116/08    8 October 2008

The OFT has referred the completed acquisition of the Millway business of Dairy Crest Group (Millway) by Long Clawson Dairy (Long Clawson) to the Competition Commission, because of competition concerns in relation to the supply of blue Stilton cheese (Stilton).

UK consumers spend around £65 million per year on Stilton, which is a protected name under EC regulations, and can only be produced, with a proper licence, in three East Midland counties. The six largest supermarket chains in the UK together sell around 90 per cent of Stilton in the UK. These retailers have always awarded their mainstream contracts for standard and mature Stilton to just three large-scale producers - the two merging parties and Tuxford and Tebbutt. As such, the merger gives Long Clawson over 50 per cent of total UK sales of Stilton post-merger.

The OFT considered the argument that, given the purchasing power of the big supermarkets, even with this significant degree of supplier concentration, consumers may not ultimately be harmed by this merger. However, based on the evidence available, the OFT has doubts that the bargaining power of the supermarkets would prevent a rise in wholesale and retail prices in this instance for the following reasons:

• Competition for the big supermarket's regular contracts for standard and mature Stilton is unlikely to be affected by most other licensed Stilton dairies. Most of these are very small or niche businesses and while one is much larger, it is unlikely to change its premium business model and expand into a mass producer, even with encouragement from the supermarkets.
• Evidence on price movements shows that competition from French or Italian blue cheeses is generally weak, and would not prevent Stilton prices going up. While supermarkets could stock more Danish Blue if Stilton became more expensive, they could not drop their Stilton supplier entirely, and their bargaining position is weaker than when they could choose between three big Stilton suppliers.

Ultimately, the OFT concluded that despite the buyer power of supermarkets, the reduction from three to two major Stilton suppliers could result in a price increase to retailers and be passed through to consumers. A full Competition Commission inquiry is justified to test whether this is, in fact, a likely effect of this merger.

Simon Pritchard, OFT Senior Director of Mergers, said:

'This deal presents a risk of higher Stilton prices for shoppers at the UK's biggest supermarkets. Given the amount that UK shoppers spend annually on Stilton, even a small retail price increase would translate into a multi-million pound effect over several years. The Competition Commission will now investigate further and see whether our initial concerns can be resolved.'

NOTES

1. The three counties in which Stilton can be produced are Derbyshire, Leicestershire and Nottinghamshire. The six largest UK grocery retailers are Tesco, Sainsbury's, Asda, Morrison's, the Co-operative Group, and Somerfield. Tuxford and Tebbutt is part of The Cheese Company.

2. The OFT has a duty to make a reference to the CC if the OFT believes that it is or may be the case that a relevant merger situation has been created; and the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

3. Under the Enterprise Act 2002 a relevant merger situation is created if two or more enterprises have ceased to be distinct enterprises; and the value of the turnover in the United Kingdom of the enterprise being taken over exceeds £70 million; or as a result of the transaction, in relation to the supply of goods or services of any description, a 25 per cent share of supply in the UK (or a substantial part thereof) is created or enhanced.

4. The full text of the decision will appear in the mergers section as soon as possible.