AGRI-FOODSTUFFS: ACCORDING TO THE ANTITRUST, THE MARKET POWER OF THE ORGANIZED MASS DISTRIBUTION GETTING STRONGER, CONFLICTING RELATIONSHIPS WITH SUPPLIERS

AND UNCERTAIN EFFECTS ON CONSUMERS

The growth of the sector has witnessed the strengthening of the power of organized mass distribution on the demand side. The role of group purchasing organizations has grown with results that are not always of benefit to suppliers and consumers. The Authority will assess carefully the new market structures, also intervening by means of the new instruments envisaged by legislation.

The strengthening of the market power of the large organized mass distribution in commercial relationships with suppliers, even by means of a reinforcement of the role of group purchasing organizations, whose effects will leave an impact not only on economic conditions in the upstream supply market but also in downstream sales, with possible repercussions to the detriment of final consumers. This is the picture that emerges from the fact-finding investigation that was concluded by the Antitrust Authority in recent weeks of the role of organized mass distribution in the food chain.

The survey highlighted the existence of problems both in the structural characteristics of the sector as well as in the way that the industry operates, and in particular found rising problems in relations between suppliers and the mass distributors. A fundamental aspect in this regard is the role of group purchasing organizations which seem to have favoured transparency in contractual conditions with manufacturers, making even less fluid the chain of negotiations and reducing the degree of competition between the distribution chains with adverse effects on possible reductions in downstream prices. Even the phenomenon of trade spending – the total payments made by suppliers to the organized mass distribution networks to pay for marketing, distribution and sales services – seems to have contributed on the one hand to increase the conflict between producers and distributors and, on the other hand, to weaken competition with regard to the final prices, raising the cost benchmark for price competition among distribution chains.

In the light of the rise in the market power of the organized mass distribution on the demand side (i.e. buyer power), the Authority will use all the intervention tools that are envisaged by law for the protection of competition, assessing any possible anti-competitive effects on consumer welfare not only in the short term but also in the medium to long term. With regard to the sale of agricultural products and agri-foodstuffs, in addition to traditional instruments (the preventive assessment of concentrations, investigation and the sanctioning of agreements and abuse), the Authority now has a new power of intervention established by means of article 62 of law no. 27/2012, which allows it to punish conduct that represents an unwarranted exercise of bargaining power on the demand side at the expense of suppliers. Thanks to this new power which complements that already provided by antitrust legislation, the Authority may intervene to protect the public interest, in the form of a proper competitive market structure, when commercial relationships of a vertical nature (not qualifying as vertical agreements or as abuse of a dominant position) between the organized mass distribution and suppliers indirectly produce adverse effects that in this respect are “appreciable”.

The highlights of the survey appear hereunder.

90% OF THE MARKET SHARE IN THE HANDS OF 18 OPERATORS BUT LOCAL MARKETS HAVE THEIR OWN WEIGHT

It does not result that the degree of concentration in the distribution sector including large distribution groups and organized mass distributors, is particularly high especially when compared with that of other major European Countries; in particular, in January 2011 it emerged that 90% of the market share was held by about 18 operators, of whom only 2 had a share that exceeded 10% while 6 others had a share above 5%. The participation of operators is not, however, evenly distributed nationwide.  Although somewhat contained at the national level, in some local markets the shares of sales reach rather high levels, giving rise to a degree of concentration that is also very high and that influences the balance of power among participants in the supply chain.

DIFFERENT STRUCTURES IN LARGE GROUP PURCHASING ORGANIZATIONS

The presence of large central buying organizations has increased to a total of 7 that group together 21 chains, with a share of the overall national sales by organized mass distribution that amounts to almost 80%. Set up to respond to the competitive pressure of large international groups, group purchasing organizations through which the individual chains enter into contract conditions with suppliers, have undergone changes in recent years that raise problems concerning competition. First and foremost among these problems is the different structures in their set up with operators who join and exit at will from these organizations. This results in an increased level of transparency in conditions that are negotiated with suppliers, with a reduction of competitive pressure on prices and a tendency towards uniformity in the conditions that are put forward by each group purchasing organization. Another element is the complexity of bargaining with suppliers, which is spread over various levels of decision-making, to the detriment of business efficiency and the consequent reduction in costs. The investigation in fact revealed that negotiations that are carried out with large group purchasing organizations have not replaced negotiations with the individual chains. The balance that has been achieved has therefore reduced the incentive to transfer to the consumer any cost savings that are obtained. Even shifting a greater part of negotiations between the organized mass distribution and suppliers on the contributions that the latter must pay for compensatory measures for distribution services and promotional activities (trade spending) does not seem to encourage the transfer to consumers of the benefits arising from purchasing costs.

SUPPLIERS FACING DIFFICULTIES, HIT BY SERVICE FEES

On the basis of the evidence that was gathered during the investigation, including the processing of questionnaires filled by 320 national agri-business enterprises, a picture of conflicting relationships emerges between producers and organized mass distribution about contributions paid by the former for the provision of exhibition, distribution and promotional services: this is an opinion that generally affects about 40% of the overall economic conditions under consideration. It emerged that distributors, in negotiations regarding the sale of services, effectively adopt positions that:

1) link the purchase of products to the sale of a package of services;

2) impose selling prices that are not linked to the characteristics of the service provided and to the actual benefit derived from them by the supplier;

3) give inadequate consideration to the payment made and moreover confirming that this failure cannot always be handled easily by a small manufacturer.

Rome, 13^th August 2013