© 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_10
Taylor Wessing, Hamburg, Germany
Taylor Wessing, Brussels, Belgium
10.1 Economic Background
Consolidation, market saturation, strong price competition and low prices are key characteristics of the German food retail market. The sector is dominated by four large retail groups. According to the Federal Cartel Office (the “FCO”), the combined market share of these undertakings amounts to roughly 85 % of the food retail market. The major chains face low margins due to fierce price competition in the sector. Specific to the German market is the success of discounters with an overall market share of approx. 40 %. In recent years, there has been a trend in consumer preference towards smaller grocery formats, including convenience stores, small grocery retailers and independents. A further feature of Germany’s food-retailing industry is the relative absence of foreign retail groups.
On the supply side, a number of big multinational groups with branded products are active on the German market, most of them with relatively high market shares. However, most grocery products come from a range of small and medium-sized suppliers with a narrower national or even regional focus and often only minor market relevance. Most of demand is met with domestic products, but Germany remains a net importer of food products. In recent years, there has been a strong trend towards concentration along the supply chain. The broader trend also affects primary agricultural production in Germany. There, the major structural trend in recent years has been the steady decline of the total number of agricultural businesses, while the number of large entities in primary production is growing strongly.
Internet shopping in the food sector has not yet been embraced by consumers in Germany, and none of the four big retail groups offers a nationwide or supra-regional online supply with food and beverages. A market survey conducted by the Gesellschaft für Konsumforschung (the “GfK”) in 2012 found that only 10 % of German consumers had ever shopped online for groceries, beverages or drugstore articles.
The few existing online activities in the grocery sector are mainly operated by small and medium-sized food retailers and have not yet raised relevant competition concerns in relation with their existence. Some of the big retail groups have started limited online activities in select metropolitan areas.
10.2 Legal Background
10.2.1 Competition Law
The German Act against Restraints of Competition (the “ARC”) does contain only a few specific provisions aimed at the retail market. Alongside EU competition law, the grocery sector is subject to the general rules of the ARC. In recent years, the relevant cartel provisions in the ARC have been aligned with Art. 101 TFEU. Section 1 ARC prohibits all agreements, concerted practices or decisions by associations that have as their object or effect a restriction of competition. This applies in particular to hard-core restrictions of competition such as price fixing, sharing of customers and markets, allocation of production, market share quotas or bid rigging. In recent years, the FCO has imposed fines for information exchanges between competitors.
Substantive differences exist between German and EU antitrust rules in the area of dominance. According to German law, hindrance and discrimination are also prohibited to undertakings with a relatively strong market position (marktstarke Stellung), i.e. small or medium-sized enterprises, as suppliers or purchasers of certain kinds of goods or commercial services depend on them in such a way that sufficient and reasonable possibilities of resorting to other undertakings do not exist. However, Sections 19 and 20 ARC deal with anticompetitive behaviour only in terms of prohibiting abusive conduct by an undertaking with a dominant or relatively high market position. Section 20(3) ARC explicitly prohibits undertakings with superior market power (überlegene Marktmacht) to abuse their market position towards small and medium-sized enterprises by selling goods or services below cost price without an objective justification.
According to German law, resale price maintenance (the “RPM”) is considered a restriction of competition by object. In a recommendation paper, the FCO has provided some guidance on RPM and a number of other competition law aspects of vertical distribution agreements between manufacturers and retailers. According to the FCO, RPM may under certain circumstances lead to efficiencies, which may result in an exemption under Art. 101(3) TFEU. It is, however, on the parties to demonstrate such efficiencies.
According to German law, there are no specific provisions beyond the ARC aimed particularly at controlling the structure of the retail sector. The general provisions of the German merger control regime apply.
10.2.2 Exemption from Competition Law
In principle, in Germany, the retail sector is neither fully nor partly exempted from competition law.
However, a sector exemption for certain agreements between producers of agricultural products is contained in Section 28 ARC. The aim of the German Market Structure Act (the “MStG”), which has implemented this provision, is to improve the market position of farms. It enables producer collectives to be set up and permits what is termed “dual membership”, i.e., membership of a cooperative and of a producers’ union.
Furthermore, Section 3 ARC contains a specific provision for small and medium-sized enterprises with requirements that, if they are fulfilled, justify an exemption from the cartel prohibition. Systematically, this provision constitutes a legal fiction with the content that the general exemption requirements of Section 2(1) ARC in general are fulfilled if the requirements of Section 3 ARC are fulfilled. However, this provision regulates only cases without any interstate effect and applies to all sectors.
In addition, German law permits certain forms of cooperation of small and medium enterprises. The FCO has published guidelines on the criteria for agreements that are de minimis and thus fall outside the scope of the prohibition to restrict competition in Section 1 ARC. The scope of the exemption is limited as the FCO has to apply Art. 101 TFEU in cases where an agreement affects trade between member states.
10.2.3 Other Regulations
In Germany, there exists also no specific regulation applying to retail grocery market structures or behaviours beyond the general rules of the ARC that have any appreciable effect on competition.
The ARC deals with the accumulation and abuse of market power and the anticompetitive coordination of business decisions of companies. However, it does not stipulate a general ban on unfair competition. Whether commercial practices by dominant or non-dominant undertakings against competitors, consumers or other market participants are improper is determined by the Act against Unfair Competition (the “AUC”), which applies to the grocery retail sector in the same way as to other sectors. The anticompetitive effect of the AUC is quite low because it restricts the retailers only regarding a number of unfair and abusive practices.
Also beyond the AUC, in Germany there is no sector-specific regulation that, for example, provides an administrative price control, the prohibiting of the passing on of discounts or rebates to consumers or special provisions regarding internet retail stores.
10.3 Sector Enquiries in the Grocery Sector
On February 2011, the FCO has initiated a sector enquiry into the food retail sector. The investigation is focused on the competitive conditions in the markets for the procurement of food and beverages by food retailers. The authority has sent questionnaires to 21 food retailers and 200 manufacturers of food and beverage products on September 2011. The enquiry into the food retail market is still ongoing. [Addendum: The FCO has finished its sector enquiry and published the results in September 2014.]
On January 2012, the FCO completed a sector enquiry on market power in the milk industry. The enquiry was already launched in 2008, and an interim report was published in 2010.
10.3.1 Reasons for the Sector Enquiries
The sector enquiry into the food retail sector has been initiated against the backdrop of the high level of concentration in the retail market and frequent contacts between suppliers and retailers. The FCO saw a necessity to get a better overall picture of the market situation in retailing and the relations between retailers and manufacturers. According to the public statements, the FCO has received several complaints by food suppliers in recent years. Moreover, several high-profile horizontal cases among suppliers highlighted competition concerns in the food sector.
To clarify allegations of abusive behaviour, the authority has also started investigations concerning the procurement practices of two leading retailers. Moreover, in a prominent case opened in 2010, the FCO is investigating the vertical relations between the agro-food industry and the retailers. On January 2010, the authority raided the premises of 11 retailers and 4 manufacturers of branded consumer goods based on allegations of price fixing between retailers and suppliers. The ongoing cartel investigation has been focused at the beginning on the product categories “confectionery”, “coffee” and “pet food” but has ultimately been extended to the product groups “body care”, “baby food” and “beer”.
The sector enquiry on market power in the milk sector was triggered by complaints the FCO received from various market participants. According to the authority, the complaints covered a wide range of allegations, including price fixing and sales below cost price in the retail sector, difficulties in switching to competing dairies and abusive long-term supply contracts with dairies.
At the same time, allegations of an unfair calculation model for and the low level of milk prices, which allegedly threatened the very existence of small milk producers, were widely discussed in the German public after farmers had organised a fully fledged boycott of milk deliveries to dairies on May 2008. The FCO later found that with its call for a boycott, the milk farmers association violated competition law.
10.3.2 Outcome of the Sector Enquiries
With its sector enquiry on the food retail sector, the FCO is currently analysing the effects of the concentration among retailers for smaller competitors and suppliers. The aim is to determine whether and, if so, to what extent the leading food retailers enjoy purchasing advantages over their smaller competitors. Furthermore, the investigation will address the effects of purchasing advantages in procurement markets on competition in the sales markets. In this regard, the development of buying alliances as a specific form of cooperation among retailers in procurement markets seems to be of particular importance. According to the FCO, the scope of the enquiry is limited to the clarification of specific questions and certain product groups.
The authority announced to investigate the structure of the procurement markets in the food sector in a first step before turning its attention to the procurement practices of the large retailers. According to the FCO, the procurement shares of the retailers will be investigated both with regard to larger product categories and, in a sample survey, with regard to nine product markets (tinned vegetables, milk, butter, cold coffee beverages (with milk), ketchup, frozen pizza, roasted coffee, sparkling wine and jam).
To date, no conclusions or recommendations on the investigation of the food retail sector investigation have been published. [Addendum: The FCO has published the results of its sector enquiry in September 2014; they are available for download at: www.bundeskartellamt.de/Sektoruntersuchung_LEH.html?nn=4592442]
Generally, the milk sector enquiry encompassed the market levels of the milk producers, the dairies and the food retail sector and focused on the downstream (dairy/retail relationships) and upstream (producer/dairy relationships) markets for milk. While the main focus of the enquiry in the milk sector was on the examination of market power on various levels of the supply chain, a major part of the investigation concerned the retail level. In particular, the FCO was concerned that the market power of retailers vis-à-vis the more fragmented dairy cooperatives would give them an overly strong negotiating position on the procurement market.
In its final report on the structure of the milk sector, the FCO concluded that power imbalances between dairies and the food retail sector exist but have to be addressed individually. According to the authority, the market position of dairies depends strongly on the share of sales to retailers, the product portfolio and distribution alternatives. Evidence for anticompetitive behaviour from retailers was not found in the investigation.