Statement of Commissioners Sheila F. Anthony and Mozelle W. Thompson

PepsiCo, Inc./The Quaker Oats Company

File No. 011-0059

The Commission today by a 2-2 vote declined to challenge PepsiCo, Inc.'s acquisition of The Quaker Oats Company. We believe that this result is regrettable.

Pepsi-Cola Company, the beverage division of PepsiCo, is the world's second-largest beverage company. Pepsi brands, among them Pepsi, Diet Pepsi, and Mountain Dew, account for nearly one-third of the approximately $56 billion in annual soft drink sales in the United States.⁽¹⁾ Quaker Oats owns the hugely popular Gatorade brand, the leading line of sports drinks in the world, with sales of over $2 billion worldwide in 2000. As Quaker's own website indicates, "[w]hile the science behind Gatorade makes it the beverage of choice for many professional athletes, it is for everyone who is hot and thirsty."⁽²⁾

Allowing PepsiCo to further consolidate its soft drink position by acquiring Quaker Oats and its popular Gatorade products raises obvious and significant concerns that competition will be lost in the highly concentrated soft drink industry. Our assessment is by no means hypothetical, but is instead supported by the evidence provided both by numerous industry participants as well as the parties themselves.

One of the critical elements of merger analysis is product market definition. Of course, as markets change over time, and manufacturers expand their product lines, it can become more difficult to draw straight lines to connect products that directly compete with each other. But, through the years, the fundamentals of the highly concentrated soft drink industry have remained remarkably constant. We are dismayed that our colleagues have failed to recognize this central fact.

Fifteen years ago, in an opinion granting a preliminary injunction against the Coca-Cola Company's proposed acquisition of the Dr. Pepper Company, Judge Gesell summed up market conditions in a statement that could just as easily be made today:

If . . . acquisition by the leading carbonated soft drink corporations becomes the order of events, as it certainly will should either major company [Pepsi or Coke] succeed [in acquiring Dr. Pepper], then down the line there will be diminishing possibility of other rivals emerging to freshen and invigorate the competition. It is just this process that Congress sought to check by bringing under sharp scrutiny any incipient move in this direction by any dominant concern functioning with the force of Coca-Cola Company in a highly concentrated market - a market of major consequence to consumers.⁽³⁾

We believe that the same could be said about PepsiCo's planned acquisition of the Gatorade brand.

Having reviewed the evidence uncovered during the staff's investigation, we believe that this acquisition will harm consumers by leading to reductions in price competition, retailer allowances, and product innovation in an industry dominated by two companies, PepsiCo and Coca-Cola. By contrast, there is no evidence that this acquisition will benefit soft drink consumers. Moreover, in light of the market positions of PepsiCo and Gatorade products, and in particular the potential threat to innovation posed by this transaction, the only appropriate course of action was to seek to block the acquisition pending further analysis through administrative proceedings. Mere monitoring and supervision might be insufficient to guard against these anticompetitive effects.

For these reasons, we believe - and we think a court would have agreed - that PepsiCo's acquisition of Quaker Oats is unlawful and contrary to the public interest. As a result of the Commission's failure to act today, we believe that consumers of sports drinks and, indeed, all soft drinks will suffer the consequences.

Endnotes:

1. PepsiCo website, available at http://www.pepsico.com.

2. Quaker Oats website, available at http://www.quakeroats.com.

3. F.T.C. v. The Coca-Cola Co., 641 F. Supp. 1128, 1141 (D.D.C. 1986).