Holland Sweetener Company - Bitter Competition

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 HSC's entry. Simple

financial analysis demonstrates that NutraSweet will destroy close to $1bln of value if it

attempts to deter HSC's 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.

NutraSweet's response to HSC's entry

NutraSweet has a number of reasons for trying to deter HSC's 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, HSC's 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 NutraSweet's 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