Essay About Canadian Aspartame Markets And Price War

Holland Sweetener Company – Bitter Competition
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The Holland Sweetener Company (HSC) is facing a decision on whether to enter into
the European and Canadian aspartame markets in late 1986. The key uncertainty
affecting the decision is the course of action that the current monopolist,
NutraSweet/Ajinomoto consortium (NutraSweet), will take to deter HSCs entry. Simple
financial analysis demonstrates that NutraSweet will destroy close to $1bln of value if it
attempts to deter HSCs entry through a price war. To maintain its market share,
NutraSweet will focus on defending its exclusive contracts with Coke and Pepsi and on
promoting its well established brand. Therefore, HSC should enter the lucrative
aspartame market in Europe and Canada and concentrate on (1) breaking the NutraSweet
hold on the diet soft drink market segment and (2) establishing its brand through
promoting new sweetener mixes for personal consumption.
NutraSweets response to HSCs entry
NutraSweet has a number of reasons for trying to deter HSCs entry into the
aspartame market. First and foremost, entry of a competitor will threaten the large profit
margins that NutraSweet currently enjoy as a monopolist (based on the case data, I
estimated the gross profit margin to be around 65% in 1986). Maintaining the currently
high price level is critical to Monsanto, the parent of NutraSweet, which paid $2.8bln for
the comapny in 1985 and needs to guarantee a reasonable return on its investment. The
current price level is also beneficial to Ajinomoto, the partner of NutraSweet, which is
suffering from low profit margins in all its other business segments (25% gross margin in
1986).
Furthermore, HSCs entry into the European and Canadian market will threaten the
current exclusive contracts that NutraSweet signed with Coke and Pepsi. The European
Commission is likely to rule the contracts anti-competitive (Coke and Pepsi account for
60% of the soft drink market in Europe) since the European patents on aspartame have
expired. Allowing another company to compete to be a supplier to Pepsi and Coke will
jeopardize the price level negotiated in these contracts and threaten NutraSweets future
market share in the rest of the world (Coke and Pepsi account for close to 50% of the
world aspartame demand).
HSC will also create overcapacity in aspartame production if it is allowed to enter the
market. Shipping of aspartame is very cheap (15-20c shipping cost per lb. versus $70
sales price per lb in 1986) and European overcapacity will affect all markets, except for
the US that is protected by the existing patents. NutraSweet is planning to bring on
stream another plant in Harbor Beach, MI, USA to meet anticipated growth in the world
demand. Assuming that this plant will have 3,000 tons per year capacity (similar to the
more recent plant in Augusta, GA, USA) and that it will come