Antitrust Update Blog

Soda bottler has bitter taste from alleged Pepsi price-fixing

A recent complaint charges PepsiCo Inc. with several antitrust violations, including price fixing and predatory pricing in violation of Section 1 of the Sherman Act, conspiracy and attempt to monopolize in violation of Section 2 of the Sherman Act, and price discrimination in violation of the Robinson-Patman Act.  The plaintiff, Mahaska Bottling Company, is an independent bottler that says it has enjoyed exclusive bottling agreements with PepsiCo for territories in and near Iowa since 1928.  As an exclusive regional bottler, Mahaska purchases syrup from PepsiCo and sells bottled drink products to retailers, which then resell them.

In recent decades, Mahaska claims, PepsiCo has entered into agreements with large retail chains—the complaint focuses in particular on Family Dollar and Dollar General—to provide those chains with price rebates on bottled drinks.  Such rebates replicate the “national” price PepsiCo wants to offer a particular chain but cannot do so directly because of independent bottlers’ discretion in setting prices for their exclusive regional territories.  Mahaska contends that PepsiCo entered Customer Development Agreements or Marketplace Investment Agreements with some independent regional bottlers under which the bottler helps defray the cost of the rebates.  But Mahaska has refused to join a CDA or MIA.

By way of additional background, Mahaska states that in 2010, PepsiCo acquired two of its largest independent bottlers, a move that drew the attention of the FTC.  The bottlers (which, post-acquisition, are known as Pepsi Beverages Company, or PBC, the other defendant in Mahaska’s suit) also bottled drinks for PepsiCo’s competitor, Dr Pepper Snapple Group (DBSG).  In the course of the acquisition, PepsiCo agreed that PBC would continue bottling for DBSG.  To address possible collusion concerns, the FTC ordered PepsiCo to maintain separation of PepsiCo and DBSG sales, and not to permit the transfer of competitively sensitive information between the two entities.

Mahaska contends that PBC and PepsiCo are ignoring the terms of the FTC order by “orchestrat[ing] an unlawful price-fixing agreement with respect to sales of PepsiCo and DPSG products.”  The complaint alleges that PepsiCo and PBC “disparaged” Mahaska to retail chains like Family Dollar, based on Mahaska’s refusal to participate in PepsiCo’s nationwide price agreements with those customers.  The result is that certain Family Dollar locations in Mahaska’s territory stopped stocking PepsiCo products.  Based on this, Mahaska claims that PepsiCo is trying to force it out of business or coerce it into accepting some of the costs of the national rebates given to Family Dollar.

Mahaska also alleges that PepsiCo and PBC have engaged in unlawful price discrimination in violation of Section 2(a) of the Robinson Patman Act by selling soft drink products below cost, to the detriment of competitors of Family Dollar and Dollar General, to force Mahaska out of the market and thereby facilitate for future anticompetitive increases in prices on both PepsiCo and DPSG products to all consumers in the relevant market.  Notably, the allegation that defendants are pricing their products “below cost” is a reference to Mahaska’s cost (which, Mahaska says, is controlled by PepsiCo)—not defendants’ costs.

From the complaint, Mahaska appears to face an uphill battle.  Although its price-fixing claim alleges a conspiracy between PBC, PepsiCo, and DPSG, there are no factual allegations about any conspiratorial conduct by DPSG itself, and DPSG is not named as a defendant.

Regarding its price discrimination and predatory pricing claims, it is hard to see how PepsiCo’s effort to offer low prices on its products to national customers would be seen by a court as anti-competitive.  Mahaska claims that the ultimate goal is “to drive Mahaska out of the market . . . so that [PepsiCo and PBC] can subsequently raise prices in Mahaska’s territories.”  But that allegation seems to ignore the fact that PepsiCo competes with other soft drink makers including Coca Cola and DPSG, making subsequent supracompetitive price increases unlikely.