Heublein, Inc

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IN THE MATTER OF HEUBLEIN, INC., ET AL.

FINAL ORDER, OPINION, ETC., IN REGARD TO ALLEGED VIOLATION OF SEe. 5 OF THE FEDERAL TRADE COMMISSION ACT AND SEC. 7 OF THE CLAYTON ACT Docket 8904. Amended Complaint Nov. 976-order, Oct. 1980 This order dismisses the Commission s November 16, 1976 amended complaint which alleged that the effect of Heublein, Inc. 's acquisition of a controlling interest in United Vintners, Inc. substantially lessened competition or tended to create a monopoly in the production, distribution and/or sale of wine in the United States. The Commission, in dismissing the complaint, held that the small lessening of actual competition resulting from the merger and the evidence in the record were insufficient to establish a violation of antitrust law.

Appearances For the Commission: Nelson M Ishiyama, Laurence 0. Masson and Mary L. Azcuenaga.

For the respondent: George J. Caspar Farmington, Ct. Richard E. Walton, San Francisco, Ca. Lloyd W McCormick, William H. Armstrong and Warren E. George, McCutchen, Doyle, Brown & Enersen San Francisco, Ca. J. Wallace Adair, Ralph J. Savarese, John DeQ, Briggs, III and Raymond A. Jacobsen, Jr., Howrey & Simon, Washington, D.

AMENDED COMPLAINT The Federal Trade Commission, having reason to believe that Heublein, Inc. (hereinafter "Heublein ), and Heublein Alled Vintners, Inc. (hereinafter "Vintners ), respondents herein, have violated the provisions of Section 7 of the Clayton Act, as amended, (15 US.C. 18), and that the above-named respondents, Allied Grape Growers (hereinafter "Alled"), and United Vintners (hereinafter United"), respondents herein, have further violated the provisions of Section 5 of the Federal Trade Commission Act (15 U.s. C. 45), through the acquisition by Heublein of a controllng interest in United, and that a proceeding in respect thereof would be in the public interest, hereby issues this amended complaint (hereinafter complaint") pursuant to Section 11 of the amended Clayton Act and . Original Comll intissued Nov 27 1972 Amended Complaint 96 F.T.C. Section 5 of the Federal Trade Commission Act, stating its charges as follows:

DEFINITIONS 1. For purposes of this complaint, the following definitions wil apply:

A. All wine, All wine is a recognized industry term for expressing total production, distribution and/or sale statistics for table, dessert and sparkling wine. There are recognized statistical subdivisions in the wine industry, for example. imports and domestic wine or premium and standard wine. For simplification, however, the market share percentages used in this complaint are for "all wine production, distribution or sale. (2) B. Table or dinner (hereinafter table) wines. Table wines are stil (non-effervescent) wine products. Their alcohol content is not over 14% by volume.

C. Dessert or sweet (hereinafter dessert) wines. Dessert wines are stil wine products with over 14% alcohol by volume. D. Sparkling wines. Sparkling wines are effervescent wine products. Their alcohol content usually ranges from 10 to 14% by volume. II.

ACQUISITION 2. On or about September 17, 1968, as a result of negotiations commenced earlier during 1968, the Board of Directors of Allied and representatives of Heublein reached an agreement in principle whereby Heublein would acquire a controllng interest in United, a wholly-owned production and marketing subsidiary of Alled. The acquisition was approved by Allied' s membership in late 1968. On or about February 21, 1969, the acquisition was completed, giving Heublein a controlling interest in United through its control of Vintners.

3. Under the terms of the acquisition agreement, Allied's members received shares of Heublein common stock valued at approximately $7 521 000, Heublein Series A preferred stock valued at approximately $20 319 000, and Heublein Series B preferred stock valued at approximately $5,000 000. Pursuant to the acquisition agreement, United was converted to a corporation with the same name and became a wholly-owned subsidiary of Vintners, a corpora- HgUBLEIN, INC., ET AL. 387 :385 Amended Complaint tion organized for the purpose of this transaction. The members of Allied received all of the Class B common stock of Vintners constituting 18% of Vintners' outstanding stock, and Heublein received all of Vintners' Class A common stock, which constituted 82% of Vintners' outstanding stock The members of Allied formed a second non.profit cooperative association with the same name succeeding to all assets and liabilities of its predecessor. All outstanding shares of Vintners' Class B common stock were contributed by the members to the new Allied organization. II.

HEUBLEIN , INC.

4. Respondent Heublein is a corporation organized, existing and doing business under and by virtue of the laws of the State of Connecticut, with its principal offce and place of business located at 330 New Park Ave., Hartford, Connecticut. At all times relevant herein, Heublein sold and shipped its products in interstate commerce and thus it was engaged in commerce as "commerce" is defined in the Clayton Act, and was engaged in or its business affected commerce as "commerce" is defined in the Federal Trade Commission Act. (3) 5. At the time it acquired a controlling interest in United, Heublein was a major industrial corporation, a national leader in the sale of alcoholic beverages and a seller of specialty food products. Net sales for its fiscal years ending June 30 were: $1 466,095,000 in 1975; $1 283 002 000 in 1974; $1 013 115 000 in 1973; $922 190 000 in 1972; $629 845 000 in 1971; $586 295 000 in 1970; $523 799 000 in 1969 and $487,767,000 in 1968. In 1969, Heublein was the fifth largest company in the United States sellng alcoholic beverages. 6. Notable among Heublein s distiled liquor products are vodka, gin, rum, tequila, Scotch and Canadian whiskey. Its Smirnoff vodka is the largest selling brand of vodka in the country and the second largest selling brand of liquor made in the United States. Heublein originated and continues to dominate the growing domestic market in the production and sale of prepared cocktails. 7. At the time of the acquisition of a controllng interest in United, Heublein was a competitor in the wine industry. Although its sales of wine produced in the United States were small, Heublein was a major wine importer. In 1967, it imported 1 100 000 gallons. This was approximately 5% of all the wine imported into the United States. Lancer s Vin Rose, produced in Portugal, was the nation leading imported table wine in 1968 and continues to be one of the 3RR FEDERAL TRADE COMMISSION DECISIONS Amended Complaint 96 F. nation s leading imported table wines. Heublein has had world distribution rights for this product since 1965. In addition, it was and is the sole importer of Harvey s Sherries & Ports, a line of dessert wines, Harvey s Bristol Cream Sherry was and is the leading imported sherry in the United States. Heublein also imported the Bertani line of wines from Italy, the Vinya and Quinta wines from Portugal and many others.

8. Since purchasing a controlling interest in United in February 1969, Heublein has expanded the company s production facilties number of wine products and vineyard acreage. In addition, in June 1969, Heublein acquired the Beaulieu Vineyard of Napa, California and its distributor affiiate (hereinafter Beaulieu). Although small Beaulieu is regarded as one of the nation s best wineries. For the 087. Also, in 1969,year prior to the acquisition, it had sales of $1 589, half of the members of the St. Helena Cooperative of St. Helena, California agreed to divert their grapes from the St. Helena Winery to United. Further, in 1969 Heublein began the annual Premiere National Auction of Rare Wines. In addition to selling rare wines, the auction also sells "futures" in anticipated production of Heublein s wines. Finally, Heublein purchased Regina Grape Products Co. of Etiwanda, California in January 1971. Regina is primarily a producer of wine vinegar.

9. Heublein is an aggressive merchandiser and distributor of its products. It is one of the nation s major advertisers with an 000 inexpenditure of approximately $35 000,000 in 1970 and $103,700 1975. In 1970 it was the second largest advertiser among companies in the liquor business. In 1975 it was the largest such advertiser. (4) Heublein s budget for its wine advertising is both substantial and expanding. Heublein distributes its alcoholic beverage products to state liquor agencies in the 18 states that monopolize the sales of such products and to approximately 600 independent wholesale distributors in the remaining 32 states, the District of Columbia and the territories ofthe United States.

IV.

ALLIED GRAPE GROWERS 10. Respondent Allied is an incorporated agricultural cooperative association organized. existing, and doing business under and by virtue of the laws of the State of California, with its principal offce and place of business in Fresno, California. At the time of the sale of a controlling interest in United, respondent Allied was in the business of acquiring grapes in California and other states and 385 Amended Complaint producing and marketing wines made therefrom through its whollyowned subsidiary United. Said wines were sold throughout the United States. Since the sale of a controlling interest in United, respondent Allied has been engaged in the business of acquiring grapes in California and other states for sale to United for the production of wine to be sold throughout the United States. Therefore, at all times relevant herein, Allied was engaged in or its business affected commerce as "commerce" is defined in the Federal Trade Commission Act.

II. As a result of its agreements with Heublein, Allied retains an 18% interest in United through its ownership of shares in Vintners, the sole shareholder of United.

12. Allied claims the contractual right to designate 8 members or 40% of the authorized number of directors of United, whichever is greater, for whom Vintners is obligated to vote, At the present time eight members of the United board of directors are designees ofAllied. UNITED VINTNERS, INC.

13. Prior to its acquisition by Heublein, respondent United was a wholly-owned subsidiary of Allied, an incorporated agricultural cooperative association organized, existing and doing business under and by virtue of the laws of the State of California. United is now a corporation organized, existing and doing business under and by virtue of the laws of the State of California. At all times relevant herein, United has had its principal offce and place of business at 601 4th St., San Francisco, California. At the time of the acquisition United was the sole operating entity of Allied, as all of Allied' production and marketing assets were held by United. When control of United was acquired by Heublein, United continued to hold and operate substantially all of said assets. At all times relevant herein United sold and shipped its products in interstate commerce and thus it was engaged in commerce as "commerce" is defined in the Clayton Act and was engaged in or its business affected commerce as commerce" is defined in the Federal Trade Commission Act. (5) 14. At the time of its acquisition, United was the nation s second largest seller of wine products. Net sales for its fiscal years ending August 31 were: $96,009 189 in 1968; $91 026 634 in 1967; and $86 231 076 in 1966.

15. Prior to its acquisition, United crushed the grapes delivered by Allied' s approximately 1 600 members and processed and distrib- Amended Complaint 96 F. uted the resulting wine. It also purchased some grapes from nonmembers. Approximately 30% of United' s distribution was done through its own wholesale operations. The remainder of its sales were made by about 370 independent wholesale distributors. Allied retained a portion of the proceeds from the wine sales as a part of its capital fund and distributed the remainder to its members in proportion to the market value of the grapes each had delivered. Although the acquisition has caused some change in the procedure for determining grower compensation, United' s function of crushing grapes, producing wine and distributing it has remained basically unchanged.

16. At its various wineries, United produces wines of all types, including table, dessert and sparkling. Most of these products are sold under brand names owned by United, for example, Italian Swiss Colony and Inglenook.

17. Subsequent to the acquisition, Heublein has expanded United' s assets. A new glass plant near United' s winery at Madera California provides most of United' s bottle requirements. In addition, a new plant for producing sparkling wines has been completed at Madera. The new facility doubled United' s capacity for producing such wines. Finally, Heublein has delegated responsibility for the distribution of some of its imported wines to United. VI.

HEUBLEIN ALLIED VINTNERS, INC.

18. Respondent Vintners is a corporation organized, existing and doing business under and by virtue of the laws of the State of California, with its principal office and place of business at 604 4th St. , San Francisco, California. Vintners was organized for the purpose of this acquisition and all of its stock is held by Heublein and Allied. Its sole asset is 100% of the stock of United. Through United, Vintners is in the business of producing and marketing wines throughout the United States. Since its formation, Vintners has been engaged in commerce as "commerce" is defined in the Clayton Act, and has been engaged in or its business affected commerce as "commerce" is defined in the Federal Trade Commission Act.

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385 Amended Complaint VII.

TRADE AND COMMERCE 19. The product markets affected by Heublein s acquisition of a controlling interest in United are wine production, distribution and/or (6Jsa1e g-enerally, as reflected by "all wine " statistics, and wine s three product subcateg-ories: table, dessert and sparkling; all of which are concentrated and nation-wide in geographic scope. 20. Wine sales in the United States are in the midst of a major expansion. They have increased from 145 186 000 gallons in 1955 to 267 084 000 in 1970 and to 367 574 000 gallons in 1975. Sales oftable and sparkling wines by California wineries, wineries in other states and importers have all shared in the expansion. Sales of dessert wines, however, have decreased since 1955. 21. Wine sales in the United States are dominated by two wineries. In 1967- , E. & J. Gallo Winery (hereinafter Gallo) and United made over 40% of the wine sales in the United States. Gallo sales were slightly hig-her than United' s. The third largest wine seller, Roma Wine Company (hereafter Roma), had less than 4% of the market.

22. An even higher concentration exists among California wineries that produce over 70% of the wine sold throughout the United States. In 1967- , Gallo and United's production accounted for almost 60% of the wine produced in California and commercially sold throughout the United States. Roma, the third largest California producer, had less than 5% of California s national wine sales. 23. There are major barriers to entry to any firm wishing to make a significant entrance into the wine business. New winery equipment and the grapes for wine production are expensive. In addition, the return on investment is slow. The high cost of advertising presents a second barrier to any winery wishing to sell on a national or even regional basis. Consumer appeal, created by advertising, is an important element in the marketing of wine products.

24. Distribution represents another barrier to entry. Liquor distributors are selectively licensed, if not directly controlled, by state governments. Each state, the District of Columbia and the federal government have their own laws regulating liquor distribution. Thus, a winery is more limited in the distribution channels it may select than a non-liquor company. In addition, there is always the potential that a liquor company wil require an independent wholesaler to carry and/or promote a full line of its liquor and wine 092 FEDERAL TRADE COMMISSION m:CISIONS Amended Complaint 96 F. products. A wine company, not possessing such leverage, is at a disadvantage.

VIII.

EFFECT OF THE ACQUISITION 25. The effect of the acquisition by Heublein of a controllng interest in United may be substantially to lessen competition or to tend to create a monopoly in the production, distribution and/or sale of wine and its three product subcategories in the United States, (7) in violation of Section 7 of the Clayton Act, as amended; and the effect of the agreement by which Heublein, Allied and Vintners undertook to eliminate the actual and potential competition between Heublein and United may be to restrain trade unreasonably, and to hinder or have a dangerous tendency to hinder competition unduly, thereby constituting an unfair act and practice in commerce, in violation of Section 5 of the Federal Trade Commission Act. These effects may occur in the following ways:

A, Actual and substantial potential competition in the production, distribution and sale of wine may have been eliminated; high levels of concentration may be increased. B. The entry and growth of new wineries and the expansion of existing wineries may have been retarded, limited, discouraged or even prevented.

C. Independent wineries may have been retarded, limited, discouraged or even prevented from purchasing better quality wine grapes as well as vineyard acreage for their production. D. Independent wineries may have been deprived of an opportunity to compete for distribution rights and, thereby, ultimate sales to consumers to the detriment of the general purchasing public. E. Mergers between potential entrants and viable wineries may result from the anticompetitive pressures resulting from Heublein acquisition of a controllng interest in United. F. Mergers between actual competitors producing and sellng wine may result from the anti competitive pressures resulting from Heublein s acquisition of a controllng interest in United. IX.

VIOLATION By reason of the foregoing, Heublein s acquisition through Vintners of a controllng interest in United, constitutes a violation of , 385 Initial Decision Section 7 of the Clayton Act, as amended, and the agreement among Heublein, Alled and Vintners by which the acquisition was accomplished, constitutes a violation of Section 5 of the Federal Trade Commission Act.

INITIAL DECISION BY ALVIN L. BERMAN, ADMINISTRATIVE LAW JUDGE JULY 2, 1979 PRELIMINARY STATEMENT The Commission s amended complaint, issued in November 1976, charged that Heublein, Inc. ("Heublein ) and Heublein Allied Vintners, Inc. ("Vintners ) violated Section 7 of the Clayton Act, as amended, (15 U.s.C. 18), and that Heublein, Vintners, Alled Grape Growers ("Alled") and United Vintners, Inc, ("United") violated the provisions of Section 5 of the Federal Trade Commission Act (15 U . C, 45) in connection with the acquisition by Heublein of a controllng interest in United.

In its complaint, the Commission defined the relevant market as all wine" which encompassed the total production, distribution and/or sales statistics for "table dessert" and "sparkling" wines which, in turn, were alleged to be recognized statistical subdivisions of the "wine industry . Table (or dinner) wines were defined as stil (non-effervescent) wine products with alcohol content of not over 14 percent by volume; dessert (or sweet) wines were defined as stil wine products with over 14 percent alcohol content by volume; and sparkling wines were defined as effervescent wine products with an alcohol content usually ranging from 10-14 percent by volume, The challenged acquisition was alleged to have been consummated on or about February 21, 1969. Following is a summation of the specific allegations, Heublein is a corporation organized, existing and doing business under and by virtue of the laws of the State of Connecticut, with its principal offce and place of business located in Hartford, Connecticut. At all relevant times, it was engaged in commerce or its business affected commerce as "commerce" is defined in the Federal Trade Commission Act.

At the time of the acquisition, Heublein was a major industrial corporation, a national leader in the sale of alcoholic beverages I The original complaint, issued in November 1972, had named only Heublein as a respondent and had charged it only with violation of Section 7 of the Clayton Act by reason of its acquisition ofa controHing interest in Unite 336- 345 0 - 81 - 25 394 FEDERAL TRADE COMMISSION m;CISIONS Initial Dccision 96 F. (being the fifth largest company in the United States so engaged) and a seller of specialty food products. Among its distilled liquor products was Smirnoff Vodka, the largest selling brand of vodka in the country and the second largest brand of liquor produced in the United States. Heublein originated and dominates the growing domestic market in the production and sale of prepared cocktails. In addition to selling a small amount of wine (3)produced in the United States, Heublein was a major wine importer. Its imports included Lancers Vin Rose which was produced in Portugal and was the nation s leading imported table wine in 1968. It continues to be one of the nation s leading imported table wines. Heublein was and is the sole importer of Harveys Sherries and Ports, a line of dessert wines which includes Harveys Bristol Cream Sherry which was and is the leading imported sherry into the United States. Heublein is an aggressive merchandiser and distributor of its products. It is one of the nation s major advertisers. It was the second largest advertiser among companies in the liquor business in 1970 and the largest such advertiser in 1975. Heublein s budget for wine advertising is both substantial and expanding. It distributes its alcoholic beverage products to state liquor agencies in the 18 states that monopolize the sale of such products and to approximately 600 independent wholesale distributors in the remaining 32 states, in the District of Columbia, and in the territories of the United States. Allied Grape Growers is an incorporated agricultural cooperative association organized, existing and doing business under and virtue of the laws of California with its principal office and place of business in Fresno, California. At the time of its sale to Heublein of the controlling interest in United, Allied was in the business of acquiring grapes in California and other states and producing and marketing wines made therefrom through United, its wholly-owned subsidiary. At all times relevant herein, Allied was engaged in commerce or its business affected commerce, as "commerce" is defined in the Federal Trade Commission Act. Prior to the acquisition of the controlling interest of United by Heublein, United was a wholly-owned subsidiary of Alled. United was the sole operating entity of Allied; all of AIlied' s production and marketing assets were held by United. At all times relevant herein, United had its principal offce and place of business in San Francisco, California, was engaged in commerce as "commerce " is defined in the Clayton Act and was engaged in or its business affected commerce as "commerce" is defined in the Federal Trade Commission Act.

At the time of its acquisition, United was the nation s second .

11c,UD. .LJ.U"I .L L".u. 385 Initial Decision largest seller of wine products. United crushed the grapes delivered by Alled' s approximately 1 600 members and processed and distributed the resulting wine. It also purchased some grapes from nonmembers. Approximately 30 percent of United's distribution was accomplished by its own wholesale operations with the remainder through about 370 independent wholesale distributors. Since the merger, United' s function of crushing grapes, producing wine and (4) distributing wine products has remained basically unchanged. United produces wines of all types, including table, dessert and sparkling, and sells most of its products under brand names which it owns, for example, Italian Swiss Colony and Inglenook. Heublein Alled Vintners, Inc. ("Vintners ) is a corporation organized, existing and doing business under and by virtue of the laws of California with its principal offce and place of business in San Francisco, California. Vintners was organized for the purpose of the acquisition and all of its stock is held by Heublein and Allied. Its sale asset is 100 percent of the stock of United. Through United Vintners is in the business of producing and marketing wines throughout the United States and since its formation has been engaged in commerce as "commerce" is defined in the Clay ten Act and has been engaged in or its business has affected commerce as commerce" is defined in the Federal Trade Commission Act. Under the terms of the acquisition agreement, United was converted from an agricultural cooperative association to a corpora. tion . with the same name, organized, existing and doing business under and by virtue of the laws of the State of California. It became a wholly-owned subsidiary of Vintners, the corporation organized for purpose of the transaction. Allied' s members received all of the class B common stock of Vintners which amounted to 18 percent of Vintners' outstanding stock. Heublein received all of Vintners ' class A common stock whicb constituted 82 percent of Vintners' outstanding stock. The members of Allied formed a second non-profit cooperative association with the same name which succeeded to all assets and liabilities of its predecessor. All outstanding shares of Vintners' class B common stock were contributed by the members to the new Allied organization. In summary, United, which had been a wholly-owned production and marketing subsidiary of Alled was reorganized as a for profit corporation with 100 percent of its stock owned by Vintners; and as a result of the various organizations and reorganizations recited in the complaint, Vintners was created as a corporation owning 100 percent of United with Heublein owning 82 percent of Vintners and Allied owning 18 percent. Since the acquisition in February 1969, Heublein has expanded Initial Decision 96 F.T. United' s assets and production facilities, the number of its wine products and its vineyard acreage. A new glass plant near United' s bottlewinery at Madera, California, provides most of United' requirements. A new plant for producing sparkling wines has been completed at Madera, doubling United' s capacity for producing such wines. Heublein has delegated responsibility for the distribution of some of its imported wines to United. (5) In June 1969, Heublein acquired the Beaulieu Vineyard of Napa, California ("Beaulieu ), and its distributor affliate. Although small, Beaulieu is regarded as one of the nation s best wineries. Also in 1969, half of the members of the St. Helena Cooperative of St. Helena, California, agreed to divert their grapes from the St. Helena Winery to United. In 1971 , Heublein purchased Regina Grapes Products Company of Etiwanda, California which is primarily a producer of wine vinegar.

The product markets alleged to have been adversely affected by Heublein s acquisition of a controlling interest in United are wine s threeproduction, distribution and/or sale generally and wine product subcategories: table, dessert and sparkling, all of which are concentrated and nationwide in geographic scope, Wine sales are alleged to be in the midst of a major expansion with sales of table and sparkling wines by California wineries and wineries of other states and importers having shared in the expansion. Sales of dessert wines, however, have decreased since 1955. Wine sales in the United States are alleged to be dominated by two wineries: Gallo Winery ("Gallo ) and United. In 1967- , these two companies accounted for over 40 percent of the wine sales in the United States with Gallo s sales being slightly higher than United' The third largest wine seller, Roma Wine Company, had less than 4 percent of the market.

It is alleged that there are major barriers to entry to any firm wishing to make a significant entry into the wine business inasmuch as new winery equipment and the grapes for wine production are expensive and the return on investment is slow. A second barrier to any winery wishing to sell on a national or regional basis is the high cost of advertising. Consumer appeal, created by advertising, is an important element in the marketing of wine products. Another barrier to entry is distribution. Liquor distributors are either directly controlled or selectively licensed by state governments. Each state, the District of Columbia, and the federal government have laws regulating liquor distribution. Thus, a winery is more limited in the distribution channels it may select than a non-alcoholic beverage company. Further, there is the potential that a liquor company wil HEUBLEIN, lng, ET AL. 397 385 Initial Decision require an independent wholesaler to carry and/or promote a full line of its liquor and wine products to the detriment of competing wineries. Therefore, a wine company not possessing such leverage is at a disadvantage.

The effect of the merger was alleged as follows: The effect of the acquisition by Heublein of a controlling interest in United may be substantially to lessen (6)competition or to tend to create a monopoly in the production, distribution and/or sale of wine and its three product subcategories in the United States, in violation of Section 7 of the Clayton Act, as amended; and the effect of the agreement by which Heublein, Allied and Vintners undertook to eliminate the actual and potential competition between Heublein and United may be to restrain trade unreasonably, and to hinder or have a dangerous tendency to hinder competition unduly, thereby constituting an unfair act and practice in commerce, in violation of Section 5 of the Federal Trade Commission Act. These effects may occur in the following ways.

Actual and substantial potential competition in the production, distribution and sale of wine may have been eliminated; high levels of concentration may be increased. B. The entry and growth of new wineries and the expansion of existing wineries may have been retarded, limited, discouraged or even prevented.

C. Independent wineries may have been retarded, limited, discouraged or even prevented from purchasing better quality wine grapes as well as vineyard acreage for their production. D. Independent wineries may have been deprived of an opportunity to compete for distribution rights and, thereby, ultimate sales to consumers to the detriment of the general purchasing public. E. Mergers between potential entrants and viable wineries may result from the anticompetitive pressures resulting from Heublein acquisition of a controllng interest in United. F. Mergers between actual competitors producing and selling wine may result from the anticompetitive pressures resulting from Heublein s acquisition of a controlling interest in United. (7) Respondents in substance denied the material allegations of the complaint. In addition, Heublein and United alleged that for a number of years competition in several segments of the wine industry has been dominated by Gallo and that prior to the challenged acquisition, United was declining competitively and, but for the acquisition, was destined to remain an ineffective competitor. As noted above, Allied was not named as a party in the original 39R FEDERAL TRADE COMMISSION DECISIONS Initial Decision 96 F. complaint. Allied, however, had moved for leave to intervene in order to protect its interest in United in the event divestiture were ordered, particularly in the light of a supply contract that (1) granted Allied the right to supply United's grape requirements for up to 80 years and (2) gave Allied the right of first refusal in the event Heublein were to divest itself of its interest in United. While affrming the administrative law judge s denial of Allied's application to intervene in the matter for all purposes, by order of June 26 1973, the Commission granted Alled the right to participate in the proceeding with respect to the issue of relief. As also noted above, Allied was named as a party in the amended complaint. Near the close of presentation of the defense by Heublein, United and Vintners (collectively referred to as "HUV"), Allied formally renounced all claims under the supply contract including the right of first refusal in the event Heublein should be required to divest itself of its interest in United. This resulted from an agreement reached among the respondents following decision in a private suit in a United States district court' in which Allied had sued Heublein for certain relief and Heublein had counterclaimed for, inter alia, relief from the supply contract. Following resolution of the private suit in favor of Heublein, Allied determined not to appeal and sold its 18 percent interest in Vintners to Heublein. Heublein then owned 100 percent of Vintners and, through Vintners, 100 percent of United. Allied abandoned all claims formerly made in this case (See RX 1248A-Z4).' (8) Relying upon the foregoing, Alled, on September 13, 1978, moved that it be dismissed from the proceeding. On September 25, 1978 ruling was deferred until the initial decision. At CB 3, complaint counsel state that inasmuch as Alled no longer owns an interest in Vintners, it is no (9)longer necessary to retain Alled as a respondent , Allied Grape Growers v. HCllblein, Inc..Civ. No. C-75-045b (Il Cal., filed July 21, 1978) , Among the abbreviations used herein arc tlm following. CH - Complaint counsel's brief (post- trial memorandum) CP Complaint Counsel's Proposed Findings of Fact, Conclusions of Law and Order CPF - Complaint counsel' s propused finding in CP-followed by its number(s) CR - Complaint Counsel's Reply to Respondenl ' Proposed Findings of Fact and Conclusions of Law CRPF - Complaint counsel' s proposed finding in CR-followed by its number(s) CX - Commission exhibit, foHowed by its number and the referenced page(s) HUV - Collective reference to respondents HeLJblein, Uni d and Vintners RAX - Exhibit of respondent Alled, followed hy its number and the referenced page(s) RP - HUV respondents' Proposed Findings of Fact, Conclusions of Law and Order Hll" HUV respondenl ' proposed finding in RP- followed by its number(s) RR - BUV respondents' Reply To Complaint Counsel's Proposed Findings of Fact, Conclusions of Law and Order RRPF - HUV respondents' proposed finding in RR- followed by its number(s) RX - Exhibit of BUV respondents followed by iL number and the referenced page(s) Tr - Transcript of heariogs, foHowed by the page number(s) , , . UjV H'D , U LH '10.

385 Initial Decision for the purpose of obtaining effective relief. Complaint counsel therefore, do not oppose Allied's motion to be dismissed as a respondent.

On December 13, 1978, Vintners moved for dismissal of the complaint against it showing that, on November 9, 1978, Vintners merged into Heublein and ceased to exist. By order of January 3 1979, ruling was deferred until the initial decision. At CB 3 complaint counsel state that, under these changed circumstances, it is no longer necessary to retain Vintners as a respondent for the purpose of obtaining effective relief and they do not oppose Vintners motion to be dismissed as a respondent.

On December 13, 1978, United moved that it be dismissed from the proceeding showing that following, and as a consequence of, Heublein s acquisition of 100 percent of Vintners and Vintners' merger into Heublein, Heublein now owns 100 percent of United. By order of January 3, 1979, ruling was deferred until the initial decision. At CB , complaint counsel state that under these changed circumstances it is not necessary to retain United as a respondent for the purpose of obtaining effective relief and they do not oppose United' s motion to be dismissed as a respondent.

At RP 138- , HUV assert that the overall all wine market was not alleged in the amended complaint as a product market but that the term was simply used for purposes of statistical reference; and that this is at odds with "complaint counsel' s present theory of the case." I do not so read the complaint. An overall reading shows that it clearly treats "all wine" as a product category or market and table dessert" and "sparkling" wines as submarkets or subcategories. For example, Par. 19 of the amended complaint alleges; 19. The product markets affected by Heublein s acquisition of a controlling interest in United are wine production, distribution and/or sale generally, as reflected by "all wine" statistics, and wine s three product subcategories: table, dessert and sparkling; all of which are concentrated and nation-wide in geographic scope. The reference to " ' all wine' statistics " does not detract from the clear specification of product markets and submarkets. (10) Again, Par. 25 of the complaint alleges, in part; The effect of the acquisition by Heublein of a controllng interest in United may be substantially to lessen competition or to tend to create a monopoly in the production distribution and/or sale of wine and its three product subcategories in the United States, in violation of Section 7 of the Clayton Act, as amended; . Further complaint counsel' s present theory of the case" is no different from that presented by complaint counsel and contested by respondents throughout the entire trial of this matter. Initial Decision 96 F.T.C. Extensive hearings were held during which a large volume of testimony and documentary evidence was received. Offcial notice was taken of a number of matters at the request of both complaint counsel and respondents, This initial decision is based upon the entire record including proposed findings of fact and conclusions of law and supporting memoranda filed by the parties, as well as their replies. The undersigned has also taken into account his observation of the witnesses who appeared before him and their demeanor. Proposed findings not herein adopted, either in the form submitted or in substance, are rejected either as not supported by the evidence or as involving immaterial matters, (11) FINDINGS OF F ACT AND DISCUSSIONS I. GROWTH IN WINE CONSUMPTION 1. In 1960 an estimated 158. 1 milion gallons of wine were consumed in the United States, or 1.46 gallons per adult of legal drinking age, In 1968 total United States consumption had increased to an estimated 205. 1 million gallons, or 1.74 gallons per adult. 1969 adult per capita consumption of wines was 1.87 gallons for a total estimated United States consumption of 225.5 milion gallons. In 1977 an estimated 390.4 milion gallons of wine were consumed in the United States, representing an adult per capita consumption rate of 2.69 gallons (1978 Wine Marketing Handbook, p. 20; offcially noticed per order dated September 27 1978). 2. Consumer expenditures in 1960 for wine in the United States were estimated to be $751 millon, climbing to an estimated $1 053 milion in 1968 and $1 184 milion in 1969. Consumer expenditures in the United States for wine in 1977 reached an estimated $3 billon dollars (1978 Wine Marketing Handbook, p. 20; officially noticed per order dated September 27, 1978).

3. Wine consumption in the United States is skewed towards individuals under 50 years of age (CX 125Z- , Z-44). The greatest wine usage level is among households where the household head is 25 to 49 years of age (CX 231 V), although there is some evidence that those 21-24 years of age consume 20-50 percent more wine per capita than do their older counterparts (CX 125Z-44). 4. A 1970 Bank of America study forecast that 40 milion young . Findings of fact, for the most part, are made in numbered paragraphs. Discussions and applications of lindings, as well as consideration of legal and other matters, appear where deemed "ppmpriate. Some follow particubu findings which pertain thereto; others follow all of the numbered findings- Findings which appear in unnumhered paragraphs are, neverthcle;;s, findings _..

385 Initial Decision adults wil have reached drinking age during the decade of the 1970' and wil make up more than 27 percent of the adult United States population in 1980, and, of the adult population of 145 milion in 1980, 70 milion wil have acquired their wine tastes during the 1960' s and 1970's (CX 288B). (12) 5. The American wine drinking public has become more and more attuned to drinking table wine (CX 366J). The 1976 edition of Impact, a wine industry trade publication, summarized: "Table wine has come of age in the United States. Americans, particularly those in the 25-35 age group, are beginning to drink wine as an inherent part of their life style" (CX 367N).

6. The Bank of America s 1970 publication stated: "(T)he bank and the industry are in complete agreement that the popularity of wine in American cultural, culinary, and ceremonial tastes and preferences is accelerating unmistakably" (CX 288A). II. THE PARTIES Heublein 7. Heublein is a corporation organized, existing and doing business under and by virtue of the laws of the State of Connecticut, with its principal offce and place of business located at Farmington Connecticut (Amended Complaint and Heublein s Answer 4). 8. Heublein sells its products nationwide (CX 4). At all times relevant herein, Heublein sold and shipped its products in interstate iscommerce and was thus engaged in commerce as "commerce" defined in the Clayton Act, and was engaged in or its business affected commerce as "commerce" is defined in the Federal Trade s Answer, 4),Commission Act (Amended Complaint and Heublein 9. Heublein was incorporated under the laws of Connecticut in 1915, It was the successor to a family business founded in the 1860' It became a public corporation in 1959 (CX 3A, 56Z-4; Tr. 3920, 4022- 23).

10, Heublein entered the vodka business in 1939 when it purchased the American Smirnoff Company. At that time, American Smirnoff was selling 6, 000 cases of vodka a year in this country (Tr, 3975).

11. In the early 1940's Heublein built a vermouth plant in Hartford, Connecticut (Tr. 3981).

12. In 1957, Heublein obtained the exclusive agency for import- 48L; Tr. 3985). (13)ing the Harveys line of ports and sherries (CX 402 FEDERAL TRAm COMMISSION DECISIONS Initial Decision 96 F. Heublein, As of the Time of the Acquisition, Was a Major Industrial Corporation and National Leader in the Sale Alcoholic Beverages and a Seiler of Food Products s 500" 13. In 1966, Heublein entered the ranks of "Fortune largest corporations and ranked in the top 100 for its earnings growth rate. By 1967, Heublein had moved up from 371st to 346th place in terms of sales, and it ranked 76th in growth in earnings per share (CX 48E, 49G).

14. In 1968, according to Forbes Magazine s 21st annual report on American industry, Heublein led the 500 largest United States corporations in profitability, defined as a company s return on stockholders' equity. Heublein ranked fifth for its five-year average of profitability and third among the top ten companies that were also noted the most adroit users of capital" The magazine Heublein s five-year average 21.2 percent return on total capital and 15.8 percent five-year growth in earnings per share (CX 38B). 15, In 1967, Heublein was the largest importer of wines into the Heublein wasUnited States (CX 48K). At the time of the acquisition, the fifth largest domestic producer of alcoholic beverages (CX 55V 327J, K).

16. In 1968, Heublein was principally engaged in the sale of spirits and beer. These products accounted for 52 percent and 39 percent, respectively, of Heublein s total sales (CX I35B, 49T). 2/3 of its total spirits sales. TheHeublein s vodka sales accounted for company ranked first in the sale of vodka (CX 9T, U, V, 55T, U, V 319J; Tr. 9289).

17. In fiscal year ending June 30, 1968, Heublein had net sales of $383 972 000, net income of $14 567 000 and earnings per share of $1.11 (CX 49T). In fiscal year 1969, the year of the acquisition, Heublein had net sales of $520 855,000, net income of $16, 570 000 and earnings per share of $1.27, all adjusted to reflect the acquisition (CX 50U). Heublein s assets as of June 30, 1968, were $141 171 000 (CX 49E, U).

18. In fiscal year 1969, Heublein had record sales and earnings in the established lines of its business for the ninth consecutive year. Total sales exceeded a half bilion dollars for the first time in Heublein s history, a year ahead of plan (CX 50E). (14) 19. In 1969, Heublein s stock sold at 20 times net earnings per share, which was very favorable at the time (Tr. 9166). 20. In fiscal year 1969, Heublein had a growing international business spanning more than 100 countries (CX 50E). 21. By 1967, as reported to its stockholders, Heublein had a "full HEUBLEIN, INC., ET AI, 403 385 Initial Decision line of alcoholic beverages" including well-known whiskey imports (CX 48J).

22. In fiscal year ending June 30, 1969, Heublein spirits were distributed principally under the following brand names: Vodka Smirnoff Vodka Relska Vodka Popov Vodka Arrow Vodka Koskorva Vodka Gin Milshire Charcoal Filtered Gin Whiskies Bell' s Scotch Whisky McMaster s Scotch Whisky Black Velvet Canadian Whisky McMaster s Canadian Whisky Tullamor Dew Irish Whisky Prepared Cocktails Heublein Cocktails Heublein Banquet Cocktails Club Cocktails Cordials, Liqueurs and Brandies Arrow Cordials & Flavored Brandies Irish Mist Liqueur Bisquit Cognacs Felipe II Spanish Brandy Tequila Jose Cuervo Tequila Matador Tequila Rum Don Q Rum Eldorado Rum Asterisks denote brands produced by Heublein (CX 55T). (15) 23. In its fiscal year ending June 30, 1969, excluding wines of United and Beaulieu, Heublein distributed wines under the following brand names:

Initial Dccision 96 FTC. Harveys Bristol Cream Sherry Harveys Other Sherries and Ports Amontilado Cocktail Sherry Bristol Fino Sherry Bristol Milk Sherry The Director s Bin Port Gold Cap Port Hunting Port Shooting Sherry Tico Cocktail Sherry Heublein Vermouth Sweet and Dry Lancers Vin Rose Quinta Red Table Wine Vinya Rose Table Wine Bertani Verona Italian Table Wines Bouchard Pere & Fils Burgundy and Bordeaux Table Wines Byrrh Aper Chateau Bottled Bordeaux Table Wines Chateau Bouscaut (Graves) Chateau St. Georges (St. Emilion) Harveys Selection Table Wines (France and Germany) Hungarian Wines Tokay Egri Bikaver Paul Jaboulet Aine Rhone Table Wines Rheinhof German Table Wines VaJle Freres French Table Wines (CX 50Z- 24. Prior to the acquisition, Heublein was importing a number of other wines in limited quantities (Tr. 4319- , 4339-40), 25. At the time of the acquisition, Heublein s principal beer brand was Hamm s. It also sold Waldech and Buckhorn beer and was introducing a new malt liquor under the Velvet Glove label (CX 55U).

26. At the time of the acquisition, Heublein had a line of specialty food products the principal brands of which were A.I. Sauce, Escoffier brand sauces, Snap- Tom tomato cocktail, Ortega sauces and chili products, and Grey Poupon mustard (CX 55V). 27. Heublein s leading alcoholic beverage was and is Smirnoff Vodka. From 6 000 cases at the time of acquisition of American Smirnoff Company in 1939 (Finding 10, supra), by 1968, Smirnoff sales approximated 22.4 percent of the United States vodka market. HEUBLEIN , INC., loa AL. ',Uij 385 Initial Decision Heublein s share of the national vodka business, including all of its vodka brands, was approximately 30. 2 percent (Tr. 9291). (16) 28. Smirnoff had a record of outstanding success. Vodka consumption increased in little more than a decade from virtually nothing to loa percent of total distilled spirits consumption by 1965. Smirnoff was the leader in making vodka a national favorite and contributed virtually all of the consumer promotion in the early years. By 1966, Smirnoff outsold every brand of scotch, gin and bourbon in the United States and was the fourth largest brand of any type of distilled spirits in the United States (CX 47D). 29. At the time of the acquisition, Smirnoff was the world' largest selling vodka and the second best-sellng brand of liquor internationally (CX 43A, 49Q, S). In fiscal year 1968, sales of Smirnoff internationally reached four milion cases (CX 491). 30. By fiscal year 1968, Smirnoff was the third best sellng distiled spirits brand in the United States and was gaining on second place (CX 491).

31. In fiscal year 1969, Smirnoff continued to improve its position in the United States distiIed spirits industry (CX 50F) and increased its overseas sales at a rate twice that in the United States (CX 50R). 32. According to the Nielsen Report, Smirnoff was the number one selling brand of all alcoholic beverages in 1977 in the three leading markets of the United States - Los Angeles, Chicago and New York (Tr. 9296-99).

33. Heublein Cocktails, reported by Heublein in 1966 to its stockholders as "undisputed leaders in the marketplace" (CX 47G), had dominated the growing prepared cocktail market since the turn of the century (CX 501). By fiscal year 1969, they commanded more than twice the sales of the next most popular brand (CX 50J). In 1969, Heublein had approximately 50 percent of the United States market (Tr. 4995).

34. Another of Heublein s leading products was Harveys Bristol Cream Sherry (CX 46E). By fiscal year 1969, Harveys had become the leading imported sherry in the nation, accounting for one-third of all imported sherry (CX 501). It is one of the most prestigious of all internationally known wines (CX 48K; Tr. 2893). 35. By 1966, Harveys full line of ten sherries and ports were carried in many liquor stores because the line was a "call" item (CX 48L).

36. At the time of the acquisition, Heublein s line of Arrow Cordials was the second best selling line of cordials and brandies in the country (CX WE). (17) 37. Heublein s Lancers Vin Rose was a light, bubbly wine , Initial Decision 96 r' packaged in a distinctive crock container, and advertised as a good choice to serve on all occasions. A Portuguese wine, Lancers Vin Rose had become a demand item in almost all restaurants and hotels. It was on more wine lists than any other imported or domestic wine (CX 48K, 49M).

38. By 1969, Lancers Vin Rose was the best scllng imported wine in the United States and its sales were increasing (CX 50F). 39. In fiscal year 1969, Heublein s Jose Cuervo Tequila and Matador Tequila tegether accounted for more than 50 percent of the tequila market (CX 501).

40. In fiscal year ending June 30, 1969, Heublein reported that its Consumer Products Division, formerly the Food Division (CX 49 0), had had an unusually good year with all its specialty foods (CX 50E). AI. Sauce, for example, continued to dominate the meat sauce market (CX 50J).

Heublein, a Growth Company 41. Heublein at the time of the merger was described as a growth company" by its Chief Executive Offcer Stuart Watson: It' s been said that truly innovative growth companies are few indeed. These are the ones distinguished by a three-fold capacity. They are able to increase the growth of their existing products, and to underwrite the costs of new products and acquisitions, while increasing their over-all sales and earnings (CX 34D). 42. Heublein was able to plan what Mr. Watson termed "a major acquisition " the acquisition of United, while increasing the forward momentum of its existing business. In 1968, Heublein considered itself to be in a "unique position" to capitalize on opportunities for future growth with its line of products that included some of the fastest growing categories of foods and spirits, its expanding plants and facilities and its planning capability (CX 34G). 43. As noted in its 1968 Annual Report Heublein s steady growth over the years has derived from the progress of its established business and from the acquisition of others with good potential" (CX 49G). (18) 44. Heublein represented itself as a growth company. For the five-year period up to 1968, Heublein had an average annual growth rate in sales of 10 percent and an average annual growth rate in profits of 12 percent. The price per share of its common stock had risen from $8 5/8-$11 (adjusted for splits) in 1963 to $26-$40 1/4 in 1968 (CX 263; Tr. 2697).

45. Heublein s case sales of Harveys Bristol Cream Sherry had 11.tUIU.. 1l'\ U"V. , ClJ n..u.

385 Initial Decision increased 84 percent during the five-year period through 1968 and its sales of Lancers had gone up 294 percent (CX 264; Tr. 2463). 46, In the period from 1963 through 1968, Heublein had the following successes with what it termed new ventures :. case sales of Arrow cordials increased 62 percent; barrel sales of Hamm s Beer increased 9 percent; dollar sales of Coastal Valley Products increased 89 percent; and case sales of Lancers wine increased 294 percent (CX 265; Tr. 2476-77).

47. Heublein s case sales of Smirnoff increased 43 percent from 1963 to 1968 and the volume sales of A. I. Sauce increased 73 percent during the same period (CX 267; Tr. 2699). 48. During the same period, Heublein s dollar sales increased 52 percent, its earnings per share increased 103 percent, the market price of its stock increased 254 percent and its dividends per share increased 250 percent (CX 266; Tr. 2477, 2699, 2700). 49. As reported in Heublein s 1969 annual report, covering the fiscal year in which the acquisition took place, Heublein s Spirits and Wine Division increased "case sales and dollar volume as much as 17 percent" (CX 50F). Smirnoff Vodka set new records and continued "to exceed the growth rate of the distilled spirits industry by some 33 per cent" and to enjoy a major share of the growing United States vodka market in the face of toughening competition (CX 50F). Lancers case sales increased again and demand outstripped production (CX 50E, F). Arrow cordials and brandies "made important advances in (Heublein s) drive to overtake first place in this growing after-dinner drink category" (CX 50F). Heublein recently introduced line of Club Cocktails, in its first full year in the national market had doubled Heublein s consumer cocktail business (CX 50E). Black Velvet, Don Q Rum and Jose Cuervo Tequila all increased in sales (CX 50E). Jose Cuervo s rate of growth tripled that of the total distilled spirits market, and Don Q sales had increased by 28 percent since that brand was acquired by Heublein (CX 501). Harveys increased in unit sales some 22 percent (CX 501). Heublein sales to the transportation business grew (CX 50J), with sales of Smirnoff and Heublein Cocktails on international air carriers up 21 percent (CX 50R). Sales to the military increased 25 percent in response to an aggressive marketing effort by Heublein (CX 50J). In the Consumer Products Division, which (19)grew 20 percent in case sales (CX 50J), A.I. Sauce grew in dollar sales 20 percent over the last year, its growth over the preceding decade having been an exceptional" 300 percent (CX 50J). Escoffer brand sauces also showed gains and Snap- Tom Tomato Cocktail increased 40 percent over the previous year (CX 50J, M). Grey Poupon Dijon Mustard had Initial Decision 96 F. increased its share of the mustard market some 33 percent in three years (CX 50M).

(a) Growth through New Products and Lines 50. Prior to the merger, Heublein had extensive research and development projects under way in food and liquor. These included the constant testing of new products of its own and of its competitors and the development of new products (CX 46H). 51. Heublein originated the prepared cocktail at the turn of the century (CX 501; Tr, 4994, 4995).

52. Heublein developed a new full-flavored cocktail with an alcoholic content between the Heublein full-strength cocktail and beer. It was the first pre-mixed cocktail to be packaged in a can. The product gained immediate consumer acceptance in the four states in which it was test-marketed and was introduced in the national market in fiscal year 1969. Heublein started with six flavors and introduced three more in fiscal year 1969 (CX 481, 501). 53. Based upon the success of Club Cocktails, Heublein introduced eight flavors of its full-strength cocktails in 8-ounce cans in fiscal year 1969 (CX 50J).

54, In fiscal year 1968, the year before the acquisition, Heublein marketed twenty new products (CX 49F).

55. Heublein introduced Smirnoff Silver to upgrade its price line and to top some of the recently imported vodkas (Tr. 4431-32). (b) Expansions in Capacity 56. In 1969, Heublein announced that it had entered into a joint venture to build a new winery near Lisbon, Portugal (CX 50F). The agreement had been signed on October 11, 1968, when Heublein and Fonseca (Jose Maria da Fonseca Sucrs. Vinhos, S.ARL. ), the supplier to Heublein of Lancers, Vinya and Quinta wines, entered into a joint venture under the name Internacional (J.S. da Fnnseca Internacional- Vinhos, Limitada), to secure land and construct and operate a wine production facility capable of producing a minimum of 750 000 cases of wine per year (CX 63, (20)65E). The $1.6 milion plant was capable of being expanded further as needed (CX 34G). Under a separate management agreement, Fonseca assumed the management duties of the joint venture with responsibility for production and related matters such as locating, developing and maintaining an adequate supply of grapes and wine (CX 64A-E). Heublein joined in the venture to assure an adequate supply of Lancers and to help the Fonsecas with financing (Tr. 4330). The wine ---._u+u.-.., u.-. u- .--..

385 Initial Decision is produced by various wineries in Portugal, then finished and bottled at the Fonseca facilities (Tr. 4332). Heublein s initial investment in the facility was approximately $500 000 (Tr. 4492). 57. Heublein s ownership interest in the production facility joint venture with Fonseca is 49 percent. Its interest in the marketing joint venture with Fonseca is 51 percent (CX 56Z-10, Z-13). Heublein owns the Lancers trademark (RPF 149).

58. In fiscal year 1965, Heublein began construction of a 500 000 plant in Allen Park, Michigan with a 2 500 000 case per year capacity. The plant began producing Heublein spirits in 1966 and, in 1968, Heublein invested $600 000 to expand it to service growing markets (CX 38B, 46G, 47C).

59. In 1967, Heublein reported a planned multi-milion dollar expansion of the Hamm s brewery in Los Angeles that would increase its capacity to 840 000 barrels per year (CX 48E). In fiscal year 1969, a 72 000 square foot loading area was added to the Hamm s St. Paul plant, and Hamm s entered into a joint venture with Continental Can to build a $1 950 000 can-producing facilty (CX 50E, N, Q).

60. In fiscal year 1968, Heublein spent nearly $8 milion to increase production capacity at major plants (CX 49F, G). 61. Almost immediately after acquiring United, Heublein announced plans for a new production facility for sparkling wine to be completed in 1971 (CX 50Q).

62. Heublein in 1969 engaged in an $18 milion joint venture with the Indian Head Company to build a glass plant, the Madera Glass Company, to serve United. Heublein and Indian Head each contributed $2 million in equity and $1 millon in operating capital Heublein arranged for a $5 milion loan from the Aetna Insurance Company and, by giving certain guarantees, was able to arrange for $6 milion in additional loans from a group of banks (Tr. 9219- 9304). An additional $3 milion was borrowed from the government (Tr. 9305). Heublein was to contribute any additional operating capital that might be needed (Tr. 9223). See Findings 217- infra for additional details. (21) 63. The glass plant joint venture resulted in savings for United in the cost of glass (Tr. 9224). By 1972, the Madera Glass Company made a $1. 8 million profit (Tr. 9226).

(c) External Growth 64. Heublein acquired a majority interest in Arrow Liqueurs Corporation in April 1964 for $6 milion, and it acquired the 336- 0 - 81 - 27 Initial Dccision 96 F. remaining minority interest in Arrow in June 1965. Arrow distributes Scotch and Canadian whiskeys, cordials and brandies (CX 12 460, 47H).

65. In January 1965, Heublein, in accordance with its selfdescribed "active acquisition program" (CX 46G), purchased Vintage Wines, Inc. for $2 125 000 (CX 61). At that time, Vintage Wines had numerous arrangements with suppliers from several foreign countries for distribution and sale in the United States of a variety of wines and certain distiled spirits (CX 62A, C, U-V), in addition to having several registered trademarks of its own (CX 62A, B K). Heublein acquired the right to import these wines under a contract agreement (Tr. 4424-25). In addition, Vintage Wines had arrangements to import wines for certain retailers under the retailers private labels (Tr. 4426-27). Lancers Vin Rose was the leading product of Vintage Wines (CX 46E, G, 351). Heublein purchased the Lancers trademark (Tr. 4289). Excluding Lancers, Vintage Wines sold about 100 000 cases of wine in 1969 (Tr. 4443). In 1968, the year prior to the acquisition of United, sales of Lancers Rose in the United States rose to approximately 360,000 cases (some 879 000 gallons) (RX 171; Tr. 8703-04). In March of 1970, a white Lancers known as Lancers Vinho Bronco was introduced. A red Lancers, Lancers Rubio, was added in Heublein s fiscal 1974 (RPF 147). 66. In November 1965, Heublein acquired all of the common stock of the Theo. Hamm Brewing Co. (CX 47Q). Heublein s Hamm beer operation performed well for several years (CX 47E, I, 48G, 49G, , 0). In fiscal year 1971, Hamm s was still profitable and expanding into new markets (CX 52N). Hamm s first loss was reported in fiscal year 1972 (CX 53F). Hamm s was sold in fiscal year 1974 (CX 359Y). 67. During the 1966 fiscal year, Heublein became the exclusive United States importer and distributor of Bertani Italian Wines (CX 47C), 68. During the 1966 fiscal year, Heublein secured United States rights to Grey Poupon Dijon Mustard, which it had previously manufactured and marketed under a licensing agreement (CX 48E). (22) 69. In 1966, Heublein acquired the exclusive United States rights to import and distribute Jose Cuervo, S. , the world's largest selling brand of tequila (CX 47C, 481).

70. In June 1967, Heublein became the sole United States distributor of Chateau St. Georges bottled Bordeaux table wines (CX 71).71. Effective January 1, 1968, Heublein acquired, for $150,000, all of the outstanding common stock of Don Q Imports, Inc. , the sole JJ.rUJjL , U""-. l:l fit..

385 Initial Decision United States distributor for the leading rum brand in Puerto Rico (CX 49K, T).

72. In October 1968, Heublein entered into a joint venture marketing company with the Fonseca family in which Heublein had a 51 percent interest (Tr. 4328). The venture was to market and sell wines worldwide (CX 67).

73. In October 1968, Heublein also entered into a formal agreement with InternacionaI whereunder the two companies would work together to develop and produce new Portuguese wines under trademarks originated or acquired by Heublein for sale by Heublein in the United States (CX 65H).

74. The Fonseca joint venture was very successful and the Fonseca Winery capacity has been enlarged to one or one-and-a-half milion cases per year (Tr. 3957, 4333). The expansion was selffinanced from the cash flow of the enterprise (Tr. 4492). 75, In fiscal year 1968, Heublein acquired exclusive long-term rights to United States sales of Black Velvet Canadian Whisky by agreement with Gilbeys (Canada) Ltd. (CX 49G, K). 76. In fiscal year 1968, Heublein acquired the United States distribution rights for Kiku-Masamune Sake, Japan s leading brand of sake (CX 49M).

77. On February 21 , 1969, Heublein acquired a controlling interest in United, the acquisition challenged by the complaint in this case.

78. This was followed on June 5, 1969, by the acquisition of Beaulieu Vineyard (Tr. 331).

79. In fiscal year 1970, Heublein acquired all of the outstanding common stock of Grape Factors, Inc. (CX 52Z-3). 80. In January 1971, Heublein acquired Regina Grape Products Co., a producer of wine vinegar products (CX 52K, Z-3). (23) 81. In fiscal year 1971, Heublein merged with Kentucky Fried Chicken Corporation, whereby that company became a subsidiary of Heublein. Heublein thus obtained a strong position in the expanding fast foods market (CX 52C, Z-3).

82. In 1973, Heublein made two acquisitions in Brazil First it acquired Drury s, an alcoholic beverage company and six months later it acquired a brandy company called Dreher (Tr. 9167), 83. In August 1973, Heublein acquired Davis Food Service, Inc. (CX 360Z-8).

84. In fiscal year 1974, Heublein Wines International was established as a unit within the Smirnoff Beverage and Import Co. In the same year, it became the exclusive United States distributor of Initial Decision 96 F. two lines of European wines, Cordier and Schloss Reinhartshausen (CX 3591).

(d) Growth and Diversifcation Policy 85. When Heublein became a public company in 1959, the underwriters thought that vodka accounted for too large a share of the company s business (Tr. 3987). Early in the 1960's, vodka accounted for approximately 75 percent of Heublein s gross sales (Tr. 3986-87).

86. Heublein was an aggressive company and it wanted to grow and diversify (Tr. 4438). At the time it acquired United, Heublein had a history of growth that it wanted to continue (Tr. 3988, 4944 8677, 9028). Heublein proclaimed as corporate goals in fiscal year 1969 record growth in sales and earnings per share, and successful introduction of profitable new products (CX 50E). 87. By the spring of 1968, Heublein had formalized a top-level New Corporate Development group, headed by its Executive Vice President, which was responsible for growth planning through the development of new business and through acquisitions (CX 45B 49G), Heublein s external development or acquisition program was active long before it became a formal department (Tr. 4426-31). 88. It was generally thought at Heublein that any acquisition would have to be of a company having a growth rate equal to or better than its existing business (Tr. 4392). 89. Heublein wanted to get into lines of business that it understood or could easily come to understand (Tr. 4439). (24) 90. Mr. John Martin, then Chairman of the Board and Chief Executive Offcer of Heublein (Tr. 3972), testified that in the early 1960' s Heublein already had an acquisition program to find new businesses and products compatible with Heublein s marketing skils, including its channels of distribution, in order to expand the kinds of businesses it was in. "We had an avaricious intention to expand our business and obviously acquisitions were part of it" (Tr. 3987 -88).

91. Heublein was interested in acquiring products sold through supermarkets or the channels of distribution through which Heublein distilled spirits products were sold (Tr. 3928-29). 92. In connection with his responsibilities for external development at Heublein, Mr. Kelley, Executive Vice President, evaluated opportunities with companies in the food and beverage business. Wine was one of the areas of opportunity Heublein considered (Tr. 4945-46).

..

_u_ :JR5 Initial Decision 98. In 1969, Heublein generally was interested in diversifying only in the package goods or consumer goods business, but only in companies with a reasonable growth rate relative to Heublein growth rate (Tr. 9164). Entry into the domestic wine business was the fulfillment of one of Heublein s three corporate goals. The others were record growth in sales and earnings-per-share, and the successful introduction of profitable new products (CX 50E). 94. Heublein planned to continue to grow in product categories where its marketing skills could assure success (CX 84G). 95. In about 1966, Heublein s long-range planning group decided that there were four categories they were interested in to diversify the Heublein business. One of those four categories was wine (Tr. 4461 66).

Additional findings which detail Heublein s interest in wines and in expanding in that market as well as actions taken in that regard prior to the challenged merger appear infra (Findings 787- , 798, 809-28).

(e) Heublein s Expansion of Its Wine Business Subsequent to the Merger 96. On June 5, 1969, Heublein acquired Beaulieu Vineyard in California (Tr. 881).

97. Heublein also maintained its interest in developing foreign imported wines after it purchased United (Tr. 4485-86). (25) 98. In May 1969, Heublein became the sole United States distributor for the sale of the Bouchard Burgundy Wines produced by Bouchard Pere & Fils (CX 70).

99. On December 81, 1969, Heublein entered into an agreement to cell and distribute certain brands of Rhone Valley table wines produced by JabouIet on an exclusive basis in the United States (CX 77).

100. In July 1970, United Vintners assumed the sole distribution rights in the United States for the Monimpex Hungarian wines (CX 74). In March 1978, Heublein assumed the rights for such wines (CX 75).

101. In February 1971, United Vintners became the sole distributor in the United States of German wines of Rhine origin and potentially of certain other German wines produced by Scholl and Hillebrand (CX 76).

102. In 1972, Mr. B.C. Solari, then President of United Vintners went to several European countries to look at new wine prospects for Heublein (CX 225A-B; Tr. 4726-81). In June 1972, he reported to Initial Decision 96 FTC. Stuart Watson, Heublein s Chief Executive Offcer, that he had worked out a possible arrangement for Heublein with respect to the Paterno line of wines. He also reported having spoken to the Becarro people in Italy and stated his intention to find out more about Yugoslavian products (CX 87).

103. Shortly thereafter, Heublein became the sale United States distributor of Paterno and Gancia wines under the Gancia and Mirafiore labels (CX 88-92). The wines included were Gancia and Mirafiore Asti Spumante, Vermouth, Chianti and Veronese wines and Sicilian Gold (CX 92B). Heublein also obtained a right of first refusal to 50 percent of any interest in the assets of Fabiano or any other Italian wine producer that Paterno might obtain (CX 92F, 323). 104. In January 1973, Heublein terminated Vi no Chianti Ancili for which it had been exclusive agent, because Heublein had obtained the exclusive distribution rights.in the United States for the wines noted above which were competitive to Ancilli (CX 72-73). 105. After the acquisition of United, Mr. Solari went to Brazil on Heublein s behalf to explore the possibility of raising grapes suitable for making wine (Tr. 4732-33).

106. In fiscal year 1971, Heublein introduced Vino Branco (a counterpart of Lancers Rose), Cold Duck and a cinnamon-flavored apple wine called Zapple (CX 52D). (26) 107. In fiscal year 1974, Heublein introduced Lancers Rubeo and widely advertised all three Lancers wines on television and in consumer and trade magazines (CX 3591).

108. Heublein was interested in developing different types of wines at the Lancers facilities (Tr. 4338). 109. New wines have been developed at the new winery facility in Portugal built by the joint venture in which Heublein participated (see Findings 56, 57 supra). Some of the experimental wines developed were Beijo Beijo, Jacare and Allegria (Tr. 4336-37), Heublein currently owns the Jacare label (Tr. 9999). Two line extensions for Lancers were developed and produced there, Lancers Vino Branco and Rubeo. Both are currently being imported into the United States (Tr. 4337-38). The joint venture makes Zazie wine for United Vintners (Tr. 8463).

1I0. Heublein imports and sells about 40 000 cases per year ofthe eight different types of burgundy wine in the Bouchard line and about 30 000 cases per year of the ten different Hungarian wines in the Monimpex line. These wines are sold through Heublein Smirnoff Sales Company (Tr. 4429- , 8829), 1I1. Heublein also imports limited quantities of Paraquita and Muscatel produced by the Fonseca family (Tr. 4334). 3R5 Initial Decision (I) Heublein s Continued Overall Post-Acquisition Growth 112. Heublein ranked 209th in terms of sales and 238th in terms of assets among the Fortune 500 for 1972 (CX 58L). By 1976 Heublein had risen to 176th position in terms of sales and 213th position in terms of assets (CX 369G).

113. In calendar year 1976, Heublein s growth in spirits was six times that of the industry as a whole. Heublein accounted for half of the total industry growth of I percent that year (Tr. 9260 , 9262). Il4. Heublein s fortunes took a downward turn in 1977. This however, was due to an unusual convergence of external business factors such as downward trends in the wine industry and the alcoholic beverage industry and a severe economic financial crunch in Brazil (Tr. 9177-78). Heublein s chief executive offcer believes that the diffculties Heublein experienced in 1977 are not symptomatic of a weakness in Heublein s business and the upward turn of sales in 1978 tends to bear this out (Tr. 9257; CX 543Z- 10). Heublein s earnings per share rose in 1978 by 17 percent over 1977 (Tr. 9254). 1977 was the only year in which Heublein s earnings per share dropped (Tr. 9255). (27) Il5. Heublein s Chairman and chief executive officer acknowledged that, except for 1977, Heublein has been classified as a growth company and a successful consumer package goods company (Tr. 9174).

116. By 1978, Heublein had grown in a few years from the fifth largest company in the United States spirits industry to the second largest. It was growing faster than any other spirits company with such a broad product line (CX 543F).

Il7. In 1978, Heublein s net sales were $1 577 114 000 and its net income was $56 529 000. Earnings per share were $2.66 (CX 543Z-10). As of June 30, 1978, Heublein s total assets were $861 388 000 (CX 543Z- 19).

3. Heublein s Marketing Strength 118. Heublein s major brands and product lines are under the direction of product, merchandising and advertising managers. Heublein employs a full range of marketing techniques (CX 56Z- 10). 119. Heublein s policy is to perform full marketing functions for products it handles rather than to act merely as sales agent (CX 46E 65J).

120, In 1975, Heublein s Chairman identified two of four of Heublein s major strengths as (1) its marketing abilty and (2) its unique position in the fastest-growing segments of the food and Initial Decision 96 FTC. alcoholic beverage business (CX 360F). Prior to the merger, it had the reputation of being a successful marketing company (Tr. 4958). 121. Shortly after it introduced canned, pre-mixed Club Cocktails, a new liquor category, Heublein reported " INSTANT SVCCESS that it had 90 percent distribution in its markets, a mark equalled only by a few brands of distilled spirits in the nation (CX 35B). 122. By 1967, Heublein s greatest single annual expenditure was $36,512 000 for advertising, merchandising and sales promotion. The creative and effective use of the total marketing expenditure resulted in expanded activities at slightly lower overall costs. Heublein s advertising expenditure was used with multiple effect across its product line (CX 48M).

123. In the year ending June 30, 1968, Heublein s advertising expenditures were $8 562 000 (CX 24). (28) 124. Advertising, merchandising and sales promotional expenditures continued to constitute one of Heublein s largest expenditures accounting for approximately $76 000 000 in fiscal year 1972, up from $68 000 000 the year before (CX 56Z-IO). In 1962, the figure had been just under $25 000 000 and in 1966, it exceeded $35 000 000 (CX 47F). 125. Heublein used advertising effectively to increase sales (CX 38B 46G 471, 481, 50F, I, M, N, Q, R).

126. Heublein either set the trends or established itself as a leader in keeping pace with the trends. It marketed new products and capitalized on changing consumer tastes (CX 47D, 48E, F, J, 49G, H, I, K, M, 50E, F, I, J, M, Q).

127. Heublein also capitalized on the trend toward increased travel and became a leader with ship, rail and airline accounts (CX 44B, 481, 50J).

128. In the year in which Heublein acquired United, it continued to emphasize marketing as it had in the past (CX 50E, F, J, M, Q). 129. Shortly after the acquisition, Heublein named Me. Bonomo described in Heublein s 1969 Annual Report as "an experienced marketing executive " as President of United (CX 50Q). 130. Heublein attributed many of its successes in the marketplace to "particularly effective marketing efforts" (CX 46E 47G, 481 , M, 49K).

131. Heublein, as of the time of the merger, planned to continue in product categories where its marketing skils could assure success (CX 34G).

132. Heublein had expertise in mass advertising-advertising in great bulk, on a large or national scale (Tr. 9037). 133. Both Harveys and Lancers are high margin products with 385 Initial Decision high advertising to sales ratios (Tr. 3699; See Findings 696- , 734- , infra).

134. Heublein had a marketing services organization called the Venture Group that was available to do merchandising and sales promotional work at the retail level. The Venture Group handled the field introduction of new products, coordinated new products research and development, developed and executed marketing programs and handled sales to national accounts, including airlines and hotel chains (CX 3.,)9H; Tr. 8904-05, 3306-07). The Venture Group handled United's wines and Heublein s spirits (Tr. 3307). The Venture Group, for example, developed the name for T. J. Swann, a United product (Tr. 8582-83). (29) 135, Heublein is currently trying an arrangement whereby one sales group handles certain national accounts such as airlines, chain hotels and chain restaurants for both its spirits products and the products of United (Tr. 8905). Some of the national accounts are the Hilton Hotels, Holiday Inn and Pizza Hut (Tr. 3307). 136. As stated by Heublein s General Counsel, a "major amount" of Heublein s marketing expenditures is in unmeasured media, primarily merchandising material. With the caveat that these expenditures are diffcult to ascertain, Heublein estimated that they amounted to approximately $10 milion in each of fiscal years 1970 and 1971 (CX 332B).

137, As of the time of the merger, new product development and strong marketing were part of Heublein s business philosophy (CX 260).

138. In 1965, Heublein relied on its self-asserted "reputation in the industry as perhaps the most astute and successful merchandisers of alcoholic beverages" in its efforts to obtain the distribution and marketing rights for Jose Cuervo Tequila. Heublein asserted that its success in marketing other products had been a result of modern marketing concepts and aggressive sellng programs (CX 178A).

139. Harveys Bristol Cream was stated by Heublein to be "the first quality Sherry to be advertised on U.S. television." By fiscal year 1967, advertising and promotion expenditures on Harveys Bristol Cream had been increased to the point that they were then greater than for all other sherries imported into this country (CX 48L).

140. Between its 1965166 and 1970/71 fiscal years, Heublein s per case advertising expenditures for Lancers rose from $. 57 to a projected $4.44 (CX 116B, I, W).

141. Of brands of vodka utilizing outdoor media advertising in 41R FEDERAL TRADE COMMISSION DECISIONS Initial Decision 96 YT. the United States in 1976, Smirnoff lead the list with expenditures of 634 200 out of a total of $4 092 900 spent by vodka marketers for outdoor media. Tbe second largest such advertiser spent $329, 100 (CX 383F).

142. Of brands of vodka utilizing newspaper advertising in the United States in 1976, Smirnoff topped the list with expenditures of $832 900 out of a total of $2 912 954 spent by vodka marketers for newspaper advertising. The second largest such advertiser spent $582 357 (CX 383F), 143. Of brands of vodka utilizing magazine advertising in the United States in 1976, Smirnoff headed the list with expenditures of 067 353 out of a total of $6 147 804 spent (30)by vodka marketers for magazine advertising. The second largest such advertiser spent $896 245 (CX 383F).

144. In the United States in 1976, Smirnoff Vodka s $4 067 353 magazine advertising expenditures were larger than magazine advertising expenditures for any other brand of distiled spirits. Johnny Walker and Canadian Club ranked second and third respectively with expenditures of some $3,600,000 each. Heublein Cocktails ranked tenth with expenditures of $2 102 771 (CX 383M). 145. Of brands of prepared cocktails utiizing magazines, newspapers and outdoor media for advertising in the United States in 1976, Heublein prepared cocktails (including Hereford Cows and Kickers) had the largest advertising expenditures of any brands advertising in one or more of these media (CX 383L).

146. Of brands of tequila utilizing magazine advertising in the United States in 1976, Jose Cuervo topped the list with expenditures of $1 258 819 out of a total of $2 555,385 spent by tequila marketers for magazine advertising. The second largest such advertiser spent $369 833 (CX 3831).

147. Of brands of tequila utilizing outdoor media advertising in the United States in 1976, Jose Cuervo ranked second with expenditures of $410,700 out of a total of $1 298 700 spent by tequila marketers for outdoor media advertising. The largest such advertiser spent $451 900 (CX 3831).

148. Advertising Age reported that Heublein was the second largest advertiser among liquor companies and the 44th largest advertiser overall in 1970 (CX 57). In 1972, Heublein had risen to first rank among liquor companies in terms of advertising and 29th overall (CX 59). In 1976, Heublein was stil ranked first among liquor companies and had risen to the 16th largest advertiser overall (CX 370).

While HUV assert that Advertising Age advertising data for HEUBLEIN, lng, ET AL.

385 Initial Decision Heublein are incorrect (RR at 243-45), the relative ranking of companies is of probative value since uniform methods for ascertain ing advertising expenditures would have been utiized for each company listed.

United Vintners 149. Prior to its acquisition by Heublein, United was an incorporated agricultural cooperative organized, existing and doing business under and by virtue of the laws of the State of California, the sole member of which was Alled. United was converted to a corporation in order to permit its acquisition by Vintners by means of a tax free exchange of shares (CX 9C-G). (31) 150. United, at the time of the acquisition, was a corporation organized, existing and doing business under and by virtue of the laws of the State of California and is such a corporation now (CX 221C; Heublein s Answer V, 13 (p. 9)).

151. United, at all times relevant herein, has had its principal offce and place of business in San Francisco, California. At all times relevant herein, United has sold and shipped its products in interstate commerce and was engaged in commerce as "commerce is defined in the Clayton Act and was engaged in or its business affected commerce as "commerce" is defined in the Federal Trade Commission Act (Heublein s Answer V, 13 (pp. 9-10)). 152. In the course of the acquisition transaction, a "new" Alled cooperative was formed to succeed to the rights and obligations of old" Allied. The two cooperatives had substantially the same membership and the same rights and obligations with respect to its grower-suppliers (CX 9D, F; Tr. 2503-04). United, prior to the acquisition, held all of the production and marketing assets of "old" Allied and has continued to hold substantially all of those assets (Heublein s Answer V, 13 (pp. 9-10)).

153. United Vintners was formed by Louis Petri when his Petri Wine Company purchased the Italian Swiss Colony business in 1953 (Tr. 2371; CX 209C). United was owned by Louis Petri until 1959 when he sold the company to Alled for $24 milion (Tr. 2372). 154. The brands of United which came with Alled's acquisition were Italian Swiss Colony, Petri, G&D (Gambarell & Davito) Margo, Greystone, Mission Bell, Lejon and Hartley (Tr. 2372; C) 209B).

155. Among the facilities which Alled acquired by virtue of i 1959 purchase of United were wineries at Lodi, Clovis, and Asl Alled had previously purchased (in 1951) the Escalon and Made Initial Decision 96 F. plants from Louis Petri and had been operating them to produce wines for the Petri Wine Company (Tr. 237l-7:; CX 209C). 156. From 1959 to 1968, United acquired additional brands and facilities. The Cella wineries at Reedley and Oakvile and the Cella and Parma brands were acquired in 1961 for $1 milion (Tr. 2385 2388; CX 209B), In 1964, United acquired the Inglenook winery at Rutherford together with the Inglenook brand for approximately $1. milion (Tr. 2385). At that time, Inglenook was well-known and had a reputation for high quality wines (Tr. 2394, 2677). John Martin, chairman of Heublein s executive committee, testified that he was informed that Inglenook was one of the two best Napa Valley premium wines (Tr. 4027). Inglenook sales went from 60 000 gallons in 1964, the year in which it was acquired by United, to 174 000 gallons in 1968 (Tr. 2395; ex 138C). (32) 157. Prior to the acquisition of a controllng interest in United by Heublein, United crushed the grapes delivered by Allied, processed the juice into wine and sold the resulting wine throughout the United States (Heublein s Answer V, 14 (pp. 10-11); CX 355; Tr. 2371).

158. In 1968, the year prior to the acquisition, United had eight wineries located throughout California and four bottling facilities in California. United also leased facilities in Chicago and Newark, New Jersey at which it bottled wine shipped from California (Tr. 2388-89; CX 55Z).

159. At the time of the acquisition, United sold wines principally under the Italian Swiss Colony, Inglenook, Petri, Lejon (sparkling wines and brandy), G&D, Margo and Bali Hai labels (CX 55Y, 209B). It also sold wines under a number of other labels including Tipo, Hartley (brandy), Bravo, Chateau Louis, Vai Bros., Marca Petri 3anta Fe, Arriba, Paree, Silver Satin, Cappella, Rhineskeller, Golden 'pur, Hombre, Pombano, Parma, La Finesse, Padre, Jacques Bonet, 'ior di California, Mission Bell and Greystone. In addition, United old bulk wine to bottlers for bottling under United's franchised ,bels and under the bottlers' own private labels. In 1968, United lid approximately 4 milion gallons of bulk wine to franchised lttlers for bottling under United's labels; it bottled bulk wine at its reet sales operations in Newark, Chicago and Los Angeles; and it 'd bulk wine to other wineries (CX 22, 209C; RX 1206V; Tr. 2611 38- , 9524-26).

60. In 1968, United produced wines of all types including dessert l€S, table wines, sparkling wines, ilavored wines, vermouth and ndy, as well as grape juice and wine vinegar. Most of the products e sold under brand names owned by United. It sold wines under ___ 385 Initial Decision proprietary names such as Bali Hai and Silver Satin (CX 55Y). It sold wines at all consumption levels "from rare estate bottled vintages to popular priced varieties" (CX 50Q). All of these products were produced in United' s wineries in California (CX 55Y). 161. In 1968, United sold its products to approximately 370 wholesale distributors (CX 55Y). In addition, United owned its own wholesale operations in the New York City, Cleveland, Southern California, Santa Barbara and Fresno areas, and parts of the Chicago area. These company-owned operations accounted for approximately 30 percent of United' s sales (CX 55Y). United also sold its products to state and local agencies which control alcoholic beverage distribution in the so-called "control'" states (CX 55Y). (33) 162. Prior to the acquisition, United was a leading advertiser in the wine industry. United's advertising expenditures in its 1968 fiscal year for its Italian Swiss Colony brand alone were $3,657 000 (CX 231Z-63). This exceeded the 1971 advertising expenditures of all companies in the wine industry except Heublein (including Italian Swiss Colony) and Gallo (CX 231, 300L-M). This level of wine advertising expenditures was not reached by any other company unti 1975, when Schenley for the first time exceeded it with an expenditure of $4 061 162 (CX 385M; see also CX 300K-M, 376L- 383L-O). B.C. Solari, United' s President and Chief Executive prior to the acquisition and for two years thereafter, was "regarded (in a Heublein analysis) as one of the most astute merchandisers in the wine business today," He was said to be matched by only Ernest Gallo as a marketer of wine (CX 209D).

163. United' s advertising expenditures in the 1960's for Italian Swiss Colony were:

1963/64 701 000 1964/65 567 000 1965/66 702 000 1966167 678 000 1967/68 657 000 1968/69 829 000 1969/70 110 000 (CX 231Z-63) Control" states (Montana, Utah, Wyoming, Iowa, New Hampshire, Pennsylvania, West Virginia Mississippi, and Montgomery County, Maryland) arc those in which fll! wine sales are made under the direction of governnwnt officials (Rlf 405 n. I) Initial Decision 96 F.TC. United was clearly one of the two top advertisers in the wine industry in each of the years listed above. 164. United's financial condition as of 1968 was assessed by Paul Warnick, a CPA and partner (now retired) with Touche Ross and Company, the independent auditor for United and Allied. Mr. Warnick was responsible for the annual audits and certification of Allied' s financial statements. He was a specialist in the field of agribusiness. Mr. Warnick summarized his assessment of United' financial condition as of August 31, 1968, the year prior to the acquisition, by stating that United "was a strong financial company (Tr. 10879- , 10883- , 10926). (34) 165. United was consistently profitable from 1960 to 1968. Its proceeds varied principally with the variations in the market cost of grapes, as shown in the following table:

United Vintners, Inc.: Net Proceeds in Excess of Quoted Average Market Price for Grapes, 1960-1968 (FY' s ending August 31) 1960 796,922 (CX 547G) 1961 924 056 (CX 548G) 1962 673 736 (CX 549G) 1963 182 289 (CX 550G) 1964 659 591 (CX 551G) 1965 552, 125 (CX 552G) 1966 118,805 (CX 553G) 1967 451 564 (CX 554G) 1968 301 356 (CX 555G) For the lO-month period ending June 30, 1969, the figure was 359,438 (CX 556E).

166. United increased its dollar sales in each succeeding fiscal year during the 1960-1968 period. United' s sales were: 1960 $51 089 141 (CX 547G) 1961 961 849 (CX 548G) 1962 663 911 (CX 549G) 1963 76,902 616 (CX 550G) 1964 80,144,988 (CX 551G) 1965 506 227 (CX 552G) 1966 86,2:31,076 (CX 553G) , In Ind, the third largest advertiser, Sd1Pn!ey had advertising expenditures of $2 577 779. t1JSU ULJ:lll U'IV. , J:l 1'L.

aR5 Initial Decision 1967 026 634 (CX 554G) 1968 96,009 189 (CX 555G) United' s sales for the lO-month 1969 fiscal "year" (ending June 30 500 for a1969) were $95 461 271 which is the equivalent of $114 553 12-month period (CX 556E). (35) in and submarket. Wi 21.3 23. 24. 27. 26. 27. 26. 26. 25. 23. found 1969those wine As dessert to Other 654 233 398 336 102 084 850 073 242 Commission of for All Gallon 23, table 1960 wines. Trade the States ine\. from 11. 13. 12. 17. popin primarily or federal, United arkl 142 317 418 belong theshipmentsthe Gallons volume. consists to not by in wine do refreshment this of, s) Win- 13. 16. 15. 18. 18. 19. 17. 18. 19. 21.0 wines alcohol submittal produced 328C) 000' Table 557 463 754 230 556 708 029 838 889 388 include wine (in Gallon gallonage (CX percent s Heublein all 14 a figuresrefreshment of to, 18. 21.0 20. 23. 23. 23. 22. 21. 22. 21.8 Heubleinover United' Wi wine bynes M), infra , w 211 467 987 628 518 495 953 830 279 , table L shipments AllGalv 46 follows. ll s aine? , According Kof, as 438- exp 167. is 1960 1961 1962 1963 19&\ 1965 1966 1967 1968 1969 As 328Jshare United' es (CXitsyears 7/findings HE U HL..lN , 1l L:" ra /\1..

385 Initial Decision (36)168. Allied was optimistic in 1968 about the future of United. Robert McInturf, President and a founding member of Alled testified that as of 1968 the outlook for sparkling and table wines was optimistic. The industry as a whole including United was experiencing increases in the sale of table wines (Tr. 2406). Buddy Iwata Secretary of Allied and a member of Allied's executive committee since the 1950's was optimistic in 1968 about the future growth of United. Based upon the prospects for the wine industry and United' history of profitability, he was optimistic about United' s future profitability as well (Tr. 2670- , 2678-79). 169. In 1969, United shipped 19,450, 100 gallons of table and refreshment wine or 16.2% of the total industry shipments of such wines. The third ranked firm in 1969 had less than one-fourth the table and refreshment wine shipments of United (CX 373Z-2). 170. United's 1969 table and refreshment wine shipments of 450, 100 gallons had never been matched by any company other than Gallo and United itselfthrough 1976 (CX 366Z-1). 171. United's 1968 table and refreshment wine shipments were 15.4 million gallons, or 15.6% of all such wine shipments (CX 373Y), (37) 336- 3450 - 81 - 28 uo' the 081. an market 58.38. toincrease 1969 refreshment 154110toprior 83215562 (Days) Gallons- reflecting developingsteps produce 82 03 already, to newly 1. 1.took 66.32.,had activities this it 19681970 of 33541752 1970. (0005) mergerfacilities 97). 27) Gallonss share 15, post 7796- Shipments September September RX theUnited' 7778. Wine from 56.38. of after table; "after 1967 since significant (Tr. a 15631063 25 (ODDs) until (Derived Gallons- sometime Refreshment, following included"updating businesscapture the and to are Unitedwine by instituted LloydsHenri Kreuschile able effort David not figures been 110 in were onsieur MogenMonarchLeonardGibsonGuild 1969172 , GaUnitedRobinson- reEreshr.ent demonstrated 9/fncreasewines itsmergeras HEUBLEIN , INC. , E'l AL. Liz' oR5 Initial Dccision (38)173. United, therefore, prior to the merger was demonstrably capable of competing in a newly growing market area and of capturing a major share of that market. While second to Gallo, it was clearly a dominant company in comparison with any other competitor to the point of outselJing the number three competitor many times over.

174. United's wine was produced by United in its own wineries (Tr. 9327, 10710-12). United's 1969 shipments were made from grapes crushed in 1968 or earlier (Tr. 7894-95). 175. In the early 1960' , Allied learned from the sales trends of United, from reports made by United's management at board meetings and from Wine Institute industry statistics that table wines were increasing and dessert wines were decreasing in importance (Tr. 2585, 10712- 13).

176. As a result of this awareness, Allied took steps to prepare United for the increased production of table wines. In 1962, the crushing capacity at its main plant at Madera, California was doubled and the storage capacity was increased through the addition of many 600 000 gallon stainless steel tanks. Refrigerated production equipment was also added at that time. The improvements in 1962 were valued at over $3 million (Tr. 2388, 2620, 2636- , 10714- 10718; CX 5498). Additional improvements were made at Madera in 1964 when a new bottling plant and warehouse for cased wine were added. Improvements at Madera in 1964 were valued at over $2. milion (Tr. 2637, 10727-28; CX 483A- , 5518). 177. The Escalon, California winery of United was converted from a dessert to a table wine winery prior to the acquisition (Tr. 2619-20). As part of its ongoing program of conversion to table wines, United carried out a three-year expansion program at Escalon which added cooperage and refrigeration (Tr. 10728; CX 484B). In 1964, one milion gallons of new tanks were added at Escalon (Tr. 10729-30; CX 484B). The expenditures for improvement at Escalon in the 1964- 1967 period were as follows:

1964 $ 188 486 (CX 5518) 1965 680 545 (CX 552R) 1966 503,666 (CX 553R) 1967 279 205 (CX 554R) (1964-67) Total 651 902 178. By 1968, the annual capacity of the Escalon plant had been increased to 13 562 000 gallons, which would have ranked that one 428 EDEHAL TRADE COMMISSION DECISIONS Initial Decision 96 F. winery alone as the 14th largest company in capacity in 1976 (CX 55Z, :366Z- 1O). (:39) 179. In 1964, United purchased the prestigious Inglenook winery, which produced table wines exclusively. It then added a bottling plant to Inglenook's Rutherford winery. United's Oakville winery, which it had purchased in 1961, was then improved and put into service in 1966 to produce table wines for Inglenook (Tr. 2:388, 10728- 29; CX 484B). The Oakvile winery today produces Inglenook table wines which are bottled at the bottling plant at Rutherford (Tr. 9:3:3:3 979:3).

180. The Asti winery of United was largely a producer of table wines (Tr. 26:36). From 1962 to 1968, constant improvements were being made at Asti. The expenditures for improvements at Asti were: $ :318 929 (CX 549S) 1962 196:3 277 454 (CX 550R) 1964 115,9:39 (CX 551S) 1965 :371, 00:3 (CX 552R) 1966 :382 941 (CX 55:3R) 1967 2:3:3 22:3 (CX 554R) 1968 206 079 (CX 555P) (1962-68) Total $1 905,668 181. United, prior to the acquisition, had plans for a new table wine brand, Napa Valley Winegrowers. It was expected that the brand would sell 1.5- 5 milion cases within five years of its introduction (CX 228A, B).

182. Prior to 1968, in anticipation of the increased importance of table wines, Allied had initiated a program of acquiring grapes which would be suitable for table wines. It had held discussions with its members to encourage the planting of the grape varieties which would be needed to produce table wines and had worked on a grape breeding program to develop grape varieties which would lend themselves to the production of table wines (Tr. 2419- , 10714). 18:3. Grape Factors, which in the early 1960's supplied grapes needed by United which were not available from Allied' s members, was no longer needed after 1964 (Tr. 2628). 184. United's shipments of branded products ranked it first or second in every wine product market and submarket in every year (except sparkling wines in 1968, when United ranked third) from 1967 to 1972 (CX :37:).

185. Italian Swiss Colony was one of the top brands in the industry. In United's fiscal year 1969/1970, Italian Swiss Colony , 38S Initial Decision shipments of approximately 12 milion gallons would have ranked that single brand as the second ranking company in the industry (CX 231C, 373H). Italian Swiss Colony was the second largest brand in the industry (40)in September 1970 (Tr. 7778, 7986). Italian Swiss Colony was sold nationwide in the preacquisition period and had been a national brand as early as 1953 (Tr. 2207- , 2392-93). 186. Allied, as of 1968, had completed paying Louis Petri for United Vintners. Payment of the purchase price of $24 millon was completed a year and a half ahead of schedule (Tr. 2433- , 2686). 187. United' s sales since the acquisition have continued to increase at a healthy pace. United's sales of approximately $96 million in 1968 have increased to in 1978 (CX 555G, 565F in camera). See In Camera Addendum. 188. United's total shipments of wine have also increased since the acquisition-from approximately 38 milion gallons in 1968 to approximately 56 milion gallons in 1976 (CX 373D;RX 1257). 189. According to Heublein s 1976 Annual Report With new products, new values and aggressive marketing both Beaulieu Vineyard and United Vintners had record years. For the fourth consecutive year, V.V. increased its share of the U.S. wine business (CX 361F). The Heublein 1978 Annual Report also reported that United "increased its market share and had the second most profitable year in its history" (CX 543F). 190. At the time of the acquisition, United had products in virtually all product categories. In table wines, United's brands included Inglenook, Italian Swiss Colony, Petri, and G&D. It also had Bali Hai, a refreshment wine (CX 472C; Tr. 2393-97). In dessert wines, United had Italian Swiss Colony, Inglenook, Petri and Lejon (for vermouth) (Tr. 2393-94; CX 472C). In sparkling wines, United had Lejon and Jacques Bonet (Tr. 7900; CX 472C). 191. Soon after the acquisition, there was a shift in emphasis among products. Richard Oster, who became United's President in September 1970, made an effort to emphasize refreshment wines (Tr, 7778, 7796-97). The major priority in United' s marketing was to shift the emphasis to Annie Green Springs, a refreshment wine (Tr. 3308- 09).

192. During the same time period after the acquisition, some of the existing brands and items were discontinued (Tr. 7783). 193. In June 1972, Oster informed AIled' s members that United was in the enviable position of being the only true full-line wine marketer in the United States (Tr. 8001) He also informed Heublein that United was the "strong number two factor" in the United States wine industry (Tr. 8000). (41) 430 FEDERAL TRAm; COMMISSION DECISIONS Initial Dccision 96 F. 194. After the acquisition, United introduced a number of new brands. In 1972, it introduced the Annie Green Springs brand of refreshment wines (CX 53G, 247D), and sold 1 000 000 cases in the first six months after national introduction (CX 371). By United' fiscal year 1974, the brand was sellng 3 million cases per year and by 1975, it was selling 4 million cases per year. It sold 10 million cases in the three years following its introduction (CX 359L, 360N; Tr. 9838- 39).

195. In fiscal year 1974, United introduced the T.J. Swann brand of refreshment wines (CX 359L). By 1975, T.J. Swann sales were approximately 2 milion cases per year (Tr. 9839). By 1977, the T. cases (CX 585B in camera). T.J.Swann case volume was Swann was a highly profiable brand for United. Its product line 14earnings were expected to be in 1977 (CX 585Zcamera). Though marketed by United, this brand is owned by Heublein (Tr. 2511; CX 358C). See In Camera Addendum. 196. Sangrole was a sangria-type product introduced by United during Richard Oster s presidency (Tr. 7946). Mr. Oster was President of United until September 1973 (Tr. 7778). The introduction Sangrole was a success (Tr. 7946). Sangrole continued to be sold in 1978 (CX 585A, B).

197. Bali Hai was a refreshment wine originally introduced in 1963 (Tr. 7908, 7913). Subsequent to the acquisition, approximately in 1971, Bali Hai was repackaged and renewed activity was placed behind it. In that year, $1 milion was spent in advertising Bali Hai (Tr. 3707-08).

198. United markets Jacare, a line of three table wines introduced in United' s 1977 fiscal year (Tr. 8509; CX 585Z-35). 199. United markets Zazie, a refreshment wine. Zazie is imported from Portugal where it is made at the Heublein-Fonseca joint venture winery (Tr. 8463, 8509, 9842). Although marketed by United Zazie is not imported by it (CX 446).

200. Italian Swiss Colony was the largest brand of United at the time of the acquisition (Tr. 2390). Its name was changed to Colony, though the wines are still called Italian Swiss Colony (CX 536F; Tr. 8429). Italian Swiss Colony (or Colony) is still one of the basic brands of United and is the largest in volume (Tr. 9502; CX 585Z- 16 thru Z- 22). A highly successful line of varietal wines has been added under the Colony label (CX 36lD). (42) 201. Petri also remains one of the basic brands of United (Tr. 9502; CX 34C). Lejon and Jacques Bonet, the brands of sparkling wine at the time of the acquisition, continued to be emphasized .....

..""''La..u., 385 Initial Decision thereafter (Tr. 7900). They remain the basic sparkling wine brands of United today (Tr. 9502).

202. Inglenook is one of the fastest growing major brands of California wine and, according to Heublein s 1977 Annual Report, in fiscal year 1977 had a case volume increase of more than 30 percent. Inglenook, in fiscal 1978, became the fastest growing major brand in the industry with a growth of almost 50 percent and sales of almost 4 milion cases (Heublein s 1978 Annual Report, CX 543N). It was estimated by United (two months before the end of United's fiscal year) to have shipments of cases in 1978, up from actual in 1977 (CX 585C in camera). See In Camerashipments of Addendum.

203. Inglenook's Navalle line was successfully introduced by United in 1971 (Tr. 8462). In fiscal year 1978, Navalle shipments were 3.4 to 3. 5 million cases or 85-90 percent of all Inglenook shipments (Tr. 8525-26). The Navalle product line earnings were estimated (two months before end of fiscal year 1978) to be on sales estimated at in fiscal year 1978 (CX 585G in camera). The comparable figures for fiscal year 1977 were product line earnings of on sales of increases 13of over percent from the previous year (CX 585Z- , Zcamera). See In Camera Addendum. 204. Heublein (through United and under United brands) produces and markets wines of all types, including table wines, dessert wines, sparkling wines and flavored wines including vermouth. Italian Swiss Colony and Colony are two of United' s most popular brands and are distributed throughout the United States. Inglenook wines, marketed in the Cask, Estate, Vintage and Navalle lines, are distributed nationally (CX 358C). Proprietary names are used for refreshment wines such as Annie Green Springs, T. J, Swann and Jacare (CX 358C; Tr. 9824).

205. United has distribution in all 50 leading metropolitan markets and has approximately 435 distributors (Tr. 9621 , 9872). 206. In the two largest markets for wine in the United States, New York City and Los Angeles, United owns its own wholesale istribution operation (Tr. 9718-19; CX 533A). United's whollyowned wholesale operation in New Jersey serves all of New Jersey as well as New York City (Tr. 9643-44). United' s Southern California wholly-owned wholesale operation serves all of Southern California (CX 533). United' s own wholesale operations in addition (43)serve three of the top 15 markets for wine (CX 533A-C). The six markets of the top 15 served by United' s owned distributors accounted for 21.5% Initial Decision 96 F.T. of wine sales in 1976 (CX 379U). These distribution operations sell wines only (Tr. 9718- 19).

207. In order for a wine company to operate its own directlyowned distribution system, it must have a strong brand and a large scale of operations (Tr. 3312). United has 145 salesmen in its Southern California distributor and about 90 in the New York/New Jersey distributor (Tr. 9928).

208. Despite the fact that United's own wholesale distribution system is operating at a loss, it constitutes an advantage to the overall winery operations (Tr. 9720-23).

209. United's wineries are as follows:

Location Area (Sq. Ft. Function Asti 363 200 Winery, bottling Clovis 271 400 Winery, brandy production Escalon 144 700 Winery Lodi Il5 700 Winery, brandy production Madera 775,800 Winery, bottling Oakville 000 Winery Reedley 221 500 Winery, bottlng Rutherford 230,576 Wineries, bottling (CX 358H) 210. Capacities and production as of the time of the acquisition were:

Production (Year ending Location Annual Capacity Aug. 31 , 1968) Asti (winery) 269 000 gal. 115 522 gal. (bottling) 300 000 cases 884 360 cases Clovis (winery) 216 000 gal. 514 292 gal. Escalon (winery) 562 000 gal. 096 519 gal. Lodi (winery) 227 000 gal. 738 680 gal. Madera (winery) 015 000 gal. 782 157 gal. (bottling) 000 000 cases 098 580 cases Oakvile (winery) 532 000 gal. 991 994 gal. Reedley (winery) 770 000 gal. 085 259 gal. (bottling) 000 000 cases 271 061 cases 385 Initial Decision Production (Year ending Location Annual Capacity Aug. 31 , 1968) Rutherford (winery) 302 000 gal.

(bottling) 180 000 cases 062 cases Total Annual Capacity: 893 000 Gal.

Total 1968 Production: 224,423 Gal. (CX 55Z) (44) 211. Madera is United's largest winery and has been its main plant since before the acquisition (CX 55Z; Tr. 2388, 10 717). Its capacity was doubled during the 1960's and its new facilities were used in producing table wine (Tr. 2637-38). The glass bottle plant supplying United's bottle requirements is located at this winery site (Tr. 9219). Annie Green Springs and T. J. Swann are produced at Madera, and it is the primary facility for Italian Swiss Colony table wines (Tr. 9901). Mr. Stuart Watson, Chairman of the Board and chief executive offcer of Heublein, has attested that the Madera plant is essential to the competitive viability of United (Tr. 9333). 212. Asti is the site of the Italian Swiss Colony visitor facility. This is an important element in the image and advertising of the Italian Swiss Colony brand, which bears the name of the original settlement (CX 443A-B). Jacare is produced at Asti (Tr. 9824). It is one of the wineries used for the bottling of Inglenook wines (Tr. 9793). More than $1.5 milion were spent in improving Asti between 1967 and 1972 (Tr. 10002-03). Mr. Watson has testified that Asti is essential to the competitive viability of United (Tr. 9333). 213. Rutherford is the showplace winery of United (Tr. 9333). Rutherford is located in the well-known Napa Valley and thereby provides a prestigious address for Inglenook (Tr. 4087). It is not an operating winery, but does bottle Inglenook wines and is the site of the Inglenook testing room (Tr. 9333, 9793). According to Mr. Watson, Rutherford is significant to the competitive viability of United (Tr. 9333).

214. Oakvile is a producing winery for Inglenook (Tr. 9333). The crushing of grapes and wine production for Inglenook wines is done at Oakvile and the wines are then sent to Rutherford for bottling and aging (Tr. 10729). Cooperage was increased at Oakvile in the mid to late 1960's (Tr. 10729). Mr. Watson agrees that Oakville is essential to the competitive viability of United (Tr. 9333). 215. Escalon is a major winery of United at which "premium Initial Decision 96 F. wines are produced, Wines made at Escalon are shipped to Asti for bottling (Tr. 9885; CX 55Z). Inglenook Navalle is the primary brand produced at Escalon. Wines used in the Italian Swiss Colony varietal table wines are also produced at Escalon (Tr. 9945-47). Escalon was converted in the 1960's from dessert wine to table wine production (Tr. 2619).

216. The Reedley plant produces primarily Italian Swiss Colony wines. It is also used for the production of the Petri brand (Tr, 9947) and has a botting facility (CX 358H). (45) 217. In 1968, glass supply problems and price increases prompted United to decide to build its own plant for production of glass bottles to be located adjacent to the Madera winery. In a management report presented to United's Board of Directors, the President of United reported on the proposed glass plant, that: "Plant capacity should be 13 000,000 cases to include Chicago bottling, and close to 15,000 000 to also include Newark. The estimated saving on the 000, 000 case plant would be $1 958 000 per year, With a yearly write-off of $702 000, the cash flow would be $2 660,000 for a five year payoff. It would take four years to recover the cash outlay" (RX 1261B). Tbe total cost to United thus would have been $10 600 000. loan 218. United was able to secure a $3 milion long-term commitment from the Small Business Administration to finance construction of the glass plant (Tr. 2423, 2681, 9305), and an additional loan commitment from a bank (Tr. 2681). United planned to build the glass plant adjacent to the Madera Winery (CX 259B). Plans to build the glass plant were suspended because of the 2681). Unitedacquisition negotiations with Heublein (Tr. 2423, would have built the glass plant even if the acquisition had not occurred (Tr. 2425, 2681; CX 259B).

219. The glass plant, the Madera Glass Company, was built in 1969, after the merger, as a joint venture with the Indian Head Glass Company owning 51 percent and United owning 49 percent. United is committed to taking the entire output of the plant (CX 557G). United enjoys a 15 percent cost saving on bottles and has earned a profit from thc joint venture (CX 563F, 564F, 565F). 220. United's total initial investment in the Madera Glass Company was $1 960 000 (CX 557G). The commitment for a $3 million loan from the Small Busi ness Administration was also utilized (Tr. 9305). United' s total investment in the company reached a high of $4.4 milion in 1977 (CX 565D). Heublein s participation in financing the Madera Glass Company was the guarantee of longterm loans of $5 million from Aetna Insurance Company, $3 millon from Wells-Fargo, $2 milion from the Bank of America, and $1 HEUBLEIN, INC., ET AL. 435 :385 Initial Decision milion from the Crocker-Citizens National Bank (Tr. 9220-23). The s require-Madera Glass Company supplies 90 percent of Heublein ments of domestic wine bottles (CX 358D). 221. Subsequent to the acquisition, United purchased the land and winery of the Oakvile Vineyards. This is adjacent to United' Oakvile Winery (Tr. 9887, 9978-79). (16) 222. United had been able prior to the acquisition to borrow , 10 914). " As ofmoney at reasonable interest rates (Tr. 2426- August 31, 1968, United had long-term debts of only $7,061 908 and members' equity amounted to $25 319 318 (CX 555E). The three longterm loans which comprised over 95 percent of the long-term debt 1/2 percent over prime, andwere at interest rates of 5 1/4 percent interest-free, respectively (CX 555H-I).

Allied Grape Growers 223. Allied Grape Growers ("Alled"), is an incorporated agricultural cooperative association, organized, existing and doing business under and by virtue of the law of the State of California, with its principal offce and place of business in Fresno, California (Heublein s Answer IV, 10 (p. 8)).

224. Prior to Heublein s acquisition of a controllng interest in United, Allied was in the business of acquiring grapes and supplying them to United for the production of wine (CX 55X; Heublein Answer IV, 10 (p. 8)).

225. Allied was started in 1951 as a farmers cooperative with 230 members (Tr. 2366- , 2381). It was formed to supply grapes to be produced into wine and sold by the Petri Wine Company (Tr. 2368). The wines were produced in the Escalon and Madera, California wineries, which were purchased by Allied in 1951 from Louis Petri (Tr. 2368, 2373). The brands and facilities of United Vintners were purchased by Allied from Petri in 1959 (Tr. 2369). 226. Allied's members entered into three-year eontraets for the sale of their grapes to Allied, which agrees to sign up a specified tonnage of its members' grapes during that period. The membership of Allied has changed substantially since the acquisition. Many growers who were members of Allied prior to the merger have withdrawn and a number of growers who were not members in 1968 have joined (RX 1018 1019, 1020 1026 1027; Tr. 2374-75).

227. After it acquired United, Allied entered into agreements with its members for grapes to be delivered to United (Tr. 2369, 2375). The money generated (after expenses) from the sale of wine by \D There i record reference (RX 1195) to a particular linancial institution refusing financing The circumstances and natuTt10fthe rinancinli, however, wcrenotdev elopedonthereconJ 1;J6 FEDERAL TRADE COMMISSION m;CISIONS Initial Decision 96 F.T.C. United was paid to the members of Allied following the delivery season. The amount of money generated (after expenses) from the sale of wine above the market value ofthe grapes delivered is called excess over (47Jrnarket" and represents the growers' earnings from United (Tr. 2369; CX 555G). The amount payable to each individual member was based upon the market value of the grapes he delivered (Tr. 2377). Out of the amount payable to the grower a certain percentage was retained by Allied (called a "retain ). The accumulated retains from the growers constituted the capital of Allied. The retains were paid back to the grower over a six-year period (Tr. 2376).

228. The average market price for grapes was based upon reports of the Federal-State Market News Service, a government agency which publishes the prices paid for grapes by wineries according to grape variety and growing area (Tr. 2378). 229. The average market price for grapes was $44. 19/ton for the 1960-1968 period (RX 1219).

230. During the period 1959-1968, the weighted average market price for grapes delivered to United was approximately $50 per ton (Tr. 2409). The weighted average return to the grower members over the market value was $10 per ton (Tr. 2408, 2715). 231. Allied's members, in addition to the average market price for grapes, received their pro rata share of the excess over average market price for grapes. The excess over average market price was generated by United from the sale of wine and represented the earnings of United (Tr. 2377, 2379).

232. Money retained in a particular year, after a time lag of about a year, was paid back in quarterly installments over a six-year period (Tr. 2376, 2541-42). The grower built up his retains for six years and thereafter would, in quarterly installments, receive money from the retain fund as well as payment of what was not retained (Tr. 2376).

233. The average retain over the 1959- 1968 period was $10.50/ton. The average net proceeds in excess of quoted average market price for grapes was about $10/ton for tbe 1959- 1968 period (Tr. 2374). " The $10/ton average for the return above the $44. 19/ton average market price is a return of about 23 percent. The $10.50/ton retain is (48)approximately 19 percent of the $54. 07/ton ($44.19 + $9.88) average total price per ton of grapes. LL Ther'" was 010 average 15- rnnnth w"iting period for grape payments. The grower would be receiving the proceeds from his previous year s CfOp during this period. Crop loans were also available to growers from Allied, if needed (Tr_ 2;;60) " Avp.r"ge rduro over market fDr th" 19(;0-1968 period ca!culaled from United' s financial statements from ID60 1 1(;g (Pages G from ex 517- 55; HX 1219) g.. g, .l.l.u,-..... u - 385 Initial Decision 234. The retain account represented the growers' equity capital in United (Tr. 2385, 10895, 10919; RX 1015B; see CX 553F). 235. The earnings of United or return over market and the market price were paid to the grower (less the retain) beginning about one year after the crop was delivered ('fr. 2545, 2557-58; see also, CX 553M).

236, A change in the tax law in 1966, whereunder the grower would have had to pay taxes on retains kept by United, caused a change in form of United' s retain fund. With the change (prior to the 1968 fiscal year) in United' s retain fund from a "revolving fund" to a capital fund", the growers' equity was considered permanent, not revolving capital The financial consequence to the individual member was essentially the same, but retains were not considered to be paid in by members for the current year and paid out by United for the crop six years before. Instead, the grower was considered to have a permanent investment and share in United which was maintained by payments from or to the member depending upon whether his proportion of the annual crop increased or decreased (RX 1014A- , loi5Z-6; Tr. 10 943-44).

237. United's retains account had grown to $25,319 318 by 1968 (CX 554E, F, 555E).

238. During the 1959- 1968 period, Allied had paid Louis Petri $24 milion for United. It did so using money generated from the retains of $1O. 50/ton. The return over average market price for grapes averaged $lO/ton over the same period (Tr. 2374, 2675-76). The payment for United, therefore, reflected the profits of United (Tr. 2374, 2674). While these profits may be said to have been held back from the growers, the growers received the full average market price for their grapes and in addition acquired a share in the increasingly valuable assets of United.

239. The average market price for grapes delivered by Alled' members prior to the acquisition (1960-1968) was $44.19 and the average market price for grapes delivered by Alled' s members after the acquisition (1969- 1977) was $90.64 (RX 1219). (49J 240. Alled recognized that the capital requirements for United would increase and so changed the form of the retain fund from a revolving to a capital fund. The change faciltated an increase in the capital investment in United (Tr. 10 943-44; RX 1014A- , 1015D, E , Z-lO). United's capital requirements were determined by its board of directors and funds were retained in or paid out of the capital fund accordingly (RX 1015Z-8, 10201). 241. By 1968, the membership of Allied had grown to 1 600 from the original 230 in 1951. The grapes signed up by Allied had grown 4:18 FEDERAL TRADE COMMISSION DECISIONS Initial Decision 96 FTC. from 50 000 tons in 1951 to 410 525 in 1968 (Tr. 2381). In 1968, and for some four years prior thereto, there was a waiting list of additional grapes which the growers wanted to deliver through Allied. In 1968 or a year or two before, there were 100 000 tons on the waiting list (Tr. 2387, 2537).

242. After the merger, United continued to erush the grapes delivered by Allied's members and produce wine (Heublein s Answer , 15 (p. 11)). Grapes were delivered to United by Allied pursuant to a long-term supply contract that had been entered into coincident with the merger (CX 221).

As recited in the Preliminary Statement, supra p. 7, that longterm supply contract was declared invalid in a private suit, Allied Grape Growers v. Heublein, Inc., Civ. No. C-75-04,56 (D. Cal, fied July 21, 1978), and Alled subsequently sold its entire 18 percent interest in Vintners to Heublein.

D. Heublein Alled Vintners 243. Heublein Allied Vintners, Inc. ("Vintners ) was a corporation organized on September 24, 1968, for the purpose of the acquisition of United by Heublein. Vintners' sole asset was 100 percent of the stock of United (Answer of Heublein Allied Vintners to Amended Complaint, VII pp. 2-3). Vintners was a holding company (CX 328D). Heublein had an 82 percent interest in Vintners and Allied had an 18 percent interest in Vintners (CX 211, 328F, H). As recited in the Preliminary Statement supra, p. 9, after Allied sold its 18 percent interest in Vintners to Heublein in 1978, Vintners on November 9, 1978, was merged into Heublein and ceased to exist. III. EVENTS LEADING UP TO THE ACQUISITION 244. Mr. Louis Gomberg, a wine industry consultant and merger broker (Tr. 1402, 1410-11), by letter dated September 28, 1967, first called to the attention of Heublein (through its Chairman, John Martin) the possibility that United might be a candidate for acquisition (Tr. 1420, 4009; RX 1130). (50) 245. Mr. Gomberg had approached Mr. Bruno C. Solari, President of United, about a possible acquisition. Mr. Solari expressed a wilingness to listen to any offer, but took no initiative in seeking anyone to acquire United (Tr. 1421-26).

246. Mr. Martin met with Mr. Gomberg on the West Coast in the fall of 1967, and they discussed various acquisition candidates (Tr, 448,5, 4491-92). Mr. E. W. Kelley, Executive Vice President of Heublein, was then assigned to find out from Mr, Gomberg whether HEUBLEIN, lng, ET AL. 4;j 385 Initial Decision any of those wineries would be interested in talking to Heublein. Mr. Gomberg said that he would talk to United and see if they were interested (1'r. 4493).

247. Later in the fall of 1967, Mr. Bruno C. Solari went to New York for purposes unrelated to consideration of a merger (Tr. 4718- 19). While he was in New York, a representative of Heublein called to set up a meeting with him (Tr. 4716). Me. Watson and Me. Martin came to meet with Mr. Solari in New York and they told him they were interested in the possibility of buying United (Tr. 4008- 4720).

248. In December 1967 or January or February 1968, key executives of Heublein agreed that they wanted to look into the United matter and decided that Mr. Kelley should pursue it (Tr. 4500-02).

249. In March 1968, a contingent from United including Mr. Solari went to Hartford to discuss the matter with Heublein (Tr. 4566, 4568- , 4721). There, Heublein presented its general plan of acquisition for the United representatives to report back to their board of directors (Tr. 4867). Heublein proposed a purchase price of about $38 or $38.5 million (Tr. 4868-69). 250. Until Me. Solari told the Alled and United Boards of Directors (actually the same board) early in 1968 of Heublein interest in acquiring United, there had been no interest on the part of either board or either company in selling out. Neither board had approached any company with respect to the possibUity of sellng United and no one had been authorized to explore the sale of United to another company (Tr. 2430- , 2682-85)." (51) 251. Mr. Kelley met with Me. Solari and Mr. Gomberg in California in April 1968 to discuss a possible Heublein-United merger (Tr, 4496). Shortly after that meeting, Mr. Kelley met in San Francisco with Mr. Solari and his associates to discuss the matter (Tr. 4573).

252. After obtaining information on United, Mr. Kelley returned to Hartford, where Heublein decided to pursue the possible acquisition further. Inasmuch as Heublein also had other opportunities, it was decided to make a study of the alternative means of entering the wine industry. McKinsey and Company was hired to do a study of four or five ways to enter the wine industry and to evaluate the merits of the United approach (Tr. 4512-13). ., Mr. Solari, who was President of United at the time of the merger and cantinued in that position under Heublein, rceaUcd meetings with Welch Grape Juice in the middle 1960's to "explore the acquisition Or II merger or how could tne two companies do better by working together than warkin" apart" (1'r 4723). Welch withdrew from the l!llks (Tr. 4724). Mr. Solari, however, confirmed the testimony of other United and Allied of6cials that no one on the Aliied board asked him to initiate any talks or explorations as 10 the sale of United ('fr. 4722). Initial Decision 96 !". 253. Two to four weeks after it was commissioned, the McKinsey study of theoretical alternatives for entering the wine industry (RX 1212A- 15) was presented to Heublein (Tr. 4533). It was presented at a meeting on May 13 , 1968, which was attended by a group of Heublein executives including Mr. Hart, Chairman of the Board and Mr. Watson (Tr. 4531). The four inside members of Heublein Executive Committee were presented with the McKinsey report as a group (Tr. 4613).

254. Over the course of the negotiations regarding the acquisition of United, Heublein increased the price it was wiling to pay (Tr. 2442).

255. During those negotiations, presentations were made by representatives of Heublein to the Boards of Heublein and Alled. Presentations were made by Stuart Watson, President, Edward Kelley, Executive Vice President, Ralph Hart, Chairman of the Board and John Martin, Chairman of the Executive Committee of Heublein. Other Heublein offcials were also present. In addition, there were district meetings with members of Allied to persuade them to vote in favor of the merger. A total of 33 district meetings (three sets of meetings at each of 11 districts) were held at which Heublein representatives were present or at which Allied and United board members made the presentations prepared by Heublein (Tr. 2445- , 2461-79).

256. Heublein represented to Allied that it was very knowledgeable in the wine business and that it had made a thorough study of the California wine business (Tr. 2468). Mr. Kelley represented to Alled in the fall of 1968 that Heublein had studied the domestic wine business for two or three years (Tr. 2777). Heublein presented itself to Alled as a good marketer (Tr. 2460- , 2476-78, 2688- 2697 -2700 2773, 2776; CX 263, 264, 267). (52) 257. Heublein utilized charts and other visual and verbal presentations to demonstrate Heublein s growth as detailed in Findings 44- , supra (CX 263, 264, 265, 266, 267; Tr. 2473, 2476- , 2697-2700). 258. Heublein representatives pointed out that Heublein had a wide distribution system and that Heublein s and United's products were compatible so that the distribution of United' s wines could be enhanced by using Heublein s distributors; Smirnoff vodka was cited by Heublein as a product which could be used to gain better distribution for United's wines (Tr. 2464- , 2487). By having Lancers wine and Smirnoff vodka along with United' s wine, the two companies could both increase the distribution of their products and both could use each other s warehouses (Tr. 2690- , 2696). 259. Representations were made that the merger would result in 385 Initial Decision increased effciency with the advertising dollar because of the joint effort (Tr. 2508- , 2692-93).

260. It was also pointed out that the combination of Heublein with United could result in getting greater shelf space at the retail level (Tr. 2695).

261. Prior to the acquisition, there were discussions between Heublein and United with respect to consolidation of distributors and marketing efforts (Tr. 8926-27; CX 422). 262. On the basis of the foregoing findings under this heading as well as the description of United prior to the merger, it is concluded that United and Alled did not enter the merger arrangement because of any inability to continue in business on their own; that they did not initiate any steps seeking to be acquired, but that, when presented with a merger offer which appeared to be to their advantage, they accepted such an offer.

IV. THE ACQUISITION 263. A "Plan and Agreement of Merger" was entered into as of August 31, 1968 among Alled, Vintners, Heublein and Connecticut Vintners, Inc. " That agreement was executed on September 26 1968 (CX 211A, 0).

264. The agreement provided that Heublein would acquire a Prior to thecontrollng interest in United (CX 55D- , 211A-C). acquisition, United had been a cooperative whose sole member was Allied (CX 21lD). United was the production and marketing arm of Allied (CX 55X). (53) , 1969, gave 265, The acquisition, effectuated on February 21 Heublein a controllng interest in United (CX 5, 55D-F). 266. Heublein, as consideration for the interest it acquired in United, gave shares of Heublein common stock valued at approximately $7 521 000, Series A Heublein preferred stock valued at approximately $20 319 000, and Heublein Series B preferred stock valued at approximately $5 000 000. The total value of the shares paid by Heublein to members of Alled and former members of Alled in exchange for their interest in United was valued at approximately $33 milion (CX 136D), 267. Prior to the acquisition, United had been converted from a cooperative association to a corporation whose sole owner was Allied (CX 211I, 328D-H). As the result of a complex reorganization, United became a wholly-owned subsidiary of Vintners, a company organized " Connecticut Vintners, Jne. was a wholly.own d suhsidiary of Heuhleinwhich was merged into Vintners as one of the stepsin effectuating the acquisition (CX 211) 336- 345 a - 81 - 29 Initial Decision 96 F. for purposes of the acquisition (CX 328D- , 211A-C). Also as a result of the reorganization, Heublein acquired an 82 percent interest in Vintners and Allied acquired an 18 percent interest in Vintners (CX 328D- 211A-C).

268. Since the merger, United has been operated as a subsidiary of Heublein (CX 136E).

269. As a condition precedent to the merger agreement, Alled, Heublein, Vintners and United entered into a supply contract, which also was executed on February 21, 1969, the date of the merger (CX 211M, 321Q). The supply contract provided that Allied would act as the supplier of all of United's grape requirements for 20 years renewable for six additional ten-year terms at the option of Alled (CX 221D-E). It also provided that Alled was entitled to 20 percent of United' s pretax profits and to designate eight members of United' 20 member board of directors (CX 221 0).

270. The supply contract has been declared in a United States District Court proceeding between Heublein and Alled to be null void and unenforceable and is no longer in effect. Alled no longer has the right to share in United' s profits nor does it have the right to representation on United's board of directors. Allied's designees on the United Board of Directors have resigned (Memorandum in Support of Motion to Certify Dismissal of Alled Grape Growers to the Commission dated September 12, 1978, p. 7, Exhibit A; RX 1248Z-26 through Z-28. See supra p. 7). 271. Allied has sold its 18 percent interest in Vintners to Heublein, and Vintners has been merged into Heublein leaving Heublein as sole owner of United (See supra, pp. 7, 9). (54) 272. Pursuant to an agreement (among Heublein, United, Alled and Vintners), Alled in late 1978 entered into a six-year grape supply contract with United (RX 1248A through Z-4). v. THE RELEVANT MARKET Determination of the relevant market is prerequisite to determination of whether a challenged acquisition does, in fact, violate the antitrust laws. An acquisition in violation of the law " . . . must be one which wil substantially lessen competition 'within the area of effective competition.' Substantiality can be determined only in terms of the market affected. United States v. dupont Co., 353 U.S. 586, 593 (footnote omitted). Geographic Market 273. The relevant geographic market in which the effects of , , . DVUL." u,,,.

385 Initial Decision Heublein s acquisition of United Vintners are to be measured is the United States as a whole (Amended Complaint, Para, 19; Answers of Heublein and United Vintners to Paragraph 19 of the Amended Complaint).

Product Market Brown Shoe Co. v. Us., 370 U.S. 294 (1962), set out the standards by which relevant product markets and submarkets are determined: The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it. However, within this broad market, well-defined submarkets may exist which, in themselves, constitute product markets for antitrust purposes. United States v. E. 1 dupont de Nemours Co. 353 U.S. 586, 593-595. The boundaries of such a submarket may be determined by examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product' s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors. Because of the Clayton Act prohibits any merger which may substantially lessen competition "in any line of commerce" (emphasis supplied), it is necessary to examine the effects of a merger in each such economically significant submarket to determine if there is a reasonable probability that the merger wil substantially lessen competition. If such a probability is found (55)to exist, the merger is proscribed (at 325, footnotes omitted).

With Brown Shoe in mind, the following findings require the conclusion that the relevant product market is "all wines" and that table dessert" and "sparkling" wines are "well-defined submarkets. . ,which, in themselves, constitute product markets for antitrust purposes. "

Product Market-Wine 274. "Wine, as defined for purposes of government regulation of wine production, winery construction, winery licensing, wine ingredients, wine taxation and related purposes, is an alcoholic beverage which is the product of the juice or must of grapes or other fruit. It includes products which have been sweetened or to which various flavoring ingredients have been added. Included are all still wines champagne and other sparkling wines, artificially carbonated wines and special natural wines. Special natural wines are flavored wines such as vermouth made pursuant to a formula approved under government regulations (CX 309J, K, L; 26 U. c. 5381-5386). 275. There are literally hundreds of different kinds of wines (CX 308K). However, all wines are produced basically in the same manner, by crushing grapes or other fruit and fermenting their juice. The ensuing procedures then differ somewhat depending upon , , Initial Decision 96 F. the particular kinds of wines desired. For a description of production procedures, see Findings 406- infra.

276. Industry statistics such as those of the Wine Institute (the leading trade association in the industry) are maintained in three categories-(l) stil wines containing up to 14 percent alcohol; (2) still wines containing over 14 percent alcohol; and (3) effervescent wines (Tr. 1579-80). The terms "dry table " or "dinner" wines are used for stil wines not over 14 percent alcohol (Tr. 1812, 3153; CX dessert" or "appetizer308Z- , 310 0, P, Q). The terms "sweet" wines are used for still wines over 14 percent alcohol (Tr, 1812 3153; also includesCX 308L, 310 0, P, Q)" The term "dessert wines" appetizer wines" (CX 308L). Effervescent wines include artificially carbonated wines (CX 309J). The term "sparkling" is used to refer to effervescent wines (Tr. 1812; CX 308R). Examples of table wines are Burgundy, Gamay, Cabernet Sauvignon, Ruby Cabernet, Pinot Noir Zinfandel, Pinot Chardonnay, Chenin Blanc, Emerald Riesling, Grey Riesling, Chianti, Sauterne. Examples of dessert wines (including appetizer wines) are Sherry, Vermouth, Port, Tokay and Muscatel. Examples of sparkling wines are Champagne and Sparkling Burgundy (CX 308K). (56) 277. Wines are also classified as generic or varietal. Varietal wines are named after the predominant grape variety contained in the wine and by law must contain at least 51 percent of that grape variety (CX 310S; Tr. 749). Examples of varietal wines are Cabernet, Pinot Noir, Zinfandel, Chardonnay, Riesling, Muscatel, Ruby Cabernet, Petit Sirah, French Columbard, Emerald Riesling, Barbera, Sylvaner and Chenin Blanc (CX 308Z-24; Tr. 540A). Generic wines may be made from a mixture of grapes, no one of which need account for any specified percentage of the grapes used (Tr. 757). Examples of generic wines are Burgundy, Rhine Wine, Sherry, Port, Sauterne and Chablis (CX 308Z- 23; Tr. 757).

278. Varietal wines contain from 51 percent to 100 percent of the varietal grape for which they are named. There is no requirement that the varietal percentage be disclosed on the label (Tr. 517) and such disclosure is not usually made (Tr. 811). There is no indication with respect to generic wines of the types of grapes used in their production (Tr. 810).

279. All wines vary in quality depending on where, when and how they are made. There are wide ranges of wine quality. There is variation within types of wines and within wineries. There is a continuum of wine quality. A particular wine can vary among " The terms "sweet" and '.dry" refer to alcoholic content, not to the taste ufthe wine (Tr 1812: ex 3D8Z- 24) 385 Initial Decision various producers, and for a single producer from year to year. There are thousands of variations in the winemaking process. Time, temperature, and winemaking procedures all affect the gradation in wine quality. The very same variety of grapes differs in quality and this causes variatjons in the wine produced from them. The wine handling ability of a winery also affects wine quality (Tr. 523, 532- 758, 913, 3153).

280. The range of prices for all kinds of wines also varies (Tr. 2873). Cabernet Sauvignon wines, for example, range in price from under $2.00 a bottle for Italian Swiss Colony up to $20 per bottle (Tr. 758). The price range of generic wines overlaps the price range for varietal wines (Tr. 2874-75). The wines of United in January 1974 ranged from $. 99 to $6.50 per 1/5 gallon bottle at California retail prices (CX 218Z-291 through Z-304). In 1972, United's product line sold over a retail price range of $.89 or $.95 to $5 or $6 a bottle. There were very few price gaps and United sold products at virtually every pricing point (Tr. 3741). " In California, Gallo prices are near the lowest end of the price range and Beaulieu prices are near the upper end (Tr. 1849). About 2 percent of wines sell above Beaulieu s prices and about 10 percent of wines sell (57Jbelow Gallo s prices (Tr. 1853). As of January 1974, the California retail price range of Gallo wines was from $. 69 to $2.79 per fifth (CX 218Z-280, 218Z-281), while that of Beaulieu wines was from $2. 25 to $7.00 (CX 218Z-263). Price-Quality Considerations 281. Wines were referred to by numerous. witnesses as "standard" or "premium . Some of those witnesses did so on the basis of wine quality (Tr. 673, 674, 774, 1871, 2214, 2215, 2154). Others applied the terms "standard" or "premium" according to price (Tr. 1712 2035, 3473, 3930, 4249, 7252, 9760- , 9983, 9984). HUV contend that the effects of the challenged merger must be analyzed on the basis of separate "standard" and "premium" wine submarkets. Their proposed categorization is based on alleged price differences (Tr. 10329-33; RX lD, IE, 7C, 7D, 9D, 15B, 17G, 23E, 25E 27B).

282. With reference to December 1972 California wine, for example, HUV have classified table wines retailing at under $1.35 per fifth as standard and those sellng at $1.35 and above as premium (RX ID, IE, 17G), "sweet" wines selling at $1.35 per fifth as standard and those selling at $1.35 and above as premium (RX 7C, 23E), " Another example of price range is Guild Wineries and Distillers whose table wines sell at retail from $1.09 to$450(Tr. 2991) 446 Fr;DERAL TRADE COMMISSION DECISIONS Initial Decision 96 FTC. sparkling wines selling at under $3.49 per fifth as standard and those selling at above $3.49 as premium (RX 9D, 25E), and refreshment wines selling at under $1.35 per fifth as standard and those sellng at $1.35 and above as premium (RX 15B, 27B). 283. Witnesses who characterized wines as standard or premium on the basis of price differed in their price divisions. Marvin Sands, President of Canandaigua Wine Company, views Gallo s $1.69 price as the upper end of the standard price range and the $1.79 to $2. prices of Almaden, Paul Masson and Christian Brothers as the beginning of the premium price range (Tr. 4249). Louis Gomberg, wine consultant who prepared various tables for HUV, used $1.25 in his industry statistics as the dividing line for table and dessert wines and $3. 50 for sparkling wines in 1970. These dividing lines were increased over the years to account for inflation and were $1.45 and $4. 00 respectively, in 1971 , $1.50 and $4. , respectively, in 1972, and $1.75 and $4. , respectively, in 1973. In 1974, Mr. Gomberg s table and dessert winc dividing line was $2. In 1975 and 1976, his dividing lines were $2 for table and dessert wines and $4. 50 for sparkling wines (Tr. 1817-22; RX 581, 585, 586). Ralph Hart, former president chief executive officer and chairman of the board of Heublein defined premium wines as those selling for $3 to $6 as of the time he was chief executive offcer of Heublein (Tr. 3930). Mr. Hart was chief executive officer of Heublein until April 1968 (Tr. 3921). (58) 284. Dr. Richard Peterson, winemaster and president of the Monterey Vineyard, is also president of the American Society of Enologists, the scientific and professional society for winemakers (Tr. 320, 325). In Dr. Peterson s opinion, the term "premium" means different things to different people, Henry Rubin, a wine columnist and wine consultant, would not define "premium" because it is a very loosely used term. Any winery can call its wines "premium and many do as a matter of self-evaluation. This, however, does not mean that they are of any higher qualiy (Tr. 721, 773-74). 285. Wine price may not be relied upon as an indicator of quality (Tr. 514). Most marketers agree that retail price depends far more on volume than on actual product quality (Tr. 514, RX 1184B). Certain wines such as the second line of Almaden and Sebastiani are marketed in a manner intended to make the consumer believe they are "premium" wines or "sublevel of premium" wines, but are actually "standard" wines (Peterson Tr. 1871). Almaden mountain wines and the Inglenook Navalle wines are both "standard" wines dressed up as "premiums" (Peterson Tr. 1877). 286. There is only a loose relationship between wine quality and price (Tr. 753). There is no absolute line between low-priced and ..1 Uh"" 1j"" 11'1'-. , ""J. ,"'J.

385 Initial Decision high-priced wines (Tr. 773). Henry Rubin as a writer on wines assesses the quality of wines against their prices and advises consumers which wines are a good value (Tr. 772). He testified that some wines, such as Lancers and Blue Nun, are overpriced for their quality (Tr. 753), while others are underpriced for their quality (Tr. 754).

287. Robert Balzer, a former wine store owner and restauranter, is a wine writer with a nationally syndicated column in the Los Angeles Times and is the food and wine editor for Holiday magazine (Tr. 2791-95). He circulates a newsletter on food and wine and has written a number of books on wine (Tr. 2795-96). He has taught five courses on wine at UCLA (Tr. 2799). He is acquainted with consumer tastes and purchasing habits in wine through his 27 years as a wine merchant, teacher, his restaurant experience and hundreds of letters each month from his wine consumer readers (Tr. 2791, 2799-2800). He is an experienced wine taster who participates in 75 to 100 wine tastings a year and who conducts monthly wine tastings by panels of competent and experienced tasters for his newsletter (Tr. 2803-08). He was presented to the public by United as a wine expert in an advertisement for Inglenook (RX 331B). The tastings for his newsletter include low-priced and high-priced wines (Tr. 2821). The quality evaluation of wine at the tastings is based upon a generally accepted and recognized 20 point scoring system developed at the Department of Viticulture and Enology at the University of California at Davis (Tr. 2808, 2840, (59)2919-22). The wines so evaluated are ranked on the basis of their quality in his newsletter (Tr. 2821-22; CX 346, 347 348, 349, 350).

288. The prices of wines which are rated in Balzer s tastings do not follow quality rankings, but vary. The retail price of wine is not a reliable index of wine quality (Tr. 2842, 2860; CX 346 347 348 349 . 350). The broad range of wines which are evaluated in Balzer newsletter irrespective of price are wines from which a consumer would choose and are thus in competition with one another (Tr. 2868 2869).

289. As an example of the variance in the price-quality relationship, ten brands of the same variety of wine, Cabernet Sauvignon each sellng for $3 would not have the same quality (Tr. 7256, 7258, 7259).

290. In comparative blind tastings by experts and novices of California and European wines, California wines were preferred although the imports frequently cost two to three times as much as their California counterparts (CX 308Z-1 thru Z-8). 291. Imported wines and California wines are similar in charac- 448 FEm RAL TRADE COMMISSION DECISIONS Initial Decision 96 F.T. teristics and are made from the same types of grapes grown under similar conditions (CX 308U). California wines are made from the European grape family called vitis vinifera (CX 308T, 308Z- 14 thru 16). John Powers, chairman of the board of United Vintners confirmed that imported and domestic wines compete with each other within industry segments (Tr. 9825). Wines produced in the eastern and midwestern states are made from grapes of the family vitis labrusca, the native American grape. Both HUV and complaint counsel have included wines from all geographic areas within the relevant markets as they have defined them (RX ID; CX 373A). 292. Heublein s own 1967/68 Marketing Plan (CX 97K, L, M) demonstrates the invalidity of HUV' s present contention that standard" and "premium" wines must be treated as separate markets. There, it was recognized that competition for Heublein Harveys Bristol Cream (a "premium" wine) came from three sources:

The premium quality imported sherry market. The imported liqueur-cordial market.

The domestic "fifth" sherry trade- up market. (60) After reciting that Harveys' prime competition comes from other imported sherries, and that, because of its high quality, premium price and position acquired by advertising effort, it was also in competition with quality cordials and liqueurs, it was concluded: Also, because of the sizeable volume and potential of the domestic "fifth" sherry market, brands such as Gallo, Taylor, and Paul Masson cannot be overlooked as competition to Harvey s Bristol Cream. This could be a trade-up market for Harvey It is noteworthy that connoisseurs have judged the quality of these domestic sherries to be as good as or equal to the quality of some imported sherries. (See opposite for comparison of prices in these three categories. The prices referred to (Retail in California) were $.82 for Gallo (well below HUV' s "standard" premium" price demarcation); and $1.75 for Taylor and $2.87 for Paul Masson. Also listed was Almaden at $1.48. Yet Heublein considered all such wines to be in competition with its Harveys brand which sold for $6. 89. Physical Characteristics 293. Wine has unique physical characteristics. The federal government has established standards of identity for wine (CX 308Z- 310N-Q). Wine is a beverage containing by law from 7 percent to 24 percent alcohol (CX 310J).

294. The sensory evaluation of wine is called organoleptic UtlL INC. T AI.. 449 38f: Initial Decision evaluation (Tr. 462). Organoleptic evaluation is used to assess the physical characteristics of wine such as clarity, aroma, bouquet color, flavor, acidity, presence of acetic acid, sweetness and other factors (Tr. 2911- , 738). There is a generally accepted standard used worldwide for evaluation of the physical characteristics of wine called the Davis 20-point scale (Tr. 2840, 2921). 295. Wine is the only beverage which offers the complete range of the four tastes to which the palate is sensitive-sweetness, acidity, saltiness and bitterness (CX 308D).

Wine Production 296. Wine of all types-table, dessert, and sparkling-are generally produced by the same group of firms. Each of the eight largest firms for wine overall in 1972 (CX 373K) produced table, sparkling and dessert wines. (61) Gallo (CX 373U, Z- , Z- 13).

Heublein (United Vintners) (CX 373U, Z- , Z-13).

National Distillers (Almaden) (RX 23A; CX 373Z- , Z- 13).

Guild (CX 373U, Z-7; RX loa).

Mogen David (CX 373U, Z- RX 26C).

Taylor (CX 373U, Z- 13; RX 18A).

Franzia (CX 373Z- , Z- 13;

RX 7A).

Seagram (Paul Masson) (CX 373Z- RX 23A, 25A).

297. Every firm which is among the eight largest firms in the table, dessert or sparkling wine category (but not in the all wine category) is a producer (or importer in the case of Renfield Importers) of all three categories of wine: table, dessert and sparkling.

Canandaigua Industries (CX 373U; Tr. 4192-93) Renfield Importers (imports) (CX 373U; RX 17D, 26A) 450 EDERAL TRADE COMMISSION DECISIONS Initial Decision 96 F.T. The Christian Brothers (CX 218Z 270, 373U) Monarch Wine Co. (CX 373Z-7, 373Z-13; RX lB) A, 233) Gold Seal Vineyards, Inc. (CX 373Z-13; RX 17 298. Vermouth, a stil wine over 14 percent in alcohol, was produced by seven of the eight leading firms in the all wine category for 1972 (CX 373K).

1. Gallo (CX 218Z-280) 2. Heuhlein (United Vintners) (CX 218Z-292, Z-285) 3- National Distilers (CX 218Z-292, Z-262) (Almaden) 4. Guild (CX 218Z-287) 6. Taylor (CX 168D (1968)) 7. Franzia (CX 218Z-278) 8. Seagram (Paul Masson) (CX 218Z thru 266) 299. The fifth ranked firm, Mogen David, is owned hy the Coca Cola Bottling Company of New York which also owns Vermouth Industries of America.

300. With certain modifications in physical plant, wineries can shift their production from one type of wine to another in response to changes in demand. This was done hy United, which made changes in its wineries in the 1960's to meet the change in demand from dessert wines to table wines (Tr. 2585, 2619, 2620, 2637). The Escalon winery was converted from a dessert wine plant to a tahle wine plant (Tr. 2619). Gallo converted its wineries to emphasize the production of table wines (Tr. 440). The Monterey Vineyard l62Jwinery was not designed with sparkling wine capability but could have added equipment to produce champagne. It could also have produced dessert wine simply by adding some tanks (Tr. 531). The industry as a whole shifted its production in the 1960's from dessert to table wine (Tr. 439, 7466- , 8090).

301. Many firms including the industry leaders, Gallo and United, produce both, what have been termed, "standard" and premium" wines. The following firms have been described as producing both such wines: Geyser Peak (Tr. 6274); California Wine Association (Tr. 1014); United Vintners (Tr. 3741, 9530-31); Guild (Tr. 3047-48); Weibel (Tr- 673, 716); Gaso (Tr. 9807, 9971); California Growers (Tr. 1954); Canandaigua (Tr. 4198); Angelo Papagni (Tr. 6276-77); Montcalm (Tr. 5162, 5244); Heuhlein (Tr. 2856); C. Mondavi (Tr, 1720); Almaden (Tr. 1870, 1871, 1877); and Sebastiani (Tr. 1870 1871).

385 Initial Decision 302. There is a trend toward expansion of the price and quality ranges sold by individual wineries (Tr. 767). Producers of low priced wines have extended their product lines upward in price and quality. In the last five years, Gallo has expanded the price range and quality range of its products (Tr. 1720, 1857- , 1998-99, 3080- 8571-72). 303. New varietals have been added to the Colony brand of United. These include Cabernet Sauvignon, Pinot Noir, Chenin Blanc, Ruby Cabernet and French Columbard (Tr. 8568). They sold at higher prices than other Colony table wines (CX 536F). 304. Producers of high priced wines have extended their product line downward in price and quality. Almaden in the 1960's bottled its mountain wine in half gallon jugs. Other companies followed and the so-called "premium" category was downgraded in price (Tr. 1871- 72). Witnesses referred to this middle price range as bridging the gap between "standard" and "premium" or between low priced wines and high priced wines (Tr. 1512, 1513, 1871-72, 8847- , 8986; CX 192A). This medium price range was sometimes referred to as subpremium" (Tr. 1513, 8986, 9477) or "mid premium" (Tr. 7259 7596). Other terms sometimes used for these medium priced wines are "low end premium" or "mountain wine" (Tr. 1512-14), Companies in addition to Almaden producing wines in this price range together with higher priced wines are: Taylor (Tr. 8414); Paul Masson (Tr. 539, 8340); Beringer (Tr. 539, 8339-40); Sebastiani (Tr. 539); C. Mondavi (Charles Krug & C.K. Mondavi brands) (Tr. 1720 7595-96).

305. United Vintners introduced a lower priced and lower quality wine called Inglenook Navalle to extend downward its Inglenook premium" line of wines (Tr. 9272- , 7834-35). (63) 306. Firms have shifted their production into this medium price range of wines in response to an increase in consumer demand (Tr. 8576). For example, the Inglenook brand of United had been exclusively in the high-priced range up to approximately 1971. By 1978, its production in table wine had shifted so that 3.4 to 3. milion cases were the medium-priced Navalle and only 460 000 cases were in the higher priced Vintage and Estate lines. This constituted a shift in the line from 100 percent high-priced wines to 12 percent high-priced wines and 88 percent medium-priced wines (Tr. 8525 9272-73).

307. The upper end of the Italian Swiss Colony ("standard") table , wine price range in 1978 was $1.79. The low end of Almaden premium ) table wine price range was $1.89 (CX 536B, F). United' standard") Lejon champagne sold at $3.39 while Almaden s ("premium ) Le Domaine champagne sold at $3.55 (CX 536B, F). Initial Decision 96 F. Production Expertise 308. Enology is the science of winemaking (CX 308Z-8). Viticulture is the science of grape growing (CX 308Z-8). There is a Department of Enology and Viticulture at the University of California at Davis (Tr. 3101).

309. Graduates of the department are employed in wineries both in the north coast area of California and the San Joaquin Valley area of California (Tr. 3101-02). (See Findings 312- infra, for discussion of significance of these two areas, 310. Dr. Richard Peterson was responsible for winemaking at Gallo and left to become winemaster at Beaulieu (Tr. 329), Gallo was producing wines which Dr. Peterson characterized as "standard" while he considers Beaulieu to be the top chateau in California producing "premium" wines (Tr. 330, 502, 508). Gallo s wine handling ability is excellent and Gallo could produce high quality wines by using higher quality grapes (Tr. 532). 311. There is a professional society of winemakers called the American Society of Enologists, to which virtually all winemakers belong (Tr. 325), Grapes and Vineyards 312. The north coast or coastal area and Central Valley or San Joaquin Valley area of California are grape growing and wine producing areas (Tr. 415, 425, 510, 1018- , 1028, 1286, 3101- 3225- , 4114, 7644-47). The Central Valley area includes the San Joaquin and Sacramento Valleys of California. The north coast includes Humboldt, Marin, Mendocino, Napa, Sonoma, Alameda Contra Costa, Monterey, (64)San Benito, San Francisco, San Mateo Santa Clara and Santa Cruz Counties (CX 296G). The geographic boundaries of the northcoast or coastal area have been expanding over recent years (Tr. 1286).

313. In the mid 1940's to mid 1960's the so-called "premium wineries such as Paul Masson, Christian Brothers and Inglenook used grapes from the coastal area rather than the Central Valley (Tr. 7476). Today, however, firms rely substantially on grapes grown in the Central Valley to produce "midpremium" wines (Tr. 7612). 314. The northcoast wineries are substantial users of Central Valley grapes. The following wineries identified by witnesses as northcoast or "premium wineries use Central Valley grapes or wine made from Central Valley grapes. Robert Mondavi; Charles Krug (G Mondavi); Paul Masson; Christian Brothers; Almaden; Sebastiani; Heublein, inc., 1'T Ai.. 'uu 385 Initial Decision Inglenook (United Vintners); Hans Kornell; and Weibel (Tr. 510, 717, 4114 7644- 7834-35, 7951-52).

315. Almaden, the leading producer of mountain table wine (RX 18A) had 75 percent of its table wine sales in its Mountain Wine line (CX 289C). The grapes for this line came almost exclusively from the San Joaquin Valley (Tr. 956). The Almaden winery is in the north coast area, but the sources of close to 75 percent of its table wines are wineries such as Pirell-Minetti, Gallo, Sierra Wine Company and Delicato, all located in the San Joaquin Valley (Tr. 928-32; CX 464E). The varietal grapes owned by Almaden comprise only 10 percent of its grape requirements. Sierra Wine Company located in the Southern San Joaquin Valley accounts for 40-50 percent of Almaden s grape or wine requirements (CX 464E). Inglenook competes for the same grapes as Gallo (Tr. 950).

316. Inglenook's Navalle line of wines which comprises about 88 percent of the Inglenook table wines is made in substantial part from Central Valley grapes (Tr. 7951-52). Among United's "premium wine" production facilities is the winery at Escalon in the Central Valley (Tr. 8509-10). Escalon is used primarily for the production of Inglenook Navalle wines (Tr. 9946). The Lodi facility which is a part of the so-called Premium Wine Company of United is also located in the Central Valley (Tr. 8509- 10).

317. Some Central Valley wineries do nothing but produce wine for north coast wineries (Tr. 1028). Central Valley wineries which shipped wine to coastal wineries include: Sierra Wine Company; Delicato Winery; California Wine Association; California Growers; Cherokee Vineyard Association; and Gallo (Tr. 928, 932, 1015, 1028 1959, 7645-46). (65) 318. The movement of Central Valley wine and grapes to north coast wineries increased in the late 1960's (Tr. 4109, 4112). 319. In 1968, the southern and central San Joaquin Valley accounted for 52.6 percent of all wine produced in California. In the same year, the Escalon-Modesto area accounted for 21.2 percent and the Lodi-Sacramento area 9.3 percent. The north coast areas of California were responsible for 14.5 percent, while Southern California represented 2.3 percent of total wine production for the state (CX 29lH).

320. In 1971, the southern and central San Joaquin Valley accounted for 57.4 percent of all wine produced in California. In the same year, the Escalon-Modesto area accounted for 20. 1 percent and the Lodi-Sacramento area 8.0 percent. The north coast areas of California were responsible for 12.6 percent, while Southern California represented 1.9 percent of the state s wine production (CX 2961). Initial Decision 96 F. 321. From 1968 through 1971, the Central Valley area of California, including the southern and central portions of the San Joaquin Valley as well as the Escalon-Modesto and Lodi-Sacramento districts, accounted for 82. 6 percent to 87.3 percent of total California production of all wines. During the same period, the north coast areas produced 11.4 percent to 14.5 percent of total California production of all wines (CX 291H and 2961). 322. It is now common practice for wineries outside the Central Valley to purchase grapes from there (Tr. 931). Without Central Valley grapes such firms could not produce as much wine as they do (Tr. 932). Dr. Richard Peterson estimated that 90 percent of the wine grapes crushed in California came from the San Joaquin Valley (Tr. 510).

323. Central Valley wineries use grapes or wine from the north coast (Tr. 1018- , 2216, 3225, 4114, 7646-47). Gallo is one of the largest purchasers of grapes and wine in the Napa Valley, one of the areas in which the finest grapes are grown (Tr. 415, 520). Gallo also purchased wines from Sonoma and Mendocino Counties (Tr. 4115). Gallo owns the Frei Brothers winery on the north coast and purchases wines from the Napa Coop in that area (Tr. 7647). 324. Both Gallo and United are large purchasers of grapes on the north coast to the point of affecting the prices others must pay for north coast grapes (Tr. 2216, 2219, 2253-54; CX 438). (66) 325. The Monterey Vineyard grape acreage is planted to so-called premium" or varietal grapes. Gallo purchases about one-third of this supply, while the remainder is purchased by Robert Mondavi Wente, Mirassou, Sebastiani and others (Tr, 519-20). Dr. Peterson identified Robert Mondavi, Wente and Mirassou as producers of premium" wine and Sebastiani as a producer of "premium" and subpremium" wines (Tr. 502, 539).

326. Napa Valley and Central Valley grapes are blended in various percentages and result in wines, including generics, of various quality levels (Tr. 526). The blending of wines is a complicated command decision of the winemaker who may blend wines from different varieties of grapes, from different districts and from different years. Every winemaker blends wines differently (Tr. 3150). Blending in the making of varietal wines varies considerably from winery to winery (Tr. 3150-52).

327, Dessert wines of all qualities are produced primarily from Central Valley grapes (Tr, 525).

385 Initial Decision Industry Recognition 328. The Wine Institute is a voluntary trade association comprised of wineries from all areas of California. " Its members produce wines of all types and at all prices (Tr. 564- , 2992). Members are not classified according to the prices at which their wines are sold (Tr. 2992). About 90 percent of winery license holders are members of the Wine Institute (Tr. 974). Its purpose is to increase public awareness of wine and to expand the market for it (Tr. 567-68). It is the leading wine industry trade association in the United States (Tr. 582).

329. One of the Wine Institute s functions is to compile statistical data to enable the industry and others to understand the industry posture, e., what is going to market, what is likely to go to market and industry trends in terms of kinds of wines (Tr, 585-86), The statistical surveys were started by Louis Gomberg while he was with the Wine Institute and were intended to inform industry members grape growers, suppliers to the industry, government agencies and universities of activities occurring in the industry (Tr. 1578-79). (67) 330, Members of the wine industry refer to the Wine Institute statistics for industry statistical information. The statistics are considered reliable and are relied upon by members of the wine industry (Tr. 590, 591, 977).

331. As originally prepared in the 1930's and 1940' , the statistical reports were broken down into three basic categories: up to 14 percent alcohol, over 14 percent alcohol, and effervescent. These categories are essentially the same today (Tr. 1578-80). Wine industry statistics are still broken down according to tax categories. Wines under 14 percent are table wines and include the so-called refreshment wines. Wines between 14 percent and 21 percent are aperitif and dessert wines. The third category is sparkling (Tr. .192), The category "all wine, the total of table, dessert and sparkling wines, is reported in the statistical reports and includes both domestic and imported wine (Tr. 979; CX 295 (Table 6)). The Wine Institute statistical reports have never been broken down by price categories nor by "standard" and "premium" classifications (Tr. 980- 81; CX 291-92).

332. The Wine Institute has an economic research department to forecast market trends and probable raw material needs for the " California is the largest wine producing area in the United States, followed hy New York (CX 293H). California prouction as a percent of total United States commercially produced wine entering distribution channels in the United States was as follows, 84.6 percent in 1960 81.5 percent in 1968, 84. 9 percent in 1969, and 85.7 percent in 1976 (CX 295N, 366L; Wine Institute Bulletin, March 24, 1978, No. 78- , Table 2, officially noticed September27 1978) Initial Decision 96 F. future. The economic research department develops the statistical data published by the Institute (Tr. 585, 972). 333. The Wine Institute has taken public positions on behalf of the California wine industry (Tr. 571). It has a trade barriers program and committee which is concerned with laws, regulations and proposed legislation in local, state and federal jurisdictions which would affect the entire wine industry (Tr. 3026-36). 334. The California Wine Advisory Board was a state board that administered a state marketing order for wine. It was in existence from 1938 to 1975 (Tr. 965). All producing wineries in California were assessed to provide funds for the Board (Tr. 969-70). 335. The programs of the Wine Advisory Board included promotion of California wine and generic advertising of wine, without the use of brand names. There were also programs dealing with trade barriurs, economic research and statistics. The Wine Advisory Board for a time prepared the statistical reports that are now prepared by the Wine Institute (Tr. 966, 972).

336. There is a trade magazine for the wine industry called Wines and Vines. It reports on the California, United States and world wine industry (Tr. 2992). Wines and Vines publishes an annual directory of the United States wine industry listing winery capacities (Tr. 1745). (68) 337. Respondent Heublein has recognized "all wine" as a market. W. Kelley, Executive Vice President of Heublein commissioned McKinsey and Company to study United Vintners and the wine industry (Tr. 4533; CX 220). The study was prepared by McKinsey employees and by Andrew Beckstoffer who was on Kelley s staff and was Heublein s Manager of Acquisition Analysis (Tr. 4533 , 8945). The McKinsey study was first reviewed by Kelley and then presented to the top management of Heublein (Tr. 4529- , 4978). The study depicted the growth in the overall wine market (CX 220E). It compared the growth rates of individual companies such as Paul Masson, Almaden, Christian Brothers, Beaulieu, Gallo and Roma on the basis of all wine (CX 220H).

338. In discussing "Competitive Structure" and the relative size of competitors, the McKinsey study states: "Except For United Vintners And Gallo, Industry Is Composed Of Many Small Competitors," and lists as competitors United Vintners, Gallo, Taylor Almaden, Paul Masson, Christian Brothers, Beaulieu, Beringer Brothers, Korbel, Wente, Martini and imports (CX 2201). This list includes both "standard" and "premium" producers, the distinct categories now contended for by HUV (RX 1, 17). The market shares of these firms and of imports as a whole are then presented as 335 Initial Decision percentages of the total dollar sales and case sales for all wines sold in the United States (CX 2201). In presenting a picture of wine production, the statistics used are for all wines and are not subdivided by type or price (CX 220K). United's market share in major geographic areas is presented as a share of the total United States wine market (CX 220Q).

339, In a proxy statement to its shareholders in connection with the acquisition of United, Heublein s and United' s market shares are listed as percentages of total industry gallonage in the categories of still wines and champagnes. No distinction is drawn between price or quality classifications (CX 55Y).

340. In the section on "Competition and Regulation " the proxy statement states generally that "The wine industry is highly competitive and its productive capacity is substantially greater than the present rate of consumption." No distinction is made among product types or prices (CX 55Z). 341. There are no wine universe statistics prepared for industry use which are broken out between "standard" and "premium" (Tr. 044, 10 047, 10 337-38).

342. Heublein made a presentation to the Federal Trade Commission staff during the investigation which preceded this proceeding and voluntarily furnished additional documents supplementing the oral presentation (CX 327 A, B). The documents discuss the competitive position of United Vintners (69Jin terms of United' market share of the total domestic wine market, the domestic table wine market, the domestic sparkling wine market, and the market for all other domestic wines (CX 327U, 35). These same markets were used in discussing United's market share of wines sold in various states (CX 327V , W, 36 thru Z-40). 343. United also recognized the "all wine" market. Richard Oster, when he was president of United, justified a budget request by using charts reflecting United's share of market (Tr. 7809-10). The charts he used show United's and Gallo s share of the total United States wine market and is not subdivided into price or product categories (RX 1247B-C). In a talk presented to Heublein s management committee, Oster described United as "a strong number two factor in the United States wine industry" (Tr. 8000). 344. Mr. Oster s monthly reports to Stuart Watson, Chairman of the Board of Heublein, reflect that United's management monitored and reported United's performance in terms of its share in the all wine market (CX 238C, 239C, 240D, 241D, E, 242C, 243D, 244D, 246E). 345. Mr. Oster s successor, John Powers, is Chairman of the Board and Chief Executive Offcer of United (Tr. 9420, 9425-26). Mr. 335- 3450- 81 - , g.. Initial Decision 96 F.T.C. Powers continues to monitor United' s performance in the "all wine market. In another proceeding, Mr. Powers responded to a question as to United' s market share, by giving United's share in the all wine market at that time 18 percent. Upon further questioning he was unable to state United's market share in product or price categories such as "low standard" or "premium" (Tr. 9671-72). 346. Mr. Bruno C. Solari, President of United Vintners prior to the acquisition, was concerned about the entry of distilled spirits suppliers such as Seagram into the "wine business . He described Seagram as controlling 4 to 5 percent of the "wine business, without further categorization (Tr. 4686, 4688).

347. Robert Ivie, President of Guild Wineries and Distillers, was Chairman of the Wine Institute from 1974 to 1977 and a director for the nine previous years (Tr. 2964, 2967-68). He was part of a Wine Institute group which made a presentation to the Cost of Living Council for relieffrom price controls (Tr. 2987, 2990). 348. The Wine Institute made the presentation for the wine industry. The industry recognized that those of its members permitted under price control regulations to raise prices could not do so because "a significant pricing factor in the wine market " Gallo (whose prices were at the low end of the spectrum), was prevented by regulation from raising its prices. The industry recognized that, as a practical (70jmatter, other firms could not raise prices as long as Gallo was precluded by regulation from raising its prices, Other members of the industry were thus deterred from raising their prices to reflect their costs, as permitted under the pricing regulations. This presentation of the industry position was made on behalf of all members of the Wine Institute including those whose wines were high priced, and was supported by the "premium" wineries (Tr. 2987 -90). Other presentations requesting relief from price controls for the "wine industry" were made by the Wine Institute (see CX 313).

Government Recognition 349. The federal government has a 4-digit standard industrial classification number for all wine (CX 318). 350. The Federal Alcohol Administration Act and regulations thereunder make no distinctions among price categories of wine (Tr, 4104-05; CX 310). Neither do the Internal Revenue Code regulations applicable to wine (CX 309). The federal excise tax rates applicable to wine vary with product type, but not according to wine quality or price (CX 363A-B).

UHLt;l1 , l1 1'1 l-L.

385 Initial Decision 351. The California Board of Equalization uses tax categories of stil wine not over 14 percent, still wine over 14 percent and sparkling wine, but makes no distinctions between "standard" and premium" wines or price categories (Tr. 1727, 9696-97). The California marketing order for wine which was administered by the California Wine Advisory Board applied to all California wineries producing wine (Tr. 581 , 582).

Common Channels of Distribution 352. In most instances, "standard" and "premium" wines pass through the same wholesale channels of distribution (Tr. 9738). Most wholesale distributors for Inglenook ("premium ) wine were also Italian Swiss Colony ("standard") distributors (Tr. 7952-53). In 13 of the leading 15 metropolitan markets for wine, 24 out of 34 United distributors carried both Inglenook and Italian Swiss Colony wines (CX 533A). Over 70 percent of United's distributors carry both its standard" and "premium" table wines (Tr. 9881). United's company-owned distributors in the Southern California and New York/New Jersey areas distribute both "standard" and "premium wines (Tr. 9718- , 9743).

353. Of the six distributor witnesses who categorized wines as standard" or "premium, four carry both "standard" and "premi- " wines (Tr. 3409, 6159, 6174, 6549, 6575, 7313-14; CX 400A, B). The sales forces of wholesale distributors are (71Jresponsible for sales of high and low priced wines and all product types (Tr. 3437 6649- , 7430; CX 400).

354. All wine companies compete with one another for wholesale distributors (Tr. 1084). Mr. Bruno C. Solari, former president of United, who testified that United's low priced wines and Seagram high priced wines did not compete, feared Seagram s entry into the wine business (Tr. 4686, 4693- , 4766-67). He felt that distribution of United' s low priced wines would be foreclosed to certain distributors who carried the higher-priced Seagram s wines (Tr. 4686, 4689 4693-94).

355. In at least eight control states, the state is the only distributor. Thus all wines must pass through the same distribution system all the way to the state retail stores (Tr. 9623-24; CX 379 0). 356. Wines of all types are sold through the same retail channels of distribution. Retail package stores carry both higher priced and lower priced wines (Tr. 3437, 6305, 6306, 7622, 8541, 9737). Grocery stores and supermarkets also carry both "standard" and "premium wines (Tr. 3437, 8541 , 9737).

460 EDERAL TRADE COMMISSION DECISIONS Initial Decision 96 F.T. 357. The wine buyer for 130 stores of a California grocery chain testified that the range of wine prices in these stores was $.83 per fith to $5 per fifth retail. He was allotted a limited shelf space for all wines in general (Tr. 2047, 2050- , 2060). 358. All wines compete for shelf space and displays in retail stores (Tr. 655, 1084).

359. Both so-called "standard" and "premium" wines are carried hy distrihutors for sales to restaurants (Tr. 1079- , 6174- , 6263 6265- , 6270, 6273; CX 400A, B).

360. Both fine wines and "jug" wines (sizes larger than one-fifth of a gallon) are sold in restaurants (Tr. 782). Fine wines on the wine list compete with the "jug" wine sold as a house wine. Customers vary their choices from time to time (Tr. 728, 782-83, 788- , 2862). Inexpensive wines are sold to neighborhood restaurants and pizza parlors as house wines (Tr. 6262- , 6310, 6574, 7321). Consumer Understanding, Use and Buying Habits 361. Some consumers buy low-priced wines for all occasions while others limit their purchases to high-priced wines. More customers, however, buy wines of varying quality and price (Tr. 776- , 782, 2849- , 7852). Consumers experiment by trying wines of various prices (Tr. 2974-75). Some join wine appreciation classes or groups (Tr. 728, 735-36, (72)2797-99). Even wine connoisseurs and other knowledgeable wine drinkers drink both high-priced and lowpriced wines (Tr. 2851).

362. Consumers, considered collectively, think of wines over wide range of price as suitable for a particular use, such as for drinking with a meal. This would encompass what might considered low-priced, medium-priced and high-priced wines (Tr. 2977 -78, 2984), 363. As testified by Dr. Barnes, HUV' s economic expert witness, products subject to relatively frequent purchase "do tend to be regarded by consumers as sometimes substitutes for one another (Tr. 10376).

364. Consumers may purchase a lower priced wine for everyday use and drink a higher priced or higher quality wine on special occasions, for example, when entertaining (Tr. 775, 2851, 2976- 2197). In restaurants, consumers may choose a lower priced house wine one time and a higher priced wine from the wine list the next (Tr. 783, 2862).

365, Consumers buy wine not on the basis of quality or price alone, but also on the basis of value in relation to price (Tr. 772 .tlJ'U DLJ'U" 11""". , J..L r:u 385 Initial Decision 2851). For example, a consumer who has tried both Gallo s Andre champagne at $1.98 and Korbel champagne at $6 might select either or a different champagne. He would not necessarily choose the most expensive (Tr. 2316 , 2330, 2332).

366. The determination of wine quality includes an element of subjective preference (Tr. 745, 2332, 2884). A consumer who prefers sweet-tasting wines might choose Gallo s lower-priced Andre champagne over the higher-priced and supposedly higher quality Korbel product because Andre tastes sweeter (Tr. 2332). 367, There is a learning curve for wine consumption. Consumers generally prefer sweeter wines when they first drink wine and move toward drier ones as they gain experience (Tr. 768 , 2849, 5281). 368. Consumers commonly trade up in price and quality over time, purchasing the next higher grade or price category (Tr. 2975 6281).

369. Trading up is a phenomenon that is recognized and exploited in the wine industry. Montcalm attempted to offer a full range of products for the consumer s maturing wine preferences (Tr. 5281). The maker of the more expensive Korbel champagne encourages trading up by consumers (Tr. 2335). "Standard" wine companies try to retain consumers who are trading up by offering varietal wines (Tr. 6281). (73) 370. United recognized the phenomenon of trading up. Richard Oster, United's former president, testified that Lejon champagne advertising was designed to trade up some consumers of lower priced wines (Tr. 7851 52). In Oster s judgment, Inglenook Navalle was directed at the person who wanted to trade up from "standard" wine to a "slightly better" product (Tr. 7949 50). Heublein s 1972 Annual Report stated that Inglenook wines were intended to capitalize on consumers' trading up as they gained knowledge of wines (CX 53 0). 371. Heublein realized that Harveys Bristol Cream competes not only with imported sherries, but also with domestic sherries, which a Heublein marketing plan called the "domestic 'fifth' sherry trademarket" (CX 97K). In the section entitled "Competition, the marketing plan points out that Gallo, Taylor and Paul Masson cannot be overlooked as competition to Harveys Bristol Cream (CX 97L). At that time, the California retail price of Harveys Bristol Cream was $6.89, Taylor s was $1.75 and Gallo s was $.82 (CX 97M). 372. Consumers understand the term "premium" wine as constituting a quality claim (Tr. 774, 2854). "Premium" may be used by almost any winery under many different conditions and has no precise meaning to consumers (Tr. 839). "Premium" has been used in advertising and publications with reference to the wines of Gallo Initial Decision 96 F. Italian Swiss Colony and Beaulieu, wines whose prices are vastly different (Tr. 839).

373. Gallo, whose products are low-priced, has long used the term premium . In the late 1950's, Gallo undertook an extensive advertising campaign in which its wines were advertised as "premi- " (Tr. 1647, 1648). Edward Shaw, a Young and Rubicam advertising agency executive responsible for Gallo s advertising, testified that Gallo used advertisements on nationwide television in 1973 and 1974 which described Gallo as a "premium" wine (Tr. 4887 , 4889- 4892-95). The term "premium" was used in those commercials to convey a quality image of Gallo, its quality vineyards, grapes, and wines (Tr. 4895-96; Comm. Phys. Exh. Y, Z, Z- , Z-2). 374. United itself has advertised its comparatively low-priced Italian Swiss Colony brands of wine as "premium . In an advertising brochure entitled "Fine Wines from italian Swiss Colony," the Private Stock and Napa Sonoma Mendocino table wines were described as "premium table wines" (CX 333C, D). The label on Napa Sonoma Mendocino bottles also used the word "premium" (Tr. 1886). These wines are classified by HUV for purposes of this case as standard table wines" (CX IE).

375. United advertises its Italian Swiss Colony wines as coming from "premium wine country" (CX 333B). (74) 376. The original Italian Swiss Colony settlement emphasized in United' s advertising was at Asti in Sonoma County, a part of the north coast area (Tr. 4094; CX 333B, 443A, B). The Italian Swiss Colony visitor center and tasting room are at Asti (CX 443A). Italian Swiss Colony wines are labelled as "made and bottled" at ..Italian Swiss Colony, California " or use a San Francisco address (Comm, Phys. Exh. A, B, C, F). ..Italian Swiss Colony, California," however, is only a post offce address for United's winery at Madera, California which is in the Central Valley (Tr. 4093). 377. Consumers do not use the term "standard" wine (Tr. 774 2855). Robert Furek, a marketing employee of United for eight years and a former vice president for marketing of United, does not recall the term "standard" ever being used in advertising or promoting Italian Swiss Colony wines (Tr. 8528-29). The term "standard" is not used on wine labels (Tr. 795).

378. Label styles on bottles of widely distributed "standard" and premium" wines are so similar that a consumer cannot determine which wine is "standard" and which is "premium" from labels (Tr. 795- , 805-06, Comm. Phys. Exh. G, L). This was demonstrated on the record with respect to five widely distributed champagnes. Champagnes selling in 1974 for $1.99 (Andre), $2. 79 (Gallo), $2. g HEUHLt.lN 11\lL.. 1\"".

385 Initial Decision (Lejon), $5.25 (Almaden) and $5.59 (Korbel) could not be distinguished as "standard" or "premium" on the basis of labeling or type of bottle closure (Tr. 806- , 822; CX 218Z-262, Z-280, Z-281, Z-294 295; Comm. Phys. Exh. J, D, 0, Q), 379. Both high-priced and low-priced wines come in cork-sealed bottles (Tr. 819). Gallo wines selling for less than $2. , as well as other low-priced wines, are cork-sealed (Tr. 819). Franzia sells corksealed wines which are "standard", as does Geyser Peak in its Summit line which is "standard" (Tr. 6279-80). Many low-priced, low-quality imports are sold with cork-sealed bottles (Tr. 820; Comm. Phys. Exh. V, W).

380. Jug wines are those which come in larger than fifth size bottles gallon or half-gallon bottles (Tr, 756). The same wines are also sold in fifths (Tr. 879- , 2867). 381. As of 1974, the following brands of wines which HUV classified in their market share tables as "premium " or "mountain were sold in both fifth and larger size bottes: Almaden (CX 218Z-262, 440Z-259) Paul Masson (CX 2I8Z-266, 440Z-263) Christian Brothers (CX 218Z-270, 440Z-268) Guild (Cresta Blanca) (CX 218Z-272, 440Z-269) Beringer (as of 1972) (CX 218Z-277, 440Z-261) (75) Harveys Bristol Cream (CX 218Z-289, 440Z-226) Lancers (CX 218Z-290, 440Z-226) United Vintners (CX 2I8Z-291, 440Z-279) (Inglenook Vintage) United Vintners (CX 218Z-291, 440Z-279) (Inglenook Navalle) Korbel (CX 218Z-294, 440Z-278) Mogen David (CX 218Z-299, 440Z-285) Monarch (Manischewitz) (CX 218Z-300, 440Z-386) Robert Mondavi (CX 218Z-300, 440Z-286) C. Mondavi (CK) (CX 218Z-301, 440Z-287) Sebastiani (CX 218Z-309, 440Z-292) Taylor (as of 1978) (CX 485C, 440Z-127) Wente (CX 218Z-313, 440Z-293) Louis Martini (CX 218Z-212, 440Z-211) California Wine Assoc. (CX 218Z-265, 440Z-266) (Eleven Cellars) 382. As of January 1974, the following brands of wine which Initial Decision 96 FT. HUV classified in their market share tables as "standard" were sold in both fifth and larger size bottles:

Franzia (CX 218Z-278, 440Z-270) Gibson (CX 218Z-274, 440Z-275) Gallo (CX 218Z-280, 440Z-271) Guild (Cribari and (CX 218Z-287, 440Z-277) Winemasters) United Vintners (CX 218Z-292, 440Z-281) (Italian Swiss Colony) United Vintners (Petri) (CX 218Z-304, 440Z-289) Guild (Roma) (CX 218Z-305, 440Z-290) California Growers (CX 218Z-286, 440Z-276) (Growers) California Wine Assoc. (CX 218Z-265, 440Z-266) (L&J) 383. Consumers cannot distinguish between "standard" and premium" wines on the basis of packaging because of the similarities in labellng, closure and botte size (Tr. 824). 384. Only a limited number of consumers understand the difference between generic and varietal wines (Tr. 808-09). Neither generic nor varietal wine labels usually disclose the percentage of varietal grapes used in the wine (Tr. 810-11). 385. Vintage dating of wines may be misleading to the consumer attempting to determine the quality of wine (Tr. 813). 386. Wineries use d/b/a (trade) names on their labels. When d/b/a names are used, consumers cannot determine what company has actually produced the wine (Tr. 813). (76) 387. Under current regulations of thc Bureau of Alcohol, Tobacco and Firearms, consumers are unable to determine where a wine was produced from the label on the bottle (Tr. 4100), Wine may be shipped from the Central Valley to the north coast area and be labeled as "produced and bottled" at a north coast location if a 100company owns facilities in both areas. In such a situation, percent Central Valley wine may be designated as "produced and bottled" at the north coast location (Tr. 4143). Wine can be shipped from the Central Valley to the north coast and be labeled as "made and bottled" at a north coast location even if the firm selling the bottled wine has not made any of it (Tr. 4144, 4147). 388. The term "estate bottled" originally meant that a wine so labelled was produced entirely from grapes grown by the producer in vineyards within five miles of the winery, The term is now so loosely $ .

HEUBLEIN , INC. , ET AL. 465 385 Initial Decision used it has practically no meaning to the consumer (Tr. 8II- , 4051 4058- , 4073).

389. There is a spectrum of wine prices from which consumers may choose (Finding 280 supra). Wine prices do not fall in distinct groups with large gaps between them but constitute a continuous spectrum (CX 218, 440).

390. Burgundy prices are an example of the continuum. Burgundy is a common generic red table wine named after the Burgundy region of France. Domestic wines with similar characteristics are called burgundies (CX 308K, L). Burgundies are available over a wide and continuous spectrum of prices (CX 218). A consumer selecting a burgundy is faced with a vast array of choices among brands and retail prices (CX 218):

89 Gallo (Carlo Rossi) (CX 218Z-281) 99 United (Petri) (CX 2I8Z-304) Franzia (CX 218Z-278) 1.09 Guild (Cribari, Tavola) (CX 218Z-289) 1.29 United (Italian Swiss Colony) (CX 218Z-292) 1.29 Gallo (Gallo Burgundy) (CX 218Z-280) 1.39 Gallo (Gallo Hearty Burgundy) (CX 218Z-280) 1.59 Almaden (Mountain Red Burgundy) (CX 218Z-262) United (Italian Swiss Colony (CX 218Z-292) 69 UnitedPrivate(NapaStock)Sonoma Mendocino) (CX 218Z-292) United (Inglenook Navalle) (CX 218Z-29I) 1.89 Almaden (Mountain Burgundy) (CX 218Z-262) 1.99 Beringer (Beringer) (CX 218Z-277) Paul Masson (CX 218Z-266) Christian Brothers (CX 218Z-270) 15 Sebastiani (CX 218Z-309) 19 United (Inglenook Vintage) (CX 218Z-291) 25 Korbel (CX 218Z-294) Charles Krug (CX 218Z-269) 50 Beaulieu Vineyard (CX 218Z-263) (77) 75 Mirassou (CX 218Z-299) 75 Heublein (Bouchard imported red (CX 218Z-288) Burgundies, 28 different 29.15 selections) (Prices are per fifth bottle at retail in 1974 in California) 391. For 1974, HUV's proposed price cut-off between "standard" Initial Decision 96 F. and "premium" table wines is $2.00 (RX 585). HUV' s position that a table wine selling for just under $2.00 would not be in competition with one seiling for just over that amount (while at the same time acknowledging that all table wines sellng at all prices under $2. would be in competition with each other and all table wines sellng at all prices over $2.00 would be in competition with each other) is untenable.

392. Not only does the price of burgundy vary from brand to brand but also within any given brand. Burgundy is only one specific type of table wine among many others sellng at different prices so that the prices of competing table wines have even smaller gaps than are demonstrated for burgundies alone (CX 218Z-262 thru Z-303 308K, 440Z-258 thru Z-294). Each of the other types also varies in price between brands and from brand to brand (CX 218Z-262 thru Z- 303, 440Z-258 thru Z-294).

393. United's own table wine prices illustrate the variety of prices at which table wines are available (CX 536E, F, I): Petri $1.9 Burgundy, Chianti, Chablis Blanc, Pink Chablis, Vin Rose, Rhine, Sauterne Colony $1.39 Alfresco Rose, Alfresco Blanc $1.49 Rose, Rhineskeller, Moselle, Chianti $1.59 Sauterne Blanc, Rhine, Burgundy, Emerald Chablis Pink Chablis, Gold Chablis, Ruby Chablis $1.69 Ruby Cabernet, Zinfandel, Barbera, Rhine Riesling, Chenin Blanc, French Columbard, Pinot Noir $1.79 Cabernet Sauvignon $2.49 Tipo Chianti (78) Inglenook Naualle $2.09 Burgundy, Chablis, Vin Rose, Rhine, Riesling $2. 19 French Columbard, Chenin Blanc, Zinfandel, Ruby Cabernet Inglenook Vintage $2.70 Burgundy, Chablis, Rhine, Cabernet Rose HEUBLEIN , INC. , ET AL. 467 385 Initial Decision Inglenook Estate $3.75 Gamay Rose, Gamay Beaujolais, Zinfandel, Petite Sirah, Sauvignon Blanc $4.00 Chenin Blanc, Grey Riesling $5.00 Pinot Noir $5.50 Gewuztraminer, Johannisberg Riesling, Charbono $6.50 Cabernet Sauvignon, Pinot Chardonnay $7.50 Red PinotiPinot St. George, Pinot Noir (Cask) $8.50 Cabernet Sauvignon (Cask) All prices are for fifth gallon bottles at retail in California in August 1978 (CX 536E, F, I).

394. Sherry is a common dessert wine (CX 308C). It is available over a wide and continuous spectrum of prices. A consumer purchasing a sherry faces many choices among brands and retail prices (CX 218). This range of choice was recognized by Heublein in its marketing plan for Harveys Bristol Cream where Gallo s $. sherry and Harveys at $6.89 are shown as competitors (CX 97K, L). 395. Champagne, a sparkling wine (CX 308C), is another example of a type of wine sold over a broad spectrum of prices (CX 218): $ 1.95 Gallo (Andre) Franzia United Vintners (Jacques Bonet) $ 2.49 United Vintners (Italian Swiss Colony Private Stock) $ 2. Gallo (Gallo) $ 2. United Vintners (Lejon) $ 3. Almaden (Le Domaine) $ 3.49 United (Lejon Blanc de Blancs) $ 4. Christian Brothers $ 4. Paul Masson Taylor (Great Western) (79) $ 5. Almaden $ 6. Beaulieu $ 6. United Vintners (Inglenook) Initial Decision 96 F. $ 7. Beaulieu (Private Reserve) $11.25 Mumms (Extra Dry) (Imported) $14. Mumms (Cordon Rouge) (Imported) (Prices are per fifth bottle at retail in 1974 in California) 396. Dr. Richard Courtney, an economist, is Vice President and Senior Economist at the Bank of America (Tr. 5435). He is an expert on consumer demand theory, the rationale behind consumer purchasing decisions and the way in which consumer purchasing decisions are translated into market demand functions (Tr. 6024 6025).

397. As testified to by Dr. Courtney, a most significant factor in determining whether products are in competition with one another is substitutability as viewed by buyers (Tr. 5992-99). If a wine purchaser can buy wine over a range of prices, products within that range are viewed as substitutes for one another. And the products in that price range are in competition with one another (Tr. 5995). 398. The likelihood of individual consumers substituting wines of differing prices is greater if wines are sold over a range or spectrum of prices rather than at distinctly separate price points. The difference in price of a few cents is not likely to inhibit the consumer from substituting one wine for another (Tr. 5994, 5995). This is particularly true of frequently purchased, relatively low priced products such as wines, as opposed to high priced products such as automobiles, houses or television sets (Tr. 10 376). As found above, table wines, dessert wines and sparkling wines are each offered in a spectrum of a multitude of prices with closely spaced intervals. 399. Individual consumers and groups of consumers are more likely to substitute products from various producers as the number of alternatively priced products are increased and the price difference among products decreases (Tr. 5996-97). Many of the major low priced wine producers have expanded their product lines into a higher price range. Other major producers of high priced wines have extended their product lines into a lower price range (Findings 301- , supra).

400. As wine prices do not invariably reflect their quality, there is a range of prices for wines of comparable quality. Wines of differing prices are thus substitutes for one another in terms of quality (Tr. 5997-98). (80) 401. To the extent consumers trade up over time to higher priced or higher quality wines, they are considering a wider range of alternatives (Tr. 5998-99). Trading up indicates that consumers view a broader range of alternative products as substitutes (Tr. 5998-99). Hl:U.tL U"\, llln. J.ou. H 385 Initial Decision This is particularly true when substitution is viewed over a period of time (Tr. 5998-99).

402, The very considerations involved when a purchaser is determining whether to trade up from the so-called "standard" category to the "premium" category places all of the wines being judged in direct competition (Tr. 5998-99). 403. As consumers buy wines at different prices, they increase their knowledge about wines and broaden the range of wines which they consider acceptable substitutes. Consumers generally learn to appreciate drier and more complex wines as they gain experience and knowledge of wines (Tr. 768, 2849).

404. The availability of wines of various types and prices in a store or restaurant has an effect on the consumer s ability and inclination to substitute among them. A store or restaurant offering a wide selection of wine wil allow a customer more substitutes among a broader range of wines (Tr. 5997). 405. Consumers have a range of choices in wine price and quality and the various wines from which they choose are in competition with one another (Tr. 788- , 2868), Submarkets Table, Dessert, and Sparkling Wine Production 406. In table wine production, grapes are delivered to the winery and crushed by mechanical crusher. The crushed grapes and their juice (called "must") are pumped into fermenting vats or tanks where fermentation takes place (CX 308V). In the process of fermentation, the grape sugar is converted to alcohol and the finished product is wine (Tr. 3130). Complete natural fermentation of grapes generally results in an alcohol content of 10 to 14 percent. Rarely does natural fermentation result in wines over 14 percent in alcohol (CX 308V). The use of 14 percent as a breaking point between tax categories for wine is because of this natural alcoholic level of wine (Tr. 1580-81). Fermentation takes from a few days to several weeks (CX 308V). Clarification of the liquid is done either before or after fermentation for white wines, and after fermentation for red wines. After fermentation, wines are aged (Tr. 3133- , 3142-43). There are variations in length of aging, types of containers in which wines are aged and size of aging containers (Tr. 3133-34, 3139-40, 3142 3143), Most wines are then blended to attain desired characteristics (CX 308Y), The wine is then bottled (81Jand some wines are aged further in the bottle before shipment (CX 308Z-1). 407. The production of dessert wines (including appetizer wines Initial Decision 96 F. and vermouth) is essentially the same as for table wines through the fermentation process. Additional steps are required alter fermentation, however. Dessert wines must be fortified to reach the desired over 14 percent level of alcohol. Fortification is accomplished by the addition of distiled alcohol from another source (Tr. 3154-55). Dessert wines are generally made with at least 17 percent alcohol to prevent spoilage (Tr. 3153-54). Fortification stops the fermentation process. The wine is then clarified and may be aged before being bottled. In the case of most sherries, the wine is generally baked (aged at high temperature) and clarified. It may then be aged or immediately bottled (Tr. 3158-59). Vermouths are flavored with herbs after fortification, following which they are clarified, aged for a short time and then bottled.

408. Sparkling wines are basically table wines with additional production steps to add the sparkle (Tr. 919). Sparkling wines are made from stil (nonsparkling) white table wines. Sugar and yeast are added to the stil wine in a closed container. The wine then undergoes a second fermentation, creating carbon dioxide which is not allowed to escape (Tr. 3170-71). This second fermentation can be done in a large (1,000- 000 gallon) tank or in filth gallon containers. If done in a tank the wine after fermentation is fitered in the tank to remove the yeast, bottled under pressure and then sold. If the second fermentation is done in bottles the wine may be transferred under pressure to a tank for fitering of the yeast. It is then rebottled and sold. This is called the "transfer process Another method of removing yeast from the bottle involves keeping the bottles turned on end to allow yeast to settle in the neck of the bottle. The yeast is removed by freezing the bottle neck, removing the cap and allowing the frozen yeast to pop out. The bottle is then topped off resealed and sold (Tr. 3171-74). This is called the "bottle process . Carbon dioxide can also be added to wine by artificial carbonation. There are not many carbonated wines on the market (Tr. 3170).

409. In the production of all wines there are many decisions made by the winemaker and many variations in the production process which cause variations in the resulting wines. As explained by Dr. Amerine, one of the leading authorities in viticulture and enology, "There are thousands of variations, almost as many as there are winemakers, time, temperature, procedures, when the procedures are applied, all of which to a smaller or larger extent wili affect the gradation and quality of the wine " (Tr. 3153). (82) 410. The production of dessert wines requires equipment in , _u_ 385 Initial Decision addition to that needed for table wines, including fortification tanks and a still to make alcohol for fortification (Tr. 529). 411. Production of sparkling wines requires specialized equipment not needed for table wines. Sparkling wines require pressureresistant tanks to withstand the high pressure generated in the tank process or in the transfer process (Tr. 926, 3171-72). Pressurized bottling equipment and special corking equipment is needed. More expensive pressure resistant bottles, more expensive thicker corks and wire to hold the corks on are also required (Tr. 530, 923--24; CX 308Z-3).

412. Special handling is required for sparkling wines because of the hazards from pressurized bottles. Workers use gloves, face shields and protective aprons in handling sparkling wines (CX 308Z- 4; Tr. 531).

Physical Differences 413. There are many differences in chemical composition (besides alcohol content) between table and dessert wines (Tr. 3168). 414. Table wines deteriorate soon after they are opened, while dessert wines, because of their higher alcoholic content, do not (Tr. 2846).

415. Sparkling wines lose their quality soon after opening (Tr. 2846).

416. Sparkling and carbonated wines contain a minimum level' of carbon dioxide specified by government regulation (Tr. 3113, 3170; 26 C. 5041(a)). Thus, by legal requirement, they are different. Differences in Use 417, As testified to by wine expert and columnist, Robert Balzer Even in relatively unsophisticated consumers there is the recognition that there are differences in wine and they fall into categories of table wine, appetizer and dessert wines, sparkling wines. Each one nominates itself for a different kind of use" (Tr. 2843-44). 418. Table wine, historically, is a fundamental and basic commodity and is the most important category (Tr. 2844). Table wines are generally served with a meal (Tr. 2844; CX 308D). Red, white and rose wines are each generally thought to go best with certain foods (CX 308N thru P).

419. Dessert wines (including appetizer wines) are generally used before or after a meal. The term "dessert wines" refers to wines over 14 percent in alcohol whether drunk as an appetizer or with dessert (Tr. 3153; CX 308L). (83JThe main appetizer wines are sherry (except Initial Decision 96 F. cream sherries) and vermouth (CX 308M). Wines served with dessert include port, muscatel and tokay (CX 308 0). Cream sherries are sweet and are therefore generally drunk after dinner with dessert (CX 308M).

420. Sparkling wines are generally associated with festive uses or special occasions (Tr. 2845, 4884 6290).

Consumer Recognition 421. Consumers generally recognize and understand the differences among table, dessert and sparkling wines. They are generally familiar with the names of common table wines as distinguished from the names of common dessert wines (Tr. 814, 2846-47). 422. Consumers are able to determine from the appearance of the bottle whether a wine is a sparkling wine as distinguished from either table or dessert wine. Sparkling wines are packaged in relatively thick bottles which have a different shape from bottles used for table and dessert wines. The appearance of the closure is also distinctive for sparkling wines (Tr. 814- 16). 423. Dessert wines are frequently labeled "dessert wine." It is not unusual for table wines to be labeled "table wine " (Tr. 814). Government and Industry Recognition 424. The wine industry recognizes three basic categories of wine which are commonly called table, dessert and sparkling wines (Tr. 1579- 18H-A). Still wines not over 14 percent alcohol are called table wines . Stil wines over 14 percent alcohol are called "dessert wines . Effervescent wines are called "sparkling wines " (Tr. 1579- I8H- , 4107-08). Flavored wines are called "special natural" wines (26 U.s.c. 5386(a); CX 309K).

425. Table wines: All stil wines not over 14 percent alcohol are taxed at $. 17 per gallon (26 U.S.c. 5041(b)(i): CX 363; Tr. 4106). This category includes those flavored ("special natural") stil wines not over 14 percent in alcohol such as Sangria and "refreshment wines (26 U.s.C. 5041(0)(1); CX 363).

426. Dessert wines: All still wines over 14 percent alcohol, with one exception, are taxed at $. 67 per gallon (26 U.s.c. 5041(b)(2); CX 363; Tr. 4107). This category includes those flavored ("special natural") stil wines over 14 percent in alcohol, such as vermouth (26 U.sC. 5041(b)(2); CX 309K, 363). The one exception is wines between 21 percent (84Jand 24 percent alcohol which are used for blending only and are not commonly sold to the public (Tr. 4107-08). 427. Sparkling wines: Effervescent wines include "sparkling HEUBLEIN, INC. , E'I AL. 470 385 Initial Decision wines" taxed at $3.40 per gallon and "artificially carbonated wines taxed at $2.40 per gallon (CX 309J, 363). Artifically carbonated wines are a small part of the market (Tr. 3170). They include flavored special natural") effervescent wines (CX 309J, 363). Although artificially carbonated wines are taxed at a different rate, they are generally considered to be "sparkling wines" (Tr. 3170). The Wine Institute statistical tables have no separate category for carbonated wines, but include them with sparkling wines (CX 297 A). 428. State taxes on wines also use the same three basic categories (CX 379R; Tr. 1578-80). In all but two states, the tax rates on carbonated and sparkling wines are the same. In all but one state the tax rate on vermouth and other dessert wines are the same (CX 379R; Tr. 1579-80).

429. Table, sparkling and dessert wines are the three basic categories recognized by the wine industry. Industry witnesses categorized wine products in these three general categories (Tr. 617 620 919 4192- 7422 7424 7592-93).

430. Table, sparkling and dessert wines are the basic categories utilized in reports on the wine industry s activities and trends. The Wine Marketing Handbook. described as the "industry bible" by a former vice president of marketing- of United, reported wine sales for all wines and the three basic categories plus vermouth (Tr. 3669 3733; CX 379U). The Bank of America, in a report on the wine industry, reported wine shipments in these three basic categories together with "all wine" (CX 288I-K).

431. United's former president, Bruno C. Solari, testified to the shift in the wine industry from dessert wines to table wines (Tr. 4756). Another former president of United, Richard Oster, testified to the growth of the "table wine market" in contrast to the decline in the "dessert wine market" (Tr. 7778, 7886, 8005). Bruce Johnson former marketing- vice president of United and former Heublein group product manager, testified to United's share of the "dessert wine market" (Tr. 3669, 3754-55).

432. Heublein s marketing strategy for its Vinya wine was intended to "capitalize on the expanding stil table wine market" (CX 352N).

433. The McKinsey study of United and the wine industry, in addition to analyzing the wine industry as a whole, reviewed the consumption of wines in the three basic categories, table, dessert and sparkling wines (CX 220K). (85) 434. Louis Gomberg, Heublein s wine industry consultant, reported to Heublein in 1968 United's market shares in the three basic categories of table, dessert and sparkling wines (CX 206A; Tr. 1407). Initial Decision 96 FTC. 435. John Powers, Chairman of the Board of United, continually monitors the shipments of United' s competitors by using the gallonage figures reported by the California Board of Equalization. They are an important part of our marketing intelligence" (Tr. 9485). Those gallonage figures are reported in the categories; wines not over 14 percent alcohol, wines over 14 percent alcohol and sparkling wines (Tr. 9696-97). The categories are not subdivided into standard" or "premium" (Tr. 9695-97). Mr. Powers recognized that Jacare, which now is' not carbonated, is a table wine, but when carbonated, was sold in the "sparkling wine market" (Tr. 9977-78). 436. Heublein has recognized the existence of the table, dessert and sparkling wine markets. In a voluntary submission to the Federal Trade Commission staff, Heublein recited the market shares of United in the table, dessert and sparkling wine markets (CX 327 A U, V).

437. The differential between the tax rates for table wines ($. per gallon) and sparkling wines ($3.40 per gallon) requires that the pricing structure for sparkling wines be higher than for table wines, with a resultant trend toward usage of sparkling wines for special occasions (CX 367T).

Exclusion of Refreshment Wines from Table Wine Submarket 438. While, because of their alcoholic content, they are taxed as stil wines not over 14 percent, refreshment wines belong in a category separate and apart from other stil wines not over 14 percent. This is due to differences in production, in the consumers to whom they appeal, in the uses to which they are put, in the manner in which they are marketed, and in their growth rates and life cycles. They are recognized within and without the industry as constituting a distinct category of wines (CX 53 0, 241E, 247D; RX 345-48).

439. Refreshment wines, also referred to as "pop" wines, are beverages generally much lower in alcoholic content (6-8 percent) than table wines (normally 10-14 percent; CX 308V). They are derived from fermentation of the cheapest available fruit concentrate, either apples, pears, grapes or other citrus fruits. Regardless of the fruit used to produce the alcohol, the resulting wine is "neutralized" or stripped of color and taste. Thereafter, the flavor, sweetener and character of the wine are added (Tr. 429- , 566- , 5144, 6179 9534-36). As the former assistant production manager of Gallo explained; (86) Well, the idea is that you strip the wine clean, more or less free from all flavor, by l1C.UDLC.ll'\ , 11'\ ,,. , I".! ru. .J.

385 Initial Dccision doing it in a carbon column or ionic machine or some other method, and then you have what amounts to alcohol and water, but it is legally wine, and then you simply add flavor and sugars so that it is palatable and sell it as, with a proprietary name and that is pop wine (Tr. 430).

440. The bulk of refreshment wine has been produced by Gallo under brands such as Boone s Farm, Ripple and Spanada; by United under brands such as Bali Hai, Annie Green Springs and T.J. Swann; and by Mogen David under the Cold Bear, Black Bear and JUG brands (CX 359L; RX 933K; Tr. 5155, 6181, 7353, 7797-98, 7822- 7911- 8308- 8319- 9535).

441. High-speed bottling lines used in the production of refreshment wines cannot be converted to the making of table wine (Tr. , Inc. , a9902). The former executive vice president of Pop Wines company created to specialize in pop wines, testified that Gallo refreshment wines were competitive with his products but that the wines of other named producers of table wines were not (Tr. 5213- 15). The marketing strategies applicable to refreshment wines are completely different from those applicable to dry table wines, even though both are stil wines not over 14 percent (Tr. 7353- , 8006- 8305-08, 8319- , 9536).

442. Refreshment wines are consumed primarily by two segments of the population: young, college-age whites and urban blacks. United' s T.J. Swann line, originally marketed to the college-age white consumer, was later repositioned and targeted towards urban blacks when market research showed they were responding to its taste and other characteristics. Many of the young consumers of refreshment wines desire their "soda pop" taste (RX 345B; Tr. 3768- 5214- 5239- 6182 7796- 8319- , 8362- , 8555- , 9535- 36, 9978). Refreshment wines are frequently the first type of wine experienced by those who previously had been drinking beer and other non-wine, party-type beverages (Tr. 3768- , 6182, 7353- 8319- , 9534-36).

443. Consumers generally use refreshment wines for purposes distinct from those applicable to dry table wines. Whereas dry table wines are used primarily as an accompaniment to food at meals, refreshment wines are not so intended and are rarely consumed with meals. Refreshment wines are consumed as social beverages. Con sumers who buy refreshment wines are interested in their flavor palatability and refreshing qualities. Refreshment wines are generally served cold and over ice. They are not normally even promoted as being consumed in wine glasses (RX 345-48; Tr. 8319- , 9535-36). (87) 444. Due to their refreshing nature and their appeal to youth Initial Decision 96 F. refreshment wine sales have a distinctive seasonal pattern. Monthly shipments of dry table wines to wholesalers are generally even during most of the year, peaking at holidays; refreshment wines have peaks in the warm weather season beginning in April or May and have a major upsurge during the summer period (Tr. 9950). 445. Because refreshment wines are largely consumed at social gatherings of young adults, the major competitive products are soda pop and beer. A former Olympia Brewing Company executive said that his company regarded refreshment wines as competing with beer for the young adult trade. The former executive vice president of Pop Wines, Inc., explained: "The pop wines. . are seen really as a mid-point, say, between the soda pop business and the beer business. It was essentially a soda pop with an alcoholic content" (Tr. 5214 6179- 8319-21).

446. Refreshment wines are also distinguished from dry table wines by their placement in retail stores. Refreshment wines are shelved together with soft drinks and beer, in a refrigerated area apart from the retail space devoted to dry table wines (RX 347; Tr. 6181 , 6607).

447. Sales of refreshment wines are characterized by extreme volatility. In contrast to dry table wines, the life cycles of these wine brands tend to be short, with accelerating sales increases and often with equally rapid declines (CX 53 0).

448. There has been a boom and bust cycle in the sales of refreshment wines. Refreshment wines happened very suddenly (Tr. 566-67). A peak year for refreshment wine sales was 1972 (Tr. 5209- 11). From 1967-1972, refreshment wine shipments grew 2 185 percent from a relatively insignificant 2.8 millon gallons to more than 64 millon gallons. In the same period, shipments of table wines (exclusive of refreshment wines) grew from 85 milion gallons to almost 156 millon gallons or 83. 5 percent." (88) Inclusion of Refreshment Wines in All Wine Market HUV (RR 125-30; RRPF 148-50) contend that refreshment wines should be eliminated from the All Wine universe as well as from the share of each company in that category. To the contrary, the very evidence above relied upon to exclude refreshment wines from the " The figures for refreshment wi'Je shipments come from RX 15 and 27. The figures for table wines are derived by subtracting the refreshment wine gallonage as shown Un RX 15 and 27 from ex nv t.hru Z-7 (which include refreshment wine gallonage).

!luv' s witness John Powers, Chairman of United, provided United sales figures for refreshment wine (1'r. 9539-4U) which are inco'1sistent with those show'1 0'1 RX 15 Since RX If; was prepared as a statistical docllme'1t for introduction i'1to evide'1ce, was introduced at the very beginni'1g of HUV's defe'1se (Tr. 6058) and the accuracy of the exhibit has 'lever been challenged by a'1Y party, I am accepting RX 15 over the testimony ofMr- Powers. 385 Initial Decision table wine submarket demonstrates that they are properly considered in the broader all wine category.

449. Refreshment wines are fermented and made like other wines up to the point the different processes are followed. They are wines to which flavor has been added (CX 309Z-15). Gallo and United, the dominant companies in the production of all wines are also the dominant producers of refreshment wines and United produces its refreshment wines at the same facilities at which it produces table wines (CX 373; RX 15, 27; Tr. 9901). The winery in which Pop Wines, a company which entered to make only refreshment wines, operated was a bulk winery that had been in existence for 30 to 40 years (Tr. 5134, 5136).

450. Wine, in general, not merely refreshment wine, is recognized by the Wine Institute (the wine industry trade association) as appropriate for use in mixed wine coolers for summer, hot drinks in winter and punches for parties all year around (CX 308G). Table wine use is not limited to meals, and white wines in particular are increasingly being utilized as cocktails (Tr. 7685; CX 367Z-10 thru Z- 13).

451. Refreshment wines are viewed as an introductory wine to accustom young consumers to wine drinking with the expectation that they will then develop a taste for better quality table wines (Tr. 5281; CX 53 0). Heublein and United direct promotions of Lejon Inglenook, Faisca and Lancers wines to young consumers and to ages just older than college level (CX 116N, 129C, 256Z- , 65). 452. Refreshment wines are sold through the same channels of distribution as all other wines (Tr. 3310-11; CX 218Z-280, Z-281, Z- 292, Z-293, Z-295, 256Z- , Z- , 371). An effort is made to have white and rose wines placed in the cold box of retailers (Tr. 6609). 453, In summary, while there are differences suffcient to require the exclusion of refreshment wines from the table wine submarket refreshment wines clearly are properly included in the overall al! wine market. (89) Discussion of Applicable Law and Conclusion All Wines" constitute the relevant product market. The following summarizes the application of the criteria enunciated in Brown Shoe Co. v, u.s., 370 U.s. 294 (1962): 1) All wines share certain physical characteristics unique to wine and are used for the same general purposes. AI! wines are products of the fermented juice of grapes or other fruits; and, as alcoholic . . .

478 FgDERAL TRADE COMMISSION DECISIONS Initial Decision 96 F.T.G beverages distinct from others, their principle use is as articles of food.

2) All wines are produced from similar raw materials, by similar production processes, using similar production expertise. While different varieties of grapes or other fruits may be used to produce different varieties of wine, and while additional steps may be added to the basic production process to produce dessert or sparkling wine, all wines are produced by the basic process of crushing, fermenting, clarification and bottling. Individual wineries are capable of using different varieties of raw materials and of changing their product line and quality.

3) Federal and state governments, as well as the wine industry itself, view the wine industry as a single group. Federal and state regulations (except for different tax rates on table, dessert and sparkling wines) on entry, tax bonding, distribution and retail pricing procedures are common for all wines. Industry trade associations, such as the Wine Institute (the primary trade group), and professional associations such as the American Society of Enologists, include representatives of producers of all wines. 4) All wines are distributed through the same wholesale and retail distribution channels, and are thus in competition with one another for wholesale distribution and retail shelf space. 5) Consumer purchasing patterns indicate public recognition of all wines as being in competition with one another, although consumers may choose particular wines for particular occasions. (90) While complaint counsel have not shown that price sensitivity exists throughout the all wines market, price sensitivity alone is not determinative of the existence or non-existence of a product market. In us. v. Continental Can Co. 378 U.s. 441 (1964), the Court held: . . . price is only one factor in a user s choice between one (product) or another. That there are price differentials between the two products or that the demand for one is not particularly or immediately responsive to changes in the price of the other are relevant matters but not determinative of the product market issue (at 455). HUV argue that, since there was a great disparity in retail prices between the products sold in 1969 by Heublein (primarily Lancers at $3.98 and Harveys Bristol Cream at $7.79) and United (the majority of whose products sold for less than $1.50), there was no actual competition between Heublein and United. They contend that" the alleged markets aggregate competitively distinct products and ,. An additionalBrown Sho,' criterion g., g., g, HEUBLEIN, INC., ET AL. 479 385 Initial Decision thereby ignore the very competitive realities relevant market determinations are intended and required to honor" (RPF 178). This position is without merit. " . . . (IJt is improper 'to require that products be fungible to be considered in the relevant market,' United States v. dupont, 351 U. S. 377, 394 Us. v. Continental Can Co., supra, at 449. And, in Telex Corp. v. International Business Machine Corp., 510 F.2d 894 (10th Cir. 1975), the court found: One evidence of cross-elasticity is the responsiveness of sales of one product to price changes of another. But a finding of actual fungibility is not necessary to a conclusion that products have potential substitutability (at 917-1R). As complaint counsel' s economic expert witness, Dr. Richard Courtney, testified (Tr. 5992- , 5995- , 6027), interchangeability in use is an accepted measure of substitutabilty, and products capable of being utilized for the same purpose are substitutes, and thus in competition. AI! wines, regardless of price, variety, or production method, are capable of consumption as alcoholic beverage food products, and are thus in competition with one another. HUV rely on United States v. The Federal Company, 403 F. Supp. 161 (W.D. Tenn. 1975), for the proposition that "when manufacturers of apparently similar products consistently fail to react to each other price changes, this shows that (91Jthey do not perceive the products as competitive and that the products do not, in fact, compete" (RPF 224). In that case, the court found that aI! wheat flours, including family flour, bakery flour, ingredient flour, industrial flour, durham flour and mil feed are not one line of commerce. The court determined that the various products derived from the wheat miI!ing process have different physical compositions and are not substitutes for one another. They are sold at different prices to different customers for different uses and there is not a fixed relationship in price among them; that there are different pricing systems for family flour and bakery flour; and, that each product is usuaI!y sold by different personnel The case, therefore, does not support HUV's position.

Complaint counsel' s proposed submarkets, table, dessert and sparkling wines, are also appropriate. The same criteria enunciated in Brown Shoe, 370 U.S. 294, support these submarkets. As discussed in the factual findings above, table wines (stil wines not over 14 percent alcohol by volume), dessert wines (stiI! wines over 14 percent alcohol by volume) and sparkling wines have distinct physical characteristics (e. alcohol content), distinct additional production processes (e. fortification or addition of carbonation), distinct uses (e. consumption with meal or as aperitif or after-dinner drink), . . . , . . Initial Decision 96 F. and distinct consumer recognition (i. table wine is often referred to as "dinner" wine, champagne is for "special occasions, Tr. 2845 6290; Heublein s advertising campaign for Harveys Bristol Cream as an after-dinner drink: "Never serve the coffee without the Cream (CX 97Z-6)).

HUV argue that the proper submarkets should be "standard" and premium" wines, asserting that there is no competition between these categories, and the industry and public recognizes such a distinction. This position is not supported by the evidence of record in this proceeding and is legally untenable. Despite extensive pleadings, HUV have not shown where clear demarcations in price, packaging, advertising, production, distribution or consumer purchasing patterns are found to support their proposed submarkets. Indeed, the facts of record show just the opposite of what HUV contend. A broad spectrum of prices is apparent among wines, all of which are clearly substitutable in end use. The Court in Brown Shoe, supra, reached the same conclusion as that reached here in refusing to hold that" . . . medium-priced shoes do not compete with lowpriced shoes. . . It would be unrealistic to accept Brown s contention that, for example, men s shoes selling below $8. 99 are in a different product market from those selling above $9. 00" (at 326). In US. Joseph Schlitz Brewing Co. 253 F. Supp. 129 (N.D. Cal, 1966), the court found There are no distinguishable price levels (92Jof beer which constitute relevant product submarkets within the line of commerce found by the court" (at 143). Also, in Mogul v. General Motors Corporation, 391 F. Supp. 1305 (RD. Pa., 1975), the court took judicial notice of the fact that:

the relevant product market cannot be limited to Cadilac. The Cadillac. competes with even the less expensive models of automobiles in serving the consuming public s transportation needs and desires (at 131:1). Respondents' own economist witness, Dr. Irstin Barnes, testified that for products subject to frequent purchase, such as foods and beverages, products with different prices do tend to be regarded by consumers as substitutes for one another (Tr. 10 376). He agreed with the proposition that: "To the extent you increase the difference in price between two products, the price overcomes the difference in quality" (Tr. 10,402), thus enhancing competition between the differently priced products.

The Commission has held, with respect to dog food, that "to be sure, the differing price and quality grades demonstrated by respondents do support finding separate submarkets here, but the submarkets are closely associated in one market Liggett Myers , . , , . . , . . HEUBLEIN, lng, ET AL. 481 385 Initial Decision Inc., Docket 8938 87 F.T.C. 1074, at 1158 (1976). Although there may be some recognition of grades of qualities of wine usually referred to a "standard" and "premium, precise demarcation is not possible. A Wine Institute publication The Story of Wines explains that: Wine, because it continually changes in quality even after bottling, and because its desirable characteristics defy measurement, has never had an industry-wide quality grading system such as many other products have. Individual vintners have their own grading systems, but these are not uniform between companies. Some vintners have low.priced and higher-priced brands; others use vintage dates or such words as special" deluxe select" reserve, or "private stock" to denote quality differences (CX 308Z-6).

As the Commission recently stated in Coca-Cola Bottling Company of New York, Inc. (Docket 8992, January 23, 1979): The principles governing antitrust market definition arc designed to satisfy the necessity to make difficult judgments in an area of unavoidably imperfect knowledge and markets so designated cannot always (nor need they, as a matter of law) satisfy the purist's (93Jdesire that every product within them possess a high degree of crosselasticity of demand with every other (at 10). Brown Shoe and the cases following it recognize that any reasonably proved submarket may support a finding of illegality. In Us. v. Mrs. Smith's Pie Co., 440 F. Supp. 220 (E.D. Pa., 1976), the court held that " Since the Clayton Act is concerned with any (sic) line of commerce, the government need not base its case on the narrowest possible market. However, nothing. precludes use of a narrower product market if that is the 'line of commerce' where competition is affected" (at 229).

Accordingly, even if narrower product markets such as "standard" and "premium" could have been established, this would not have precluded the appraisal of the effects of the acquisition on the broader "all wines" market and the "table dessert" and "sparkling" wine submarkets.

454, Based upon the foregoing findings of fact and in consideration of the applicable law, the relevant product market wjUrin which to appraise the effects of the acquisition is found to be all wines (domestic and imported); and the appropriate submarkets are table wines (excluding refreshment wines), dessert wines and sparkling wines. VI. STRUCTURE OF WINE INDUSTRY AND RELEVANT ACTIVITIES 455- Both domestic and foreign wines are marketed in the United States (CX 218A thru 2-316, 366A thru 2-22). 456. Shipments into distribution channels refer to tax-paid 4R2 EDERAL TRADE COMMISSION DECISIONS Initial Decision 96 F. withdrawals of wine together with imports of wine for consumption. Tax-paid withdrawals of wine are withdrawals from bonded status at which time state and federal taxes are assessed. Normally, wines remain in bonded status until they are ready for market (CX 295L; Tr. 4039-42).

Shipments 1. All Wines 457. In 1960, shipments of all commercially produced wine entering distribution channels in the United States totaled 163 352 000 gallons. In 1968, all wine shipments had increased to 213 658 000 gallons. In 1976, all wine shipments had grown to 376 389 000 gallons (CX 273, 295J, 3661, 373E; Wine Institute Bulletin, March 24, 1978, No. 78-3, Table 2, officially noticed September 27 1978). (94) 458. From 1957 through 1966 shipments of all wines grew from 151 881 000 gallons of commercially produced wine entering distribution channels in the United States to 191 176 000 gallons, for an average annual growth rate of about 4.4 milion gallons. Between 1966 and 1967, all wine shipments grew 12.2 million gallons. Thereafter, shipments of all wines grew substantially from year to year. Total shipments of all wine increased approximately: Gallons (millions) Year 10. 1967 to 1968 1968 to 1969 31.7 1969 to 1970 37. 1970 to 1971 1971 to 1972 1972 to 1973 1973 to 1974 18. 1974 to 1975 8.4 1975 to 1976 Between 1966 and 1976, the all wine market grew at an average annual rate of approximately 18. 5 milion gallons (CX 295J , 3661, 373C, E, F, H, J, K; Wine Institute Bulletin, March 24, 1978, No. 78- Table 2, offcially noticed September 27 1978). tit;U.tlt;IN , INC. , t;T AL. 4t1;1 385 Initial Decision Table Wines 459. From 1968 through 1972, table wine shipments including all stil wines not over 14 percent alcohol by volume (excluding refreshment wines) entering distribution channels in the United States grew substantially from year to year. Table wine shipments grew by approximately:

Gallons (millions) Year 12. 1968 to 1969 14. 1969 to 1970 13. 1970 to 1971 22. 1971 to 1972 (CX 295J, 373Z, Z- , Z- , Z-6, Z-7; RX 15A- , 27A-B). In 1968, table wine shipments entering distribution channels in the United States, amounted to 93,445 400 gallons and constituted 43. percent of all commercially produced wines entering distribution channels in the United States (CX 295J; RX 15A- , 27 A-B). (95) Refreshment Wines 460. In 1968, refreshment wines entering distribution channels in the United States amounted to 5 321 000 gallons and constituted 2. percent of all commercially produced wines entering distribution channels in the United States (RX 15A- , 27 A-B). In 1972, their share had increased to 19 percent (CX 373K). 461. Between 1968 and 1972, refreshment wines entering distribution channels in the United States grew dramatically. Shipments were approximately:

Year Gallons (millions) 1969 14.

1970 29.

1971 51.7 1972 64.

(RX 15A- , 27A- " In view of th exclusion of refreshment wines from the table wine market, and there bning nO record evidence of refreshment winl'hipments sub equal'nt to 1972 , findings on the table wine market do not go beyond 484 FEDERAL TRADE COMMISSION ImCISIONS Initial Decision 96 F. Dessert Wines 462. Between 1957 and 1967, the volume of dessert wines entering distribution channels in the United States has fallen and risen but overall has shown a decline. Since 1968, dessert wine shipments (including vermouth and other special natural still wines over 14 percent alcohol by volume) have continued to decline from 102 377 600 gallons in 1968 to 94 566 000 gallons in 1976 (CX 273U, 295J; Wine Institute Bulletin, March 24, 1978, No. 78- , Table 2 officially noticed September 27, 1978).

463. In 1968, domestic and imported dessert wines (including vermouth and other special natural still wines over 14 percent alcohol by volume) were the largest selling wine type, accounting for 47.9 percent of all commercially produced wine entering distribution channels in the United States (CX 295J, 373E, N). 464. In 1976, dessert wine shipments declined to 21 percent of all wine shipments entering distribution channels in the United States (Wine Institute Bulletin, March 24, 1978, No. 78- , Table 2, offcially noticed September 27 1978).

5. Sparkling Wines 465. In 1960, shipments of commercially produced sparkling wine entering distribution channels in the United States totaled 4 321 000 gallons, accounting for 2. 6 percent of all wine shipments. In 1968 sparkling wine shipments had grown to 12 513 000 gallons or 5. percent of all wine shipments entering distribution channels in the United States (CX 295J). (96) 466. Shipments of sparkling wine peaked in 1971 , totaling 970,000 gallons, or 7.8 percent of all wine shipments (CX 295J, 373J, Z-12).

467. From 1971 through 1976, sparkling wine shipments entering distribution channels in the United States have declined and leveled off, ranging between 20 and 22 milion gallons annually. In 1976 shipments of sparkling wines were 21.8 millon gallons, or 5. percent of total wine shipments entering distribution channels in the United States (CX 3661).

468. After increasing over 500 percent between 1960 and 1971 sparkling wine shipments went into a period of decline as cold duck sales collapsed. The sparkling wine shipment decline leveled out in 1975 and in 1976 sparkling wine shipments grew 7 percent over 1975 shipments (CX 366T).

B. Concentration and Concentration Trends 385 Initial Decision 469. The four firm concentration ratio of the all wine market in the United States was 47.4 percent in 1967, 47.9 percent in 1968, 50. percent in 1969, 53. 6 percent in 1970, 56.7 percent in 1971 and 54. percent in 1972 (CX 373B, D, F, H, J, K). 470. The eight firm concentration ratio of the all wine market in the United States was 55.9 percent in 1967, 57.4 percent in 1968, 60. percent in 1969, 63.6 percent in 1970, 67.0 percent in 1971 and 66. percent in 1972 (CX 373B, D, F, H, J, K). 471. The four firm concentration ratio of the United States table wine market, consisting of stil wines not over 14 percent alcohol by volume (excluding refreshment wines), was 49. 7 percent in 1967, 48. percent in 1968, 47.4 percent in 1969, 47.4 percent in 1970, 47. percent in 1971 and 43.5 percent in 1972 (CX 373V, Y, Z- , Z- , Z- 7; RX l. , 27A-B).

472. The eight firm concentration ratio of the United States table wine market, consisting of still wines not over 14 percent alcobol by volume (excluding refreshment wines), was 61.0 percent in 1967, 60. percent in 1968, 59. 6 percent in 1969, 60. 5 percent in 1970 , 59.4 percent in 1971 and 57.4 percent in 1972 (CX 373V, Y, Z- , Z- , Z- 7; RX 15A- , 27A-B).

473. The four firm concentration ratio of the United States dessert wine market, consisting of stil wines over 14 percent alcohol by volume, was 49.0 percent in 1967, 50.4 percent in 1968, 51.3 percent in 1969, 52.4 percent in 1970 , 54. 6 percent in 1971 and 52.4 percent in 1972 (CX 373L, N, P, R, T, U). (97) 474. The eight firm concentration ratio of the United States dessert wine market, consisting of stil wines over 14 percent alcohol by volume, was 56. 1 percent in 1967 , 58. 5 percent in 1968, 59. percent in 1969, 61.2 percent in 1970 , 63.7 percent in 1971 and 63. percent in 1972 (CX 373L, N, P, R, T, U). 475. The four firm concentration ratio of the United States sparkling wine market was 37.0 percent in 1967, 41.9 percent in 1968, 54.9 percent in 1969 " 56. 8 percent in 1970, 59. 6 percent in 1971 and 61.0 percent in 1972 (CX 373Z-8 thru Z-13). 476. The eight firm concentration ratio of the United States sparkling wine market was 56. 5 percent in 1967, 62.7 percent in 1968 71. 9 percent in 1969 , 73.7 percent in 1970, 75.2 percent in 1971 and 78.0 percent in 1972 (CX 373Z-8 thru Z-13). " Until November 196r1, Lancers Intt the definition of and was taxed as a carhonilted wine and thus fell within the sparkling wine submarket.In that month, Heublein stabilized the carbonation or Lancers at a level below that required of a carbonated wine, thus ch.mr;ing its ptsition to that of a table wine (Tr H70. 14)- As of thllt time Heublein could nO longer market Lancers as an effervescent wine, whether by packaging, adverti ing or otherwise (CX 309Z-25,- Statistics for 1969, however, do not reflect the change and include Lancers as a sparkling wine for the entire year 4R6 FEDERAL TRADE COMMISSION DECISIONS Initial Decision 96 F. 477. These concentration ratios narrated above follow in tabular form:

ALL WINE MARKET SHARE Top 4 Top 8 1967 47.4% 55.

1968 47. 57. 1969 50. 60. 1970 53. 63. 1971 56. 67. 1972 54. 66. TABLE WINE MARKET SHARE Top4 Top 8 1967 49. 61.0% 1968 48. 60. 1969 47.4 59. 1970 47.4 60. 1971 47. 59.4 1972 43. 57.4 (98) DESSERT WINE MARKET SHARE Top 4 Top 8 1967 49. 56. 1968 50.4 58. 1969 51.3 59. 1970 52.4 61.2 1971 54. 63. 1972 52.4 63. SPARKLING WINE MARKET SHARE Top 4 Top 8 1967 37. 56. 1968 41.9 62. 1969 54. 71.9 HEUBLEIN, INC., ET AL. 487 Initial Decision Top 4 Top 8 1970 56. 73. 1971 59. 75. 1972 61.0 78. 478. Professor Scherer has written that when 40 percent of a market is concentrated in the top four firms, inter-firm interdependence and coordination become increasingly probable. Professors Kaysen and Turner have found that when the top eight firms have 50 percent of the market, there is a Type 1 oligopoly where there is a great likelihood that the firms will recognize their interdependence and act in a non-competitive manner. They have classified as a tight oligopoly the situation where the top four firms have 50 percent (Tr. 5679-81). These are generally accepted benchmarks of a concentrated industry and are being applied in this case. 479. Measured both by four firm and eight firm concentration ratios, the all wine market and the table wine and dessert wine submarkets were concentrated in the period 1967 through 1972 (CX 373).

480. Measured by four firm concentration ratios, the sparkling wine submarket was concentrated in the period 1968 through 1972 (CX 373).

481. Measured by eight firm concentration ratios, the sparkling wine submarket was concentrated in the period 1967-1972 (CX 373). 482. Measured both by four firm and eight firm concentration ratios, the all wine market and the dessert and sparkling wine sub markets were characterized by increases in concentration over the period 1967 through 1972 (CX 373). (99) 483. Four firm and eight firm concentration ratios in the all wine market and in the table and dessert wine submarkets may be understated due to the inclusion of United States taxpaid withdrawals of all bulk wine in the universe figures for each market but exclusion of taxpaid withdrawals of bulk wine, except taxpaid withdrawals of bulk wine shipped to franchised bottlers, from individual firm shipments (CX 373A). There is no evidence that sparkling wines are, or can be, shipped in bulk form. 484. In 1968, the year before the merger, the all wine market eight firm concentration of 57.4 percent exceeded the 50 percent threshold at which Professors Kaysen and Turner deemed industry interfirm coordination and interdependence likely. In 1968, the all wine market four firm concentration of 47.9 percent exceeded the 40 Initial Decision 96 F.T. percent threshold at which Professor Scherer deemed industry interfirm coordination likely (CX 373D; Tr. 5681, 5684-85). 485. In 1972, the all wine market four firm concentration of 54. percent exceeded the 50 percent threshold at which Professors Kaysen and Turner characterized an industry as a tight oligopoly within which interfirm coordination and interdependence is extremely likely (CX 373K; Tr. 5681-82).

486. In 1968, the United States table wine market was concentrated. By Professors Kaysen s and Turner s four firm concentration standards, in 1968, the table wine market approached tight oligopoly in which interfirm coordination and interdependence is extremely likely. The four firm concentration in this market in 1968 also exceeded the 40 percent threshold at which Professor Scherer deemed interfirm coordination and interdependence likely (CX 373Y; Tr. 5680- , 5684). In 1972, the table wine market remained concentrated, exceeding Professor Scherer s 40 percent threshold (CX 373Z-7; Tr. 5681-82).

487. In 1968, the United States dessert wine market was concentrated. By Kaysen and Turner, four firm concentration standards in 1968, the dessert wine market qualified as a tight oligopoly in which interfirm coordination and interdependence is extremely likely to occur. The four firm concentration in this market in 1968 also exceeded the 40 percent threshold at which Professor Scherer deemed interfirm coordination and interdependence likely (CX 373N; Tr. 5681- , 5687). In 1972, the dessert wine market remained a tight oligopoly by Kaysen and Turner s four firm concentration standards (CX 373U; Tr. 5681-82).

488. In 1968, the United States sparkling wine market was concentrated. The four firm concentration in this market in 1968 exceeded the 40 percent threshold at which Professor Scherer deemed interfirm coordination and (loo)interdependence likely. In 1968, the eight firm concentration in this market exceeded the 50 percent threshold at which Professors Kaysen and Turner deemed interfirm coordination and interdependence likely (CX 373Z-9; Tr. 5680, 5686). In 1972, the sparkling wine market four firm concentration ratio exceeded the 50 percent threshold at which Professors Kaysen and Turner characterized a market as a tight oligopoly in which interfirm coordination and interdependence is extremely likely (CX 373Z-13; Tr. 5681-82).

489. No data beyond calendar year 1972 exists in the record of the share of the top four and top eight companies of the United States all wine market, measuring individual company shares by taxable withdrawals of bottled wine and of franchised bulk wine plus HEUBLEIN, lng, ET AL. 489 385 Initial Decision imports for consumption. However, the record contains data beyond 1972 on wine shipments by the ten largest United States wineries. 490. Domestically produced wine of the ten largest United States wineries, as a percentage of total wine shipments entering distribution channels, measured by domestic taxable withdrawals of bottled wine and of all bulk wine plus imports for consumption, accounted for 71 percent of all wine shipments in 1973. The domestically produced wine of the ten largest United States wineries dropped to 68 percent of total wine shipments in 1974, recovered to 69 percent in 1975, and rose to 69.4 percent in 1976. Over the period 1970 through 1976, the share of the ten largest United States wineries increased from 66 percent to 69.4 percent of total wine shipments entering distribution channels in the United States (CX 366U-Z; see also CX 295J; Wine Institute Bulletin, March 24, 1978, No. 78-3, Table 2, offcially noticed September 27, 1978, for universe figures). 491. In the all wine market, the four. firm concentration ratio during the period 1973 through 1976 remained beyond the 50 percent threshold level at which Professors Kaysen and Turner considered the industry interfirm coordination and interdependence extremely likely to occur. The four largest United States wineries (Gallo United Vintners, Almaden, and Mogen David/Franzia), not includ. ing their affiiated imported wine operations, alone accounted for 56 percent in 1973, 53 percent in 1974, 53 percent in 1975 and 53 percent in 1976 of the universe of all domestic and imported wine shipments entering distribution channels in the United States. The eight largest United States wincries (the four named above and Canandaiqua, Guild, Taylor and Monarch), not including their affiiated imported wine operations, alone accounted for 69 percent in 1973, 66 percent in 1974, 67 percent in 1975 and 66. 8 percent in 1976 of the universe of all domestic and imported wine shipments entering distribution channels in the United States (CX 366Y-Z; Tr. 5681-82). (101) 492. Beyond calendar year 1972, no record data exists of the share of the top four and top eight firms in the dessert wine market measuring individual firm share by taxable withdrawals of bottled dessert wine and of franchised bulk dessert wine plus dessert wine imports for consumption. However, the record contains data with respect to dessert wine shipments by California producers. 493. In the period 1973 through 1976, the dessert wine market remained concentrated. The four largest California producers of dessert wines (Gallo, United Vintners, Guild and Bear Mountain), not including their affliated imported wine operations . alone accounted for 50 percent in 1973, 45 percent in 1974, 48 percent in Initial Decision 96 F. 1975 and 49. 6 percent in 1976 of total dome tic and imported shipments of dessert wines. Four firm concentration in the period 1973 through 1976 in the dessert wine market, measured by shipments of the top four California producers alone, exceeds the 40 percent threshold at which Professor Scherer deemed industry interfirm coordination and interdependence likely. The eight largest California producers of table wines (the four named above and Franzia, Christian Brothers, California Wine Association and Paul Masson), not including their affiiated imported wine operations, alone accounted for 60 percent in 1973, 53 percent in 1974, 56 percent in 1975 and 58.0 percent in 1976 of total shipments of domestic and imported dessert wines entering distribution channels in the United States. The eight firm concentration in the period 1973 through 1976 in the dessert wine market, measured by shipments of the top eight California producers alone, exceeds the 50 percent threshold at which Professors Kaysen and Turner consider industry interfirm coordination and interdependence likely to occur (CX 366Z-1; Tr. 5681-82).

494. Beyond calendar year 1972, no record data exists of the share of the top four and top eight firms in the United States sparkling wine market, measuring individual firm share by taxable withdrawals and franchised bulk wine (if any) plus imports for consumption. However, the record contains data beyond 1972 with respect to the share of the sparkling wine market held by the ten largest California wineries, not including their affliated imported wine operations. As a percentage of the total universe of sparkling wine shipments entering distribution channels as measured by domestic taxable withdrawals of bottled sparkling wine and franchised bulk sparkling wine (if any) plus sparkling wine imports for consumption, the ten largest California sparkling wine producers, not including their affliated imported wine operations, accounted for 68 percent in 1973, 70 percent in 1974, 72 percent in 1975 and 69. percent in 1976 of total shipments of sparkling wines entering distribution channels in the United States. Over the period 1970 through 1976, the share of the ten largest California sparkling wine producers increased from 59 percent to 69.3 percent of total domestic and imported sparkling wine (102)shipments entering distribution channels in the United States (CX 366Z-2; see also CX 295J; Wine Institute Bulletin, March 24, 1978, No. 78- , Table 2, judicially noticed September 27 1978, for universe figures). 495. In the sparkling wine market, the four firm concentration during the period 1973through 1976 remained beyond the 50 percent threshold level at which Professors Kaysen and Turner consider 385 Initial Decision industry interfirm coordination and interdependence extremely . likely. The four largest California producers of sparkling wines (Gallo, United Vintners, Almaden and Franzia), not including their affliated imported wine operations, alone accounted for 58 percent in 1973, 57 percent in 1974, 56 percent in 1975 and 54.7 percent in 1976 of total shipments of domestic and imported sparkling wines entering distribution channels in the United States. The eight largest California producers of sparkling wines (the four named above and Paul Masson, Guild, Korbel and Weibel), not including their affliated imported wine operations, alone accounted for 67 percent in 1973, 67 percent in 1974, 68 percent in 1975 and 66. percent in 1976 of total shipments of domestic and imported sparkling wines entering distribution channels in the United States (CX 366Z-2).

496. The all wine market and the table, dessert and sparkling wine submarkets were concentrated at the time of the merger and remained concentrated through 1972. And concentration increased during that period in the all wine market and in the dessert and sparkling wine submarkets. As further demonstrated above, in the period 1973 through 1976, the all wine market and the dessert and sparkling wine submarkets remained concentrated. The trends towards increasing concentration over the period 1967 through 1972 in the United States in the all wine market and in the dessert and sparkling wine submarkets increase the probability of recognized interdependence among wine producers and hence the probability of interfirm coordination. The effects of the merger therefore, must be evaluated in the light of this concentrated state of the industry.

Skewness 497. In the period 1967 through 1972, the size distribution of market shares among the top four and top eight firms in the all wine market and in the table and dessert wine submarkets was skewed (Tr. 5699-5701). In the period 1969 through 1972, the size distribution of market shares among the (103)top four and top eight firms in the sparkling wine market was skewed (Tr. 5701). This skewness increases the probabilty of interfirm coordination among the competitors in the all wine market and the three submarkets (Tr. 5696-5701).

498. The size distribution of the market shares of firms within the top eight competitors in the United States all wine market in the " There is no record evidencecovering the post 1972 period for table wines excluding refreshment wines Initial Decision 96 F. period 1967 through 1972 was as follows (CX 373D, F, H, J, K; Tr. 5698):

ALL WINE MARKET 1967 968 1969 970 1971 1972 Markel Market Markel Markel Market Market E. & J.

Gallo Winery 22. 24. 25. 29. 32. 32.4 United* Vintners Inc. 18. 17. Heublein, Inc. 18. 18. 16. 14. Schenley Industries Inc.

The Taylor Wine Co.

Inc.

Joseph E.

Seagram & Sons, Inc. 2.4 Mogen David Wine Corp.

Guild Wineries and Distileries National Distilers & Chemical Corp. 2.4 Franzia Bros.

Winery 2.4 'Effective 1969 United' figures are incl uded with Heublein s. (104) 499. The size distribution of the market shares of firms within the top eight competitors in the United States table wine market in the period 1967 through 1972 was as follows (CX 373V, Y, Z- , Z- 6, Z-7; RX 15A- , 27A-B):

U1:L INC. , .tT AL.

385 Initial Decision TARLE WINE MARKET 1967 1968 96. 1970 1971 1972 Market Market Market Market Market Market E. & J.

Gallo Winery 24. 24. 25. 23. 21. 20.4 United** Vintners Inc. 17.4 14.

Heublein Inc. 13. 14. 14. 12. Mogen David Wine Corp. 5.4 National Distillers & Chemical Corp.

Guild Wineries and Distilleries Schenley Industries, Inc.

Joseph E.

Seagram & Sons, Inc.

Monarch Wine Co.

Inc. 1.8 Franzia Bros.

Winery 3.4 *Excluding refreshment wines.

**Effective 1969, United's figures are included with Heublein s. (105) 500. The size distribution of the market shares of firms within the top eight competitors in the United States dessert wine market in the period 1967 through 1972 was as follows (CX 373L, N, P, R. T U):

Initial Decision 96 F. DESSERT WINE MARKET 1967 968 969 1970 1.971 1972 Market Market Market Market Market Market E. & J.

Gallo Winery 22. 22. 22. 22. 21. 20. United* Vintners, Inc. 20. 21.0 Heublein Inc. 21. 22. 24. 22. Schenley Industries Inc.

Taylor Wine Co. , Inc.

Canandaigua Industries Co. , Inc.

Joseph E.

Seagram & Sons, Inc. 1.6 1.9 California Wine Association 1.6 1.8 1.8 Renfield Importers Ltd. 1.6 1.7 2.4 The Christian Brothers 1.8 1.8 Mogen David Wine Corp.

Guild Wineries and Distilleries 4.4 *Effective 1969 United' s figures are included with Heublein s. (106) 501. The size distribution of the market shares of firms within the top eight competitors in the United States sparkling wine market in the period 1967 through 1972 was as follows (CX 373Zthru Z- 13):

SPARKLING WINE MARKET 1967 968 1969 1970 1971 1972 Markel Markel Market Market Market Market E. & J.

Gallo Winery 11. 18. 27. 32. 33. United* Vintners Inc. 10. 10. Heublein Inc. 20. 16.4 15. 14. The Taylor Wine Co.

Inc. 14. 12. 10. Joseph E.

Seagram & Sons, Inc. 6.4 4.0 National Distillers & Chemical Corp.

Monarch Wine Co. , Inc.

Robin Fils & Cie., Ltd.

*Effective 1969, United' s figures are included with Heublein s. (107) initial Decision 96 F. 196'7 1968 1969 1970 1971 1972 Market Market Market Market Market Market Weibel, Inc.

Guild Wineries and Distilleries Franzia Bros.

Winery 3.4 Gold Seal Vineyards Inc.

502. Measuring the skewness of the market share distribution among the top four and top eight firms in the United States all wine market by the skewness of market share distribution among the top four and top eight United States wineries, the all wine market remained skewed during the period 1973 through 1976 (CX 366Y, Z- 1).

503. Measuring the skewness of the market share distribution among the top four and top eight firms in the United States dessert wine market by the skewness of market share distribution among the top four and top eight California wineries, the dessert wine market remained skewed during. the period 1973 through 1976 (CX 366Z- 1 ).

504. Measuring the skewness of the market share distribution among the top four and top eight firms in the United States sparkling wine market by the skewness of market share distribution among the top four and top eight California wineries, the sparkling wine market remained skewed during the period 1973 through 1976 (CX 366Z-2).

Gallo and United Vintners Dominance 505. While United had a smaller market share than Gallo United was stil a dominant factor in the industry. This is reflected in the appraisal of the industry conducted for Heublein by the McKinsey study where, in its analysis of "Competitive Structure, it was stated, "Except For United Vintners And Gallo, Industry Is Composed Of Many Small Competitors" (See Finding 338 supra). This is confirmed by analysis of the industry. HEUBLEIN, lng, ET AL. 497 385 Initial Decision 506. In the all wine market in 1968, the second ranked competitor, United, shipped more than six times the wine gallonage of the third ranked competitor (CX 373D). In 1969 and 1970, the pattern was repeated with the second ranked competitor, now Heublein shipping more than six times the annual wine gallonage of the third ranked competitor (CX 373F, H). In 1971, second ranked Heublein annual wine gallonage shipments exceeded the third ranked competitor s shipments by a ratio of better than 4 1/2 to 1 (CX 373J). In 1972, second ranked Heublein continued to ship wine at a rate of nearly four to one in comparison to the third ranked competitor (CX 373K).

507. Subsequent to 1972, United, the second ranked domestic winery, continued to maintain a significant margin in wine shipments in comparison to the third ranked domestic winery in the all wine market. In 1973, United shipped 54 milion gallons of wine in comparison to third place Almaden s 14 million gallons. In 1974 United shipped 49 million gallons in comparison to Almaden s 15 milion gallons. In 1975, United's wine shipments jumped to 59 million gallons in comparison to Almaden s 16 million gallons, and in (108)1976, United shipped 56 milion gallons in the all wine market in comparison to Almaden s 18.7 million gallons (CX 366Y). 508. United Vintners and Gallo are the dominant domestic producers of wine. In 1960, United produced 18.5 percent and Gallo produced 20. 1 percent of all domestically produced wines entering distribution channels in the United States. By 1968, United accounted for 22. 1 percent of all domestically produced wine entering distribution channels in the United States and Gallo accounted for 26.7 percent, totaling 48.8 percent of all domestically produced wine entering United States distribution channels (CX 330K). In 1976 United and Gallo combined produced 49.8 percent of all domestically produced wine entering United States distribution channels, accounting for 17.6 percent and 32.2 percent respectively (CX 381). From 1960 to 1976, United's and Gallo s combined share of all domestically produced wines entering United States distribution channels rose from 38.5 percent to 49.8 percent (CX 330K, 381). 509. In 1966, United produced 11.3 percent and Gallo produced 2.4 percent of all domestically produced sparkling wines entering distribution channels in the United States. (Data is not available for earlier years.) By 1968, United accounted for 12.8 percent and Gallo accounted for 13.6 percent, totaling 26.4 percent of all domestically produced sparkling wine entering United States distribution channels (CX 330M). In 1976, United produced 12. 2 percent and Gallo produced 39.7 percent of all domestically produced sparkling wines Initial Decision 96 FTC. (CX 381). Between 1966 and 1976, the combined share of United and Gallo of all domestically produced sparkling wine entering distribution channels in the United States rose from 13.7 percent to 51.9 percent (CX 330M, 381).

510. Gallo and United are the dominant producers in the all wine market. The combined all wine market share of these two companies was 41.6 percent in 1967 and 41.9 percent in 1968. The combined all wine market share of Gallo and Heublein/United was 44.7 percent in 1969 , 47. 5 percent in 1970, 49. 6 percent in 1971 and 46.7 percent in 1972 (CX 373B, D, F, H, J, K).

511. The combined dessert wine market share of Gallo and United was 43. 0 percent in 1967 and 43. 9 percent in 1968. The combined dessert wine market share of Gallo and Heublein/United was 44. 1 percent in 1969, 44. 5 percent in 1970, 45.7 percent in 1971 and 43.3 percent in 1972 (CX 373L, N, P, R, T, U). 512. The combined table wine market share of Gallo and United was 41.6 percent in 1967 and 39.2 percent in 1968. The combined table wine market share of Gallo and Heublein/United was 39. percent in 1969, 38. 5 percent in 1970, 35, 8 percent in 1971 and 32. percent in 1972 (CX 373V, Y, Z- , Z- , Z- , Z-7; RX 15, 27). (109) 513. As explained above, I have excluded refreshment wines from the table wine submarket. Yet, volume-wise, refreshment wines constituted a substantial proportion of wine production, especially in the years 1970-1972. The following concentration ratios and universe figures for refreshment wines show that this segment of the all wine market was even more concentrated and skewed than any of the relevant submarkets; and that Gallo and United were the leading producers:

REFRESHMENT WINES (% of market, 000 gals.

(RX 15A- , 27A- 1967 1968 196' 1970 1971 1972 Gallo 56. 63.03% 58.30% 75.41% 82. 39% 7880% 1563 3354 8321 22087 42562 50634 United 38. 32. 38. 21.54 10. 1063 1752 5562 6310 5655 5440 Robinson-Lloyds 1.82 1.08 154 107 196 Monsieur Henri 1.03 1.50 110 440 1212 2119 385 Initial Decision 1967 1968 96. 1.970 1.971 1.972 Mogen David .48 1148 3921 Monarch 86 1.65 187 853 2255 Leonard Kreusch Gibson Guild Seagram 88(110) REFRESHMENT WINE CONCENTRATION RATIOS (derived from prior table) Universe (000 gals.) firm firm firm 1967 778 gals. 94.46% 98.06% 99.92%" 1968 321 gals. 95.95% 98.80% 99.97% 1969 271 gals. 97.27% 99. 12% 99.99% 1970 288 gals. 96.95% 99.08% 99.92% 1971 657 gals. 93.34% 97. 91 % 99.96% 1972 251 gals. 85.07% 95.48% 99.63% Refreshment wine is not one of the submarkets involved in this matter, and Heublein was not engaged in this submarket at the time of the acquisition. Nevertheless, it is significant that when a new area for opportunity arose in the wine industry, the same two dominant companies, Gallo and United, were in a position to secure the lion s share and bring about an extremely concentrated submarket.

514. In 1967, Taylor Wine Co., Inc. ("Taylor ) and United were the top two companies in the United States sparkling wine market, ., 1967concentrationratioisforsevenfirms 500 FEDERAL TRADE COMMISSION m;CISIONS Initial Decision 96 F. with a combined share of 24. 6 percent. In 1968, Taylor and Gallo were the top ranked companies with a 24 percent combined share of the sparkling wine market; United ranked third with 10.7 percent of that market. Heublein/Uniled and Gallo were the top two ranked companies in the United States sparkling wine market during the period 1969 through 1972. The combined sparkling wine market share of these two companies was 38. 9 percent in 1969, 44.3 percent in 1970, 47.8 percent in 1971 and 47. 6 percent in 1972 (CX 373Zthru Z- 13).

515. Gallo s great period of growth between 1970 and 1972 was connected in large measure with sharp gains in sales of its Boone Farm line of refreshment wines. Since its peak in 1972, Boone Farm has suffered erosion and Gallo has deemphasized refreshment wines. Gallo s emphasis in (lll)advertising has shifted to Gallo higher priced table wines and its Carlo Rossi brand of table wine (CX 366Z, Z-5, 367P).

516. As noted, Finding 489 supra, the record contains no individual company market share data subsequent to 1972. However, the record does show United increased its share in the all wine market in each of its calendar years 1973, 1974, 1975, 1976 and 1978. The record is silent as to 1977 (CX 361F, 543F). Trend Towards Mergers and Acquisitions 517. The wine industry has been characterized by a significant trend towards mergers and acquisitions of wine suppliers from 1940 through 1977 (RX 485Q, 533A-D, 1216A-D; CX 209F, 299A-C; Tr. 4190, 5129- , 6564, 6576, 8465- , 9887). F. Conclusions, Discussion of Impact of Merger and Case Law Based upon the above findings of fact, I conclude that at the time of the acquisition the all wine market was concentrated and skewed as were the table and dessert wine submarkets; and that the sparkling wine submarket was concentrated. Concentration ratios for the top two, four and eight firms in the market and submarkets in 1968 were:

Top 2 Top 4 Top 8 all wine 41.6% 47. 57.4% table wine 39. 48.1 60. .'-'---_U' 385 Initial Decision Top 2 Top 4 Top 8 dessert wine 43. 50.4 58. sparkling wine 24. 41.9 62. In each of these markets, four-firm concentration exceeded the 40 percent threshold at which Professor Scherer deems industry interfirm coordination likely. In each of these markets, the eightfirm concentration substantially exceeded the 50 percent threshold at which Professors Kaysen and Turner characterize an industry as an oligopoly within which interfirm coordination and interdependence is likely.

Following the acquisition, the all wine market, as well as the table dessert and sparkling wine submarkets remained concentrated. The two, four and eight firm concentration ratios in 1969 were: Top Top Top 8 all wine 44. 50. 60. table wine 39. 47.4 59. dessert wine 44. 51.3 59. sparkling wine 38. 54. 71.9 (112) The four and eight firm concentration ratios exceeded the Scherer and Kaysen and Turner thresholds discussed above. In addition, the four firm concentration ratios (except for table wine) exceeded the Kaysen and Turner thresholds for a tight oligopoly within which interfirm coordination and interdependence is deemed extremely likely.

The concentrated state of the wine industry is enhanced by its skewness. Skewness, as explained by economist Dr. Robert E. Smith (Tr. 5695), describes the disparity in size among the leading firms in an industry. As the preceding market share tables indicate, the all wine, table wine and dessert wine markets were skewed both in 1968 and in 1969, the year of the acquisition. The sparkling wine market appears to have become skewed in 1969. However, contrary to complaint counsel's assertion (CB, p. 20), I do not find that such skewness which occurred in that market in 1969 as a result of the merger is relevant to the issue of a possible or probable long-term increase in concentration in this submarket due to the merger. As previously noted (Finding 475 n. 21), in November 1969, the carbonation level of Lancers, which accounted for 99.7 percent of Heublein s 7.2 percent share of the sparkling wine market (derived Initial Decision 96 F. from CX 373Z-10, Z-ll), was stabilzed at a level below that at which it could be classified as a sparkling wine. In succeeding years, Complaint counsel include Lancers as a table wine. Thus, the increase in Unite' sparkling wine market share achieved by inclusion of Lancers was of consequence only from the date of acquisition, February 21, 1969, until November 1969. This transitory impact upon skewness is of no significance in this case which is concerned with long term probabilties.

Skewness is marked, however, in the other markets, and is important as an indication that the power accompanying strong market shares may be enhanced by disparate size in relation to other competitors in the market. The more skewed a given market is, the greater the likelihood that firms wil be able to coordinate their activities effectively. The skewness of market structure is an independent determinant of the ability of competitors to coordinate their activities (Tr. 5696-97). In Warner-Lambert Co. 87 F. C. 812 (1976), the Commission considered the issue of skewness of the market: In addition to conventional concentration ratios, the degr of asymmetr in siz is another factor which ecnomits consider in asing theamong leading firrompetitive structure of markets. A given level of concentration meaur by aggrgate market share held by top firm may portnd different market conditions depending upon whether firms within the gruping ar (1l3)relatively equal or quite disparte in size, with equality of size evidencing a more favorable climate for competition (at 870). (1977), the In American General Insurance Co. 89 F. C. 557 Commission also looked at skewness in the market and, while finding that skewness was not significant there, nevertheless held that; " asymmetrical oligopoly may aggravate whatever lessening of competition may result from a merger. . ." (at 638). The disparity in size between United, the second leading firm, and the third leading firm in each market except sparkling wine is clear when expressed as the third ranked firm s percentage of United' s volume: PERCENTAGE OF THIRD RAKING FIRM S SHIPMENTS TO THOSE OF UNITED 1968 1969 all wine 17% 16% table wine 36% 33% dessert wine 15% 16. 500 supr) (Source: market share tables, Findings 498, 499, . . .

J'J. lal JJC\"l""Ull At the time of thc acquisition, the all wine market, and the table wine and dessert wine submarkets were concentrated and skewed. In United States v. Phikulphia Natiol Bank 374 U.S. 321 (1963), the court held that" . . . if concentration is already great, the importnce of preventing even slight increases in concentration and so preservng the possibilty of eventual deconcentration is correspondingly great" (at 365 n. 42). HUV has raised arguments that the Court in Philadlphia Natiol Bank rejected. HUV argues that Heublein pre-acquisition market shares were insufficient to materially change the competitive structure of the industry. While Heublein s shares may have been small (see below, p. 114), the court in Philadlphia Natiol Bank rejected such logic: "It is no answer that, among the three presently largest firms. . ., there will be no increase in concentration. If their argument were valid, then once a market had beome unduly concentrated, further concentration would be legally privileged" (I/.

The slight decline in United' s share of the table wine market in the year of the acquisition does not vitiate a finding of high concentration in that submarket, nor prohibit a finding that the acquisition was ilegal as to that submarket. In RSR Cor. 88 F. C. 800 (1977), a cae in which the second place producer with 12.16 percent of (114) production acquired the fifth place producer with 7.02 percent, thereby creating a new number two firm with 19.18 percent of industry shipments, the Commission noted that:

even were the record to point. . . to a decline in concentration exclusive of thi merger, such a consideration would not weigh heavily in the fac of the high abslute level of concentrtion and the incre therein caus by thi merger. Evdence of a trend toward concentration may be relevant to show a violation in a ca such as Unite States v. Von s Grery Co. 38 U.S. 270 (196) involving compartively smal market shars and comparatively low concentration. It is obviously not in a ca nec involving large shar and high concentrtion (at 88 n. 18). In 1968, Heublein s rankings and market shares were: all wine 16th 79% tablc wine 30th 23% dessert wine 13th 54% (CX 373E, N, Z; RX 15, 27) HUV argue that these increments to United' s market shares resulting H Spakling wine is not being corwidere in light of the tempora natur of th incrment. Se p. 112 supr. . . . .

504 FEm;RAL TRADE COMMISSION DECISIONS Initial Decision 96 F. from the merger were so small as to be de minimis (RPF, pp. 190 256 263). Thc contention that such small increases cannot be considered in support of a finding that the acquisition had the proscribed anticompetitive effect, is without merit.

In United States v. Aluminum Co. of America 377 U.S. 271 (1964), thc Court found that an addition of 1.3 percent to the leading market share of 27.8 percent was anticompetitive in a highly concentrated market (two-firm conccntration of 50 percent, four firm concentration of 76 percent) but one in which small independents stil participated. The Court noted that the objective of the 1950 Amendments to Section 7 " . . . was prevent accretions of power which 'are individually so minute as to make it difficult to use the Sherman Act test against them (at 280).

In Stanley Works v. FTC 469 F.2d 498 (2nd Cir. 1972), cert. denwd 412 U.S. 928 (1973), the court found that a market with a four-firm concentration ratio of 41 to 51 percent was "sufficicntly concentrated to invoke the proscriptivc sanction of the Claytn Act" (at 504), and held that" . . . the rationale underlying at least two Supreme Court decisions indicates that (the foreclosure of) Stanley s (115)1 percent is not a de minimis share of the. . . market" (at 506). Significantly, in responding to the dissenting opinion which noted that Stanley s market share was .47 percent smaller than the smallest foreclosure which had been held ilegal prior to Stanley, the majority held that: In view of this market concentration. we cannot asume. that a difference of les than one-half of one percent-the difference between Blatz's 1.47 percent and Stanley 1 percent market shar-is of decisive significance for a question of such contrllng importnce as whether one percent market control is, or is not de minimi (at 50. Adopting the Second Circuit's reasoning, in view of Heublein entrenchment of United's market position (pp. 172-75 infra), the concentrated and skewed structure of the wine industry and Heublein s position as an actual potential expander (pp. 175-5 infra), Heublein s market shares at the time of the merger were not so insignificant that they should not be considered along with these various other factors.

HUV , relying primarily upon United States v. Blak a-r Decker Mfg. Co. 430 F.Supp. 729 (D. Md., 1976), assert that it is improper to , 385 Initial Decision include in the same market wines imported and sold by Heublein and wines manufactured and sold by United. In that case, however the court found no competitive overlap between the manufacturer and its retail seller. But, based on the facts of this case, considerable competitive overlap did exist between Heublein and United. In United States v. Continental Can Co., 378 U.S. 441 (1964), the Court held that "Where the area of effective competition cuts across industry lines, so must the relevant line of commerce. . . . " (at 457). Heublein and United compete at the distributor, supplier, and wholesale levels in distribution of their wine products, and both compete in promotion of their products at these levels and in advertising media to increase retail sales. HUV have argued that Lancers Rose and Harveys Bristol Cream, the bulk of Heublein s gallonage, should not be included in its market share because they are imports and thus subject to supply volatility (in the case of Lancers) and the control of the actual owners (in the case of Harveys). To the contrary, the Lancers endeavor (jointly owned by Heublein) is a sophisticated, growing, and profitable business with no indication that supply problems are of any concern to Heublein. Neither is there any evidence of record that Allied Breweries, Ltd., owners of Harveys, participates in the marketing or distribution of (116)Harveys wines imported by Heublein for the United States market to the extent of usurping Heublein s control over such matters. 25 HUV contend (RPF 240) that, as a general proposition, imports should be distinguished from domestic products in Section 7 cases and rely on the following statement from W. Fugate Foreign Commerce and the Antitrust Laws, 345, 351 (2nd ed. 1973): Imports are much more subject to being cut off, and they can be cut off merely by a decision of the foreign producer. Likewise, they can be cut off by tariffs and other governmental trade restraints.

HUV neglected, however, to include the immediately preceding sentence: Imports have been treated the same thus far. although there is room for distinction" (emphasis added). The case law does not distinguish foreign from domestic products in computing market shares based on universe figures of total United States sales including imports. See g.. United States v. Standard Oil Co. (New Jersey) and Potash Company of America, 253 F.supp. 196, 204 (D. 1966).

I also reject HUV' s argument that the acquisition was procompeti- " While the Harveys marketin(: plan i8 a joint effort of Heublein s brand m:mager, Harveys' representative and the advertising agency, the Heuhlein brand managp.r would make the final decision in the event of any disagreement(Tr_ 4404).

336- 34:' 0 - 81 - 33 506 EIJERAL TRADE COMMISSION DECISIONS Initial Decision 96 F. tive, The contention is made that since Gallo has been firmly established as the leading producer in the wine industry since the mid-1960' s (RRPF 13), " . . . the merger has aided not hillderedcompeition . . . .. (RPF 250); and, that" . . . the 10. 1 point increase in the eight-firm ratio between 1967 and 1972 was due to the increases of Gallo (9.5 points); Almaden (1.9 points); and Mogen David (1.5 points)" (RPF 251). While United' s share did decline 4. points during this period, it remained the second leading firm far ahead of the third producer; its absolute volume increased impressively (from 38 226 600 gallons to 45 307,700 gallons); and in the six years since 1972, its market share has risen again in at least five of those years (Finding 516 supra), HUV' s contention that an otherwise unlawful acquisition is not anticompetitive if it results in the creation of a company better able to compete with a major competitor has been rejected as a matter of law, See, g., Ford Motor Company v. United States, 405 U. S. 562 569-70 (1972); (1l7)United States v. Bethlehem Steel Corp. , 168 Supp. 576, 615-18 (S. Y. 1958); and, United States v. Philadelphia National Bank, 374 U.S. 321 , 371 (1963). At the time of the acquisition, the wine industry was a tight oligopoly and the market was skewed. While possessing a market share substantially smaller than that of the largest company, United had the second largest share which was several times larger than that of the company in third position. Heublein s acquisition of the second ranking producer immediately increased concentration by the extent of Heublein s share of the market. The acquisition also served to entrench United's dominant position and to remove Heublein as an actual potential expander (See pp. 172- infra), The effects of the merger, therefore, may be to substantially lessen competition.

VII. BARRIERS TO ENTRY OR EXPANSION IN THE WINE INDUSTRY In order to further understand the overall impact of the acquisition upon competition in the relevant market and submarkets, we must proceed beyond the percentage increments added to United' market shares and the measurable percentages of additional competitive strength resulting from Heublein s elimination as an actual competitor of United. It is also necessary to examine what special competitive assets the Heublein organization brought to United, and whether United's second ranking position was entrenched by the Heublein acquisition in light of the characteristics of the wine industry.

. . . . HEUBLEIN, INC., ET AL. 507 385 Initial Decision Such analysis begins with an examination of whether there are high barriers to entry or expansion. Barriers to entry or expansion are conditions or arrangements which impede free entry into the relevant market on a level of sufficient magnitude to compete with industry leaders. Thus, the concept is better termed a "barrier to effective competition. The Budd Co. 86 F. C. 569, 577 (1975). Whether there are high barriers to entry is also relevant to the general question of whether the acquisition of a company may, for any other reason, have the effect of substantially lessening competition. For, if barriers are low any apparent anticompetitive effect could be dissipated in the long run by the entry of new competition. Ekco Products Co., 65 F. C. 1163, 1207-08 (1964), Findings relating to barriers to entry or expansion in the wine industry on an effective competitive level follow.

Capital Requirements and Long Payout Period Barriers 518. The capital requirements to engage in wine production on a significant scale are great. Capital requirements for even a modest level of winery operation are substantial. Capital requirements to market wines in significant (118)volume, and establish brand recognition, are large. High capital requirements constitute a significant barrier to entry and expansion in the wine business (Tr. 5712- 5715 5717).

519. Witnesses who addressed the subject of capital requirements noted the extremely high capital intensity of the wine business, The general manager of Souverain winery testified: It takes a lot of money to stay in the wine business. You can enter the wine business with one barrel and a tub to crush. the grapes in, but if you want to go into a large national brand as we have chosen to do, it takes money to sustain your operation. It is definitely capital intensive. You don t enter in one year and make a profit the next year (Tr. 2139).

520. Dr. Richard Peterson, Winemaster and President of The Monterey Vineyard (Tr. 320), testified:

I am sure everyone knows by now, the wineries' business is capital intensive in the extreme. (Tr. 359).Dr. Peterson added that the winery business is "just like pouring money down a hole, you just keep putting money in before you can begin to sell wine to start with" (Tr. 359). 521. Patrick McDonald, a director of and consultant to Montcalm Vintners, Inc. (Tr. 5115), a failed new entrant testified: We elected to limit our capital involvement in the industry by not going into the Initial Decision 96 F. vineyard business or the grape business, but merely concentrating on the production of the wine and the marketing of the wine. Even limiting ourselves that way, we found out that for the type of operation that we wanted to become that it required what we considered to be an inordinate amount of capital (Tr. 5182). 522. Andrew Beckstoffer, the Heublein employee responsible for gathering and analyzing data with respect to the wine business, also judged the wine industry as capital intensive (Tr. 8979-80, 9026- 9074 9085- 9092-93). (119) 523. Capital requirements to establish the plant and facilities for even a modest sized winery are substantial (Tr. 352-57, 674- , 2107 2119, 2142- 2245- 2154 3452-53, 5136- , 5181- , 5184, 5188- , 5218).

524. For example, the Souverain Winery, with capacity of approximately 2 1/2 milion gallons, was built by the Pilsbury Co. in 1973 at a cost of $5,800 000 (RX 1192G; Tr. 2107, 2119, 2144). 525. Lee Chandler, the current general manager of Souverain considers Pilsbury s building costs of Souverain to have been "very low" relative to the average per gallon cost of building a winery (Tr. 2144). Mr. Chandler estimated that it would cost between $10 milion and $11 millon today to build the Souverain facility, not including the fountain and restaurant which are an integral part of the winery (Tr. 2142-43). He estimated that in 1973 or 1974, it cost between $3 and $4 per gallon of capacity to build a winery (Tr. 2144). 526. The relatively small size of the Souverain endeavor is apparent when we compare its 2 1/2 milion gallon capacity with the 226 milion gallon capacity of Gallo, the 95 milion gallon capacity of United and the 57 milion gallon capacity of Guild in 1976, and note that Guild was the fourth largest company in the all wine market in 1972 with but 3.8 percent (CX 373K, 458). 527. The cost of obtaining an adequate supply of grapes and bulk wine significantly contributes to the high capital requirements in the wine business, particularly for new entrants and expanding firms (Tr. 356, 3464, 3468- , 5137, 5181- 5186- , 5255, 8128- 8131; CX 413B).

528. In order to assure themselves an adequate supply of grapes, many vintners operate their own vineyards (Tr. 350, 352, 1008, 1953- , 3202- , 3453, 8972, 9005).

529. The costs of establishing a producing grape vineyard contribute to the high capital requirements in tbe wine production business by as much as $8 000 per acre (Tr. 360- , 2237, 3453, 3466, 5181, 5184).

530. Since the production period of raw wine is seasonal, depending upon the seasonal maturation of grapes (CX 308U), wineries HEUBLEIN, lng, ET AL. 509 38.\ Initial Decision must bear large bulk wine inventory costs from grape crush season to grape crush season (Tr. 2272; CX 240D, 247C). 531. The cost of maintaining inventories of bulk wine significantly contributes to the high capital requirements in the wine business, particularly for new entrants and expanding firms (Tr. 2140- 2235, 3464, 5181- , 5184, 5186, 8131; CX 240D, 24lD, 242C, 243C, 244D, 245D, 246D, 247C). (120) 532. Contributing to high capital requirements in the wine business for new entrants and expanding firms are the marketing costs of establishing brand recognition (Tr. 5184, 5188-89), as well as the costs of establishing and maintaining a winery sales force to solicit wholesale distributors and assist distributors' salesmen in obtaining and maintaining retail distribution of a winery s products (Tr. 630- , 2122, 2125, 2174, 2222- , 3324). 533. Also contributing to high capital requirements in the wine business is the extended payout period over which a winery must wait to begin to earn returns on its investment and recoup its full investment. This is a characteristic of the wine industry and constitutes a significant barrier to entry and expansion (Tr. 5712). 534. From the time of planting, it takes five to six years for a grape vineyard to produce a full crop (Tr. 361, 2238). In some grape growing areas, the length of time from planting to vineyard maturity may be as much as eight to nine years (Tr. 362). 535. The aging period required for wines, particularly red table wines, before they may be sold prolongs the period over which a winery must wait in order to earn income from its investment (Tr. 359, 1021- , 2140- , 5184, 5188-89). The time of grape crush to sale of the wine ranges from a minimum of six months to as long as ten years (Tr. 3133- , 3161, 3223).

536. The length of time required to establish brand recognition also contributes to the long payout period during which a winery must wait to recoup its investments (Tr. 5713). 537. A substantial length of time is required before a new entrant in the wine industry becomes profitable. In the opinion of Dr. Peterson, Winemaster and President of The Monterey Vineyard in California, it takes six to ten years for a winery to become profiable from the initial time of building of the winery. If the new entrant plants its own vineyards, an additional four to eight years are expected to elapse before the winery becomes profitable (Tr. 363). 538. During the 3 1/2 to 4 1/2 years that the Souverain winery was owned by Pillsbury, Souverain did not make a profit (Tr. 2107 2113). In 1976, Pillsbury sold Souverain at a loss (Tr. 2118-19), Since it was sold by Pilsbury, Souverain has operated at a loss and at less Initial Decision 96 F, than full capacity (Tr. 2141). The current general manager of the company expects it to be profitable within three or four years (Tr. 2144). (121) 539. California Growers Winery started its branded case goods business in 1971 (Tr. 1958-59). The President of California Growers testified on January 26, 1978: "I would say that during the last seven years that there has been virtually no contribution to profit on our proprietary case good business" ('lr. 1958- 59). 540. Geyser Peak Winery in California was acquired by Joseph Schlitz Brewing Company in 1972 and began sellng branded case goods in the fall of 1974 (Tr. 3452). In every year since 1974, Geyser Peak has sustained an operating loss (Tr. 3453-54; CX 389). Geyser Peak is not profitable today and is operating at less than full capacity (Tr. 3453, 3467). Geyser Peak's operating plan forecasts that it will be operating in the black within the next five years (Tr. 3467). 541. One notable example of substantial capital investment in the wine business is United's glass plant, valued at $18 milion (Tr. 9221-22). The glass plant results in substantial cost savings to United (Tr. 9223).

The Distribution Barrier Methods of Wine Distribution 542. Since tbe repeal of prohibition, 32 states and the District of Columbia have adopted licensing systems for distribution of alcoholic beverages. In general, these states have established three-tier systems of distribution. Ownership of each of the three levels of distribution-supply, wholesale and retail-must be separately maintained. Individual suppliers, wholesalers and retailers are licensed by the state to do business (CX 368 0). Generally, licensed suppliers may sell only to licensed wholesalers who, in turn, may sell only to other wholesalers and to retailers (CX 508A-B; state statutes cited under para. 2(c), p. 5, of Facts Submitted for Official Notice dated May 2, 1978-noticed on record without objection; CX 368D, 511). These 32 states are referred to in the wine industry as "open states (Tr. 4217).

543. The 18 remaining "monopoly" states, pursuant to the Twenty-first Amendment, exercise varying degrees of monopoly control over the wholesaling of alcoholic beverages (CX 368F). Eigbt states (Montana, Utah, Wyoming, Iowa, New Hampshire, Pennsylvania, West Virginia and Mississippi) monopolize the wholesaling of all wines and spirits (Tr. 9628-28). In 1969, these eight states accounted for 5.9 percent oftotal consumption of wines in the United HEUBLEIN, INC. , ET AL. 511 385 Initial Decision States, as measured by case shipments. In 1976, these eight states accounted for 6.3 percent of total wine consumption (RX 1231). 544. In four additional monopoly states (Idaho, Maine, Alabama and Michigan), the state monopolizes the wholesaling of spirits and wines over 16 percent alcohol by volume (Tr. 9623-28). (122) 545. The six remaining monopoly states (Oregon, Ohio, Washington, North Carolina, Vermont and Virginia) monopolize the wholesaling of spirits, but license others to wholesale wines (Tr. 9622- 9873-77).

546. The 18 monopoly states are often referred to as "control" states by wine industry members (Tr. 625 4217). 547. It is more diffcult to secure distribution in control states than in open states because control states' purchasing agents limit their purchases to those brands they select for sale at all outlets. In open states, while the seller may not be able to get full distribution he still may be able to acquire some accounts (1'r. 4217). 548. As described by wine marketer and consultant, Stanford Wolf, the general methods of distribution for a California winery are as follows:

A California winery can distribute directly to the consumer (in California). Under our laws in California, he can distribute to wholesalers or combinations thereof. A winery distribution outside of California can be to wholesalers who are just wine wholesalers or to wholesalers which are beer and wine wholesalers, or to wholesalers that are spirits and wine wholesalers, or all three. There s distribution to the control state board in a limited number of states. These are the general methods of distribution (Tr. 7502).

549. A "primary" or "prime" distributor is a marketing and sales intermediary between the vintncr and the wholesaler. A primary distributor usually handles a vintner s brand on a national or at least regional basis and acts on behalf of the brand owner in contacting and selling to wholesalers (Tr. 7503). 550. As a rule, the primary distributor purchases the products from the vintner and then resells to a wholesale distributor. The winery may then ship directly to the wholesale distributor or to primary distributor warehouses (Tr. 666). 551. Primary distributors frequently undertake marketing responsibilities. and have control over marketing and sales decisions (Tr. 2233, 2300, 2320, 2322).

552. A "broker" in the wine business handles the sale of a winery s products to the wholesaler without taking title and usually is paid on a commission basis. Brokers do not replace wholesale distributors in the distribution chain, (123)but serve as distribution intermediaries between the vintner and wholesaler (Tr. 7502). Initial Decision 96 F. 553. Where permitted by state law, vintners sometimes organize their own direct wholesale operation. Such direct operations are generally unprofitable (Tr. 1033- , 9718-21). 2. Importance of Effective Distributors 554. Obtaining good wholesale distribution is vital to the success of a wine company engaging in branded case goods sales (Tr. 1973 2993, 3327).

555. Two factors were most frequently identified by witnesses to qualify a wholesale distributor as "good" or "effective . First, the wholesaler must have financial strength and be a good crcdit risk to the wine supplier. Second, the wholesaler must be capable of soliciting and servicing all the retail accounts within its market area (Tr. 644, 662- , 1970, 1994, 2123- , 2994, 4208- , 4699, 4701, 4703 6853).

556. Part of a wholesaler s ability to cover retail accounts adequately is determined by the size of its sales force. In addition the sales force of a "good" or "effective" distributor must be trained to sell wine (Tr. 644, 1972, 2123, 4208-09). Aside from the ability of a wholesaler to be a "good" distributor, it tends to be "good" for a winery which is a significant supplier to it (Tr. 1972, 1994). 557. A significant mark of a "good" or "effective" distributor is the wholesaler s strength with the retail trade in securing shelf space for the products it distributes (Tr. 6853). One vintner explained how a good distributor hclps get shelf facing. He is already selling the retailer one of the must items in his store. Each of the distilers has one or two or three must items. There may be 20 or 30 items without which no retail store could live (Tr. 655). 558. A weak distribution system impedes the ability of a new winery entrant to generate suffcient volume of sales to spread fixed operating costs. The larger the size of the new entrant, the more important it becomes to secure effective wholesale distributors (Tr. 2111 2121 2141 2176 5181- 5185).

559. Although not all large wine and spirits wholesale distributors may be said to be "effective" wine distributors (Tr. 3022), it is generally true that the large wine and spirits wholesalers tend to have the requisites to handle wine effectively for a significant new entrant or expanding firm (Tr. 641- , 662- , 1057- , 1063, 1240- , 2123-24). (124) 560. Strong selling spirits lines give wine and spirits wholesalers strength with the retail trade (Tr. 650- , 662- , 1085; CX 115B). 561. There are few wine only wholesalers (Tr. 663, 1081- , 4210). It is very difficult to support a wholesale organization on the volume :185 Initial Decision generated by selling wine alone (Tr. 3311- , 4210). With the exception of the Gallo and United direct wholesale operations, wine only wholesalers tend to be weak (Tr. 663- , 5169, 5185, 5230). 562. Except in those states where the state reserves to itself the wholesaling of spirits, beer distributors which also distribute wine tend to be less effective wholesalers of wine than wine and spirits distributors (Tr. 661, 5147- , 5153, 6669). 563. If a substantial volume of wine were sought to be wholesaled by a wholesaling facility whose major business is beer, the beer and wine would be incompatible products within that facility because of their different methods of sale and delivery (Tr. 661- , 686, 3351 3354, 3364, 3371, 3420, 3610, 6836).

564. It is not surprising, therefore, that wine suppliers generally prefer to distribute their wines through wholesalers who carry both wine and spirits (Tr. 626, 662- , 1083- , 1240-41). 565. Few wholesalers whose major business is distributing beer also distribute wine (Tr. 2999-3000, 3428; CX 218A thru Z-316). 566. The current president of the California Beer Wholesalers Association could name only one California beer wholesaler, other than his own company, which distributed only wine and beer (Tr. 6221, 6245, 6284-86).

567. Guild, Canandaigua, California Wine Association, Paul Masson and Christian Brothers are distributed primarily through wine and spirits wholesalers, except in those states where the wholesaling of spirits is undertaken by the state and wine passes through wine only or beer/wine wholesalers (Tr. 3000, 4210- 4689-90).

568. Asked to name United's wine wholesalers who were beer distributors, Mr. Powers, the Chairman of the Board of United, named only one beer distributor in the entire United States who was not either located in a monopoly state where independent spirits wholesaling is prohibited or was not also a distributor of spirits (Tr. 9638- , 9873-77). (125) 569. United's wines are wholesaled in the top 20 metropolitan markets for the sale of wine (Tr. 9872). United, however, has neither a beer/wine only wholesale distributor nor a wine only distributor with the exception of those areas where United has its own direct allwine wholesale operation, in any of these markets (Tr. 9812-16). This clearly demonstrates the importance of being able to utilize combined wine and spirits wholesalers.

Important Areas of Distribution 570. From 1962 through 1976, California, New York, Ilinois, New Initial Dccision 96 F. Jersey, Pennsylvania, Michigan, Florida, Ohio, Texas and Massachusetts have consistently been the top ten states in terms of consumption of wine (CX 297G; RX 1231). These ten states collectively received 70.4 percent in 1962, 69. 2 percent in 1968 and 65.6 percent in 1976 of all commercially produced wine entering distribution channels in the United States (CX 297G).

571. Wine consumption is concentrated in the major metropolitan population centers where regular users of wine are also concentrated (CX 379U, 386B; Tr. 7524, 8353- , 9619). 572. For the introduction of new brands of wine, wine marketers tend to focus upon the major metropolitan markets where wine consumption generally is concentrated (Tr. 1965; CX 3520). 4. Limited and Declining Number of Effective Distributors 573. New entrants aspiring to significant size and independently owned wineries find it diffcult to obtain effective wholesale distributors. The number of effective wine wholesalers is limited (Tr. 655 681, 1057- , 1063, 1969, 1984, 2111, 2121, 5154-55, 5185, 5188-89). 574. Montcalm Vintners, Inc., attempted to acquire other wine companies in order to get distribution by virtue of the other companies' associations with wholesalers (Tr. 5143 , 5194-95). 575. For at least the past ten years, the departure from business of wine and spirits wholesale distributors and the mergers and consolidations of wholesalers have reduced the number of independently owned wine and spirits wholesalers (Tr. 643- , 652, 680, 1058 1064- , 1093, 2996, 3525- , 7182-85, 7228, 7236, 7289- , 7306, 7568 6813 6827 6831 6875 7370-71).

576. Overall, there are fewer wine and spirits wholesale distributors than there were ten years ago (Tr. 643, 6831), and fewer "good" or "effective" distributors (Tr. 1057-58, 2996). (126) 577. The number of large distributors in metropolitan markets, with populations over one milion people, has also been declining (Tr. 1057 - , 4209-10).

578. On the average, there are four to six large wholesale distributorships for a given major metropolitan market (Tr. 641- 3019 3021). For example, within the Los Angeles area, there are five major ownerships (totaling nine distribution branches) of wine and spirits distributors (Tr. 6946, 6951). In the New York metropolitan area, there are five major wine and spirits wholesalers, each having separate divisions (Tr. 7250; CX 395Z- 12). 579. In Washington, D.C., where per capita consumption of wine is the highest in the nation, there are roughly a dozen wholesalers who handle wine (Tr. 7572; CX 379S).

I1f',UDLI'll, ll I'l 1\L. bi:) 3135 Initial Decision 580. Ilustrative of the substantial difficulty which wineries, particularly new entrants aspiring to significant size, have in endeavoring to find effective distributors in major metropolitan markets is the experience of California Growers Winery. Mandia is California Growers' current wholesale distributor in New York City, but it is not a major distributor. Mandia covers less than 1 percent of the New York metropolitan area in its endeavors to sell California Growers' wines (Tr. 1984).

581. In both 1970 and 1976, New York was the second largest metropolitan area in the United States for case sales of wine, bchind the Los Angeles-Long Beach metropolitan area (CX 379U, 386B). 582. Even California Winc Association ("CW A"), a reasonably well-established, independently owned wine supplier, has experienced significant diffculty in securing a New York City wholesale distributor for its wines. CW A has not been able to secure a meaningful distributor in New York since CW A's previous wholesaler in New York closed its doors in 1977. CW A did have a wholesale distributor, a small house called Testa, in metropolitan New York. Testa had no salesmen and buys about 500 cases from CW A every three or four months (Tr. 1008, 1059, 1105). 583. One central cause of the declining number of wine and spirits distributors is the low profitability of liquor wholesaling. Generally, the wholesale business opcrates on a very small net profit ranging from 1 percent to 1 1/2 percent to 2 percent before taxes (Tr. 3536).

584. The president of one large wholesaler, whose sales were about $78 millon in 1977, testified that the cost of operations in the wine and spirits wholesale business has increased rapidly, more rapidly than profis (Tr. 7356, 7390). Mr. Hermann, President of McKesson Wine and Spirits Co., testified: "Liquor wholesaling trends are for a high volume, low margin industry" (Tr. 7233). McKesson consolidated (127)wholesaling facilities in response to pressures squeezing the industry s profit margin (Tr. 7289- , 7306). 585. Demonstrating the decreasing number of substantial wholesalers is the decrease in membership of the Wine & Spirits Wholesalers of America, Inc. ("WSW A"), a trade association of major wine and spirits wholesalers in the United States (Tr. 3507- , 3511 3517-18).

586. There are no other trade associations for the wholesale liquor industry on a national level comparable to WSW A (Tr. 3512). The WSW A convention is the largest convention of the industry (Tr. 8670).

587. The General Counsel of WSW A believed that it had the vast , 516 FEm;RAL TRADE COMMISSION DECISIONS Initial Decision 96 F. majority of substantial wholesalers operating in the United States (Tr. 3541); that there are relatively few substantial wholesalers who are not members of WSW A (Tr. 3511). By "substantial wholesalers he meant "those people that have capital invested or substantial capital invested in it and are in a position to service suppliers adequately" (Tr. 3717- 18).

588. Excluding monopoly states, WSW A had 435 members plus 281 branches of members in 1973, 428 members plus 276 branches of members in 1974, 427 members plus 257 branches of members in 1975, 399 members plus 229 branches of members in 1976 and 383 members plus 227 branches of members in 1977 (Tr. 3543-44). 589. In monopoly states, WSW A had 29 members and three branches in 1973. In 1977, there were 37 members and three branches of members of WSW A in the monopoly states of Maine Michigan, Ohio, Oregon and Virginia (Tr. 3544). Supplier Influence 590. As Dr. Richard Peterson, President and Winemaster of the Monterey Vineyard, testified:

(P)ower, the muscle, whatever it is called, leverage, I think that it is common in the wine industry. I don t like it, but I think it is there (Tr. 489). 591. Dr. Peterson explained wine supplier "leverage" to mean: Well, someone has muscle or someone has leverage with someone else, I guess I wil say A has muscle with B when B needs A to do something or to continue doing what he is doing. If it is a distributor, the distributor (128)might be carrying a wine line that he continues to want to carry, maybe it is growing or doing quite well. That distributor will bend over backwards to continue that wine line if possible (Tr. 378). 592. In the judgment of Fred Switzer, General Counsel of WSW A a major liquor supplier theoretically could influence one of its wholesalers not to take on a particular line or product of competing suppliers if the major supplier had the "leverage to influence the wholesaler" (Tr. 3551-52).

593. In Mr. Switzer s view Heublein would have the normal leverage that would be associated with the importance of their brand in a wholesaler s house" (Tr. 3580; see also Tr. 3612, 3614, 3628-30). Mr. Switzer observed that "Heublein is considered an important factor in the market (by wholesalers)" (Tr. 3614). 594. Heublein s General Counsel, George Caspar, acknowledged the existence of spirits supplier leverage in a transmittal to the Federal Trade Commission during the formal investigation of the merger. Mr. Caspar stated:

. . . . . 385 Initial Decision A number of the questions has indicated a concern on the part of the Commission staff as to the possibilty of foreclosing distribution by the entry of liquor companies into the wine industry. This is obviously a legitimate concern. Certain distilers can, and often do, dominate and control their distributors (CX 327Z-13 through 14).

595. Robert Ivie, President of Guild Wineries & Distillers, defined a "captive house" as a wholesaler in which a particular supplier is in a strong enough position to heavily influence the wholesaler activities (Tr. 3001).

596. A supplier s influence over the wholesaler s activities could affect the ability of other companies to obtain distribution through that wholesaler. Guild has experienced problems in obtaining distribution with a captive house (Tr. 3001-02). 597. The importance of a major spirits supplier to a wholesaler and retailer has been described by the President of Wine World, a producer and marketer of wines:

Any time you have a successful liquor brand such as BmiTnoff (Heublein s major brand) or (J29)Canadian Club or Cutty Bark Scotch, any distributor would have to have some interest in that. If he was in the liquor business or had thoughts of going into the liquor business, it is just common, good business practice to check the interest in a brand such as that (Tr. 3336-37).

598. The major spirits suppliers have considerable power to influence the operations and decisions of wine and spirits wholesalers (Tr. 641, 1064-65). Whenever a distiler acquires a winery, it makes it more diffcult for an independent to compete for distribution (Tr. 1057-60).

599. Joseph E. Seagram & Sons, Inc., Heublein, Inc., National Distilers & Chemical Corp., Schenley Industries, Inc., Fleischmann Distiling Corporation, Hiram-Walker-Gooderham & Worts, Ltd. and Brown-Forman Distilers Corporation are the distiled spirits suppliers most frequently identified in the record as major suppliers (Tr. 640- , 656, 1065, 3361, 3532, 6543- , 6773, 6947, 7210, 7312, 7359). 600. Each of these spirits suppliers owns and operates one or more domestic wine companies and/or one or more wine importing companies (CX 373K; Tr. 8692-93). For example, Joseph E. Seagram & Sons, Inc. owns and operates Paul Masson Vineyards, Inc.; and National Distilers & Chemical Corporation owns and operates Almaden Vineyards (CX 373K).

601. It is a common practice in the wine industry that a wine supplier obtaining a new product or group of products-whether by new product development, by acquisition, or by virtue of a primary distribution arrang ment with a wine producer-endeavors to place the new product(s) in wholesale distribution houses with which the 518 FEDERAL TRAm; COMMISSION DECISIONS Initial Decision 96 F. supplier has an ongoing relationship (Tr. 627, 636- , 646- , 2137 2232, 3310- , 3360- , 3379- , 3405, 3438, 3837- , 3866, 3925-26, 3985- , 4288-89, 4689, 4693, 5165-66, 5194-95, 5237, 7226, 7298, 7312, 7359, 7531- , 7582- , 7952-53, 8483- , 9644; CX 325, 218Z- 256Z- 533A-B).

602. When Heublein obtained the agency for importing and marketing Harveys ports and sherries in 1957, it placed the Harveys products in the wholesalers in which the Heublein spirits products were already being carried. This was in addition to retaining the distributors through which the Harveys wines were already being sold (Tr. 3985-86).

603. When Heublein purchased Vintage Wines, Inc. in 1965 and obtained the Lancers trademark, Heublein retained the existing distributors for Lancers wines and added additional (130)ones. The majority of the additional distributors were already carrying Heublein alcoholic beverage products (Tr. 4288-89). 604. When United introduced the Inglenook Navalle brand of wines, in most cases, the wholesale distributors used for the distribution of Inglenook were United' s preexisting Italian Swiss Colony distributors (Tr. 7952-53).

605. United's Fiscal 1972 Profit Plan and Major Programs established a "sales plan" to "Place Annie Green Springs in Petri (a United brand) houses if product is rolled out nationally" (CX 256Z- 34).

606. As specifically evidenced for the period July 1972 to January 1975, United' s rule of thumb in test marketing and introducing new products was to place them with wholesale distributors which were already handling United's Italian Swiss Colony line. In order to expand the, geographic distribution of Inglenook products, United generally went with the same wholesalers that were handling United' s other wine Jines (Tr. 3310- 11). 607. Heublein chose 11 introductory markets for the distribution of Beaulieu brandy. In July 1970, in nine of those markets, the distributors targeted by Heublein were existing distributors of Heublein products. Heublein targeted an existing distributor of Beaulieu wine in one of the remaining two markets and in the other utilized a broker (CX 93M, 94B, 324, 325, 356Z- , Z-37). 608. Effective January 1 , 1977, Julius Wile Sons & Co. , Inc. became the sole marketing agent for the wine products of Souverain Cellars (Tr. 2126). Julius Wile is a subsidiary of Standard Brands, Inc. (CX 299B) and markets imported liquers and wines (RX 518C; Tr. 2125). Julius Wile placed Souverain in wholesale houses that had handled other Julius Wile products for many years (Tr. 2137). HEUBLEIN, lng, ET AL. 519 385 Initial Decision 609. As Fred M. Switzer, Executive Vice President and General Counsel of the Wine & Spirits Wholesalers of America ("WSW A" testified, generally the alcoholic beverage supplier "expects the wholesaler to assist him in connection with his whole family of lines unless the supplier has split his lines between different distributors in the same market. "But if he has only one distributor in the area he naturally expects him to handle the entire line " (Tr. 3550). 610. One factor motivating liquor wholesalers to handle the full family of products of an alcoholic beverage supplier, including its wines, is the desire of the wholesaler to maintain or secure an exclusive relationship with the supplier for one or more products of the supplier. One Washington, D.C. (131)wholesaler who distributes United' s products explained, "We don t want him dealing with anybody else" (Tr, 6412). In the District of Columbia area, liquor wholesalers generally handle product lines on an exclusive basis (Tr. 6402) , 611. Wholesalers prefer to obtain long-term exclusive distribution rights, or primary marketing area rights, to a wine or spirits brand or line, in contrast to sharing primary distribution rights with another wholesaler (Tr. 6412, 6841- , 7383-89). To the extent a wholesaler is successful in building sales of an exclusively distributed brand within his marketing area, that wholesaler alone enjoys the repeat wholesale sales of the brand (Tr. 3366- , 6843, 7385), 612. Normally, a wine and spirits wholesaler has no control over whether or not he obtains a brand or line of wine or spirits on an exclusive basis (Tr. 6844).

613, Wholesalers of wines and spirits generally do not have written contracts with their suppliers (Tr. 3385, 6787, 7352, 7403), And when a liquor supplier does have a contract with a liquor wholesaler, it is universally true that the supplier writes the contract (Tr. 3533).

614. Although WSW A has recommended to wine and spirits suppliers that they write contracts which provide for termination of the right to distribute the supplier s brands only for good cause generally those recommendations have not been adopted by suppliers (Tr. 3533- , 3545- , 3565).

615. Wholesalers of wine and spirits want to maintain good relations with their suppliers. To that end, they may purchase and carry a supplier s slow moving products and so lose money (Tr. 3551). When a wholesaler takes on an additional product which he deems to be a strong seller, he also takes on additional weaker selling items (if the line in order to obtain the stronger selling product (Tr. 3393-94). 616. Heublein s own agency relationship with Harveys exempli- Initial Decision 96 FTC. fies the obligation imposed by a major supplier. The obligation was articulated by Heublein s Executive Vice President: Q. Was it Heublein s desire to take on Harvey s Selections? No, it was not. It was Harvey s desire to sell some imported wines in the United States.

Q. Then why did you take them on? A. Because we were asked to and we did have the Harvey s Bristol Cream and sherries and ports, and (t32Jwe felt it somewhat of an obligation, so we said. "Yes, we wil take it on " (Tr. 4414).

617. Vintners consider the offering of a broad line of wine products to be an attractive selling point to wholesalers since the vintner can supply all the wholesalers' needs (Tr. 1100 , 1980, 2024). When this is done, it makes it more diffcult for other wine companies to compete for wholesale distribution (Tr. 1100). 618. When wholesalers carry full lines of their major or desired suppliers, this makes it all the more diffcult for a new winery which is starting with a limited line to supplant a type of wine the wholesaler already carries.

619. A wholesaler is reluctant to take on an additional substantialline of wines which includes products of the same types and price points as lines of wines he is already carrying. However, a weak or small line of wines may not meet the same objection and unique individual items of wines may also readily find distribution (Tr. 507 640- , 1969, 1973, 2994, 3366, 3402, 3406, 4206, 5159- , 6799, 6960 7588).

620. Alcoholic beverage supplier influence with a wholesaler is a function of the number and kinds Qf product offerings of the supplier and the dollar volume of business to be produced by the supplier products. The larger the number and kinds of products of the supplier and the dollar volume of business represented by the supplier s products, the greater the influence of the supplier with a wholesaler (Tr. 1042, 1064- , 1068-69, 1089, 1100, 4799-4801, 5004; CX 395Z-11 thru Z-13).

fj21. The power of an alcoholic beverage supplier to terminate its wholesalers without cause is a source of influence of the supplier over the wholesaler. Mr. Switzer, General Counsel of WSWA explained that, although major liquor suppliers seldom terminate their wholesalers, "the power to terminate arbitrarily without cause ,ives the supplier an influence, a leverage over the daily day-to-day ,perations of the wholesaler in the way he runs his business and it leprives him of a certain independence" (Tr. 3547); Mr. Switzer also tated, "Where a supplier whose brands represent a substantial ortion of the wholesaler or distributor s business terminates the , HEUBLEIN , 11,,\/0' 1:..

385 Initial Decision franchise, it is a serious business setback to the wholesaler, depending upon. . . " the circumstances, " . . . but in the majority of the cases it is a very serious setback" (Tr. 646, 3536). 622. Prompted by its inability to get wine and spirits suppliers to add provisions to their contracts with wholesalers which provide for good cause termination only, WSW A (133Jhas recommended the adoption of state franchise security laws to that effect (CX 554 555A-C; Tr. 3565, 6838, 7400-01).

623. WSW A is interested in state franchise security laws to protect wine and spirits wholesalers not only against unjust terminations but also against the possibility that the supplier exercise a threat of termination implicitly or explicitly to influence daily operations of the wholesaler to his detriment (Tr. 3561). 624. Franchise protection laws, including the subject of "leverage" of suppliers over wholesalers in the sale of spirits has been on the agenda and has been discussed at WSW A conventions. 62.5. Major spirits lines frequently are a substantial source of revenue to large wine and spirits wholesalers (Tr. 33.52, 3362, 6551- , 6612, 6658- , 6812, 6855, 6947-48, 7356-58). They may well be essential to the very existence of the wholesaler (Tr. 646- , 1064 1070- 1082-83).

626. Major spirits suppliers frequently have primary or exclusive distribution arrangements for a product line or lines with distributors in a metropolitan market (Tr. 640-42, 656, 4689, 4693, 4695, 4697 4708- , 6402, 7357, 7388-90). A spirits supplier may give an exclusive on one product or group of products to one wholesaler and an exclusive on other products to another wholesaler for a given territory (CX 218Z-12 thru Z-33).

627. The products of the major spirits suppliers tend to be distributed by the principal wine and spirits wholesalers in a given metropolitan market (Tr. 640-42).

628. The commitment of a wholesaler to handle the newly acquired wine products of an established supplier may itself have an exclusionary effect upon competing wine suppliers (Tr. 1068-69). 629. To the extent that offering a wholesaler a broad line of spirits and wines influences the distributor to accept the wine line, suppliers of more limited wine product offerings are disadvantaged in obtaining and retaining effective wholesale distribution (CX 395Z- , Z-12; Tr. 1064-65).

630. Vintner Weibel testified that when he sought new distributors in 1968 I would automatically have crossed off all Seagrams distributors because Seagrams is automatically Paul Masson. 1 was 1'fi 3't5 0 - 81 - 31, Initial Decision 96 FTC. barred from them. You have National Distillers with Almaden in a similar situation" (Tr. 639-40).

631. Bruno Solari, President of United prior to its acquisition by Heublein (Tr. 4686), was concerned that the entry of liquor suppliers into the wine business would cause (134)United to have to rely upon less effective distributors (Tr. 4686, 4696- , 4699-4701, 4703; CX 295Z-11 thruZ- 13).

632. Mr. Solari's explanation of why it was necessary for United to set up a direct wholesale operation in Southern California, exemplifies supplier influence:

I had one (wholesaler) in Southern California, Bohemian Distributing Company, but they tied up very closely with Seagrams. When that happened, we had to step out and start our own thing in Southern California (Tr. 4708-09). 633. Stuart Watson, Chairman of the Board of Heublein, related Mr. Solari' s concerns of the effect of National Distilers' Almaden acquisition and his expectation of the beneficial effects ofthe merger of Heublein and United:

He (Solari) was concerned that now that National Distillers owned Almaden that the future of United Vintners and those distributorships would be in jeopardy and that it was important in looking ahead for United Vintners to affiliate itself with a company like Heublein who had access to these distributors because it was a principal alcoholic beverage company distributed through the same channels (Tr. 4967). 634. Mr. Watson also testified:

Many of the Italian Swiss Colony distributors across the country were National (Distillers) distributors because of this heritage and so there was concern on the part of tbe management of United Vintners from a marketing standpoint about the relationship of the distributors. There was a duplication, in other words (Tr. 4962). 635. Indeed, just five days after the merger, Heublein s Senior Vice President for the Smirnoff Beverage and Import Company reported to Mr. Watson as follows:

Knowles (Beaulieu s Vice Presidents also told me that Pete Jurgens of Almaden Vineyards fawned by National Distillersj is very much concerned over the fact that V. is in so (135)many National Distiller s wholesalers. Almaden s West Coast sales manager has asked the salesmen to list specific instances where the promotion and sale of Inglenook may be impeding the progress of Almaden (CX 208B). 636. Fred Weibel, President of Weibel Champagne Vineyards since the 1950' , explained supplier influence: What has been your experience in remaining in a wholesale liquor house where in that house there is present a liquor company which also owns a wine company? You are there by the grace of the liquor company until they blow the whistle on you (Tr. (48).

. . .

385 Initial Decision 637. Wine and spirits wholesalers desire to maintain good relations with their major suppliers (Tr. 3557) and decline to carry wine or brandy products of certain vintners for fear of jeopardizing their relationships with their major suppliers (Tr. 640- , 1070- 3557).

638. Wholesalers have declined to purchase The Monterey Vineyard' s wines due to leverage exercised by wine suppliers of the wholesalers. In one instance, it appears that Paul Masson exercised leverage and in another either United' s or Almaden s influence precluded the purchase of Monterey Vineyard wines (Tr. 381- 393-94).

639. A limited number of wine items of a new wine supplier may achieve distribution. However, a broad line of wine items of a wine supplier can pose a threat to other wine suppliers at the wholesale distribution level and may encounter major supplier influence (Tr. 385, 698).

640. Dr. Peterson, when seeking wholesale distribution for the wines of The Monterey Vineyard, a new entrant, found it very diffcult to get distribution in wholesale houses whose major suppliers were Heublein, Seagram, Schenley, National Distillers or Hiram Walker. However, after Monterey Vineyard's failure and reorganization as a smaller producer, Dr. Peterson found it easier to get wholesale distribution (Tr. 354 384-85). 641. Christopher Carriuolo, then Senior Vice President of Heublein s Smirnoff Beverage and Import Company (CX 357Z-5), when discussing the possibilty of a primary distribution arrangement between Heublein and Beaulieu Vineyards, reported to Mr. Watson in February 1969 that: (136) (He) pointed out (to the national sales manager of Beaulieu) that such an allance would be an advantage to BV in guaranteeing good distribution, merchandising coverage, development of wine lists, technical know-how, distribution and warehousing facilities, etc. " (CX 208B).

This representation had been made because of Beaulieu s inability to expand beyond the few markets the product was then being sold in (Tr. 8787).

642. In documents prepared by Heublein and presented to the Allied Board of Directors as well as at Alled member meetings Heublein represented that one of the advantages to accrue to United from the merger would be "marketing strength through wider distribution" (CX 341, 342). This meant that, having access to Heublein s distributors, United would be given greater marketing strength (Tr. 2467, 2487).

Initial Decision 96 FTC. 643. Heublein represented that since Heublein s and United' products were compatible, United's wine distribution could be enhanced by Heublein s distributor organization. Smirnoff vodka was cited as a product which could be used to secure better distribution for United's wines; and it was stated that by having Lancers and Smirnoff together with United' s wines, distribution for both companies could be increased (see Finding 258 supra). 644. Heublein s influence at the wholesale level is recognized by wine suppliers (Tr. 640- , 650- , 3336-37, 4226). As the President of Weibel Champagne Vineyards testified:

Now, do you have an opinion as to Heublein s potential to exercise influence as to exclude your company from wholesale distributors? They certainly have the power if they were to elect to exercise it. Why do you say that? Heublein is extremely important to that distributor. Obviously he is making a lot of money off the Heublein line (Tr. 650-51). (137) 645. A Heublein internal management communication reveals Heublein s awareness of the leverage jt had at both the wholesale and retail levels. George McCarthy, Brand Manager of Lancers, wrote to Walter Cohan, Vice President of Marketing of Heublein: The opportunity for Vinya in many ways relys (sic) on the continued growth of Lancers. We are able to insist on Vinya distribution and display mainly because of the Lancers leverage we have in many distributors. At the retail store level, the Lancers leverage also allows us Vinya distribution and display. Any serious softening of this leverage can result in a loss ofVinya potential as well as Lancers. Lancers as a high volume, high profit item, also allows us distributor and promotion leverage for new product introductions. Since Lancers is in many distributing houses that are not Smirnoff houses the importance of this brand gives us additional alternatives (to main line distributors) for distributing new products. Since Lancers as a wine product is not under the same restrictions as liquor, it also gives us promotional opportunities for new products. Obviously this leverage is only effective if Lancers continues to be a high volume growth item with strong consumer demand (CX 115B; see also ex 114 for identification of personnel). This document details the leverage enjoyed by reason of Lancers in addition to that in houses that carry Smirnoff, where leverage is assumed.

646. Heublein s Vinya Marketing Plan for fiscal 1972/73 stated: (W)e wil insist on all Lancers distributors stocking and distributing this product. As a general rule, we have already notified sales personnel that all Lancers distributors should carry a minimum of 10% of their Lancers inventory in Vinya (CX 352P), (138J 647. In 1976, of the top 25 United States metropolitan areas for HEUBLEIN , INC. '1 J\L.

385 Initial Decision consumption of wine, measured by case sales, 19 were also among the top 25 metropolitan areas for the consumption of vodka, measured by case sales (CX 313C, 379U).

648. In 1976, of the top 50 United States metropolitan areas for consumption of wine, measured by case sales, 41 were also among the top 50 metropolitan areas for the consumption of vodka, measured by case sales (CX 313C, 379U).

649. In 1976, of the top ten state markets for wine consumption, measured by case sales, eight were among the top ten state markets for vodka consumption, measured by case sales (CX 379S, 383E). 650. In 1976, of the top ten state markets for wine consumption, measured by case sales, seven were among the top ten state markets for tequila consumption, measured by case sales (CX 379S, 383H). At the time of the merger, Heublein ranked first in the United States in the sale of vodka (Finding 16 supra). Its Smirnoff brand was not only the world's largest selling vodka, but was the second best sellng brand of liquor internationally. It was the third best sellng distiled spirits brand in the United States and was gaining on second place (Findings 29, 30, supra). Lancers was tbe best selling imported wine in the United States (Finding 38 sUJYra). Heublein tequilas accounted for more than 50 percent of the United States tequila market (Finding 39 supra). In addition, Harveys Bristol Cream was a "call item" (Finding 35, supra). 651. Considering Heublein s strength in the very markets where the sale of wine is concentrated, Heublein s potential leverage and influence on wholesalers to carry United' s products is all the greater. 652. Due to possible repercussions with respect to this administrative proceeding, a Heublejn executive, Christopher Carriuolo who was then the Group Vice President of the Beverages Group of Heublein which included supervision of United (CX 357Z-5; Tr. 4316), instructed Mr. Richard Maher, Jr., United' s Vice President of Sales and Marketing, not to seek to combine Heublein distributorships with United distributorships. Mr. Maher testified as follows: Q. Now, sir, for the period of time that you were employed by United Vintners, were you under instructions from any Heublein employees not to seek to combine the wholesaling efforts of United Vintners with the wholesaling of Heublein products? (139) A. Yes.

By Mr. Masson:

Q. What were those instructions? A. The general discussion was that we should not go ahead and seek to combine 526 n;DERAL TRADE COMMISSION DECISIONS Initial Decision 96 F. Heublein distributorships with United Vintners distributorships. However, there was no limitation upon individual cases, Who gave you those instructions? I bc!ieve it took place in a conversation with Mr. Carriuolo and Mr. Oster. I believe he was there.

And who is Mr. Carriuolo? At that time, he was group vice-president of the spirits and wine division whatever the exact title was.

Were any reasons articulated to you by Mr. Carriuolo why you should not seek to combine the wholesaling efforts of United Vintners with Heublein'! Complications relative to the FTC case.

This FTC ca:;e? Yes. (Emphasis added; Tr. 3317- 19) This testimony evidences Heublein s understanding of the distribution advantages afforded by the merger and its intention to utilize those advantages. It also refutes tbe evidence upon which HUV rely (RR 252), which purports to demonstrate that no such advantages have accrued to United. (140) Conclusion 658. The wholesale distribution system for wines constitutes significant barrier to entry and expansion (Tr. 5708-09). Retail Shelf Space Barrier 654. Obtaining shclf space in retail stores is critical to successful distribution of wine (Tr. 3015, 6256). The important aspect of shelf space is shelf facing. Shelf facing is the amount of space on a shelf required to display one wine bottle with its label showing (Tr. 654). 655. Frcd Weibel, Prcsident of Weibel Champagne Vineyards testified:

The total battle in distribution is fot shelf facings. You cannot sell to the consumer if you don t have it exposed on a shelf where the consumer can see and buy it ('fr. 654). 656. While the overall amount of shelf space allocated to wines at the retail level has increased as consumer interest in wine has grown (Tr. 673, 2008- , 7474), gaining access to the expanded wine shelf space remains very difficult (Tr. 654, 5710- , 10 484). Witnesses described the efforts to gain shelf space as a "battle" (Tr. 654), a bitter fight" (Tr. 6257) and competition for shelf space as "extremely intense" (Tr. 6849). The 1976 edition of Impact, a wine industry trade publication, summarized the situation: "(TJhe battle for incbes on the retailers' shelf has never been fiercer" (CX 367Z-3). 657. Mr. Setrakian, President of California Growers Winery, Inc. testified:

:385 Initial Decision One of the basic keys to the success of a proprietary Case goods operation is the availability of shelf space, which is becoming a commodity in great demand because of the Jimitation of it. Once you gain it, you do everything you can to retain it. Once you lose it, it is very diffcult to get back (Tr. 1989). 658. One indication of the constricted nature and importance of wine shelf space is the necessity of retailers to discontinue a wine item if another wine item or line is added to the shelf (Tr. 2033- 2066- , 2069, 6853, 7938). And once a wine item has lost its shelf space to another brand, it is difficult to get space back (Tr. 1989, 7934-35). (141) 659. Although floor stacks have been used to expand the space available for retailing of wines, floor stacks for a given brand or item are limited, temporary and difficult to obtain. It is shelf space that really counts (Tr. 1085, 1990 2031- 2062- 6257 7242). 660. The greater the number of wine items in a brand line for which a winery can obtain shelf space, the greater the potential for development of brand recognition through shelf space exposure (Tr. 1084- , 8608). Correspondingly, the greater the number of wine items of a brand or brands for which a winery can obtain shelf space the more diffcult it becomes for items of competing brands to obtain shelf space (Tr. 1989).

661. Eye level shelf position in a retail store is considered the most desirable (Tr. 2062).

662. Retailers decide on the shelf space and shelf facing to allocate to items of a wine brand based upon their expected movement offthe retail shelf (Tr. 1085 2061 2068 3011). 663. A supermarket chain s wine buyer testified that he generally does not purchase wine items unless they have already established a record of sales and that the most important factor in determining which wine items or brands to carry is case movement or turnover. The record of case movement off the retail shelf also determines whether a wine item wil be dropped or retained (Tr. 2066- , 2072). 664. The relationship between a wine brand' s wholesaler and prospective retailers is a significant factor controlling the likelihood of a brand's items being placed on retail shelves (Tr. 626, 662- 1085, 4699 4701 4703 5169 5230; and see Finding 557 supra). 665. In recounting the advantages of the proposed Heublein/United merger to members of Alled, Heublein representatives represented that, with a major supplier like Heublein, the likelihood of getting greater shelf space would be increased if United' s wines were distributed along with Heublein s products (Tr. 2695). Initial Decision 96 F. Utilization of Secondary Wine Lines As a Marketing and Distribution Tool 666. A "secondary line" of wine is generally a case goods line of a vintner which is priced lower than its more widely known or primary case goods line (Tr. 1115, 1984).

667. A secondary line of wine can be used to block out wine brands of competing vintners at the wholesale and retail levels (Tr. 1116, 1124 1989, 2033-34). (142J 668. A secondary line of wine may be utilized to erode a competitor s relationship with its wholesale customers by offering a cheaper price to get a foot in the door with the distributor (Tr. 2033, 3244 3246-47, 3257 3284).

669. A secondary line of wine may be utilized defensively by a wine marketer to retain shelf space in retail outlets against other wine brands, as well as offensively to undermine competitors' wine sales and thus threaten the continued position of other branded wine items on the retail shelf (Tr. 1989 2011- 2031-34). 670. In marketing Lancers, Heublein has used a secondary line of wine as a blocking brand. As stated in Heublein s Faisca Rose Wine Marketing Plan for fiscal 1972/73:

At various corporate junctures, Quinta, Vinya and Faisca were conceived as blocking" brands on the one hand, or as candidates which might generate control of segments of the Portuguese Rose business at different price levels (CX 129B). 671. Heublein s Vinya Marketing Plan for fiscal 1972/73 included, as part of its "Brand Philosophy Vinya will be repackaged and repriced, and wil be used as a brand to stave off the increasing low priced competition from other imported rose wines that arc making: inroads in various parts of the country (CX 352G). The Plan called for lowering the FOB price (CX 352M, U) and forecast negative gross profits for the brand (CX 352U, V). The plan was "to use Vinya to fight the lowest priced roses. . . " (CX 352W). 672. Petri and Parma, also known as Petri's Parma (Tr. 1093), are two secondary wine brands of United (Tr. 1116- , 1985). 673. From March 1977 to at least December 1977, United offered Petri or Parma table wines at FOB prices below cost to wholesalers in Florida, Virginia, New York, Massachusetts, Rhode Island, Missouri and Wisconsin (RX 1147A, F; CX 354; Tr. 1090- , 1187-91, 3241- 3248 3284 4428-30).

674. The record contains illustrations of four winery competitors of United that lost wine sales as a result of their inability to meet the Parma or Petri FOB table wine prices on a profitable basis during HJ:UtlLr l1'\ H....

385 Initial Decision the period in 1977 that Parma and Petri were being sold below cost (Tr. 1092- , 1986- 3246- 4231). (143) D. The Advertising and Brand Recognition Barrier Brand Recognition 675. From the mid- 1960' s to the present, as consumption of wine has increased, the brand marketing of bottled wines has received increased emphasis by wine suppliers in the United States (Tr. 7796 9839; CX 360N).

676. Consumers of wine are brand conscious, particularly frequent users who are brand followers and tend to be brand loyal (Tr. 2977 , 7.025, 9928).

677. A 1972 Time magazine study of wine buying in six major metropolitan markets found that the most important consideration for a purchaser of wine is brand reputation. The study noted: " advertised brand with a quality image has its greatest sales potential in this primary market" (RX 479Y).

678. The 1977 edition of Impact, a wine industry trade publication, described 1976 as a year in which "established brand franchises showed their importance" and a year in which "establishment of Impact furthernew brands was extremely diffcult" (CX 366Z- 10). noted that "most large bulk-oriented wine producers without established brands" had a poor year in 1976 (CX 366Z-5). 679. Vintners prefer to engage in the proprietary (i. e" branded) case goods business in contrast to private label (Tr. 1016, 1950 5170, 7796, 7799). Bulk wines are not profiable for wine producers (Tr. 7799, 9527).

680. The goal of brand marketing is product differentiation (Tr. 85.06-57; CX 125E, 335).

681. Establishing and maintaining a favorable brand image of a line of wines is vital in order (a) to create and maintain consumer awareness and demand and (b) to attract and retain wholesalers and retailers (CX 97U, Z-6, 114F, 116B, J, 125F, H, Q, 188K, 192A-B, D , 231F-G, Z- , Z- , Z- , Z-47, Z- , Z- , Z-55, 326, 367W 393C, L; RX 25lD, B, G, 400A-D, 424A- , 461A-C, 479Y, 492, 933M; Commission Physical Exhibits Y thru Z-2; Tr. 465, 511 , 657, 767 1871 1983 2095 3038 3367 4026 4883, 5239 6364-6.0, 7490, 8311- 8608, 8555- , 8743- , 9839).

682. Wholesale distributors of wine are reluctant to take on wine lines which have not achieved some brand recognition. They do not have time to do pioneering to get new products accepted (Tr. 3368- 69).

g Initial Decision 96 f'. 1' C. 683. Brand recognition makes it easier to get shelf space and shelf facings (Tr. 657, 1086). One long-time California vintner (Tr. 618- 19) testified, "The better known your brand is the easier it is to get a shelf facing. If (144)it is a name brand, retailers know it is going to move and that is the proof of the pudding as far as the retailer is concerned" (Tr. 657).

684. Following the acquisition of United by Heublein, efforts were made to emphasize the promotion and marketing of United' products as brands rather than as commodities (Tr. 4464, 7778, 7796 7799).

685. Strong brand recognition in the wine business takes an exceptionally long time to establish. Robert Setrakian, President of California Growers Winery, a new entrant in the proprietary branded wine case goods business, testified that he expected his branded label, which had been introduced in J 973 or 1974, to "take a minimum of another fifteen years" to establish with "long-term continuity" (Tr. 1948, 1983, 1999, 2029), Mr. Setrakian added:

If one were to check into the marketplace, you would find out that the wellestablished brands, whether it be Gallo or Christian Brothers or any of them, have been in the marketplace for well over 35 years (Tr. 2029). 686. A brand name which is identified with a long tradition of winemaking is a substantial asset. Brand association with a tradition of winemaking is a fact which is emphasized in wine marketing to wholesalers, retailers and consumers. This helps in developing consumer acceptance (RX 378A, 384A, 422, 457, 486, 494A), 687. A "wine item" generally refers to any size or any variety of wine product. It encompasses the same products sold in different sizes and different varieties sold in the same size (Tr. 2024, 7895-96). 688. A "line extension" is a new product item sold under an existing brand name Lancers White wine (Vinho Branco) (Tr. 3759).

689. Once brand recognition of a line of wines is achieved, wine producers seek to capitalize on the brand recognition by line extensions under the brand name (Tr. 3759, 7834-:15, 8557; CX 361P 366Z- , Z- , 367Z, Z-2).

690. Among the long-term objectives of the 1972/73 Lancers Marketing Plan was to "(t)ake advantage ofline and size extensions to maintain and increase momentum (Increased share)" (CX 125G). (145) 691. A Heublein February 1970 intracompany memorandum reported: "Long range plans call for line extensions of White and I/EUBU;IN, lng, ET AI, 531 3R5 Initial Decision Red Lancers. . The stronger base we are able to build in the next couple of years on Lancers Vin Rose, the easier (and cheaper) it wil be to introduce line extensions without corresponding increases in advertising" (CX 115A).

2. Utilization of Advertising To Create and Maintain Brand Recognition 692. Advertising is recognized by wine marketers, including Heublein, as a very important factor in creating and maintaining wine brand recognition and in increasing wine brand sales (Tr. 1983, 3038, 3367-68, 3690, 8699-3700, 3715, 3756, 3763- , 3804, 8608; CX 49M, 51H, 52H, 97Z-12 thru Z- , 98B, 99K, 102C, F, 103K- , 116K , 125F - , Q, 129L, N- , U, 231E, Z-20, Z- , Z- , Z- , Z- , Z- 42 thru Z- , Z- , Z-60 thru Z- , 256Z- , 352C, I, Z- , 353B 360M, 585D, I, K, P; RX 25lD, F).

693. Image advertising is widely utilizcd in the marketing of wines (CX 466; RX 348A- , 378, 406, 425, 457 A- , 462A, 464 , 468, 566). Advertising can be a central factor used in the creation or enhancement of a wine brand's image (CX 97K, Z- , 98B, 99B, K, M 116K, 125E, F, Q, 231F- , Z- , Z- , Z- , Z-48 thru Z- , Zthru Z- , 256Z-59; Tr. 8743-44).

694. The Italian Swiss Colony Marketing Plan for fiscal 1970/71 cited as a marketing strategy for its table wines: "Increase consumer awareness and quality image of ISC versus Gallo, especially for products where no discernible difference exists, through 'line advertising" (CX 231Z-25).

695. Heublein s "Harveys Marketing Plan Summary, " dated April 23, 1970, notes that it wil rely primarily on advertising and merchandising to position "Harveys Bristol Cream away from the sherry or cream sherry market in terms of image " adding however that "we still must consider this market in terms of potential and competition" (CX 99K, M).

696. Notable examples of substantial advertising expenditures to create brand recognition for a wine product are the Lancers and Blue Nun brands (Tr. 3368; CX 125Z- , 128, 366Z- , 379D). 697. Advertising has been an important factor in creating and maintaining a high profit margin for the Lancers and Harveys products marketed by Heublein. Both products, backed by substantial advertising, have achieved product differentiation and premium prices in part through the creation and maintenance of recognized brand images (CX 97K, 99A, J, K, M, 114E- , 116B, J, L- , 125E- 218Z-289, Z-290, 441B; Tr. 3690, 3699, 8743-44; RX 251C, D, G). (146) 698. Heublein s 1972/1973 Marketing Plan for Lancers called for Initial Decision 96 F. continued "heavy spending" on Lancers in order to "reinforce our image and story to the consumer" (CX 125F). Shorter length commercials were preferred because of already high Lancers Rose consumer awareness but continued "need to reinforce our image (CX 125Q).

699. Heublein s Vinya Marketing Plan for 1972/73 stated: " order to build Vinya into a volume brand, it is essential that significant advertising dollars are available to build the necessary consumer awareness and demand in our major markets, and to insure distributor and trade support" (CX 3521). 700. Wine suppliers whose wines already have established brand recognition enjoy an absolute cost advantage in advertising over firms without established wine brand names (Tr. 5718- , 5738-39). 701. Richard Oster, President of United from September 1970 until September 1973 (Tr. 7778), judged that, for the long-term good of United' s wine business, the company could more profiably spend its money in advertising, which has a cumulative effect, than in price promotions (Tr. 7859, 7863- , 7926-27). Mr. Powers, Chairman of the Board of United, also believes wine advertising benefits extend into the future (Tr. 9902).

702. Advertising is also required to maintain substantial sales of already established brands (Tr. 7944, 9322, 9608; CX I11A, 114F). 703. The necessity to advertise a branded wine increases as competing brands of wine are advertised (Tr. 8342, 8354- , 9608; CX 125F, Z- 17).

704. The fiscal 1972/73 Lancers Marketing Plan strategy was to continue to spend at a high level behind advertising and promotion" in order to "dominate the 'noise level' among wine advertisers (CX 125F).

705. Since other wineries provide advertising support to their brands, it is also necessary for United to cultivate retailers through commitments of advertising support for United's brands in order to help move the product out of the store. Although an attractive promotion may encourage a retailer to carry a- wine brand, it is still necessary to advertise (Tr. 8355-56).

706. Wholesalers' salesmen have priorities in devoting time to the wine brands they represent. A salesman generally gives preference to the brands carried exclusively by the wholesaler. Next, he is motivated to sell the wines that are most attractive to the retailer by virtue of fast movement off the retail shelf (Tr. 3324- , 3366-67). (147) 707. Brand advertising is an important factor in creating movement of wine off the retail shelf. Consumers are influenced to 385 Initial Decision purchase wine brands by brand advertising (Tr. 654, 656, 660, 767 772 1088 2232 2853 2859 8011 8367 8356, 9838). 708. A commitment by a wine supplier of advertising support for a brand is an important factor in getting wholesale distributors and retailers to carry the brand (Tr. 2994, 3010- , 3366- , 4206-07, 6849; CX 97Z- , 120S- T, 125F). Advertising in trade journals may also influence purchases (Tr. 656).

709. In states with pricing restraints, such as affrmation laws, price posting requirements or minimum markup requirements, large wine companies with resources to advertise can be much more effective than where there is an unrestrained market (Tr. 1055-56). 710. In states which control the sales price of wine, advertising is more effective in generating wine sales. If pricing is one of a supplier s tools of selling and he does not have advertising money to spend, the inability to use pricing as a selling tool makes competitors' advertising all the more effective. For example, Ohio fixes the minimum price, called a "floor, at which a winery can sell to the wholesaler, the minimum margin at which the wholesaler must sell to the retailer, and the minimum margin or markup of the retailer to the consumer. A vintner that tries to break into such a market without advertising money to spend is deprived of price as a sellng tool. If competitors advertise their wine brands in a state such Ohio, the winery without advertising funds cannot lower its price to save its sales volume against competitive inroads induced by the advertising (Tr. 1047-48).

711. In states with affrmation laws, the vintner is compelled to sell to wholesalers at the lowest price at which the wine product is sold anywhere in the United States. Therefore, advertising is more effective even in non-affirmation states in generating sales and taking business away from non-advertisers of wines who cannot drop price any lower and remain profiable (Tr. 1053-56). 712. United Vintners has utilized "line advertising" to promote all the products of different wine types under the same brand name. The FY 70/71 Italian Swiss Colony Marketing Plan states the rationale" for line advertising:

Line advertising provides an umbrella for products under the ISC Brand which have no discernible difference from similar Gallo items. The objective is (148)to plant an image of modernity and quality in the consumer s mind. (CX 231Z-45). 713. Heublein s Lancers Marketing Plan for fiscal 1972/73 also recognized the advantages of line advertising when enunciating the long term strategies of the Lancers brand: _.

. '"H" L'- _L'_- _.JL'U' Initial Decision 96 F. Take advantage of line concept in advertising, merchandising and sales promotion. (Some cannibalization, but great economies and more realistic.) (CX 125G) Merchandising and Packaging 714. "Merchandising" materials in the wine business generally refer to retail point-of-sale or retail display materials used to attract consumers' attention to a branded product (Tr. 632- , 2063, 7858 8765).

715. Such merchandising is utiized in wine brand marketing as a tool to establish and maintain wine brand recognition (CX 99C, K, T I11B, 115B 116E 125Z- , Z- , Z- , 129L, V, 236F, 352P, Z- , 256Y , Z- , 569C-J; RX 25lE, M-N).

716. It is a form of advertising, although distinct from media advertising (Tr. 2284, 6213, 6650; RX 438). 717. The quality and quantity of retail display materials available from a vintner is a factor which wholesale distributors weigh in deciding whether or not to take on a wine or wine line and how strongly to support the vintner s wine products viz- viz other wine products in the wholesale house. Display materials also motivate retailers to buy a vintner s brand(s) (Tr. 3324-25, 7508- , 8305). 718. Packaging (including bottle size and design) and labeling changes are another form of non price competition used in wine brand marketing (CX 97Z- , Z-28, 99C, T, ll1B, 125Z- , 129W 231F, Z- , 242D, 256Z- , Z- , Z- , 352W, 569C-J). 719. Packaging and labeling are very important in the sale of wine (Tr. 3325, 3789, 4207, 6201, 6799, 7490, 7509, 9617; CX 231F- 352G, 360P, 393C-D).

720. Packages go out of style and more contemporary designs are fashioned to make wine products attractive (Tr. 3789, 7484- , 7490). Different bottle sizes are used to achieve variable retail pricing per ounce of wine (CX 256Z-61). (149) 721. Label designs are used in wine brand marketing to differentiate products (Tr. 7614- 15).

722. Most major competitors, including United and Heublein Gallo, Almaden, Christian Brothers and Paul Masson, restyle their packaging (Tr. 3789; CX 231F, 352G, 367Z-2). 723. Brand advertising, including merchandising, works together with packaging in wine brand marketing to establish and maintain brand recognition at the retailer and consumer levels (CX 97Z- , Z- , 115A- , 116B-C, 129U-W, 231F- , Z- , Z- , Z- , Z-54 thru 56, 360P, 393C-D).

Initial Decision The Nccessity of High Advertising Expenditurcs Constitutes a Barrier to Entry 724. As testified to by United's recent Vice President of Marketing, a firm wishing to enter or expand in the wine industry so as to take a share of the market away from United or Gallo would have to engage in advertising (Tr. 8441, 8616- 17). 725. Among the factors contributing to the failure of Montcalm Vintners, Inc., a new winery entrant, was inadequate advertising support of the company s brands (Tr. 5154-55, 5175-76, 5185). 726. Korbel Winery, a well-established sparkling wine producer tried to expand into the production and sale of table wincs, but failed due to inadequate advertising support for its table wine line (Tr. 2208, 2230- , 2271).

727. Advertising support for national introduction of a new wine product is costly (Tr. 2146- , 2223, 2232- , 3705- , 3710- , 5154- , 7963, 8023-24; CX 201A, 585Z- , Z-34). 728. Generally, in order to establish a new wine brand, it is necessary to spend more on advertising than for an established brand to the point that a firm entering the market must spend twice the advertising dollars of its competitor to take a share of the market away from that competitor (Tr. 8432-33; CX U5B). 729. The enormity of that undertaking in connection with competing for a portion of United's market share is reilected by the public statement made a little over a year after the merger, in May 1970, by Stuart Watson, Chairman of the Board and Chief Executive Offcer of Heublein:

I think our (advertising) effort in national magazines such as Life Time and Newsweek, on TV and in newspapers probably rates as the most intensive and extensive campaign of wine promo- (150Jtion ever undertaken by a single company in this country ('rr. 5015- 16).

730. A new firm spending the same dollar amount as industry leaders for advertising must spread its costs over a smaller volume of sales. A company attempting to enter or expand in the wine industry, therefore, suffers an absolute cost disadvantage in advertising in comparison to industry leaders (Tr. 5719-20). 731. A new line would have to be supported by "front load" or investment spending . This means advertising expenditures at such a high level in support of a wine product over an initial period of time that the margin on the product sold would not recover current advertising expenditures. The product would have negative earnings on the assumption the investment would be recovered on later sales (Tr. 3705- , 3710-12; CX 129U).

536 FEm;RAL TRADE COMMISSION DECISIONS Initial Decision 96 F. 732. There is no certainty that advertising investment spending for a wine product will ever be recovered. Advertising investment spending is a risky proposition (Tr. 3712; CX 585Z-42). 733. In Heublein s Faisca Rose Wine Marketing Plan for Fiscal 1972/73 " it was estimated that the introductory media advertising campaign for national rollout of Faisca would be $1 milion and that the cost of the media advertising campaign to sustain Faisca would be approximately $925 000 per (151)year. It was estimated that an additional $350 000 in merchandising expenses would be required for the introductory national rollout (CX 129E-G, L). For the first two years of rollout Heublein estimated that "front load" spending on Faisca, and other factors, would result in product line earnings loss for Faisca of $322 500 (CX 129P, U).

734. Lancers' advertising to sales ratios were 2. 7 percent in Heublein s fiscal 1966, 10.9 percent in fiscal 1967, 11.6 percent in fiscal 1968 and 8.0 percent in fiscal 1969 (CX 135G). 735. Between Heublein s 1966 and 1972 fiscal years, Lancers annual advertising expenditures rose from $75,000 to $2,160 000 (CX 125Z-16), and the brand earned direct profi of $4 276 000 on net sales of $11 853 000 in 1972 (CX 125Z-7). This represents an advertising to sales ratio of over 18 percent. For fiscal 1970/71 Heublein projected spending $4.44 per case of Lancers on media advertising (CX 1161).

736. Harveys' advertising to sales ratios were 17.9 percent in Heublein s fiscal 1966, 15. 1 percent in fiscal 1967 , and 15.6 percent in fiscal 1968 (CX 135G).

737. The following charts depict advertising to sales dollar ratios for a number of Heublein and United products. The charts provide such ratios in a number of ways, including and excluding excise taxes, and reflecting in some instances marketing expenditures which include advertising, merchandising and packaging. Promotional expenses are also treated in varying manners to take into account HUV's contentions that promotional expenses are really price post-offs. HUV object to the exclusion of excise taxes from sales contending that the total price includes the excise tax. I disagree. Taxes are imposed upon sales or withdrawals but do not reflect the " !IUV have objected to the reliance upon projected or planned advertising figures which, they claim, do not necessarily evidence actual advertising expenditures- However, marketing plans and budgets arnvery carefully prepared documents produced and maintained in the regular course of business and approved at the highest levels Corporate expenditures, includi!1g advertising expenses, are matters concerning which detailed and exacl business records are maintain"d To the extent HUV may have wished to overcome reliable documents reflecting advertising expenses intruduced by complaint counsel, it was incumbent upon HUV to have pruduced and authenticated more reliable document.. This they have not done. Self serving letters submitted to complaint counsel (e.I:.. ex 3:JOA-B) do not overcome such reliable documents. The same ruling applies to data supplied to the Commission by IIUV during the course of the investigation of this Cab to the extent that HUV now assert the submittals arc incorrect jj HEUBLEIN, INC., ET AL. 537 385 Initial Decision return to the seller. The appropriate sales figure is one which excludes excise taxes. (152) SEE IN CAMERA ADDENDUM (153) SEE IN CAMERA ADDENDUM (154) AIJn' !o;1 r;: SAIF.S RAlff lJlmTvnTI:r:t"

(ry n (1I\-.lgeleJ)Ccx 2 6Y)) l1'.lA AD. I::)IA AD; AD,SALES mid II'-2- \T10 36/ SAl':; RADIO 37/ (l0"-PR10::7'IJm: W ISC R7. 'J. '.eJl (....lwt!g Bali 1\61) !!HHai 57. B1. 11.J7. l., 17. lO. U7. B7. 26. 71. 30. Ie Prots Excludir excise tax pmrotiona frun AlIle8. all' ! ABlea r:Xclu"!J1 ""elm.! r.'ox fa"! lI(\rtiBir 8Jd .r uli. expcndlt:ell ,..,wpM"" U",,\utin o."jl "ted )111 ec)j)!nlf1 exclu.IIJ'" ""else tlll ,nul AllleA r:",.J\'!Jtl' (155)SEE IN CAMERA ADDENDUM (156) SEE IN CAMERA Aj)DENDUM (157) The advertising:sales ratios reproduced above are particularly signifcant in that they show that Heublein engaged in much higher advertising in proportion to sales" than United and that the ratios for new products is twice as much, and more, as those for established products. "

738, The fact that a fixed amount of advertising is being used for a product which has an increasing number of cases being sold does not dilute the impact of the advertising to the consumer (Tr, 3763- 64). Therefore, the absolute amount of dollars spent by a will FtJ.. Corp.,He11bJeios69 F. advertjsjngsa!esc. :180, 434 (1966),ratiosafrdfor386winesF. 2dare936comparable(ad Cir- 1967)to the 15.7 percent con idcred high inGeneT( .. In addition to the data for "New Products", the ratios given for umcers Re and Jacare reflect n(Jw produ expenditures , .

Initial. Decision 96 F. marketer for a brand is significant, independent of the advertising to sales ratio in evaluating advertising as a barrier to competition (Tr. 5724).

739. Major competitors in the wine industry, including Heublein United, Gallo, Paul Masson, Almaden, Taylor, Christian Brothers and Mogen David, all advertise their brands nationally (Tr. 4887, 4889- 7620- 9830; CX 216A, 379C, D, 444- , 579C-D). 740. Major media advertising such as network and spot television and radio, as well as print media, are used by a substantial number of wine marketers, including Heublein and United (CX 97Z- , Z- 35, 98J, 99K, lOOC, 102C, F, 111B, 115A, 118A, 119C, G, 120C, F 125F, I, L, T, 201A, 216A, 231Z-60 thru Z-62, 239D, 240E, 241E, 242E, 243E, 300C thru M, 367Z- , 379C thru U, 444-45, 472A-B). 741. In 1970, $30.6 milion was spent in wine media advertising. By 1976, the figure had more than doubled to $63.7 milion (CX 300B, 379B; Tr. 3726-33).

742. In 1976, each of the leading firms in the wine market," with the exception of Guild, spent in excess of $1 milion in advertising. Heublein topped the list with $16,982,977 (including HMS Frost) and Gallo followed with $13,411 227. National Distilers spent $2 101 595. Mogen David and Franzia combined for $1,269 184. Seagram spent 846 242 and Taylor (Coca-Cola of Atlanta) spent $1 933 816. Guild spent $686 530 (CX 379K-L). (158) 743. In 1976, estimated total expenditures for media advertising in magazine, broadcasting (television and radio) and outdoor by wine marketers was $62 017 251. Heublein s estimated wine advertising expenditures of $16,982 977 (including expenditures for HMS Frost) in that year accounted for 27.4 percent of total wine advertising in these media (CX 379L).

744. Eight companies (Gallo, Heublein, National Distilers Guild, Mogen David, Taylor, Franzia and Seagram), which were the wine industry leaders in 1972 (CX 373K), accounted for 73. 1 percent in 1970 and 66.0 percent in 1971 of total wine advertising expendi- ;ures in magazines, radio, television and outdoor media (CX 300B, K- 11). In 1976, the same eight companies (Taylor having been acquired 'y Coca-Cola of Atlanta) accounted for 58.4 percent of all wine advertising expenditures in magazines, radio, television and outdoor ,edia (CX 379K-L; Tr. 3726-33).

745. In 1970, estimated percentages of total United States wine ivertising expenditures (excluding newspapers), by type of media ;ilized, were as follows: magazine, 24.4 percent; outdoor 6 percent; " These are the eight leading firms as of 1972 , . g., HEUBLEIN, lng, ET AL. 539 385 Initial Decision spot television, 41.4 percent; network television, 20.6 percent; spot radio, 12.8 percent; and network radio 2 percent (CX 300B; Tr. 3726- 33), 746. In 1976, estimated percentages of the total United States wine advertising expenditures, by type of media utilzed, were as follows: magazine, 12,6 percent; newspaper, 2.7 percent; outdoor, 1.0 percent; spot television, 41.1 percent; network television, 27, percent; spot radio, 12.3 percent; and network radio, 3.3 percent (CX 379B; see also Tr. 3726-33).

Conclusions 747. Advertising and other forms of non-price competition such as merchandising, packaging and label design significantly contribute to establishing and maintaining brand recognition in the wine industry.

748. Wine companies with established brands doing a substantial volume of business may enjoy absolute cost advantages in advertising their wine brands.

749. An entering or. expanding firm in the wine industry has an absolute cost disadvantage with respect to advertising by virtue of the brand recognition of established competitors, large and small achieved in part through the accumulated effect of advertising and other non-price marketing tools.

750. If the new entrant or firm desiring to expand its wine market share wants to compete on a par in terms of advertising with a firm with the established brands, it has to spend more than the established brand due to the accumulated recognition of the established firm s brand(s). (159) 751. Heublein, as one of the leading marketing and advertising firms in the United States, adds the capability of significantly increasing advertising and other merchandising expenditures in support of United's already well-established brands. This would accentuate the barrier to entry and expansion associated with the accumulated brand recognition of United's products. By May 1970, Heublein had already taken giant steps to accomplish this (Finding 729, supra).

E. State Laws and Regulations 752. State laws and regulations regarding wine are voluminous and complex and vary widely from state to state (e. CX 289; Facts Submitted for Official Notice, dated May 2, 1978 and subsequently noticed without objection; Tr. 3028, 7181). :J4U FEDERAL TRADE COMMISSION DECISIONS Initial Decision 96 F. 753. An August 1972 publication of The Wine Institute, the most important industry trade association, states: Distribution methods within the states vary radically. So complex, in fact, are wine-sellng restrictions among the states that it is difficult for vintners to establish national distribution. Many concentrate on selected markets for which they have specifically designed their business operations. Interstate trade barriers and non-uniform wine laws and regulations gradually are being corrected. but progress has been slow (CX 308Z-1), 754. Mr. Serlis, former President of The Wine Institute, described the regulation of the wine industry across the country as a "hodgepodge" that makes it extremely diffcult to do business (Tr. 576). 755. One of the reasons the McKesson wholesale operation is decentralized is the complexity of state regulations (Tr. 7181, 7271). 756. Even Heublein found it easier simply to avoid "the maz of laws" concerning entry in Kansas by not seeking to introduce its Faisca Rose wine in that state (CX 129D)." (160) 7 57. An Italian Swiss Colony advertisement represents that not all wine varieties are sold in every state, due in part to various state regulations (CX 333E).

758. Heublein represented to the Federal Trade Commission that it was important even for a winery the size of United to obtain a partner having "management and marketing expertise" and knowledge of the highly complicated, comprehensively regulated alcoholic beverage business" (CX 327Z-5). 759. State laws that limit the alcoholic content of wine make it more diffcult for a winery to operate because the laws vary from state to state. Florida, for example, has a tax penalty for wine with more than 17 percent alcohol (Tr. 1049-50). 760. Affrmation laws make it harder to enter a market and favor the dominant brands (Tr. 1053-55; Findings 709, 711 supra). 761. Many states have laws governing the resale price of wine. In Ohio, for example, the state fixes the minimum price at which a winery sells to a wholesaler, the margin at which the wholesaler can sell and the margin at which the retailer can sell (Tr. 1046-47). 762. In a fair trade price posting state, a vintner loses freedom of pricing and discounting (Tr. 1046).

763. In some states, the vintner posts the retail price. In other states, the distributor posts the retail price. The posted retail price for a winery will vary from state to state (Tr. 3272-75). .. Kaml' ranking as "a very por witJer:onSllming st.ate" was an additional factor in not seeking to sell in that tate(CX 129D).

HEUBLEIN, INC., ET AI,.

385 Initial Decision 764. Some states permit only periodic price changes, Massachusetts has such a law (Tr. 7844, 7973).

765. It is more diffcult to get distribution in control states than in open states (Finding 547 supra). It is necessary to make a separate application for each product a wine company wishes to have listed in a control state (Tr. 4217, 4263).

766. Some states require submission of labels for approval. Some require the submission of the wines themselves for analysis and approval (Tr. 1050).

767. To obtain a listing in Pennsylvania, each wine, type and size must be approved by the state. The application for a listing is made for a flavor type and a particular size and each application is reviewed separately (Tr. 9937).

768. Federal and state taxes vary with the alcoholic content of the wine. Federal taxes differ from state taxes. Taxes on wine differ from taxes on spirits. Taxes on wine vary from state to state (Tr. 7291-92). (161) 769. Wine and spirits prices vary from state to state depending on the various state tax laws and whether the markup structure is fixed by state regulation (Tr. 7254). Wine prices in a state also vary over time as state taxes and other variables change (Tr. 7259). F. New Entrants in the United States Wine Industry Have Been Small Local Producers 770. Mr. Louis Gomberg, a paid consultant and witness for Heublein, prepared an exhibit (RX 1176A-H) showing "De Novo Winery Entrants" for the period 1960-76. Of 255 entrants listed during the 1960-1976 period, 221 were characterized by Mr. Gomberg as "very small, total capacity to 100,000 gallons." Mr. Gomberg further identified 29 of the new entrants as "small, total capacity 100 001 to 1 000 000 gallons. " Four other new entrants were described by Mr. Gomberg as "medium, total capacity 1,000 001 to 000 000 gallons." Of all the entrants, one was identified as "large, total capacity over 5,000,000 gallons" (RX 1176A-H). 771. The exhibit prepared by Mr. Gomberg, however, does not accurately reflect the size and nature of new entry into the wine industry. The capacities listed do not reveal production or production capacity; they refer only to storage capacities and count an empty tank as much as a filled container. Thus a new entrant may take over an existing facilty, but the storage capacity of the acquired winery does not reflect the production goals or achievements of the new entrant (Tr. 1741, 1753- , 1757-58). Further, a winery given a permit to produce wine might actually produce none. This condition Initial Decision 96 F.T. could continue for two years before the winery s basic permit would be subject to cancellation under provisions of the Federal Alcohol Administration Act." Nevertheless, the winery would be carried on RX 1176A-H as a new entrant (Tr. 1791- , 1912-13). 772. The witness relied very heavily upon the Wines and Vines Directory, a wine industry publication, in preparing the exhibit. That directory listed capacities for most wineries. While the great preponderance of the wineries in the "very small" category had capacities substantially below 100,000 gallons, with most apparently below 10 000 gallons, Mr. Gomberg nevertheless set up the category with a 100,000 gallon cut-off (Tr. 1751, 1886- , 1893-1904). The witness conceded that a sample check of tbe "very small" new entrants showed that the vast preponderance were insignificant in terms of size (Tr. 1903-04). After an attempt to avoid answering the question, the witness also conceded that some of the "very small" entrants, less than 50 percent, were retirement, hobby or part-time wineries (Tr. 1904-12). (162) 773. The one "large" new entrant identified by the witness was California Mission Wines, Inc. (RX 1176E). This company, however, is a bulk wine producer with no brands and no bottling capacity (CX 459E).

774. The four "medium" wineries were The Monterey Vineyard Noble Vineyards, Papagni Wine Co. and Bronco Wine Co. (RX 1176D-F). The Monterey Vineyard failed and was sold to Coca-Cola of Atlanta on November 3, 1977 (Tr. 363-65). Noble Vineyards is a bulk wine producer only (CX 459E). While listed as having entered in 1972 (RX 1176D), as of January 1978, the witness could not say that company had actually marketed any wine (Tr. 1782-83). 775. The storage capacity of Papagni Wine Co. is 3,000 000 gallons (CX 459B). Bronco Wine Co.'s storage capacity is 1 000 000 gallons (CX 459B). There is no record data as to the production or profitability of Bronco Wine Co. or Papagni Wine Co. 776. During the period 1968 through 1976, there have been 105 novo California "entrants" into the wine industry, which account for 3.4 percent of total California wine industry capacity in 1976 (CX 459A-E).

777. Between December 31, 1960 and December 31, 1976, total non-California winery storage capacity, including capacity both of bottled and bulk wine companies, grew by 38, 168,000 gallons (RX " For example, the witnc% conceded that he did not know whether A. FiJli!,pi Winny, listed as a "small" entrant in 1!J7!i(H-X 1176F) had pmduced any wine "in the lwo years since they were authorized to produce" (Tr 17Rl) ._., ..----_u.

385 Initial Decision 660). In the same time period, comparable California winery capacity grew by 417 107 000 gallons (RX 659).

778. California companies thus accounted for 91.6 percent of the total growth in domestic wine storage capacity of bulk and bottled wine companies during the period December 31 , 1960 through December 31, 1976. California wine companies accounted for 93 percent of the growth during the period December 31, 1968 through December 31, 1976 (RX 659-60).

779. The ten largest California wineries plus three major bulk producers accounted for 78.4 percent of the total increase in California winery storage capacity between December 31, 1968 through December 31, 1976 (CX 458A-B).

780. Two ambitious attempts to enter the production and marketing of bottled and branded wine on a significant scale since 1970 are California Growers Winery and Bear Mountain Winery. Both of these entrants were successors to bulk wine operations and have continued to sell bulk wine while attempting to develop a case goods operations (CX 409, 458A; Tr. 1948- , 1956- , 1965, 1980, 1998- 2014 9767-68).

781. California Growers Winery has never earned a profit from its branded case goods sales in the seven years during which it has endeavored to establish itself (Tr. 1958-59). (163) 782. Bear Mountain Winery began producing bottled wines under its own labels in 1973 or 1974 (Tr. 9767). It had sustained losses in excess of $31 000,000 as of January 1978 (Tr. 1996, 7634, 9505-06). Its tax-paid withdrawals of wine have declined over the period 1975 through 1977 (Tr. 9505). Within the last year, Bear Mountain has been sold to the Jean Labatt Company of Canada (Tr. 9504). 783. The record, therefore, shows that, while there have been a number of small de novo entrants into the wine industry, there have been no successful, significant de novo entrants. There Are Substantial Barriers to Entry in the Wine Market- Discussion and Conclusions A barrier to entry is an arrangement or condition in an industry that impedes free entry. A barrier to entry may also be referred to as a "barrier to effective competition. The Budd Co., 86 F. C. 569, 577 (1975). The concept encompasses a barrier to expansion (Tr. 5701- 03). It is not necessary that there be many or a particular number of barriers. Cases in which barriers playa role may involve only one or two barriers. See, g., General Foods Corp. v. FTC 386 F.2d 936 (3d Cir. 1967). The issue to be resolved is whether there is in fact a barrier to entry. Such a barrier may exist because of a single ); ), Initial Decision 96 F. situation or because of a combination of circumstances. Here, the record shows a number of substantial barriers to entry. Entry or expansion, for purposes of Section 7 analysis, refers to an effective competitor" making "substantial sales" in a relevant (here national) market. See, Warner-Lambert Co., 87 F. C. 812, 880- Missouri Portland Cement Co. v. Cargill Inc., 498(1976). See also 2d 851, 857 (2nd Cir. cert. denied, 419 U.S. 833 (1974) (court' analysis assumes entry the size of the acquired company); United States v. Falstaff Brewing Corp., on remand, 383 F. Supp. 1020, 1021 (D.R.I., 1974) (court' s analysis assumes entry at "an acceptable level of sales United States v. Phillips Petroleum Co., 367 F. Supp. 1226 (C. D. Cat. 1973), affd 418 U.S. 906 (1974) (court' s analysis assumes a major market entry).

As most recently evaluated by the Commission, the question is whether there is a barrier to that level of entry which approaches that of the industry leaders or which is suffcient to challenge the dominance of industry leaders. Freuhauf Corporation, Inc., 91 F. 132, 232 (1978).

While it has been possible for a number of entrants to produce and sell wine in small quantities, such endeavors have no significance in terms of competition in the relevant markets. (164) The Long Payout Period Characteristic of Investment in the Wine Industry Constitutes a Significant Barrier The long period of time during which a firm must pay money out before receiving a return is a significant barrier to entry in the wine industry. Three aspects of the industry contribute to this long payout period. First, new vineyards do not produce grapes at capacity for five to six years after planting. Second, because of the nature of the production process, wine is not placed into distribution channels until at least six months to as long as ten years after the grapes are first picked. Third, it takes a great deal of time to create consumer demand for a brand of wine. The expenditures necessary to create brand recognition must be made up front and there is no way to predict when to expect a return. A return on investment will not begin until there is an established demand for the product. Long lead times significantly reduce the likelihood that entry into a particular industry wil be economically feasible. FTC v. A tlantic- Richfield Co., 549 F.2d 289 (4th Cir. 1977). The delay involved in establishing a business to the extent necessary to receive a return is therefore, one of the obvious factors that potential entrants consider. See Missouri Portland Cement Co. v. Cargill Inc., 498 F.2d at 864; United States v. Black Decker Mfg. Co., 430 F. Supp. 729, 762 n. 64 HEUBLEIN, INC., ET AL. 545 385 Initial Decision (D. Md. 1976), In Fruehauf Corporation, Inc., 91 F. C. at 225 n, 16 the Commission found that a time component of four years for entry was "obviously a barrier. Accord, RSR Corp., 88 F. C. 800, 888 (1976) (three years), This record shows that a varying but substantial number of years is required from the time a company first seeks to establish a source of grapes until its wine is ready to enter distribution channels. In addition, substantial time is required to create consumer preference for a brand. Clearly, the overall length of the payout period for entry into the wine industry compounded by the addition of time it would take to become profitable constitutes a high barrier to entry. Capital Requirements Constitute a Significant Barrier The amount of capital that must be invested to develop new production capacity in the wine industry is suffciently high impede significant new entry or expansion. If a winery chooses to establish its own vineyards, as many have in order to assure themselves an adequate supply, it may cost $8,000 per acre, exclusive of the price of the land itself, to bring the vineyard to full bearing capacity. Beaulieu, for example, number 28 in the table wine market in 1968 with a .25 percent market share (CX 373Z, unranked in other markets), expected to be able to increase its capacity by 75 000 cases in that year because of 150 additional acres it had put under cultivation several years before (CX 207 A). (165) The record shows an example of where the capital outlay for production facilities alone has been $5,800 000 for 2 1/2 milion gallons of capacity, a gallonage substantially below the eighth ranked firm in the all wine industry in 1972 which, with a market share of 2.3 percent had 75 953,000 gallons of wine entering distribution channels (Findings 524- supra), An additional investment burden is the necessity of maintaining expensive wine inventories. Certain parts of the plant and equipment necessary to produce wine are used for a relatively short period of time each year. This seasonal aspect of the industry means that at least a year s supply of inventory must be maintained. The absolute amount of capital required for entry or expansion in an industry is significant to the extent that it is "so large that relatively few individuals or groups could secure it. " It is also " rough measure of the risk faced by a new entrant" so that even if a company could afford it, it would be reluctant to take the risk. Fruehauf Corporation, Inc. 91 F. C. at 224 n. 14. And see, Jim Walter Corp" 90 F,T.C. 671, 761, 762 (1977) ($9 to $12 milion );

Initial Decision 96 F. RSR Corp., 88 F.considered "not insignifcant" or "moderate 800, 888 (1976) ($10 milion considered "significant" The absolute amount of investment necessary to develop new capacity in the wine industry constitutes a significant barrier to entry. The investment figures in this record referred to above would have to be multiplied several times for entry on a scale suffcient to challenge the market leaders.

Limitations on Distribution Constitute a Highly Significant Barrier One of the requisites for successful entry is an adequate distribution system. See, g.. United States v. Falstaff Brewing Corp., on remand, 383 F. Supp. at 1024. United States v. Phillips Petroleum Co., 367 F. Supp. at 1246. In United States v. General Dynamics Corp., 415 U.s. 486, 501 (1974), the Court observed that "in most markets distribution systems" are a "significant" factor in assessing a firm competitive strength. A commercial winery seeking to grow to any appreciable size faces a very steep barrier in trying to arrange effective distribution for its products.

In most states, wineries are required by law to distribute their products through wbolesalers. Wineries generally prefer to distribute their products through combined wine and spirits wholesalers because they are usually the more effective wholesalers in a given market. The fact that established wine companies distribute through major wine and spirits wholesalers demonstrates that this is the more (166)effective method of distribution. The major metropolitan markets, in which most wine is sold, generally have only a limited number of effective wine and spirits wholesalers for a winery aspiring to significant size. The number of such wbolesalers has been decreasing.

The problem, however, goes beyond the limited and declining number of effective wholesalers for wine in major wine consumption areas. Whether or not they choose to exercise it, major suppliers, particularly spirits suppliers, have an undue influence over their wholesale houses so that competing products may not be taken on. This is because of the importance to the wholesalers of the major products they are handling and the fear of doing anything that might impair ongoing relationships with their major suppliers. Effective wholesalers are reluctant to take on new lines of wines of any significance in terms of volume from anyone other than a present major supplier. A strong favoritism is inherent in the as in wholesaler s relationship with the major supplier. Indeed, United States v. Wilson Sporting Goods Co. 288 F. Supp. 543, 555 385 Initial Decision (N.D. Ill. 1968), the incentive to treat a major supplier s products favorably "may even initiate with the dealer." Heublein and United are prime examples of major suppliers that are in an advantageous position to place new products or line extensions with their existing wholesalers to the point of filling all the wholesalers' needs and correspondingly, to deter their wholesalers from taking on competing products. In addition to a relationship which favors present major suppliers to the detriment of new entrants, the record evidences instances where major suppliers have exercised leverage to that end.

The process of building a distribution network suffcient to gain an appreciable share of the market would be an obstacle to a new entrant or a small firm in any national consumer goods industry. the wine industry, however, it is especially diffcult to the point of constituting a significant barrier because of the limited availabilty of effective distributors and because of the ability of large, established firms to influence their existing wholesalers to extend distribution of their own new products to the excl usion of aspiring competitors.

Apart from the barriers to securing adequate distribution through wholesalers, it is also difficult for a new entrant to secure any distribution in a control state.

The Diffculty in Obtaining Retail Shelf Space Constitutes a Barrier to Entry Obtaining shelf space, or shelf facings, in retail stores is critical to successful distribution of wine. However, it is diffcult to obtain such space. A limited amount of shelf (167)space is available for wine at any given time, and it is usually necessary to displace a wine item currently on the shelf in order to expand the number of facings for another item or to obtain a facing for a new item. Large, established firms may be able to obtain more favorable and greater amounts of shelf space. Heublein, for example, represented to Alled that it was capable of obtaining greater shelf space for United' s products. High costs are incurred in obtaining shelf space. Retailers prefer to take on products only if they have established brand recognition or established sales. Brand recognition is costly to acquire. Other means of obtaining shelf space, such as promotional pricing or use of a great deal of salespower, are also very costly. See The Procter & Gamble Co.. 63 F.T.C. 1465, 1566-67 (1963). Diffculty in obtaining adequate displays or shelf space, therefore constitutes another barrier to entry or expansion in the wine Initial Decision 96 F. industry. See General Foods Corp. v. FTC, 386 F.2d 936, 945 (3rd Cir. 1967).

The Diffculty in Creating Consumer Demand for a Wine Brand Suffcient To Gain an Appreciable Share of the Market Constitutes a Substantial Barrier to Entry or Expansion One of the requisites for successful entry into the wine business is the ability of the entrant to ensure sales by creating a preference among consumers for its particular wine products. Impressing the consuming public that products are different is important in marketing wine because wines are relatively low-priced products whose distinguishing physical features, aside from color, are not readily discernible by consumers. See General Foods Corp. v. FTC 386 F. 2d at 338; Black and Decker 430 F. Supp. at 775; Fruehauf Corporation, Inc. 91 F. C. at 227. Furthermore, some sort of pre-sale or differentiation of products is important in the sale of wine because it is often sold through self-service outlets. See discussion in United States v. Lever Brothers Co.. 216 F. Supp. 887, 893 (S. Y. 1963). Accord, General Foods, supra. Because ofthe array of wines available for the consumer s selection, the creation of the impression of product differentiation is probably more important in the marketing of wines than for most consumer goods.

Product differentiation is achieved in the wine industry primarily through brand recognition based on favorable images of quality. Successful achievement of brand recognition is a very signifcant factor and an indicator of competitive strength. See General Dynamics Corp., 415 U.s. at 501. The (168)record shows that it is essential to establish and maintain brand recognition by projecting a favorable brand image. Brand name recognition can "prove a decisive advantage" insofar as it is likely to be transferable to new products in the same market. Black and Decker 430 F. Supp. at 764-65. The record exemplifies how wine companies with established brands trade on their name through "line extensions Brand marketing has become increasingly important in the wine business, and all wineries attempt to associate the image of their brands with quality. The record shows that advertising is very effective in stimulating and maintaining a preference among consumers for a particular brand of wine. Some notable examples of the successful use of advertising in the wine business are Italian Swiss Colony, Harveys and Lancers. Advertising also has been used effectively as a means to create brand recognition and preference sufficient to enable marketing high margin wine products such as Lancers and Harveys.

HEUBLEIN, lng, ET AL. 549 385 Initial Decision Consumer preference for certain brands in the wine industry may also stem from a "long history of industry dominance, General Foods, 386 F.2d 936 at 945. United and Gallo enjoy this advantage, Brand recognition may also be generated through the use of other non-price forms of promotion such as merchandising, packaging and labeling.

(CJommon sense" indicates that advertising has a significant impact in markets of a consumer oriented nature. Black and Decker, 430 F. Supp. at 752. The principal way to gain an appreciable share of the market within a reasonable period of time is through the use of "mass advertising and market promotion. " See General Foods, 386 2d at 938. The record in this case shows that advertising is a major competitive weapon in the wine industry. New firms and small firms that seek to grow must somehow find a way to overcome the existing noise level" of advertising to capture the attention of consumers for their brands.

New firms and small firms attempting to gain an appreciable share of the market operate at a disadvantage with respect advertising since firms with larger established brands enjoy absolute cost advantages. As a general rule, "distinct advantages" in advertising and brand loyalty "stem from nationwide marketing. United States v. Phillips Petroleum Co.. 367 F. Supp. at 1245. One absolute cost advantage stems from the cumulative effect of advertising. The effect of a given advertising expenditure by an established firm is greater than the effect generated by the expenditure of the same amount by a firm with a less established brand. A new entrant or expander would have to spend more on advertising to compete on a par (169)with the firm having the established brand. Gallo and United, with their firmly established brands, enjoy great advantages in this respect. They also have an advantage because of their large market shares. A firm attempting to enter or expand on a smaller scale than existing companies spending an equal or greater amount on advertising wil have a higher per unit cost because the total cost is applicable to a smaller number of units sold. It wil be necessary, therefore, to make heavy advertising expenditures in order to achieve appreciable market penetration.

Consumer preference for certain brands has been "generated through extensive advertising and a long history of industry dominance. General Foods, 386 F. 2d at 945. See Procter Gamble, 63 F. C. at 1533; Black and Decker, 430 F. Supp. at 764. Wine is als( a business in which brand name recognition and advertisinl capabilty have a definite impact on a firm s likelihood of succes, Initial. Decision 96 F. The use of advertising to create brand recognition (here in the wine industry)operates "as a formidable barrier to new market entrants who, in order to gain a signifcant foothold in the market, would have to withstand the powerful competitive weapons" presently employed by others which would "confront them upon their first entry. General Foods Corporation, 69 F. C. 380, 424 (1966). Accord, Procter Gamble, 386 U.S. 568, 579 (1967) (recognition of advertising by others as a major competitive weapon" confronting new entrant).

A product differentiation barrier exists when an entrant or expander must take affrmative steps to differentiate its product whether through brand recognition or otherwise, in order to lure buyer loyalties away from similar products of an established seller or to capture the loyalties of new consumers. The Commission has observed that "(w)whether national advertising and distribution programs are viewed simply as a condition of entry. . . or as a means of creating substantial product differentiation, or a combination of the two. . . it is clear that these barriers" can be substantial. Sterling Drug, 80 F. C. 477, 597 n. 23 (1972). The Commission has long recognized the product differentiation barrier. As explained in The Procter Gamble Co., 63 F. C. 1465, 1553 (1963):

The term refers to consumer preferences as between very similar, close-substitute products or brands. Such preferences need not, and frequently do not, fest on real or substantial differences in terms of quality or usefulness. By reason of distinctive packaging, the firm s long history, mass advertising and sales promotions. or other factors, a firm may succeed in establishing such a definite (I70Jpreference for its brand that the consumer will pay a premium to obtain it, although it is functionally identical to competing brands. Such brand allegiance, which the prospective entrant marketing a new brand, will not, of course, command, may he the cumulative result of the expenditure of many millons of dollars over a period of many years to promote the brand, and may, in consequence, be very diffcult to counteract even if the entrant makes a very substantial initial investment to promote his own brand. As a result, in 9n industry in which product differentiation is an important factor, not only may the l.ew entrant find it especially diffcult to pry customers loose from the established irms, but the higher price obtainable for a brand that has been successfully lifferentiated in the public mind from competing brands may impart a flexibility in rieing, akin to that imparted by cost advantages, which the newcomer may not he hle to achieve for many years.

he record shows that the product differentiation barrier exists in Ie wine industry to such an extent that it constitutes a very Lbstantial impediment to entry and expansion. HEUBLEIN, INe., ET AL. 551 385 Initial Decision The Proliferation of Laws and Regulations Subsequent to Passage of the Twenty-First Amendment Constitutes an Additional Impediment to Competition in the Wine Industry The Twenty-first Amendment, in addition to repealing Prohibition, also granted to the several states and territories the authority to regulate the sale and distribution of alcoholic beverages within their borders. The result has been a proliferation of varying laws and regulations among the states regarding such matters as wholesaling, label approval, price posting, markups, minimum prices, taxes and advertising.

It would appear that a company large enough to attempt a significant national entry or expansion in the wine industry would be able to hire the expertise necessary to cope with the various state statutes and regulations. Therefore, I do not consider this problem in itself to constitute a barrier to entry. Nevertheless, it is a situation which, when considered along with the various impediments and barriers discussed above, constitutes a real impediment to entry or expansion in the wine industry. (171) New Entry Does Not Belie the Existence of Barriers to Entry Many small new wineries have entered the industry (RX 1176). As interest in wine has increased in this country, many people have decided to try to make wine for themselves. In large part, these endeavors, which are required by law to operate as bonded wineries, are very small and may be characterized as "garage" or "one-man operations (Tr. 7305; CX 192A). In terms of storage capacity, the new wineries account for a small percentage of industry growth and an even smaller percentage of total industry capacity (CX 459C-D). The sheer number of new entrants means nothing when their total share of the market remains slight compared to the market leaders. United States v. Black Decker Manufacturing Co" 430 F. Supp. 729 751 (D. Md. 1976); Jim Walter Corp. 90 F. C. 671, 762 (1977). As in Procter Gamble, 386 U.S. at 578, where the existence of some 200 fringe firms did not belie the fact that Clorox enjoyed a dominant position nationally, the existence of numerous, tiny new wineries does not belie the dominance of United and Gallo. This is true regardless of the age of such operations. In the wine industry, it is the leading firms that have captured by far the greatest share of growth (CX 458).

Nor do the number of new entrants belie the substantial barrier! to entry or expansion characteristic of the relevant markets in thh case. See Black Decker, 430 F. Supp. at 751 and cases cited therein Initial Decision 96 F. T. Barriers to signifcant entry or expansion exist wholly apart from what is required to start a household bonded winery. Given an expanding market, such as wine, an increase in the number of competitors or even a rise of the sales of smaller firms at a faster rate is neither surprising nor inconsistent with an overall lessening of competition. Jim Walter 90 F. C. at 762-63; American General 89 F. C. 557, 636 (1972). New entrants may simply be prospering under the umbrella of weakened competition resulting from high levels of concentration in the market or responding in small part to rapidly increasing demand, without posing an immediate or certain threat to the leaders. Ibid.. In the wine industry we have the additional fact that many of the so-called "new entrants are not even commercial operations but rather have been established as vocational pursuits.

More large-scale entry is expected to occur when demand is growing rapidly. Scherer Industrial Market Structure and Economic Performance (1970) 229-30. Even to maintain its market position in a period of industry expansion, (172)a firm would have to grow. The leading firms would have to grow that much more to increase the concentration ratios. And that is what occurred in the all wine dessert and sparkling wine markets from 1968- 1972. As in American General, 89 F. C. at 640, the substantial increases in the four- and eight-firm concentration ratios from 1968 to 1972 show that the industry leaders "have made their gains primarily at the expense of the smaller members of the industry." The post-1972 data for the wine industry indicates that this has continued to be true, despite the rising demand.

Aside from the very small wineries of insignificant individual or aggregate volume, a few new entrants are plainly serious endeavors intent on establishing themselves with a place in the market on a noticeable, even if relatively small scale. Even these entrants however, have had no effect on the concentrated state of the markets. Their record of success has been less than impressive. By expanding too quickly, some have sustained serious losses. See 4american General, 89 F. C. 557 at 637. To the extent that they still Jroject success in the future, such projections, particularly in view of he diffculties others have experienced, should be greeted with some kepticism. American General, 89 F. C. at 637. Even if they meet their own projections, these firms would still be small in comparison ) Gallo, United and other high ranking firms, and could easily take .. This is true even where. as here the market share or a leading firm ha dropped slightly.Jim Waller, 90 Gat763 ._ .

385 Initial Decision their sales from the overall growth of the market without eroding the position of the market leaders.

VIII. ENTRENCHMENT OF UNITED S DOMINANT POSITION Entrenchment, as an antitrust violation, occurs when the acquiring firm affords additional competitive advantages to a dominant firm in a concentrated market. Sterling Drug. Inc.. 80 F. C. 477, 604 (1971). There, the Commission considered such factors as contributions to the acquired firm s production, distribution and marketing capabilties and resources ibid. and, at 604 n. 29, the threat to change the structure of the industry and the effect of dissuading smaller firms from competing aggressively. The structure of the industry referred to by the Commission was that resulting from the raising of entry barriers, as recited in FT v. Procter Gamble Co.. 386 U.S. 568, 578 (1967).

In Procter Gamble, supra, at 575, the Court discussed the heightening of such entry barriers as advertising costs, retail distribution and fear of retaliation by the industry leader. Black and Decker, 430 F. Supp. at 774 discussed" . . . the degree of synergy between the acquired and acquiring firms' marketing and manufacturing systems, between their technologies, and between their brand name recognition. General Foods, 386 F.2d at 945 noted the advantages in retail display and marketing which the acquiring company, "an even more formidable opponent " would enjoy. These elements are clearly present in this merger. (173) It is not necessary that the acquired company s market share be increased. The maintenance or entrenchment of a large market share in a concentrated market is suffcient to constitute a violation. United' s market shares and market positions at the time of the merger were suffciently large and signifcant in the all wine, table wine and dessert wine markets that it could be anticompetitively entrenched. In all wine, it had 17.9 percent of the market and its second place share was over six times that of The Taylor Wine Company which was in third position (Finding 498 supra). The entrenchment of such a share and such a market position clearly would be anticompetitive.

In table wine, United had 14.6 percent of the market and its second place share was 2.7 times that of Mogen David which, was in third position (Finding 499 supra). The entrenchment of such a share and such a position clearly would be anticompetitive. In dessert wine . United had 21 percent of the market and its second place share was over six times that of The Taylor Wine 336- 3450 - 81 - 36 Initial Decision 96 F. Company which was in third position (Finding 500 supra). The entrenchment of such a share and such a position clearly would be anticompetitive.

In sparkling wine, United was in third place with 10.7 percent of the market. As complaint counsel concede (CPF 1131), the entrenchment of such a share would not be anticompetitive in view of Taylor s 12. 1 percent and Gallo s 11.3 percent market shares. Also, discounting Heublein (See discussion p. 112, and Finding 501 supra), the next two largest firms had 6.3 percent and 6 percent of the market, respectively. Thus, United was not in such a dominant position vis-a-vis the next smaller firms as it was in all wine, table wine and dessert wine.

The record establishes that the acquisition has served to entrench United' s dominant market position in all wine, table wine and dessert wine.

The first barrier to entry discussed above was that of large capital requirements. Heublein, one of America s largest and most profiable corporations at the time of the merger, has financed United' operations with outstanding loans or lines of credit ranging at all times from $50 MM to $96 MM (Tr. 2515). This financing has been at rates lower than United could have secured elsewhere (Tr. 8121- 9473-76). Further, Heublein, which itself expends large sums for expansions in capacity (Findings 56- supra), announced almost immediately after the merger plans for a new United production facility for sparkling wine (Finding 61 supra). Also right after the merger, Heublein helped finance the $18 milion dollar glass plant which has resulted in savings for United in the cost of glass and has operated at a profit. Heublein s participation in financing was to arrange (17 4)for $11 MM in bank loans by guaranteeing payments. It also was to contribute any additional operating capital that might be needed beyond that originally put up by United and Indian Head the joint venturers (Findings 62- 63, supra). The merger has also entrenched United's ability to achieve distribution and, correspondingly, has increased that significant barrier to entry and expansion for others (Findings 590-652 supra). As one wine marketer testified:

Every time there is an acquisition by a distiller of a winery or of a brand of wine, it makes it that much more diffcult for a company like ours, an independent company to compete. (Tr. 1057).

At the time of the acquisition, Heublein had a large, wellestablished, nationwide distribution network for both wine and spirits. In most instances, its wines and spirits were distributed by g HEUHLt.lN , 11"'L., bl n...

385 Initial Decision the same distributors (CX 93; Tr. 2464). As found above, Finding 258, supra, Heublein, as one of the inducements for Allied members to vote in favor of the merger, stressed the distribution advantages that would accrue to United by reason of Heublein s existing wide range of distribution of both spirits and wines. And the opportunity to take advantage of Heublein s distribution channels and sellng muscle was one of the benefis of the then proposed merger recognized by Mr. Bruno Solari, President of United (Tr. 4967-68). Heublein s past exercise of leverage with wholesalers to expand the distribution of Heublein products (Findings 645 , 646, supra) shows both its capability and the likelihood of capitalizing on its importance to wine and spirits wholesalers to the distributional advantage of United and so increasing barriers to others. The record otherwise demonstrates Heublein s intention to utilize the distribution advantages of the merger (See Finding 652, supra). While Heublein may have refrained to an extent, because of this suit, from generally exercising these advantages, Heublein currently has one common sales group handling national accounts such as airlines, chain hotels and chain restaurants for both its spirits products and United' s products (Finding 135 supra). Heublein s ability to maintain and protect United's shelf position through advertising (and other non-price marketing tools) and through use of secondary lines of wines may result in a raised supra). And thebarrier at the retail shelf level (Findings 670likelihood of United securing greater shelf space was one of the advantages of the proposed merger recounted to Alled' s members by the spokesmen for Heublein (Finding 665 supra). (175) Clearly, the merger wil significantly increase the advertising and brand recognition or product differentiation barrier. The acquisition of United by Heublein, one of the leading marketers and advertisers in the nation, provides the capability of significantly increasing advertising and merchandising efforts in support of United's already well-established brands. And by May 1970, United's wines were supported by what was then probably the most intensive and extensive advertising campaign of wine promotion ever undertaken by a single company in this country (Finding 729 supra). Heublein is a very strong marketer and mercbandiser (Findings 118-148, supra). In 1965, it asserted that it had a "reputation in the industry as perhaps the most astute and successful merchandisers of alcoholic beverages" (CX 178A).

Its outstanding, indeed spectacular, successes with Smirnoff Vodka (Findings 27- , 47, 49), Harveys Bristol Cream (Findings 34- , 45, 133), Lancers (Findings 37, 38, 46, 49, 133), Heublein Cocktails Initial Decision 96 F. (Finding 33), Arrow Cordials and Brandies (Findings 36, 46, 49) and Jose Cuervo and Matador Tequila (Findings 39, 49) demonstrate its capabilities. The superimposition of these capabilties upon United can only serve to entrench United' s dominant position. Conclusion I find that Heublein s acquisition of United entrenched United' dominant position and strengthened barriers to significant entry or expansion in the all wine market and in the table and dessert wine submarkets.

IX. POTENTIAL EXPANSION Heublein Was an Actual Potential Expander into the Domestic Segment of the United States Wine Industry 784. As of the time of its acquisition of United, Heublein was an actual potential expander in the United States wine industry by entry into the domestic segment of the industry; and, but for the acquisition of United, would have entered by alternative, more procompetitive means. The record shows, by both objective and subjective evidence, that Heublein definitely intended to expand its position in the market by entering tbe domestic segment, had explored various means of so doing, and was capable of expansion novo or by toehold acquisition.

785. Heublein had not only the capabilty, but also the incentive to expand its position in the wine industry by entering the domestic segment. Heublein was an aggressive growth company (Tr. 4438). The wine industry was experiencing a period of rapid growth and appeared attractive (Tr. 4456-57, 5117). Heublein had a high return on capital, was seeking (176)additional high return opportunities and the wine industry offered such an opportunity (Tr. 5117). Heublein could put to use in related fields the marketing and advertising skils which it possessed (RX 1215; Tr. 4439). Heublein could put to use its familiarity and capability with respect to supermarket and alcoholic beverage channels of distribution (Tr. 4945-46).

Heublein Was a Small but Important and Growing Force in the United States Wine Industry 786. At the time of the acquisition, Heublein s market share in the all wine, dessert wine and table wine markets was relatively small. Nevertheless, because of the concentrated state of the market HEUBLEIN, INC., ET AL. 557 385 Initial Decision it ranked sixteenth, thirteenth and thirtieth in those markets, respectively. Until Heublein, by its own choice after the merger repositioned Lancers from a sparkling wine, it ranked fourth in the sparkling wine submarket.

787. Heublein had been in the wine business only since 1957, but since that time it had experienced a very rapid growth. From 1963 to 1968, sales of its two leading wines had increased-84 percent for Harveys Bristol Cream Sherry and 294 percent for Lancers. In the fiscal year in which the acquisition occurred, sales of both products increased again (Findings 45, 49 supra).

788. As the market share tables for 1967 and 1968 show, Heublein s wine business was growing fast enough to improve its market position and, in the all wine and table wine markets, to move up in rank:

1968Heublein Market Share1967(Rank) Market Share (Rank) All wine 63% (17) .79% (16) Dessert wine .45% (13) .54% (13) Table wine 20% (31) .23% (30) Sparkling wine 0 % ( 4) 7.2 % ( 4) (CX 373) 789. Heublein prided itself as a growth company and actively pursued a growth and diversification policy. Included in this was an active determination to expand its position in the fast growing wine industry, particularly the domestic segment. The only realistic assessment of Heublein s market position but for the merger is that it would have continued to grow at an impressive rate. 790. In 1967, Heublein reported that the wine portion of its business had grown rapidly and accounted for an important share of total sales and earnings. In acknowledgement of this growth Heublein expanded the sales force covering its wine market and gave its top brands special attention (CX 48K). (177) 791. In 1968, Heublein s Annual Report reflected awareness of the substantially increasing consumption of wines and increased consumer interest in wines (CX 49K). It reported that the trend toward flavorful, light alcoholic drinks was a factor contributing to the growth of wine sales (CX 49M).

792. In October 1968, Heublein told its stockholders that its success with imported wines has accentuated our interest in domestic wines" (CX 34G). It showed its further awareness of the Initial Decision 96 F. opportunities in wine by saying, "We believe that California wines are about to enter an era of rapid growth" (CX 34G). 793. Heublein had expertise in the wine business (CX 37B), having achieved its initial market share in wine with only two major single-item products (CX 320, 373D, N, Y, Z-9). Heublein Was a Major Industrial Corporation, a Leading Marketer of Alcoholic Beverages 794. At the time of tbe acquisition, Heublein was the largest wine importer in the United States and in the year following the acquisition was the fifth largest domestic producer of alcoholic beverages (Finding 15 supra). In the year of the acquisition, Heublein distributed 22 brands of spirits, ten of which it produced (Finding 22 supra). In the year of the acquisition, Heublein distributed 24 primary brands of wine (excluding United and supra).Beaulieu) and others in limited quantities (Findings 23, 24 addition, Heublein produced three brands of beer and malt liquor (Finding 25, supra) as well as specialty foods (Finding 26 supra). Heublein s legendary success with Smirnoff Vodka, Lancers Rose and Harveys Bristol Cream Sherry has been discussed above (Findings 27- , 34- , 37-38), as has its success with canned cocktails, tequila, rum, and the Arrow line of cordials and brandies (Findings 33, 39, 71).

795. One of the reasons for Heublein s great success and growth over the years was its strength in marketing. Aggressive, effective marketing was a major point of pride with Heublein. Heublein originated prepared cocktails and with its Smirnoff vodka it pioneered the rapid growth of the vodka market, leading it from virtually nothing to become one of the major distilled spirits categories. Even when Heublein was not setting the trends, it was keeping pace with them. For example, as interest in travel increased, Heublein took the (178)lead in marketing distiled spirits to the airlines and to other travel accounts (Finding 127 supra). 796. Heublein was a leading producer and importer of the distiled liquors commonly known as "white" goods, notably vodka, gin, rum and tequila. Indeed, in 1968, Heublein considered itself to be "in a unique position with representative brands in all eight of the fastest growing categories of distiled spirits" (CX 49K). Heublein was capitalizing on the trend toward the light taste in alcoholic beverages with its spirits products and its wines. 797. Heublein regularly introduced and promoted new products so While these statements were made after entry into the merger agreement, they reflect the prior existence of anoveraBinterestindomesticwincsnot!imitedtotheparticu!urmcq:;er. HEUBLEIN, INC., ET AL. SSg 385 Initial Decision and it emphasized the full range of marketing activities including merchandising and packaging. It was a major advertiser and used its advertising effectively to promote sales. 798. Heublein had a well-established and strong distribution network, At the time of the acquisition, it was the fifth largest distiled spirits supplier in the country. Today it is number two. Several of its products, including its Lancers and Harveys Bristol Cream wines, were "call" or "demand" items in retail accounts. As a result of this, in addition to its size, Heublein s strength in terms of wine and spirits distribution gave it a very real advantage and incentive in expanding its market position further. In addition, Heublein had demonstrated knowledge and capability with respect to distribution through supermarkets, where a growing percentage of wine sales were occurring.

799. Heublein sells to distributors, state agencies, transportation and military accounts (CX 4, 16, 56Z-7).

800. Heublein is in a dominant position vis-a-vis its distributors and is able to secure distribution advantages (pp. 218-240). 801. There were approximately 400 Heublein spirits distributors in 1972 (Tr. 8797).

802, Heublein was interested in acquiring products that could be sold through its spirits distribution channels (Tr. 3929). 803. When Heublein obtained the rights to sell Harveys, it increased Harveys distribution by placing it with Heublein wholesalers (Tr. 3985-86).

804. Prior to the acquisition of Vintage Wines, Inc., Heublein imported wines were marketed through the Smirnoff Beverage and Import Co. (Tr, 8651). When Heublein acquired Lancers, it was placed in the Heublein spirits division (Tr. 8658). (179) 805. Heublein believed that Lancers wine "lends itselfto our type of distribution" (CX 46G).

806. Lancers and Harveys wines were sold in part through distributors that handled Heublein spirits products (Tr. 3924). 807. The Heublein spirits sales force handles Beaulieu Vineyard Wines (Tr. 9841).

808. Heublein believed that United's wine products were compatible with its own. Heublein told Allied's members this compatibility could be beneficial in the distribution of United's products, because Heublein could place United products with its distributors, and mentioned Smirnoff as a primary example of one of its compatible products (Tr. 2464-68).

809. Heublein representatives stated that by having domestic wine to go along with Smirnoff, Lancers and other Heublein g..

Initial Decision 96 F. products, United's distribution system would be greatly enhanced by using Heublein s warehouses and distributors and, similarly, Heublein would be able to use United warehouses and distributors. This would result in greater overall distribution (Tr. 2691). 810. Mr. Carriuolo, Heublein s Executive Vice President, believed that an alliance with Heublein would give a small winery an advantage in terms of distribution as well as in other ways (CX 208B).

Heublein s Efforts To Implement Its Corporate Growth and Diversifcation Policy Pointed toward Expansion in Wine 811. Heublein was a "growth" company with strong financial resources as measured by its excellent price earnings multiple for its shares, by its ability to generate internal funds from profits, and by its access to external funds at favorable rates. Heublein s growth was achieved by acquisition of established businesses, new products and lines, expansions in capacity, and by marketing new brands (by acquisition and distribution agreements) of products already being marketed by Heublein. In deciding upon candidates for acquisition Heublein looked for products compatible with its marketing skils and channels of distribution (e. supermarkets or spirits distribution channels), and which would expand the kinds of businesses it was already in (Finding 91 supra).

812. In the early 1960' , one Ray Weiser, who identified himself as representing Heublein s importing company, told Louis Gomberg, a wine property broker, that Heublein was (180)interested in the Alta Vineyards Company" (Tr. 1415). At the time Schenley sold Alta Vineyards in 1963, it was substantial in size and had an established distribution network (Tr. 2971-73).

813. In January 1965, Ed Kelley, Vice President of Heublein advised a merger consulting firm that Heublein would not be interested in acquiring a wine distributor unless it owned all or a substantial portion of its brands and the brands were other than price" items, in which case it might be interested and would appreciate further information (CX 173-74). 814. In 1965, John Martin, Heublein s Chairman, wrote to a financial representative to express Heublein s interest in acquiring " HUV would dispute this finding on the ground that "There is absolutely no proof that Mr. Weiser was even employed by Heublein. Or what position, if ,my, he held with any company" (RRPF 337). However, there is no reason to reject the particulars of the contact between Mr. Weiser and Mr. Gomberg as related by Mr. Gomberg, and Mr. Gomberg could not reasonably have been expected to verify the fact and nature of Mr. WeiHer employment by Heublein. Heublein was in a position to present any evidence to refute the related fact that Mr. Weiser was employed by Heublein Heublein having failed to offer any such evid.",ce, I have accepted the testimonyofMr.Gombcrg ..

UJjLCll'j, U \J.

385 Initial Decision the Taylor Wine Company. Mr. Martin indicated that he had already had an exploratory talk on the subject with Taylor people and, although Taylor was not presently interested, he wanted a follow-up on the matter (CX 165). Various reports on Taylor to Heublein followed (CX 166-69), although nothing ever came of the matter. 815. Mr. Kelley, Heublein s Vice President, said that the Taylor Wine Company was one of th alternative acquisition candidates for Heublein and that they studied it as thoroughly as one could without having inside information (Tr. 4542).

816. Heublein, as early as mid- 1965, had contacts with represens interest intatives of Almaden and advised them of Heublein acquiring that company (CX 139-42).

817. In January 1967, after having been advised that Almaden was willng to sell, Heublein prepared an outline of a proposal to purchase and made an offer of purchase. The offer was approximately $12 milion (Tr. 917; CX 144-47).

818. On or about August 17, 1967, the Charles Krug Winery was suggested to Heublein as an acquisition possibility. The information was immediately passed on to Mr. Edward Kelley, Heublein Executive Vice President, who was then responsible for long-range planning (CX 148; Tr. 4425-26). As of October 2, 1967, the matter was stil under consideration (CX 152). (181) 819. In December 1967, Ed Kelley, Heublein s Executive Vice President, informed a broker for the Mogen David Wine Company that he would "think about" that winery but that Heublein was then considering other wine possibilities" (CX 197). Mr. Watson, Heutheblein s Chief Executive Offcer, suggested that Mr. Martin, Chairman, should make any initial contact because of his "direct access to Mogen-David" (CX 198). After reviewing the matter, Heublein decided not to pursue the acquisition of Mogen David (CX 203).

820. In March 1968, Chris Carriuolo, Heublein s Senior Vice President, reported to Heublein s Executive Vice President that he had had a discussion with Lee Knowles, Vice President of Beaulieu Vineyards (CX 207). Mr. Carriuolo stated that "because of our (Heublein s) interest in the U.s. wine business " Heublein should consider several kinds of agreements with Beaulieu in order to get closer to the company with the view of eventually taking it over (CX 207B). He expressed his understanding that Heublein s Mr. Martin and Mr. Hart had approached Beaulieu about the possibility of buying it a few years before (CX 207A). Nearly a year later, Mr. Carriuolo reported his further efforts to develop ties with Beaulieu Initial Decision 96 F. (CX 208B), and, on June 5, 1969, the company was acquired by Heublein (Finding 78 supra).

821. In the Spring of 1968, Heublein executives had focused on wine as an area of expansion opportunity (Finding 92). Previously, Heublein had explored the possibilities of foreign production of wine (Tr. 346, 4732); and, as far back as 1966, Heublein s long-range planning group had identified wine as a product suitable for diversification. In March 1968, Heublein s Executive Vice President referred to " . . . our interest in the U.S. wine business" (CX 207B). At that time, Heublein was not interested in "small vintage wine types" of wine companies (Tr. 4950), but was interested primarily in a California winery (Tr. 4955).

822. In the early summer and fall of 1968, Heublein considered the acquisition of the San Martin Winery (CX 185-90). Heublein Mr. Beckstoffer visited San Martin, collected information about the winery, discussed the various arrangements that could be made and reported back to Heublein s Executive Vice President (CX 187). Heublein obtained a detailed report on various aspects of San Martin from wine industry consultant Louis Gomberg (CX 188). 823. At Heublein s request (CX 191A), wine industry consultant Louis Gomberg, in the fall of 1968, submitted reports to it regarding several domestic wineries that might be acquisition candidates (CX 191). (182) 824. Also at Heublein s request, Mr. Gomberg reviewed a number of wineries that Heublein might use "in bridging the price gap between the top of the Italian Swiss Colony line and the bottom of the Inglenook line" (CX 192A). In reviewing the field of candidates, Mr. Gomberg reported on the prospects of acquiring each winery (CX 192E, F) and, if the winery were small, on expanding it (CX 192G). 825. During the period of discussions with United, Heublein did not reject, but merely postponed merger talks with Guild, a small winery, pending completion of "a study of the alternatives of how to enter the wine industry" and of its negotiations with United (Tr. 4512-13).

826. When Mr. Ed Kelley, Executive Vice President of Heublein was placed in charge of planning in March 1968, one of Heublein corporate objectives was to enter the wine industry within one to three years. And this goal was assigned to Mr. Kelley (Tr. 9279-86). 827. Subsequent to the acquisition, Heublein reported to its stockholders in the 1969 Annual Report that "The addition of the ., , , . . HEUBLEIN, lng, gT AL. 563 385 Initial Decision domestic wine business to an already flourishing imported Wine business was one of our three corporate goals"" (CX 50E). 828. I conclude that Heublein had the intent and capability to expand into the domestic wine industry at the time of its acquisition of United;" and, but for the acquisition would have entered by other means in the near future. In light of Heublein s proven capabilities and successes, particularly in the imported segment of the wine industry, it may also be anticipated that its expansion into the domestic segment of the wine industry would have had a significant competitive impact. (183) The Merger Violated Section 7 of the Clayton Act under the Actual Potential Entrant (Expander) Doctrine Heublein s acquisition of United, a dominant firm in the concentrated United States wine industry, had the anticompetitive effect of eliminating Heublein as an actual potential competitor. Section 7 of the Clayton Act "looks not merely to the actual present effect of a merger but instead to its effect upon future competition. United States v. Von s Grocery Co 384 U.S. 270, 277 (1966). A merger s effect upon future (potential) competition may be either the edge effect (the "waiting-in-the-wings" or "on the fringe" perceived potential competitor effect), or the entry (actual potential entrant) effect. The court in United States v. Phillips Petroleum Company, 367 Supp. 1226 (C. D. Cal. 1973), affd. 418 U.S. 906 (1974), discussed the theoretical foundations of the actual potential entrant doctrine as follows:

The crux of the entry effect is that if the company which enters the market by acquisition had entered unilaterally,1 it could have supplied an additional competitive force without eJirninating one already present in the market. An acquisition of a company in the market by a company which is likely to enter on its own thus has an anticompetitive effect on the market.

. . . the terms 'unilateral entry independent entry, or de novo entry denote entry into a market through the entering firm s own efforts without a purchase or acquisition of stock or assets of a firm already in the market other than of de minimis nature (at 1232).

" The other two objectives "were record growth in sales and earnings-per-share and the successful introduction of pro/it able new pr"duct. .. (CX !JOE) " As developed above, the harriers and impediments to entering the wine market. would not have been substantial barriers to Heublein. Heublein had, or had ready access to, the necess(lry capital; its compatible distribution system Was already in operation and it had the influence with who!esllJers to secure additional wille dif;triblltion as required; it was in position to obtain the necessary retaiJshelfspace;it was a national leader in advertising and promoting prDduCL to develop brand recognition and prel'erence: and it wah fully acquainted and cilpableofcopingwith the rnultitudeofvaryingstat.e laws and reglliations Initial Decision 96 F. In United States v. Black and Decker Mfg. Co., 430 F. Supp. 729 (D. Md. 1976), the court reviewed the case development of the actual potential entrant doctrine," and summarized the analytical prerequisites enunciated therein as follows: (184) In a nutshell. review of prior potential competition cases suggests that the competitiveness of the market first be determined; the feasibility of alternative means of entry to a leading firm acquisition must then be explored with reference to the incentive and capability of the acquiring company; and finally, the ability of those alternative means of entry, if any, to deconcentrate or provide significant procompetitive effects must be examined (at 748), Applying those criteria to the facts of this case, it is clear that Heublein was an actual potential competitor whose elimination had an anticompetitive effect. First, as discussed above, at the time of the acquisition concentration ratios in the relevant market (all wines) and in the three submarkets was high. Furthermore, market shares in the all wine market and in the table and dessert wine submarkets were skewed by the high shares of only two dominant firms, one of which was United.

Second, Heublein had feasible alternative means of entry in terms of its incentive and capability. As noted above, Heublein intended to expand in the domestic wine industry because such products would allow it to effciently utilize its marketing experience and ability and its distribution channels for imported wines and domestic and imported spirits. Heublein s incentive and ability to expand in the wine industry distinguish this case from such conglomerate mergers as Missouri Portland Cement Co. v. Cargill, Inc. 498 F. 2d 851 (2nd Cir.), cert. denied, 419 U. S. 883 (1974); and Federal Trade Commission v. Atlantic Richfield Company, 549 F.2d 829 (4th Cir. 1977). In the latter, the Commission challenged the acquisition by Arco (a producer of petroleum, natural gas, and uranium) of Anaconda Co. (a miner and producer of copper and aluminum). There, in an action brought by the Commission for preliminary injunction to prevent consummation of the merger during pendancy of administrative antitrust proceedings, the court found that the Commission had failed to show substantial likelihood of success in demonstrating the anticompetitive effect of the merger:

. , . the conglomerate merger in the instant case involves no product or market extension; it is a merger purely for purposes of diversification, Arco is not poised on the fringe of the copper markets; it has no technological skils readily transferrable to United Sinies v Mnrine Bancorporalirm.41!i U.S. 602 (HI74): Federal Trade Commissir", v. Pruder Gamble Co.. 386 U.S. ;,(;R (1967): United Siulesv. Fah;tufr Brewing Corp.410 US 526 (197::1): lind,United Slutes v. Phillips Petroleu.m C"mpany. supra.

. . . g, HEUBLEIN, INC. T AL. dU'- 385 Initial Decision the copper markets; it has no channels of distribution which may be utilized to distribute copper (at 295). (185) Heublein s acquisition of United was a product extension merger into the domestic wine business for which it had readily available the technological marketing skills and distribution channels such as were noted in Federal Trade Commission v. Procter Gamble, 386 U.S. 568, 580 (1967), and Federal Trade Comm "ion v. General Foods, 386 F.2d 936, 945 (3rd Cir. 1967).

Heublein s intent to expand in the United States wine market was formulated and accomplished within a definite time frame: one to three years from the time its executives were assigned the goal of expansion in this industry (Finding 826 supra). The facts of this case thus meet the reasonable temporal estimate related to the near future " requirement announced in BOC International Ltd. Federal Trade Commission, 557 F. 2d 24, 29 (2nd Cir. 1977). Heublein had the financial capabilty for either de novo or toehold entry. It had for several years been exploring the possibilities of acquiring specific small wineries and had made efforts toward that end (Findings 812- supra). Indeed, it had acquired Beaulieu in a move that culminated efforts that preceded, and were totally unrelated to, the acquisition of United (Findings 78, 820 supra). Heublein could have made such an acquisition or acquisitions and expanded production in the manner pursued by Almaden and indeed as it did with Inglenook in developing their "Mountain" and Navalle" lines, respectively, or in the manner of its extension of the Lancers line from rose into Vinho Branco white wine and Rubeo red wine (Findings 65, 106- , 203, 204, 315, 688, 690, 691, 713 supra). the time of the acquisition, Heublein was financially strong, capable of financing its investments in new products through internallygenerated profis, by borrowing from external sources at favorable rates or by purchase with shares of Heublein stock, which was the method used to purchase United. It was also able to provide financial support to its acquisitions and new endeavors the $96 million credit extended to United after the acquisition (p. 173 supra). Heublein s expansion in the United States wine industry was financially feasible.

Heublein s expansion in the United States wine industry de novo or by toehold acquisition and subsequent expansion in the manner of Almaden and Inglenook would have had procompetitive consequences. A major advertiser and strong marketer would have been introduced into the market to challenge the dominance of Gallo and United.

I therefore conclude that Heublein was an actual potential Initial Decision 96 F. expander in the United States wine industry in 1968 with the incentive and capability of expansion within one to three years, and on a suffciently large scale to challenge the dominance of Gallo and United. (186) x. CONCLUSION: THE PROBABLE EFFECT OF HEUBLEIN S ACQUISITION OF UNITED VINTNERS MAYBE TO SUBSTANTIALLY LESSEN COMPETITION IN THE UNITED STATES WINE (NDUSTRY Prior to the merger, Heublein s shares of the relevant markets were:

all Wine 79 percent (16th in rank) table WIne 23 percent (30th in rank) dessert wine 54 percent (13th in rank)"

These percentages are superficially small, although not appreciably smaller than the 1.3 percent and 1 percent held to be anticompetitive increments to a dominant firm s share in a concentrated market in United States v. Aluminum Company of America. 377 U.s. 271 (1964) and Stanley Works v. FTC 469 F.2d 498 (2nd Cir. 1972), cert. denied. 412 U.s. 928 (1973), respectively. In United States v. General Dynamics Corp.. 415 U.s. 486 (1974), the Court discussed the role of market share data in antitrust analysis:

In most situations, of course, the unstated assumption is that a company that has maintained a certain share of a market in the recent past will be in a position to do so in the immediate future. Thus, companies that have controlled suffciently large shares of a concentrated market are barred from merger by Sec. 7, not because of their past acts, but because their past performances imply an ability to continue to dominate with at least equal vigor, In markets involving groceries or beer, as in Von:" Grocery, supra, and Pabst, supra, statistics involving annual sales naturally indicate the power of each company to compete in the future. Evidence of the amount of annual sales is relevant as a prediction of future competitive strength, since in most market." distribution systems and brand recognition are such significant factors that one may reasonably suppose that a company which has attracted a given number of sales will retain that competitive strenf,rth (at 501). (187) The most basic premise of the antitrust laws, that increasing concentration leads to anticompetitive interfirm coordination, requires that any significant increment in the share of a dominant firm in a concentrated industry be prevented. The Court held in United States v. Philadelphia National Bank, 374 U.S. 321 (1963) " Heublein s share of the sparkling wine suumarket is not being considered here for the reason stilted at p. ""pm.

HEUBLEIN, lng, ET AL. 567 385 Initial Decision that.. . . . if concentration is already great, the importance of preventing even slight increases in concentration and so preserving the possibility of eventual deconcentration is correspondingly great" (at 365 n. 42). And in United States v. Aluminum Co. of America, 377 S. 271 (1964), the Court noted that the objective of the 1950 amendments to Section 7 of the Clayton Act "was to prevent accretions of power which 'are individually so minute as to make it diffcult to use the Sherman Act test against them' " (at 280). Therefore, the evaluation of whether Heublein s small shares of the all wine market and of the table and dessert wine submarkets were de minimis as of the time of the merger must be made in light of the recognition in Philadelphia National Bank and A luminum Co, of America that "slight" or "minute" accretions in concentration or power must be considered under Section 7. Further, as of the time of the merger, Heublein s shares of the markets were growing. Its percentage shares, therefore, understate the probability of the potential future increment. In addition, Heublein s distribution rights to Harveys and Lancers, items of great prestige and consumer demand, were more significant than their small shares of the industry would indicate.

Under the circumstances recited above, the potential market share increment to United's already dominant position is found not to be de minimis and the acquisition violates Section 7. As previously found, Heublein has also violated Section 7 by reason of its entrenchment of United's dominant position (pp. 172- , supra), as well as by elimination of Heublein as an actual potential competitor (pp. 183- supra). Therefore, Heublein has violated Section 7 under the three separate principles enunciated above. Under a broader view, Heublein has violated Section 7 because of the totality of these three anticompetitive effects (the increased concentration, the entrenchment of United, and the loss of Heublein as a significant actual potential competitor). The anticompetitive effect of all three elements considered together is, of course, greater than that of anyone evaluated separately.

Heublein and United have asserted as an affrmative defense that But for Heublein s acquisition of a controllng interest in United United' s predecessor cooperative associa(188)tion was destined to remain an ineffective competitor." In their post hearing submittal HUV argue that at the time of the merger, United was clearly in a weakened financial and competitive position and did not have the ability to maintain into the 1970's the position it had enjoyed in the early to mid-1960' s (RPF 102).

Initial Decision 96 F.T. To the contrary, the record shows that United was the second largest company in the relevant markets (except for sparkling wine where it ranked third) at the time of the merger with market shares significantly larger than the third largest company. It also shows United' s abilty to maintain its position in the table wine market as consumer demand shifted from dessert to table wines. When a new opportunity arose in the wine industry, refreshment wines, United had the ability to secure almost 40 percent of that market, outselling the number three competitor many times over. The findings descriptive of United prior to the merger (150- , 190 209- , 222-41) depict a successful and aggressive company with multiple plants producing all types of wines and sellng its products through 370 distributors and its own distribution system, in all 50 states and the District of Columbia.

It had acquired the Italian Swiss Colony line, among others, from Petri in 1957 for $24 millon and had repaid that purchase price a year and a half ahead of schedule. United had also acquired the prestigious Inglenook Winery in 1964.

United was a leading advertiser in the wine industry and its president and chief executive offcer was considered one of the most astute merchandisers in the wine business. United was consistently profiable, a financially strong company.

As of the time of the merger, United was planning a new table wine brand and had taken steps toward constructing a $10 milion glass plant. United had been able to borrow money at reasonable interest rates as required.

Allied' s membership increased from 230 grape growers in 1951 to over 1 600 in 1968, and members were anxious to participate in the cooperative venture. There was a waiting list of 100 000 tons of grapes the growers wanted to deliver through Allied. HUV' s discussion (RPF 53-102) of United' s and Alled' s operations is claimed to demonstrate a defense within the holding of United States v. General Dynamics, 415 U.s. 486 (1974). There, the Court found that statistics showing the acquired company s market share did not reflect its ability to compete because the company lacked uncommitted reserves (189)of coal and could not acquire any with which compete for future business. In this case, to the contrary, United (through Allied) was able to secure the raw material it required. There was no basic impediment to the continuation of United' s vigorous competitive position.

The facts relied upon by HUV, interpreted in their very worst light, reflect business and organizational problems soluble in the normal Course of operations. HUV's assertions that these present HEUBLEIN, INC.. ET AL. 569 385 Initial Decision problems which presage a diminution of United's competitive position are too conjectural for adjudicative determination. The record does not indicate that United could not have resolved its alleged diffculties. HUV' s assertions are insuffcient to comprise a failing company" defense. 56 XI. REMEDY Divestiture of United Vintners The principal purpose of relief in a Section 7 case is to restore competition to the state in which it existed prior to, and would have continued to exist but for, the illegal merger. . . . Ordinarily, a presumption should favor total divestiture of the acquired assets as the best means of accomplishing this result United States v. Continental Can Company. Inc.. 1964 264 at p. 80,183 (S.D. N.Y. 1964). . RSR Corp.. 88 F. 800 893 (1976).

Divestiture in this case is both necessary and appropriate to remedy the anticompetitive effects of the acquisition. The Heublein share of the market wil be removed from United. United wil be restored to its former competitive position, a positive benefit for the market since United wil no longer be bolstered by the entrenching effects of Heublein s resources. And Heublein wil be repositioned as an actual potential competitor.

HUV have argued that, in the event of an order of divestiture, it should not be required to divest Jacare, Esprit and T.J. Swann, trade names owned by Heublein and which came into existence after the acquisition (RR 352). The inclusion of after acquired proprietary rights to T.J. Swann and Esprit in the order of divestiture is necessary and appropriate to maintain United's competitive integrity. At the time of the merger, United already had a strong share of the refreshment wine market while Heublein marketed no such wines (Finding 513 supra). (190) J. Swann, thereafter, was produced and distributed by United as a continuation of its endeavors in the refreshment wine market. It is a high volume, profiable brand (Finding 195, supra) and it must be divested with United. Esprit is another refreshment wine developed by United (Tr. 9544-45), and thus should not be excluded from the divestiture. Jacare originally was the name of a Lancers type carbonated wine developed by Heublein in the facility partially owned by Heublein in Portugal. The wine was test marketed in the United States but was a failure and was discontinued before United was acquired by Heublein. The Jacare wine being sold by United ,. As previously found (Finding 262 supra), United WIIS not sold becau c of an inability to continue in business on own, but rather in response to what appeared to he an advantageous offer which was initiated by Heublein. 336- 345 0 - 81 - 37 Initial Decision 96 F. today is a California wine developed and produced by United. It is a table wine and has no resemblance to the product previously sold by Heublein under the Jacare label (Tr. 321- , 4438, 4486, 9977-78). Jacare, therefore, is not being excluded from divestiture. Divestiture of T.J. Swann, Esprit and Jacare is being ordered because these products are an integral part of the United product line. Divestiture does not depend upon Heublein s choice as to which company holds title to the trade names under which United does business.

Complaint counsel would have Heublein prohibited, for ten years from acquiring, without Commission approval, any interest in any concern engaged in the production, importation, distribution and/or sale of wine. Such a sweeping prohibition would be inconsistent with the actual potential entrant basis of this case. One of the reasons Heublein s acquisition of United violated Section 7 is because it removed Heublein as an actual potential entrant. The order of divestiture is procompetitive, in part, because it repositions Heublein as an actual potential competitor, allowing potential entry by toehold acquisition. The provision requested by complaint counsel would preclude this procompetitive element of the order. In addition as proposed, the provision would prohibit vertical integration to facilitate distribution. This case involves a horizontal acquisition with product extension and entrenchment aspects. There is no basis for prohibiting vertical integration.

In Budd Company, 86 F. C. 518, 582 (1975), the Commission announced a general presumption that a firm holding 10 percent or less of a target market would be considered a "toehold" firm. Consistent with that principle, the prohibition against further acquisitions is being limited to situations where the acquisition or acquisitions would increase Heublein s total share of the relevant market or submarkets to over 10 percent. Such a provision would permit toehold acquisitions in the markets as they exist today and would allow for considerable market change before a toehold acquisition might be prohibited. Heublein may seek Commission (191)approval of an acquisition which would be inconsistent with the 10 percent limitation or, upon a showing of changed conditions of fact or as a matter of public interest, may seek such modification as may be appropriate under Section 3.72(b) of the Rules of Practice. Dismissal of the Complaint Against Allied Grape Growers, United Vintners, Inc., and Heublein Alled Vintners, Inc. Under the terms of the acquisition, United was converted from an agricultural cooperative association into a corporation which then Uth.. . l1 .lT l\L.

385 Initial Decision became a wholly-owned subsidiary of Heublein Allied Vintners. Heublein Alled Vintners was owned by Heublein (82 percent) and Alled (18 percent). On September 13, 1978, Allied moved for its dismissal from the proceeding upon a showing that it had sold its 18 percent interest in Heublein Alled Vintners to Heublein which then 100owned 100 percent of Heublein Alled Vintners and, through it, percent of United. Allied also abandoned all claims formerly made in this case including the right of first refusal in the event Heublein should be required to divest itself of its interest in United. On November 9, 1978, Heublein Alled Vintners merged into Heublein and ceased to exist. Heublein thus now owns directly 100 percent of United (pp. 7- supra).

Relying upon the foregoing, Heublein United Vintners and United, on December 13, 1978, also moved for dismissal of the complaint against them. 1 deferred ruling on all three motions for dismissal until the initial decision. In their post-trial memorandum (CB 3), complaint counsel state that they do not oppose any of the three motions.

In consideration of the order being issued against Heublein which affords all of the relief required in this case, any order issued against Alled Grape Growers, United Vintners, Inc. or Heublein Alled Vintners, Inc. would be superfluous. Therefore, I am dismissing the complaint as to these three respondents.

ORDER It is ordered. That the complaint against Alled Grape Growers Heublein Alled Vintners, Inc., and United Vintners, Inc. be, and it hereby is, dismissed.

It is further ordered. That, subject to the prior approval of the Federal Trade Commission, respondent Heublein, Inc. (hereinafter Heublein ), a corporation, its successors and assigns, and its offcers, directors, agents, representatives, (192)employees, subsidiaries and affiiates, shall, within one year from the effective date of this Order, divest all of the stock of United Vintners, Inc. and all assets, rights, property and privileges, tangible and intangible including all plants, equipment, machinery, raw material reserves inventory, customer lists, trade names, trademarks, good wil and other property, including all additions and improvements thereto, of 572 FEDERAL TRADE COMMISSION m;CISIONS Initial Decision 96 F. whatever description acquired by Heublein as a result of its acquisition of any interest in Heublein Alled Vintners, Inc. and, thereby of its wholly-owned subsidiary United Vintners, Inc. (hereinafter "United"), formerly a wholly-owned subsidiary of Alled Grape Growers (hereinafter "Allied"), or acquired by Heublein as a result of the sale to Heublein by Alled of Alled' s interest in Heublein Alled Vintners, Inc. or the subsequent merger of Heublein Alled Vintners, Inc. into Heublein, and all trade names under which wine is produced and marketed by United, including but not limited to Jacare, Esprit and T.J. Swann.

It is further ordered, That for a period of ten (10) years from the date of approval of the divestiture required by this Order, Heublein shall not acquire, directly or through any corporation, subsidiary, division or other device, without the prior approval of the Federal Trade Commission, the whole or any part of the stock, share capital assets or any other interest of or in any concern engaged in the production, importation, distribution and/or sale of wine, where Heublein s and said concern s combined share of the United States all wine, table wine, dessert wine or sparkling wine market or submarket would exceed 10 percent; nor shall Heublein enter into any arrangement with any concern by which Heublein obtains the market share in whole or in part, of any concern involved in the production, importation, distribution and/or sale of wine whereby Heublein would possess a total share in excess of 10 percent of the United States all wine, table wine, dessert wine or sparkling wine market or submarket.

It is further ordered. That pending divestiture, Heublein shall not make or permit any deterioration in the value of any of the plants machinery, parts, equipment, or other property or assets to be divested that may impair their present capacity or market value unless such capacity or value is restored prior to divestiture, nor shall Heublein take any steps to impair United's economic and financial position. (193) It is further ordered, That within twenty (20) days of the effective date of this Order, United shall be maintained and operated as a HEUBLEIN, INC. T AL. 573 385 Initial Dccision separate corporation with separate books and accounts separate management, separate assets and separate personnel. It is further ordered, That no substantial property or other assets of United or its subsidiaries shall be sold, leased, otherwise disposed , encumbered, other than in the normal course of business, without the written consent of the Federal Trade Commission, and Heublein shall not commingle any assets owned or controlled by United with any assets owned or controlled by Heublein. VlI It is further ordered That, in complying with the requirements of Paragraph 11, none of the property or business of United shall be divested to anyone who. is an offcer, director, or in any other way controlled or influenced by Heublein, or to anyone who owns or controls, directly or indirectly, more than 1 percent of the outstanding capital stock of Heublein or to anyone who is not approved in advance by the Federal Trade Commission.

VIl It is further ordered, That Heublein shall, within thirty (30) days (60) daysfrom the effective date of this Order and every sixty thereafter until Heublein has fully complied with the provisions of this Order, submit, in writing, to the Federal Trade Commission a report setting forth in detail the manner and form in which Heublein intends to comply, is complying, or has complied with this Order. All compliance reports shall include, among other things that are from time to time required, (a) the steps taken by Heublein to accomplish the required divestiture, and (b) copies of all documents, reports. memoranda. communications and correspondence concerning or relating to the divestiture. Heublein shall on the first anniversary of the effective date of this Order, and upon each anniversary date thereafter until the expiration of the prohibitions set forth in Paragraph 111, submit a report, in writing, listing all of its acquisitions of or mergers with other concerns engaged in the United States wine industry, the date of each such acquisition or merger, the products involved and such additional information as may from time to time be required by the Federal Trade Commission or its staff. (194) Opinion 96 F.

It is further ordered, That respondent Heublein notify the Commission at least thirty (30) days prior to any proposed change in the corporate respondent such as dissolution, assignment or sale resulting in the emergence of a successor corporation, the creation or dissolution of subsidiaries or any change in the corporation that may affect compliance obligations arising out of this Order. OPINION OF THE COMMISSION By PnOFSKY. Commissioner:

The question here is whether the acquisition by Heublein, Inc. ("Heublein ) of a controlling interest in United Vintners, Inc. United") violated Section 7 of the Clayton Act' and Section 5 of the Federal Trade Commission Act.' The amended complaint, issued in November 1972*, charged that the effect of the acquisition "may be substantially to lessen competition or to tend to create a monopoly in the production, distribution and/or sale of wine" in the United States. (2) The amended complaint challenged the acquisition on a horizontal and several conglomerate theories, alleging that it: (i) eliminated actual existing competition between Heublein and United; (ii) eliminated the likely entry of Heublein into the wine market by the acquisition of a firm with a smaller market share than United; and (iii) would unduly entrench United's position as a market leader. The administrative law judge ("ALJ") found a violation based upon each of these three theories and ordered divestiture. We disagree and, finding no violation of the antitrust laws, order the dismissal of the amended complaint.

As to the theories of horizontal anticompetitive effects, we find the small lessening of actual competition resulting from the merger was insuffcient to establish a violation of Section 7. Similarly, with respect to the conglomerate theories, we find that the evidence in the record simply falls short of establishing a violation. L THE MERGING PARTIES AND Tile INDUSTRY Heublein is primarily a manufacturer, importer and marketer of alcoholic beverages. In 1968, the year prior to the acquisition , !:;USG18 , 1.'USC. 4!i . Amended Complaint iss"pd Nuvember lG. 1!J71i .

, u. .L '- ;JID 385 Opinion Heublein ranked as the fifth largest domestic producer of such beverages, I.D.F. 15 ' earning a net income of $14 567,000 on net sales of $383 972 000. I.D. F. 17.' Distiled spirits and beer were Heublein principal product lines; distiled spirits (mainly Smirnoff vodka) providing 52% and beer 39% of its 1968 sales. I.D.F. 16. Wine, a less significant product line, provided $14 371 000 of the 1968 sales. CX 135 B. At that time Heublein, principally an importer, sold approximately 1 685 400 gallons of wine making it the sixteenth largest seller of wines in the United States. CX 373 D, E. (3) Prior to the acquisition, United produced and marketed numerous lines of wine-its best known brands being Italian Swiss Colony, Petri and Inglenook. In 1968 United sold approximately 38,226 000 gallons of wine, making it the second largest seller of wines in the United States. I.D.F. 498; CX 373. Its income in that year totaled 301 356 on net sales of $96 009,189. I. F. 165, 166. Heublein acquired United at a time of rapid growth in the wine industry. Americans consumed an estimated 158.1 milion gallons of wine in 1960; by 1968 that figure had risen to 205. 1 milion. I.D. F. 1- They spent an estimated $751 milion on wine in 1960; by 1968 that figure had risen to $1 053 milion. I. F. 2. This rapid growth continued into the following decade. American wine consumption had increased to 390.4 milion gallons by 1977, and expenditures to $3 bilion. I.D. F. 1, 2. Although this growth in consumption encouraged new entry in the market, I. F. 770, 776, the market has remained moderately concentrated. In 1968, the top four firms accounted for 47.9% of wine shipments, with the top two firms- Gallo and United-controllng 41.9%. I.D. 11. II. THE RELEVANT MARKET The Administrative Law Judge found, in accord with the stipulation of the parties, that the United States is the relevant geographic market for assessing the legality of the merger. He also found that one relevant product market is the "all wine" market, a market composed of the four basic types of wine: (1) sparkling, or efferves- , The following abbreviationo; are used herein. LD. ' - InitialDecision Finding of Fact No LD - lnitia!DecisionPageNo. Tr - Trani\ript.ofTestirnonyl'ageNo. ex - Complaint Counsel"s Exhibit No RX Respondent.s Exhibit No RR - Respondent.s Reply to Complaint. Counsel"s ProposedinrJings off"ct CAR - Complaint Cuunsel' s Appeal Brief Page No RHAB - Respondent' o; Reply Appf'a! RriefPage No , Heublein acquired 82% of the stockof United in September !961j for about 1':J3 million. tn. F. 2(;;3 In August 1978, Heublein acquired t.he rcnminder g.

Opinion 96 F.

cent wines; (2) stil wines containing up to 14% alcohol, commonly called table wines; (3) stil wines containing over 14% alcohol commonly called dessert wines; and (4) refreshment wines, produced from inexpensive fruit concentrate rather than grapes.' As we acknowledged in Coca Cola Bottling Co. of New York, Inc., (4)93 C. no (1979), the competitive offerings of the wine industry do not consist of altogether homogeneous products." 93 F. C. at 204. But, as we stated there, those diverse products nevertheless may appropriately be designated as a market" for antitrust analysis. 93 C. at 205. There is some signifcant competitive confrontation among even the most disparate wines, and there is also some supplyside interchangeability of productive facilities. Since no reason has been offered to abandon that conclusion here ' and since this record amply supports it, we hold that the all wine market is also appropriate in this case.

The ALJ also found that sparkling wines, table wines, and dessert wines each constituted a relevant submarket, but we do not find it necessary to reach these issues. Since the relevant concentration ratios and market shares for the acquiring and acquired companies do not substantially differ between the all wine market and these proposed submarkets, a determination of the validity of the submarkets would not affect the ultimate disposition of the case. See Brown Shoe Co. v. United States, 370 U.S. 294, 327 (1962). III. HORIZONTAL ASPECTS OF THE MERGER This case involves an acquisition by Heublein, a major marketer of . alcoholic beverages with a very small presence in the wine market of the second largest domestic wine company. In light of Heublein extremely small percentage share of the market and the failure of complaint counsel to demonstrate that this percentage understates Heublein s true market significance, we cannot affrm the ALJ' finding of a violation in the horizontal line. United ranked second in the all wine market in 1968 with a share of 17.9%, and Heublein ranked sixteenth with a share of .79%. The 1968 market shares of , The somewhat arbitrary categories of sp,ukling, table and dessert wines are used by state governments to tax wine distribuiion and by the industry itself to monitor production LD.F. 276, ::131,4 430. The term refreshment wines i.' simply descriptive. Although refreshment winesarc not made from grapes, as are other table wines, and contain Jess a!coho! tlJan other table wines (7-8% as compared to 10-14%1, they are still inclu.ded io the wine category for tax and statistical purposes. I.DF 1\38, . Although respondeot apparently cootested this market definitionbefore the ALJ, insisting that there were separate m..rkcts for standard and premium qu.oity wines see. e. VF. 282; RR I !JO. this position 11% not been asserted here. HRAI'J ,. ); , HEUBLEIN, lng, ET AL. 577 385 Opinion United and Heublein in the table wine market were 15.6% and ,23% and in the dessert wine market 21.0% and .54%.' CX 373 Although their 1968 market shares in the sparkling wine market were signifcantly higher, 10.7% and 7,2%, Heublein in late 1969 lowered the carbonation level of Lancers, the wine that accounted for (5) 99.7% of its sparkling wine sales, bringing it into the category of table wine, and leaving Heublein with a negligible share of the sparkling wine market. I.D. 112.

At the time of the acquisition, the wine market was not highly concentrated nor was there any significant trend toward concentration. The four-firm ratio was 47,9%-fallng near the lower end of any reasonable definition of "concentration.'" The import of that four-firm ratio is amplified by the distribution of 41.9% of the market among the top two firms. Recent research has suggested that high two-firm shares may be more relevant than four-firm shares (6) in predicting interdependent anticompetitive behavior. '" Disregarding, for the moment, other indicators of market behavior, we are wiling to assume that the all wine market was suffciently concentrated to warrant careful scrutiny of further increases but not so highly concentrated that an extremely stingent anti-merger policy is required. In light of the market share and concentration data presented here, Complaint Counsel cannot argue successfully that a prima facie violation has been shown. See United States v. Philadelphia National Bank, 374 U.S. 321 (1963). Although market share percentages are "not conclusive indicators , Since we do not find itnecessary to reach the i sues raised by the AI J's definition of suhmarkets, we have relied upon suhmarket shares computed by complaint counsel. , Complaint Counsel, in their appeal, (,challenge the ALJ's trelJtmeot of this change in carbonation level. The ALJ concluded that Heublein s premerger slmre of the sparkJil1fi wille market should be ignored beUIUS!' of the subse'lljent alteratiOfJ of Lancers- But he did not then consider the Lancerssa!es in his l!valuation nflleublein lihare of the tab!ewine market OoiI1g so would haw iflcreased Heublein s share of the l..bJe win!' market- apart from the wines of United- to .90% in 1970, the first full year after the change in carbonation. CX 373. United' table wines accmmted for 14.8% in that year. ex :!7 l If the sales of Lfl/1Cers in 1968, prior to the char!!;c, Were added to Heublein s other table wine sales, it woud yield a share of 1.2%. ex 373. While we agree with Complaint Counsel' s criticism of the AU' s calculations, that critkism doos not alter our conclusion that this merger was 110t likely tosobstantial!y lessen competitinn ineitherthealJ wine market or any of the proposed submark.-ts . In The Slanley Works 78 F. C 1023, 1065 (1971),a.rrd, 469 !,' 2d 498, 504- , (2d Cir. 1972), cert denied, 412 Us. 928 (1973), the Commi$ion found and the Court of Appeals agreed theit four-firm conc'-ntration in this rml!:;e described a concentrated market See aL Department of Justice Merger Guid.-lines, 'j and 6 (1\)68), 1 Trade Reg Rep, i4.'10 at 6884 (1971) defining a market with four- firm concentnltion above 75% as "highly concentrat",.!"); F Scherer Indus/rial Markel Structure and Economic P r(()rmance 280 (2d ed, 1979) (sugr;esls critical fOllr-firm concentration level is between 45 and 5!J percent); n P. Areeda & n. Turner Anlitrust Inw ,:404 at 278 (1(178) reascJI to believe that substantial effeds generally disappear once four-firm concentration ratioH fall below.'O to 55%" j Rain Indus/rial Organization1:31 (2d ,.d HJ68) (four firms controlling 50-65'Yc, renects " high-moderate caocentration) See Kwoka, The Effect of Market Share Distribution on Industry Performance, 61 Review of ECQnomics OIod Statistics 101 (197!J) Although this concern with two firm concentration has emerged only recently, the CrJmrnissioo has previrJusly recogni ed that any skewing of the distribution of market share towards the leading firms may aggravate whatever lessening of competition that may result from a merger. Wamer-Lambert Co., 1'7 Ji, C. 812 (1976); Sullivan llrlfdbok o(thel..lwo(A"litrusl 621 (1977) Opinion 96 F.

of anti competitive effects United States v. General Dynamics Corp., 415 U.s. 486, 498 (1974), we note that no decision has ever found a horizontal violation based upon so small a percentage increase in concentration. Violations have been found in two cases where there were percentage increases of approximately 1%: 1.3% in United States v. Aluminum Co. of America, 377 U.S. 271 (1964), and 1.0% in Stanley Works v. FTC, 469 F. 2d 498 (2d Cir. 1972), cert. denied, 412 U.s. 928 (1973). But those cases differ significantly from that before us now.

First, in each case, the larger party to the merger controlled more of the market than did United; Alcoa accounted for 27.8%, and Amerock, the firm acquired by Stanley, 22-24%. Alcoa and Amerock were the largest firms in their respective markets, while United, by contrast, was second behind Gallo.

Second, the acquisitions reviewed in Alcoa and Stanley Works Alcoa thethreatened more imminent anticompetitive effects. In market was already far more concentrated than the market here; the top two firms controlled 50% of the market, the top four 76%, and the top nine 95.7%. The Supreme Court also noted a trend toward vertical integration and elimination of small independent competitors resulting from recent mergers. 377 U. S. at 279 n.6. No comparable pre-acquisition trend exists in this case. Four-firm concentration in Stanley Works was approximately 50%, comparable to that of (7)the wine market but the Court of Appeals concluded that evidence of Stanley s strategy and pricing policies in other markets increased the likelihood of anti competitive effects resulting from the small addition to concentration in the market at issue. Evidence before the Commission showed that Stanley had always sought to minimize price competition, acting as a "price leader" for every hardware product line in which its market strength permitted it to do so, and that pursuance of that policy was likely in the relevant market after the acquisition. The Stanley Works, 78 F. 1023, 1067-1074 (1971). According to the Second Circuit, the acquisition threatened to turn "a concentrated market manifesting limited signs of price competition into a rigid, lifeless market tending toward even greater concentration and economic enervation." 469 F.2d at 505. The record in this case contains no such evidence of past business activity by Heublein that adds an additional anticompetitive threat to an otherwise small increase in concentration in a moderately concentrated market.

A comparison with United States v. Crowell, Collier and Macmillan, Inc., 361 F. Supp. 983 (S. Y. 1973) highlights the disparity between Heublein s acquisition of United and the mergers in Alcoa , u.

385 Opinion and Stanley. The acquisition by Crowell Collier closely paralleled Heublein s. Crowell Collier, with .6% of the relevant market acquired the leading firm in that market. The District Court refused to find a horizontal violation, even though the four firm concentration was 69.6%, and the market share of the acquired firm was 41.9%-statistics significantly higher than those in the Heublein acquisition." The court emphasized that the particular conditions present in the market undermined even the superficial appearance of a horizontal lessening of competition. Among these conditions were a lack of a trend towards concentration, the absence of a likelihood of future defensive mergers, a lack of vertical integration among the competing firms, and the inability of any of the firms in the market to affect competition through control of price, due to the prevalent industry practice of sales through competitive bidding. (8) It can also be questioned whether the market share statistics of 17.9% and .79% depict, as accurately as did the figures in Alcoa Stanley Works, the possible reduction of competition resulting from this acquisition. The wine industry, as we observed in Coca Cola Bottling Co. is comprised of disparate products. 93 F. C. at 204. And although variations in price, quality or sweetness do not justify the rejection of a relevant market comprised of all wines, those variations must be considered when evaluating the possible competitive effects of a merger between two wine producers. In both Alcoa and Stanley Works little disparity existed between the products of the merged firms" and hence the market share figures of 1.3% and 1 % accurately measured the competitive confrontation between the firms that might be diminished by the merger. Heublein and United however, sell markedly different products, and thus Heublein market share of .79% may well overstate the actual competition between them.

In 1968 United produced and marketed a wide range of wines, primarily under the Italian Swiss Colony, Petri and Inglenook brands. LD.F. 160, 190. Heublein had three principal wine products: " The Heublein-United percentages arguably fa!! outside even that "gray area at the edge of potential illegillity The Pilsbury Co" !J3 F, C. %6, 10:J9 (l97!) untJ,'r the Department of Justice guidelines for horizontal mergers. In a market with a four firm concentration under 75%, the guidelines suggest that lin acquisition by iI firm with 15-20% of the market is suspect when the ilcquired firm has alleast 2-:1% Departmf'nt of Justice Merger Guidelines 6 (lhis). I Tmde Reg. Rei', '14510 at (ijj4 (Ifni) " In Alcoa the rdevanl mllrket was defined as bare and im;ulated aluminum conductor, a product " designed alrnostexclusively forusf' by electric utilities in carryingelectr icpowerfromgf'neratingplantstoconsumers:' 377 S. ilt 27:t The Court described '10 significant prnduct variations among producersStanleyIn Works, the relevant market WliS stipulated by the parties as all residential and institutional cabinet hardware, 41j J at 500. Although Judge MansfieJd'sdissent argued that an analysis of pruduct varia tions reduced Stanley s 1% markctsharetoan actual competitive ovedap of, 5%, the majority rejected the argument. 4(j91".2d at 501; " See SKI' Industries. Inc..(1976-79J Trade Reg, Rep. (CCIl) (vrc Complainl imd Orders) '12U,95 (l!)7 j) (94 TG Ii);Kaiser AZ,lminum Chemir:l GJrp. !J:1 l".TC. 7(j4 (l!mJ);United Stall'sv. Federal Company. 40:J F. Supp 161 (W. D. Tenn. HJ7 $:j, Opinion 96 F.T.G vermouth, produced by Heublein in the United States, I.D. F. 11; Lancers, a carbonated rose produced by Rose Marie da Fonseca Sucrs. in Portugal, and solely distributed by Heublein in the United States; and Harveys Bristol Cream, a cream sherry produced by John Harvey & Sons, Ltd. in England, and also solely distributed by Heublein in the United States. (9) Both Harveys Bristol Cream and Lancers stood high on the scale of prices in the wine industry. United' s Inglenook line also commanded premium prices, but the vast majority of United's wines sold at the lower end of that scale." Wine prices offer a rough guide to consumers' estimates of quality, and thus crudely delineate the areas of most intense competition for any wine along tbe broad spectrum of price and quality in the wine market. Most wine producers, as we noted in Coca Cola Bottling Co.. view "the bulk of their competition as coming from similar type wines within a narrow price range. " 93 C. at 203-4. The record in this case, confirming that conclusion reveals that the most intense competition for Heublein s premium priced Lancers and Harveys brands did not come from United's low price wines. To be sure, Harveys Bristol Cream and United' s less expensive ports and sherries do compete: all are dessert wines offering similar tastes and uses. See CX 63, 65, 97k; Tr. 2863- , 2876. But the record reveals quite clearly that Harveys had achieved a unique position in the market. Heublein promoted it and consumers apparently accepted it-as a prestigious wine especially suited for gifts and special occasions, see I.D.F. 34; Tr. 2082, 3801- , 8737; CX 97 Z- , 98B, 99G, J, K, and other wine producers considered that less expensive dessert wines provided no substantial competition. See Tr. 1868, 4245-46, 7218, 7316, 7512- , 8744. Lancers occupied a somewhat similar position. Though it competed to some extent with all table and sparkling wines, Heublein had also marketed it, with apparent success, as a prestigious wine see Tr. 8704; CX 107, 116B, C, Q, 120A, 125E, Z-25, Z- , and Heublein, and other wine producers believed that most lower priced wines offered little significant competition. See Tr. 465- , 522- , 2081- , 7316-17; CX 129B, 352D. The competitive distance between Heublein and United is less striking than that between Mogen David and Franzia described in Coca Cola Bottling Co. 93 F. C. at 199. Nonetheless, our conclusions in that decision are stil relevant here. To the extent that the wines of Heublein and United compete in separate segments of the broad " Heublein Harveyo Bristol Cream sold for approximately $5.75 per fifth in their ex !J7M , and Lanc!'TS, 7!i. Tr. H7() 0::1 By comp"riol!n Italian Swiss Colony s burg-undy, chablis aod rose sold for approximately $H!) per fifth in 19!i8. RX 1 ,;;,. Although Inglenook' s brand Inglenouk Estates sold its cabernet, pinut nO;T and chardonnay for approximately $:!.50-$:J. , RX lZ,'i5, all of Inglenook's brand accounted for onlyli% of all United' 196H sales and. l % of the all wine market. ex 227 _u,' u.-"

38.0 Opinion all wine market, there is less "likelihood that this merger wil increase opportunities for interdependent behavior on the sellng side. " 93 F. C. at 207. These observations are (IO)not dispositive here, as they were in Coca Cola Bottling Co. but they do indicate that Heublein s very low market share of .79% nevertheless may overstate the competitive overlap with United. Moreover, complaint counsel failed to prove that Heublein had special competitive potential such that its small market share understated its possible future competitive significance. In Alcoa the Supreme Court explained that Rome Cable s 1.3% market share did not fully reflect its competitive potential. Rome had competed aggressively, pioneered in research and sales, and developed special aptitudes and skils in the relevant product line. Complaint counsel did not establish that Heublein had comparable competitive signifcance in the wine market. It is true that Heublein was highly successful in product marketing. But it would distort Alcoa definition of the special small competitor to make advertising or ITlarketing, except in special circumstances not present here, a distinguishing characteristic. Heublein was not an innovative competitor. Its initial success came from sales of its principal product Smirnoff vodka." Most of its product diversification had resulted from acquisitions and distribution agreements, not research and development." In the wine industry itself, Heublein had little significant aptitude, skill, or research potential at the time of the merger; its principal products, Lancers and Harveys, were imported from (U)foreign manufacturers. " Nor was Heublein an aggressive price competitor. Whatever competitive potential Heublein did possess was in no way unique; numerous other firms with a small " We are careful, however, not to place too much reliance on the positioning of ",eq:;L'.! firms ' products within a single market, Or else the notion ofa "mark!'t.. could be eroded, We note the limited head-on competition betwt'n United and Heublein at the time of tht' merger only to assist us in assessing complaint counsel's contention that Heublein s ,7f1% market share in rarity understated the competitive significance of Heublein, " In thil, vOlJka sales account!'d for approximately 75% of Heublein s gross sales, Tr. :!9Rfi-K7. fo'rom l%:J to 1!jfiR itssalesofSmirnoffincreas!'d4:-!%, 1.D.F. 47, " Although Heublein had developed some successful premixed cocktails. based On work beginning at the turn of the century, Sf'f! LDF 51 5::1 , its recent entry into new product lines had been accomplished by merger ,10.1 agency flgreements. Its list of 3cquisitions i!1CJuded: Arrow Liquers Corporation in I!JG5. a distributor of scotch. whiskeys. 3nd brandies, LD. F, 64; Vintage Wines in 1!JG5. a distributor of foreign wines and spirit, I.DY (;5: Theo lIamm Brewing Co in 1%5, LO. F. fj(); Don Q Imports in I!JfiR, a rum distributor lnf. 71: 3nd Beaulieau Vinyards in I!H;!JLD.F7R The list of distribution agreements included: a 19fii agreement granting exclusive US. distribution rights for Rert3ni Jtalian Wines, ID. F, (;7: a 1!)()6 agreement granting exclusive U, S. distribution rights for Jose Cuervo tequila, U).F. Ii!); a 1 J67 agrecmcnt granting exclusive US di1;tribution rights for Chateau St. Georg" wines of France, I.D.F. 7() a 1!HJ8 agrcement granting exclusive U.s distribution right ror Black Velvct Canadian Whiskey. l.D. . 75: and a I!JG8 3grcement granting exclusive UB distribution rigbts for Kiku-MasamuO!' S"ke, .lapan lelldings3ke. LDF, 76.

" Se,'discussionp.R.sf/Pra 582 FEDERAL TRAm; COMMISSION DECISIONS Opinion 96 F.

share of the market could be considered equally important future competitive factors. 19 Finally, we note that the evidence of market concentration trends does not significantly increase the likelihood of adverse competitive effects from this acquisition by a firm with a market share of less than 1 %. A trend toward concentration did emerge after the acquisition. The market share of the top four firms increased from 47.9% in 1968 to .56.7% in 1971. LD.F. 447. But that figure has fallen thereafter. The unavailability of some import data for the years after 1972 makes impossible any precise calculation of the decrease. LD. 489. We wil assume, for the sake of argument, the accuracy of the smaller estimate of that decline proposed by Complaint Counsel placing four firm concentration at 54.2% in 1976. CAB 16. This data does not describe a particularly strong trend toward concentration see. e. g.. United States v. Philadelphia National Bank 374 U.s. 321 (1963) (increase of market share of top seven firms from 61 % to 90%), and, in light of the decline in recent years, it is insuffcient to elevate to the level of a violation the increase in concentration resulting from this merger.'" (12) We conclude, after consideration of these conventional elements of horizontal merger theory, that the increase in concentration resulting from this merger is not likely to produce significant anticompetitive effects, and thus does not constitute a traditional horizontal violation of Section 7. It has been urged, however, that Heublein 79% market share understated its competitive significance because Heublein s active consideration of other acquisitions at the time it acquired United makes it a unique potential deconcentrator of the market, and also because Heublein s strength as a liquor distributor, the popularity of its products, its access to financing, and its large advertising expenditures, adds more to United than Heublein market share indicates. Consideration of "conglomerate" aspectshere, the possibility of Heublein s expansion by toe-hold acquisitions and the possibility of some entrenchment of United' s market position-can be useful in the analysis of horizontal mergers involving small market shares. See Stanley Works v. FTC, 469 F. 498 (2d Cir. 1972); United States v. Wilson Sporting Goods Co.. 288 F. Supp. 543 (N.D. Ill. 1968). But the possibility of entrenchment or a lessening of potential competition cannot be deemed significant- See discussion Pl'. 21- 2:\ ;"1;-0.

Cf Department of Ju licc mere:€r Guidelines i 7 (liHjH) 1 Trade Reg. Rep (CCH) 1 4:;10 at (iHH4 (1971) (sllggesti'1l; th"t acqLJi itio'1 of firm with 2% of m"rket will be challenged if eight- finn concentration has increased by 77, in C,-lOyear period): Sullivan.supra note 10. at (;22 ("'If, "II thing consjdered. t.he merger does not 810'1e or with other factors pose a threat of excessive "uncerltrution. the mer!' fact that in the recent pa t conr.ent.ration incri,,,sed due to inlernal growlh lJught"ott(JhccmJugh to invalid ate the merger. 285 Opinion whether under consideration as an independent basis of violation, or as an aggravating factor in a horizontal violation-without some consideration of the settled qualifications on conglomerate merger enforcement developed by the Supreme Court. Those qualifications after all, are not arbitrary but are tools to evaluate whether the likelihood of anticompetitive effect is significant. Since the ALJ found that this merger violated Section 7 under both entrenchment and actual potential competition theories, we will evaluate those claims on their own, before considering their significance when coupled with a horizontal theory.

IV. THE ACTUAL POTENTIAL COMPETITION ASPECTS A potential entrant' s acquisition of a leading firm in a concentrated market may violate Section 7 if it is likely that the potential entrant, but for the acquisition, would have entered the market independently or by the acquisition of a smaller competitor in that market. Any such merger may lessen competition by eliminating the substantial increased (13)deconcentration or other procompetitive benefits likely to result from the presence of a new, or a newly reinvigorated competitor in the market.

A potential expander, with only a minimal share of a concentrated market, may also violate Section 7 by acquiring a leading firm in that market if it is likely that the potential expander would otherwise have attempted to increase its market share by building new capacity or acquiring a smaller competitor. The merger lessens competition much as if the potential expander were a potential entrant not yet in the market." The ALJ found that Heublein See discussion PI'. 23& 2(i ;'Ifra.

" The Supn'mt' Court ha" expressly reservedapproval ur the actual potential compt'tilioll doctrine,See United Siaies Marini' Brmmrpomtian, 4J8 UB. 602, f:25 (l!l71); United Statesv. Fa/stoff Brewin!J Corp,410 IJB. :'26, 5:17 (1973). But a" we noted inBrunswick Corp. (197913 'fr"de Reg Rep. (CCIl) n' I'C Complaints and Orders) 1! 21,;23 the Commission, together with numernus rederal courts, has endorsed the doctrine ;Ind we ar.. confident that it ewntually will receive the SUprl'me Court's approval" 11979J :'1Trade Reg. R"p. (CCIJ) (Vrc Complaints and Orders) \1 21,1j2:!at21.782 f!J1 FT.C 1174at12(i7j " ps the Commission uhst'rvt'd in The Relldi;r Corp..77 C. 7:B (l970) reversed and remonrlNl on other gro!lnd. 4GO F. 2d ,,:14 (6th Cir. 1!J71), in holding that Section 7 is viobted by the elimination of potential entry by toehold acquisit.ion as well as by inlernar expansion, tht' " form of entry" eliminated was not d..erminative; "what was determinative. !was) the actual elimioatiun of the additional decision-making, lh" added capacity, and the othpr market stimuli which woold have result.l'd had entry taken a procompetitive form. " 77 F, C. at R17. !fthe potential expander would have built new capacity Or acquirl'd a smallercumpetilor, the acquisition or" market. leader arguably adver.;ely affects competitiun in much lhe same manner While Bendix is often cited as a potential competition dP1:ision, it is less commonly noted that Bendix already had a small, 5% share of tho' aut.omotive fiter market before its acquisition of Fram Corpomlion. 77l"TC. at R09 ! ., Opinion 96 F.

acquisition of United lessened potential competition by eliminating the possibility of any such pro-competitive expansion." (14) Under the analysis outlined by the Supreme Court in United States v. Marine Bancorporation, 418 U.s. 602 (1974), and elaborated in subsequent decisions in the Courts of Appeals, approval of the ALJ' s conclusion requires findings that (i) the all wine market was substantially concentrated, (ii) Heublein had the capacity, interest and economic incentive to expand, (iii) its expansion offered a substantial likelihood of producing deconcentration or other signifcant pro-competitive effects," and (iv) that Heublein was one of the few most likely entrants or expanders and that its elimination as a result of the merger would be reasonably probable to substantially lessen competition. While close questions arise on several counts, we conclude that the record would adequately support the first three of these findings. But the record also plainly shows that Heublein was but one among an unusually large number of potential entrants and expanders. Under those circumstances, as we will discuss more fully below, we do not believe that the elimination of Heublein s potential for deconcentration would be likely to substantially lessen competition. Before reaching this issue, however, we will first review the evidence bearing upon the concentration of the market, the likelihood of Heublein s expanding by alternative means, and the probable effects of such expansion.

Likelihood of Entry and Prospects for Deconcentration The preservation of potential competition is only important when the relevant market is concentrated." Concentration ratios may be used to establish a prima facie case that the relevant market is suffciently non-competitive to warrant the application of the actual potential entrant doctrine and the burden then falls upon the party defending the merger to show that those ratios "did not accurately depict the economic characteristics" of the market, " The all wine market' s four firm ratio of 47.9% arguably falls at the edge of a reasonable definition of those markets where the loss through " Complaint Counsel have not argued, and the Also did no!. find, th"t the possibility of Heublein s expansion exerted any disciplining effect upon the pricing decisions ofcompet.itors in the all wine markd. Thus this case does !Jot involve the perceived potential entry doctrine,See. Uniled Siaiesv. Fulslurr Bn'wing Corp. 410 U,S. 526 (1!n:J); Sullivan supmnotelO ,,t.!i3:!-i:J8 " Rnmswick Corp. (I\J7Y) : Trade Reg. Rep. (CClI) (FTC Complainl. and Order;) 21.(j2 (!J4 F. C, 1171J There i :'"me authority, as well, that Heublein s expansion must be shown to have been likely to occur in the reasonably near future, SeeROC In/ern"tional. I. v. F 1'C. 5,,7 P' 2d 24, 2!J (2d Cir. in7) See,,/so United Slates Siemens Corp.. 1l9ROJ;, Tradt, Reg. Rep. (CCH) r !i: 2i:7 (2d Cir. U!i:O). " Uniled Slates Marine Rcmcorporation, 41i: U.S. 602, 6:)1 (HJ71). See Turner, Conglomerate Mergers & Section 7 of the Clay ton Act, 78 llarv. L. Rev, l:H:J, 1:IH2 (l!H,;,) " United States v. Murinen"nt'(Jrporation, 11H UB. (iO:!, 6:!1 (1974) , 385 Opinion merger of a potential entrant may (15)substantially lessen future competition." In light of the high two firm ratio of 41.9%, we find that the actual potential entrant doctrine applies here. Respondent has offered no convincing evidence to the contrary. We believe the record also supports the finding that it was . reasonably probable that Heublein would have acquired a smaller competitor in the all wine market if the acquisition of United had not been possible. " In the years prior to the purchase of United, Heublein, primarily a marketer of vodka, had used acquisitions to enter the scotch, whiskey, brandy, beer and rum markets.'" Strong economic incentives (16)encouraged the continuation of this pattern of growth into the wine market. That market was the only remaining major alcoholic beverage product market where Heublein did not fully participate." The market's recent rapid growth, LD. , 2, promised a profitable future, a promise made all the more tangible by the success Heublein had found possible with the two major wines it already sold." Heublein s history of diversification into various alcoholic beverage markets suggests that wine was " natural avenue of diversifcation"" for a company with Heublein products and experience. Wine was distributed through the same channels as Heublein s other products, advertised and marketed in " In Uniled Siaies v. Marine Rancorporalion. 41R US, 502 (1974). three firm concentration was Ij2%, considerably higher than here.The Commission and lower federal courts have found lowf'r concentration ratios suffcient to apply the pQtcntial competition doctrine,see, e.g, The Rendix Corp..77 FT.G 73\ (1970),reversed and remanded On other wound.., 450 F.2d 534 (6th Cir. 1971) (4 firm concentration at 80R%):United Siaiesv. Black & Decker Mfg Co" 430 F. Supp. 729 (D. Md, 1976) (4 firm concentration at 77, !i%); Uniled Siaies v. WilsrJT ::'prtinf: CrJOtL, Co" 8S F, Supp, ,,43 (N.D. Ill. 196R) (4 firm concentration at 6:J%), and most decisions appear to have a.'sumed that the lower boundary is nfor 50%.See, e.g. United Slates v. HUf:hes Tool Co. 415 r' , Supp. 6:17 (GO Cal. 1976) (4 firm concentration at :14% not suffcient);United Stales Philip. Pelroleum Co.. ::167 F. Supp. 1226 (GO, Cal. 1973).atrd. 418 U.s, !J06 (1974) (4 firm concentration at 58% is sufficient);United Stales v. Falstaff Brewing Corp" ::183 F. Supp. 1020 (O.H.I. 1974) (on remand from Supreme Court, 4 firm concentration at 50% not suffcient), See f:enera/ly, Toehold Acquisitions, Potential Toehold Acquisitions, and Section 7 of the Clayton Act, 42 Antitrust L.J 573 (1973) (60% is presumptively suffcient); V P. Areeda & D. Turner,AntilntSt Law'; 1119 atRO(1980)(::;!i%is ambiguous mustconsider otherstructuraI characteristics The market concentration here also falls just beyond the borders of the Df'partment of Ju.'tice Merger Guidelines. See Department of ,Justice, Merger Guidelines 18 (1958), 1 Trade Reg. Rep, 1 4510 at 6R8R (1971) " Although the Ala also found that it was likely that Heublein would expand its share of the market through de novo construction if the acquisition of United were not possible, we find no evidence in the record to support this conclusion '0 SeenoteI7 supra.

" Cf Brunswick Corpomlion, (l979j 3 Trade Reg. Rep. (CCII) (fVrC Complaints aod Orders) 62:1 (94 F.T.C 1174) (Yamaha s entry into U.S. outboard motor market found to be likely in part because it "was practically thf' only significant part of the world in which Yamaha was not selling substantial numbers of outboards at all" " From 1963 until 1968, sales of Lancers had increased 294%. and Harveys Bristol Cream, K4%. I.D.F. 7/17 " FTC.' v. Procter Gamble Co.. 386 US. 568, 580 (1967). Cf The Bendix Corp.. 77 FT.C. 731 . 815 (1970), reversed and remanded rm ()/her grounds, 450 ",'2d 534 (6th Cir. 1971), ("the whole logic of Bendix .' corporate development and the unambiguous direction ofitsbu.'inf'ssgrowth . all point ed toexpflnsion " into the relevllnt market) 336- 3450 - 81 - 38 Opinion 96 F.

the same manner, and called for management expertise not unlike Heublein s experience with similar products. There is also evidence that Heublein, recognizing these economic incentives, had a significant interest in expanding in the wine market. Heublein s acquisition of United is, of course, some evidence of Heublein s interest in the market. But that evidence is of little use in predicting whether Heublein would have purchased a smaller competitor if the United acquisition could not occur. More relevant is the evidence of Heublein s interest, throughout the years preceding the United acquisition, in wine companies having a significantly smaller market share than United. Few corporate policy documents trace this interest, but such evidence should not be necessary where as here, there is objective evidence that a toehold acquisition or novo (17)expansion would have been likely. Here, in fact, the record evidence of discussions and negotiations with possible acquisition candidates reveals significant interest in the relevant market. During the late 1960' , the period of lIeublein s diversification into numerous alcoholic beverage markets, Heublein also acquired or attempted to acquire several small wine companies. In 1965, three years before the United acquisition, Heublein expressed an interest in acquisition to both the Taylor Wine Co. and Almaden Vineyards, but neither was then available. CX 165- , 139-42. When Almaden did become available in 1967, Heublein made an unsuccessful bid. CX 144-47. These attempts to enter the market prior to the acquisition of United provide persuasive evidence of Heublein interest in the market." Heublein had not adopted a policy of gathering information and watchful waiting, "" but rather was actively seeking acquisitions. This evidence also rebuts Respondents claim that any firm with a smaller market share than United would not have been an acceptable acquisition candidate. Such declarations of an intention to acquire only a market leader, whether drawn from corporate documents or elicited from management at trial, are not highly probative in an actual potential competition case. They offer little help in answering the central question-whether the Respondent would have entered the market by alternative means if the challenged acquisition were prohibited." In this case, lIeublein " ty rrcv. I'roclcr& Gamble CrJ.. :J86 US. . ,,80 (1%7) (entry into bleach market likely beeau " bleach " complementary to Proctor s product, i "old t(j the same cu tomers through the san", channels. and is adverti and merchandized in ttJe Slime manner Sre, e.g, RmnHw;r.'k Co/poralirHl, f)97!Jj: Trade Rt'g. )(('p. (CCH) (fq' C Complaints and Orders) 1: 21 (i2:J f!H C ! 174):The Bendix Corp..77 F,TC. 7:J1 (1970), reversed and /'emar!dcd on vtlu:r"n",,,ds,4;'0 F'2d ,,:H (!ith Cir UJ7!) (talks with acquisition candidates per ive evidence, even though no offer made) " F. T. v. At/anli,' R;ch(l:ed Co..:'49 F, 2d 28 2WI (4th Cir ! J77) " Sec. e.g, United Stales Falstaff Brewi"" C"'p. 110 US :,2(;, ;,7" (EI7:,\) (Marsh,,11 concurring); British Uxyp,en Ca. Ud, Sf; TC. 1241 , I:J"n (ID77), r,','rrs"d a",i remanded on otherf'o!1nds.,,7 F2d 24 (2d r:ir. 1 JT/) .

385 Opinion unsuccessful overtures to Taylor and Almanden, and even the purchases of Vintage Wines and the Lancers trademark in 1965 show that Heublein was interested in smaller acquisition candidates. The record shows that in 1967 Taylor accounted for 2.8% and Almaden 2.0%, while Vintage would have accounted for approximately .53% of the all wine market. (18) The record also shows that Heublein had the financial capacity to acquire a smaller wine company, that smaller companies were available, and that such an acquisition offered a feasible means of expanding Heublein s market share. Financial resources would have posed no obstacle to the acquisition of a smaller firm. Heublein ranked among the largest and most profiable companies in the nation. And some of the same factors that provided an economic incentive for the United acquisition-Heublein s experience in the marketing and distribution of other alcohol products, for examplealso support the conclusion that it would have been within Heublein s capacity to acquire and successfully run a small wine company.

The record indicates that such smaller candidates were available at the time of the United acquisition, or shortly thereafter. Aside from Gallo and United, the largest firms in the market, the other leading firms each possessed approximately 2% of the market in 1968, clearly a suffciently small share to qualify as a toehold acquisition.'" Of this group, one firm, Guild Wineries and Distilleries, accounting for 2. 1 % of the market in 1968, was available at the time of the United acquisition. Guild approached Heublein with the suggestion of a merger a few months after Heublein learned of United' s availability, but Heublein preferred to pursue the United deal Tr. 4477, 4494, 4512-13." (19)Two other firms in this group became available soon after the United acquisition. Roma, a firm with approximately 2% of the market in 1968 was acquired in 1971 and Franzia Brothers Inc. with 2.2% was acquired in 1973. Of the many smaller firms outside the top ten, several were available at the time of the United acquisition and several others soon thereafter. " In 191i7 Heublein stood::!Gth in the " Fortune "DO" rankingol'rirms by sales and 7Hlh by growth in earnings per share. In I H;!J it rank"d ;,th by five year aver"ge profitability- tD_V 1:!- 14. Cf /Jill/I'd Sial". v, Phillips Pe:lm/""m Company, 867 F. Supp- 12211 (C.D. Call97::! arrd, 418 US. )(Hi(1!)71) See The Bendix C(Jl'-77 FTC 7:1. !J )70), real' n;"d und rem"",J,'d'HI vlha grolwds, Lio 1".2d ,,:,4 (Gth Cir. l!J7) '0 See, e. g, Missouri l'ortlond CementCo. Y. C"rgil! IncnrpOrGterl,4!JH F. 2d 8:,1 (2d Cir), ,."rl. derlied, 419 U. HB:., (1!J74)(firm with 10% too large tobe" toehold);United Statesv. Rl",:k f)cckerMtf: Cn 4:!I F. Supp 729 7G7- 6R(D. Md. 1!)7;):Turner supr('l() 2ri ,,t1:J(j7. 70. " Mogen David Win!' Corp. , accounting for 2, 5% of th" m;:rket ;:150 l\pprol\ched Heublein with l\ merger proposal during this period, and Heublein again decided nnt to pursue the possibility, ex 1!1. 20:J. But given the uniqueness of Mngen Uavid's products see 0"." Cu!" Rulliinfi C", or New York1,,(, . !):j F.TC 110 (197!J), it may hay" offered a lessvjablebascfor"xpan iun in Iheall wincmark"t Opinion 96 F.T.

San Martin Winery with approximately . 21 % of the market in 1967 approached Heublein with a proposal for merger in 1968, but Heublein preferred to pursue the United acquisition. CX 185-90, 373. Beaulieu Vineyard, with approximately . 14% of the market in 1969 was actually acquired by Heublein a few months after United. I.D. 78; CX 373. During the four years following the United acquisition, a total of fifteen small firms became available and were acquired by companies other than Heublein. CX 299.

While it is true that none of these firms offered the substantial market share of United, the record offers persuasive evidence that the market share of a smaller firm could be expanded by an acquiring company and thereby contribute to deconcentration. After its acquisition of Almaden in 1967, National Distilers & Chemical Corp. was able to triple Almaden s sales by 1972; its market share doubled, increasing from 2.0% to 3.9%. CX 373. Heublein itself was able to increase Inglenook's sales over five fold during that same period. CX 227. This is persuasive evidence that the acquisition and expansion of one or more small wineries offered a viable alternative route for Heublein." It also indicates that Heublein s acquisition of a smaller firm, instead of United, offered a substantial likelihood of ultimately producing some deconcentration and increased competition.

Was There a Probabilty of a Substantial Lessening of Competition? Assuming Heublein had the capacity, interest, and economic incentive to expand by acquisition of a smaller competitor, and that such acquisition would have produced pro-competitive effects in a concentrated market, it stil does not follow that the acquisition of United would constitute a violation. Section 7 is concerned with the probability (20)of a substantial lessening of competition, and the elimination of a potential entrant or expander leads to a substantial anticompetitive effect only when there is a limited number of other firms reasonably likely to enter or expand in the relevant market. The reason we are concerned about the size of the universe of entrants goes back to first principles about protection of potential competition. Essentially, we are concerned about the possibility that active competitors in a market, by agreement or tacit collusion, will raise price, diminish product quality, or otherwise fail to respond " See United Stotesv. Philips Petro/cum Co. :j(;7 t' - SUPf'- 122(j, 1247 (GD Cal 197:Jj, !"ert. denied, 418 US nOli (EI74)(relying upon similar evidence to show fcasibilityofto eholdacquisitions). " See BOC Interrm/ional. Ltd.v. F.TC. ;";;'7 F. :!d 2:1, 27 (2.1 CIL 1977); Fox supra note 21:, at :;81 (bot.h suggesting that this branch of theMarine Brmcorpomtion toest requires nu "biharate factual proof) ......), 385 Opinion independently to competitive pressures. If any of these things occurred, there would be an incentive for potential competitors to enter or expand in the imperfectly competitive market, and Section 7 is enforced to assure that any such potential competition is not removed by merger. But if there are many other firms roughly as capable and qualified as the party to the merger, and sharing similar incentives to expand from existing toeholds or to enter de novo, elimination of any single company as a potential deconcentrator normally wil have no significant anticompetitive effect. Under this analysis, Heublein s elimination is insignifcant in competitive terms because the record demonstrates the existence of an unusually large number of strong companies who either made toehold acquisitions or were wiling and able to do so at about the time Heublein acquired United.

Two preliminary points warrant consideration here. First, in weighing the evidence on this issue, we place tbe burden of persuasion upon Complaint Counsel. Since a merger eliminating a potential deconcentrator is anticompetitive only when the universe of other potential deconcentrators (21)is limited, proof of the point belongs upon the party challenging the merger. It would be impractical, however, to require Complaint Counsel to bear the burden of coming forward as well. Proving the negative of this proposition-proving, in other words, that no or only a few other firms were likely potential deconcentrators-would be too burden" some a requirement to be an element of the prima facie case. So we place upon the party defending the merger the initial responsibility of coming forward with evidence that a group of plausibly qualified potential deconcentrators exists. That burden is not discharged simply by naming a long list of companies who might have entered and then leaving it to the plaintiff to disprove the likelihood of entry with respect to each. Rather, the party defending the merger must be able to point to objective factors indicating that the designated firms wil likely be willng and able to enter or expand if the market becomes less competitive. Once that has been done, the issue is raised and Complaint Counsel bear the burden of persuading that the universe of potential deconcentrators is limited. " See, e.g.. F. rc Allan/i,. Richfield Co.,54fJ F, 2d289, ::00 (4th Cfr 1ft?7):Missouri Portland Cement CO. CnrlJiil, Incorporated. 498 F.2d 851 (2d Cir. cal. denied.4H! U,S. BR:J(1!J'4): Uniled Slal,' Y. Crowell Collier & MacmUlan, Inc.. :J6J F, Supp, 98:3 (S.D.N.Y. 197:n: Turner supra note at 1aH2 (if other potential entrants numerous, loss of nie insignificant under an actual pou,ntial competition theory):FTC 4Prode, Gamble Co.. :38fi U.s. ;,(iR (l967);Bealrice foods Company, B(i F.TC 1;6,1 (197.':'), afrd. 510 F'2d ,'30:3 (7th Cir. 1976): Unit,'d . ,;t(lte. Y. Hu.ghes Tool Co..415 F Supp. 6:37 (cn Ca!. \976) (if other potentia! entrants numerous, lossone insignificantof lJndl'r perceiyed potential competition theory). " On this question of dj triblJtiOTl of burdens of proof we follow the suggested apprnach ;n V p, i\reeda & D Turner su.pm note 28 . 1 12:ia. at 124. 5, Seeftenem.liy James, Jr. , Burdens Dfl'roof, 47 Va. L. Rey .5! (l J(jl). Opinion 96 F.

A second preliminary point concerns the definition of factors indicating the likelihood of entry by other outside firms. The membership of the group of other potential deconcentrators should be defined by similar criteria and kinds of evidence as are used to find that the firm at issue was likely to enter or expand. Less certainty of proof should be required with respect to these other firms, however, because the record usually will disclose far less about them than about the parties to the merger at issue. Firms sellng similar products as the firm at issue, and standing in a similar relation to the relevant market-in this case, firms already holding a toehold position in the wine market-would be the most obvious potential expanders." The record here shows that nine major firms sellng liquor also had a small share of the wine market at the time ofthe United acquisition: (1) Joseph E. Seagram & Sons, Inc. (2.5% of the all wine market); (2) National Distilers & Chemical Co. (2.3% of the all wine market); (3) Brown-Forman Distilers Corp. (2.9% of the table wine market); (4) Schieffelin & Co. (.69% of the table wine market); (5) Renfjeld Importers, Ltd. (.95% of the all wine market); (6) Foremost-McKesson, Inc. (percentage not available); (7) Liggett & Myers, Inc. (.24% of the table wine market); (8) Schenley Industries (2.9% of the all wine market); (22)and (9) Hiram Walker, Gooderham & Warts, Ltd. (percentage not available). All of these firms are of substantial size and likely to have had the same incentive as Heublein to expand their share of the wine market. Although some were financially smaller than Heublein, that does not necessarily make them less likely to expand; all were of substantial size and the capital markets are available to fund potentially profiable ventures."

This list of potential deconcentrators is already formidable, but its criteria are nonetheless probably too narrow. We see little reason for limiting the group of potential entrants to other alcoholic beverage companies with experience in the wine market, since any acquirer could probably count on the acquired company to supply whatever experience" would be needed. There is thus little basis for arguing that a firm competing in the liquor or beer market and interested in the wine market, but lacking experience there, is signiflcantly less likely to acquire a wine company than a liquor or beer firm already competing in the wine market. A more reasonable definition of the universe of potential entrants in this case may therefore also include liquor or beer companies outside, but with some interest in, the wine " See (tf'nemlly Sullivan supra note 10 at (i:H: V P. Areed" & 0 Turner, supra note 2H 1123 at l24-:14 Bradley, Potential CumpetitiQn Merger, 87 Yule L.J \'7,,- 77(1977) " V P. Arf'eda & D. Turner supra /Jotf' lK , ,; 112;1 at 1:\7 HEUBLEIN, INC., ET AL. 591 385 Opinion market. The record shows that at least five liquor or beer companies actually entered the wine market by toehold acquisition shortly after 1968: (1) Glenmore Distilers Company; (2) Joseph Schlitz Brewing Company; (3) Scottish & Newcastle Brewers, Ltd.; (4) Northwest Distillers; and (5) Norton Simon, Inc. Since these firms did enter shortly after 1968, it is highly likely they had the capacity, interest and economic incentive to do so at the time Heublein was removed from the list of potential entrants. The number of such firms who did not actually enter, but could have been similarly characterized as likely to enter, is probably larger.

This logic carries further. In this case there is little rational basis for limiting the list of potential deconcentrators to firms with experience in the liquor or beer markets. Seven large firms with experience in neither market actually entered the wine market by acquisition shortly after 1968: (1) Coca Cola Inc.; (2) The Nestle Company; (3) Standard Brands; (4) Pilsbury Company; (5) Pepsico, Inc.; (6) Beatrice Foods Company; and (7) United States Tobacco Co. (23) We emphasize that this list of potential entrants is made up companies who either actually held a toehold position in the wine market at the time of Heublein s acquisition of United or entered that market shortly after the merger. This is not just a speculative list of potential candidates with some uncertain capacity and interest-a situation in which we would be much less likely to assume companies were part of the potential competition universe. We need not now define the minimum number of other potential entrants that makes the loss of one an insignificant lessening of competition. The number present here is overwhelming-substantially greater than any definition that has emerged in the cases or the literature." There were a total of at least 21 companies with capacity, interest and economic incentive comparable to Heublein to enter or expand in the wine business who either were already in the product market on a toehold basis at the time Heublein acquired United, or who entered shortly before or after that acquisition. Looking at this group, we are unable to conclude that Heublein acquisition of United would have been likely to substantially lessen competition." That conclusion is buttressed by the fact that the wine market was only moderately concentrated and was rapidly expand- See, e.!:., Ur,filed Stalr' v. HI,,;hes TrlOl Company. 41" F. Supp. (j:H (Cn. Cal JfJ?6) ((; other potelltial entrants made 105S of one insignificant): V 1'. Aree,b & n Turner supm note 2H. : 11 :) at 12:!-4 (I!JRO) ("a uoivl'rse exceeding three similarly well-qualified potential entranb should bp pmsurnptively suf!dent to obviate concern and auniverseol ,ixentmntsremovesanyplausibl\'basis " See. e.g. FTC v, Allantie Rich(icld C".,:)49 . ,od ,oK!J, :\00 (4th Cir. !!J77); Miss(w. rl Purtlalld Cem"nt Co. CarKili InL'orporaled, 4!JS F. ,od H!)l (,od Cir). cer/. denied. 41D US H J: WJ74); Unlled Siules v.Crowell Collier & Mur:nullan, Inc :J!i! F. SUf'p. HH:! (SDNY. 1!J7:J) Opinion 96 F.

ing. We hold, therefore, that the ALJ erred in finding a violation of Section 7 on the actual potential competition theory. In the light of the evidence described above, it is also impossible to conclude that a horizontal violation exists on the theory that Heublein was considering acquisition of smaller companies than United, and that the possibilty of toehold expansion makes it a more signifcant competitor than its small market would otherwise suggest. Standing as one among this large group of other firms also likely to enter or expand. Heublein is simply not a unique competi tor, and the loss of its potential for deconcentrating the market is not signifcant. (24) V. THE ENTRENCHMENT ASPECTS Entrenchment analysis considers the possible anticompetitive advantages that a large acquiring firm can confer on an acquired s market. Although FTCfirm over competitors in the acquired firm v. Procter Gamble Co., 386 U.s. 568 (1967), the seminal decision examined only the adverse competitive effects of substantial advertising and promotional advantages bestowed upon a dominant firm in a concentrated market, the logic of the Court's analysis extends further. Arguably any substantial competitive advantage resulting from the acquiring firm s size disparity or resources may cause a merger to violate Section 7 -whether the acquired firm is dominant or not-if that advantage "may substantially reduce the competitive structure of the industry by raising entry barriers and by dissuading the smaller firms from aggressively competing. The ALJ was correct, therefore, in concluding that this acquisition might violate Section 7 on an entrenchment theory even though United was not the dominant firm in the market. Adverse competitive effects conceivably could result from any significant competitive advantage gained by United even if United were not the market leader. Of course, if the acquired company is small and weak in its own market, the advantages obtained by the merger may strengthen 't and probably enhance competition.

The ALJ found that the acquisition entrenched United, and thus 'iolated Section 7, because Heublein conferred on United three ignificant competitive advantages: (1) the ability to obtain substanai, inexpensive financing; (2) the ability to participate in a large 1vertising and merchandising budget, with its attendant effcienes; and (3) the possible leverage that Heublein s popular Smirnoff FTCv. Procter GambleCn., 386 u.s. 56!!, 57!! (1967). SecSuUivan supra riote 10, at (i56. ("H is the effect of renchment, not the parliclilar mechanism, which is central to the C!oror analysis. ), ). ). HEUBLEIN, INC., ET AL.

385 Opinion vodka and other liquor products might provide to increase wine distribution and sales, either through explicit or more subtle forms of tying. Barriers to entry would therefore be raised and smaller competitors disadvantaged, the ALJ ruled. Despite recent criticism of entrenchment theories based upon such competitive effects, ample precedent stil holds (25)that a violation of Section 7 may predicated upon them." The ALJ was also correct, therefore, in concluding that these kinds of competitive advantages deserved careful scrutiny.

But a violation is not made out simply by arguing that an acquisition might conceivably confer some competitive advantage. Adverse competitive effects cannot be assumed; the record must prove the competitive advantage to be both reasonably likely and signifcant and, as a result, that competition would probably be adversely affected. Indeed, because adverse competitive effects from entrenchment" can be rather elusive, it is particularly important that a factual basis be .carefully constructed." Highly relevant here would be evidence demonstrating the magnitude of the acquiring company s competitive strengths, the impact of those strengths in the market of the acquired firm, and the inabilty of the other firms in that market to match those strengths or otherwise compete effectively." Since the record in this case does not show that any advantages conferred on United as a result of the merger would be likely to have a significant competitive effect, we hold that the ALJ incorrectly concluded that the acquisition "entrenched" United and thus violated Section 7. (26) In light of these findings, it is also impossible to conclude that a horizontal violation exists on the theory that Heublein s competitive advantages in the wine market make it a more significant competitor than its small market share would indicate. " See. e.g, MUiSQuri Partland Cem",,1 Co, v, Carf!ill. Im'()rprJraled. 4!Jf\ F.2d 8;11.1'65 (2d Cir.), ccrt denied. 419 US 88;1 (!974) (n more metaphorical than real"): V p, Areeda& D. TUrner supra note 28. H 110;3, 110:), llo ), 11:J4. " On cheaper capital co t, see Budd Company. 8/; TC- 518 (1975); United Slales Ingersoll.Rand Co" 320 F:2d :j09 (:!rd Cir- 191i:: United Stales II. In/errw/ionr,l Telephonf! and Telel;raph Corp..:-124 F. Supp. 1 (0- Conn. 1970), appeal dismissed.404 U,S- 1iol (1971): on advertising advantaf:es and effciencies.see FT v. Pro('f!r & Gamble C,,- 386 U.s. 568 (1967):General Fo()d.Corp'm lion v, F. TC., 386 F.2d 9:36 (3rd Cir. UH;7. ('frl. denied. ::91 S. !H!) (1!J68); Uniled Slates Black fkcker Mfg Co.. 4::0 F. Supp. 729 (0. Md. lD76): and on the possibility af explicit or subtle leverage see Procler Gamble Ca. 63 F. C. 1465 (1!J6::).afrd. 86 US, ;,(;8 (1967) (only the Commission decision addressed this point):U'liled SI(lIesv. Wilson Sportiog Goods Cn. 288 F, Supp. 4:: (N,D. HI. 1968), Cf FTC v, Cansolidakd Foods. 380 U.S. 5n (1%5) (merger creating possibility of reciproca! buying ma) vio!ateSection7) " Se!!. e.g.. Missouri Pari/and Cement Ca.v, Cargill Inmrpomled, 498 F2d 851 (ld Cir. I.'ert. denied. 419 D. 8R:: (1974): Carrier Carp Uniled Technologies Corp..1978-2 Trade Cas. "62,::93 (N,DNY. urrd. 1978- 2 Trarl Cas. \. 62 405 (2d Cir. 1(78), See generally Turner supra note 26, at 13!",2. " See. e,g. Sterling Druf:. Inc.80 F. C 477 (1!71):Missouri Portland Cemenl Co. v. Cargill. Im' orporull'd. 2d 851 (2d Cir, cerl. denied, 419 U.S, ,lB: (1974) g., g., Opinion 96 F.

Capital Costs The acquisition did strengthen United's financial position. Heublein provided valuable access to new capital, and helped to arrange and participated in the financing of new production facilties. See, I.D.F. 62, 63; I.D. 173-4. Heublein directly extended up to $90,000 000 in long term loans. See. e. Tr. 2515, 8121-28; CX 555 562.

The record does not show that at the time of the merger this new access was likely to give United a significant competitive advantage over other firms in the wine market, or that it subsequently did so. Although United did borrow heavily from Heublein, the record does not show that the cost of those loans was significantly cheaper than United had paid before the acquisition." Neither does the record contain evidence that United was able to obtain financing at significantly less cost than its competitors in the wine market. The evidence does suggest that any "capital cost" advantage was highly unlikely to have existed. Many of United' s competitors, as we have already noted, were owned by large distilers and conglomerates, and the financial strength of many equalled or surpassed Heublein s. At the time of the acquisition, three distilers with substantially greater sales and assets than Heublein competed in the wine (27)market: Joseph E. Seagrams & Sons, Inc., National Distillers & Chemical Corp., and Scheneley Industries." And many of the firms that subsequently acquired small wine companies-Coca Cola Bottling Co., Standards Brands, Inc., Norton Simon, Inc., and Beatrice Foods Co., for example-were vast diversified enterprises whose resources dwarfed Heublein " All of these firms could have matched or surpassed any competitive advantage that Heublein financial resources offered United. In light of their presence in the " The loan from Heubleill ..ctually boreII::% higher interest them ane of United' two major long term nterest bearing laans before the acqui ition. The interest r;items aflhe !"alls from Heublein were set at 1% over the 'rime rate, ex fi62; Tr, 947;1; the n,te of one of the pr"ac'luisition long term l,.mnsIn% averwas the prime rate. f,G5, ,. The record does contain evidence that in1975 and 197!! Heublein unsucc,' fully attempted to replace iL IIn loans ta United of approximately $!)( OOOOOO with bank loans;the effort failed because no bank was willing to :tend the loans without charging higher rates, See Tr, 8121-- , \J47 (), But this evidence alone does not answer l' central question- whether Heublein s financing gave Unit.ed a significant competitive advantage The i,Jence may not even reflect any "advantage at all, but rather only a chan e in conditions in the clipitaJ markets. " In I H;R Joseph E. Seagrams & Sons, lnc- had sales of $1.049,593 000 and assts of $7;m 7!iO OOO, Nation!!1 tiller: & Chemical Corp, $%7 (;4:, 000 and $7!J4 j5,OOO, tlnd Schenley Industries, Inc, $fi50348 OOO and 9:m OOO, RX 475, 509, 537, Heublein ftad sales of$::g:J,!J72,OOO and asset.., of$141 171 000, CX49 " Coca Cola, for example, had salesof $;;,559 878,000 and a"sets of S 22;j 924 OOO in lU77, the year it acquired ling Vineyards and the Taylor Wine Co- ex 299; RX 12:-2, Sb\nd!!rd Brands had sales of $l 2!J4 989 18 and ts of$718,517,599 in 1972, the year it acquired Juilius Wile Sons & Co, CX 299; RX f,JR. Norton Simon had sales 739,76;-; 000 and assets of $1 947 OOO in 1977, the year it acquired San Martin Vineyards, ex 299; RX 481. rice Foos, which acquired Brookside Enterprises in !!I?;J, had snes of $fi 288 578,000 and a&wts of B.87G,OOOby 1977 CX299 RX 12:J2.

g.. ), HEUBLEIN, INC., ET AL. 595 385 Opinion market, it is impossible to conclude that Heublein s abilty to finance United could have substantially lessened competition, Advertising Effciencies There was no substantial evidence in the record justifying the conclusion that Heublein was likely to or did bring to United a significant competitive advantage in advertising, or that the merger was likely to or did increase barriers to entry attributable to advertising or product differentiation. While it is true that Heublein spent heavily for advertising, its expenditures, even without taking FTCinflation into account, were far less than found in either Procter Gamble Co., 386 U. S. 568 (1967) or General Foods Corporation v. F. T C, (28)386 F, 2d 936 (3rd Cir. 1967), cert, denied, 391 U.S. 919 (1968), the decisions pioneering the concept that signifcant advertising advantages could violate Section 7.'" More importantly, those decisions did not define large advertising expenditures alone as the threat to competition. The mergers were prohibited because the acquiring companies bad access to signifcant advertising effciencies whether from access to cumulative quantity discounts or simply scale effciency savings unavailable to the other competitors in the acquired firm s market. Although the record in this case suggests Heublein did benefit from some such efficiencies,61 there is no evidence whatsoever on how much was saved, nor any evidence indicating that those effciencies were not available to the other firms in the wine market. Considering the number of other large competitors who were either in the market the time of the United acquisition, or who entered shortly thereafter it is highly unlikely that Heublein enjoyed any comparative advantage.

Even if Heublein had enjoyed such an advantage, the record does not show that it would have been of decisive importance or even competitively significant. Advertising was critical to a firm s success " C"m,,,,l' SterlingDrug Co.. HI) FT.C. 477 (1971): Mi.%ouri Portland Cement Cu. v. Cargin jnearpnmled. 498 2d 851 (2d Cir, cert. denied. 419 U.S. 8H:J (1974); United States v. Black Deckl" Mfc- Cu. , 4:\0 F. Supp. 729 (D Md. 197(;)with FTCv. Procle,& Gamble. :386 UB 561j (1967) GO Procter & Gambk was the "nation s largest advertiser" in 1957 , the year it acquired Cloro" FTCv. Pructer & Gamble Co.. 3!!/j U.S. ,56R. 57: (J9fi7), and General Foods was the third larg"st in 19fH , three years after it acquired S" General Foods Corpam/ion v. FTC. 3R(; F. 2d )3fj, 988 (3rd Cir.19m), cer/. d ed, :ml U.S 919 (l9!;8). Procter & Gamble s expenditures f')r advmtising and other promotions tot"Jled $127 000 000 in Hj, :186 US at 573; Genera! Foods totaled $G9 OOOO()() in 1957, the year of the acquisition. 3B6 F.2d at9:m. In 1970, two years after theUnitedacquisition oneadvertisingpublicationdescrihedHp.ublein as the 44th largest advertiser in the nation, and fixed its expenditures at $40 500 000 ex 339, 331 , 3:J2. Respondent has maintained that its ('xpenditures were even lower. ex 332 ., The record contains evidence, for example, that some discounts were available in purchases of local television and radio time, bilboard space, ,md newspaper and magazine space,see, eg, Tr. ;I7Jii, 7987. 8770, 9754- , and that significant savings could be earned by sharing advertising time or space among several products.See, ex 501, 87Z- !pp.., Opinion 96 FTC.

in Procter Ga""ble and General Food because the product markets were composed of low priced, high turn-over items lacking significant distinguishing characteristics. The wine market differs (29) markedly in this respect from the liquid bleach or steel wool markets; it is composed, as we have already noted, of competing products varying significantly in price, quality and use. Where such product differences exist, an advantage in advertising costs is less likely to be of competitive importance."' It is also more likely to be competitively useful, encouraging product variations by informing consumers of a wide range of different products. An examination of the advertising to sales ratios in the wine market bears out this observation. Especially high advertising expenditures were not necessary for Gallo and United to maintain their leading market shares in 1968 nor for National Distilers to increase Almaden s market share in the years that followed. In 1967 Gallo s advertising to sales ratio was 5.4%, and United's 6.0%. Between 1971 and 1974, the period of Almaden s market expansion its advertising to sales ratio never exceeded 1.9%." These ratios are significantly lower than those in cases where advertising has been found a critical element of market success, and thus a possible basis for entrenchment under Section 7." Any advantage in advertising costs that Heublein might have brought to the wine market was thus of doubtful competitive significance.

Possible Tying or Leverage Since Heublein s liquor products could be sold through the same distribution channels as United' s wines, this acquisition creates the possibilty that Heublein could use the popularity of Smirnoff vodka as leverage to coerce its distributors or retailers into carrying United' s wines. Whether Heublein issued express threats or exerted more subtle coercion-or even if distributors and retailers voluntarily purchased United' s wines to curry Heublein s favor-competition might be lessened by the restricted access to distribution channels imposed upon United's competitors. Section 7 clearly may be ,iolated by a merger creating the possibility that the acquiring irm s reciprocal buying power wil give a competitive advantage to See, e.g., United Slatesv. Black Decker Mfg. Co..430 F. Supp. 729(D. Md. 1976); United Stales v, Crowell ,ilier Macmilrm. lfU.. 361 F. Supp. 983 (S, Y. 1973); Uniled Slates Wilson Sporling GQ(JL Co" 88 F 543(N.D. l!1968).

" &c RR 11i 291, 292, 331; RAB p. 67 fn.99. " &e. e.g.. GelUral Food Corp. 69 F. C. 380, 434 (1966),affd 386 F.2d 936 (3rd Cir, 1967),cert. denied. 391 3. 919 (1958)(over 15%).

, , t1.rUJjL.rJ1 , J1 v" .rJ i\L.

385 Opinion the acquired (30)firm, whether that advantage may result from explicit or subtle coercion or from voluntary actions." While the issue is less clear, we wil assume that Section 7 can also be violated by a merger creating the possibility of a competitive advantage arising from the leverage of a successful product of the acquiring firm. This is especially true when, as here, the acquiring company has a truly desirable product-Smirnoff vodka-in a clearly related line and the acquired company s products already hold a leading market position.

Several considerations suggest, however, that the mere possibilty that leverage could occur should not be suffcient to establish a violation. First, it will almost always be the case that leverage is possible" when firms sellng related products merge. At the same time, substantial effciencies and savings can result from the integration of distribution systems following such mergers either actual selling or distribution efficiencies or a reduction in transaction costs resulting from customers abilty to do business with a single seller. A rule that outlaws mergers upon a showing of the mere possibility of leverage therefore would have significant social and economic costs." Hence "leverage" should be a ground for barring an otherwise unobjectionable merger only when the evidence of probable adverse competitive effects is fairly clear. Second, since any full line forcing or tying produced by the leverage could most likely be later challenged under Section 3 of the Clayton Act or Section 1 of the Sherman Act, the anticompetitive effects that could only be eliminated by prohibiting (31)the merger wil often be both insignificant and remote. They would be limited to coercion too subtle to be proven in a subsequent enforcement action, and voluntary purchases by distributors and retailers. In light of possible redeeming economic benefits of mergers integrating distribution systems, and the likelihood that in most cases few significant anticompetitive effects wil result from any leverage made possible by them, we conclude that the existence of possible leverage should See, eg Yrc v. COflolidaledFoOf. 380 US, ,'192 (19fi.'1); United Slutes v. Ingersoll-Rand Co" ::120 2d (:hd Cir. 19fi:J);Alli. Chalmers MfI;. Co. v, White COfloiidated Indus Inc"414 V2d 50/; (:rd Cir 19(,9),ced. denied, 396lJS J(O j(1970) " See note .'12 supra. See aL o C",:a Cola Bottling e,) of New York. Inc"98 F. C. 110 (1979);United Stutes International Telephone Telegraph e(Jrp. 124 F. Supp. 19 (D Conn. 1!J70),appeal di. ",i. sed, 404 US ROl (1971); Department of Justice MergerGuidelin I 20 (1968), I Trade Reg. Rep. 4!i10 at 6RH9 (1971) " Of coursf', evidence of efficiencies is not admissible in individual cases in defen e uf an otherwise illegal merger. See FTCv. Procter Gamble 886 U,S. 568, 580 (1976) ("Possible economies cannot be used as a defense to ilegality ). Our point rather is that in lookin" prospetively at what kind of across-lhe-board rules should he develuped to treat questions of entrenchment by lev!orage in cong !omer"tecases, possible !ossofefficiencies, along with many other factors, should be taken into account.Cf The Pillsbury Co.9:3 F.TC 966 (l97 .. ); ). Opinion 96 F.

be a ground for barring a merger only when the evidence shows that it wil probably produce significant adverse competitive effects. The record in this case wil not support such a finding. Smirnoff vodka might have been a powerful leverage tool, but the record contains no convincing evidence showing either that Heublein would probably have exercised that leverage, or that distributors and retailers would have purchased United's wines to win Heublein favor and thus insure their supply of Smirnoff. There is no evidence that Heublein had ever attempted to use the leverage of any of its products prior to the acquisition of United. Neither is there any evidence that the potential for exercising leverage motivated Heublein s decision to acquire United, that Heublein ever attempted to use its leverage to increase United's sales, or even that Heublein considered it. " (32) A comparison with the record supporting the Supreme Court' determination in FTC v. Consolidated Foods, 380 U. S. 592 (1965) that the use of reciprocal buying power posed a threat to competition highlights the lack of evidence in the record now before us. In that case, the Court had before it evidence that Consolidated Foods planned a program to apply its purchasing power and implemented that program with systematic coercive efforts, that some customers gave in to the coercive efforts, and that the acquired company succeeded in increasing its market share. While all of these elements need not be proven to establish a violation, the record in this case does not convincingly establish any of them. Indeed, as noted previously, United's market share was down considerably in the years following the merger.

Consideration of the marketing practices of other firms in the wine market supports the conclusion that significant anticompetitive effects were unlikely. The record contains no convincing evidence that other distilers owning wine companies had ever used the See V P Arced.. & D. Turner supra nok 28 11:11\ at 202- 1:3 (HI801: ef FT v. Consolidated Foods. 380 592 603 (196.'';) (St.eward, J , concurring) ("Clearly the opportunity for reciprocity is not alone emmgh to invalidate 11 merger under Section 7. United Silliesv. International Telephone Telegrnph Corp_ :J24 P. Supp. 19 (D Conn. 1970j, appeal dism ",r1, 404 U.S. R01 (1 J71) (must show reciprocity " is likely to occur Bu.1 cf AlliB Chalmers Mfg Co. While Con",,,lidaled Indus. Inc..414 F.2d 506 (3rd Cir. 1969), ced. denied.3% U.s 10ml (1970); United Stoles Ingersoll-Rand Co. :J20 F. 2d 509 (:-!rd Cir 19(i J) (both preliminary injunction cases 6ugge ting necessity only uf showing reciprocity is pu ible) Cf United States v. In/emational Tdepl",n" Teler;raph Corp_ 324 f- Supp- 19 (D. Conn. 1970),appeal dismissed, 404 UB 801 (1971) (similar lack of evidenced convinced court that use of H'ciprocal buying power not likely) 1'heon!y evidence in the record suggesting any proclivity fur using one product to increase the alesuf,lOother is found in twu marketing strategy ducumenL describing a 1971 plan to ea e t.he introduction of a new line of Unite wines, the Vinya !ine, by requiring ret"ilerssubstituteto some Vinya for their u!:ual purchases of Lancers See CX 115, 352- Thi is nut t.he kind of leverage t.hat disl'lOices competitors. g., HEUBLEIN, INC., ET AL. 599 385 Final Order leverage of their successful liquor products to increase their wine sales.'. Neither is there any convincing evidence of substantial voluntary behavior by distributors and retailers to win the goodwill of their major suppliers to the disadvantage of smaller wine producers. If evidence of industrywide practice is to support an inference that the leverage of a particular acquiring firm is likely to be used, that evidence-in the absence of any showing that that company has used its leverage in the past or intends to use it in the future-must be more systematic than the anecdotal testimony in this record. See, e. Tr 391, 641- , 1044, 1057 4960-68. Finally, the likelihood of the strategy s appeal is diminished by the lack of evidence indicating that distributors or retailers would have been vulnerable to pressure from Heublein. There is no substantial evidence that they depended upon their major suppliers for substantial credit, leases of facilities, or sales assistance.71 There are, indeed, (33)many indications that distributors and retailers would have been strong enough to resist any pressure directed at them if it had been attempted and that Heublein s competitors were strong enough to prevent leverage from deadening competition on increasing market concentration.

In sum, then, this record wil not support the conclusion that the possibility of leveraged sales created by this acquisition was likely to have produced significant anticompetitive effects. FINAL ORDER This matter has been heard by the Commission upon the appeals of complaint counsel and respondent from the initial decision and upon briefs and oral argument in support of and in opposition to the appeals. For the reasons stated in the accompanying Opinion, the Commission has determined to sustain respondent's appeal. Complaint counsel's appeal is denied. The motions to supplement the record fied by respondent and complaint counsel are denied. Accordingly, It is ordered, That the complaint is dismissed. Cf United 2!ules v. International Telephone Telegraph Corp" 324 . Sup!,. 19 (ll Conn. 1 J70), appeal dismis. 404 US 801 (1971) (suggesting similar evidence woujd be relevant to show likelihood of reciprocity powt'rheingexercised) " See United Siotes v. WiLwJn Sporting Gods Co. 288 . Supp. 543 (N-D Ill 19fir) (dealers' dependency for crcditandassistancemadethemvulnerab!e) Modifying Order 96 F.