Supply chain compliance: sales team beware

Account managers and sales teams are under significant pressure to achieve internal financial targets, to supply the products at low prices to achieve the retailers’ desired margins and to achieve market share growth in an increasingly competitive environment. Arrangements made with retailers in these tough commercial conditions can often come into conflict with the competition rules. The areas in which competition concerns frequently arise are identified below.

Pricing issues

All retailers must be completely free to set their own prices as they wish. It is legitimate to recommend a retail price and even in some cases stipulate a maximum price. However specifying a minimum retail price, a fixed retail price or enforcing a recommended retail price using any direct or indirect pressure, incentives or threats will constitute a serious infringement of the competition rules.

Although these rules seem clear, this is an area that frequently gives rise to concern on the part of sales teams and account managers when negotiating with retailers. Common examples of areas of difficulty include:

Price marked packs – the difficulty in providing packs with the price permanently marked on the packaging is that the manufacturer is effectively specifying a fixed resale price. The pre-printed price gives rise to an expectation on the part of the consumer that the product will cost the same as that marked on the pack and the retailer has little or no flexibility in deviating from this. To avoid an infringement, in all cases, the retailer should be offered the option of taking exactly the same product in packaging that has not been price marked, without incurring any disadvantage in doing so. Alternatively, it should be clearly stated on the packaging that the marked price is only a recommended retail price.

Promotions – these take many forms, often incorporating discounts and rebates. It is important to ensure that, although the promotion may only be short-lived, it is never possible, subject to the ability to set a maximum price, to infringe the principle that the retailer should be free to set its own price. For example, rebates, discounts or special wholesale price offers used to encourage a retailer to run a promotion should not be contingent on the retailer selling the product at a fixed price or never going below a minimum price.

Margin estimates and guarantees – frequently and particularly at times when a manufacturer is seeking a price increase, retailers request an indication from manufacturers on the relevant margins that could be achieved. Estimated margins can be provided based on an assumption that your product is sold at RRP. However, any margin should be clearly stated to be an estimate. It should never be expressed as being guaranteed, fixed or a ‘target’ margin.

Discounts and rebates – sales teams should be aware of two basic rules when granting discounts and rebates: (i) not to use them as a means to ensure adherence to a fixed or minimum resale price and (ii) to ensure that they cannot be considered abusive if they relate to a product which is dominant.

Resale prices are dealt with above. As for dominance issues, then there is nothing wrong with a dominant market share (40%+) but having a dominant position does impose special responsibilities. A dominant company must not profit from its dominance to the detriment of consumers or competing manufacturers with smaller market shares.

There are fundamentally three types of discount: discounts based on volume, discounts based on targets and so-called fidelity or loyalty discounts. Of these three, volume discounts are the least likely to infringe the prohibition on abuse of a dominant position provided that the discount or rebate is given to the customer because of the objectively justifiable and quantifiable amount the customers buys and is referable to cost savings.

Discounts or rebates granted as a reward for reaching defined targets may also be an abuse, particularly if the criteria are not transparent and the reference period over which the discounts are calculated is long.

A fidelity or loyalty rebate is usually granted as a reward for exclusivity and will often oblige the customer to take all or most of its purchases from one source. The commercial justification for the customer doing so is unlikely to be objective and cost-based and these are therefore likely to be considered as abusive.

To avoid further competition law concerns, any discounts which relate to dominant products should not be set at a level that the resulting price of the products could be predatory (i.e. below costs). Neither should they be discriminatory in the sense that equivalent discounts should be granted to equivalent customers.

Frequently, discount or rebate schemes can apply to a bundle of products, some of which are dominant, others not. Thus any scheme in which dominant products are present should be carefully scrutinised. As a general rule, any discount, rebate or even exclusivity arrangements that relate to a dominant product should be agreed separately, distinct from other product schemes.

Stocking and exclusivity arrangements

With the pressure on available shelf space ever increasing, manufacturers frequently seek a variety of ways to ensure their products are stocked in place of those of their competitors. Arrangements include:

Shelf space commitments and incentives – it is permissible for you to agree with and/or incentivise retailers to increase your share of space on fixtures. However, concerns can arise where your market share exceeds 40%. European Commission guidance indicates that your share of shelf should not exceed your relevant market share of the product concerned.

Product ranges – various incentives and arrangements may be used to ensure that the retailer stocks a number of products across a product range. Such incentives can be particularly problematic if they relate to any product that is dominant. Making the stocking of a dominant product conditional upon the purchase of another product or range of products is likely to constitute an abuse of a dominant position. This is also likely to arise where a discount or rebate is granted which is conditional on the stocking of other products of the supplier or is conditional on the retailer reaching set purchase thresholds or stocking a specified percentage of a product. Obliging a retailer (with or without a discount) to stock the full product range is also likely to constitute an abuse.

Exclusive supply agreements – In general, exclusivity is likely to be problematic only where the products concerned are dominant. In such cases, outlet exclusivity arrangements are likely to give rise to material competition concerns and should be avoided. Similar concerns will also arise in relation to exclusive arrangements relating to the use of a freezer, refrigerator or cooler unit where the retailer is not permitted to use the unit for any competing products. Indeed, on 28 September 2006, the European Court of Justice upheld a decision of the Court of First Instance that it was

contrary to EC competition law for Unilever’s subsidiary Van den Bergh Foods (formerly HB Ice-Cream) to supply retailers with freezer cabinets on the basis that these cabinets be used only to stock HB impulse ice creams.

Category management

Manufacturers are frequently invited to participate in category management initiatives by retailers where they are asked for their recommendations on the product range for the category and other related matters. This can raise two concerns: (i) it may facilitate the exchange or disclosure of commercially sensitive information between competing manufacturers and (ii) where a manufacturer is appointed a category manager and is dominant, undue pressure placed on the retailer may be found to be abusive behaviour.

Participation itself does not give rise to any competition concerns but it should be carefully monitored. The relationship should be between the manufacturer and the retailer only. The disclosure of commercially sensitive information should be limited. Certainly no such information should be exchanged between manufacturers, and the retailer should be restricted from providing any information it receives from one manufacturer to another. Above all, category management should not be used as a forum for manufacturers to agree between themselves as to the appropriate listings or placements within a category.

Conclusion

The above issues are just some of the typical areas in which food and drink manufacturers can face competition concerns in their day-to-day dealings with retailers.

The size of many sales teams and the commercial pressures they face can mean that many of these issues are overlooked.

It is therefore critical to ensure that you have an effective compliance policy in place with regular training of all necessary personnel and with access to clear and practical manuals and guidelines. Whilst such a policy helps to ensure that you avoid any competition law infringements, the very existence can be used by the competition authorities to reduce any eventual fine should an infringement ever be investigated.

This article first appeared in the Food & drink bulletin in November 2006. Please click here to view the pdf in a new window.