Market shares of the retail grocery chains in Sweden 2011. Source: DI Dimension Nr 4, May 2013
16.2 Legal Background in Sweden
16.2.1 Scope of Competition Law with Respect to the Grocery Sector
There are currently no specific competition regulations in place in Sweden for the grocery retail sector. Generally, the industry is to date subject to the general competition rules enshrined in the Swedish 2008 Competition Act2 and its EU counterparts. These national Swedish Rules on competition are essentially equivalent to the provisions of Articles 101 and 102 TFEU, save for the criterion of affecting trade between Member States. The Swedish Competition Authority, Konkurrensverket (the “KKV”), as well as private parties, is entrusted to apply Articles 101 and 102 TFEU when applicable in national litigation.
Unfair competition is, however, considered under Swedish law to be a broader concept, and a wider interpretation of the term would encompass several other legislative instruments directly or indirectly addressing the conditions of competition in different industries. Alongside the Competition Act, the Marketing Practices Act3 deals with misleading, aggressive and unfair marketing practices, which arguably are important issues when taking a broader view on the market conditions and behaviour of undertakings. Rules on fair competition are essentially a long-standing tradition in Sweden, and in this field there is currently a comprehensive bundle of rules aimed at unfair practices and consumer protection.4
16.2.2 Abolishment of the Specific Regulation for the Retail Market in Swedish Competition Law
There are currently no specific provisions applicable to the retail market regarding competition law. Previously, however, Sweden had a national block exemption for voluntary chains of retailers,5 i.e. chain stores made up of independent retailers under common brand name, as opposed to corporate chains. Agreements or practices establishing the latter would normally escape the application of competition law, as such retailers normally are within the same economic unit, whereas Article 101 TFEU could be applicable to the former.
The old national block exemption was targeted at smaller chains holding up to 20 % market share, whereby joint purchasing and marketing, co-operation on the determination of prices in the common marketing, common accounting and calculation standards, exclusivity on purchased goods and co-operation regarding establishments, financial and administrative services for stores and staff development were exempted from the application of the Swedish 1993 Competition Act.6 The ordinance also exempted horizontal co-operation on prices and accounting and calculation standards for chains holding 20–35 % market share. Odd as it may seem within the context of competition law today, special rules also applied for the calculation of market shares.
The ordinance had no counterpart in EU law and was not enacted on the basis of long-standing experience that lay behind the Commission’s block exemption regulations. Instead, and in hindsight, it could be viewed as a practical way by the legislator to cope with the state of play in the Swedish retail sector, which indeed was made up of many of such voluntary chain stores at a time when a dramatic change in Swedish competition law occurred and entirely new principles were introduced. The ordinance was limited in time and was determined to expire on 1 July 2001. Another motivation behind the ordinance was the ongoing work in the EU on group exemptions and that the Government, at that time, needed to clarify for undertakings the rules of the game in the marketplace.
The national block exemption regulation received negative critique on grounds that the market share calculation deviated from established practice within the EU competition law, that the exemption itself was an anomaly in relation to the then EU law and that the exemption could be questioned from a constitutional point of view.7 The regulation was undoubtedly not built on a solid legal ground.
In a report from 2000, the KKV held that the national block exemption ordinance on horizontal co-operation in the retail sector might run afoul of EU rules, as it could entail a more favourable approach to individual exemptions than what followed from EU rules and case law. From a harmonisation point of view, this was consequently deemed potentially contrary to EU law. Equally important, the KKV held that the concentration level in the Swedish retail industry was quite high and the ordinance could prove counterproductive to enhance efficiency in the retail sector, strengthen even further the power of larger players and restrict competition. Therefore, the KKV advocated that the ordinance should not be extended and instead let it expire.
At the same time, the 2000 vertical agreement block exemption regulation entered into force,8 and the block exemption regulations for certain horizontal agreements were under way.9 Based upon the apparent overlapping regulation that this would result in, the Swedish Government found that the Ordinance should not be renewed, leaving the retail sector subject to general competition rules.
16.2.3 Laws Aimed at Controlling the Structure of the Grocery Retail Market or the Behaviour of Large-Scale Grocery Retailers Outside of Competition Law
Apart from the old national block exemption ordinance, which was applicable not only to the grocery retail sector, but also to voluntary chain stores in general, there has been no sector-specific legislation for the grocery retail sector. Food regulations may potentially also have at least indirect effects on competition in the grocery sector, but such considerations are not the subject of this article.
Taking a more general view on grocery sector, there have been—and still are—legislative instruments that relate to the necessity to prevent inflationary pressure of grocery retail prices. In that regard, the Price Regulation Act10 is still in force and applies to goods and services supplied in return for payment, as well as renting of residential apartments and commercial premises.
It was originally passed as part of legislative instruments to cope with macroeconomic challenges during and after World War II, whereby rationing and the interest to control escalation of prices as a result of shortages of supply were of prime interest. Following the oil crisis in the early 1970s and the high inflation in the 1980s, the act was used quite frequently, mirroring the macroeconomic policy of that time. Essentially, the act provided for the possibility of introducing maximum prices or to freeze or cap prices. Experience showed, however, that it was a blunt instrument that merely dealt with the symptoms of an underlying macroeconomic problem, and the price regulation activities decreased significantly at the end of the 1980s to come to a complete stop during the change in overall economic policies in the beginning of the 1990s. The introduction of the then EC-based 1993 Competition Act marked the definite ending of the general retail price regulation activities in Sweden.
A Commission of inquiry on rationing and price regulation, which was chaired by this rapporteur, proposed in 2009 that the price regulation act should be repealed altogether and that such actions should be reserved to a complement to rationing; however, no active steps have been taken in that direction yet.11
In summary, therefore, competition law is fully applicable to the retail grocery sector and subject to both national provisions on competition as well as the EU counterparts. The retail grocery sector does not receive neither beneficial nor unfavourable treatment by competition law.
16.3.1 Market Studies Commissioned by the Swedish Competition Authority of the Retail Grocery Sector
There have been several major studies over the years related to competition issues in the grocery retail sector. Following an assignment by the Swedish Government to assess the conditions of different levels of the distribution chain in the food sector, the KKV published in 2011 a comprehensive study of the grocery sector, concerning not only the retail level but also the whole distribution chain from farmers or growers to end consumers.12
Apart from this general assessment, the KKV has a permanent assignment to supervise and report twice a year to the Commission the retail monopoly for alcoholic beverages regarding its non-discriminatory function. This assignment stems from the accession treaty to the EU and the dispute between Sweden and the EU Commission on the legality of the Swedish retail monopoly. Such goods are not, at least from a Swedish viewpoint, treated as foodstuffs in general, and these reports are therefore forthwith treated as outside the scope of this article.13
In 2009, the KKV published a report on the state of competition in the grocery retail sector, which was authored by Copenhagen Economics. The assignment was to use qualitative and quantitative methods to describe the underlying factors that affect the price level of foodstuffs in Sweden in comparison to other countries in Europe.14
The competition authorities of the Nordic countries published jointly in 2005 the results and findings of a working group. The group was assigned with the task to identify, analyse and propose solutions to the competition problems in the Nordic food markets and provide recommendations on how to promote and ensure a competitive Nordic food market.15
An overview of the Swedish grocery retail industry was published by the KKV in 2004. The report provided a contemporary description of the grocery sector and proposals for changes in the legislation.16
The Swedish Government assigned the KKV to conduct an in-depth investigation into the competition conditions in the retail grocery sector in 2002 and to analyse the price levels in comparison to other countries. The assignment resulted in two reports.17
Based upon statistics from Eurostat that Swedish food prices were in the region of 20–25 % higher than the EU average price level for groceries, the KKV published a study in 2001 that dealt with what could be done in order to bring prices down. Questions raised entailed what could increase competition result in that respect, what should be done and, lastly, who should act in order to reduce prices.18
The 2001 study had a forerunner in a major multi-industry survey covering several sectors in the economy. The Swedish Government had assigned the KKV to chart and analyse how competition conditions had developed on the Swedish market during the 1990s. One of the sectors that were given special attention was the grocery retail sector.19
16.3.2 Motivation of the Sector Inquiries or Market Studies Undertaken in Sweden
The common denominators of the studies undertaken is mostly related to concerns that food prices were higher in Sweden in comparison to the EU average and that it has constantly been a concern regarding the high concentration level in the grocery retail sector. However, the paradox appears to be that the output or quality of groceries has not been a major concern, and the establishment of discount retailers alongside incumbent super- and hypermarkets have so far implied both lower and higher prices spread on a wider range of products. The importance and impact of demand for locally organically produced food and groceries have not been the main concern in the market studies conducted despite the fact this appears to have attracted growing attention amongst consumers. Another important competition factor is the introduction and growth of private labels of the major retail chains. Further research on this topic appears to be needed.
16.3.3 Main Topics Covered by the Swedish Market Studies
The first study in 2000 was of general nature, whereby the task was to analyse the state of competition in general in eight important sectors of the economy in the light of the accession to the EU, internationalisation and consumption patterns. Furthermore, more than 30 different proposals were introduced in order to enhance competition and find more efficient instrument to combat restrictions of competition that ran contrary to the consumers’ interest.
The 2001 study on the possibility for local communities to promote lowering of food prices covered mainly issues related to local rules on establishment and the application of the local planning/zoning procedures, i.e., general concerns related to the conditions for establishments.
In 2002, the KKV conducted a specific study of the grocery retail sector in Sweden in order to analyse the competition conditions in that sector. The Swedish Government assigned the KKV to present how the different players in the retail level of the distribution chain were organised in relation to ownership, way of organisation and existing co-operations. The ongoing centralisation of the industry should also be investigated in order to assess how that affected the business methods of the retail companies, especially regarding the product range, and what effects could be anticipated in the light of the changes in the industry. Another study in 2002 set out, firstly, to highlight the reasons to the high price levels in Sweden and, secondly, to generate proposals of measures to bring down price levels. Again, price levels appear to have been the prime concern.
The KKV presented a follow-up study in 2004, at which time it concluded that the competition had indeed intensified in the grocery retail sector, but there was still room for considerable improvements. Again, the KKV looked, inter alia, into the local planning rules and how new retail chains could be established.
The inter-Nordic study that presented jointly the Nordic competition authorities in 2005 examined the food markets in the Nordic region, again against the background that food prices tended to be higher in the Nordic countries than other countries in Europe. The more or less explicit apprehension was that grocery prices would be permanently higher than the EU average to the detriment of consumers.
Several years passed, and in 2009 the KKV decided to deepen the understanding of the driving forces of prices and factors underpinning the price mechanisms in Sweden in comparison to other countries in Europe. In doing so, the KKV therefore assigned Copenhagen Economics to undertake such a study based upon qualitative and quantitative methods. The study analysed the relationship between concentration and mark-ups and the relation between barriers and concentration and ended with a simulation of price impacts and connected all steps.
The most comprehensive study of the food sector in Sweden was undertaken in 2011 and encompassed the whole distribution chain from farmers/growers to end consumers. Like the older studies, the task assigned the KKV by the Swedish Government was to analyse competition conditions and other market factors in the food sector. However, this time the task was considerably broader compared to older studies as the whole distribution chain was covered. Apart from describing the food sector in terms of structure, market players, concentration levels, vertical integration, pricing in relation to other countries, the task was also to analyse entry barriers and the impact of locally and/or organically small-scale grown foodstuffs.
16.3.4 Main Conclusions and Recommendations of the Market Studies
The first major study dating back some 13 years did not result in any major recommendations in terms of competition policy. It did, however, contribute with a deepened understanding of the structure and market behaviour of the grocery retail sector and how this in general affected the state of competition in the sector. The study showed that there were three major chains dominating the market. In total, there were about 10,000 outlets of groceries in Sweden in 2000; however, only 6,500 outlets were actual grocery retail stores with a traditional range of products. The remainder consisted of specialised stores, food halls, tearooms, farmers’ markets, service stations, etc. In 1998, the total private consumption of groceries amounted to about SEK 170 billion or about 18 % of total private consumption. The market shares were distributed as shown in Figs. 16.2 and 16.3.
Distribution of market shares by turnover in 1998. Source: KKV Study 2000
Distribution of market shares by turnover 1998 for traditional grocery stores. Source: KKV Study 2000
An important conclusion of the study was that the higher prices in Sweden could at least be 50 % ascribed to macroeconomic factors: level of income, labour costs, taxes, density in population, consumption patterns and currency exchange rates. However, the remaining 50 % were ascribed to weak competition in many sectors of the economy. Enhancing competition would therefore be beneficial for consumers, the study concluded.
The 2001 study took the first steps in that direction, and some 16,000 local development plans/zonings for property development were analysed, thereby focusing on the conditions of new establishments. The study concluded that there was a clear relationship between higher prices and smaller retail space, i.e., the development of supermarkets and hypermarkets could bring price levels down considerably. However obvious this may seem from a mere economy of scale perspective, it also meant that the local municipalities had an important role to play in their capacity as city and local planners in granting building permits and to plan for such zones locally. Municipalities were urged to look favourably on such establishments, naturally in a transparent and non-discriminatory way. At the same time, however, its was acknowledged in the study that such major shifts in the planning procedure brought about trade-offs and difficult considerations in terms of impoverishment of the trade within the towns (especially old city centres), environmental aspects, road planning, etc., as new hypermarkets typically required new land to be utilised outside the old city centres. Therefore, the local municipalities were identified as a key player in bringing consumers’ prices down.
The first 2002 study revealed that food prices were about 11 % higher in Sweden than the EU average in 2001, including VAT. Consumer prices in general were about 19 % higher than the EU average. The reasons for the generally higher prices in Sweden again highlighted weaker competition in Sweden in relation to other countries, and this could account for as much as 50 % of the price differences. Other factors were also considered, primarily the absence of significant grey import (parallel import), high transport costs, high gross national income (although that connection did not apply to Sweden), cost of labour and nominal currency exchange rates. Causes of actions suggested by the KKV were increased funding to the authority in order to combat cartels even more fiercely and to continue the re-regulation of several markets previously sheltered from competition: taxi, domestic air travel, post- and telecommunications, etc. Also, the remaining monopolies in the pharmacy industry should be discontinued, and the local competition plans should be drafted. A report from the Swedish Government20 also suggested that entrepreneurship was lower in Sweden than in other comparable OECD countries, and the KKV held that entry barriers of different kinds should be minimised. On the macro-level, the KKV argued that remaining obstacle to intra-community trade must be enhanced in those sectors still not harmonised and that Sweden should introduce the euro as a currency in order to eliminate the exchange rate effect on prices. Moreover, the KKV held that consumers’ surplus should be given special attention in the competition policy.
The parallel and more specific 2002 study into the grocery retail sector emphasised the increased concentration levels as a specific problem. The overall risks connected thereto that were considered were the difficulties of smaller manufacturers to access shelf space, local retailers having less room to adapt locally and product range not matching consumer demand. Presumably, this was an externality of the growing importance of private labels. The KKV therefore propagated the need for the introduction of new players on the market to remedy such concerns. Exactly how such actions would in fact have any adverse effects on private labels remains unclear. In order to achieve new establishments, the planning rules should be designed to look favourably on new establishments, and the competition interest should be “considered” in granting building permits and the overall planning work by municipalities and county councils. Again, it remains unclear exactly what should be changed either in the zoning regulations or in the practice of competent communal boards. It appears from the report as there is an underlying presumption that local communities had adopted a strict approach on permits to the detriment of newcomers and thereby indirectly counteracting the development of an increased competition. There are, however, no such supporting data to unequivocally draw such a conclusion. Instead, the fear of that this would be the case appears to motivate the measures proposed.
The 2004 study found that the introduction of international food chains had brought about enhanced competition, at least to some extent, whereby overall prices had been reduced. The gap to the EU average had dropped but was still considered too high. The growing importance of private labels was not seen as a problem but rather as a sign of increased competition. Again, the importance of local municipalities’ planning activities was given special attention. It appears that inter-retailer competition (including that between private labels) were more important than the possibility of smaller producers to get access to shelf space in existing stores.
The inter-Nordic study in 2005 found that although food prices had decreased over the last 5–10 years, they were still between 12 and 24 % higher than the European average. However, increases in food prices were lower than elsewhere. Eliminating for VAT and the low promotional activities in the Nordic countries, the difference turned out to be lower, some 6–12 %, i.e., still significantly higher that the EU-15 average. Food supply was found to be narrower that in, e.g., France, although the general findings remain somewhat unclear.
Consumer demand was deemed notably heterogenic between the Nordic countries, despite the similar demographical characteristics. Consumers had displayed an increasing interest for “exotic” food but remained traditional in their demand as national dishes dominated the dinner tables in the Nordic countries. The nature of demand had also changed over the years as interest had been growing for quality, ethical considerations and sustainability in the food sector. Such products were growing in demand. The impact of these changes in demand in relation to competition has not been explored in further detail.
The study noted the growing importance for super- and hypermarkets as well as discount stores in the retail level of distribution. The overall concentration level had grown even further, which entailed a shift in the balance of market power to the benefit of large retailers. Concerns were raised that even though lower prices were envisaged, this might occur at the expense of product diversity in the store shelves. The increased concentration in the retail level was found to exhibit the hallmarks of stable tacit collusion, increasing the risk for reduced manufactures’ prices not being passed on to consumers. Also, the cost structure was found to be less favourable in the retail sector as a result of wages in general being higher in the Nordic countries. The establishment of Lidl as a new player marked a change towards increased internationalisation of the trade, although the assortment and marketing remained national. Although only anecdotal evidence exists, milk products turned out to be especially difficult to sell in Sweden unless it had Swedish origin. Changes in zoning regulation and application of such rules allowing for the development of hypermarkets and other large self-service stores with a wide range of goods and a large car park, usually situated outside a town, had also contributed positively to the increased competition.
The study also showed that the increased downstream concentration had led to vertical integration upstream, whereby the role of previously independent wholesalers and other middlemen had been taken over by the retail grocery chains to a large extent. This could naturally result in increased bargaining power amongst the retailers and increase efficiency by reducing double marginalisation. The trend was generally considered to be beneficial to consumers, but on the other hand no guarantees were in place to ensure that the efficiency benefits would be passed on to consumers either in full or at least in part. Furthermore, the more powerful position of buyers would also affect the suppliers, as they would have to supply distribution centres rather than individual shops. It appears safe to say that the bargaining power of the retail grocery sector has increased over the last decade considerably, although distributed over a few major players. Such increased buying power is expected to have effects on the structure of the upstream suppliers.