Hungary
Type of stores (segmented by size)
Market share in %
Above 2,500 m2
30
401–2,500 m2
35
201–400 m2
8
51–200 m2
18
50 m2 and below
9
Among the retail chains,5 the largest market player is Tesco, but the second and third place is taken by Hungarian franchise chains Coop and CBA (franchise cooperations of large number of smaller stores). The first three players have more than 40 % market share. Other significant players are the Spar group, hypermarket chain Auchan, discount chains Lidl, Penny and Aldi, and Hungarian franchise alliance ReÃl. As shown in the table, smaller stores have not more than 10 % market share.6
Retail chains, and in particular multinational chains, purchase products usually through their centralized acquisition system, but local units may have some independence to purchase from local producers. Hungarian franchise chains have both a centralized system and regional centres and also allow their members to purchase from local producers individually.
11.2 Legal Background
11.2.1 The Competition Act
Act No. LVII of 1996 on the Prohibition of Unfair Market Practices and the Restriction of Competition (the “Competition Act”) contains no specific rules with regard to the grocery sector. As a general rule, the Competition Act provisions are applicable to all companies carrying out economic activities in Hungary, unless otherwise specified by a relevant act. Thus, as a general rule, the behaviour of companies active in grocery sector is governed by the Competition Act.
The Competition Act includes rules on unfair competition, certain types of misleading advertising between business players and anticompetitive practices (agreements, abuse of a dominant position and merger control).
There are no specific thresholds for the grocery sector. According to the general rules, a merger shall be notified if the combined turnover of the parties in Hungary exceeds HUF 15 billion (approx. EUR 48 million)7 and each of at least two of the undertakings concerned has total net sales revenue in Hungary in the preceding year of the merger in excess of HUF 500 million (approx. EUR 1.6 million).
11.2.2 Other Regulations
Besides the Competition Act, there are other laws that specifically govern activities carried out in the retail market. Act No. CLXIV of 2005 on Trade (the “Trade Act”), for example, sets out provisions applicable to traders having significant market power.
Further, Act No. XCV of 2009 on the Prohibition of Unfair Distributional Practices Applied Towards Suppliers with regard to Agricultural and Food Products (the “Unfair Distributional Practices Act”) contains agricultural and food-industry-specific provisions prohibiting unfair distribution practices applied by traders towards suppliers.
Relevant provisions of the Trade Act and the Unfair Distributional Practices Act will be elaborated on in more detail below.
There are several pieces of legislation relevant from the perspective of the retail market, but those legislation are outside the scope of competition law. The Trade Act and the Unfair Distributional Practices Act, for example, contain specific provisions concerning the retail sector.
The Trade Act’s provisions regarding the prohibition of abuse of significant market power is applicable to all traders having significant market power, whereas the Unfair Distributional Practices Act’s provisions are only applicable to traders active in the agricultural and food industry, however, regardless of the market power of an undertaking. If an unfair business conduct falls under the Unfair Distributional Practices Act, the Trade Act shall not be applied.
There are no specific laws primarily aimed at controlling the present structure of the grocery retail market (general merger rules shall apply) or the behaviour of existing large-scale grocery retailers, except for the Trade Act mentioned above.
There are legal provisions, however, that may affect the foundation of new large grocery retailers. Relevant provisions of Act No. LXXVIII of 1997 on the Formation and Protection of Built Environment (the “Built Environment Act”) are aimed at minimizing the number of newly created large retail stores and shopping malls (retail stores and shopping malls are collectively referred to as “Commercial Buildings”). The Built Environment Act prohibits (1) the establishment of Commercial Buildings the floor area of which exceed 300 m2 and (2) the enlargement of existing Commercial Buildings as a result of which their floor area exceeds 300 m2. Such large Commercial Buildings cannot be created, unless the relevant minister provides for its approval.
As a general rule, retail grocery sector is not exempted from competition law. However, there are sector-specific regulations, which provide exemptions under certain circumstances.
The recently adopted amendment to Act No. CXXVIII of 2012 regulating the Conduct of Interbranch Organizations in the Agricultural Sector (the “Interbranch Organizations Act”) introduced new rules that aim to create better market circumstances for farmers by taking into account special features of the agricultural sector and introduce an exemption from the prohibition of anticompetitive agreements and concerted practices in the field of agricultural products. Since the scope of the Interbranch Organization also covers the processing stage of the product chain, even wholesalers, multinational retail chains and food processors may benefit from the exemption.
11.3 Advocacy
The Hungarian Competition Authority (GazdasÃgi Versenyhivatal, the “GVH”) continuously monitors different sectors; therefore, it carried out and ordered several market studies in the grocery retail sector some years ago.
In 2007, the GVH ordered a market study on the relationship between large retail chains and their suppliers (hereby referred to as “the 2007 Study”),8 as a preparatory step for conducting a broader market study. On September 2009, the GVH published its market study (hereby referred to as “the 2009 Study”) in which it analyzed the buying processes of agricultural products in 2008, a year that was very turbulent for various reasons in the sectors concerned.9
The emergence of big retail chains led to higher concentration in the vertical chain of the retail sector, altering the bargaining positions of different market players in the vertical chain. To address the issues caused by these changes, the Hungarian legislator introduced the Trade Act, which aimed to protect suppliers from several conducts of large retail chains. The GVH conducted the 2007 Study to assess the effects of the Trade Act on the food retail sector and the concept of buyer power.
On September 2008, the Agricultural Committee of the Hungarian Parliament called upon the GVH to analyze the buying process of agricultural products in 2008. The GVH was asked to do so because in 2008 it focused its attention on the buying process of four agricultural markets. The low price paid by retail chains to producers of sour cherry, melon and apple caused serious tensions, and the European milk market crisis also hit the Hungarian market players. These events were followed by the GVH with increased attention in the course of its competition supervision activity. However, no proceedings under the Competition Act were initiated by the GVH since it could not have been presumed that buyers or merchants formed a cartel or abused their market dominance.10
The 2007 Study focused on the relationship between large retail chains and their suppliers. The study aimed at discovering the important features, market position of the suppliers. Also, the study examined the effects of the Trade Act (suppliers’ awareness of the new law, application of the law in the business, etc.). The 2007 Study showed the vulnerability of suppliers vis-Á-vis large retail chains having and sometimes abusing significant market power. Abusive conducts may be the following: various fees and conditions that serve as a “tax” that suppliers have to pay to the buyers in order to access the market, breach of contractual terms (such as deadlines for payment), threat of termination of contracts, etc.
The 2007 Study concluded that the larger a retail chain became, the more of its conducts resembled the above-mentioned patterns. The study also found that bigger suppliers were more likely to suffer from these practices than smaller competitors, resulting from the fact that they needed access to the market in order to grow. Many companies did not respond to the questionnaires. It is very likely that the most vulnerable companies were afraid to provide data for the study.
The 2007 Study also found that the high standards applied by the retail chains affect the competitiveness of the suppliers positively: in order to comply with those standards, the suppliers have to improve and invest in their activities.
The 2009 Study concluded that legislative actions altering the legal environment of the activities of the market players cannot solve those deep-rooted problems that producers face (such as asymmetry in the level of concentration in the vertical chain or low efficiency). Competition law and the specific rules cannot deal with issues that arise from the illegal market (the so-called black market) activities such as breaches of tax obligations. In addition, SMEs shall become more “market-oriented,” i.e., more adaptive to the changing economic environment and competitive challenges. Different legislative and enforcement activities shall be systematic in order to initiate substantial changes in the sectors concerned. The GVH concluded that it would be neither desirable nor legally defendable to exempt the agricultural sector from competition law because it would lead to poor competitiveness of the producers.11
11.4 Market Definition in the Grocery Sector
11.4.1 Product Markets
There is no special statutory definition for relevant markets in the grocery retail sector. According to the practice of the GVH, the relevant product market extends to the retail sale of daily consumer goods, which embraces the retail sale of food, soft drinks and alcoholic drinks, domestic chemical products, cosmetic goods and other daily necessaries.12 In its earlier case law, the GVH also highlighted that a unified market definition has to be applied covering smaller stores, supermarkets and hypermarkets.13
In its recent decisions, the GVH considered the complexity of the question as to whether substitutability exists between the hypermarkets and smaller store formats.14 Although the definition of the product market remained unified, the GVH articulated in numerous decisions that it could not be entirely ruled out that the hypermarkets could be regarded as a separate product market within the grocery retail market due to their specificities compared with smaller shops (such as their wide range of goods, lower price level, longer opening hours and suburban location). For the time being, however, the GVH has been reluctant to declare hypermarkets to be active on a separate market within the grocery retail sector. In its recent decisions, the GVH underlined that even if a hypermarket could not be substituted by smaller stores, a hypermarket could mean an alternative for smaller stores; thus, at least a partial substitutability exists in this respect.15
To sum up, the GVH believes that different store formats, as a general rule, can be considered to be substitutes of each other, and thus they were regarded to be in the same product market. However, the GVH was eager to note that it could not be entirely ruled out that under special circumstances hypermarkets may constitute a separate product market.
11.4.2 Geographic Markets
Similarly to the product market dimension of the retail grocery market, there is no statutory definition for the geographical dimension of this market either. However, some guiding principles can be deduced from the GVH’s enforcement record in this respect as well.
Following the practice of the European Commission, the GVH took the view that the market for grocery products is local in scope.16 These local markets, in general, extend to the territory of one or more municipalities; however, in some cases, the GVH found that either a narrower or a wider market definition has to be applied.17 In order to determine the proper extent of these local markets, the GVH applies the “substitution chain test” in line with the Notice on the relevant market issued by the European Commission.
In some cases, the GVH defined the territory of neighbouring municipalities (local district) as the relevant market for grocery products.18 This territory is often called a “local district,” which is originally a unit of public administration, comprising several communes in an area of approx. 30 km in diameter. However, the territories of those neighbouring municipalities are only regarded to be the relevant geographic market if they are situated close enough to each other so that the stores located there, in fact, compete with each other.19
In some recent cases, the GVH also stated that in case of larger cities, a narrower market definition (i.e., a geographical market covering some districts of the city instead of covering the entire area of the city) may be possible, but the GVH found it unnecessary to address this issue since none of the mergers raised any competition concerns.20
11.5 Abuse of Buying Power
11.5.1 Legislative Background
The Competition Act does not define buying power or dependency. Interestingly, the merger notification form21 refers to “buyer power” as a factor, which may offset the possible anticompetitive effects of a merger; however, it does not contain any definition. As buying power is not defined by the Competition Act, abuse of buying power is not per se prohibited by the Competition Act, whereas abuse of dominant position (including dominant buying power) is prohibited in general.
Buying power is defined by the Trade Act as “significant market power.”
According to the Trade Act, “the term ‘significant market power’ refers to a market situation as a consequence of which the dealer becomes or has become a contracting partner for the supplier which the latter is unable to reasonably evade at forwarding its goods and services to the customers and which is able, due to the size of its share in the turnover, to influence regionally or all over the country market access of a product or a group of products.”
According to the Trade Act, significant buyer power vis-Á-vis suppliers exists where the consolidated net turnover derived from commercial activities of the group of undertakings in question, including all the parent companies and subsidiaries under Act C of 2000 on Accounting or, for the case of joint purchasing, all the undertakings establishing the purchasing association in the previous year was higher than HUF 100 billion (approx. EUR 343 million). Further, significant market power of the dealer also exists where the commercial undertaking or the group of undertakings or the purchasing association is in, or acquires, based on the structure of the market, the existence of entry barriers, the market share and the financial strength of the undertaking and its other resources, the size of its trading network, the size and location of its outlets and all of its trading and other activities, a one-sidedly favourable bargaining position vis-Á-vis its suppliers.
Should the statutory turnover threshold not be met, the GVH may still find the existence of significant market power if, for certain goods, a significant part of the market transactions is conducted through large-size stores.22
In respect of the Trade Act, there is no need to show restriction of competition to label a practice abusive. The Trade Act contains a detailed indicative list of abuses:
(a)
unjustifiably discriminating against suppliers,
(b)
unjustifiably restricting suppliers’ access to sales opportunities,
(c)
imposing unfair conditions on suppliers, which result in a distribution of risks one-sidedly benefiting the dealer, in particular disproportionately shifting costs which are incurred also in the business interests of the dealer, as costs of storage, advertising, marketing etc., on the suppliers,
(d)
unjustifiably altering contract terms, to the detriment of the suppliers, after concluding the contract or reserving this option for the dealer,
(e)
subjecting future business relations of the dealer with the suppliers to conditions, in particular stipulating or retrospectively enforcing the application of a most-favourable-conditions clause or obliging the suppliers to give discounts, in respect of certain products and for a specified period of time, exclusively to the dealer in question or obliging the suppliers to produce, in order to get any of their products to be distributed, products sold under the trade mark or brand of the dealer,
(f)
charging fees one-sidedly to suppliers for, in particular, putting them on the dealer’s suppliers-list or allowing their goods to become part of the dealer’s product range or in consideration of services not demanded by the suppliers,
(g)
threatening with termination of the agreement (delisting) with the intention to enforce one-sidedly beneficial contractual terms,
(h)
unjustifiably forcing suppliers to avail themselves of third persons as suppliers or of an own service provider of the dealer,
(i)
applying sales prices, in cases in which the dealer is not the owner of the goods, which are lower than the invoice prices determined in its contracts, save for prices applied in the sales of substandard goods or in clearance sales within a seven-day period before the expiry of the quality preservation term or introduction prices applied no longer than 15 days or prices applied in end-of-season clearance sales or in cases where the types of products dealt with or the field of activities are changed or in clearance sales of stocks of outlets which will be closed down.23
11.5.2 Law Enforcement
The Trade Act is applicable to all traders, irrespective of the products distributed by the trader having significant market power. With one exception, the GVH carried out formal inspections exclusively against large retailers of daily consumer goods.
11.5.2.1 Infringement Decisions
There has been only one case24 so far where the GVH concluded that the retailer abused its significant market power by a unilateral and unjustified application of turnover-based bonus. The GVH acknowledged that retailers have the right to ask for a bonus from the supplier if it is based on actual and significant sales results, i.e., no bonus can be requested for the use of the facilities of the retailer. In the case at hand, the GVH found that the bonus system of retailer was abusive as the so-called fix part of the bonus system was simply a fee to be paid for the use of the facilities of the retailer. Further, the GVH found that the so-called moving (dynamic) part of the bonus was also abusive, given that the dynamic bonus had to be paid to the retailer if the retailer did not achieve the target or even when the retailer sold a single unit of the goods in question. Finally, the GVH also found that the application of the bonus system was obligatory for the suppliers; therefore, in practice, it worked like a listing fee and thus constituted an abuse.
Several other cases were investigated by the GVH, but most of them ended with commitments.
11.5.2.2 Commitments
Section 75 of the Competition Act contains provisions on the commitment procedure, which also applies in cases under the Trade Act.25
Practices involving the passing on of retailer’s costs to suppliers were eliminated as the result of the commitments undertaken by the retailers. In one case, costs of coordinating the activities of shelf filling service providers were passed on to suppliers.26 In another case, the retailer passed the costs of changing suppliers on to suppliers.27
The nontransparency of the selection of third-party service providers was also challenged. In one case, the retailer decided to limit the number of shelf filling service providers. In the course of the procedure started by the GVH following complaints, the retailer undertook to choose the service providers in a transparent tender procedure by taking into account the preferences of the suppliers and the suppliers’ previous experience in connection with the applicants. Further, the retailer also promised that the maximum price applicable by the service providers would be an important factor in the tender process.28