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NEGOTIATIONS WITH RETAIL ALLIANCES/ BUYING GROUPS A practical guide under competition law Dr Michael Bauer AIM Industry Trade Meeting – 10 March 2015

NEGOTIATIONS WITH RETAIL ALLIANCES/ BUYING …€¦ · NEGOTIATIONS WITH RETAIL ALLIANCES/ BUYING GROUPS A practical guide under competition law ... pure administrative

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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

4

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:

Negotiations with alliances/buying groups | 10 March 2015

7

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

Negotiations with alliances/buying groups | 10 March 2015

9

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

Negotiations with alliances/buying groups | 10 March 2015

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

Negotiations with alliances/buying groups | 10 March 2015

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

Negotiations with alliances/buying groups | 10 March 2015

13

What are the general borderlines for retail alliance/buying groups in negotiations with suppliers?

Negotiations with alliances/buying groups | 10 March 2015

14

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

Negotiations with alliances/buying groups | 10 March 2015

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:

16

(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

Negotiations with alliances/buying groups | 10 March 2015

17

… 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

Negotiations with alliances/buying groups | 10 March 2015

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

21

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.

Negotiations with alliances/buying groups | 10 March 2015

22

What are the borderlines for retail alliance/buying groups in specific cases?

Negotiations with alliances/buying groups | 10 March 2015

23

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)

Mo

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y sc

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ario

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

25

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

26

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

27

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

28

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

Negotiations with alliances/buying groups | 10 March 2015

29

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

Negotiations with alliances/buying groups | 10 March 2015

30

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

31

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

32

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

33

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

34

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

35

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

E [email protected]

Negotiations with alliances/buying groups | 10 March 2015 Negotiations with alliances/buying groups | 10 March 2015 * Food Supply Chain Initiative

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