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Bell’s Brewery Sale May Tap Into Longstanding Portfolio Effects Debate

Posted  November 19, 2021
By Sarah Bayer

The announced acquisition of Bell’s Brewery by Japanese conglomerate Kirin provides an opportunity to reexamine the much-maligned “portfolio effects” doctrine of merger analysis.

Bell’s, the Michigan-based craft brewer of Oberon and Two Hearted Ale, will join Fat Tire maker New Belgium within the Lion Little World Beverages subsidiary of Kirin.  Kirin owns a wide array of brands globally, as well as firms in other industries such as pharmaceuticals, real estate, and agricultural biosciences.

The antitrust concerns surrounding consolidation of the beer industry have previously been reported in this blog. As a result of a series of mergers, the U.S. beer market is dominated by two transnational conglomerates, InBev and Molson Coors, which together account for approximately 60% of US beer sales, notwithstanding the emergence of the craft beer industry.

The legitimacy of the “portfolio effects” doctrine has been hotly contested by European competition enforcers on one side and the U.S. antitrust agencies on the other.  The European Commission introduced the concept of “portfolio power” in Guinness/Grand Met (1997), in which the Commission concluded that despite the absence of concentration within specific antitrust product markets, the combined strength of the consolidated portfolio would strengthen Guinness’ dominant position.

Will Kirin’s acquisition of Bell’s raise similar concerns?  In considering that question, here is a primer on the basics of the portfolio effects doctrine:

    1. What are portfolio effects?

“Portfolio effects” may refer to any of several advantages enjoyed by a newly combined firm after a conglomerate merger.  The enlarged company may benefit from “full-line forcing,” where distributors or retailers must buy multiple products within the portfolio in order to sell any of them.  Alternatively, the firm may use its newfound scale to offer pricing flexibility, enabling it to gain entry for the full range of brands it offers.

In the case of Kirin, the potential portfolio effects might include using such tactics to pressure distributors to carry a full complement of Kirin brands alongside New Belgium and Bell’s.  If such portfolio effects did occur, that coercive conduct could boost Kirin’s legacy brands so that they would not have to compete on their own merits.  Another potential portfolio effect would be Kirin’s crowding out competitors and blocking new start-ups by eating up space on shelves and taps.

    1. Where can portfolio effects be found?

Portfolio effects can be found in almost any industry. In addition to alcoholic beverages, regulators and other observers have raised concerns about portfolio effects in other sectors of food retail, in the transportation sector with the merger of bus networks or airlines with complementary networks, and even in the academic journal industry with the bundling of e-journals.

    1. Why is the portfolio effects doctrine controversial?

The crux of the issue is whether portfolio effects create benefits for consumers, even if competitors are disadvantaged.  In many cases, firms that possess a portfolio of leading brands can save money on production, advertising, and distribution; however, economists and antitrust enforcers often disagree whether those cost savings will ultimately be passed on to consumers rather than kept by the dominant firm.

Moreover, even if these cost savings are shared with consumers, the long-term effects of a dominant portfolio may ultimately enable a firm to abuse its size and take advantage of the structure of its market to squeeze out smaller firms—simply because the conglomerate owns a sufficient number of “must carry” brands that are tied or bundled with less attractive offerings from that portfolio.  Accordingly, any short-term benefits enjoyed by consumers may prove to be fleeting, as the conglomerate will gain the power to raise prices or reduce product quality after excluding its competition.

Balancing the potential for short-term consumer gains against the potential for long-term consumer harm has proven challenging for antitrust enforcers and the divergent views may be more the product of differing procedural preferences than a fundamental disagreement on the merits.  That said, retailers and manufacturers readily report that despite theoretical concerns to the contrary, portfolio-type effects can and do occur regularly in the marketplace.

    1. How have U.S. courts and antitrust agencies dealt with portfolio effects?

Although U.S antitrust agencies have acknowledged that a conglomerate merger can create anticompetitive effects, they tend to prefer ex post conduct enforcement as opposed to ex ante enforcement at the merger approval stage.

Conwood v. U.S. Tobacco, 290 F.3d 768 (6th Cir. 2002), illustrates the type of conduct that may be actionable under U.S. antitrust laws.  In that case, the court affirmed a jury’s verdict that a smokeless tobacco manufacturer violated the Sherman Act when it contracted with retailers for exclusive control over store racks—control which the distributor wielded to physically remove and even destroy its competitor’s products.  While the Conwood arrangement was especially egregious, the FTC has observed that manufacturers often contract with retailers for input into how offerings are displayed in stores.  According to the agency, where such contracts contain appropriate safeguards, like competitor firewalls and at-will termination, retailers and consumers can benefit from manufacturers’ expertise on products and promotion strategies.  Hence, ex ante prohibitions are disfavored.

    1. What does the future hold for the portfolio effects theory?

Portfolio effects were hotly contested in the early 2000s, when antitrust regulators on either side of the Atlantic reached conflicting results in analyzing the proposed acquisition by General Electric Co. of Honeywell Inc..  Although U.S. Department of Justice approved the merger in full, the European Commission blocked the deal, which remains a high water mark of U.S.-EU divergence.

The experience in the U.S. beer market over the intervening 20 years teaches that European concerns over portfolio effects were not misplaced.  In industries like beer distribution that have high barriers to entry and constrained capacity, portfolio effects are more likely to crush competition. Firms must be vigilant for the possibility of portfolio effects and accompanying anticompetitive behavior and must be aware that this behavior is not tolerated equally across borders.

The beer industry will serve as a case in point for antitrust enforcers and policymakers as they increasingly rely on European competition law as a source for the reversal of decades of lax merger enforcement in the U.S.

Written by Sarah Bayer

Edited by Gary J. Malone

Tagged in: Antitrust Enforcement, Antitrust Litigation,