- Put yourself in the shoes of Winfried Vermijs as of late 1986. What response should he expect from NutraSweet after Holland Sweetener Company’s decision to enter into the European and Canadian aspartame markets?
As of late 1986, aspartame became a major sweetener because of its unique properties that rivaled sugar. Aspartame is 180 times sweeter than sugar, has the same caloric content as sugar, and does not promote tooth decay when compared to sugar. Because aspartame is not suitable for baking due to its instability at high temperatures, G.D. Searle & Co. realized the potential to use aspartame as a tabletop sweetener and a replacement for sugar in soft drinks. Searle acquired the patents for the “use” and “blend” of aspartame and created NutraSweet, a separate operating division, to have a monopoly over the aspartame market. In 1987, these patents are set to expire in Europe and Canada, so it is a major opportunity for Winfried Vermijs and his Holland Sweetener Company (HSC) to enter the small aspartame market and compete against NutraSweet. Upon the announcement of HSC’s decision to enter into the European and Canadian aspartame markets, Vermijs should expect NutraSweet to respond somewhat combatively, as their parent company discovered aspartame and they have dominated the market since. NutraSweet will likely respond to HSC’s debut by promoting their own product familiarity and quality and by lowering the price of their product to drive out the competition.
The major buyers of aspartame are the soft drink companies Coca Cola and Pepsi, which use the sweetener in their diet beverages. NutraSweet cleverly negotiated multi-year contracts with these soft drink companies to become their exclusive suppliers of aspartame. When HSC uncovered that NutraSweet had multi-year contracts with these companies, HSC filed an anti-competitive complaint with the European Commission. Assuming the European Commission deems these multi-year contracts to be anti-competitive, it does not necessarily mean that the soft drink companies will change suppliers of aspartame. Coca Cola and Pepsi may consider the idea of changing suppliers, but NutraSweet would aggressively market their product by emphasizing that it has been used in the soft drink company’s diet beverages for years and that the consumers of the beverages would be familiar with the taste of their specific product. Changing up suppliers could be a risky move for Coca Cola and Pepsi. NutraSweet can also attack HSC on the quality of their aspartame, as HSC’s manufacturing process employees a natural catalyst to solve the problem of achieving a precise coupling between the aspartic acid and phenylalanine inputs, which is not a proven and credible process to produce aspartame. The trust factor associated with NutraSweet’s brand would be an important differentiator that HSC could not provide.
When HCS tries to compete for the soft drink manufacturers’ business in 1987, Winfried can expect that NutraSweet will engage in a price war with HSC to keep total control over the aspartame market. NutraSweet’s response would likely be to cut rates for the soft drink companies to prevent HSC from settling into the market. This approach may not be the most beneficial scenario for either party because these discounts would end up cutting from both company’s profits. However, this would be appealing to the soft drink companies, which will get a better deal on their aspartame supply. This price-cutting strategy could help NutraSweet maintain its monopoly over the aspartame market. In the short term, NutraSweet will probably end up experiencing a profit loss due to the discounts, but this will serve eliminate a competitor from the market. In the long term, NutraSweet could retain total control over the aspartame market.
- How should Vermijs assess the relative likelihood of the two scenarios -- price war vs. normal competition (“live and let live”) -- he has in mind?
While Vermijs should be prepared for either normal competition or a price war, he should spend more energy strategizing on how best to respond to a price war, as this seems to be a more likely scenario, considering NutraSweet’s history of market dominance. They are unlikely to give in without a fight.
To prepare for a price war, Holland Sweetener Company (HSC) should take any steps they can to cut costs, particularly in production. HSC already claims its aspartame-production method was more cost effective than NutraSweet’s method (although this is disputed), but they should continue to find ways to cut costs, in order to allow them to sell their product at a lower price point to both companies and consumers. Due to the factors mentioned in response to the previous question, it will be difficult for HSC to survive a price war against NutraSweet. However, if they start trimming the fat now, they may stand a chance.