Competition Bureau statement regarding the proposed acquisition of the natural cheese business of Kraft Heinz Canada ULC by Parmalat Canada Inc.

On May 30, 2019, the Commissioner of Competition issued a No Action Letter (NAL) with respect to the proposed acquisition of the natural cheese business of Kraft Heinz Canada ULC (KHC) by Parmalat Canada Inc. (Parmalat). The NAL confirms that, at this time, the Bureau will not challenge the transaction.

As part of its review, the Bureau obtained orders from the Federal Court under paragraph 11(1)(a) of the Competition Act (Act) to orally examine representatives of Parmalat Canada and KHC. This is the first time since the 2009 amendments to the Act that the Bureau has used this statutory provision to examine representatives of the merging parties of a transaction after issuing a supplementary information request under subsection 114(2) of the Act.

In conducting its investigation, the Bureau also obtained information from a wide range of stakeholders, including organizations involved in the supply management of milk, grocery retailers, foodservice companies, industry associations, and other cheese producers. The Bureau also reviewed documents and analyzed data that it collected throughout its investigation.

Background

On November 6, 2018, Parmalat announced that it had reached an agreement to acquire the assets associated with the natural cheese division of KHC.

Parmalat (a wholly-owned subsidiary of Parmalat S.p.A.) produces and supplies dairy and food products in Canada, including cheese, table spreads, cultured products, and beverages. Its natural cheese business involves multiple formats and flavours of natural cheese, including sales under the Black Diamond brand.

KHC (a subsidiary of The Kraft Heinz Company) manufactures and markets a wide range of food and beverage products in Canada, including natural cheese.

Under the transaction, Parmalat will acquire the assets associated with KHC’s natural cheese business, specifically its natural cheese brands Cracker Barrel, P’tit Québec, and aMOOZa! in the Canadian market, as well as KHC’s processing plant in Ingleside, Ontario. The transaction does not include the sale of KHC’s processed cheese business.

Analysis

The Bureau considered the effects of the transaction under various candidate product market definitions, including differentiating by quality of cheese (e.g. specialty cheese, non-specialty cheese excluding processed cheese (regular cheese), and processed cheese), by format of cheese (e.g. block, slices, shreds, snack and combinations thereof), and by brand (e.g. branded cheese and private label cheese). While the parties’ most significant overlap is with respect to regular cheese, which is typically found within the dairy aisle of the grocery store, it was not ultimately necessary to define the relevant product market.

The review primarily focused on the impact of the transaction on the grocery retail segment, where the parties’ overlap was most significant, but also considered its impact on the food service segment.

The Bureau considered both national and regional dimensions to competition. The review identified that there are regional differences in preferences, product types, and brand strengths. However, there are also national shipping patterns and negotiations with major retailers that are often conducted on a national basis. The Bureau also considered the relevance of tariffs charged on non-Canadian milk and cheeses as part of its geographic analysis.

The Bureau’s analysis demonstrated that, for the sale of regular cheese products, Parmalat Canada and KHC most closely compete with each other, Saputo’s Armstrong-branded products, and retailers’ private label products. The Bureau also considered the more limited presence of regional competitors.

The Bureau considered the possibility of either unilateral effects or coordinated effects arising from the merger. The Bureau concluded that the transaction would not give rise to a likely substantial lessening or prevention of competition in any relevant market. In coming to its decision, the Bureau considered a number of factors, including effective remaining competition, the growing importance of private label cheese products, barriers to entry (including the supply management system for milk), the degree of countervailing power held by major grocery retailers, the views of the market, and various quantitative analyses of the potential effects of the merger.

Examinations of Parties’ Representatives

The Bureau’s review of the transaction included oral examinations of representatives of Parmalat and KHC under oath or solemn affirmation pursuant to an order of the Federal Court under paragraph 11(1)(a) of the Competition Act.

The Bureau sought the orders to gather further information about a variety of topics related to the review, including events described within the transacting parties’ records, details of the supply management system for milk, and potential efficiencies that may arise from the transaction. Conducting these examinations provided additional insight into the industry and the merging parties’ businesses that otherwise would not be available to the Bureau.

The Bureau will continue to consider the use of oral examinations of representatives of the merging parties in the future on a case-by-case basis.

Conclusion

After assessing the competitive dynamics between Parmalat and KHC, the Bureau concluded that the transaction was unlikely to result in a substantial lessening or prevention of competition in any relevant market in Canada.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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