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JollibeeBitter Competition: The Holland Sweetener Company versus NutraSweet

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Case Facts
The low-calorie, high-intensity sweetener dominated by NutraSweet, the operating entity of G.D.Searle & Co. NutraSweet had recorded sales of $711 million in 1986. NutraSweet has monopoly in the market owing to the patents which are about to expire in 1987 in the European and Canadian markets The Holland Sweetener Company (HSC), a joint venture between Tosoh Corporation and DSM, preparing to enter these markets with low cost patented process for manufacturing aspartame NutraSweet manufacturing involved high investment as minimum 2000-tonne annual capacity setup required for efficient production In 1986, HSC began setting up a 500-tonne aspartame production plant in Europe NutraSweet adopted “branded ingredient” strategy to market aspartame to food and beverage manufacturers, and offered discounts of up to 40% off the list prices to become exclusive worldwide supplier The soft drink market in U.S., dominated by Coca-Cola and Pepsi, accounted for 80% revenue of NutraSweet.

Rest 20% accounted for by tabletop sweeteners, and other food and beverage products NutraSweet AG, a joint venture between NutraSweet and Ajinomoto, had 60% of soft drink market in Europe (Coca Cola- 50%, Pepsi-10%) NutraSweet has exclusive, multi-year contracts with Pepsi and Coke, and HSC is planning to lodge a complaint with the EC, claiming contracts to be anti-competitive Several other high intensity sweeteners poised to enter U.S. and European markets in the coming years The trend of blending expected to strengthen as it has received consent from researchers and health authorities Winfried Vermijis, president of HSC, considering two strategies- “normal competition” and “price war” for entering the Canadian and European markets Porter’s 5-Forces Analysis

Industry under consideration- Aspartame market in Europe and Canada 1. Threat of New Entrants
Barriers to Entry
Incumbency advantage- NutraSweet has patents for aspartame in U.S., Canada and Europe and thus has monopoly in the market Exclusive, multi-year contracts of NutraSweet with Pepsi and Coca-Cola, which form 60% of soft drink industry Switching costs expected to be low because it is a commodity product Capital intensive industry and the plant had to be run at or near to design capacity Capacity expansion requires chunky incremental investments

Need to develop new process for manufacturing as the current processes are patented Threat of retaliation from incumbent is high- incumbent is expected to cut prices 2. Bargaining power of Suppliers

Low power of suppliers as the two chemicals required are easily available 3. Bargaining power of Buyers
For soft drinks market, low power of buyers as NutraSweet has monopoly and they are charging a premium Expected that bargaining power of buyers will go up once the patent gets expired and new players will enter 4. Threat of substitutes

New high intensity sweeteners have submitted petitions for FDA approval and expected to enter the sugar substitute market The new products have an advantage as they are heat stable which is absent in aspartame 5. Rivalry among existing competitors

Currently, no rivalry in the industry as it is monopolized by NutraSweet because of patents

Expected scenario in 1987

NutraSweet’s patents are expiring in European and Canadian markets, and HSC has started setting up a 500-tonne production plant in Netherlands 60% of the soft drinks market is captured by Pepsi and Coca-Cola, which has multiple-year contracts with NutraSweet European market for aspartame is growing at a rate of 26% per year Scenario 1: HSC loses the anti-competitive case against NutraSweet AG Major market share comprising of Pepsi and Coca Cola will remain with NutraSweet In this case, NutraSweet would not engage in price wars with HSC and continue to charge a premium for aspartame The Holland Sweetener Company can plan to capture rest 40% of the soft drinks industry and gain market share in other food and beverage industries HSC needs to remain sustainable till the end of long term contracts of Pepsi and Coca-Cola, and end of patent expiry in U.S. Scenario 2: HSC wins the case and NutraSweet’s contracts with Pepsi and Coca Cola are declared void In this case, European market will be open for competition between NutraSweet and HSC Heavy retaliation expected from NutraSweet as HSC’s entry will not go unnoticed.

The Holland Sweetener will enter the market with prices lower than those charged by NutraSweet so as to attract major players such as Pepsi and Coca Cola NutraSweet has huge installed capacities which it needs to utilize for economical returns. Thus, it is expected to engage in price wars to retain its control over the European and Canadian market Currently, aspartame is priced at $70 per lb. With the expected price wars, the rates can fall down by 70% which is equal to gross margin of NutraSweet in 1986 Coca Cola and Pepsi will benefit from the expected price wars as both the companies will offer their products at far lower prices

Figure 1: Payoff Matrix between HSC and NutraSweet
If one company reduces prices while the other maintains, the company with lower prices will capture market share (payoff of +2) from the competitor (payoff of -2). If both lower prices market share will be divided, with lower profit margins (payoff of -1). If both maintain prices, market share will be divided, but margins will be maintained (payoff of +1). The above relative payoffs will result in the scenario where both players lower prices leading to a price war. As it is a repeated game scenario – it makes sense for both players to corporate. But running at 100% utilization is essential and NutraSweet has excess capacity, prices will fall.

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