European retailers lobby the EU to combat territorial supply constraints

8th June 2018

European retailers have called for the EU to take action against the use of territorial supply constraints, on the grounds that such constraints are currently being used by major brands with a dominant market position in order to force retailers and wholesalers to buy products only in the country in which they operate. On 23 May 2018, the lobbying group EuroCommerce released a statement arguing that the use of territorial supply constraints is resulting in the fragmentation of the European Single Market, allowing major brands to “maximise their already considerable profits at the expense of consumers.”

The statement from EuroCommerce follows the publication of a study by the General Secretariat of the Benelux Union. This suggests that territorial supply constraints in the region have a clear effect on the prices, quality and characteristics of products across a wide variety of sectors. The European Commission (“Commission”) has also recently raised concerns on the same issue, and has recently opened an investigation into alleged anti-competitive territorial supply constraints by the multi-national brewing company AB InBev.

What are “territorial supply constraints”?

Territorial supply constraints are defined by the Commission as barriers set by private parties that have the effect of limiting where and from whom retailers can purchase products. Under such agreements a retailer may be referred to a specific national subsidiary of the supplier and prevented from sourcing the products from subsidiaries in other countries.

Some of the main consequences of territorial supply agreements include higher prices for consumers and a reduction of the overall range of products available in a given market. On the other hand, some retailers argue that exclusive distribution systems, when implemented in line with competition law, can contribute to the proper functioning of distribution networks.

If the supplier imposing the constraints is in a dominant position or if the constraints form part of an agreement between the supplier and an independent wholesaler, then under certain circumstances competition law can be used to sanction the constraints as a form of anti-competitive behaviour. However, competition law does not cover situations where the constraints are imposed by vertically integrated suppliers onto their national subsidiaries.

The Benelux Study

The Benelux Study was conducted in October 2016 by the General Secretariat of the Benelux Union, the Belgian Federal Public Service Economy, the Dutch Ministry of Economic Affairs and Climate Policy, and the Luxembourg Ministry of the Economy, along with relevant sector organisations from all three countries.

The Study consisted of a survey among retail enterprises in the Benelux countries, with responses received from 66 companies across Belgium, the Netherlands and Luxembourg. The participants ranged from micro companies to large-scale firms, and covered a wide variety of retail sectors and products including food, books, electronics, furniture, kitchen appliances, sports equipment and jewellery.

Of these 66 companies 89% indicated that they were affected by territorial supply constraints, and between 67-77% of the respondents indicated that such constraints have a negative impact on the market through increased prices for consumers, reduced profit margins for businesses and a restriction in the range of products available for given markets. In addition, between 44-50% of the participating companies indicated that territorial supply constraints adversely affect the quality of products as well as delivery times and product characteristics.

The Study acknowledges its own limitations in so far as participants were limited to the Benelux countries, and responses to the survey were based on the participating companies’ own judgements and experiences. Accordingly the results of the survey mainly reflect the perceptions of the companies themselves, and may not be statistically significant. However, the Study does provide a “general picture” of the use of territorial supply constraints, and the data collected can be used to describe general trends and patterns.

The results of the Study have been welcomed by lobbying groups. A press statement from EuroCommerce claims that the Study demonstrates “with concrete evidence” the prevalence of territorial supply constraints and their impact on retailers and consumers, with the group further asserting that such restrictions are “particularly imposed by dominant, often multinational suppliers, for whom the EU market only represents a small percentage of their global turnover.” Manufacturers who make use of territorial supply constraints have been described as “exploiting the full benefits of the single market for themselves, and restricting it for retailers”.

The Commission has been combatting territorial supply constraints for over forty years, as they go against the principles of the EU Single Market. With this in mind it is surprising that they are still being used on such a wide scale by so many companies, particularly when the Commission has repeatedly acknowledged the negative impacts territorial supply constraints have on retailers and consumers.

Wider EU Action

The release of the Benelux Study has been described as an “important pilot” for further EU action against territorial supply constraints, with Christian Verschueren, the Director-General of EuroCommerce, stating that the Study “provides further evidence of a worrying trend for all those who care about the single market and the interests of consumers… this is a little known issue which needs to be addressed as a matter of urgency.” Verschueren has voiced his intent to see EuroCommerce work with its national members and the Commission with the aim of seeing rapid change.

The Commission has already acknowledged the issue of territorial supply constraints in a number of published documents, including a 2018 communication titled “A European retail sector fit for the 21st century” (“Retail Communication”) and an accompanying staff working document. In the Retail Communication the Commission acknowledged that territorial supply constraints drive market segmentation, which limits competition and can have a negative impact on prices and the availability of goods. The Commission concluded that “such behaviour should be prevented”, and pledged to “undertake further fact finding on the effects of such practices on the Single market”, with a view to taking further action if suppliers do not voluntarily change their approach.

The suggestion of further action may reflect the value of the retail sector to the wider EU economy; retail is the EU’s biggest sector after financial services, accounting for 4.5% of value added and 8.6% of EU employment. The removal of “economically significant barriers” is therefore crucial, with the Commission stating that “private operators should not prevent retailers from exploiting fully the possibilities of the Single Market to source products cross-border… retailers should be given the choice to decide from which national entity of the supplier the goods should preferably be sourced.”

Significantly, the release of the Benelux Study and the Commission communication on the retail sector has occurred in parallel with a current Commission investigation into alleged anti-competitive practices of AB InBev. The multi-national brewing company has been accused of abusing its dominant position by partitioning markets and hindering cheaper imports of its beers from the Netherlands into France and Belgium. Some of AB InBev’s business practices which have raised concerns include changing the packaging of beer cans in the Netherlands and France to make it harder to sell them into Belgium, and limiting the access of Dutch retailers to key products and promotions.

A press release from the Commission describes the case as “an example of the Commission's effort to ensure effective competition along all levels of the value chain from farmers, producers, distributors to consumers.”

Comment

The Commission has been combatting territorial supply constraints for over forty years, as they go against the principles of the EU Single Market. With this in mind it is surprising that they are still being used on such a wide scale by so many companies, particularly when the Commission has repeatedly acknowledged the negative impacts territorial supply constraints have on retailers and consumers.

Commentary in the Benelux Study suggests that one possible reason for the continued use of territorial supply constraints, despite years of opposition, is the lack of transparency surrounding their implementation. Retailers who are affected by territorial supply constraints often approach the issue with caution as a result of the “one-sided power relations and dependencies between traders and supplying companies” – this makes data and public information surrounding territorial supply constraints very rare.

It is not yet clear precisely what new initiatives the Commission will introduce to combat territorial supply constraints, however, the combination of the Retail Communication, the Benelux Study and recent investigations into such practices suggests that new developments are likely to be forthcoming.

For more information please contact Annabel Borg.

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