COMMISSION DECISION

of 9 March 1999

relating to a proceeding under Council Regulation (EEC) No 4064/89

(Case IV/M.1313 - Danish Crown/Vestjyske Slagterier)

(notified under document number C(1999) 560)

(Only the English text is authentic)

(Text with EEA relevance)

(2000/42/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to the Agreement on the European Economic Area, and in particular Article 57(2)(a) thereof,

Having regard to Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings(1), as last amended by Regulation (EC) No 1310/1997(2), and in particular Article 8(2) thereof,

Having regard to the Commission decision of 6 November 1998 to initiate proceedings in this case,

Having given the undertakings concerned the opportunity to make known their views on the objections of the Commission,

Having regard to the opinion of the Advisory Committee on Concentrations(3),

Whereas:

(1) On 5 October 1998, the Commission received a notification of a concentration pursuant to Article 4 of Regulation (EEC) No 4064/89 (the Merger Regulation) consisting of the merger of the Danish cooperatives Slagteriselskabet Danish Crown AmbA (Danish Crown) and Vestjyske Slagterier A.m.b.A. (Vestjyske Slagterier).

(2) By decision dated 6 November 1998, the Commission found that the notified operation raised serious doubts as to its compatibility with the common market. The Commission accordingly initiated proceedings in this case pursuant to Article 6(1)(c) of the Merger Regulation.

I. THE PARTIES

(3) Danish Crown is the largest Danish cooperative slaughterhouse and has 13122 members (farmers) who supply raw materials (pigs and cattle) to the cooperative. Danish Crown is vertically integrated in slaughtering, meat processing and meat trading. Its main activities in the Community are in the United Kingdom, Germany, France, Denmark and Italy.

(4) Vestjyske Slagterier is the second largest Danish cooperative slaughterhouse and has 17722 members (farmers) who supply raw materials (pigs and cattle) to the cooperative. Vestjyske Slagterier is vertically integrated in slaughtering, meat processing and meat trading. Its main activities in the Community are in Denmark, Germany, the United Kingdom, France and Italy.

II. THE OPERATION

(5) The notified operation consists of a combination of the operations of Danish Crown and Vestjyske Slagterier in a newly incorporated cooperative society to which Danish Crown and Vestjyske Slagterier (hereinafter collectively referred to as "the parties") will transfer all their activities, assets and liabilities and which the parties' members will join collectively as members. The parties slaughter approximately 16 million pigs and 500000 cattle per year. The company will be the largest slaughterhouse in Europe(4) and the world's largest pork exporter.

(6) In addition, the parties are also shareholders in four other Danish cooperatives: daka a.m.b.a. (daka), Danske Andelsslagteriers Tarmsalg - Schaub & Co. a.m.b.a. (DAT-Schaub), Slagteriernes Fællesindkøbsforening a.m.b.a. (SFK) and Scan-Hide a.m.b.a. (Scan-Hide). As a result of the merger, the parties will acquire control of each of those four cooperatives for the reasons stated below.

(7) Daka is active in animal rendering (abattoir by-products). It is owned by Danish Crown (43 %), Vestjyske Slagterier (34 %), TiCan (3,8 %) and a number of other slaughterhouses and retailers (12,5 %). After the merger, the parties will have five out of 10 board members. Two members are elected by the employees. The Articles of Association provide for a specific system as to the appointment of board members and the majority of the board appoints the Chairman who has a casting vote. The Board is responsible for determining the commercial policy of the company. After the merger, the parties will be in a position to cast approximately 86 out of 114 votes at the General Assembly. The Articles of Association require that amendments of the Articles of Association can only be decided with the approval of another independent member who represents at least three votes.

(8) The entity resulting from the merger will be in a position to cast 75 % of the voting rights in the General Assembly and will therefore be in a position to decide on the strategic decisions of the cooperative (budget, business plan and important investments). Furthermore, the parties will have half of the votes in the Board and the Chairman of the Board cannot be appointed against their will. The parties will acquire decisive influence and thus sole control within the meaning of Article 3 of the Merger Regulation.

(9) DAT-Schaub is traditionally active in the processing and sale of natural casings from the animals slaughtered at the Danish cooperative slaughterhouses. It also trades in spices, and in meat and meat products (main activity of the parties). DAT-Schaub is owned by Danish Crown (49,8 %), Vestjyske Slagterier (31 %), Steff-Houlberg (13,8 %) and TiCan (5,5 %). After the merger, the parties will have six out of nine board members and approximately 80 out of 101 delegates at the General Assembly. The Articles of Association state that a minimum of two independent members must be in favour of any resolution taken at the General Assembly. However, a member who represents two thirds or more of the voting rights, such as the merged entity, can amend the Articles of Association.

(10) The merged entity will be in a position to cast 80 % of the voting rights at the General Assembly and has a clear majority in the board. Its majority at the General Assembly will allow it to change the provision of the Articles of Association that requires the agreement of two independent members for all resolutions at the General Assembly. Therefore, as a result of the merger, the parties will acquire sole control over DAT-Schaub.

(11) SFK is a supplier to the meat and food industry of packaging material, spices and food ingredients, cleaning products, clothing and tools for the meat industry and machinery and equipment for the meat industry. SFK is owned by Danish Crown (42,6 %), Vestjyske Slagterier (24,7 %), Steff-Houlberg (17,4 %), other slaughterhouses (14,4 %) and TiCan (1,1 %). The Board consists of a maximum of 12 members. A maximum of eight is appointed by members of Danske Slagterier out of which the parties would be able to appoint five members(5). Two board members are appointed by the other slaughterhouses while another two members are appointed by the employees. Decisions of the Board are adopted by simple majority and the chairman has a casting vote. The Board determines the commercial policy of the company. At the General Assembly, the parties will be in a position to cast 74 % of the votes. Resolutions of the General Assembly are adopted by simple majority, but resolutions to amend the Articles of Association cannot be passed without a minimum of two independent members being in favour.

(12) The entity resulting from the merger will be in a position to cast 74 % of the voting rights in the General Assembly and will therefore be in a position to decide on the strategic decisions of the cooperative (budget, business plan and important investments). The parties will thus acquire decisive influence and thus sole control within the meaning of Article 3 of the Merger Regulation.

(13) Scan-Hide sells raw, sorted, and salted hides from cattle. It is owned by Vestjyske Slagterier (47,3 %), Danish Crown (33,2 %) and other slaughterhouses (19,5 %). Before the operation, none of the parties had the possibility to exercise control over Scan-Hide although exceptionally this year, Vestjyske Slagterier would be able to cast more than 50 % of the vote at the General Assembly as it supplied more than half of the hides in the previous year. After the merger, the parties will appoint five out of eight members of the Board and will be able to cast approximately 82 out of 104 votes at the General Assembly. Therefore, as a result of the merger, the parties will acquire sole control over Scan-Hide.

III. CONCENTRATION

(14) On the basis of the foregoing, the operation can be considered to lead to a concentration encompassing a full merger between Danish Crown and Vestjyske Slagterier within the meaning of Article 3(1)(a) of the Merger Regulation and the acquisition of control by the parties in each of the four cooperatives (daka, DAT-Schaub, SFK and Scan-Hide) within the meaning of Article 3(1)(b) of the Merger Regulation.

IV. COMMUNITY DIMENSION

(15) The operation has a Community dimension pursuant to Article 1(2) of the Merger Regulation as the combined aggregate turnover of all the undertakings concerned exceeds EUR 5000 million (Danish Crown: EUR 3126 million; Vestjyske Slagterier: EUR 1496 million; daka: EUR 68 million; SFK: EUR 116,8 million; Scan-Hide: EUR 39,9 million and DAT-Schaub EUR 589,3 million)(6). Furthermore, Danish Crown (EUR 2053 million), Vestjyske Slagterier (EUR 865,3 million) and DAT-Schaub (EUR 328,7 million) have an aggregate Community-wide turnover of more than EUR 250 million. Danish Crown, Vestjyske Slagterier, Scan-Hide and DAT-Schaub do not achieve more than two thirds of their aggregate Community-wide turnover within one and the same Member State.

(16) The operation does not necessitate cooperation with the EFTA Surveillance Authority pursuant to EEA Agreement.

V. RELEVANT MARKETS

(17) The parties are active in the buying of live animals for slaughter, the sale of fresh meat for final consumption, the sale of fresh meat for industrial processing and the sale of processed meat products. The activities of daka, DAT-Schaub, SFK and Scan-Hide have been described above.

(18) In their notification the parties identified the following relevant markets: (i) the market for slaughter of live animals (divided into each species, i.e. pigs, cattle and lambs) in "Northern Europe" (i.e. Denmark, Sweden, Germany and the Benelux countries); (ii) the Community-wide market for all types of meat; and (iii) the Danish market for the collection and processing of abattoir by-products (rendering).

(19) For the reasons stated below, the Commission considers that the relevant markets should be defined more narrowly. However, the Commission considers that the concentration does not raise concern, irrespective of the market definition chosen, with regard to the purchase of lambs and sheep and the sale of their meat. In addition, the business activities of DAT-Schaub, SFK and Scan-Hide on markets other than those described below do not give rise to concern either.

A. RELEVANT PRODUCT MARKETS

(a) The purchase of live pigs and cattle for slaughtering

(20) With regard to the slaughtering of live animals, the parties have stated that the killing lines in a slaughterhouse differ for each species and cannot be changed within a reasonable time-span and without incurring significant costs. In addition to that, it will take up both time and cost for a farmer to switch production from the breeding of one species of animal to another (raising cattle instead of pigs, for example). Therefore, there is no supply-side substitutability between the different species at the slaughtering level. The Commission investigation has confirmed those findings.

(21) In conclusion, the purchase of live pigs and cattle, respectively, for slaughtering constitute two separate relevant product markets.

(b) Fresh meat markets

Pork and beef are separate relevant product markets

(22) The parties have argued in their notification that all types of meat such as pork, beef and veal, sheep and lamb and poultry, together with processed meat products, belong to the same product market as they are readily substitutable in the diet.

(23) However, in previous cases concerning consumer products markets, the Commission has found that simple substitutability in functional characteristics is not sufficient to define the relevant product market(7). Similarly in the case of meat the evidence shows that the different types of meat should not be considered as part of the same relevant product market for the purpose of assessing the impact on competition of the present merger.

(24) It is first to be noted that the different types of fresh meat are priced differently, with, on average, beef being the most expensive, pork 20 to 25 % less expensive and poultry about half as expensive as beef. Furthermore, those meats are perceived differently by the consumers, and therefore have a different position in the market place. For example, with regard to meat attributes such as flavour, taste, nutritional value, tenderness, cost, ease of use, the evidence in the Commission's file shows that in Denmark poultry received the highest overall ratings, particularly high on tenderness and ease of use, whereas beef scores high on flavour and taste but low on cost. Pork on the other hand scores high on ease of use, flavour and taste, but low on leanness.

(25) Those considerations are confirmed by information from the Danish meat wholesalers and supermarkets, which have indicated that there are considerable underlying differences in the purchase motivation of consumers for the different meat types. The special taste and the specific image (seasonal consumption around Easter) distinguishes lamb from the other meat types. For poultry, a typical motivation to purchase is the "healthy"-"low fat" image. In the case of Denmark, pork consumption is heavily motivated by tradition. Given the price differentials, the perceptions of consumers and their consumption patterns, it can be concluded that the different types of meat are only imperfect substitutes for each other.

(26) The Commission asked the buyers whether in their opinion a 5 to 10 % price increase in pork or beef prices respectively would result in substitution of other meat types (beef/pork, lamb, poultry and processed meat products). The Danish caterers have indicated that such a price increase would not change their consumption patterns. In the opinion of Danish wholesalers a switch from beef to pork and from beef and pork to poultry would only be possible to a certain extent. In the opinion of Danish supermarkets the demand for beef would not be affected by a rise or fall in beef prices. Some supermarkets indicated that, in response to a price increase/decrease, consumers would rather buy cheaper/more expensive parts of beef. With regard to pork, supermarkets considered that a price increase for pork could lead to some switching to poultry. In conclusion, therefore, this market information confirms that the different types of meat are only imperfect substitutes, and accordingly only a certain degree of substitution exists between the different types of fresh meat.

(27) The parties have provided a graph on the development in the relative prices of pork and the relative consumption of pork (see Annex 21 to the notification). This graph shows that relative prices of pork have fluctuated relatively strongly without resulting in a large fluctuation in relative meat consumption. In particular it is seen that the change in the relative price of pork of 4 percentage points between 1986 to 1988, and the change of 7 percentage points between 1992 to 1995 resulted in proportionally smaller changes in relative consumption. That graph, therefore, supports the conclusion that there is only limited substitution between pork and the other types of meat in response to price changes.

(28) In the notification the parties have provided own-price elasticities for pork of - 0,35, - 0,4, - 0,53. The sources are the OECD and DG VI of the Commission. In particular for the Community the OECD has estimated own-price elasticities of - 0,3 for beef, - 0,3 for pork, - 0,2 for poultrymeat and cross-price elasticities, which are numerically smaller than 0,3, between each of those three types of meat. According to the parties, they believe that those elasticities reflect the situation on the Danish market as well. Furthermore, according to the parties, it is recognised that there is positive cross-price elasticity between different meat types in the Community (see the notification, Section 6, p. 5).

(29) The Commission acknowledges that there may be positive cross-price elasticities between different types of meat. This also means that the price developments of different types of meat are to a certain extent linked. However, this does not mean that it should be concluded that all types of meat are part of the same relevant product market for the purposes of assessing the competitive impact of the proposed merger. On the contrary, the inelastic own-price elasticities for beef, pork and poultry meat imply that an increase in the market price for each of those types of meat would only lead to a limited loss of volume due to substitution of other types of meat or a reduction in consumption. Those price elasticities, therefore, indicate that beef, pork and poultrymeat each constitutes a separate relevant product market.

(30) The fact that pork and beef are separate relevant product markets is also confirmed by the way the parties have organised the marketing of pork and beef. Indeed, their pork and beef sales organisations are completely separate and there are separate marketing strategies for pork and beef. This can best be illustrated by the fact that the "fore-calculation" (i.e. a management support-tool for the pork sales staff in assessing the optimal price for a particular cut) does not contain a single reference to beef prices or targets. Furthermore, in the organisational structure of the merged entity (as well as previously for both parties), there is a Livestock Committee and a Pig Producers' Committee that will separately follow and consider matters of relevance for the entire livestock (cattle) division and pig division respectively.

(31) Also the market organisations for beef and pork under the common agricultural policy (CAP) are quite different. In fact, the pork market organisation is described as "very liberal" with very few market-regulating instruments at the disposal of the Commission (no guaranteed minimum prices - some aid for private storage). As a result less than 1 % of the total EAGGF guarantee budget goes to pork. The Beef Regime has a system of guaranteed prices for the producers, which is now being gradually reduced. Beef accounts for 14 % of the EAGGF budget and export refunds play a much more important role for beef than for pork. The fact that there are different regimes for pork and beef is a further indication that those products belong to different markets. If the two products were part of the same market, then the effect of measures in one regime would have an important impact on the other product so that they should then have either the same regime or a very similar one.

(32) As far as supply-side substitutability is concerned, it is not easy to change a cutting line for beef to one for pork. This is due to the fact that pigs supplied to a slaughterhouse are much more homogeneous than cattle. This therefore permits a much higher degree of automatisation of the pork cutting lines compared to the beef cutting. In beef cutting, a much more detailed selection procedure takes place when the carcase arrives, owing to the numerous breeds of cattle supplied and their respective meat characteristics. Therefore, the cutting process for beef is less automated than for pork. Accordingly, there is no supply-side substitutability between pork and beef meat.

(33) For all the above reasons it can therefore be concluded that fresh pork and fresh beef are separate relevant product markets for the purpose of the assessment of the proposed merger. This conclusion has not been contested by the parties in their reply (hereinafter "the Reply") to the Commission's Statement of Objections pursuant to Article 18 of the Merger Regulation (hereinafter "the SO").

The sale of fresh meat to industrial processors and the sale of fresh meat for human consumption (retail and catering) are separate relevant product markets

(34) The meat resulting from slaughtered animals is either consumed by the final consumer as "fresh meat" or supplied to meat processors for the production of processed meat products. "Fresh meat" means that the meat has not undergone further processing, i.e. no other ingredients or spices have been added, nor has the meat been cooked, smoked or dried.

(35) Most of the different parts of a slaughtered animal are sold to meat processors or for fresh meat consumption, taking into account the specific cutting requirements of those buyers. The Commission does not contest that the cutting specifications can be changed relatively easily. However, once the meat is cut by the slaughterhouse, there is for those cuts no more possibility for arbitrage. The parties have identified a limited number of cuts that are sold to both processors and for fresh consumption. There are, therefore, limited theoretical possibilities for arbitrage between the two channels. However, before that arbitrage could represent a competitive constraint on the parties' competitive behaviour vis-à-vis the supermarkets (see below), the processors would have to start to perform wholesale functions. This is not evident in a market where the "freshness" of the meat is crucial. Furthermore, the high level of purchasing from other Member States by processors is also an indication that the competitive market conditions in this market are different. Therefore, the Commission considers that the sale of fresh meat to industrial processors constitutes a different market.

Catering, supermarket, butchers and farm sales are separate relevant product markets but supermarkets and butchers can be considered together

(36) The sale of both fresh pork and fresh beef for human consumption can be further distinguished into a retail market and a catering market. Furthermore, the retail market can be split into the sale of fresh meat through supermarkets, butchers and farmers (farm sales).

(37) The parties have contested that split. They claim that there is full supply and demand substitutability between those channels. Furthermore, their price structure would be identical as there is one basic weekly price list from which negotiations on price start. However, the Commission considers that the fact that there is a basic price list is not necessarily an indication that those different channels should be considered as one market. First, the basic price list already consists of different columns with reductions or increases in view of the different clients or categories. Second, the parties often deviate from the "columns" in dealing with individual customers. Therefore, the fact that a basic price list exists is no indication that the parties could not price-discriminate between those channels.

(38) The catering market is defined as the sale of fresh meat to restaurants, canteens, government institutions and ship and airport chandlers. The distinction between a retail and a catering market is based, firstly, on the fact that the origin of the meat is less important for the caterers than for the retailers. The caterers prepare the meat to serve it to the final consumer as part of a ready-cooked meal and do not sell the fresh meat as such. Therefore consumer preferences with regard to origin are less important. This has led to a greater share of imports in the catering market than in the retail market. Secondly, there is no realistic possibility for arbitrage between the two markets in view of the differences in distribution (specialised distribution to caterers via relatively small wholesalers - direct supply by slaughterhouses to retail) and packaging (meat supplied to supermarkets is to a large extent already pre-packed and labelled with the necessary information for the supermarket client). Thirdly, the retail market needs to be supplied at all times with a full assortment of the different cuts of fresh pork and beef. Caterers typically only need the cuts for the meals included on their menus. Fourthly, it results from the Commission's market investigation that the few large catering wholesalers who buy their meat [less than 10 %](8) cheaper than some of the retail clients, in particular smaller supermarkets and butchers, do not sell a single kilogram of pork to the retail market.

(39) In the retail sector, fresh meat is sold to the final consumer through supermarkets and butchers. Those channels differ in so far as a substantial part of butchers (some 100 out of the around 820 Danish butchers(9) themselves slaughter the live animals or purchase their meat from local private slaughterhouses operated by butchers. Although the parties state that the fresh pork products supplied to butchers and supermarkets are the same, butchers buy more half- or quarter-carcases or main cuts than supermarkets. Furthermore, the sales price of the slaughterhouses to butchers is typically some [less than 10 %](10) higher than the price to supermarkets, including small supermarket outlets. The parties consider that those price differences are a result of differences in volume, trade structure (spot- or framework-agreement basis) and buying power. The butchers' retail prices are some 20 to 25 % more expensive for pork, beef and lamb than those charged by supermarkets and up to 50 % more expensive for poultry and processed meat products.

(40) The Commission considers that it can be concluded on the basis of the above that butchers and supermarkets constitute a distinct market. However, it can be noted that the competitive assessment would remain the same whether one considers a separate supermarket market or a combined retail market since butchers account only for around 10 % of the combined retail market(11).

(41) So-called farm sales whereby farmers sell bigger quantities of up to a half or quarter carcase of their own animals directly to the final consumer can be distinguished from the retail market. Whereas both supermarkets and butchers sell meat in various cuts and offer the consumer the possibility to purchase relatively small quantities (typically covering the required quantity for one family meal), farm sales, whether further cut or not, will have to be stored in the consumer's freezer. Farm sales do not therefore constitute a direct substitute for the "typical" buyer of small quantities and obviously do so even less for consumers living in cities(12).

(42) In conclusion catering and farm sales constitute separate relevant product markets. The same conclusion can be reached for supermarkets and butchers; however, the competitive assessment would not be different for a separate supermarket market or a combined retail market.

(c) Processed meat

(43) A processed meat product can be defined as meat from mammals or birds, containing external ingredients such as salt or spices, being raw, dried, smoked or cooked. In view of that additional processing of the meat, whereby up to 20 % of the weight of the final processed product comes from external ingredients and whereby meat from different species is often mixed, the Commission considers that processed meat products are to be distinguished from fresh meat. This view has been confirmed by the Commission's market investigation where a substantial majority of meat wholesalers, supermarkets, meat processors and cutters have indicated that consumers, when faced with a 5 to 10 % price increase for fresh pork or fresh beef, would not switch to processed meat products. In addition, the ultimate consumer does not "perceive" the processed meat product as resulting from a slaughtered animal and is not able, for a large part of processed meat products, to see the intrinsic qualities of the originating meat (leanness, colour, tenderness, type of breed and very often even the type of species - pork/beef/poultry).

(44) With regard to processed meat products, the information from the parties indicates that all processors are able to use all processing techniques (drying, smoking and cooking) on meat from all species. That supply-side substitutability would, therefore, tend to support the conclusion that there is an overall processed meat product market. However, it is not necessary for the purpose of the present assessment to reach a final conclusion on the exact scope of this market, as it will not affect the assessment of the operation.

(d) Collection of abattoir by-products

(45) This activity concerns the collection, processing and marketing of inedible animal waste/by-products from farms and the meat industry as well as the collection and destruction of dead animals. Those by-products are converted into meat meal, bone meal, animal fat, hides from dead animals and blood products.

(46) With regard to the collection of abattoir by-products, Community legislation distinguishes high-risk material from low-risk material. To obtain high-risk material, a rendering plant must be licensed for that purpose. A high-risk licensed plant has a general duty to receive and process specified risk material. All parts of slaughtered animals that are not veterinary-approved after slaughter are high-risk. High-risk material "by nature" is thus, for example, blood waste, animals dead from natural causes, pig hair, floor waste, rejected carcases.

(47) Low-risk material is material that is separated and has received veterinarian approval. Potential low-risk material is, for example, offal, head and fat, bones, rind and blood. It does not necessarily have to be delivered to a "high-risk licensed renderer", but can be supplied to, for instance, pet-food producers. However, if that potential low-risk material is not separated or has not received veterinarian approval, it is also high-risk material.

(48) As high-risk material can only be supplied to a high-risk renderer, the relevant product market, for the purpose of this case, is the high-risk material market(13). The parties agree with this conclusion.

(e) Conclusion

(49) On the basis of the above, it is concluded that there are separate markets for the purchase of live pigs and cattle for slaughtering, fresh pork and fresh beef. Furthermore, fresh pork and beef, respectively, can be subdivided into the sale to industrial processors and for human consumption. With respect to the latter, retail and catering are distinct markets. In the retail sector, fresh meat is sold to the final consumer through supermarkets, butchers and farm sales. It can be left open whether supermarkets and butchers constitute distinct markets, since the assessment would not be significantly different owing to the butchers' limited share of the retail market. Finally, with respect to abattoir by-products, the relevant product market is the high-risk material market. For the remaining products the market definition can be left open.

B. RELEVANT GEOGRAPHIC MARKETS

(a) The purchase of live pigs for slaughtering

(50) The parties consider that the geographic market for slaughtering of live pigs is "Northern EC", including Denmark, Germany, the Benelux countries and the southern part of Sweden(14). This geographic market definition is based on the possibility of transporting live animals for slaughtering. In this context it has been argued by the parties that: (i) the cost of transport is limited given that, for a distance of 1000 km, the cost would only amount to around 5 to 6 % of the product value; (ii) although Community legislation provides that animals have to be rested, fed and watered if they are transported for more than eight hours, specially adapted trucks make a 24-hour journey possible permitting transport distances of 1500 to 1600 km including loading and unloading, and (iii) it is the loading and unloading of the pigs, as opposed to the transport itself, which is the primary concern for the development of stress.

(51) The parties have also referred to the fact that the export of live slaughter pigs from Denmark mainly to Germany has increased from 188000 pigs in 1996 to around 307000 in 1998. Furthermore, it has been argued that the commercial reasons for transporting live animals from Denmark to Germany are that significant overcapacity of German slaughterhouses (around 30 %) exists and that German slaughterhouses and other Community slaughterhouses pay more than Danish slaughterhouses, although price fluctuations in one Member State are followed by the same trend in other Member States. Finally, it has been submitted that more than 5 million slaughter pigs are exported from one Member State to another of which, in 1996, some 2,8 million slaughter pigs were exported from the Netherlands to other countries, including almost 2 million to Germany (the bulk of those exports might be to slaughterhouses some 50 to 80 km from the Dutch border), but also some 360000 to Italy.

(52) However, the Commission investigation has resulted in the following findings with regard to the definition of the relevant geographic market.

(53) The first element is the "catchment area", i.e. the distance from which slaughterhouses obtain their pigs. The Commission's investigation has shown that Danish and foreign pig slaughterhouses buy 90 % of their live pigs within 120 km of their slaughterhouses.

(54) The parties have argued in the Reply (pp. 37 to 38) that this fact "is not sufficient to conclude that there is a separate Danish market for live pigs for two reasons. First, the observed pattern of local sourcing is quite consistent with effective substitution within the wider Northern European market in view of the low level of transport costs. Secondly, the parties contend that this pattern of local sourcing reflects historical supply arrangements and does not indicate the absence of effective competitive constraints over a wider area". However, it is the view of the Commission that the possibility for effective substitution and the resulting competitive constraints over a wider area are considerably limited for 94 % of Danish pig production as the farmers are subject to the cooperative obligations (see below). Even on the basis of a 120 km catchment area, the sourcing by Danish slaughterhouses of foreign pigs and by foreign slaughterhouses of Danish pigs is limited as can be seen from the import and export figures described below.

(55) Secondly, there are limited exports of Danish slaughter pigs and the exports are almost all to Germany. Moreover, those exports have remained rather limited despite relatively important price differentials between Denmark and Germany in 1996 and 1997. In 1995 exports accounted for less than 1 % of total production and the price differential with Germany was 0,57 %. In 1996 188000 slaughter pigs were exported accounting for less than 1 % of total Danish slaughter pig production(15) and the price differential was 4,3 %. In 1997 the figures were 245000 pigs accounting for less than 1,3 % of total production and a price differential of 4,9 %(16). For 1998, exports totalled 307000 pigs, accounting for less than 1,6 % of total production and a price differential of 2,5 % for the first 37 weeks (taken over the whole year the prices in Denmark were 0,24 % higher than in Germany).

(56) The parties contend that the above figures indicate a significant increase in the level of exports to Germany in the period 1995 to 1998 and that the total number further increased in 1998 when price differentials were considerably smaller than in 1996 to 1997 when the larger price differences were due to largely unanticipated special factors (BSE and Dutch swine fever).

(57) The Commission recognises that exports have further increased. However, they are still extremely limited if compared, for instance, with exports of Dutch pigs to Germany. For instance in 1996, the price in Germany was only 1,5 % higher than in the Netherlands (compared to the 4,3 % price difference with Denmark) and the Netherlands exported 1916201 slaughter pigs to Germany. Those exports account for some 15 % of the Dutch production of slaughter pigs, compared to less than 1 % of Danish production. It can thus be concluded that consistently higher prices in Germany during three years have not affected Danish exports to any significant extent.

(58) It can be noted that there is virtually no import of pigs for slaughtering into Denmark (almost 3000 pigs in 1997 and only 210 in 1998 - all from Sweden). This is probably the consequence of rules adopted by Danske Slagterier to avoid "contagious pig diseases". Those rules include the necessity for a slaughterhouse to have facilities that allow for the separation of foreign pigs from local pigs, and a price reduction of some 20 % for imported pigs. The parties submit that those rules do not prohibit the import of pigs for slaughter, but merely ensure that the veterinary status associated with for example United States Department of Agriculture (USDA) veterinary authorisations can be maintained at the relevant slaughterhouses. The USDA veterinary authorisations would allow for imports from Sweden, the United Kingdom and Ireland. The Commission recognises that those rules do not theoretically prohibit imports by the cooperative pig slaughterhouses, but, in reality, they make imports very difficult. The parties further state that private slaughterhouses, most of which have no USDA authorisation, can freely import animals for slaughter with no price deduction. Such imports have not taken place in the past as the relative prices have not provided an incentive to import pigs. The Commission accepts that the private slaughterhouses, accounting for 4 % of Danish slaughters, can import. It can, however, be questioned whether such slaughterhouses, of which the largest slaughters less than 200000 pigs per year, have the organisational structure to start such imports.

(59) Thirdly, no pig farmer joined a foreign cooperative or started export operations despite the opportunity given to the members of the parties to terminate their membership with immediate notice during a period of two weeks after the agreement of the parties to merge reached on 29 September 1998. The parties have informed the Commission that Steff-Houlberg benefited from that opportunity by accepting farmers, from Jutland and Funen, as members. Those members are expected to produce more than 600000 pigs.

(60) The parties submit that this phenomenon is not relevant as at that time German pig prices were below Danish prices and producers might have chosen a "wait and see" approach especially under the present weak market conditions. The Commission considers that this "wait and see" approach could be taken as a further expression of the traditional preference of the Danish pig producer for the stability associated with long-term contracts (i.e. membership of a cooperative - see below) versus the opportunities and risks associated with the spot market (i.e. non-membership). It can be observed that, in the past, if a cooperative was less successful than others, the matter was always resolved by a merger between "neighbouring" (Danish) cooperatives, rather than by the cooperative farmers starting to deliver to private slaughterhouses or to export markets.

(61) The Commission considers that the above factors are all an expression of the importance of the cooperative structure of pig slaughtering in Denmark and that, therefore, as far as buying live pigs in Denmark is concerned, the relevant geographical market is, at most, national(17). The four Danish cooperatives cover 94 % of slaughters of Danish pigs and that figure has been more or less the same for at least the last five years. The farmers, members of a cooperative, are subject to (a) an exclusive supply obligation vis-à-vis their cooperative, (b) a 12 to 24 months notice of leaving period and (c) a bonus payment accounting for 4 to 8 % of their total payment for the pigs supplied that will be handed out only once a year (see below). In addition to those "structural links", pig prices are very cyclical. The farmer therefore has to strike a balance between his position as a member of the cooperative today and his position as a non-member in a relatively uncertain economic environment. Thus, the cooperative farmer will have no opportunity to give any immediate response to a possible price change in the market. The fact that the farmer can, if he has given his notice to leave, withdraw his notice up to three months before it would take effect, does not change that conclusion because the farmer can still only leave once a year.

(62) At the oral hearing the parties presented data showing that prices of live pigs in Denmark in the past have moved together with prices of live pigs in other northern European countries. In particular the parties showed a graph of the quarterly price development of live pigs in Denmark, Germany, France, the Netherlands and Sweden, a graph showing the weekly German price for live pigs relative to the Danish price, and a calculation of the correlation coefficients on quarterly average prices of live pigs between Denmark and respectively Germany (0,97), the Netherlands (0,98) and Sweden (0,93). According to the parties, those price developments and correlation coefficients are evidence that prices for pigs in different countries show a marked tendency to move together over time, and this suggests that competitive constraints keep prices in line.

(63) The Commission has examined those data and has come to the conclusion that the price developments and correlation coefficients presented by the parties are not evidence of any competitive constraints on the parties on the Danish market for purchase of live pigs. First, it is noted that there may be common factors such as the development in feed prices, which to a certain extent cause the correlations. More importantly, as noted in recital 55, Danish exports of live pigs have only been in the range of 0 to 2 %. The low level of exports even in periods of price differences between Denmark and Germany is mainly due to the contractual obligations on farmers to deliver their pigs to the cooperative slaughterhouse of which they are members. Therefore, farmers in reality do not have the possibility to export live pigs in response to short-term price differences. Consequently, exports of live pigs do not have an impact on Danish prices of live pigs. In particular this means that if, for example, prices are higher in Germany than Denmark, then Danish prices will not increase in response to an increase in exports of live pigs to Germany owing to the restrictions on farmers which prevent such exports.

(64) Rather than competitive constraints the Commission found that the correlations between Danish live pig prices and the live pig prices in other countries can be explained by the way the Danish price is calculated. In particular it is noted that the weekly Danish price is a weighted average of the prices which the slaughterhouses achieve for meat on their various export markets. The Danish price is, therefore, owing to the high export share, mainly dependent on export prices rather than on domestic prices. The Danish price for live pigs is, therefore, automatically correlated with the prices of live pigs on the export markets. In other words the transmission mechanism for price fluctuations on the Danish market for live pigs goes via the price fluctuations on the downstream fresh meat markets abroad and is fed back on to the Danish market for live pigs through the weekly price quotation in Danske Slagterier. This link explains the price correlations. However, it also means that the parties' price correlations cannot be taken as evidence that the Danish market for live pigs is part of a wider northern European market for live pigs.

(65) On the basis of the above, it can be concluded that the purchase of live pigs for slaughtering is limited at most to Denmark.

(b) The purchase of live cattle for slaughtering

(66) The parties have also argued that the relevant geographic market for the purchase of live cattle is Northern Europe for the same reasons as indicated above for pig slaughtering. They have submitted that the cost of transporting cattle is somewhat greater, but that cattle can be transported more easily. The parties also estimate that the overall market will continue to decrease owing to Community milk quota limitations and the increased export of male calves from Denmark to the Netherlands.

(67) The Commission has examined the same factors for cattle as for pigs and has come to the conclusion that the indications in favour of a national geographical market are less clear.

(68) First of all, the "catchment area" for cattle could be somewhat larger (up to 200 km) and other slaughterhouses have indicated that transport could be made profitably from a distance of 300 to 350 km.

(69) Second, only half of the Danish cattle for slaughtering are produced by members of the three Danish cooperative cattle slaughterhouses (the parties and NV-OX(18). Therefore, half of the Danish cattle production is not subject to the cooperative rules (obligation to supply and notice to leave period), compared with 6 % of the pig production.

(70) Third, the price differences with Germany have been smaller for cattle than for pigs but, nevertheless, there is somewhat more cross-border movement. Exports of live cattle from Denmark accounted for some 9000 head in 1997, 1,2 % of total Danish cattle production for slaughtering (731600 in 1997) and imports into Denmark accounted for around 1,5 % in 1995 and 1996. With a few exceptions, prices have in general been higher in Denmark than in Germany.

(71) In addition, the parties are both active in North Germany where Vestjyske Slagterier operates a slaughterhouse and Danish Crown has a substantial number of cattle slaughtered on contract.

(72) In contrast to pig farmers, Danish cattle farmers do not need themselves to set up a direct contract with a foreign buyer of their animals. They can sell their cattle on (Danish) live cattle markets where approximately 20 % of Danish cattle is currently traded. On those markets foreign buyers (as well as private slaughterhouses and supermarkets) can buy the cattle.

(73) However, it is not necessary for the purpose of the present assessment to reach a final conclusion on the relevant geographical market, as even on the narrowest market, i.e. Denmark, the merger would not lead to a dominant position as a result of which effective competition would be significantly impeded in the common market.

(c) Fresh pork - supermarkets

(74) The parties argue that the geographic market for fresh pork covers, in view of the trade flow across Member States for pork (24 %) and in view of the CAP, at least the Community and that there is a trend leading to a world market. A few years ago there were larger differences in the products bought in the Community, Japan, the USA and eastern Europe. Today, most of those differences are said to be smaller. In all those markets pork products are bought in different cuts, but the cuts show only small variations in the same basic products.

(75) The parties play down the issue of national or geographic consumer preferences for meat as those preferences can be associated with:

(a) the consumer's intention to support the national industry: the parties acknowledge that at times of an agricultural crisis, national forces can be mobilised to support the national industry but such situations are generally short-lived as the social links between the modern consumer and the local agricultural sector are disappearing;

(b) tradition: the professional retail buyer is looking increasingly international. In addition, the parties are increasing their own sales in Germany and refer to the large imports of beef and processed meat products in Denmark, and

(c) the degree of consumer confidence in the safety or quality associated with the product: this issue is losing its link with geographical preferences (origin of the meat), but becomes more and more associated with objectively based quality-assurance systems such as those of the UK retail industry.

(76) Furthermore, according to the parties there are no barriers to entering the Danish market. In particular it is argued that: wholesale prices show a similar development between Member States; veterinary controls in individual Member States are based on Community law and are non-discriminatory; and finally pork can be imported into the Danish market by simply delivering to the distribution centres of supermarkets, which could then distribute the fresh pork to individual stores. In conclusion, Denmark should not be considered a separate relevant geographic market. Rather there is a Community-wide market for pork.

(77) The Commission investigation has not confirmed the view of the parties. Danish pork has in the past accounted for 99 % of total sales of fresh pork in supermarkets. This has not changed even when short-term price developments, say over a period of three to six months, have been markedly different on neighbouring geographic markets. In truly integrated geographic markets, it would be expected that price fluctuations would cause at least some trade flows simply in response to short-term price differences. However, this has not been the case. The parties have also produced price data based on the invoiced prices of the main cuts in countries such as Denmark, Sweden, Germany, and the United Kingdom. According to the parties those figures show that there has been a parallel development of prices on those markets. According to the parties it is always sought to sell a given product in a given week on the market which gives the highest price. Therefore, prices move in parallel. The Commission recognises this mechanism. However, it does not exclude that a dominant company on the Danish market for pork could keep a small but significant price difference between the Danish market and export markets, if there are barriers to imports (see below). It is, therefore, difficult to accept those price data as evidence of a market wider than Denmark.

(78) Furthermore, it seems quite clear that consumer preferences vary between countries. Differences occur at all levels: (a) preferred type of pork (lean/fat) with the related difference as to the preferred slaughter weight of pigs (lighter pigs in Denmark than in for example Germany), (b) differences in the typical consumption of specific parts of the pig, and (c) differences in the cuts of the same piece of meat.

(79) Moreover, there are other reasons, which explain why imports of pork into Denmark have been virtually non-existent in the past.

(80) First, it is not possible for imports simply to be distributed via the distribution centres of the supermarkets, as claimed by the parties. Rather according to the Commission investigation only the largest supermarket chain would have this possibility and, in this case, only for a part of their volume. Virtually all fresh pork sold in Danish supermarkets is distributed directly from the slaughterhouses to the stores either by the Danish slaughterhouses or by hauliers hired by the supermarkets. Therefore, the Danish supermarkets would have to invest in additional refrigeration and distribution facilities in order to import fresh pork.

(81) Second, all fresh pork (foreign and local) sold in Denmark is subject to a veterinary control for a special form of salmonella, namely Salmonella DT 104. The parties have stressed that this test is not discriminatory. However, no other country specifically tests this form of salmonella. In addition, only in Denmark and Sweden are there national programmes in place to contain salmonella levels in pork (the programmes cover farms and slaughterhouses). Therefore, importers (other than Swedish) face an increased risk, compared to the Danish producers, of being caught positively by the Salmonella DT 104 test as they do not routinely test for it in their total production, nor do they have in place a general salmonella reduction programme. The Salmonella DT 104 test is thus another barrier for imports of fresh pork.

(82) Finally, Danish consumer preferences for Danish pork are very strong. Danish supermarkets indicate the origin of the meat on the product because they consider that this is valuable information for their customers. This consumer preference, based, inter alia, on confidence in the strict Danish veterinarian regulations, makes it extremely difficult to convince consumers to purchase imported fresh meat. In the view of a clear majority of Danish supermarkets, and more than for any other meat type, the origin of pork is a relatively important to very important factor in the average consumer's purchasing decision. (see also Section VI.E.c below)

(83) At the oral hearing the parties presented data from Danish Crown showing that in the past, prices of fresh meat have shown similar movements in countries such as Denmark, Germany, Sweden and France. In particular the parties presented graphs showing the quarterly price development of middles, hams, fore-ends, and tenderloins in Germany, Denmark, Sweden and France. Furthermore, graphs were produced of the monthly price development of collarjoints, shoulders, and loins in Denmark and Germany. Finally, a number of correlation coefficients for those cuts between Danish prices and prices in Germany, Sweden and France were presented. Those correlation coefficients were in most cases higher than 0,9. Those data according to the parties show that wholesale prices for fresh pork products in different countries show a marked tendency to move together over time. This suggests, according to the parties, that competitive constraints keep prices in line across countries.

(84) The Commission does not agree that the data presented by the parties are indications that the Danish market for fresh pork sold through supermarkets is part of a wider Northern European or Community market for pork. First, the data are only from Danish Crown and therefore do not necessarily represent the overall market situation. Second, correlations are likely to reflect, at least partly, the price development in common input factors between countries, such as feed prices. Third, the prices are to some extent based partly on sales to processors as well as sales for human consumption (retail and catering). Since for sales to processors the market is wider than Denmark, this also explains some of the correlation between Danish prices and prices in other countries. Fourth, and most important, the Danish prices are to a certain extent automatically correlated with export prices owing to the way the Danish slaughterhouses optimise their revenue stream. According to the parties, the sales department of a slaughterhouse will always sell a given quantity of meat wherever it will receive the best price. This creates an incentive for the slaughterhouse not to sell at a cheaper price in Denmark than on its export markets. Therefore, prices in Denmark and on export markets would be expected to move together.

(85) In any event, in this particular case past movements in prices cannot be taken as evidence that the geographic market is wider than Denmark for the purpose of assessing the competitive impact of the proposed merger. As noted above, there are barriers to trade. Consequently, imports have only been around 1 % and imports have not taken place in response to short-term price differences between Denmark and other countries. In conclusion, due to the existence of barriers to trade, it is not credible that a higher price on fresh pork in Denmark than, for example, in Germany would lead to imports which would align Danish and German prices in this short term. Therefore, it is more appropriate to assess the impact of imports under potential competition. It is noted that the Commission did not find it likely that a dominant company on the Danish market would be challenged by imports if it attempted to maintain a higher price on the Danish market compared to its export markets (see Section VI.E.c).

(86) In conclusion, the Commission recognises that fresh pork is transported and traded internationally. Therefore, as a matter of principle, fresh pork from other Member States could be offered to Danish consumers through the Danish supermarkets. However, as set out above it is also recognised that there are barriers to imports which make it unlikely for imports to have a competitive impact in the short term on the Danish market for pork sold through supermarkets. This is also evident from the fact that international price fluctuations have not in the past resulted in any imports into the Danish market. In conclusion, rather than considering the market for pork to be a Community-wide market, it is more appropriate to consider the Danish market for fresh pork sold through supermarkets to be a separate relevant geographic market, and assess the potential impact of imports under potential competition (see below).

(d) Fresh pork - farm sales and butchers

(87) Those markets do not extend beyond Denmark since they are mainly supplied by small local private slaughterhouses. The parties are not active on the farm sales market.

(e) Fresh pork - the catering market

(88) In the catering sector, the competing Danish slaughterhouses consider that at least 85 % of the pig meat sold to caterers is Danish. The larger caterers indicated that they bought up to 20 % of imported meat, the smaller caterers somewhat less (1997 figures resulting from the Commission's market investigation). The parties claim, on the basis of an estimate from their own sales people and some contacts with some of the larger catering-wholesalers that, at the end of 1998, imports accounted for around 50 % of total sales(19). The origin of the meat is, according to wholesalers, a relevant factor in the purchasing decisions of the caterers for pork, especially for government institutes and hospitals for which it is very important. However, none of the caterers indicated the origin of the meat to the final consumer, and they had not faced any demands from their consumers to do so.

(89) It is not necessary for the purpose of the present assessment to reach a final conclusion on the relevant geographical market as even on the narrowest geographic market, namely Denmark, the merger will not lead to a dominant position.

(f) Fresh beef - supermarkets

(90) The Commission investigation indicates that there are strong consumer preferences in Denmark for beef of Danish origin. A clear majority of the responding Danish supermarkets, including the two most important supermarkets accounting for around half of the sales, consider the origin of the beef a relatively important to very important factor in the average customer's purchasing decision for beef. This consumer preference is also reflected in studies presented by the parties. Furthermore, the BSE-crisis has had almost no impact on beef consumption in Denmark. This can probably also be attributed to the strong confidence of the Danish consumer in the Danish veterinarian system.

(91) However, the Commission's investigation has shown that some 24 % of the consumption of fresh beef (retail and catering) is imported and the responding supermarkets sell around 20 % of beef of foreign origin. Although supermarkets and wholesalers alike have indicated that, despite those strong consumer preferences for beef of Danish origin, they must import beef because there is not enough high-quality Danish beef(20), the imported meat is sold in the supermarket at the same price and with the same presentation to the consumer. This tends to indicate that they are alternatives for the consumer.

(92) On the basis of the above, it is appropriate to consider that the relevant geographic market for fresh beef sold through supermarkets is wider than Denmark.

(g) Fresh beef - farm sales and butchers

(93) Those markets do not extend beyond Denmark since they are mainly supplied by small local private slaughterhouses. The parties are not active on the farm sales market.

(h) Fresh beef - the catering market

(94) The origin of the meat is, according to wholesalers, a relevant factor in the purchasing decisions of the caterers for beef, especially for government institutes and hospitals for which it is very important. However, imports are higher than in the supermarkets. In addition, none of the caterers indicated the origin of the meat to the final consumer, and they had not faced any demands from their consumers to do so. It appears, therefore, that the geographic scope of the catering market is wider than Denmark.

(i) Sale of fresh meat to processors

(95) The Commission investigation showed that, in general, meat processors can and do source their meat regardless of its origin. The geographic market is, therefore, wider than national.

(j) Processed meat products

(96) Although the origin of the processed meat products has been raised as a choice factor for certain processed meat products, consumer preference seems to be, overall, much less important than it is for fresh meat. Also the origin of the product is normally not indicated and even where it is, such as the sale of Danish origin bacon in the United Kingdom, it seems possible to exchange, to a large extent, bacon of Danish origin with, for instance, bacon of Dutch origin. Also in Denmark, supermarkets sell processed meat products (on the basis of pork) supplied directly by foreign processors and processed meat products of Danish processors that contain meat of non-Danish origin. The geographic market is, therefore, wider than national.

(k) Collection of abattoir by-products

(97) Community legislation prohibits the export of high-risk material. On the other hand, low-risk material may be exported and there is some import of low-risk material into Denmark.

(98) With regard to high-risk material, it can be concluded that, for the purpose of this assessment, the geographic market is at most Denmark.

(l) Conclusion

(99) It can be concluded that the market for slaughtering of live pigs and the market for high-risk material, respectively, is at most Denmark. The market for fresh pork sold through supermarkets is Denmark while the market for fresh beef sold through supermarkets is considered to be wider than Denmark. For the remaining products the geographic market definition can be left open.

VI. COMPATIBILITY WITH THE COMMON MARKET AND THE FUNCTIONING OF THE EEA AGREEMENT

A. OVERALL MARKET STRUCTURE

(100) In 1960, 62 cooperative slaughterhouses existed in Denmark. Over the years the number of cooperative slaughterhouses has decreased as a result of mergers and at present Denmark has four cooperative pig slaughterhouses (i.e. Danish Crown, Vestjyske Slagterier, Steff-Houlberg and TiCan). There are also 127 smaller private slaughterhouses. The four cooperatives account for 94 % of the slaughters of slaughter pigs, sows and boars of Danish origin (19153000 pigs in 1997)(21).

(101) Danish Crown and Vestjyske Slagterier are by far the leading slaughterhouses in Denmark. In comparative terms, they have a combined turnover which is almost 10 times larger than that of Steff-Houlberg and more than 30 times larger than that of TiCan. In terms of market share for the buying of live pigs, the parties slaughter almost six times more pigs than Steff-Houlberg and 15 times more than TiCan. As to slaughter facilities, Danish Crown has 12 facilities and Vestjyske Slagterier seven facilities, all located in the western part of Denmark. Steff-Houlberg has two slaughter facilities east of the Great Belt (Sealand and Bornholm) and TiCan has one slaughter facility in the north western part of Denmark. With respect to distribution, both Danish Crown and Vestjyske Slagterier, as well as Steff-Houlberg, have their own distribution systems covering Denmark while TiCan does not have its own distribution system.

(102) Furthermore, Danish Crown and Vestjyske Slagterier are vertically integrated for both pork and beef, in the sense that they are also active in the downstream markets for the sale of fresh meat, meat processing and meat trading. In comparison, TiCan is much less vertically integrated than the parties. The vertical integration in the private slaughterhouses and NV-OX stops at the cutting of the carcases of the slaughtered animals.

(103) Both parties also control or have an important shareholding in a number of sales companies which, apart from their own products, also sell products from the other competing Danish pig and cattle slaughterhouses, mainly to export markets such as the rest of Europe, Japan and the USA.

(104) In this context it should be noted that, prior to the merger, there were two main channels for the important export business of the Danish pig cooperatives (around 85 % of pork is exported). Foodane is a sales company fully owned by Vestjyske Slagterier and ESS-Food is owned by the three other cooperatives Danish Crown (70 %), Steff-Houlberg (17 %) and TiCan (13 %). In addition to ESS-Food, export sales of the two small cooperatives are channelled through DAT-Schaub, Tulip International (a meat processing company owned by Danish Crown) and their subsidiaries. In sum, the two remaining cooperative slaughterhouses will depend for a substantial part of their exports on the merged entity.

(105) Furthermore, as mentioned above, the cooperative resulting from the merger will also acquire sole control over a number of other companies in related markets which the other (cooperative) pig slaughterhouses have significant commercial relationships with: abattoir by-products (daka), casings (DAT-Schaub) and packaging materials, etc. (SFK). Steff-Houlberg is a member of DAT-Schaub and SFK while TiCan is a member of daka, DAT-Schaub and SFK.

(106) Finally, Danske Slagterier (Danish Bacon and Meat Council) is an association consisting of the four cooperative Danish pig slaughterhouses whose overall aim is to safeguard the interests of the cooperative pig slaughterhouses. The board consists of 12 members of which four members are the chairmen of the four cooperatives, and the other eight members are elected on the basis of the number of slaughters in each cooperative. In 1998, Danish Crown had five members (including the chairman), Vestjyske Slagterier had four members (including the vice-chairman), Steff-Houlberg had two members and TiCan one member. On that basis, the parties will clearly have the majority of members following the merger.

(107) In the Reply, the parties have submitted that all members of Danske Slagterier have minority rights in the most important decision-making body of the association, namely the Assembly of Delegates. No decision can be passed without the consent of the majority of the delegates of at least two members.

(108) First, it should be noted that without prejudice to the said rule, decisions by the Assembly of Delegates are adopted by simple majority. As the delegates are appointed by the members of Danske Slagterier in proportion to the number of pigs slaughtered in the previous accounting year, the parties will control a clear majority of the votes and have, therefore, the possibility to block the adoption of any proposal. Secondly, the powers of the Assembly of Delegates are limited to the election of the accountant, the approval of the annual accounts, the adoption of any submitted proposal, and amendment of the Articles of Association and winding up, which, however, requires a two-thirds majority. Furthermore, the Assembly may at the proposal of the Board of Directors elect two members of the Board of Directors. If no such proposal is made, all members of the Board are appointed by the members in accordance with a fixed formula, giving the parties the abovementioned majority. The Board of Directors can decide on all issues. Decisions are taken by simple majority. There is thus no minority protection at this level. Therefore, the parties have the power to adopt any decision and at the same time ensure that no conflicting decision is adopted by the Assembly of Delegates. Against this background, it is the view of the Commission that the parties will be able to exercise decisive influence in Danske Slagterier.

(109) The activities of Danske Slagterier relate to the entire supply chain from primary production to marketing. Those activities include a national breeding programme, which is at present being reviewed by the Danish Competition Authority, veterinary and health programmes, meat industry research within the framework of the Danish Meat Research Institute, trade and consumer information, and promotion of Danish pork on export markets. The activities of Danske Slagterier are funded from three main sources: a statutory production levy on all slaughter pigs produced in Denmark, a rebate from Danish land tax, and a membership fee.

(110) Thus, Danske Slagterier provides essential functions and constitutes a very important and integral part of the entire Danish pig sector. Moreover, the nature and extent of those activities create strong links and common interests between the four cooperatives. Following the merger, Danish Crown and Vestjyske Slagterier will control Danske Slagterier and thus also those activities of the main competitors, Steff-Houlberg and TiCan, which are carried out by Danske Slagterier, including the promotional activities on export markets.

(111) Furthermore, a national price quotation system has been established within the framework of Danske Slagterier. Thus, a Price Committee each week fixes a price per kilo, which according to the agreement must be paid by the four cooperatives to their members. This price is calculated on the basis of the actual sales prices obtained by the cooperatives. Every Wednesday, each company reports the prices obtained for ham, middles and fore-ends. The quotation is published each Friday with effect for the following week. In addition, Danske Slagterier fixes other price parameters such as the deduction for weight above or below the standard 67 to 78,9 kg for a pig and payment for meat percentage. The Price Committee is composed of the chairman and the managing director of each of the four cooperatives.

(112) The agreement establishing the national price quotation system has been notified to the Commission by Danske Slagterier. The agreement is currently subject to a separate procedure under Article 85 of the Treaty. In that context a warning letter has been issued.

(113) Given that the parties, after the merger, will be in a position to control Danske Slagterier, they will also have control over the price quotation system.

B. THE COOPERATIVE STRUCTURE

(114) According to the parties, the farmers are in control of the cooperative and can therefore prevent any exploitation of a dominant position vis-à-vis themselves. This would imply that the assessment of the competitive impact of the transaction on the farmers should be excluded from the present assessment. In order to assess this contention, account must be taken of the Danish cooperative structure.

(115) Danish cooperatives are in general not subject to any specific statutory company law and hence all relevant provisions governing the activities of the cooperatives are laid down in the Articles of Association of each cooperative. The main characteristic of a Danish cooperative society is that the farmer is both a co-owner of and a supplier to the cooperative. The largest members supply significantly below 1 % of total supplies. A member is obliged to deliver all the animals intended for slaughtering to that slaughterhouse on an exclusive basis while the latter in turn is obliged to buy 100 % of the member's production. The cooperative slaughterhouses can also buy animals from non-members even though this is rare for pigs(22).

(116) Every farmer can become, on simple request, a member of the cooperative for a particular species. However, a member cannot leave his cooperative as easily. According to the Articles of Association of Danish Crown as well as Vestjyske Slagterier, members can leave the cooperative with one year's notice expiring on 1 April without any penalty. A farmer has, therefore, to give 12 to 24 months' notice before he can leave. This notice can be withdrawn by the farmer up to three months before the expiry of the notice (1 April). If he rejoins, the farmer is tied back to the cooperative for another full notice period.

(117) All members of a Danish cooperative receive the same base price for their supplies, namely the price resulting from the weekly quotation organised by Danske Slagterier (see recital 111). In addition to this base price, a member receives also a share of the overall profit of the cooperative that is paid out once a year. This "residual payment" or "bonus" is set by the cooperative as an amount of x DKK/kg for each kilogram of carcase weight supplied by the farmer in the respective year. The residual payment for pigs has accounted in all cooperatives, during the last years, for between 4 and 8 % of the total price per kg paid to the farmer.

(118) In comparison and although there are some similarities between the Danish cooperative structure and those in other countries, the Danish system appears to impose more constraints on the farmer. By way of illustration, a Dutch slaughterhouse cooperative does not provide for exclusive supply and there is no term of notice to leave the cooperative. However, the cooperative is under an obligation to buy what the members wish to supply. If a member supplies his whole production to the cooperative, he is entitled to an annual bonus payment. However, this payment is only a fraction of the bonus payment that the Danish cooperatives pay out (NLG 0,40 or +/- EUR 0,18 per pig compared to DKK 0,50 per kg or +/- EUR 5 per pig), and therefore it constrains the farmer's freedom to supply much less.

(119) The merged entity will have a total of some 30000 members which means that the direct influence of the individual farmer is limited. The members will belong to one of a number of regional assemblies that, inter alia, elect a total of 509 members to the committee of delegates. Each farmer will have one vote. The committee of delegates is the decision-making organ of the cooperative, which appoints the members of the board and decides, inter alia, on the appropriation of profits. Each member of the committee has one vote. Decisions are taken by simple majority, except decisions on amendment of the statutes and merger, which require a two-thirds majority. Therefore, the vote of one member cannot be exercised directly, but only through a number of elected representatives. It would thus appear that the individual farmer has no real direct influence on the commercial conduct of the cooperative, let alone control over it.

(120) Furthermore, the cooperative neither owns the individual farmer nor does it assume any liability for his operations. Hence, the individual farmers and the cooperative constitute separate legal and economic entities and thus the sale and purchase of pigs and cattle are not done internally within one group. Therefore, it is necessary for the purpose of the present assessment also to take into account the buying position of the merged entity vis-à-vis the Danish pig farmers, including cooperative members, in the assessment of the competitive impact of the transaction.

C. THE PURCHASE OF LIVE PIGS FOR SLAUGHTERING

(a) Market shares

(121) The new entity will buy 76 % of the production of Danish live (slaughter) pigs (sows and boars). In this context, the addition of market shares is substantial given that Danish Crown at the moment has a share of 47 % while Vestjyske Slagterier has a share of 29 %. Their closest competitors, the two other cooperative slaughterhouses, have respectively 13 % (Steff-Houlberg) and 5 % (TiCan) of the market. Historically, those market shares have been very stable(23). The remaining 127 private slaughterhouses buy and slaughter 4 % of Danish slaughter pigs and 1,6 % of Danish pigs are exported.

(b) Actual competition

(122) The private Danish slaughterhouses are not realistic alternatives to the new entity. The 118 small slaughterhouses kill, on average, fewer pigs than the typical Danish farmer produces. Even the nine slaughterhouses licensed to export are too small to constitute a serious alternative to the new entity, as the largest of them accounts for only around 0,8 % of total slaughters. Steff-Houlberg and TiCan will not be sufficient alternatives to the parties in the future in order to avoid the creation of a dominant buying position. Both companies are working at full capacity. TiCan has had a waiting list for years and, in view of the location of its slaughterhouse in the middle of a town, it has limited possibilities to expand further. The intake of new members by Steff-Houlberg following the parties' agreement to merge has exhausted the possibilities of this company to expand capacity further with relatively modest investment levels.

(123) The parties argue that capacity can be expanded with limited costs (cost calculations have been provided) and that capacity will be increased when raw material supply is available. The Commission does not dispute that capacity has increased in Denmark in line with the increase in pig production. However, a distinction has to be made between the obligation for the cooperative slaughterhouses to increase their capacity to take on the increased production of their existing members and a capacity expansion to accommodate supplies of new members. The latter increase will only occur if the slaughterhouse can be certain that it will receive increased supplies in the short to medium term. Given that potential new members would normally be bound by a notice period if they have previously been a member of another cooperative, it is far from certain that the slaughterhouse would receive the supplies in question once the capacity has been increased. Such an investment would involve a considerable risk since it would involve important sunk costs. It can in this respect be noted that pig production in Sealand, the "home base" of Steff-Houlberg, has decreased proportionally compared to Denmark as a whole. This reduction has, as indicated above, now been "compensated by the approximately 600000 pigs produced by members who used the opportunity to leave Danish Crown or Vestjyske Slagterier in the two-week period following the announcement of the merger to join Steff-Houlberg. Those additional supplies have exhausted the possibilities of Steff-Houlberg to increases capacity at relatively modest investment costs. It is, therefore, unlikely that Steff-Houlberg will increase its capacity further to an appreciable extent in order to accommodate supplies of new members."

(124) In conclusion, the competitors currently present on the market will not be able to prevent the creation of a dominant position.

(c) Potential competition

(125) One of the effects of the exclusive supply obligation imposed on the farmers who are members of the cooperatives (and represent 94 % of the Danish production of pigs) is that other Danish as well as foreign slaughterhouses may be foreclosed from obtaining supplies, or increasing present supplies of Danish live pigs because the farmer can only deliver to his respective cooperative. Only if he terminates his membership, can he export, deliver to one of the private slaughterhouses or deliver to one of the other Danish cooperatives (provided that they have excess capacity). And the termination of the membership will take between 12 to 24 months.

(126) Furthermore, if the farmer were to switch, that would involve certain costs. Delivering to a Danish cooperative as a non-member means that the farmer foregoes the annual profit share (4 to 8 % of total payments to members). In practice, the farmer will thus be faced with the choice of remaining a member of his cooperative or of exporting everything to Germany (the cooperative Swedish Meats, accounting for 70 % of slaughters in Sweden, does not buy imported pigs). It is therefore not surprising that exports of live slaughter pigs from Denmark are so limited in spite of relatively long periods of consistently higher prices in Germany, where the slaughterhouses at present operate below full capacity utilisation. Consequently, for the vast majority of Danish pig farmers there are no real alternatives other than to remain a member of their cooperative.

(127) The parties have indicated that Danish cooperative pig farmers are very well informed about live pig prices in Germany, that the export infrastructure (transport companies who also act as middleman) is in place and that delivery contracts of a longer term could be negotiated. The underlying idea is, therefore, that exports to Germany should be considered as a realistic form of potential competition. However, the German market is to a very large extent a "spot market". The German slaughterhouses thus have to compete by way of their (weekly) prices for deliveries with neighbouring slaughterhouses and the farmers will thus decide who to supply on the basis of those prices. This is a completely different framework to the Danish system. It would, therefore, be a major decision for a Danish farmer to enter into the German system. Due to the uncertainties and risks associated with such a decision, it is unlikely that the German market will become an attractive alternative. Even the cooperative farmers who would want to "test" the German market will remain considerably hindered in their opportunities to do so in view of the exclusive supply obligation and the long notice period.

(d) Conclusion

(128) On the basis of the above, the Commission considers that the merger would lead to the creation of a dominant position on the Danish market for the purchase of live pigs for slaughtering. The concerns that the Commission identifies with regard to the creation of this dominant position do not relate to the possibility for the parties to extract monopsonistic profits from their suppliers as such profits would be shared out back to the farmer-members in the form of the "residual payment" or "bonus". The Commission's concerns actually relate, inter alia, to: (a) the parties' control of innovation in the Danish pig industry; (b) the reduction of choice for the farmers; and (c) the possibility for the parties to drive private slaughterhouses out of business. This latter strategy would enable the parties to capture the private slaughterhouses' market shares both on the Danish market for fresh pork sold through supermarkets and on the market for the purchase of live pigs.

(129) In recent years there has been a trend towards more innovation in product development involving breeding pigs, animal feed, etc. This should be seen against the background that consumers demand a larger variety of products (for example organic products) than previously. The parties have indicated that they are at the forefront of product innovation in Denmark with products for export as well as for the home market and that there is no reason why they should deviate from this strategy.

(130) However, the parties will achieve control over innovation in the Danish pig industry. Pig cooperatives that wish to introduce specific schemes for the production of speciality pigs (organic pigs, free-range pigs, and so forth) need to have the price rules for the payment of such pigs approved by the Board of Danske Slagterier. The parties' control of the Board gives them, therefore, the possibility to achieve control over innovation in the Danish pig industry. In view of the Danish consumers' preferences for meat of Danish origin (see below), this could lead to less innovation addressed to the specific needs of the Danish market. In this respect, it can be noted that some Danish supermarkets have, in the past, initiated direct contact with farmers (outside the cooperatives) in order to develop new products to the specifications of supermarkets.

(131) Furthermore, the merger will significantly reduce the choice of the farmers. Prior to the merger a farmer had at least the choice of supplying either Danish Crown or Vestjyske, both based on Jutland. If one of the cooperatives were to become less profitable than the others or if a (substantial) minority of the members were otherwise dissatisfied with its commercial strategy, they would have the possibility of terminating their membership and joining another cooperative. Following the merger, a substantial minority of the members of the new entity would in effect have no alternative. As indicated above, the two remaining cooperatives, Steff-Houlberg and TiCan, both run at full capacity and have waiting lists and the private slaughterhouses are not a real alternative. Following the merger, existing members would therefore be effectively locked into the new entity.

(132) The 127 private slaughterhouses, which collectively slaughter 4 % of Danish pig production, hold less than 40 % of the domestic market for fresh pork consumption (retail plus catering). The nine export-licensed slaughterhouses, accounting for three quarters of the production of the private slaughterhouses, depend on a very limited number of farmers for their supplies. By capturing a proportion of those limited product volumes, the new entity would be able both to substantially increase its share of the domestic market for fresh pork and to increase its market share at the buying level. It should be noted that: (a) deliveries from such suppliers are the only way in which a cooperative can attract new supplies of Danish pigs in the short term, since all other farmers are tied to a cooperative; and (b) capacity utilisation is very important in terms of profitability, making the private slaughterhouses all the more vulnerable if one of their few important suppliers fall away. Furthermore, by offering contracts to such non-members for the production of speciality pigs, the new entity could pay a higher price to those producers, without having to increase its purchase prices in general, and at the same time address specific and increasing demand in the market for such products, without destabilising the cooperative structure of the company. It would therefore appear to be a rational strategy for the new entity to exercise its economic power on the market for the purchase of live pigs for slaughtering by offering higher prices to farmers who currently supply the economically weak private slaughterhouses, depriving them of their commercial basis and thereby driving the latter out of business.

(133) In the Reply, the parties submitted that it would be contrary to the Articles of Association to offer higher prices to farmers currently supplying private pig slaughterhouses and that in fact none of the members of the parties would accept non-members being offered such contracts. More specifically, the parties argue that, according to the Articles of Association of Danske Slagterier, the cooperatives are obliged to follow its settlement rules, including the weekly price quotation. Those rules, which are adopted by the Board of Directors of Danske Slagterier, provide that all members are paid the weekly quotation and that non-members cannot be paid more than the quotation.

(134) However, the Commission does not consider that the settlement rules necessarily and effectively preclude a differentiation of the price paid to the farmers. First of all, as mentioned above, the settlement rules including the weekly price quotation have been notified to the Commission under Article 85 of the Treaty and a warning letter has been issued. It is therefore questionable whether those rules can provide a valid basis for the argument put forward by the parties. Furthermore, the Articles of Association of the parties merely refer to the settlement rules. The settlement rules themselves are adopted by the Board of Directors of Danske Slagterier and may be amended by the Board without necessitating an amendment of the Articles of Association of Danske Slagterier. It should be recalled that the parties appoint a clear majority of the members of the Board of Directors. The parties can thus amend the settlement rules at any time. Under the current settlement rules a slaughterhouse may, subject to approval by Danske Slagterier (the Board) conclude special contracts for the production of certain types of pigs and pay the farmer a supplement in addition to the weekly quotation to compensate him for the additional cost of producing such pigs. The parties claim that such contracts cannot be offered to non-members, as otherwise they would receive a price exceeding the weekly quotation, implying that the supplement not only covers actual costs but also includes an additional price incentive. Even if that interpretation is to be accepted, the present settlement rules could be amended, allowing such contracts to be granted to non-members, if the parties considered it to be in their commercial interest to do so. Finally, it is not obvious why it would not be in the interest of the members to accept the payment of a premium to non-members in the short term, if by doing so, the cooperative could increase its market share on the Danish market to the benefit of all members.

D. THE PURCHASE OF LIVE CATTLE FOR SLAUGHTERING

(a) Market shares

(135) As indicated above, even if the relevant geographic market is limited to Denmark, the merger would not lead to a dominant position as a result of which effective competition would be significantly limited in a substantial part of the common market.

(136) The parties will buy, as a result of the merger, 58 % of Danish live cattle for slaughter. The addition of market shares is substantial given that Vestjyske Slagterier at present accounts for 36 % of the market while Danish Crown has a market share of 22 %. As 45 % of supplies of cattle to Danish Crown are made by non-members, the parties' "guaranteed" supplies by cooperative members account for 48 % of Danish live cattle for slaughter. The nearest competitors slaughter 9 % and 8 % of Danish live cattle for slaughter respectively. The competitor with 8 % is NV-OX with whom the parties are in merger negotiations. If the merger with NV-OX goes through, the parties would increase their market share by a further 4 to 5 % accounted for by the direct supplies to the slaughterhouse by the cooperative members and non-members(24). The six other slaughterhouses with an export licence have a market share of between 1 and 3 %. The remaining 10 % of slaughters take place at non-export slaughterhouses and farm slaughters. Steff-Houlberg and TiCan do not have cattle slaughter activities.

(b) No significant limitation of effective competition even on a Danish market

(137) It is acknowledged that the other cattle slaughterhouses all have market shares below 10 % and that all, with the exception of NV-OX, are private slaughterhouses(25) with the competitive disadvantage that their supply is less secure than that of the parties which can rely heavily on the guaranteed supplies from their members.

(138) However, cattle production in Denmark is decreasing and expected to continue to decrease. On the other hand, consumption is stable. The private Danish slaughterhouses have access to half of the Danish cattle production that is accounted for by non-members of a cooperative, compared to only 6 % of the pig production. From the perspective of the farmers, it can be concluded that the non-members supplying cattle to a cooperative and the individual cooperative cattle farmers (or a substantial minority(26) of them) have a viable alternative in selling their production on live cattle markets where currently 20 % of cattle are already sold (and typically bought by private slaughterhouses, supermarkets and possibly exporters)(27) or directly to the private slaughterhouses.

(139) In addition, one of the larger Danish supermarkets is also active in this market. It purchases itself Danish cattle on the cattle markets and has them contract-slaughtered at the private slaughterhouses. It is also directly involved in contract-production of calves.

(140) It is, therefore, concluded that, even if the relevant geographical market is Denmark, the merger would not lead to a dominant position as a result of which effective competition would be significantly limited.

E. DANISH MARKET FOR FRESH PORK SOLD THROUGH SUPERMARKETS

(a) Market shares

(141) The parties estimate that the total Danish fresh pork market (retail plus catering) is at least 111000 t. The Commission subsequently attempted to verify this figure and to establish the main sources of uncertainty affecting the estimate. The Commission's market investigation confirms that the figure of 111000 t is a realistic estimate of the total Danish fresh pork consumption.

(142) The parties have expressed doubts as to the reliability of parts of the calculation concerning sales of fresh pork for final consumption (see the table at Annex), in particular with regard to the estimate that imports in supermarkets account for only 1 %. In particular, they questioned whether the Commission has correctly allocated the estimated total imports of 42000 t pork in Denmark in 1997 over the different markets and whether the Commission has included in its calculation certain information which the parties obtained from several supermarket chains.

(143) The Commission's market investigation consisted in sending out questionnaires to all Danish slaughterhouses, to all meat wholesalers (including importers and "cutters") known by the parties and to all the major supermarket chains plus some smaller supermarket chains. A limited number of questionnaires has been sent to Danish meat processors and Danish meat exporters. This has enabled the Commission to estimate: (a) the total sales of pork of Danish origin over the different retail and catering markets; (b) total purchases by supermarkets (Danish and imported meat); and (c) sales through caterers and butchers. 20500 t sales of fresh pork to butchers have been reported by the cooperative slaughterhouses, a butcher association's wholesaler (Mesterslagteren) and the private slaughterhouses (based on the extrapolation of the replies of the private slaughterhouses). However, the figure of 20500 t has been halved in the table in the Annex in view of double counting with regard to the Mesterslagteren' sales and in view of the fact that a substantial part of the meat sold to butchers is further processed by them. Indeed, the highest estimate of sales by butchers is that they account for 10 % of total retail sales. Also the meat resulting from "contract-slaughters" by the private slaughterhouses for the owner of the animal where the meat would be consumed by the owner (or sold as "farm sales") and the sales by the cooperative slaughterhouses to their employees have been taken out of the total 111000 t.

(144) On the basis of the replies of the parties, the other cooperative slaughterhouses, the private slaughterhouses (extrapolation), the wholesalers and the supermarkets, it can be concluded that supermarkets sell at least some 76300 t of fresh pork. Sales of pork of foreign origin account, on the basis of the replies of the Danish supermarkets, for less than 1 % (volume and value). Based on the assumption that the total market accounts for 111000(28), that catering accounts for 15 % and that butchers account for around 10 % of retail, total supermarket sales would account for 84350 t. The Commission considers that it is reasonable to assume that the purchases of supermarkets that did not reply to the Commission's questionnaires and from wholesalers that did not reply to the Commission's questionnaires account for the "missing" 8050 t(29).

(145) As the Commission's market investigation did not focus on imports by meat processors and meat exporters (who also re-export meat that they imported), the Commission cannot allocate the total estimated imports of fresh pork in Denmark over the different trade channels. However, imports by the responding supermarkets, covering small, medium-sized and large supermarket chains, account for 1 % of their total fresh pork sales(30).

(146) On the basis of the above methodology, it is estimated that Danish supermarkets sell around 84350 t of pork. The parties will account for a market share of around 40 % (direct and via wholesalers). The addition of market shares is important: Danish Crown [20 to 25 %](31) and Vestjyske Slagterier [15 to 20 %](32).

(b) Actual competition

(147) As a result of the merger, the supermarkets will only have one other main alternative supplier, the other cooperative, Steff-Houlberg, which accounted in 1997 for less than 30 % of their purchases. Furthermore, it should be noted that the third major cooperative slaughterhouse TiCan does not constitute a real supply alternative to the supermarkets ([less than 5 %](33) market share). TiCan only has a small product portfolio compared to the other cooperatives which only allows it to compete on the Danish market in the local market of north west Jutland and its supplies to "retail-wholesalers" are also limited. The 127 private slaughterhouses together account for less than 30 %. Although some of the larger of those slaughterhouses can to some extent serve as a third, fourth or fifth supplier to local outlets of a particular supermarket chain, none of them has the necessary volume, cutting, packaging or distribution facilities to enable them to compete on an equal basis with the parties. Actual competition will, therefore, only come from Steff-Houlberg. The merger will, therefore, result in the creation of a duopoly consisting of the parties and Steff-Houlberg, which together will have about 70 % of the market.

(148) The Commission considers that it is unlikely that Steff-Houlberg will be able to further increase its market share as a result of the merger, since to the knowledge of the Commission, no major supermarket has previously had only Danish Crown and Vestjyske Slagterier as their main suppliers. Accordingly, Steff-Houlberg will not be able to attract new customers who want to maintain a multi-sourcing policy as a consequence of the merger. Furthermore, Steff-Houlberg already has, in view of its overall position at the slaughtering level (13 % of all slaughtered pigs), a very strong position in the home market. It is also located on Sealand, close to the major population area in Denmark (Copenhagen) where it has a very strong position.

(149) The Commission has examined the likely future competitive relationship between the parties and Steff-Houlberg. As set out below, rather than a competitive duopoly, the operation is more likely to lead to the creation of a duopolistically dominant position, where the duopolists together have about 70 % of the market.

(c) Potential competition

(150) The Danish slaughtering sector has undergone a consolidation process over the last 40 years leading to a higher and higher concentration of the sector. There have been no significant new entrants to the industry other than small scale entries (a butcher requesting his slaughter permission). Furthermore, as a result of the operation the parties will effectively control access to the necessary raw materials owing to the structure of the cooperatives (see the market for purchasing live pigs above). It is, therefore, unlikely that there will be any new entrants in the future.

(151) Imports are the most important source of potential competition. T