Commission Decision

of 30 October 2001

declaring a concentration to be incompatible with the common market and the EEA Agreement

(Case No COMP/M. 2416 - Tetra Laval/Sidel)

(notified under document number C(2001) 3345)

(Only the English text is authentic)

(Text with EEA relevance)

(2004/124/EC)

CONTENTS

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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 1310/97(2), and in particular Article 8(3) thereof,

Having regard to the Commission's decision of 5 July 2001 to initiate proceedings in this case,

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

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

Having regard to the final report of the Hearing Officer(4) in this case,

Whereas:

(1) On 18 May 2001, the Commission received a notification pursuant to Article 4 of Regulation (EEC) No 4064/89 (the Merger Regulation) of a proposed concentration whereby Tetra Laval SA, France, belonging to the group Tetra Laval BV (Tetra), the Netherlands, intends to acquire within the meaning of Article 3(1)(b) of the Merger Regulation control of the French company Sidel SA (Sidel) by way of a public bid announced on 27 March 2001.

(2) After examination of the notification, the Commission concluded that the notified operation fell within the scope of Regulation (EEC) No 4064/89 and that it raised serious doubts as to its compatibility with the common market and the EEA Agreement. On 5 July 2001, the Commission decided in accordance with Article 6(1)(c) of the Merger Regulation to initiate proceedings in this case.

(3) On 10 September 2001, the Commission adopted a decision pursuant to Article 11(5) of the Merger Regulation requiring Tetra to reply to a request for information relating to its competitive position on the markets for extrusion blow-moulding machines (EBM), high-density polyethylene (HDPE) aseptic filling machines, HDPE non-aseptic filling machines, aseptic HDPE bottles and non-aseptic HDPE bottles. Tetra supplied the requested information on 11 September 2001.

(4) The Advisory Committee discussed the draft of this Decision on 19 October 2001.

I. THE PARTIES

(5) Tetra, the notifying party, is a privately held group of companies, which is active in the design and manufacture of equipment, consumables and ancillary services for the processing, packaging and distribution of liquid-food (known as the Tetra Pak packaging business). Tetra's business includes traditional carton packaging, where it is the worldwide market leader, and more limited activities in the plastic packaging sector. Tetra is also engaged in the supply of equipment, systems, accessories and consumables to dairy farm production and animal husbandry (known as DeLaval).

(6) Sidel is a company involved in the design and production of packaging equipment and systems, in particular, blow moulding machinery, barrier technology and filling machines for PET (polyethylene terephthalate) plastic bottles. Sidel is the worldwide leader for the production and supply of blow-moulding machines. The company also has activities in engineering, conveying, overwrapping and palletising, health and beauty.

II. THE OPERATION AND THE CONCENTRATION

(7) On 27 March 2001, Tetra Laval SA announced a public bid for all outstanding shares in Sidel. Tetra Laval SA is a privately held company established under French law for the purpose of holding Sidel's shares acquired through the public bid. It is a wholly owned subsidiary of Tetra.

(8) Tetra Laval SA's bid for Sidel was for cash at a price of EUR 50 per share. This represented a 32 % premium to the three-month average share price and a 52 % premium on the 21 March 2001 share price but was significantly lower than the average Sidel share price over a period of three years. The bid valued Sidel at approximately EUR 1,9 billion and was financed through the existing credit lines and internal resources of Tetra. The board of directors of Sidel unanimously recommended the acceptance of the bid.

(9) In accordance with French law, the bid was unconditional. Pursuant to the bid, approximately 27,1 million shares, approximately 81,3 % of outstanding Sidel shares were tendered to Tetra Laval SA. In addition to those shares, Tetra Laval SA has also acquired approximately 3,5 million shares in Sidel either on the open market or in individual purchases from major shareholders. As a result Tetra currently holds 92 % of Sidel's shares.

(10) The proposed acquisition, whereby Tetra acquires sole control over Sidel, constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation.

III. COMMUNITY DIMENSION

(11) The undertakings concerned have a combined aggregate worldwide turnover of more than EUR 5 billion(5) (Tetra EUR [...]*(6) and Sidel EUR [...]* in 2000). Both Tetra and Sidel have a Community-wide turnover in excess of EUR 250 million (Tetra EUR [...]* and Sidel EUR [...]* in 2000), and they do not achieve more than two thirds of their aggregate Community-wide turnover within one and the same Member State. The notified operation therefore has a Community dimension within the meaning of Article 1(2) of the Merger Regulation.

IV. COMPATIBILITY WITH THE COMMON MARKET

A. GENERAL DESCRIPTION OF THE LIQUID-FOOD PACKAGING INDUSTRY

1. INTRODUCTION

(12) The competitive impact of this operation will be primarily in the liquid-food packaging industry. This is the industry sector where the parties focus their activities. The parties are mainly active in two segments of the liquid-food packaging sector: plastic, in particular PET packaging, and carton packaging. The discussion of the industry will therefore focus on these two sectors. A detailed analysis of the relevant product markets is set out in Section IV.B.

(13) Liquid-food packaging is a complex industry which includes a number of different technologies and equipment. Liquid foods (water, dairy products, juices, carbonated soft drinks, etc.) can be packaged in different packages. There are four major packaging materials used for liquid-food packaging: carton, plastic (including PET and HDPE), cans and glass.

(14) Increasingly, beverage companies use a mix of different materials to package their products, for example, Coca Cola can be found in glass, PET and aluminium cans. To a large extent, the technology and kind of package that can be used for the packaging of a given liquid is determined by the liquid's characteristics. In addition, in some cases consumer preferences and tradition dictate the choice of material, for example almost exclusively glass for wine and champagne. Price is also a relevant factor. The graph set out below shows the diversity of packages used by beverage companies across the world to package the same liquid, iced tea.

Source: Canadean Iced tea Report 2000

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2. IN-HOUSE PACKAGING AND PACKAGING BY CONVERTERS

(15) Liquids are packaged in two main ways: in-house by the liquid producers themselves and by "bottle converters". In-house packaging requires the purchase of packaging equipment and installation of packaging lines at the premises of the beverage company. By contrast, converters produce empty packages, which are then either filled by filling companies or sold to beverage companies for filling in-house. A mid-way system is the "hole-through-the-wall" arrangement whereby a converter will install machinery next to the premises of the beverage company and will produce bottles, which are literally conveyed through a hole in the wall to the beverage company for filling. Converters include companies like Schmalbach-Lubeca, Pechiney and Crown Cork & Seal.

(16) There are differences in the mix of in-house or converter activity across the four major packaging materials. Carton packaging mainly takes place in-house in a single stage, which combines creation of the package and filling. PET is mainly blown and filled in-house in two different steps but PET bottles are also produced in large numbers by converters. Virtually all glass and cans are manufactured by converters.

(17) In order to package a liquid there is a need for a number of specific pieces of equipment and inputs, from the raw material (plastic resin preform, aluminium, carton, glass) to the machine which creates the empty package to a filling machine that fills and seals the liquid including conveying machines, closure applicators and other secondary equipment. Equipment suppliers sell their machinery to beverage companies for in-house production and to independent converters.

(18) Sales of equipment are usually in the form of individual bids. This may be on invitation for tender or following a direct approach for a quotation. The final price will be determined in negotiations with customers and will depend on factors such as type of machine, capacity, customer specifications, servicing and consumables and negotiating power.

(19) The parties have activities in the carton packaging sector and the plastic (PET and HDPE) packaging sector. It is therefore useful to present the different stages and equipment necessary for carton and plastic packaging of liquids.

3. PET PACKAGING

(20) PET is a resin material. PET bottles are transparent bottles familiar to consumers mainly as bottles used for mineral water and carbonated soft drinks (CSDs). Packaging of liquid-food in PET bottles requires a combination of distinct machinery and, if required, a barrier technology. There are three distinct stages in the packaging process: (a) production of plastic preforms, the preproduction tubes used to make PET bottles; (b) production of empty PET bottles using the plastic preforms in specialised stretch blow-moulding machines and (c) filling of the finished PET bottles with the liquid using a dedicated filling machine. Beverage companies usually produce and fill PET bottles in-house. Beverage companies also buy empty PET bottles from converters.

(21) A typical PET packaging line includes the following machinery:

Injection machines: Preforms are produced from resin in injection machines(7). Special machines are used to make preforms with enhanced barrier properties. Preforms are usually produced by converters and are sold as a commodity to beverage companies. The price of standard (non-barrier) preforms depends heavily on the price of resin on the open market. Preforms with barrier properties are not commodity products.

Stretch blow-moulding machines (SBM machines): SBM machines are complex pieces of equipment that produce finished PET bottles by stretching and blowing the PET preforms in a mould which gives the bottle its shape (stretch blow-moulding).

Filling machines: The PET bottle is filled either aseptically(8) or non-aseptically by dedicated filling machines. Non-aseptic PET filling machines are generally used for carbonated drinks, mineral water, edible oils and fresh milk. Aseptic PET filling machines are used for ambient juices, fruit or flavoured still drinks, ready-to-drink tea and coffee drinks and liquid dairy products. In case of aseptic filling, the bottles are sterilised and closed with pre-sterilised caps.

Secondary line equipment: After being filled, PET bottles are capped, labelled and packaged onto pallets with the appropriate overwrapping. Cap applicator: In direct connection to the filling machine, the closure applicator applies the closure to the bottle. Depending on closures and models of filling machines, this can also be done within the filling machine. Labeller: After filling and capping, the bottles are labelled with the individual product label (paper or plastic). Shrinkwrapper: For the purposes of facilitating further transport, storage and display of the bottles, they are in some cases wrapped together (for example, in packs of six bottles) in plastic film. These machines are called shrinkwrappers, sometimes also film wrappers or film applicators. Cardboard packer: Again, for the purpose of facilitating further transport and storage, the bottles are then, in some lines, packed into cardboard or plastic trays in a cardboard packer. These machines are sometimes called case packers or wrap-around packers. Palletiser: Finally, the end of the line is the palletising, by which the bottles in multipacks, cases, trays or crates are loaded for transport. The pallet is wrapped with a stretchable plastic film that binds the pallet together for protection during transportation.

Between the SBM machine and the filling machine the bottles are transported on air conveyors, i.e. transport chains gripping the bottles by their neck ring and transporting them by air blown under the neck. Between the other machinery the bottles are transported on slat-chain or standard belt conveyors.

Barrier

(22) For oxygen sensitive products (such as juices or beer), the gas barrier properties of a PET bottle need to be enhanced. One of the basic technical differences between PET and other materials used for liquid-food and beverage packaging is the fact that PET is gas-permeable(9).

(23) To enhance the barrier properties of PET, a barrier technology is applied onto the standard PET bottle. Different barrier technologies have been developed. Barrier technology is not specific to any particular kind of SBM machine. Barrier technology is either embedded in the material used for the preform, added to the preforms or applied on the finished bottle once the SBM machine process has finished. In all cases, standard SBM machines are used. However, in cases where the barrier is not contained in the preforms themselves but is simply added onto the finished PET bottle, a separate dedicated barrier coating machine is required.

(24) For light-sensitive products such as UHT white milk a light barrier needs to be added. Light barrier technology involves using pigmented PET or a sleeve covering the PET bottle.

4. HDPE PACKAGING

(25) HDPE is a high-density polyethylene plastic material. Unlike PET, HDPE does not have a completely transparent glass-like appearance but is rather "cloudy". HDPE is familiar to consumers as a packaging material for mainly UHT milk, especially in the United Kingdom.

(26) HDPE is produced in a similar way to PET but using different machinery. HDPE bottles are produced by EBM machines. HDPE bottles are filled by dedicated aseptic and non-aseptic HDPE filling machines.

5. CARTON PACKAGING

(27) Carton packaging consists of introducing pre-manufactured but not yet folded (flat) carton material into a single carton filling machine in which it is both folded and filled.

(28) It is important to note that carton packaging follows a supply route, which is different to that for PET packaging. Unlike PET with its distinct stages of production (preforms, empty bottles, filling), the liquid-food carton business is one of integrated pack construction, filling and sealing often referred to as form-fill-seal. All these operations are done on one carton packaging machine within the beverage company's factory. The carton machine supplier, for example, Tetra, in general provides the machinery as well as the blank cartons (flat carton or carton reels that will be shaped by the machine in the form of the final package). There are distinct aseptic and non-aseptic carton machines and the distinction between aseptic and non-aseptic carton packaging runs throughout the packaging process from the creation of the flat carton to its folding and filling.

(29) A typical carton packaging line includes the following major pieces of machinery:

Carton filling machine: The filling machine both folds and fills the cartons, which are either pre-manufactured flat, "blanks", or, for Tetra's aseptic machines, are supplied in reels. When carton packages are designed to have plastic caps, these are in some cases entirely or partly applied in the filling machine but in most cases are applied by a cap applicator.

Cap applicator: The cap applicator applies plastic openings to cartons that are designed to have such caps (mainly the "gable-top" cartons). Shrinkwrapper: For the purposes of facilitating transport, storage and display of the cartons, they are in some cases packed together in plastic film by a shrinkwrapper, are also called a film wrapper or film applicator. Tray packer: For the purpose of facilitating further transport and storage, the cartons are then packed into cardboard or plastic trays in a tray packer. These machines are sometimes called case packers or cardboard packers. Palletiser: The end of the line is often the palletising stage, where the cartons are loaded on pallets for the final distribution.

Each machine is linked to the next by a conveyor. In carton packaging lines these are mainly flat-type conveyors, where the cartons "stand" on a moving belt.

B. RELEVANT PRODUCT MARKETS

1. INTRODUCTION

(30) Tetra took the view in the notification that the present transaction concerns the sector of manufacture and supply of equipment used for packaging liquid-food in PET bottles because this is the sector in which there are horizontal overlaps in the parties' activities with regard to specific pieces of equipment. Tetra has thus identified three horizontally affected markets within the PET packaging equipment sector: low-capacity SBM machines, barrier technologies and aseptic PET filling machines. Tetra considers that the relevant product markets for analysing the transaction are no wider than those three markets. Tetra maintained this view in the reply to the Commission's statement of objections dated 21 September 2001 (the reply) and at the oral hearing on 26 September 2001 (the oral hearing). Tetra further argued that PET packaging systems and equipment and carton systems are not closely related markets and that a variety of packaging materials are used to market and package liquid foods: carton, PET, HDPE, glass and cans. Tetra argued that each of these packaging materials forms a distinct product market.

(31) The Commission notes that the activities of Tetra and Sidel cover a very wide area of the liquid-food packaging equipment sector and both parties describe themselves in terms of their overall presence in the liquid-food packaging sector. Both parties are active in SBM machinery, barrier technologies, aseptic PET filling machines and secondary PET equipment (conveyors, etc.).

(32) In addition, Sidel also manufactures moulds (a shaped piece of equipment in the blow moulder in which the hot preform is stretched and blown to form the final PET container), non-aseptic PET filling machines, PET hot-filling machines, EBM machines (which produce HDPE bottles), aseptic and non-aseptic HDPE filling machines(10), secondary line equipment and distribution packaging equipment.

(33) Tetra's main business focuses on carton packaging where it is by far the biggest player in aseptic carton packaging machines and aseptic cartons as well as non-aseptic carton packaging machines and non-aseptic cartons. Tetra is also active in the processing of liquid-food. In the plastic packaging sector, Tetra also produces PET preforms, HDPE bottles and plastic beverage bottle closures. Tetra is also active in the market for EBM machines through an [...]* agreement with Graham Engineering Corporation (Graham), USA [...]*. Graham machines are fully adaptable for customised HDPE bottles for pasteurised, extended shelf-life and aseptic products. Tetra has also developed a linear aseptic EBM filling LFA-20, designed to package UHT milk and juice. The machine does not require a "clean room" but incorporates a very small internal aseptic chamber reducing the customer's investment and operational costs.

(34) The Commission considers that, whilst the direct horizontal overlaps of the parties' specific pieces of equipment may be a meaningful starting point in the analysis of the relevant market, it is important to place the analysis in the context of "the general market in systems for packaging liquid-food products"(11). This becomes even more pertinent in this particular case given the parties' many and varied activities in the liquid-food packaging sector as a whole.

(35) The Commission has considered the market for packaging of food and beverages in a number of previous decisions(12). In many of the previous decisions(13) the Commission did not come to a definitive conclusion on the definition of the relevant product market but proceeded on the basis that the market should be divided according to packaging material and hence packaging equipment (separate market for glass packaging, for carton, etc.). However, in several decisions(14) the Commission has also indicated that the liquid-food packaging market is complex and that end-use and other criteria may be relevant for market definition.

(36) The Commission is bound to consider how the market is functioning and the appropriate definition of the relevant market based upon the past, current and likely future situation of the packaging industry. It is therefore necessary to start the analysis of the relevant market by examining whether PET and other packaging systems compete with each other to the extent necessary for them to be placed in the same relevant product market.

(37) In order to assess whether or not different packaging systems are substitutable, it is also relevant to examine the downstream market for the final packaged product at consumer level, that is to verify whether consumers regard the different packages as substitutable. Tetra has submitted that the lack of a clear distinction between the downstream packaged product market and upstream equipment market confuses the competitive assessment. The Commission agrees with the notifying party that the two markets are distinct. However, the Commission considers that demand for the equipment can only be derived from the demand for the final products which the equipment will pack. It is therefore necessary to examine the downstream market. The notifying party's economic consultants agree with this, stating "the demand for carton machines is derived from the demand for products in cartons. Similarly, the demand for SBM machines is derived from the demand for products in PET bottles."(15) It is important to note, however, that a finding of demand substitution in the downstream market does not necessarily result in a finding of substitution in the upstream market as there may be a number of factors, for example, heavy switching costs, preventing intermediate customers, the beverage companies, from switching from one packaging system to another despite consumers' willingness to switch.

(38) Given the complexity of the liquid-food packaging sector, it is useful to define the terminology to be used throughout this Decision: (a) "packaging system or packaging material" refers to the packaging system or packaging material used by a beverage company for its products (carton, PET, glass, etc.); (b) "packaging equipment" refers to SBM machines, carton packaging machines, glass packaging machines, etc.; (c) "packages" refer to the flat cartons, empty PET bottles or preforms, etc.; (d) "the packaged product" refers to orange juice in PET, UHT milk in carton, etc.; (e) "end-use product" refers to the type of liquid-food to be packaged. This terminology will be used throughout the remainder of the text when analysing the relevant market and assessing dominance.

2. SUBSTITUTION BETWEEN PACKAGING SYSTEMS

(39) The Commission considers that its analysis of the relevant market should focus on assessing whether alternative packaging materials and hence alternative packaging systems compete with each other to the extent necessary for them to be placed in the same relevant product market(16). If this is the case, it is then necessary to consider whether customers could easily switch from one piece of alternative packaging equipment to another; for example, a carton filling machine and the equivalent PET equipment, either a PET SBM machine together with a PET filling machine or a PET "Combi" machine so that the two pieces of equipment ought to be placed in the same relevant product market.

2.1. End-use product segments

(40) The Commission's investigation has shown that the use of a given packaging material for a given liquid-food is mainly driven by the liquid's characteristics. The first question, therefore, when considering whether two packaging materials and hence two packaging systems may be potential substitutes is to look at whether they are capable of packaging the same liquids.

(41) Each end product has very particular characteristics, which dictate the choice of packaging. For example, CSDs require packaging that can withstand the pressure of carbonation; for these drinks, for example, carton is simply not an option. Milk requires a light barrier. Beer requires both a light barrier and an oxygen barrier. In some cases, consumer preferences and tradition dictate the choice of material, like glass almost exclusively for wine and champagne. As a result, a dairy, for example, wishing to package its product does not necessarily have a choice between all the packaging materials. There are products that can, however, be packaged in different materials.

(42) Tetra has argued that end-use distinctions are not meaningful in the packaging equipment sector. Tetra focused its argumentation on SBM machinery, which according to Tetra is generic; that is to say, an SBM machine produces an empty bottle that can be used for different types of end products. The notifying party's arguments in relation to SBM machines are assessed below in recitals 176-182.

(43) The Commission's analysis shows that even for an allegedly "generic" piece of equipment such as an SBM machine it is justified to examine the equipment market with reference to the end-use segments. An analysis based on end-use segments is even more relevant when comparing whole packaging systems in order to assess whether or not they may belong in the same product market. Given that each liquid has very particular characteristics which dictate the availability of a given form of packaging, it is necessary to look at end products in order to assess whether the various packaging materials are "regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use"(17). It is evident that the customer will only be faced with a choice of those packaging materials that are capable of packaging the given liquid-food and, as a result, packaging materials unsuitable for a given product will never be able to exercise any competitive constraint in that product segment. Conditions of competition may therefore differ within each end-use product segment(18).

(44) In the light of the foregoing, the Commission has reached the conclusion that end-use segmentation constitutes a meaningful analytical tool for assessing the liquid-food packaging equipment market(19).

(45) The analysis in this Decision focuses on those products that can be packaged both in carton and in PET: liquid dairy products (LPDs), juices and nectars (juices), fruit-flavoured still drinks (FFDs) and ready-to-drink tea and coffee drinks (tea/coffee drinks). The common product segments, LDPs, juices, FFDs and tea/coffee drinks, form a large part of the whole liquid-food sector; they represented about 40 % of all non-alcoholic beverages in 2000. These products have been traditionally packaged in carton because of their specific characteristics, oxygen and light sensitivity, and are increasingly being packaged in PET as a result of recent improvements in PET technology and changes in consumer demand. The beverage industry refers to these beverages as "sensitive" liquids. The Commission has therefore assessed the impact of the transaction with particular regard to these end-use segmentations.

2.2. Aseptic and non-aseptic packaging

(46) A major distinction for the packaging of liquid beverages is whether they are filled aseptically or non-aseptically. Aseptic packaging is generally defined as the bringing together of pre-sterilised products with packaging rendered sterile and filling the product into the pack in a sterile environment designed to prevent recontamination. Sterilisation involves the elimination of micro-organisms, which might later cause the product to deteriorate(20). By ensuring sterility, aseptic filling of liquids extends the shelf-life of the product significantly. Aseptic filling can be done with a number of different packages: glass, carton, PET and HDPE. Carton is the main packaging material used for aseptic filling with a predominant share of the market.

(47) Aseptic filling is mainly used for "sensitive" products, namely juices (or juice-based drinks) and liquid dairy products. Juices and dairy products can also be packaged non-aseptically in which case they require refrigerated distribution. Most other products are packaged non-aseptically without requiring chilled distribution.

(48) Juices and liquid dairy products differ in one significant respect: juices are high-acid products whereas liquid dairy products have low-acid content. Low-acid products require more stringent aseptic conditions. Unlike high-acid products, in the case of low-acid liquid dairy products, any non-sterility leads to the presence of pathogens, which are harmful to consumer health. Therefore the use of a viable aseptic process is paramount for liquid dairy products.

(49) The Commission has considered the possibility of substitution between aseptic and non-aseptic packaging in previous decisions(21) and has concluded that aseptic packaging constitutes a separate product market. This distinction has been confirmed by the Court of First Instance and the Court of Justice(22).

(50) The Commission's previous assessment remains valid and was confirmed by the market investigation in this case. Aseptically packaged products have a much longer shelf life than products packaged non-aseptically and satisfy different needs. Typically, aseptic milk will last six months while non-aseptic milk will last less than a month. The distribution is different (ambient/chilled distribution), taste is affected to a significant extent which makes the products hardly interchangeable from the consumer's perspective and demand elasticity is very low. In addition, there is no supply-side substitutability (aseptic and non-aseptic filling machines use very different technology) and not all suppliers are capable of producing both machines, aseptic technology being much more complicated.

(51) On the level of equipment (carton machines or PET filling machines), the distinction between aseptic and non-aseptic packaging has also been confirmed by the market investigation. All market participants responded that there is no substitution between aseptic and non-aseptic filling. This view is not contested by the parties. It is therefore concluded that it is reasonable to segment the market into aseptic and non-aseptic packaging systems.

2.3. Packaging systems using PET and packaging systems using other materials

(52) The notifying party argues that packaging systems using different materials, in particular carton packaging systems and PET packaging systems, form distinct product markets for the purposes of competition law analysis. Tetra argues that no PET equipment supplier has any power to influence a beverage company's choice between carton and PET packaging. Tetra submits in this respect the following justification which is based on two main arguments: (i) minimal overlap: PET and carton are used for different end products with minimal common products and PET use in the common products is limited and will not grow in the future; (ii) no pricing constraints: even with common product overlap and future growth, PET and carton packaging systems form distinct product markets and pricing of one does not constrain the pricing of the other. This is due to the fact that the main driver for the choice of packaging systems is marketing differentiation of the final product, shape, positioning, consumer group that is targeted, etc.

(53) The Commission agrees that packaging systems using different materials, for example glass and cans, form distinct relevant product markets for competition law analysis and that, therefore, PET packaging systems belong to a distinct product market as the choice of each packaging material is driven primarily by marketing considerations. However, the Commission does not agree that carton and PET do not share common product segments and that there can be no interaction between the two. As will be explained below in Section IV.3.3 on PET growth, the Commission believes that PET will grow rapidly in the same end-use segments as carton. Given that the parties have major activities in the carton and PET sectors (Tetra being a dominant player in carton packaging and Sidel a leading player in PET packaging equipment), the Commission has decided to look more closely at the interplay between carton and PET and the future growth of PET in the traditional carton end-use segments.

3. PET AND CARTON INTERPLAY

(54) The Commission's investigation showed that the notifying party's contention that there are minimal overlaps between the customer base of PET and carton is not accurate.

3.1. End-product segments overlap

(55) PET and carton have traditionally been used for packaging different beverages. This is mainly due to different physical characteristics of these packaging solutions. Carton is non-transparent and hence suitable for oxygen and light-sensitive products but cannot withstand carbonation. PET is transparent and can withstand carbonation but has been traditionally less suitable for oxygen and light-sensitive products. As a result, carton has been used mainly for LDPs (primarily white milk) and juices whereas PET has been principally used for water (still and carbonated) and CSDs(23).

(56) This is apparent from Tables 1 and 2 below(24) which show the main beverages packaged in carton and PET respectively. Common PET and carton products appear in bold italics.

Table 1

Carton products in the EEA in 1999

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Table 2

PET products in the EEA in 1999

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(57) From Tables 1 and 2 it is clear that PET is a suitable material for the packaging of all the products that have been traditionally packaged in carton. Seen from the perspective of the carton sector, therefore, PET may potentially provide an alternative competing material for the entire spectrum of carton-packaged products.

(58) The main common end-use product segments for which both carton and PET are suitable packaging materials are LDPs, juices, FFDs and tea/coffee drinks, the "sensitive" beverages(25). This standard categorisation is widely used in industry analyses, independent studies and Sidel's own materials(26). These products cover almost the entirety of carton-packaged products and represent currently roughly 40 % of volume of all non-alcoholic beverages (water, CSD, LDPs, juice, FFDs and tea/coffee drinks (including sports drinks)). All of them can and are currently packaged also in PET. Furthermore, these four categories are similar in that they are all "sensitive" products packaged both aseptically and non-aseptically but they are also distinct from one another in that for each category the specific characteristics of the product dictate slightly different packaging solutions (juices are high-acid, whereas LDPs are low-acid, FFDs and iced tea do not require the same extent of oxygen barrier as juices).

3.2. Current use of PET in the common product segments

(59) The notifying party submits that, even in those product segments that are common to carton and PET, PET's use is very limited and will not grow significantly in the future. The reason is mainly due to the technical difficulties of developing a light barrier for low-acid aseptic milk which will be sufficient to protect the milk from light and at the same time offer a cost-effective packaging solution. Thus, according to Tetra, PET's presence in the common product segments can be ignored.

(60) The Commission's analysis has not supported the view of the notifying party. It is true that PET has not yet made significant inroads into the main carton products (LDPs and juices), mainly due to PET's historical technical limitations, which, so far, have made it an imperfect material especially for aseptic filling. However, the Commission's investigation has shown that the parties, their competitors and third parties including major chemical companies are making significant investments in researching for a barrier technology which will enable aseptic milk and juice to be packed in PET technically and economically. According to market participants, recent and forthcoming improvements in barrier technology as well as in PET aseptic technologies will therefore change the current situation.

(61) In addition, it has to be noted that already today it is possible to package and sell commercially fresh milk, flavoured milk, iced tea, fresh juice, long-life (hot-fill) juices, fruit-flavoured drinks and sports drinks in PET. The two segments presenting technical problems for the use of PET today are aseptic juices and aseptic white (UHT) milk.

(62) For example, the following branded products with which many consumers are familiar have started being packaged in PET, having switched partially from more traditional carton packaging.

Liquid dairy products

Campina - Stassano (Netherlands, Belgium), Parmalat (Italy), Granarolo (Italy)

Juice and nectars

Del Monte juices (United Kingdom), Pepsi Cola - Tropicana juices (United Kingdom), Coca Cola - Minute Maid (Belgium), Gerber - Ocean Spray (United Kingdom), Conserve Italia - Carioga/Derby/Jolly (Italy), Parmalat - Santal (Italy)

Fruit-flavoured drinks (FFDs)

Schweppes - Oasis (France, Italy), Sunkist (Belgium), Parmalat - Santa (Italy), Glaxo - Ribena (United Kingdom)

Iced tea

Liptons - Ice tea (Belgium), Liptonice (Germany, Italy)

(63) During the investigation, Tetra asked Canadean, a consulting company in the beverage industry, to prepare a study on past and future use of PET in the common product segments, i.e. the "sensitive" products, in western Europe.

(64) The study confirms that PET is already used in all the common product segments, to a limited extent in the segments of LDPs and juices and to a greater extent in the segments of FFDs and teas.

(65) According to the Canadean figures provided by Tetra(27), in the year 2000, for the main carton-packaged products, PET represented only 0,5 % of packaging for liquid dairy products (carton 70 %, HDPE 17 %, glass 7 %, cans 1 %, other packaging materials 5 %). In the same year, PET represented only 0,5 % of packaging for juices (carton 65 %, glass approximately 31 %, HDPE 2 %, cans 1 %).

(66) Canadean concluded that for the period 1993 to 2000 the market for LDPs was static, that HDPE growth had eaten into carton sales and that PET only had a marginal effect and mostly on glass. For juice and nectars, carton sales increased in spite of PET and HDPE gains apparently at the expense of glass. Market growth during the period 1993 to 2000 was almost all in cartons.

Table 3

Pack mix for LDPs and juice and nectars 2000((Canadean study submitted to the Commission on 24 August 2001.))

>TABLE>

(67) According to Tetra, 30,7 billion litres of LDPs were produced in the Community in 2000, of which nearly 50 % were non-aseptic and just over 50 % were aseptic. Flavoured milk represented 2,7 billion litres. PET use was mainly non-aseptic and accounted for more than 60 % by volume.

(68) For juice, Tetra has estimated that 9 billion litres were produced in the Community in 2000, of which less than 10 % were chilled (non-aseptic). For juices, more than 80 % of PET use was in the ambient segment.

(69) The picture provided by Canadean is already today very different for the segments of FFDs and tea/coffee drinks which do not require the same barrier properties as LDPs and juices. PET has already made more significant inroads into these segments.

(70) In 2000, in the FFDs segment, PET represented 20 % (carton 42 %). It is expected to grow to approximately 22 % by 2005 (carton 37 %). In the tea/coffee drinks segment PET represented 25 % in 2000 (carton 53 %) and is expected by Canadean to grow to more than 30 % by 2005 (carton 46 %). Canadean concludes that for the period 1993 to 2000 market growth was mainly in plastics, although glass has fared well. PET and HDPE have eaten into carton sales. For tea/coffee drinks carton has captured most of the growth but PET has displaced existing demand for carton. For the period 2001 to 2005 the impact of PET is expected to threaten cartons for both product groups.

Table 4

Pack mix for fruit-flavoured still drinks and iced tea and coffee 2000((Canadean study submitted to the Commission on 24 August 2001.))

>TABLE>

(71) According to Tetra, 2,7 billion litres of FFDs were produced in the Community in 2000, of which over 95 % were ambient. PET use was mainly in ambient supply and accounted for more than 95 % by volume. For tea/coffee drinks 2,3 billion (including sports drinks) were produced in the Community in 2000.

3.3. Growth of PET in the common product segments

(72) According to Tetra, PET use for LDPs and juices will not increase to any significant extent in the next five years. Tetra acknowledges that PET can and is currently successfully used for the packaging of FFDs and tea/coffee drinks.

3.3.1. Technological considerations

(73) The notifying party claims that PET will not grow due to technical limitations.

(74) As regards LDPs, Tetra submits(28) that a light barrier is very important. Light exposure leads to deterioration of vitamins and formation of light-induced off-flavours. The degree of deterioration of milk quality depends on time and intensity of light exposure. These limitations apply only to UHT white milk. Tetra accepts that technical solutions to provide a light barrier for PET exist. This can be achieved with a dark intermediate layer or by covering bottles with a sleeve containing a dark layer. All those solutions are currently technically possible. However, according to the notifying party, they involve high costs and complex manufacturing technology, raise recycling issues and eliminate transparency of the bottle which is one of the major advantages of a PET bottle. In addition, aseptic filling PET technology for low-acid products (LDPs are low-acid products) is insufficiently developed. Tetra has submitted that no aseptic PET filling machines have proven viable for the packaging of low-acid products and received FDA (US Federal Drug Agency) approval. However, Tetra acknowledges that several filling machine producers, including Sidel, have aseptic filling platforms that it believes are in principle capable of filling LDPs.

(75) As regards juices, Tetra submits that an oxygen barrier is required. Juice is sensitive to oxygen, which can result in loss of vitamin C and changes in the colour and flavour of the product. The sensitivity of juice to oxygen varies with fruit type. The most sensitive are orange juice and red juice (blackcurrant, cranberry, strawberry). According to Tetra, viable barrier technologies exist but are not sufficiently developed and remain costly. In addition, Tetra maintains that aseptic technology for juices still has some limitations.

(76) The Commission's investigation has only partially confirmed Tetra's contentions. It is true that aseptic technology for the filling of low-acid products is still at a developmental stage. It is also correct that UHT white milk requires a light barrier and that juices require an oxygen barrier.

(77) However, the Commission's investigation has shown that these limitations do not apply to large segments of the relevant "sensitive" product segments. In particular, fresh milk (which constitutes 40 to 50 % of the total milk market in the EEA) distributed in a chilled chain does not pose the same problems. Fresh milk can and is already successfully packaged in standard PET without any barrier properties. Flavoured aseptic milk does not pose particular problems either and is currently packaged in PET.

(78) The Commission's investigation has also shown that the technical limitations put forward by Tetra (light barrier, aseptic filling problems and oxygen barrier) have already been addressed and that technologies will rapidly improve in the future.

3.3.1.1. Light barrier

(79) As regards the light barrier, the Commission found that it is already technically possible to package aseptic milk using multi-layer barriers. The bottle has a white coating on the outside, and usually has a black layer on the inside, so that it protects the milk from light. This type of packaging provides adequate protection but has two main drawbacks. Firstly it is more expensive, which is the reason why it is mainly used only for premium products (such as buttermilk) and secondly it still has some limitations for recycling. Despite these limitations, a major European dairy has already introduced a PET bottle with a light barrier for churned milk under the Stassano brand which appears in Dutch supermarkets.

(80) An independent study by the Virginia Polytechnic Institute and State University (2001)(29) compared flavour retention in extended-shelf-life milk packaged in HDPE (an established material for the packaging of UHT milk) and PET. The study noted that "PETE(30) has many advantages over HDPE in which milk is usually packaged. It has considerable mechanical resistance and is lightweight, transparent, and relatively gas tight. Another benefit is that consumers can see the product, which is not the case with pigmented HDPE. The objective of this study was to determine if development of certain off-flavors and associated flavor compounds in milk was related to packaging material)." The study concluded that "PETE materials with amber pigmenting are very effective in protecting milk flavor against oxidation. Incorporation of a UV light-blocking agent also yielded improved flavor protection compared with the commonly used HDPE material but was less effective than amber PETE. Higher gas barrier properties of PETE in combination with protection against light oxidation suggests that amber PETE or PETE-UV would be effective materials for extended shelf-life milk".

3.3.1.2. Aseptic technology

(81) The Commission has found that aseptic PET filling technology already exists for both low-acid and high-acid products. Sidel has confirmed that, whilst at the present time there is no solution to allow PET to be used at affordable cost for packaging UHT milk, there are no overwhelming technical reasons why PET should not be used for UHT milk, and it is already used for flavoured milk.

(82) The parties are active in this field and can offer aseptic PET filling machines for low and high-acid products. As regards low-acid products, Tetra claims that no filling machine has proven viable for the filling of low-acid products. However, Tetra has acknowledged that several filling machine producers have aseptic filling platforms capable of filling low-acid products. Indeed, the Commission found (and Tetra acknowledged) that Tetra's own filling machine, the RFA-40, has been used successfully in Asia to fill low-acid products such as low-acid milky teas. These products are easier to fill aseptically than LDPs. Tetra(31) is continuously researching the field to come up with a viable aseptic PET filling solution for LDPs.

(83) Indeed, many companies are actively trying to promote use of PET for liquid dairy products including coming up with solutions for the packaging of UHT milk. An independent study states: "There's little doubt that aseptic packaging into plastic bottles is one of the most dynamic areas of food packaging today. Not only will the number of installations continue to rapidly escalate but also the scope of products will continue to increase.... Look for companies like Sidel/Remy, Stork, Serac, Shibuya and TetraPak to aggressively make the necessary technical changes to afford the eventual packaging of shelf stable, low-acid foods on their fillers. This explosion in market activity is driven by the consumers' love for the plastic bottle and the economic advantages the aseptic packaging has over comparable hot fill..."(32).

(84) In addition, extended-shelf-life (ESL) milk is increasingly packaged in PET. ESL milk is a non-aseptic non-ambient product which is packaged under ultra-clean conditions which provide it with an extended shelf life (around 30 days). ESL is therefore a midway solution between aseptic and fresh milk. Sidel has sold [...]* Combi SRU machines [...]* to package ESL flavoured milk (Nesquick chocolate and banana-flavoured milk). Lehman Brothers reported that: "The impact was twice the production speed over the previously used paperboard cartons, flexibility in package designed, improved profitability, and an extended shelf life for wider product line"(33). The Commission has been informed by third parties that ESL milk is at present packaged in PET in a number of European countries. In the Netherlands, for example, ESL milk with a one-month shelf life is packaged in clear PET.

(85) With respect to juice, PET can be used for packaging of long-life juice that is aseptically filled. Such products are already on the market (Minute Maid 1 litre in France, Tropicana in the United Kingdom and Sinaasappelsap in Belgium). The barrier technology is available. Indeed the Combi SRA developed by Sidel is for long shelf life aseptically filled products (tea, flavoured water, isotonics, juices and possibly dairy products with UV barrier package). Sidel has already sold [...]* Combi SRA machine [...]* for the packaging of aseptic tea and orange juice.

3.3.1.3. Oxygen barrier

(86) As regards oxygen-barrier technologies, Tetra does not claim that these do not exist. Market respondents confirmed that with existing barrier technology PET can be and is currently used for many types of "sensitive" products such as FFDs, tea and coffee drinks and some juices and LDPs. The most problematic fields of use are pure juices.

(87) The Commission's investigation has shown that there will be continuing improvements in PET barrier technology. This will make PET an even more suitable material for the packaging of LDPs and juices. The investigation showed that most companies active in PET packaging are already providing barrier-technology solutions. Indeed, both Tetra and Sidel have developed successful barrier technologies using plasma coatings. The Commission found that there are over 20 companies active in this field with different barrier solutions. The most promising future technology is a monolayer PET resin which will include the requisite barrier properties. These technologies are likely to be commercialised shortly and will radically change the PET barrier landscape.

(88) In the light of the foregoing, the Commission has reached the conclusion that both aseptic filling technology and barrier technology currently enables PET to be used for the packaging of LDPs, juices, FFDs and tea/coffee drinks and that both these technologies will continue to improve rapidly and continually improving in the near future.

3.3.2. Cost considerations

(89) The notifying party has argued that one of the reasons why PET will not grow rapidly in the future at the expense of carton is its higher cost. Tetra undertook a cost study, which concluded that the cost of producing a PET bottle is significantly higher than that of a carton package. For a one-litre aseptic juice, for example, the costs were up to 50 % higher for PET, the additional costs arising from consumables because of the need for the label and a screw-cap, and from higher equipment costs. A large proportion of the cost difference was attributed to the filling/SBM process. Similar results were found on smaller packages and non-aseptic processes for both juice and milk.

(90) The Warrick Report(34) found that, for aseptic packaging, "PET is 30 to 40 % more expensive than carton currently" and stated that to be competitive on total cost, pack price would need to be 5 to 10 % lower than aseptic carton cost, to compensate for the lower distribution cost of carton systems. The report states that even with a reduction in the price of barrier bottles because of higher volume production, the cost will remain approximately 20 % higher than cartons. On this basis the report concludes that "any use [of PET bottles] will be restricted to niche markets..."(35) The main opportunities for aseptic milk packaging include "possible opportunity for an ambient ESL product - aseptically filled in a non-barrier bottle"(36).

(91) The Commission considered the extent to which it would be possible at present and in the future to offer PET at a competitive price to carton.

(92) The Commission's market investigation did not produce a clear picture of the relative costs of PET and carton packaging systems. Some market participants stated that for most applications and in particular for products requiring a barrier, PET is more expensive. The majority of respondents, however, were not able to identify the precise cost differences; for many, this was because they did not have experience in both materials. However, some third parties (notably those with greater experience in PET) informed the Commission that for them PET was actually cheaper than carton. One iced tea producer reported costs per package price for 1,5 litre PET standard to be around 25 % cheaper than one litre carton. Another iced tea producer reported for the same products that the PET price was 33 % cheaper than carton. One milk producer had undertaken a study comparing carton and PET costs for one-litre aseptic milk packaging on various technologies and design which clearly showed PET to be cheaper in some instances and highly competitive in others. This study did not confirm the large differences between PET and carton reported by the notifying party.

(93) Tetra has also argued that packaging costs represent only a small proportion (approximately 10 %) of the cost of the final product. Therefore, there appears to be no reason why small cost differentials between PET and carton packaging systems should result in significant price differences of the retail product sold in supermarkets. The reason why PET packaged products are more expensive than carton packaged products is because beverage companies initially position them as premium products to extract higher profits from these lines. As PET becomes established in the market place it is expected that it could also target non-premium product segments. In Italy and Australia where PET for fresh milk is established there is almost no price differential between fresh milk packaged in carton and fresh milk packaged in PET.

(94) An example of a recent PET introduction is the OLMA dairy in the Czech Republic. OLMA has recently begun to fill its fresh milk and drinking yoghurt in PET. It stated that "the cost of the new PET bottle in comparison to a market standard carton is about 30 to 40 % [higher], but this fact is completely irrelevant in our new production concept. If we are successful in increasing our fresh milk market share from 3 to 11 %, then all the cost involved in the project will become relative"(37). The introduction by OLMA of fresh milk in PET bottles has already been far more successful than expected, "the huge demand from the retailers and consumers for the attractive, transparent and lightweight bottle" soon led to a need for greater capacity. OLMA has placed an order for an additional PET line with Elopak Plastic Systems(38).

3.3.2.1. HDPE cost comparison

(95) Tetra also uses cost arguments to claim that PET will not grow in the milk segment because of its higher cost compared to HDPE. Tetra also suggests that PET is over 10 % more expensive than HDPE. In its reply, Tetra lists the advantages of HDPE for the aseptic packaging of dairy products. HDPE has significantly lower costs than barrier treated PET, aseptic filling machines for HDPE already exist, PET cannot have off-the-centre necks or handles like HDPE, the sterilisation process for HDPE is simpler and less sensitive than for PET and, finally, coloured PET is difficult to recycle.

(96) The PCI study(39) has also examined how PET compares with HDPE and found that PET offers the same functionality as HDPE, but with a better overall appearance. Clear bottles emphasise the freshness of the product and offer a distinct on-shelf appeal. The cost differential is reported to be about 10 % on the pack as a whole. This array of qualities has so far focused PET on certain parts of the dairy product market where is particular qualities offers a clear advantage over the alternatives. These segments include premium qualities fresh milk in sizes of less than one litre, dairy beverages both for household pack sizes and single-serve sizes, and children's single-serve dairy drinks(40).

(97) The Commission's market investigation confirmed PCI's suggestion that PET has marketing advantages over HDPE, in particular, where visibility can be achieved. To the extent that marketing advantages exist there is no reason why this slightly higher cost of PET over HDPE should hinder PET's growth prospects. Indeed HDPE's higher cost by comparison to carton did not stop HDPE's rapid growth at the expense of carton in France. In its submission of 3 October 2001 Tetra provided an example from the French milk aseptic market showing that HDPE has now gained a market share of nearly 30 %. HDPE for one litre aseptic milk was over 20 % more expensive than perforated carton. Despite this cost difference, aseptic milk packaged in HDPE successfully penetrated the French milk market to the detriment of carton.

3.3.2.2. Investment costs

(98) Tetra has considered the level of investment that would be required to achieve the kind of PET growth envisioned by the Commission and considers it unrealistic. Tetra uses the EEA milk market as an example for the investments needed. Tetra argues that, at present, there are about 4000 carton filling machines installed at dairies throughout the EEA. If PET were to represent 50 % of all milk packaging by 2005, that would mean that 2000 carton filling lines would have to be replaced within the next three years (nine to 12 months' lead time for the line to be running). As PET filling lines on average run somewhat faster than carton filling lines, this would mean about 1500 PET filling lines would have to be installed. The average cost for a low-acid PET filling line is about EUR 10 million. This means that total investment required for EEA dairies for the replacement of packaging lines alone would be EUR 15 billion. There would be many additional costs resulting from such a switch, such as costs resulting from a change in the logistics chain and the marketing strategy.

(99) The Commission believes this analysis is flawed on several accounts. Firstly, the Commission did not predict 50 % growth in its statement of objections(41). Secondly, PET filling lines will not only replace carton but also glass, cans and HDPE. Thirdly, whilst consumption of plain white milk in larger sizes is not expected to grow significantly, consumption of milk in single-serve bottles and flavoured milk, for example, is expected to grow fast according to the PCI study. Therefore, the capacity for such products does not necessarily need to replace existing capacity. Fourthly, investment in new lines did not seem to prevent the rapid growth of PET in Italy where it took a 10,5 % market share of the fresh milk market in just two years(42). Even Canadean(43) expects this rapid growth in Italy to continue and estimates that "within the chilled sector PET bottles could reach almost 23 % in Italy by 2005". Similarly, in France, where HDPE has been taking market share from carton, the rapid investment in HDPE filling lines for aseptic milk enabled HDPE to capture around 10 % of this market in just six years(44). Fifthly, the lifetime of a carton machine is around 10 years which suggests that on average one would expect 10 % of existing capacity to be renewed each year. On the basis of information supplied by Tetra, this suggests that 400 carton machines will be replaced each year. It is clear that, if only a proportion of such machine sales are captured by PET sales, it can still represent a significant increase in PET capacity.

(100) The Commission also notes that the cost quoted by Tetra in its calculation for an average low-acid PET filling line is significantly higher than that quoted by Sidel(45) in its cost comparisons of different PET filling lines. A standard aseptic filling line (Alto) and an aseptic Combi line are both expected by Sidel to cost just over EUR [4 to 7 million]* and not EUR 10 million as stated by Tetra. The OLMA project in the Czech Republic was worth EUR 2,7 million and includes SBM machines, bottle storage facilities and the filling machines, all of which were installed in five months(46).

3.3.3. Marketing considerations

(101) Marketing is one of the major advantages of PET which will drive its growth in the relevant product segments. The main advantages of PET are its strength (compared to carton, HDPE and glass), light weight (particularly compared to glass); transparency and glass-like appearance (unlike carton, HDPE and cans). PET is reclosable/resealable and ideal for consumption on the move (unlike carton, cans and to some extent glass and HDPE). Finally, PET has shape flexibility in design (unlike carton, cans and glass). The main disadvantages of PET are its costs for barrier applications and its low light barrier.

(102) The Commission's investigation showed that beverage companies, supermarkets and consumers endorse PET enthusiastically because of those advantages. Tetra does not contest that PET is a very attractive packaging material. However, Tetra claims that PET loses its major advantage, transparency, when a light barrier is required in particularly with respect to UHT milk which requires an opaque bottle. In this case, Tetra claims that PET has no marketing advantage as compared to HDPE. The Commission has, however, found that opaque PET bottles exist in the EEA market and are successful with consumers. In some instances, partial transparency can be achieved by covering the bottle with a semi-transparent film. An independent research company, PCI(47), explains that long-life flavoured milk has already been packaged very successfully in PET using this method: "The PET bottle for Nesquick is in many respects a state-of-the-art bottle at this time. It achieves a 60-90 day shelf life by combining: direct fed from a blowing machine into an aseptic filler; the bottle has a foil seal to improve barrier; UV light damage is controlled by the use of a PETG shrink sleeve; and the pack is distributed in the chill chain".

3.3.4. Growth forecasts

(103) In the light of recent and forthcoming technological developments, cost and marketing considerations, the Commission has concluded that PET use in the common product segments will grow significantly in the next five years.

(104) When considering the potential growth of PET, the Commission consulted various data from research studies done for Tetra (Canadean), independent studies (PCI - PET Packaging, Resin and Recycling, "The potential for PET in the packaging of liquid dairy products", 2001 Limited, Warrick Research Report Packaging Markets (2000) and the Pictet "European Packaging Machinery", September 2000) in addition to the market investigation. The result of each of those studies are assessed below.

3.3.4.1. Canadean study for Tetra(48)

(105) The Canadean study commissioned by Tetra does not foresee significant growth for PET in LDPs and juices. For milk, PET now represents 0,5 % and is expected to increase to 1,2 % by 2005, and for juice PET now represents 0,5 % and is expected to increase to 1,1 % by 2005. Canadean's results are set out in the following tables:

Table 5

Pack mix for LDPs and juice 2000 (actual) and forecast for 2005((Canadean study submitted to the Commission on 24 August 2001.))

>TABLE>

(106) The LDP market is, according to Tetra, not expected to grow over all, remaining around 30,5 billion litres in size; the split between aseptic and non-aseptic is also expected to remain fairly constant. The juice market is expected to reach 10 billion litres by 2004; the split between chilled and ambient is expected to remain the same.

(107) Canadean predicts faster growth for FFDs and teas and concludes that, in these segments, PET will threaten carton and will take market share away from carton.

Table 6

Pack mix for fruit-flavoured still drinks and iced tea and coffee 2000 (actual) and forecast for 2005((Canadean study submitted to the Commission on 24 August 2001.))

>TABLE>

(108) According to Tetra, the FFD market is expected to grow overall to 3,5 billion litres, the split between ambient and chilled is expected to remain fairly constant although a slight increase in the chilled sector may occur. The tea/coffee drinks market is expected to reach 2,7 billion litres by 2004.

(109) The Canadean study provides some arguments as to why the balance between carton and PET is unlikely to be seriously upset across Europe in the future. Canadean provides a list of events, which will need to occur for the PET share to increase dramatically. First, a multinational drinks company will need to emerge as a pan-European champion of PET packaging. Canadean believes this is unlikely to happen in the case of liquid dairy products. Secondly, PET packaged products will need to be priced significantly below prices charged for the carton packaged equivalent for a sustained period. PET packaged products will also need to be offered at prices considerably below those of HDPE packaged equivalents. Thirdly, a pack size or size range will need to be developed which meets hitherto unsatisfied consumer demand. Fourthly, distributors' own brands and those of smaller drinks companies will also adopt the use of PET packs following the lead of a multinational. Finally, the Italian example is unique and unlikely to be replicated across the EEA.

(110) The Commission cannot accept Canadean's arguments and believes that Canadean's forecasts are overly pessimistic.

(i) Leading multinational company

(111) Canadean believes that PET needs to be introduced by a leading multinational drinks company that can force change through its own system, with the agreement of retailers and consumers, and oblige its competitors to follow suit. Whilst the Commission agrees that the introduction of PET by such a company could perhaps accelerate the rate at which PET bottles becomes more widely used this is not a necessary condition for substantial growth of PET. The Commission also considers that Parmalat, the Italian dairy which was the main driver of the fast growth of PET experienced in Italy, as a pan-European champion could drive the PET penetration in Europe further. Although its activities in PET in Europe have mainly focused on Italy, Parmalat is also present in more than 20 countries including France, Spain, Germany, Portugal and the United Kingdom and has major activities throughout the world. Parmalat could also develop its successful Italian model in other countries. In addition, the Commission has found that other multinational companies such as [...]* are actively promoting liquid dairy products in PET.

(112) Irrespective of such a driving force, the Commission's market investigation has overwhelmingly indicated that PET is the preferred packaging material for marketing and for consumer convenience. Therefore, it will not be necessary to force PET on the market as both producers and consumers appear to prefer this packaging solution. Likewise retailers did not seem to be against the introduction of PET in a wide range of product areas. Indeed for milk, juice, iced tea and sports drinks most retailers selected PET as their first or second preferred packaging material. Third parties also expressed little doubt that the future would see greater PET penetration, although the enthusiasm for PET as a packaging material was clearly country-related (the exposure of PET is for example greater in France and Italy than in Sweden and Finland) and product related (iced tea producers are more used to PET than most of the German LDP producers).

(113) In this context the presence of the leading multinational PET machine supplier (Sidel) may have greater influence on the rate at which liquid-food producers are willing to package some of their production in PET. By having experience in a wide range of countries such a company should be expected to draw on its experience developed with downstream producers, most importantly converters, and to cooperate with them to enable a successful launch of PET. The Commission is of the view that a large international supplier of SBM machines together with large independent converters will have the incentive and power to develop the introduction of PET with as wide a range of companies as possible. The Commission's investigation has confirmed that converters in cooperation with Sidel have been very active in promoting the use of PET for the packaging of branded products.

(ii) Prices

(114) Canadean argues that the retail price at which PET packaged products are introduced should be below the price of the equivalent carton and HDPE packaged products. There is no obvious reason why this should be the case and Canadean provides little guidance on why this should be a condition for significant growth. In Italy for example, as Canadean shows, PET in fresh milk has been successfully launched, gaining significant market shares although it was offered at the same price as carton.

(115) Given the many advantages of PET as compared to carton and consumers' willingness to accept products offered in PET packaging it is not immediately clear why it is necessary to offer this advantageous packaging at a discount compared to the other packaging options.

(iii) Pack size

(116) Canadean argues that pack sizes and size range will need to be developed to meet unsatisfied consumer demand. This argument relies on PET being complementary to carton and achieving penetration by creating new market growth. Initially as seen in the iced tea segment, the introduction of PET will target markets where penetration is possible through market growth to achieve higher margins rather than facing tougher competition in slow growing markets. There is no reason however why PET should not grow significantly in markets were market growth is limited. Moreover it is already possible for PET to be produced in a wide range of sizes with PET being more flexible in design and sizes than carton. The Commission therefore views this condition as being fulfilled at the present time.

(iv) Retailers and small producers

(117) Finally, Canadean suggests that distributors' own brands and those of smaller drinks companies will also have to adopt PET. There is however no reason why retailers or smaller drinks companies could not adopt PET. The Commission's market investigation showed no unwillingness on the part of retailers to accept PET as a packaging for "sensitive" products. Likewise, there is no reason why smaller companies should be unwilling to switch to PET. Indeed, in Italy a significant number of small dairies replying to the market investigation were already packaging in PET and the overwhelming majority of the remainder were interested in or planning to introduce PET packaging for their products. Tetra itself in a press release dated November 2000 stated that "there are still numerous small to mid-size independent operators located across the nation [Italy] serving the needs of people living in the local villages and countryside. Some of them are following a recent international trend that began developing in the late 90s when more and more dairies started packing premium-positioned pasteurised milk into one-litre PET bottles."

(v) Italian example is unique

(118) Canadean data shows that, in 2000, PET had already reached 4,5 % of the Italian LDP market as a whole (fresh/non-aseptic and UHT/aseptic milk) and that more than 10 % of the Italian fresh milk market used PET in 2000. PET was used to package 150 million litres of milk in Italy and only 26 million litres in the rest of the EEA. This shows the potential for increase in other regions if the Italian example is followed. Similarly in the juice segment, total volume of PET across western Europe was 45 million litres. Just three countries, Switzerland (18 million litres), the United Kingdom (9 million litres) and Belgium (8,5 million litres), accounted for three quarters of total volume.

(119) In its reply, Tetra argues that the Italian example provides no guidance for developments in the rest of the EEA. This is because the relative success of PET packaging for fresh milk in Italy occurred in very special circumstances that are unlikely to be present elsewhere in the EEA. Parmalat introduced PET as a means of boosting sales and profitability and its rival Granarolo followed with its own PET packaging and an advertising campaign. This, Tetra believes, eroded any profitability which may have resulted from the introduction of PET and could well deter entry from other dairies.

(120) It would appear however that, on the contrary, small and medium-sized independent dairies in Italy have started packing in PET bottles following the example of the two major dairies. Tetra has recently sold [...]* Tetra Plast LX-2 to [...]*, a converter [...]*, which allows these smaller dairies to supply milk in PET without having to carry the full investment cost.

(121) The Italian market may have been the first to develop PET for milk but the Commission does not believe that it is unique. PET use has already penetrated the fresh-milk markets in Belgium, the Netherlands and Austria. Despite Tetra's argument that in the large United Kingdom fresh-milk market dairies have already made considerable investment in switching from carton to HDPE bottles and are therefore unlikely to swing again towards PET in the short to medium term, Canadean has reported that LDPs in PET will be launched in the United Kingdom during 2001 through two major supermarket chains ([...]*). Milk in PET is also expected to be launched in Spain from 2003.

(vi) Conclusion on Canadean study on PET growth

(122) The Commission therefore has concluded that the necessary factors outlined by Canadean for significant growth have to a large extent already occurred or will occur in the near future. In addition, Canadean already acknowledges that there will be significant success for PET in certain segments in specific national markets and across the EEA notably in the tea and coffee-based products sector.

(123) It is also important to note that the forecasts by Canadean were put into question at the oral hearing. Firstly, it was established that the sophisticated forecasting model for the beverage industry, which Canadean has developed in conjunction with City University of London, was not employed when carrying out the predictions for Tetra. Instead Canadean used a model(49) which considers previous growth as an indicator of future growth and ignores the future technological developments particular to barrier technology. Secondly, the forecasts are not based on any evidence from customers or supermarkets, whereas the Commission's market investigation took the views of these participants into account. Given that the decision to package products in PET is said to be customer driven, a study excluding customer views is not particularly robust.

(124) For the reasons set out above, Canadean's forecasts for PET's growth seem over-pessimistic. In addition to technological improvements, the Commission has looked closely at the expected growth of the PET market in the new segments of "sensitive" products (LDPs, juices, FFDs, tea/coffee drinks) from the perspective of the parties, third-party respondents and independent analysts.

3.3.4.2. Canadean's independent studies prior to the merger

(125) Canadean produces annual reports with analyses of various beverage segments. The Commission has obtained from third parties reports on three of the four relevant segments: juices, FFDs and teas. There is no independent Canadean report on LDPs (an independent study by another company PCI is analysed below).

(126) Canadean's calculations for PET penetration in 2000 in the juice segment are set out in Table 7. These are a snapshot of the year 2000 and do not include growth forecasts. It is important to note that PET in Europe was non-existent in the juice segment in 2000 (it has now appeared) and that if the example of other regions is followed Europe represents enormous growth potential.

Table 7

Share of consumption by pack mix

>TABLE>

Source:

Canadean Global Juice and Nectar Report 2000.

(127) In its submission of 3 October 2001, the notifying party claimed that developments in other regions such as North America and Australasia were not relevant for an analysis of the European market. Tetra claimed that the US experience in PET in juice was not informative because of the widespread use of hot-filling, which is not accepted by European consumers due to taste issues. The Commission has, however, found that hot-fill is used to a large extent in some European markets such as Germany. In any event, the recent developments in aseptic PET filling for high-acid drinks (which Tetra accepts is possible in contrast to low-acid drinks) mean that aseptic rather than hot-fill can be used to cater for Europeans' preference for aseptic-filled liquids.

3.3.4.3. PCI study on "The Potential for PET in the Packaging of Liquid Dairy Products" (2001) ("PCI study")

(128) PCI states that developments in aseptic filling of PET are enabling it to offer an alternative to the aseptic carton and so increase significantly its potential in the dairy products market, enabling it to move out from the simple market application of short-shelf-life fresh milk sold through chilled distribution systems(50). According to PCI, standard PET provides some protection and is an adequate barrier for short-shelf-life products. Where a longer shelf life is required, other packaging types must be used (such as cartons with a layer, or plastic bottles with a barrier layer). Alternatively, PET's UV barrier can be improved by the addition of proprietary UV barrier compounds or amber colouring.

(129) Long-life packaging allows brand owners to fill PET from high volume centralised locations and ship to sales outlets over a wide area. The packaging therefore meets the requirements of the modern dairy industry. PCI does not, however, expect PET to make inroads in the low-end commodity part of the white milk market. "We do not anticipate that PET will be very successful in replacing existing packaging - mainly cartons and HDPE - in the commodity fresh milk sector mainly because this is by and large a price-sensitive segment. There are exceptions, however, most notably in Italy where the premium Alta Qualita segment has already converted to PET to a large extent. The Italian example may suggest opportunities to other dairy companies seeking to differentiate plain milk varieties"(51).

(130) The PCI study states that PET is not likely to make any inroads in aseptic milk, a segment that accounts for at least 45 % of the milk market. In making this prediction PCI may have failed to take into account developments in light barrier technologies for UHT white milk. PCI also shows that dairy products in PET bottles have already been introduced in the following Member States: Belgium, Netherlands, Italy and the United Kingdom. PCI predicts that PET will reach 9,2 % for plain fresh milk in Europe by 2005 and 25 % for other dairy beverages. According to PCI the "other dairy beverages"(52) segment is "one sector of the liquid milk market that is experiencing rapid growth in Europe (...). One of the most successful to have emerged recently has been flavoured dairy drinks, based on milk and yoghurt"(53). Total PET consumption for dairy products is predicted to rise from 4000 to 43000 tons in Europe by 2005. According to PCI "this is a realistic projection"(54).

3.3.4.4. Warrick Research Report Packaging Markets (2000)(55) ("Warrick Report")

(131) According to the Warrick Report, another independent study of the liquid-food packaging sector, milk and juices account for some 80 % of aseptically packed product volume in Western Europe.

(132) The aseptic milk markets in Western Europe are "mature - in many cases in slight decline. Aseptic PET systems will therefore tend to replace other types of pack rather than grow with additional demand(56). The use of a wider range of packs means that companies are more likely to use aseptic filling, because they are not limited to the use of 'brik' cartons which tend to be associated with economy products"(57).

(133) In the juice market "cartons are under long-term threat from plastic bottles. Increasing importance of premium and branded products will put more emphasis on pack design, which will enable carton designs to be promoted for use with quality products. Continuing improvements to shape, pouring facility, closure, etc. will be important in this market. Carton systems will need to ensure that their cost advantage in high-volume markets is maintained through increased line speeds, pack cost reduction and improved efficiency"(58). "The success of juice drinks with preservatives in plastic bottles may affect demand for aseptic carton systems" "Opportunities in the juice sector will depend on companies exploring the use of different types and designs of pack"(59).

(134) For example, in France, aseptically filled plastic bottles (PET and HDPE) now have a significant share of the premium pure juice market. However, plastic bottles have made little impact in any other country in the premium long-life sector(60). In the tea segment, "in most markets, aseptic PET is likely to be the main pack type, with cartons continuing to predominate in Germany"(61).

(135) The Warrick Report provides some conclusions for overall PET penetration in the aseptic market for "sensitive" products. Warrick states that "plastic bottles have shown the most rapid growth in liquid-food packaging, and are expected to be the fastest growing type of pack in the next three years. Most of the growth will be for PET bottles, in particular for ready-to-drink tea. HDPE bottles currently account for about half of bottle use"(62). The fastest-growing sector in recent years has been ready to serve tea, and new beverages such as flavoured water and sports drinks. These are also expected to be the fastest-growing sectors over the next few years(63).

(136) The Warrick Report forecasts use of aseptic filling to increase by about 50 % by 2003. Most of the increase will be for PET, the use of which will approximately double to some 2 billion packs(64). The value of the whole aseptic market in Europe was EUR 4,5 billion in 1999. Of that, aseptic carton packaging was over EUR 3,5 billion in 1999.

3.3.4.5. Analysts' reports - Pictet "European Packaging Machinery" (September 2000) (Pictet Report)

(137) The Pictet Report predicts strong growth for PET. According to the Report, "demand for PET is expected to grow by 10 % p.a"(65). "Future growth will be strongly underpinned by the use of PET bottles with improved barrier qualities which can be filled with oxygen-sensitive products"(66). "As consumers are increasingly insisting on PET packaging for milk, juices and sauces, it is of the utmost importance to have an aseptic-filling solution for PET bottles"(67).

(138) According to Pictet, thanks to recent improved barrier properties, "PET is now also becoming an attractive packaging option for other oxygen-sensitive products, like milk and fruit juice which offer appreciable market potential."(68) Pictet continues: "the attractive market outlook for PET containers should, in our opinion, not be adversely influenced by aseptic cartons which are currently also used for oxygen-sensitive products. We see clear comparative advantages for PET containers over aseptic cartons (see table below) and we expect plastic to gain ground rapidly on cartons"(69). "We are expecting sales growth for juice cartons to decelerate as juices will be increasingly filled in PET bottles. [page 15] With aseptic filling becoming a standard for PET bottlers, the matter of filling the bottles with oxygen-sensitive liquids, like fruit juices, is no longer an obstacle"(70) As for milk, Pictet expects to see a "shift towards cartons being substituted by PET bottles"(71).

3.3.4.6. Parties' forecasts

(139) Sidel has made some estimations of how it foresees the PET markets developing. In its Dossier de Presentation(72) Sidel predicts an annual growth of [...]* for fruit juices, teas and isotonic drinks. By 2005, Sidel forecasts that PET sales in these product areas will increase by [...]*. At its annual meeting(73) Sidel stated that the segment of juices, teas and isotonic drinks were "increasingly shifting to PET,...at the expense of carton and glass containers". Furthermore in an interview with PET Planet(74) Francis Oliver said "I predict that the PET market will double in a short time...New application will include beer, milk, fruit juices...". From this it is clear that Sidel views the common product segments as being produced increasingly in PET in the future.

(140) Tetra predicts rapid growth for the aseptic PET filling market (sold only to customers in the common product segments). Within the last three years the number of installed machines in the EEA has increased by [70 to 80 %]*, with the highest increase in 2000. This market growth is expected to continue over the next years at a rate of [20 to 30 %]* annually(75).

3.3.4.7. Market investigation

(141) The Commission's market investigation showed the extent to which market participants expected PET to grow in the future. Third-party views on this differ widely across type of third party, country of origin and experience of PET. German milk producers for example saw little prospect for growth in the near future, whereas Italian and Belgian producers were far more optimistic. Furthermore, iced tea producers were very optimistic, expecting fast growth for PET at the expense of carton.

(142) Generally, market participants suggested significant growth in PET use in the short term in the "sensitive" products. For those participants who felt able to quote the proportion of the "sensitive" products that would be packaged in PET in the 2005, the Commission found that on average PET would represent around 40 % in milk, 30 % in juice, 40 % in FFDs and over 50 % in iced tea. Respondents who were unable to predict the exact proportion of PET use in the future provided the Commission with some insight as regards their opinion on future growth. One major company active in the "sensitive" products market stated: "If it was cost effective and acceptable to consumers then there would probably be an incentive to move from carton to PET because of the considerations that currently differentiate carton and PET including image to consumers and consumer acceptance, pack differentiation, robustness and effective resealability". Another company stated: "We believe that technology already exists to provide good oxygen and light barrier properties and that PET will grow rapidly in the four sectors mentioned."

(143) The Commission's investigation showed that third parties were very enthusiastic about PET's future growth when improvements in barrier technology become established. An SBM machine supplier stated that "we are strongly convinced that thanks to the barrier technology PET will be able to gain market share for juices versus carton". Most respondents projected rapid PET growth to the detriment of carton in both milk and juice in the near future in such an eventuality. PET, due to its inherent advantages - transparency, malleability, ease of use, low cost and recyclability - is seen as a competitive material. Provided barrier technology becomes established, a significant number of market participants expect PET to reach more than 50 % of milk and juices to the detriment of carton in the next 4 to 5 years. A major company active in barrier technology forecasted that with a further cost reduction in their technology and improvements in PET manufacturing economics (i.e. blowing), PET will compete effectively with carton bricks and will lead to a substantial penetration of this material in this segment.

3.3.5. Conclusion on the current use and growth of PET in common product segments

(144) In the light of the above, the Commission has come to the conclusion that there is already significant overlap between PET and carton in the FFDs and tea/coffee drinks segments where PET already represents 20 % and 25 % respectively. PET will continue to make inroads into these segments at the expense of carton(76). Under a conservative estimate, with PET reaching 30 % in each of these segments by 2005, PET would pack 800 million litres of tea/coffee drinks (including sports drinks) and 1 billion litres of FFDs.

(145) Despite the current overall limited presence of PET in LDPs and juices on an EEA-wide basis, there is significant PET presence in LDPs and juices in certain Member States such as Italy, Belgium, Netherlands, France and the United Kingdom.

(146) The improvements in barrier technology and aseptic PET filling are expected to enhance PET's position in all four relevant product segments. The Commission has made a careful assessment of the parties' submissions and forecast estimates, third-party studies, responses to the market investigation and a review of the technological improvements. It is concluded that in the LDP and juice segment, PET will grow significantly in the next five years.

(147) The Commission considers that it is realistic to expect that PET will reach at least 10 to 15 % in fresh milk and 25 % in flavoured and other dairy beverages by 2005. PET's use for UHT milk (which represents approximately 50 % of the total milk market in the EEA) is uncertain even though the relevant light-barrier technology exists. Growth will depend on developments in low-acid aseptic filling and cost reductions. The Commission considers that PET has significant potential at least in smaller, premium segments of aseptic milk such as single-serve packages. With PET reaching at least 15 % of fresh milk, 25 % of other dairy beverages and only 1 % of UHT milk by 2005, PET will package approximately 3 billion litres per annum (this represents approximately 9 % of the total European market for liquid dairy products).

(148) As regards juice, in the light of the market investigation, the Commission expects substantial switching from glass to PET and a more limited switching from carton to PET to occur. Major beverage companies have already introduced juice in PET; these include the Minute Maid and Tropicana brands. The Commission believes that it is realistic to expect PET to reach at least 20 % of the overall juice market in the EEA by 2005; this would represent approximately 2 billion litres of juice filled in PET. This is still significantly lower than the level that PET has reached in North America and Australasia.

3.4. Rivalry between PET and carton in overlap products

(149) The Commission also investigated whether, given that carton and PET are technically substitutable, i.e. both materials can package the same products, and given the growth of PET in the common product segments, carton and PET packaging systems substitute each other to such an extent that they should be placed in the same product market for competition law analysis.

(150) Tetra has argued that even if the two materials can be used for packaging the same products, PET and carton packaging systems form distinct product markets and the pricing of one does not constrain the pricing of the other. This is due to the fact that the main driver for the choice of packaging systems is marketing differentiation of the final product, shape, positioning, and consumer group that is targeted.

3.4.1. Rivalry in the retail market

(151) Tetra has argued that beverage companies tend to use PET for premium products whilst reserving carton for bulk, low-margin products for price-conscious consumers. As a result, according to Tetra, PET and carton target different consumer groups and do not compete in the retail market. Tetra has supported its argument by producing examples showing that the same product (orange juice or apple juice) in the same supermarket own-brand was consistently more expensive when packaged in PET than in carton containers.

(152) The market investigation has only confirmed the notifying party's view partially. The Commission found that PET has been used as a marketing tool for the introduction of premium and branded products. However, the Commission found that PET is also used for low-margin products such as white milk; for fresh milk, which represents close to 50 % of the total dairy market in the EEA and, to a more limited extent, aseptic milk. PET has already captured 10 % of the fresh milk market in Italy where it is sold at the same retail price as carton packaged milk. There is nothing to prevent beverage companies from using PET in different simpler shapes for non-premium products as PET becomes established in the market and packaging costs continue to fall. Indeed, an analyst concludes, "our analysis of the PET market clearly shows that PET has both marketing and economic advantages for mass consumption markets"(77).

(153) In addition, the investigation revealed that carton is used for premium and branded products and in these segments PET would presumably constitute a direct rival. Moreover, new technological developments in carton have resulted and will continue to result in more differentiated carton shapes, which could provide a direct marketing alternative for premium and branded goods. Iced tea products by Twinings, for example, are at present sold in round "can-like" carton containers.

(154) It is therefore concluded that, whilst not being perfect substitutes at consumer level, both carton and PET can target the same consumer groups and offer a choice in all the common end-use product segments and that, in any event, PET will be well placed to target premium products that have in the past been packaged in carton.

3.4.2. Elasticity of demand between PET and carton packaging systems

(155) Tetra has stated that the choice of packaging is driven by numerous factors, including the physical properties of the liquid and the packages, packaging sizing and shape, consumer perceptions of the nature of the beverage and the package and branding concepts. This diversity of factors means that beverages are usually marketed in multiple types of packaging to satisfy varying consumer needs, and also that different beverages are packaged in a different mix of packaging materials.

(156) This has been confirmed by the market investigation to a certain extent. The submissions and data collected by the Commission show that an assessment of the level of substitution between different packaging materials is a complex exercise and that many parameters need to be taken into account. For example, packaging cost comparisons differ drastically depending on the size of the package used.

(157) The relative cost of PET has already been discussed in Section IV.3.3.2. Tetra submitted that, regardless of relative cost, the main driver of a beverage company's choice for a packaging material and hence packaging system is market differentiation and consumer preference. The market investigation only partially confirmed the view of the notifying party. Market respondents were asked, for example, whether they would switch from a carton packaging system to a PET packaging system and vice versa if the cost of one packaging system rose permanently by a small percentage (5 to 10 %). The majority of market respondents confirmed that such small price increases would not have a significant influence on their choice of packaging system. This argument is naturally stronger when comparing specific pieces of equipment which form only a part of the overall packaging system (e.g. it is estimated that the cost of the SBM machine accounts for 20 to 40 % of the cost of a whole PET filling line).

(158) However, the market investigation also revealed that, whilst cost is not the primary factor in the choice of packaging system, in particular, given that the two packages are not seen as perfect substitutes by consumers, it nevertheless remains a significant factor. Many respondents indicated that a price increase of 20 % would be sufficient to make them switch to the alternative packaging system. The investigation also showed that switches would mainly be one-way from carton to PET packaging systems and not vice versa. This is not surprising given that PET is seen as a more modern material which is, over all, preferred by consumers, all other factors (including price) remaining equal.

3.4.3. Switching costs

(159) The market investigation has shown that customers would be unwilling to abandon installed carton lines in favour of new PET lines unless there were significant price differences (much more than 5 to 10 %) or compelling consumer demand. This argument does not apply in cases of new installations either as additions of capacity or when old lines come to the end of their life (normally PET and carton lines have a life-span of approximately 7 to 10 years). In addition, switching costs are not prohibitive although they are relatively high. The establishment of a new PET line costs approximately EUR 1,5 million for a standard line to around EUR 7 million for a high-capacity aseptic line.

3.4.4. Supply-side substitutability

(160) The Commission agrees with the view of the notifying party that the mechanical concepts of carton packaging machines and SBM machines are very different and that the technology is not transferable. It is not possible to modify a carton packaging machine in order to produce PET bottles and vice versa. Both Tetra and its smaller rival carton supplier, SIG, have been able to obtain a foothold in the PET market through acquisitions rather than through capitalising on their own existing carton packaging technology.

(161) Whilst the Commission agrees that there is not sufficient supply-side substitutability indicating in itself a single product market, it cannot accept Tetra's contention that the two sectors are so different that know-how in one cannot have any use in the other. This is particularly so with regard to aseptic technology. Tetra contends that whilst aseptic technology has been an important driver of success in carton packaging (the majority of cartons being used are aseptic) this has not played any role in PET (where less than 0,5 % is aseptic). The reason for PET's limited aseptic role is that it has been used for products