.I.S. retail sales for Tasmania for each product category for 1988 were as follows:
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B.I.S. national category analysis for the 12 months ended 30 September 1989

B.I.S. national category analysis for the 12 month period from October 1988 to September 1989 for the three manufacturers was as shown in the confidential annexure marked "A" to these reasons.
B.I.S. national category analysis for the 12 month period from October 1988 to September 1989 for Arnotts was as shown in the confidential annexure marked "A" to these reasons.
B.I.S. national category analysis for the 12 month period from October 1988 to September 1989 for Nabisco was as shown in the confidential annexure marked "A" to these reasons.
B.I.S. national category analysis for the 12 month period from October 1988 to September 1989 for Westons was as shown in the confidential annexure marked "A" to these reasons.
In the 12 month period ended 30 September 1989, Arnotts', Nabisco's and Westons' national biscuits sales by weight, and the percentage shares in the respective product categories, were as shown in the confidential annexure marked "A" to these reasons.
Biscuit industry management reports
The reports of management of Arnotts, Westons and Nabisco which were tendered throw considerable light on the operations of the Australian biscuit industry. A great deal of documentary material of this kind was tendered by the parties. I will refer to some of the more significant of this material. The facts described, and the opinions expressed, by management in these reports were confirmed by the evidence given by the witnesses called by the Commission from the biscuit industry and the wholesale and retail grocery trade.
Arnotts' management reports
Arnotts' "1987/1988 Marketing Plan"
In 1986, the management of Arnotts prepared a document entitled "1987/1988 Marketing Plan". The document dealt with "brand policy", "product mix", "packaging", "pricing policy", "trading terms", "sales and distribution", "promotional policy", "research", "market place measurement" and "national biscuit marketing objectives".
Under the heading "brand policy" the following was stated:
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Under the heading "product mix" the following was stated:
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Under the heading "packaging" the following, inter alia, was stated:
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Under the heading "pricing policy", the following was stated:
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Under the heading "trading terms", the following was stated:
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Under the heading "promotional policy", the following was stated:
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Reference was made to four main promotional activities: advertising, personal selling, sales promotion and publicity. Under the sub-heading "publicity", the following appeared:
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Under the heading "research", the following was stated:

RESEARCH.

Marketing Research activities involves not only the processing of internal and external data collection and analysis designed to measure trends in the market place, but also involves qualitative and quantitative analysis that is specifically designed to enable us to make effective marketing and advertising decisions and develop marketing strategies.

On a regular basis it is important that we regularly explore consumer needs and attitudes in the changing marketing environment through all areas of the "marketing mix".

Basically the following research vehicles are utilised in measuring the market and in determining what are the consumer needs and attitudes:

* Biscuit Industry Statistics (B.I.S.) * A.C. Nielsen Pty. Limited

* Overseas Imports

* Warehouse Withdrawals

Note: In the near future scanning data will be available from various sources. * Consumer Taste Tests

* Consumer needs

* Consumer Attitudes

* Usage and purchase behaviour * Company position and image.

Under the heading "market place measurement", the following was stated:
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Under the heading "national biscuit marketing objectives", the following was stated:
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Reports of the General Sales Managers of Arnotts to Arnotts' General Manager, N.S.W. Division in late 1987 and 1988 dealing with "market conditions" and related matters
The General Sales Manager's report for the month of December 1987 described the trading activities of, inter alia, Westons and Nabisco. Westons' activities were the subject of this comment:

There has been very little apparent activity by this company in December, which of course is fairly traditional. Certainly a lot of their displays have been lost, mainly because of pressure from both purely seasonal demands for display spots and also because of their lack of a presence in the Cracker market. During this month they released Golden Harvest, a plain sweet biscuit, not greeted with much enthusiasm by either the market place or the Westons' representatives.

Nabisco was the subject of these, inter alia, comments:

During the month of December Nabisco again were able to under-cut the price of their savoury range in comparison to Arnott's on organised promotions. They also commenced promoting their range much earlier in the month. One example being a two week Gondola End promotion retailing at 89 cents, a saving of 34 cents per packet, from 30.11.87 through to Saturday 12.12.87 in all Super K outlets, off-take was very good. Unsold stock was still available at the price until after New Year.

Woolworths also ran a two week promotion of Nabisco savouries at 99 cents from W/C 15.12.87, a saving of 24 cents. Arnott's major disappointments in promotional prices were found in Coles where our savouries were promoted at $1.09 and Jewel where jatz retailed at $1.07 during the last two weeks of December. Apparently Nabisco still has plenty of stock to get rid of, as Woolworths at Jesmond received 100 cases of stock after Christmas, which they did not need, and on attempting to send them back were given an extra 20 cents a packet to keep them.

In the report for June 1988, there was a discussion of the trading
activities of the marketing of chocolate biscuits under the heading "general" as follows:

Chocolate biscuits headed up most promotions during June with Westons (apart from Arnott's leading the field with price. The whole Westons Chocolate biscuit range was featured in Coles stores w/c 20th June for 89 cents packet, possibly the cheapest retail for Chocolate biscuits that we have seen for 12 months or more.

Westons new lines for this season do not appear to have the off take that has been experienced in previous years, particularly when the consumer can purchase Arnott "Headliners" such as Tim Tam, Mint Slice, Chocolate Monte, etc. for 99 cents. This year, because we have had good promotions - particularly with Franklins and Woolworths, we have made the opposition sit up and take notice.

Having such a price advantage gives the representatives something to bargain with at store level, especially when negotiating for prime display positions, e.g. all Woolworths stores supplied front end displays for the promotion and Franklins, where possible gave us front Gondola End displays. The new 'Carob' range of biscuits from Nabisco and also their Chocolate biscuit range have had a fairly poor result at the stage of the season, although a notable chocolate promotion was in Clancy's w/c 24th June where Nabisco Chocolate biscuits sold for 99 cents packet (a saving of 36 cents packet.

I feel that Arnott's have had the best of it so far this year with Westons taking a back seat first time for a long time.

The report then discussed the activities of several biscuit manufacturers.

Westons was first discussed. The report stated:

"As usual for this time of the year chocolates have received all the attention, but there does not seem to be as much enthusiasm in the Westons camp as previous years."

In respect of Nabisco, it was stated:

"Except for Conversation, Chips Ahoy and a few lines of Chocolate and the Natural Choice range things are very quiet in all areas. . ."

Cadburys was the subject of this report:

This company is still very quiet compared to last year. Very little promotional activity is reported, but they are still offering $3.60 a case off to a group of stores to sell at $1.2. Cadburys are advertising on Franklins shopping trolleys, which is a bit of a coup. This type of advertising is keeping the consumer very much aware of their image as a quality Chocolate biscuit. At times Arnott representatives have been asked to point out where Cadburys biscuits are layed into the shelves by consumers as a result of being prompted by the sign.

Players was reported to be "having a big push in all areas with their three new wafer lines."
The report for July 1988 offered the following general comments:

July was a very hard trading month for N.S.W. Trading Area and all other States. Whilst it is difficult to determine a single reason for the -9.3% achievement to budget result, general opinion is that school holidays and Expo in Queensland extracted a large proportion of normal food spending dollars from consumers. After eight almost clear months of trading since our last major strike, it is apparent we have lost approximately 5% consumer franchise to pre-strike periods. Considering the exceptional promotional activity mounted during the five months period February to June 1988, the achievement to budget result for that period was a disappointing -249,590 kilograms (-1.9%). Promotional expenditure for July 1988 was kept at a high level (3.97%), however results were not forthcoming. The expansion of generic products and house brands, which are in direct conflict with our major sellers, is also causing concern through loss of biscuit bar space for our products and confusion to the consumer who is offered "look alike" products at much lower prices.

In respect of Coles the following observations, inter alia, were made:
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Franklins was the subject of these comments:
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"Market conditions" were then described under the sub-heading "Westons". It was stated:
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In respect of Nabisco, it was stated that:
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In respect of Cadburys it was stated that:
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In respect of Players, it was stated that:
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In the report for August 1988, the following general comments were made:
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Market conditions were described as follows:

Westons

Field Reports indicate there was no extraordinary promotional activity during August. Chocolate biscuits, 500 gram

Family Assorted and Assorted Creams and Ryvita range received most attention.

Nabisco

Little to report since July other than the appearance at clearance prices of Natural Choice Cookies and Carob Coated products.

Cadburys

Retailers have reported that this brand has not performed well this year. This is evident by the volume of ageing stock in the trade and low price specials available so late in the season.

Players

It appears Players has enjoyed a fairly successful month. Wafers have been advertised and displayed well and sales reported by our field personnel as fair to good.

Commentary by Arnotts' Managing Director June 1988

The papers providing for the meeting of the Board of Directors of Arnotts to be held on 10 August 1988 included a document entitled "Managing Director's Commentary June 1988". Several topics were dealt with. Under the heading "Biscuits - Australia", the sales position in all the States was summarised. Reference was made to the B.I.S. "market share figures" for the 12 months ended 30 June 1988 as follows:
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Under the heading "Biscuits - Confectionery - NZ", sales of biscuits were dealt with. Reference was also made to sales of confectionery. Under the heading "Snack Products", the results of operations described as "Arnott's Snack Foods", "Lips", "Siesta" and "Red Seal" were discussed. Reference was made to "(t)he basic Arnott's snack foods business".
Arnotts' Competitive Activity Report June 1988
It was the practice of Arnotts to provide the Board of Directors with periodic "competitive activity reports". For instance, with the Board papers for the meeting to be held on 10 August 1988, there was such a report for the month of June 1988. It reported on the trading activities, in all States, of Westons, Nabisco and "Others". The last category included Cadbury, Players and "Generic". This format was typical of these reports.
Arnotts' Competitive Activity Report July 1988
This report, in the usual format, was in the Board papers for the meeting to be held on 14 September 1988.
The following comments were made in respect of Nabisco:

NABISCO

Queensland:

There has been very little activity by the company since the take-over was announced. Reports have it that the stores are complaining in relation to a lack of service and the number of out of stocks from this company. During the month of July, Franklins promoted the five Nabisco Chocolate biscuit varieties at 85 cents, however, severe stock problems have occurred as some stores reported ordering sixty cases, only to receive five.

New South Wales

Nabisco continued concentration on their chocolate range. Victoria/Tasmania

Nabisco's level of promotional activity continued to be fairly quiet in stores this month with no activity on their choc coated range. Premium 250g varieties received advertised support with S.S.W. 79 cents., Bi-Lo and Franklins 85 cents and S.E.Dickins and Foodmaster 99 cents. Victoria/Tasmania cont. .

T.V. Advertising for Chips Ahoy continued this month as well as a new promotion "Healthy, Wealthy and Wise". Prizes to the value of $100,000 and entry tokens in packets. Reports of combined biscuit and cereal displays featuring this promotional theme have been reported. South Australia

The majority of activity from Nabisco has been on Ritz, Table Water and Flavoured Snack varieties although we have noted increased Chocolate Biscuit promotions. The Carob varieties have not cleared from previous promotions and problems with excess stock and expiry dates are evident in major stores.

The trade has made mention of Nabisco's poor service and support at store level since the Best Foods takeover. Nabisco have recently informed the trade of a $100 minimum purchase requirement for deliveries.

Western Australia.

Nabisco have commenced a new television campaign called "Healthy Wealthy and Wise". This campaign includes a competition in which participants can compete for $100,000 in prizes. Reports from the trade indicate that Nabisco are giving little or no service. Fixture levels are very low and in a number of cases, empty]

Arnotts' Competitive Activity Report August 1988

This report, in the usual format, was in the Board papers for the meeting to be held on 12 October 1988.

Nabisco was discussed as follows:

NABISCO:

Queensland:

Promotional activity was very restricted for this company during August with the only recorded promotion being on their Savoury Lines in Franklins at $1.09. Trade reports continue regarding poor representation i.e., no call in some major chain stores for up to three weeks. New South Wales

Most stores in the Metro Area reported that they have not seen a Nabisco representative for three weeks. Their stock levels in all major outlets were very low.

Victoria/Tasmania

Activity continued to be very quiet with industrial problems obviously affecting deliveries of promotional and shelf stock. Nabisco's In-A- Biskit range received advertised support with S.S.W. 89 cents, Franklins 99 cents and Foodmaster and Supa Valu at $1.19. Premium 250g varieties were promoted with Franklins 85 cents, S.E. Dickins 95 cents, Tuckerbag 99 cents and Jewels at $1.03. Minor instore activity at special prices ranging between 79 cents to $1.09 were reported.

South Australia

Lack of service in stores is possibly due to the fact that Nabisco are not replacing representatives who have sought other employment. Western Australia

Nabisco are having problems supplying stock for their confirmed promotions. The major activity centered around their Chocolate Biscuits, Snack Range, Premium Range and Good Valu.

Arnotts "Trading Area Brief" on "Tim Tam Duo Bar and Handy Bag" (March 1986)

In March 1986, Arnotts' management prepared a "Trading Area Brief" for these "Tim Tam" products. The Brief introduced the subject as follows:
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Under the heading "Market Information", the following appeared:
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On the subject of "Store Placement", it was stated:
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The Brief contained this summary:
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Arnotts' "Notes on Tim Tam Bar" August 1986
In about August 1986, Arnotts' management prepared some "Notes on Tim Tam Bar". The topic was introduced in this way:
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The author then identified this problem:
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The document then described an advantage and a disadvantage:
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The document suggested this approach:
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Arnotts' "Chocolate Biscuit Campaign - 1987"
In November 1986, Arnotts' management prepared a document entitled "Chocolate Biscuit Campaign 1987". The following introductory observations were made:

1. INTRODUCTION.

There is no doubt that last year and in particular the traditional season (February - September) was amongst the most difficult in our experience of marketing and selling chocolate biscuits.

There were a number of factors which influenced the market place, the major areas being:-

(a) Sales Tax: In September 1985 the Federal Government placed a 10% sales tax on chocolate biscuits. When this was added to the wholesale price and in many instances the retailer taking the opportunity to improve margin then two price increases, the retail price of chocolate biscuits rose by as much as 20% in the market place over that of previous year.

(b) Economy: Whilst there is conjecture as to the exact state of the economy it is fair to say that there has been a general community perception that things have not been buoyant.

This has not enhanced the sales of chocolate biscuits.

(c) Competitors: There is little argument that the chocolate segment is the most competitive within the industry and became even more so during 1986. Hudsons continue to try to "crack" the market. Generics have become more prevalent and Westons and Nabisco are fighting to hold share, not to mention imported varieties.

(d) Seasonal Conditions: By and large the weather early in the 1986 season was not conducive to sales. It was mid-May in most trading areas before the weather became cool.

(e) Advertising: Unfortunately due to budget restrictions we were asked to operate at television module levels down some 20% on previous year during the season.

(f) Other: Many other factors such as co-operative spending, retail shelf layouts, the fight for merchandising space etc. have played their part.

The campaign was described as follows:

1987 CHOCOLATE BISCUIT CAMPAIGN. As expressed earlier in this brief we are coming out of a difficult year compounded by many factors. 1987 will see an acceptance of many of these areas by the consumer and should lead to a turnaround in the segment.

The market is not going to be easy and will require a major effort from both the marketing and selling elements to ensure we gain our rightful share. However, we are not going to be panicked into making quick decisions affecting our long established and successful direction.

Our campaign in 1987 will be directed to doing what we do well even better, with the co-operation of all concerned.

Our enormous strength is quality and a consistent approach which the consumer recognises as uniquely Arnotts in terms of respect and confidence. This formula will be continued for the coming season.

The following details the major elements of the campaign.

Arnott's "Agency Brief" for "Salada - Reduced Salt" - May 1987

In May 1987, Arnotts' management prepared an "Agency Brief" for a dry cracker biscuit to be marketed under the name 'Reduced Salt' Salada (release date: January 1988). Under the heading "Dry Cracker Market" the following appeared under the sub-heading "Situation":
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Under the sub-heading "Market Opportunity", the following appeared:
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Later in the document, the following appeared under the sub-heading "Conclusion":
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Arnott's "Agency Brief" for "Arnotts Cracker and Savoury Segment" - Review 1987/Campaign 1988
In March 1988, Arnotts' management prepared an "Agency Brief" for "Arnotts Cracker and Savoury Segment" - Review 1987/Campaign 1988. The introduction was as follows:
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Under the heading "Structure of the Market" the following appeared:
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The brief then referred to the B.I.S. and said that three "competitors" (Arnotts, Nabisco and Westons) "account for around 90% of the market in volume terms and close to 95% in dollar terms."
The following conclusions were offered for dry crackers:
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The following conclusions were offered for flavoured snacks:
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Arnotts' "Cracker and Savoury Trading Area Brief" for the 1987 season
Earlier in 1987, Arnotts' management prepared a "Trading Area Brief" for cracker and savoury biscuits. The Brief contained the following introductory remarks:
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The Brief analysed statistics from the B.I.S. in respect of sales of dry crackers and flavoured snacks by Arnotts, Westons and Nabisco.
Arnotts' "Cracker and Savoury Brief 1988"
In 1988, Arnotts' management prepared a "Cracker and Savoury Trading Area Brief". The following introductory remarks were made:
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The "Brief" analysed the information contained in the B.I.S. in respect of the sales of dry cracker and flavoured snacks by Arnotts, Nabisco and Westons.
Arnotts' management report on "Sunshine" biscuits August 1988
In August 1988, Arnotts' management prepared a report entitled "Sunshine Biscuits in the 90's". The report contained an analysis of the volume and market shares of the "Australian biscuit market", including sales under the "Sunshine" brand for the 12 months ended March 1988 and for the previous two years. Included in the report was the following observation:
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Westons' management reports
Westons' management also reported periodically on the activities of other biscuit manufacturers, particularly Arnotts and Nabisco.
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Weston's "Business Plan" for "Biscuit Trading" for the years 1988/1989/1990
In late 1987, the management of Westons prepared a "Business Plan" for "Biscuit Trading" for the years 1988/1989/1990. In the introduction, the following, inter alia, observations were made:
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The "Business Plan" included a section entitled "Marketing - Biscuits retail". In that section, under the heading "Overview", the following introductory comments were made:
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Under the sub-heading "Problems Confronting Westons Performance", the following was observed:
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Under the sub-heading "Total Market Size and Growth Trends" the following appeared:
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Later in the document (at p 13) under the heading "Business Plan" there was a sub-heading "Confectionery" and a further sub-heading "Wagon Wheels". The following, inter alia, appeared:
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Nabisco's management reports
Nabisco's management also reported regularly on the trading activities of other biscuit manufacturers, particularly Arnotts and Westons.
Nabisco's "Post Analysis - Chocolate Biscuits 1987"
In 1987, Nabisco's management prepared a "Post Analysis - Chocolate Biscuits 1987".
In reporting on a "poor" performance, the analysis dealt with "pricing structure" as follows:

Since 1984 both Nabisco and Westons have specialled Chocolate biscuits near the end of the season to retail at 99 cents and as low as 89 cents. This practice has resulted in price sensitivity for Chocolate biscuits creating a barrier to purchase at the normal retail price. In September 1985 a 10% sales tax was placed on all biscuits, impacting on Chocolate biscuits being the most expensive per gram. Further to these pricing problems the economic recession has impacted on household spending. Indulgent products like Chocolate biscuits become the first taken out of the trolley when the shopping bill is too high.

The strategy in 1987 was to endeavour to educate the consumer to pay more for Chocolate biscuits by specialling at $1.29 to a minimum of $1.19.

Unfortunately, in order to pick up volume this was not upheld and 99 cents specials reigned supreme.

Under the sub-heading "Product Varieties", the following appears:

Nabisco has the unfortunate position of being in no-mans land when it comes to Chocolate biscuits. Arnott has a strong franchise with premium priced, premium quality product. Cadbury a new entrant in 1987 closely follows Arnott in positioning.

Westons are the cheaper Chocolate biscuits with a value for money positioning as well as a strong franchise with Chocolate Wheatens. Nabisco does not fit in either position and has no strong franchised products.

Under the sub-heading "Competition" the following appears:

Chocolate biscuits are the most competitive category. Of the three major manufacturers: Arnott is market leader with 65% share; Westons 25% and Nabisco 10%. Additional to the big three are Cadbury who are expected to be a strong presence over the next few years and Players representing the cheapest end of the market i.e. - Gobb Stoppers for kids.

Nabisco's "Fancy Assorted Marketing Plan 1987"

In July 1986, Nabisco's Biscuit Division management prepared a "Fancy Assorted Marketing Plan 1987". Under the sub-heading "Share", the following appeared:

Both Nabisco and Weston have suffered share losses over the past five years to the gain of Arnott. Apr Point Change 1981 1982 1983 1984 1985 1986 '81-'85 '84- Nabisco 12.2 10.3 13.8 12.1 10.1 9.6 (2.1) (2.0) Arnott 71.6 72.3 66.9 69.8 76.3 76.6 4.7 6.5 Weston 16.2 17.4 19.3 18.1 13.6 13.7 (2.6) (4.5) In terms of Nabisco's business, Fancy Assorted currently represents 9.2% of total volume, a downward shift from its position of 10.6% in 1985. This is, in part, due to the category's poor performance but also the increased emphasis on high priority categories such as Dry Crackers, and Chocolates.

The Plan stated the "Key Issue" as follows:

"How can Nabisco improve brand recognition and loyalty in the Fancy Assortment category, given Arnotts firm stranglehold at the top end of the market and Sunshine's revamped range which competes directly with Weston at the lower end?".

Nabisco's "Biscuit Marketing Plan - 1988"

In late 1987, Nabisco's management prepared a "Biscuit Marketing Plan - 1988". The plan reported on the performance of Nabisco's biscuit division in 1987 as follows:

CURRENT YEARS PERFORMANCE

Biscuit division will achieve 10,000 tonnes in 1987, representing 90% of budget and 99.6% of last year. Growth in Nabisco's priority categories - Dry Crackers, Flavoured Snacks and Cookies has been higher than planned, but has been counteracted by significant volume losses in our Chocolate and Assortment business. Market share is projected to be 9.0% (1986 9.2%), assuming a 2.0% improvement in market volume in 1987, following four consecutive years of decline, at an average rate of 1.0% per year.

Under the heading "Background" and under the sub-headings "The Market" and "Size", the following appeared:

The Market

Size:

Total Biscuit Market volume over the last 12 months has been measured at 112,300 tonnes, an increase of 1.9% over previous year, (12MMA June). The total retail value of the Biscuit market is estimated to be $450 million (Source: Retail World), which has been declining each year until 1987, where it has improved over 1986 levels. Consumption per head is 6.86kg, making Australians the third largest per capita consumers of biscuits in the world following U.K. and New Zealand. The volume growth of the market in 1987 has been partly attributed to the inability of the three major manufacturers to effect price increases since June 1986, owing to the Prices Surveillance Authority decision to monitor Biscuit pricing.

The three major manufacturers account for approximately 92% of all biscuits sold, with a number of smaller companies accounting for the other 8% (Players, Paradise, Generics). Arnotts occupy a position of dominance in the market with a volume share of over 75%, a dominance it holds across all product categories with the exception of Chocolate (58% share).

Under the sub-heading "Segment Shares" the following appeared:

Market growth in Dry Crackers, Crispbreads and Fancy Non Assorted categories has been at the expense of the Chocolate and Cookie categories, the hypothesis being that consumer interest is increasing in healthier, better for you biscuits (Dry Crackers, Crispbreads), rather than the more expensive indulgent biscuits (Chocolate).

Under the sub-heading "Seasonality" the following appeared:

Whilst there is little seasonality in total Biscuit sales, sales by category are more seasonal with Chocolate consumption heaviest during May-September, counteracted by heavier consumption of Dry Crackers and Flavoured Snacks during the September/March period.

Under the sub-heading "Trade Study" the following appeared:

It is believed the grocery trade in Australia would prefer to operate in a more competitive environment within the biscuit market, which given Arnotts dominant market position, is clearly not the case at present. Trade margins on Nabisco tend to be higher than Arnotts and Westons, as the trade adopt a more of a "loss leader" approach with selected Arnotts and Westons lines.

Nabisco's Dry Cracker "Premium" Biscuit - 1988 Marketing Plan

In late 1987, Nabisco's management prepared a "Marketing Plan" for their "Premium" dry cracker biscuit for 1988. The Plan stated (at p 1) that the dry cracker "segment" of the market in 1987 was estimated to be 20.9m. kilos "representing 17.9% of the total biscuit market". Under the sub-heading "Competition", the following appeared:

Arnott's and Nabisco are the only two major manufacturers competing in this market. Generic activity is limited to cream crackers only.

Arnott's has 21 varieties, with SAO and SALADA believed to be their largest selling items. Dry Crackers account for 20.3% of Arnotts total retail sales. Nabisco competes with 10 varieties.

Under the title "Problems" the following, inter alia, was stated:

On shelf space for Nabisco products is severely limited. The cost of buying new space for new products is prohibitive. This impacts on the launch of new PREMIUM varieties necessary to achieve budgetted sales volumes. Slower selling lines within the dry cracker segment are being reviewed with deletion in mind.

(It appears that in retail stores, biscuits are usually grouped together in "biscuit bars". Generally speaking, Arnotts biscuits are displayed together and are first in the traffic flow, occupying about 50% of the biscuit bar. Nabisco's biscuits are usually grouped together next, occupying about 10% of the biscuit bar. Weston's biscuits are then displayed, occupying about 15% of the shelf space. Imported and other brands are then displayed. Arnotts' sales representatives' "merchandising standards" include the following directions:

"Arnotts should be first in flow as laid down in the Sales Manual.

Percentages lower than 50% of bar space are not an acceptable standard.

House brands and others mixed with Arnotts is also not acceptable."

According to the evidence of Mr. Simeone, Nabisco's Sales and Marketing director between 1986 and 1988, whose evidence I accept, Arnotts "single biggest strength was the extent of the facings, or shelf space, occupied by their products in the retail stores and the display of all biscuits in blocks by suppliers. Generally, Arnotts' biscuits were positioned first in the traffic flow in stores, with more than half of the total shelf space allocated to biscuits.")
Nabisco's "1988 Flavoured Snacks Marketing Plan"
In the middle of 1987, Nabisco's management prepared a "Marketing Plan" for flavoured snacks for 1988. The Plan stated (at p 3) that in 1986, the flavoured snacks "segment" represented 5.5% of "the total retail biscuit market" and that the segment would grow by 2.3% in 1987. It was said that Nabisco was "driving much of (the) growth in flavoured snacks".
Under the sub-heading "Swot Analysis", under the title "Strengths", the following appeared:

* High market share within the segment (26.5%) for 1987, enabling potential economies of scale in production.

* Adoption of a strongly competitive positioning for 1987/1988 (strength of flavour) - on judgement. * Nabisco enjoy excellent distribution of all varieties. * Distinctive packaging enables: - excellent on shelf presence; - appetite appeal;

- ranging prominence;

* Our packaging is preferred over Arnotts giving us a competitive advantage*. * Use of consumer promotion and bonus packs has given Nabisco a competitive edge over Arnotts.

Under the title "Weaknesses", the following appeared:

5.2 Weaknesses

* Nabisco's reliance on the last quarter for profit recovery and sales targets makes us vunerable to attack.

* Seasonality:

1985 52.9 (NAB) 45.0 (MKT) 1986 45.4 (NAB) 43.3 (MKT). * High levels of trade spend over past years has effected profitability.

* Lack of continuity in advertising approach and media effort has resulted in low aided and unaided awareness and a weaker brand franchise. * Arnotts has a share advantage of 3:1 putting it in a very dominant position. * Unable to match or surpass Arnott's product superiority in "post oven toppings" ie. BBQ and Spicy Tomato. SOURCE: Quantum Research - Qualitative July 1987. * Unable to get like with like shelving, weakening our ability to compete head on. * Pricing variations by account favour Arnotts by 1-3[/pkt, due to trade margins on Nabisco being higher than Arnotts.

* Underdeveloped brand for Nabisco in Victoria.

The imposition of sales tax on biscuits in 1985

As has been noted, a sales tax was imposed on biscuits in 1985. On 2 October 1985, an officer of Arnotts wrote to a senior member of Arnotts' management suggesting some arguments, in the form of a draft "submission", which could be put to Government for the removal of the tax. The memorandum enclosing the submission stated, inter alia, the following:

We should press strongly, I feel, the arguments that the tax was not only arbitrary - in that biscuits are primarily a 'staple' food product like any other and not a luxury - but also discriminatory. I cannot see how the Government can counter these points with any logic. The 'fall back' position would seem to be an acceptance of a tax on chocolate biscuits but not on other biscuit categories, for it would appear that the chocolate and confectionery lobby has been successful.

The tax has only been looked at from the viewpoint of our biscuit business. Another point to be put forward strongly is, of course, that Arnotts, as a group, is caught in a three-way-bind of taxes on biscuits, pet foods and snack foods and is, therefore, singularly disadvantaged.

As well as using a professional lobbyist, it may be worth considering employing a PR company that could skilfully create a positive environment for us which even in the long-term, could work to our advantage at government level. Similar work should, perhaps, be done at the consumer level for I have a feeling that there will be a limited awareness of this new tax. The last thing we want is for the consumer to blame Arnott's for putting up its prices.

We should, perhaps, also be considering undertaking some research to ascertain consumers' attitudes to the concept of close substitution on which the tax is based, their general attitudes to the tax and the likely effect on their purchase behaviour.

In the draft submission, under the heading "The Biscuit Market in Australia", the following was stated:

Australia has one of the highest per capita consumptions of biscuits in the world. Biscuits are, therefore, very much part of the Australian food consumption pattern and traditionally have been so. In contrast to the situations in many overseas markets, biscuits, in Australia, are regarded to a large degree by the consumer as being a 'staple' food item. In our marketing approach over the years we have always regarded and treated them as such. The 'staple' - and stable - nature of the biscuit market in this country can be illustrated by the fact that our list of 15 national top-selling varieties comprises products of considerable longevity which are regarded and used mainly as basic food items by the consumer rather than as luxury treats:

Product Category Date

1. Sao Dry Cracker *

2. Assorted Creams Sandwich/Fancy *

3. Family Assorted Plain Sweet *

4. Scotch Finger Shortbread *

5. Milk Arrowroot Plain Sweet c.1880

6. Jatz Dry Cracker 1950s

7. Tim Tam Chocolate 1950s

8. Salada Dry Cracker 1963

9. Barbecue Shapes Flav. Cracker 1960s

10. Milk Coffee Plain Sweet *

11. Mint Slice Chocolate 1950s

12. Monte Carlo Sandwich/Fancy 1920s

13. Ginger Nut Plain Sweet *

14. Shredded Wheatmeal Plain Sweet *

15. Spicy Fruit Roll Fruit 1920s * Appears in 1906 price list. Apart from Tim Tam and Mint Slice, two chocolate biscuit lines, it is difficult to understand how any of the rest of these products could be interpreted in any way as being a close substitute for chocolate or confectionery.

The biscuit industry in Australia, led by Arnott's, has always been characterised by the wide range of biscuits available to the consumer, satisfying all sorts of tastes and usage occasions. For example, in 1983-84, the journal Retail World in its annual report of December 5, 1985, calculated that the market was split as follows:

Volume Share % Dry Crackers 16.6 Crispbread 6.3 Flavoured Crackers 4.8 Cookies 8.1 Plain Sweet 15.6 Shortbread 4.7 Sandwich-Fancy 12.9 Chocolate 12.5 Plain Sweet (assorted) 9.7 Sandwich-Fancy (assorted) 8.8 ----- 100.0 These categories are not purely industry categories; they reflect very much the way consumers categorise and use biscuits themselves. To look quickly at each category in turn:

Any information the Commission does have as to the structure of the biscuit industry is primarily dependent on known industry sources, which you will no doubt take into account (e.g. the Aust. Retail World Annual Report and Foodweek sales estimates attached). The Arnotts group has been the predominant supplier of biscuits in Australia since the late 1960's when it successfully beat Nabisco and George Weston to get control of the best known local biscuit makers in each state. But even without the benefit of recent market enquiries any competition analysis would need to consider the power of the major retail groups within the food retailing area and the possible countervailing power such groups may have on local biscuit suppliers, including Arnotts Ltd. Supermarket business apparently represents some 90% of the biscuit trade with the top four chains representing some 75% of that 90%. The above response is brief; however as indicated the Commission has had little recent close involvement with the Australian Biscuit industry and for this reason I think I can offer little more to assist your enquiry."

It is apparent from the terms of the letter that Mr. McKeown's views were tentative only. They were also very much dependent upon industry sources, the details of which are not known. In the circumstances, Mr. McKeown's opinions are entitled to little weight.
Media release dated 20 July 1988 stating that the Commission did not propose to intervene in the bid by Goodman Fielder Wattie Ltd. for Rank Hovis McDougall P.L.C.
Arnotts rely upon a media release issued on behalf of the Commission in July 1988 as follows:

"On current information the Trade Practices Commission sees no need to intervene in the proposed takeover by Goodman Fielder Wattie Ltd. of Rank Hovis McDougall PLC of the UK.

First Assistant Commissioner Hank Spier said today the Commission had examined the likely implications for Australian processed food markets of a successful bid. Present indications are that it would not put Goodman in a position of dominance in the total Australian processed food market.

There are a number of other substantial companies and a large number of smaller operators in the market. Moreover, the buying power of the supermarket chains is a significant countervailing force in the market. However Mr. Spier said the Commission would closely monitor progress of the takeover bid for developments which might affect its initial assessment."

The views expressed by Mr. Spier should, in my opinion, be given little weight for present purposes. His views were very generally expressed and were not addressed to the biscuit industry, but rather to the "Australian processed food markets". We do not know, and cannot evaluate, the sources of his information. No details were given to enable an assessment to be made of the merit of his opinion.
The statement of Weston's attitude to the proposed take-over of Nabisco by Arnotts
Reliance is placed by Arnotts upon a letter dated 28 September 1988 written by Weston to the Commissioner. The background to the letter was a report in the "Sydney Morning Herald" dated 24 September 1988 as follows:

"TPC WARY OF NABISCO SELL-OFF TO ARNOTTS By Eric Ellis

MELBOURNE: ICM Australia's planned disposal of its recently acquired Nabisco biscuit brands to the biscuit market titan, Arnotts Ltd. was in limbo yesterday as the Trade Practices Commission expressed 'concerns' about the mooted deal.

'I'll be very surprised if this one gets through,' a leading food industry analyst said. 'Any deal that puts one company in control of 80 per cent of a market is very much a line-ball affair,' she said.

The TPC yesterday confirmed it had launched a 'very detailed investigation' of the deal, under the anti-monopoly provision of the Trade Practices Act, section 50.

'The commission has obvious concerns about the proposed arrangement and its likely effect on the market,' a TPC spokesman said.

Arnotts already has a stranglehold on the $550 million Australian biscuit market, boasting a 67-70 per cent stake which would jump to 75-80 per cent if the Nabisco deal was consummated.

The proposed deal has also fallen under the scrutiny of the Foreign Investment Review Board, given that the US-based Campbells Soups group has a 30 per cent stake in Arnotts.

The UK-controlled George Weston group, controlling some 13-15 per cent of the biscuit market, is understood to have expressed private unofficial concerns to the TPC about the deal and to be preparing an official submission.

Industry analysts feel much would seem to depend on the interpretation of the Australian market, which could be segmented into separate chocolate, savory and sweet biscuit markets, thus diluting Arnotts' domination. ICM Australia, formerly known as the Intercity Mills group, is controlled by the secretive Shears family and is best known for its breakfast cereals operations, in particular the Uncle Toby's porridge lines. ICM acquired Nabisco Australia in May in a $50 million all-or-nothing deal from the RJR Nabisco group of the US. That deal included Nabisco's biscuit, nut and cereal lines. It sold the Planters nut division to Amatil Ltd in June."

By letter dated 28 September 1988, Mr. Robert J. Kelly, secretary of Westons, wrote to the Chairman of the Commission as follows:

"I refer to a recent article by Eric Ellis headed 'TPC wary of Nabisco's sell-off to Arnotts' which appeared in the Sydney Morning Herald (September 24, 1988). The article purports to attribute certain views to the George Weston Foods Group.

In the light of this publicity the Board of George Weston Foods Limited has instructed me to inform the Commission that the Company does not hold the views attributed to it in the article. In fact the Board is of the view that there would be no significant competitive change in those areas in which the Company competes with Arnotts Limited."

In my opinion, the letter is of little assistance in the resolution of the issues in these proceedings.
CONFIDENTIAL
The response by Coles Myer Ltd. to the Commission's questionnaire
In October 1988, the Commission sought the response of Coles Myer Ltd. to a number of questions thought to arise out of the proposed acquisition of Nabisco by Arnotts. Questions 1 and 2 were as follows:

"1. Is there a market for biscuits?

2. Are there segments within that market?"

By letter dated 20 October 1988, Mr. K.L. Irvine, company secretary of Coles Myer, replied to these questions as follows:

"1 and 2. Yes. However, if substitutability is an important criteria as to whether or not a market exists, a separate market for biscuits may not exist."

It is difficult to attach much weight to this comment. Some officers of the Coles Myer group were called by the Commission and cross-examined by the respondents but Mr. Irvine was not called. Although he was company secretary, we do not know his own experience in the trade itself nor do we know what facts or reasoning he had in mind. In making these assertions in such general terms, no attempt is made to address the question of "substitution" in any specific or concrete way. Some further comments made by Mr. Irvine in the letter, to which reference will be made shortly, confirm the suspicion that Mr. Irvine did not have any specific sources of information.
Question 3 was as follows:

"3. To what extent are other products substitutable for biscuits?"

Mr. Irvine's response was:

"3. Biscuits are often used as a 'snack' food therefore any other product category used for 'snack' purposes is substitutable."

The comments made in respect of Q.'s 1 and 2 apply here also.
Question 4 was as follows:

"4. Are other snack products marketed in direct competition?"

Mr. Irvine's response was:

"4. Yes."

The comments made in respect of Q.'s 1 and 2 apply here also.
Question 5 was as follows:

"5. To what extent do you believe that consumers take into account other products as possible alternatives when considering a biscuit purchase?"

Mr. Irvine's response was:

"5. Quite a large extent, but we do not have any specific information in this area."

The comments made in respect of Q.'s 1 and 2 apply here also.
Question 6 was as follows:

"6. What influences the degree of substitution?"

Mr. Irvine's response was:

"6. Advertising, packaging and marketing techniques and the nature of the alternative product."

The comments made in respect of Q.'s 1 and 2 apply here also.
Question 7 was as follows:

"7. To what extent is there substitution between one segment and another?"

Mr. Irvine's response was:

"7. We have not carried out consumer research in this area and cannot answer the question."

Question 11 was as follows:

"11. Brand importance -

- how important are brand names for promotion purposes?

- is it important to you that a supplier has a range of brands?"

Mr. Irvine's response was:

"11. - Very important.

- Yes."

The comments made in respect of Q's. 1 and 2 apply here also.
Question 12 was as follows:

"12. How important are generics - why/why not? From whom do you purchase generics?"

Mr. Irvine's response was:

"12. Very important strategically. To be competitive in the market place. We purchase generics from Paradise Foods, Players Biscuits and Biskex."

The comments made in respect of Q's. 1 and 2 apply here also.
Question 13 was as follows:

"13. Are imports significant - why/why not?"

Mr. Irvine's response was:

"13. Biscuits are imported mainly for seasonal events, i.e., Christmas time, but the majority of our purchases are supplied by Australian Manufacturers."

Question 15 was as follows:

"15. How important (vigorous) are smaller manufacturers as competitors?"

Mr. Irvine's response was:

"15. Small manufacturers must compete vigorously for their place in the market. They can be important because they offer the opportunity to develop boutique ranges."

The comments made in respect of Q.'s 1 and 2 apply here also.
Question 16 was as follows:

"16. What concerns would you have if smaller manufacturers disappeared?"

Mr. Irvine's response was:

"16. Small manufacturers have their place in the market. At times they are very innovative, e.g. introduction of boutique ranges and develop new opportunities for their market segment."

The comments made in respect of Q.'s 1 and 2 apply here also.
Question 17 was as follows:

"17. How difficult would it be for a new entrant to get into the market -

- is there a high degree of brand loyalty (reinforced by advertising)? - any costs in a manufacturer getting his products onto the shelf? - how big a problem is availability of shelf space?

- would new entrant be required to spend significantly on promotion and merchandising? - is it easier for established manufacturer to distribute his products? - how easy is it for a manufacturer to move from manufacture of one biscuit to another?"

Mr. Irvine's response was:

"17. The success of a new entrant into the market place is determined by management expertise, marketing expertise, quality of product, positioning of product, and financial resources. - Yes.

- Most manufacturers experience costs in getting new lines on to the shelf, e.g. manufacturing costs, transport costs, media advertising costs, promotional activity costs, representative wage and administration costs or brokerage fee costs.

- Shelf space in a Supermarket is extremely valuable and must be utilised to the full. There are always many more products available than shelf space.

- The Grocery industry is very competitive and as such, all manufacturers must market their product to suit the competition they will face. There is no point in retailers accepting products that are not so supported as they will not sell.

- Not necessarily.

- Unable to comment on manufacturing techniques."

This response appears not to be controversial.

Question 18 was as follows:

"18. How would a manufacturer improve his market share?"

Mr. Irvine's response was:

"18. By actively marketing his product."

The comments made in respect of Q.'s 1 and 2 apply here also.
Question 19 was as follows:

"19. How do suppliers compete with each other - what does each of them offer in discounts and promotional expenditure as, say, a percentage of price?"

Mr. Irvine's response was:

"19. Suppliers compete with each other by many and varied marketing means in a twelve month financial period. The techniques used are different and varied depending on product type and competition activity in the market place. Discounts and promotional activity are as varied as the marketing activity again dependent on competition and marketing strategy."

The comments made in respect of Q.'s 1 and 2 apply here also. Further, Mr. Irvine's response should be read against the background of the description of Arnotts, already referred to, by the management of Coles New World, as "dominant market leader", given in June 1989. Shortly before this, in May 1989, the management of Coles New World had reported that they were "in no doubt. . . as to the difficulty of taking on Arnotts" in launching "Farmland" cookies. Earlier, in January 1989, Coles New World management reported that the "Farmland" launch would be most exciting "but realistically it is also going to be a difficult task to successfully take on Arnotts."
At the end of his letter, Mr. Irvine added the following observation:

"I would also add that the Commission should note that we do not have available consumer research as it is normally the practice of manufacturers to conduct same and not the practice of retailers."

In the circumstances, except in non-controversial areas, the opinions expressed in the letter should be given little weight.
Ex. 85 -Competition for Arnotts from another source?
It is submitted on behalf of Arnotts that it should be inferred that Arnotts may encounter competition from another, confidential, source. The identity of the potential competitor suggested is mentioned in confidential exhibit 85 and the principal reasons why Arnotts contend that the inference should be drawn are stated in Arnotts' confidential submission being tab 7 in vol. 5 of Arnotts' written submissions. Arnotts does not contend that the party in question has actually commenced to manufacture and supply biscuits in Australia. But Arnotts argues that it should be inferred from the evidence tendered that this party may launch its products here "at any time".
In my opinion, the evidence before me does not permit this inference to be drawn. There is no evidence, either direct or circumstantial, that the party in question proposes, or, for that matter does not propose, to launch its products in Australia at this stage. The evidence simply does not permit the making of any conclusions, one way or the other, as to the intentions, if any, of that party in this area.
The first issue: Is there a market for biscuits and, if so, is Arnotts in a position to dominate that market?
In my opinion, the evidence demonstrates, first, that there is in Australia an area of "close competition" in the supply of biscuits and, secondly, that there is a "market" for biscuits in the sense explained in the authorities. It is clear that the market is a substantial one. The "product" market is biscuits and the "geographical" market is Australia. For present purposes, the relevant "market" may be described as a national market for the supply of biscuits.
Further, in my opinion, Arnotts is, in the sense explained in the authorities, in a position to "dominate" that market. Arnotts has had, for many years, a very large market share. True, Arnotts has some competition in the supply of biscuits, but not much. The evidence shows that the members of the biscuit industry and the members of the grocery trade, being the "players" in the market, act upon the belief that Arnotts is in a position to exercise, and does exercise, from time to time, a commanding influence in the market. The evidence establishes that the size and strength of Arnotts is such that, in practice, other entities are unable or unwilling to offer any significant competition to Arnotts in the biscuit market in the medium or long term. Even in the short term, there is an obvious reluctance to meet Arnotts "head-on" or directly. Instead, other suppliers of biscuits seek to find "gaps" or "niches" in the market. All of this conduct is an indication that Arnotts holds a commanding influence in the market.
The second issue: can it be said that Arnotts' acquisition of the shares in Nabisco would, or would be likely to, substantially strengthen Arnotts' power to dominate the national biscuit market?
It is convenient to deal first with the meaning of "substantially" where used in s.50(1)(b)(ii).
The meaning of "substantially" in s.50(1)(b)(ii)
In my opinion, where used in s.50(2)(b)(ii), the adverb "substantially" suggests a degree of strengthening of power that is "real or of substance and not insubstantial or nominal" (see Tillmanns Butcheries Pty. Ltd. v. Australasian Meat Industry Employees' Union (1979) 42 FLR 331 per Bowen C.J. at pp 338-9; per Deane J. at p 348; R. v. Hudson (1985) 63 ALR 257 at p 270).
In my view, Arnotts' acquisition of Nabisco would, or would be likely to, substantially strengthen Arnotts' power to dominate the national biscuit market. Several considerations support this conclusion.
Nabisco's market share
For one thing, Nabisco has approximately 8% of the total Australian biscuit market and approximately 9% of the B.I.S. share. For another, in two important segments of the market, dry crackers and flavoured snacks, Nabisco is Arnotts' only competitor. It will be recalled that in the March 1988 "Agency Brief" for "Arnotts Cracker and Savoury Segment", Arnotts' management said that these segments were "vitally important" to Arnotts because of "sheer volume" and the "growth rates being achieved disproportionately to the total biscuit market." Many of the witnesses from the retail trade said, and I accept their evidence, that, in their view, if Arnotts had no significant competitor in these segments of the market, Arnotts' power to bargain with retailers, in these areas at least, would be considerably enhanced.
Economies of scale
Another consideration is that it appears that Arnotts will gain economies of scale from the acquisition of Nabisco. By letter dated 21 September 1988, Mr. A.S. Dawson, Arnotts' managing director, wrote to Mr. David Fawcett, managing director of Foodland Associated, Kewdale, W.A., as follows:

"This is to confirm my telephone advice to you today of Arnotts' application to the Trade Practices Commission to purchase the biscuit business of Nabisco Brands. I was very disappointed to hear from you that the relationship between Foodland and Arnott Mills and Ware is not all it should be. I will ensure that our people do all they can to put it right.

You expressed the general objection that the grocery business is ending up in too few hands. I can appreciate that point of view. However from Arnotts' perspective we are only a fraction the size of Nabisco and Westons when you consider their global biscuit business. We are now attempting to compete in more international markets and if we can gain economies of scale in our Australian production facilities then we can be more competitive internationally. The Australian market is so small in comparative terms that to be only a reasonable size player in the global market almost means by definition that you have to be a large player in the Australian market.

I can assure you that we would like growth in the Australian market and one does not get growth by abusing a strong market share position. . . "

(It may be noted that "international competitiveness" is not a matter which can be taken into account as a defence to proceedings alleging a contravention of s.50.)

Conclusions on the second issue

The considerations mentioned, viewed against the background of the failure by Arnotts or Nabisco to call any evidence from management, support the conclusion that the acquisition of Nabisco would, or would be likely to, strengthen Arnotts' power to dominate the Australian biscuit market and would, or would be likely to, strengthen Arnotts' power to do so to a degree that was real and of substance and was not insubstantial or nominal; that is to say, to strengthen that power substantially.
Conclusions on the commission's claim that there has been a contravention of s.50(1)(b)
For these reasons, I conclude that Arnotts is in a position to dominate the market in Australia for biscuits and that the acquisition of the shares in Nabisco by Arnotts would substantially strengthen the power of Arnotts to dominate that market. It follows that the deemed "acquisition" of shares under the option agreement contravenes s.50(1)(b).
Given that the option agreement was entered into after the service of process in these proceedings, it must also follow that Fledspac and Dickens were "involved" in the contravention within the meaning of s.75B(1) of the Act. It should be noted that counsel for Fledspac and Dickens argued that I should find that his clients were not so "involved". In my view, the argument is without any substance.
It further follows that any actual (as distinct from the deemed or notional) acquisition of the shares, by virtue of the exercise of any option granted by the option agreement, would also contravene s.50(1)(b).
I propose to grant declaratory relief accordingly.
Further relief
I will now hear the parties on the question of what further relief, if any, ought to be granted. Specifically, the parties will be given an opportunity to be heard on the questions, first, whether a declaration should now be made pursuant to s.81(1A) of the Act declaring the deemed acquisition of shares to be void; and, secondly, whether injunctive relief should be granted to restrain the future exercise of any of the options. It should be noted that, at present, the status quo is preserved by undertakings.
Costs
The respondents must pay the costs of the proceedings to date, except where a special order for costs has already been made.

[1990] FCA 15

31 JANUARY 1990