NEGOTIATIONS WITH RETAIL ALLIANCES/ BUYING GROUPS A practical guide under competition law
Dr Michael Bauer
AIM Industry Trade Meeting – 10 March 2015
Some general remarks ……………………………………………………………… slide 3
When are co-operations between retailers not allowed? ………………………………………… slide 4
What are the borderlines for retail alliances/buying groups in negotiations with suppliers?
In general ………………………………………………………………………. slide 13
In specific cases ……………………………………………………………… slide 22
Overview
2
A typical lawyer's answer: it all depends
Competition law is not the same European wide
Competition law is not equally uniformly by authorities
The law and its application develops slowly into the right direction
More advanced jurisdictions: France, Germany, Italy, UK …
Less advanced jurisdictions: EU, Belgium, Netherlands, Switzerland …
Between safe harbor and stormy waters
Retail alliances/buying groups are usually permissible but operate in legal grey zones
Assessment often requires in-depth analysis
A guideline is just a guideline
A general warning
3
Some general remarks
… it cannot replace legal advice in the individual case
Negotiations with alliances/buying groups | 10 March 2015
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When are co-operations between retailers not allowed?
Negotiations with alliances/buying groups | 10 March 2015
Merger Control
Prohibition of anti-competitive agreements
5
Legal framework
• Retail alliance/buying group is established in corporate structure
• Members take over certain stake in entity
• Members' turnover exceeds certain thresholds
Creation of retail alliances/buying group must comply with the general prohibition of anti-competitive agreements
Not relevant in case of existing alliances/buying groups
• Legally: Same standard EU wide (plus CH)
• In practice: Application by national authorities differs
Ex ante control by competition authority
• Self assessment, no ex ante authority control
• Possibly in future : notification requirement in France
IF:
Negotiations with alliances/buying groups | 10 March 2015
If retailers are no competitors on retail and purchasing market: no issue
6
Prohibition of anti-competitive agreements
In practise creation of retail alliance/buying Group is usually permissible if certain rules are observed
If retailers compete only on purchasing market: no issue unless market share on retail market > 40%
Rule of
thumb
If retailers compete on retail market: detailed assessment necessary
If the creation is permissible, retail alliance/buying group may perform all regular functions
• Excessive coordination
• Abuse of buyer power
• Unfair trading practise
Exception:
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Detailed assessment
Safe harbor rule The combined market share
does not exceed 15% on all purchasing market(s)
The combined market share does not exceed
15% on (all) retail market(s).
Outside the safe harbor prohibition possible if:
• The members compete on a retail market
• The members have high combined market shares on a retail markets
• The alliance/buying group comprises "regional top dogs"
• Other buying agreements exist in the market (network effects)
• The alliance/ buying group includes a market leader
• The alliance/buying Group itself has buyer power (e.g. ability to request unreasonable benefits from the supplier)
Negotiations with alliances/buying groups | 10 March 2015
Loi Macron Approved by the French National Assembly
Expected to be enacted in summer 2015
New powers for competition authority
If retailers
• hold a dominant position
• have a market share of more than 50% and
• cooperation raises competition concerns
8
National peculiarities: France
Mandatory notification at least two months prior to implementation of buying alliance if members aggregated turnover exceeds certain thresholds
ADLC may order the buying group to modify, complete or terminate all agreements and decisions as well as disposing of assets
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National peculiarities: Italy
Centrale Italiana
Investigation re buying group alliance established by COOP, DESPAR, GARTICO, DISCOVERDE and SIGMA.
Risks for competition
Purchasing market: Decrease in capacity to compete for suppliers. Could lead to reduction of the variety and/or the quality of products and innovation and investment initiatives.
Retail market: Risk of the coordination of sales strategies and the decrease in incentives to compete.
Exchange of commercially sensitive information between the members (risk of collusion).
Immediate liquidation of Centrale Italiana but replacement by limited agreements between some (not all) of the members.
Authority accepted the commitments and closed investigation without imposing any sanction in September 2014.
Commitments
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Three years investigation, report from 2014
200 manufacturers and 21 retail companies investigated, 7 sample product categories
Econometric analysis of approx. 3,000 negotiations
Assessment of buyer power with a view to
• merger control proceedings • assessment of buying groups • abuse of (relative) buyer power cases
Data gathering and gaining new insights
NOT: … to answer the question of whether there is a problem of buyer power in the German food retail
10
National peculiarities: Germany
Sector inquiry food retail
Target
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Only 6% of products do have potential for "must have" items
EDEKA, REWE and Schwarz are bottlenecks for branded products
Leading retailers are in a stronger bargaining position than the manufacturers and have a significant structural advantage over their smaller competitors
"even high-volume suppliers can have relatively weak bargaining power"
11
National peculiarities: Germany
Outcome re market
Negotiations with alliances/buying groups | 10 March 2015
Abuse of buyer power
Many indications suggest that at least Edeka, Rewe, Schwarz Group and Aldi are addressees under the control of abusive practices
New type buying groups
No longer merely represent a time-limited bundling of purchasing volumes, but must be seen as part of the concentration process taking place on the sales market
Large food retail companies increasingly gain substantial and direct influence on the smaller competitors from which it is almost impossible for them to break free
Effects on the sales and procurement markets will be examined in future cases
Starting point 15% ms in markets affected
Smaller partner's market position in the regional sales markets
Degree of alignment of the cost structures
Additional agreements, joint private label etc
Network effects resulting from the participation in different buying groups
Effects from information drain in case of switching
12
Outcome re Buying Groups
Note: German Competition Authority already raised concern as regards the buying group in Rewe/Wasgau case (2011)
National peculiarities: Germany
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What are the general borderlines for retail alliance/buying groups in negotiations with suppliers?
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Not the same legal standard European wide
Prohibition of anti-competitive agreements or information exchange
Abuse of buyer power
Prohibition of abuse of dominance
Prohibition of abuse of dependency
Unfair trade practices
Codes of Conducts
Same legal standard European wide
Specific concept under German law
Excessive coordination Same legal standard European wide
Approach by authorities largely the same
Approach largely the same
Specific concept under French law and Italian law (for food products)
Food Supply Chain Initiative, UK Grocery Code, Belgian CoC
Partly only soft law
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Negotiations with Retail Alliances | 10 March 2015 15
Which law applies?
Effect-based approach
The competition law rules of a country apply whenever effects of an agreement or conduct occur in the respective country
If an European Retail alliances comprises retailers from Belgium and France,
which operate shops in Belgium, France and Italy, negotiates with a supplier located in Germany,
the laws of Belgium, France and Italy apply.
Example:
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(Up to) three different legal borderlines …
Prohibition of anti-competitive agreements or information exchange
Abuse of buyer power
Prohibition of abuse of dominance
Prohibition of abuse of dependency (Germany)
Unfair trade practices
In general if aggregated market share exceeds 40%
EDEKA case (see excursion)
Excessive coordination Coordination within retail alliiance/buying group may not go beyond
regular functions No Gos: cartel agreements (territorial protection, resale prices, promotions, M&A coordination etc)
E.g. prohibition of retroactive demands, request of benefits and/or listing fees without compensation
France: Code du Commerce, amended in March 2014
Italy: E.g. prohibition of requests which are not justified by the nature or content of the business relationship
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… plus various codes of conduct
Obligatory code of practice that the big 10 grocery retailers must abide by when dealing with suppliers.
UK Grocery Code
Groceries Code Adjudicator Power to investigate any retailer that breaches the Code and order them to take whatever action is appropriate (TESCO case see excursion)
Currently no fining powers but this is being amended.
Food Supply Chain Initiative
Contractually obligation of the signatories to comply with the principles.
Impermissible (excerpt)
• Any non-contractual retroactive unilateral changes in the cost or price of products or services
• Demanding payment for services not rendered or payment manifestly not corresponding to the value/cost of the services rendered.
• Requests of listing fees that are disproportionate to the risk incurred in stocking a new product.
Negotiations with alliances/buying groups | 10 March 2015
June 2008:
Approval EDEKA /
Plus acquisition
Autumn 2008:
Request of 5 special conditions in context of annual
negotiations.
More than 500 suppliers affected
Aim: Refinancing of acquisition.
Additional profits of EUR 300 to 400 Mio.
for 2009
Dec. 2008:
Closing
Feb. 2009:
Complaint by Marken-
verband
April 2009:
Initiation of administrative
offence proceedings.
Dawn raid at EDEKA
Nov. 2010:
Limitation of investigation. Focus only on
sparkling wine (Sekt)
July 2013:
Change into pure
administrative proceedings
Statement of objections to
EDEKA
July 2014:
Decision:
Finding that EDEKA infringed "Anzapfverbot"
NO fine
Appeal by EDEKA
Proceedings pending at
Higher Regional Court of
Düsseldorf 18
Excursion 1: EDEKA case
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Addressee Dominant buyers (retailer) As of 40% market share
Each buyer (retailer) in relation to suppliers which are dependent on the buyer
- General position buyer downstream market - General position buyer procurement market - Position on affected procurement market - Bilateral positioning, i.e. sales share buyer
Prohibited Buyer requests economic advantage (condition)
Past decisions: only "breach of contracts"
Possible Consequences
Cease and desist order
Fine
Damage claims
19
Edeka: Legal background
Up to 10% turnover
without objective justification
(delineation towards "hard bargaining")
New criteria in EDEKA case: - condition/service reasonably linked - Reasoning/calculation of request and service
comprehensible (transparent) - Condition proportionate (only evidence test)
FCO decision binding
Negotiations with alliances/buying groups | 10 March 2015
Most favored value comparison of purchasing terms and conditions
Lasting condition – implemented with at least 115 suppliers
Comparison using three reference dates in the past
Expansion to remaining product range
Most favored value comparison of terms of payment
Lasting condition – implemented with at least 226 suppliers
"Cherry-picking", no consideration of package of terms and conditions
Synergy bonus of 0.5% of total turnover
Lasting condition – implemented with at least 216 suppliers
Without measurable consideration, additional advertising campaigns/listings insufficient
Partnership bonus of 4% on previous turnover
For 2009 and 2010 (meanwhile partly redefined)
To make shops more attractive
Without measurable return service
Extension of product range bonus of 10% on expected additional turnover or 40 euros per item
For 2009 and 2010
Without measurable return service as no specific listing commitment
20
Edeka: Main findings (all five requests were unlawful)
Negotiations with alliances/buying groups | 10 March 2015
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Excursion 2: Tesco case
Scope of the investigation
Conduct of Tesco from 25 June 2003 (GCA start) to 5 February 2015
Delay in payment associated with
short deliveries, including imposition of penalties
consumer complaints where the amounts were not agreed
invoicing discrepancies such as duplicate invoicing where two invoices were issued for the same product
deductions for unknown or un-agreed items
deductions for promotional fixed costs (gate fees) that were incorrect
deductions in relation to historic promotions which had not been agreed.
Payments for better positioning of goods (shelf-positioning) not related to promotion
Principles of fair dealing
Status • Requests for information sent to suppliers. Deadline: 3 April 2015. • Evidence needed
On 5 February 2015 Groceries Code Adjudicator (GCA) launched investigation on the basis of allegations of specific breaches of the UK Grocery Code
Tesco said it was vital that staff kept to
agreements with suppliers, including not
making retrospective changes, giving
reasonable notice of any changes to
supply agreements and being
“thoughtful and empathetic” when
communicating with suppliers.
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What are the borderlines for retail alliance/buying groups in specific cases?
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Three different sizes of retail alliance/buying groups
Aggregated market share of less than 15%
Coordination • Permissible: Perform typical functions, cooperation in purchasing, exchange business information which is necessary for the implementation of the Buying Group
• Impermissible: Excessive coordination (cartel agreements)
Requests • The rules of abuse of dominance or dependency do usually not apply.
• Rules of unfair trading practices apply
Aggregated market share between 15 and 40%
Coordination • Permissible: Cooperation in purchasing and exchange of information which is necessary for the implementation of the BG if:
• Impermissible: Excessive coordination (cartel agreements)
Requests • If suppliers are dependent on the retailers on the purchasing market the rules of abuse of
buyer power may apply if foreseen by the applicable national law (e.g. Germany).
• Rules of unfair trading practices apply
Aggregated market share of over 40%
Coordination
• Impermissible: If retailers are competitors on a national retail market, any cooperation in purchasing is highly likely not permissible
• Impermissible: Excessive coordination (cartel agreements)
• Permissible: If retailers are no competitors on any retail market, cooperation in purchasing may still be allowed
Requests • The rules of abuse of buyer power generally apply as retailers likely own a dominant market
position and suppliers are likely dependent on the retailers
• Rules of unfair trading practices apply
o … retailers are no competitors on the national retail market OR
o the cooperation does not lead to anti-competitive effects. (case-by-case assessment)
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Negotiations with alliances/buying groups | 10 March 2015
Permissible IF retailers do not compete in the retail markets
• Joint purchasing is usually permissible.
• Retailers may also make agreements with suppliers subject to an agreement with the Buying Group
IF retailers compete in retail markets
• Buying Group may negotiate prices and conditions & retailers and may make Buying Group …
• … only if the cooperation does not lead to anti-competitive effects (case-by-case assessment)
Impermissible Coordination of geographic foot prints of retailers
Coordination of M&A activities (including concerning minority shareholdings)
• Coordination of resale prices, number, time, duration and/or scope of promotions …
• … unless the retailers are clearly no competitors on the same retail market
24
Medium-sized retail alliance/buying groups : Joint purchasing
Approach by national competition authorities might differ
Negotiations with alliances/buying groups | 10 March 2015
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Medium-sized retail alliance/buying groups : Coordination of product range
Permissible IF retailers do not compete in the retail markets
Implied alignment is permissible if it does not lead to anti-competitive effects (case-by-case assessment)
Impermissible Coordination of product portfolios unless the retailers are clearly no competitors on the same retail market
Coordination of listings or de-listings at its retailers unless the retailers are clearly no competitors on the same retail market
The higher the aggregated market share, the less likely it is that …
… the BG may oblige its retailers to purchase exclusively through the BG
… the BG may oblige its retailers to purchase certain minimum volumes (of certain types of products) through the BG
Coordination of product range and/or creation of joint private label is usually permissible
IF retailers do compete in the retail markets
Approach by national competition authorities might differ
Negotiations with alliances/buying groups | 10 March 2015
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Medium-sized retail alliance/buying groups : Joint promotion
Permissible IF retailers do not compete on the retail markets
IF retailers compete on retail markets
Impermissible Negotiation of promotion plans for the retailers, i.e. concerning number, time, duration and/or scope of promotion unless the retailers are clearly no competitors on the same retail market.
Negotiation of detailed supplier contributions to individual promotional activities unless the retailers are clearly no competitors on the same retail market.
- may negotiate general budgets for promotional activities and other marketing services performed by retailers but only if the cooperation does not lead to anti-competitive effects (case-by-case assessment)
Joint promotion is usually permissible
Approach by national competition authorities might differ
Negotiations with alliances/buying groups | 10 March 2015
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Medium-sized retail alliance/buying groups : Joint logistics
Permissible IF retailers do not compete on the retail markets
IF retailers compete on retail markets
Impermissible Joint logistics may not lead to exchange of sensitive business information among retailers
Joint logistics (warehousing, invoicing, rack-jobbing etc) is usually permissible
may organize and/or operate joint logistic services only if the cooperation does not lead to anti-competitive effects (case-by-case assessment)
Approach by national competition authorities might differ
Negotiations with alliances/buying groups | 10 March 2015
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Medium-sized retail alliance/buying groups Exchange of commercially sensitive information
Permissible IF the retailers do clearly not compete in any market any exchange of sensitive business information is usually permissible unless it concerns the entry into other markets
IF the retailers are competitors on retail markets information regarding buying prices and conditions of the retailers may be exchanged if indispensable for the implementation of a (permissible) joint buying agreement
Exception 1: IF alliance/group has been established to only negotiate certain additional "international" conditions ("European bonus") there is no justification for sharing information on other prices/conditions negotiated by the retailers separately
Exception 2: Retailer recently left one alliance and becomes member of another alliance
• Waiting period of at least one year before the changing retailer may disclose the prices and conditions negotiated by the first alliance to the new alliance or the new alliance”s members
• This means: No active participation in joint negotiations with suppliers during waiting period
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Medium-sized retail alliance/buying groups : Exchange of commercially sensitive information
Impermissible Exchange of (exceeding) sensitive business information which is not indispensable for the implementation of a (permissible) joint buying agreement
E.g. any exchange of sensitive business information on conduct on the retail market (sales prices, promotions, geographic footprint, general business strategy) unless retailers are clearly no competitors on the same retail market
In any event retailers may not exchange information on entering of geographic markets
The retailers may also not exchange information on actual volumes purchased from individual suppliers unless they are clearly no competitors on the same retail market
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Medium-sized retail alliance/buying groups : Retroactive demands
EU standard Usually permissible as the alliance is not to be considered as dominant, and IF cooperation does not lead to anti-competitive effects (case-by-case analysis)
France Impermissible as the alliance may not negotiate with retroactive
effect any additional rebates, discounts or other benefits
Germany Impermissible in case of supplier dependency on retailer (Metro/ allkauf). E.g. improved re-bates following retail ("wedding bonus")
Italy Permissible In general as the alliance/group is not to be considered as dominant
Impermissible In case of sale and supply of food products
CoC by FSCI*
Retailers may not negotiate any non-contractual retroactive unilateral changes in the cost or price pf products or services
Negotiations with alliances/buying groups | 10 March 2015 * Food Supply Chain Initiative
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Medium-sized retail alliance/buying groups : Lack of reciprocity (service)
EU standard Permissible* Usually permissible as the alliance is usually not to be considered as dominant, and IF cooperation does not lead to anti-competitive effects (case-by-case analysis)
France Impermissible Request of any advantage without corresponding service actually provided or with a service manifestly disproportionate to the value of the service.
E.g. request of an alignment with business conditions obtained by other retailers without corresponding services.
E.g. demand of benefits from suppliers for unspecified services. If services are not precisely worded, it acts to the detriment of the BG since those services are deemed to be no real services.
E.g. referral to services which are already covered by national agreements to justify additional rebates or payments.
E.g. request to sponsor promotional activities or to finance an acquisition or investments in outlet renovations, IF not justified by a common interest and by proportionate service.
Negotiations with alliances/buying groups | 10 March 2015 * From a competition law point of view – no from a tax point of view
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Medium-sized retail alliance/buying groups: Lack of reciprocity (service)
Germany Impermissible in case of supplier dependency on retailer
Request of any benefit without an objective justification/ reason for the benefits demanded:
• E.g. synergy bonus following merger without any measurable synergies at suppliers' side
• E.g. as precondition to enter into negotiations concerning new business during contract year (pay-to-play)
• E.g. contribution for outfit improvements of retailer’s stores or customer loyalty programs
• E.g. expectation bonus (re expected growth)
Request of benefit for services if the identical service is already covered by national agreement
Note: Rules may change due to outcome of pending court case.
Negotiations with alliances/buying groups | 10 March 2015 * From a competition law point of view – no from a tax point of view
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Medium-sized retail alliance/buying groups : Lack of reciprocity (service)
Italy Permissible* As the alliance is usually not to be considered as dominant
Impermissible Concerning sale and supply of food products
may not request conditions which are not justified by the business relation.
may not make continuation of business relationship subject to services which have no connection with the objective of the contracts or relationship
CoC by FSCI**
Threating with business disruption or the termination of the business relationship to obtain an advantage without objective justification
Demand of payment for services not rendered or demanding payment manifestly not corresponding to the value/cost of the services rendered
Negotiations with alliances/buying groups | 10 March 2015 * *Food Supply Chain Initiative
* From a competition law point of view – no from a tax point of view
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Medium-sized retail alliance/buying groups : Joint listing fees
EU standard Permissible … if the cooperation does not lead to anti-competitive effects (case-by-case analysis)
France Impermissible Negotiation of listing or access fees without committing in writing to a proportionate volume or to a service requested by the supplier
Germany Permissible … if the cooperation does not lead to anti-competitive effects (case-by-case analysis)
Impermissible In case of supplier dependency on retailer, the BG may then not request disproportionate listing fees.
Note: Rules may change due to outcome of pending court case.
CoC by FSCI*
Request of listing fees that are disproportionate to the risk incurred in stocking a new product.
Negotiations with alliances/buying groups | 10 March 2015 * Food Supply Chain Initiative
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Dr. Michael Bauer
CMS Hasche Sigle / EU Law Office
T +32 2 6500 421
T +49 211 4934 0
M +49 173 28 31 322
Negotiations with alliances/buying groups | 10 March 2015 Negotiations with alliances/buying groups | 10 March 2015 * Food Supply Chain Initiative
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