© Springer-Verlag Berlin Heidelberg 2015Pierre Kobel, Pranvera Këllezi and Bruce Kilpatrick (eds.)Antitrust in the Groceries Sector & Liability Issues in Relation to Corporate Social ResponsibilityLIDC Contributions on Antitrust Law, Intellectual Property and Unfair Competition10.1007/978-3-662-45753-5_8
Castrén & Snellman Attorneys Ltd., Helsinki, Finland
8.1.1 Economic Background
In the following, we discuss the Finnish food distribution market and introduce the relevant local legislation and case law, as well as examine what the main alleged competition concerns are in the market and whether they are effectively handled.
The most common topic for the public discussion on the grocery sector seems to be the increased concentration of grocery retail networks. Currently, two groups hold a combined market share of approximately 80 %, and there are only a few smaller chains in the market in addition to them. Another feature of the Finnish grocery retail market is that the prices of foodstuffs are relatively high in general. Among consumers and sometimes in public discussion, the blame for the price development is put on the concentration tendency. Market studies, explained in further detail below, have, however, shown that the price formation of groceries is not that straightforward, nor is the market structure, which is commonly simplified as a field of two major players. The market studies and a closer view on the market imply that the main reasons for the high prices are, in fact, found elsewhere, and on the other hand, the market is competitive even with an arguably small amount of operators.
The increasing level of concentration is, however, one factor that led to the Finnish parliament supplementing the Finnish Competition Act1 with a new Section concerning a dominant position in the grocery retail market. The amendment of the Finnish Competition Act defining grocery chains with a market share of 30 % or more as dominant seeks to prevent, among other things, further concentration in the sector by attempting to prevent practices that would increase entry barriers. This amendment was, as expected, highly debated. It will be discussed in more detail in Sect. 22.214.171.124.
The value chain of the groceries consists of three vertical levels that are primary agricultural production, secondary production (processing) and grocery retail. In Finland, the primary agricultural production level is characterised by a large degree of domestic production. Most of the raw material used by the food processing industry is produced in Finland. Primary production is also characterised by fragmentation, as there are almost 60,000 farms in Finland. Individual farms are relatively small compared to several other European countries. Challenging climate conditions due to the northern location of Finland also weakens the competitiveness of Finnish agriculture.2
The food processing industry is the fourth largest industrial sector in Finland. Meat processing, dairy industry and beverage industry are the major branches. Certain food processing markets are relatively concentrated with only a few major players. The processing level also has experienced further concentration in the past years as a consequence of mergers. The main challenges for the food processing industry are expected to include increasing international competition, as well as the price development and the availability of raw materials.3
As regards the grocery retail sector, it has experienced further concentration during the preceding decade. Currently, the market can be characterised as concentrated with two major grocery chains, called S Group and K Group, which nationally have a combined market share of roughly 80 %, as mentioned above. Other players include another domestic grocery chain, Suomen Lähikauppa, as well as the international grocery retailer Lidl.4
8.1.2 Legal Background
126.96.36.199 The Finnish Competition Act
The Finnish Competition Act is a general law governing the protection of sound and effective economic competition. The act applies to all units that are engaged in economic activity, with the exception of agreements or arrangements concerning the labour market and certain agricultural activities. The Finnish Competition Act includes provisions almost identical to Articles 101 and 102 TFEU, as well as merger control provisions based on the Merger Regulation of the European Commission.5 However, the national provisions apply regardless of whether the restriction of competition may affect trade between EU Member States. Otherwise, the prohibitions set by the Finnish Competition Act are similar to the ones set by the Articles of TFEU, the prohibition of resale price maintenance and abuse of dominant market position as examples especially applicable to the grocery market.
188.8.131.52 Dominant Market Position in the Grocery Retail Market
Traditionally, the Finnish legislature has tended to avoid sector-specific competition law regulations. To the extent that sector-specific legislation has been enacted, they have been introduced in separate laws, for example, in the energy and telecommunications sectors. However, the development in the Finnish grocery retail market has resulted in the Finnish legislator considering it necessary to intervene in the situation by statutory means. Hence, in 2013, the Finnish parliament enacted an amendment to the Competition Act to tackle perceived issues relating to the high market power of the two major Finnish grocery retail chains.6 The new provision in the Competition Act entered into force on 1 January 2014 and provides that a grocery retailer chain with a national market share of 30 % or more is considered to hold a dominant market position.7
When calculating the relevant market share, the total daily consumer goods sales of all the undertakings belonging to a certain retailer group are taken into account. The relevant geographic market of the grocery retail segment will be considered as national for the purposes of calculating the market share.8 The more detailed definitions of the relevant product and geographic markets of the grocery retail sector in Finland are explained further in Sect. 8.3.2 below. The new amendment will apply to both the S and K Groups as both of them currently have a market share of above 30 %. The amendment was highly debated prior to its enactment, and there is still uncertainty as to the measures the Finnish Competition and Consumer Authority (the ‘FCCA’) is intending to take now that the amendment has entered into force.
The aim of this new provision is to increase competition in the Finnish grocery retail market. The amendment also seeks to ensure that the major retail chains treat suppliers and other operating parties in the grocery sector in a non-discriminatory manner. These goals are intended to be achieved by imposing the responsibilities of a company in a dominant market position on the two major grocery retail chains.9
Under the new law, there will, therefore, be no need to establish the existence of dominance in an individual case where either of the two major grocery retailers is alleged to have abused their market power. The assessment of abusive behaviour is intended to remain equivalent to the assessment under Article 102 TFEU. The government bill expects that the new law is going to affect the operations of the two major grocery retailers in many ways, and careful observation will be required, for example, when deciding on pricing practices in order to avoid any conduct that could be deemed abuse of a dominant position.10 However, the government bill and other preparatory material of the amendment do not include any precise examples of what kinds of past conduct of these two grocery retailers would be prohibited from engaging in under the new law.
184.108.40.206 Exemptions from Competition Law
In addition to the collective agreements in labour market, a specific exemption concerning the agricultural sector is included in the Finnish Competition Act. The prohibition of agreements restricting competition, i.e. the national equivalent of Article 101 TFEU, does not apply to certain agricultural activities. These are arrangements by agricultural producers, associations of agricultural producers, sector-specific associations and any associations formed by these sector-specific associations concerning the production or sale of agricultural products or the use of common storage, processing or refining facilities if the arrangement fulfils the substantive requirements of Section 42 TFEU, under which the rules on competition of Articles 101 and 102 of the said Treaty shall not apply.
The limitation in the scope of application regarding agricultural activities only includes cooperation arrangements between agricultural producers and associations of agricultural producers. Therefore, an agreement between, for example, a producers’ cooperative and a slaughterhouse does not fall under the scope of the exemption. It must also be noted that the exemption does not cover the abuse of a dominant position.11
220.127.116.11 Laws Against Unfair Trade Practices
Legislation concerning unfair trade practices is distinct from competition law in Finland. The Unfair Business Practices Act12 forbids unfair business practices such as the use of misleading marketing information and practices that may inappropriately harm the business of another undertaking. There are no per se prohibitions on such negotiation practices under unfair trade legislation in Finland. The Finnish unfair trade legislation concerns per se type prohibitions on certain forms of advertising, as well as the misuse of confidential information. The Market Court can issue a cease-and-desist order for practices prohibited by the unfair trade legislation. A criminal procedure is also applicable for certain wilful or grossly negligent violations of the unfair trade legislation.
The Act on the Payment Terms in Commercial Agreements13 was enacted in January 2013. The act regulates payments between companies as well as companies and public contracting entities. In accordance with the act, the term of payment may exceed 60 days between companies only if the parties specifically agree on a longer term. Under the act, any agreements that lead to the creditor waiving its rights for interest in delayed payments are null and void.
18.104.22.168 Other Regulations Applicable to the Grocery Retail Sector
Zoning regulations, for example in the Land Use and Building Act 132/1999, are often a publicly discussed factor that is considered to affect the structure of competition in grocery retail. The law has particular stipulations concerning zoning considerations for major retail stores, namely the size of 2,000 m2 or more, such as accessibility by public transportation, minimisation of negative effects of traffic and viability of commercial operations in city centres. The grocery retail industry has also noted that, in addition to major retail stores, the current zoning legislation hinders the development of smaller convenience stores.
Other laws that have been considered to affect the grocery retail market structure are limitations on opening hours, namely small groceries are allowed lengthier opening hours than large ones. Another topic in active public discussion in Finland is the prohibition to sell over-the-counter medicines outside pharmacies. Smaller groceries could possibly be more viable if they could enlarge their product range to non-prescription medicines. Related to the discussion on the selling restrictions of over-the-counter medicines is the discussion on the prohibition of the retail sale of beverages with over 4.7 % alcohol outside the state monopoly liquor stores. In addition, one significant factor in the grocery retail market is the tax legislation, such as value-added taxation.
8.1.3 Market Studies
22.214.171.124 The Finnish Competition and Consumer Authority
The market situation in the grocery retail sector, as well as the value chain in general, has drawn the attention of other instances besides the legislator. The FCCA has published a study on buying power in the daily consumer goods trade, ‘Study on Trade in Groceries’ on 10 January 2012.14 As a continuation of the study, the FCCA has published a study on the position of the primary producers in the food supply chain on 27 March 2013, ‘Study on Primary Production’.15
The FCCA’s Study on Trade in Groceries aimed at answering questions related to the application of competition law to the grocery retail sector. The study was undertaken as competition in the food supply chain had been under public discussion for several years. The grocery sector had faced criticism of industry concentration, the increases in the price levels of groceries and the differences in the price trends between Finland and other countries.16 The main subject of the study by the FCCA was buyer power in grocery retail and whether it could potentially enable unfair practices in the food industry. Since there are two grocery retail chains with high market shares in Finland, it was considered possible that these retailers could use their buyer power in a way that could impede effective economic competition in the food supply chain. The other topics covered by the study were category management, private labels, slotting fees and transfer of risk between the actors.17
In its study on the Trade of Groceries, the FCCA concluded that private labels and category management in grocery retail may harm competition since private labels might not compete with branded products in a neutral manner. Furthermore, gratuitous marketing allowances and risk-transferring practices, by which risk is transferred from the retailer to the supplier, were found to be possibly harmful to effective competition. The main perceived competition problem arising from marketing allowances was that they increase entry barriers. According to the FCCA, the transfer of risk occurs mainly in the form of buy-back clauses that were seen to create uncertainty and pressure to raise prices. The FCCA concluded that further investigations into the grocery retail sector were necessary.18
In its study on primary producers, the FCCA examined whether other levels of the food supply chain hold buyer power towards the primary producer level and the possible consequences from the producers’ point of view. The effects of regulation concerning primary production are also assessed in the report.19 The main topic of the FCCA’s study on primary production was the competition conditions under which primary producers operate. Sectors such as meat production, fish farming and open air and glasshouse cultivation were particular focus areas of the research.20 In its study on primary production, the FCCA considered that certain contractual practices might be problematic for competition in primary production. The FCCA considered that the negotiating power of the producers was relatively weak compared to that of the players on the retail level. A possible solution for balancing the powers of different operators in the food supply chain would be further cooperation between primary producers. This is considered permissible under Finnish competition legislation provided that a fair share of the benefits resulting from the improved market performance is passed to the consumers.21 The FCCA’s study also pointed out that strict regulation on primary production affects competitive neutrality. According to the producers interviewed for the study, some EU directives are applied both more rigidly and also ahead of time in Finland compared to other countries. In addition, taxation of producers differs, depending on the size of the company, which puts them in an unequal position. Compliance with various regulations also gives rise to administrative costs for the producers.22