1. Check it Out: Antitrust Issues in the Grocery Industry IRELAND Gerald FitzGerald Úna Butler 21 May 2008

2. Overview Legislative Background Competition Authority Grocery Reports Some Recent Merger Cases Concluding Remarks

3. Legislative Background

4. 1987 Groceries Order Ban on below-cost selling => “below net invoice price” Restrictions relating to other practices:  Resale price maintenance  Unfair discrimination  Standard terms and conditions  Advertising allowances and “hello money” Limited enforcement of Groceries Order

5. Repeal of Groceries Order Pressure for repeal, particularly from Irish Competition Authority since 2002 Strong opposition to repeal from certain retailers, suppliers and trade associations Public consultation initiated in 2005 In 2006, Groceries Order repealed and replaced by Competition (Amendment) Act

6. Competition (Amendment) Act 2006 (1) “Grocery goods” means “any food or drink for human consumption that is intended to be sold as groceries” Prohibits certain unilateral conduct by non-dominant undertakings in the grocery trade:  Resale price maintenance  Price discrimination  Advertising and slot allowances  “Hello money” =>BUT only if conduct has “as its object or effect the prevention, restriction or distortion of competition in the trade of any grocery goods in the State or in any part of the State”

7. Competition (Amendment) Act 2006 (2) Civil remedies (declaration, injunction, damages) only; no criminal offences/penalties No enforcement actions to date: Competition Authority member has said grocery markets not unique and competitive effects of certain prohibited practices need to be carefully reviewed On enactment, Minister requested the Competition Authority to monitor the grocery trade “to see how it responds to the new legislative environment”

8. Competition Authority Grocery Reports 2008

9. Competition Authority Reports Two Reports published in April 2008: 1.Description of the Structure and Operation of Grocery Retailing and Wholesaling in Ireland: 2001-2006 2. Price Trends in the Irish Retail Grocery Sector: 2001-2007 => Descriptive, not analytical, reports

10. Structure Report: Wholesale Grocery Sector Vertically-integrated retailers: Report describes their integrated distribution networks but does not treat them as part of the wholesale channel Three categories of wholesale operators:  Wholesaler-franchisors: license symbol trade marks to affiliated retailers, but also supply independent retailers  Cash-and-carry wholesalers: not integrated with retailers; primary source of supply for independent retailers  Buying groups: principal function is to negotiate terms with suppliers on behalf of members Trend is towards greater integration between wholesalers and retailers in the grocery sector

11. Structure Report: Retail Grocery Sector (1) Six vertically-integrated retailers (i.e. supermarket multiples):  top three have 30-45% of total retail market “Affiliated retailers” operating under 18 different brands, but note:  18 brands are owned by six wholesaler-franchisors  Top three brands have 20-35% of total retail market Independent (i.e. non-affiliated) retailers:  Account for 55% of total number of grocery retail outlets, but only 14% of retail grocery sales Source: Competition Authority, Grocery Reports Press Briefing Presentation (April 2008)

12. Structure Report: Retail Grocery Sector (2) Vertically-integrated retailers: –Number of outlets almost doubled since 2001 –Recent new entry by discounters (up to 10% market share) –Tend to serve one-stop shoppers Affiliated retailer groupings: –Similar growth in number of outlets –Mimic vertically-integrated retailers: Central warehousing & distribution Central billing Minimum purchasing obligations Recommended prices –Tend to serve convenience and top-up shoppers –But vertically-integrated retailers are moving into this sector

13. Structure Report: Retail Grocery Sector (3) Independent retailers (non-affiliated): –Own and operate a retail outlet under a unique brand or fascia; not affiliated to any wholesaler-franchisor –Typically operate small outlets offering limited range of grocery goods with other non-grocery goods –Typically purchase from “cash-and-carry” centres –Number of retail outlets belonging to independent retailers fell by 44% between 2000 and 2006 –Independent retailers re-emerging as affiliated retailers

14. Price Report: Trends in Grocery Sector 2001-2007 Source: Competition Authority, Grocery Reports Press Briefing Presentation (April 2008) Price trends prior to repeal of Groceries Order (“GO”) in April 2006: Prices of GO items increased by 5.7% Prices of non-GO items first increased and then declined rapidly with a net effect of a slight decrease (-0.7%) Consumer Price Index (CPI) increased by 14.8%

15. Price Trends in Grocery Sector (April 2006 – November 2007) Price trends following repeal of Groceries Order (“GO”) in April 2006: Decrease in prices of goods previously covered by GO Increase in prices of items never covered by GO Sharp increases in prices of 40 items since end of 2007: attributed to rises in world commodity prices Source: Competition Authority, Grocery Reports Press Briefing Presentation (April 2008)

16. Some Recent Merger Cases (1) Premier Foods/RHM (9 February 2007) Merger of two producers of food products Market defined as the “gravies” market, despite arguments that it should be a wider “meat extracts” market. The Competition Authority found that while there appeared to be supply side substitutability between gravy mixes and stock cubes, there was no demand side substitutability Parties had almost 80% of the Irish gravies market Competition Authority rejected parties’ arguments in defence of merger (e.g. buyer power of the supermarket multiples; growth of own label products; possibility of new entry) Strong brand awareness was a major factor; different in the UK where own label products have c. 30% of the market Conditional clearance: purchaser required by Competition Authority to divest Erin brand

17. Some Recent Merger Cases (2) Britvic/C&C (13 August 2007) Merger of two producers of soft drinks Focus on market for “fruit squashes” (i.e. dilutes). In adopting this narrow market definition, the Competition Authority relied on:  parties’ internal documentation  customer and competitor surveys  econometric analysis of POS data Merged entity would have had 60-70% of the squashes market. But deal cleared because of:  absence of brand loyalty  significant influence of retailer “own label” squashes

18. Some Recent Merger Cases (3) Musgrave/J&J Haslett (15 August 2007) Merger of wholesale distributors Horizontal overlap in wholesale distribution of groceries Market highly concentrated, but merger cleared unconditionally because: –Low accretion of market share –Presence of other strong competitors BWG/Mangans (2 May 2008) Merger of two wholesaler-franchisors Transaction approved unconditionally, but Competition Authority decision not yet available Low accretion of market share post-merger probably a critical factor in the decision

19. Concluding Remarks (1) Competition (Amendment) Act 2006: A Competition Authority member has made two points in relation to the new rules:  The relevant question in evaluating prohibited conduct is: does it cause consumer harm?  A predatory pricing test must take into account the demand inter-relationship among the products sold by a multi-product food retailer.

20. Concluding Remarks (2) Trends:  Increasing integration of wholesalers and retailers  Growth of “own label” grocery goods, especially among vertically-integrated retailers  Move by vertically-integrated retailers into convenience sector  Possible further market entry by UK multiples  Likely further consolidation at wholesale and retail levels of grocery market Further Competition Authority Reports awaited:  Analysis of impact of planning laws on expansion and entry by grocery retailers  Possible analysis of supply level of grocery market

21. Check it Out: Antitrust Issues in the Grocery Industry IRELAND Gerald FitzGerald Úna Butler 21 May 2008