In the course of its E-commerce Sector Inquiry (Sector Inquiry) launched in May 2015, the European Commission gained an insight into the standard business practices engaged in by producers of consumer goods when distributing their products online. The Sector Inquiry, which formed part of the Commission’s wider Digital Single Market Strategy, was recently completed, with the European Commission publishing its long-awaited final report (Report) on 10 May 2017. Information on the Sector Inquiry and all related documents can be found here.
According to the Report, manufacturers of branded goods often restrict their retailers’ online sales activities or prohibit them from selling via online marketplaces and platforms (Platform Ban). Some manufacturers claim that increasing online sales activities of their retailers will lead to an erosion of end-consumer prices as selling through the internet puts a significant pressure on pricing due to the high level of transparency and consumer reach it generates.
The actual online sales generated via online channels are, of course, adding to manufacturers’ overall sales figures and would therefore be expected to be in their overall commercial interests. However, some brand manufacturers claim that they experience a decrease in both overall sales and profitability in the medium and long term due to the increasing pricing pressure resulting from online sales. They maintain that such development could harm their retailers’ brick-and-mortar sales performance, which may require higher investments especially when specific customer services are provided.
To ensure that brick-and-mortar sales remain attractive to consumers, retailers seek to match the cheaper online prices offline. Accordingly, ‘hybrid’ retailers tend to request cheaper sell-in prices or higher front margins for products sold offline (as compared to online sales) in order to ensure profitability. Larger retailers with a certain degree of buyer power may even threaten the manufacturer concerned with the de-listing of their branded goods from their brick-and-mortar offerings, which could have a significant impact on the manufacturer’s sales performance.
Statistics suggest an increasing shift in sales from offline to online, a trend which is effectively set by consumer shopping preferences. The replacement of offline by online sales is leading to a decrease in brick-and-mortar infrastructure and offline sales activity by retailers. Manufacturers that take a sceptical view of, and in some cases restrict, online sales argue that however well-trained and consumer service-oriented online shops are, they simply cannot provide a ‘look and feel’ experience to consumers.
Brand-makers wishing to retain a presence for their products in the offline retail world may therefore wish to support offline retail activity with a performance-oriented approach and/or by keeping control over online prices. However, both these approaches are likely to be at odds with applicable German and European competition rules. Maintaining resale prices and adopting pricing strategies which restrict online sales are considered a hardcore restriction of competition under Article 4 of the European Commission’s Vertical Block Exemption Regulation (VBER).
In its Report, the Commission identifies that pricing limitations, dual pricing (i.e., charging different prices according to the channel through which a product is sold) and Platform Bans are among the most widespread vertical competition restraints in e-commerce. The European Commission takes the following view on these restrictions of competition in its Report:
- Measures seeking to control retailers’ prices in online sales by restricting the retailers’ freedom to set their final prices to customers is clearly a hardcore restriction of competition within the meaning of Article 4a) of the VBER. The Commission’s position is generally in line with its guidance provided regarding resale price maintenance in its Vertical Guidelines, and is further evidenced by the enforcement practices at both EU and national level.
- In relation to dual pricing, the Report mentions that several respondents to the Sector Inquiry criticised the current competition rules as being too strict. Under the prevailing rules, manufacturers are generally prohibited from charging different prices to hybrid retailers according to whether they sell the manufacturers’ products online or offline. Further, the Report refers to critical voices which claim that only by engaging in dual prices can a level playing field between online and offline trade be established by taking into account the different cost structures of these channels. The Commission also mentions that there is a call for a more flexible, performance-oriented approach, i.e. a differentiation in pricing according to the channel, which would encourage the retailers’ investments in more costly (typically offline) value added services. The Commission goes on to refer to the existing guidance provided in relation to the VBER when it concludes that dual pricing is generally considered to constitute a hardcore infringement under the VBER, and that exempting dual pricing under the efficiency defence of Article 101(3) of the Treaty on the Functioning of the European Union is only permissible in limited circumstances. In Germany, where enforcement in relation to dual pricing is particularly strict, the German Federal Cartel Office has so far refused to accept an exemption on the grounds of the efficiency defence.
- One of the main aims of the Sector Inquiry was to better understand the prevalence and characteristics of marketplace restrictions and the importance of marketplaces as a sales channel for retailers and manufacturers. The Report contains some data concerning the relevance of online marketplaces which suggests that Germany is the Member State with by far the highest proportion of marketplace restrictions (including direct Platform Bans and indirect restrictions on platform sales through quality requirements) and that these restrictions are mostly found in selective distribution agreements and typically concern branded goods (while not being limited to luxury, complex or technical products). Regarding the admissibility of Platform Bans under competition law, the Report makes reference to the preliminary ruling currently pending before the European Court of Justice (CJEU) in Case C-230/16 – Coty Germany GmbH v Parfümerie Akzente GmbH. In this case, a manufacturer of branded cosmetic products wanted to prohibit its retailers within a selective distribution system from selling its products via a certain online marketplace. The Higher Regional Court of Frankfurt is staying its proceeding while it seeks guidance from the CJEU on the question of whether or not the relevant Platform Ban constitutes a hardcore restriction within the meaning of Article 4b) and/or c) of the VBER. The outcome of this case is still open but hopefully the ruling will provide for specific guidance beyond this case as to when Platform Bans comply with competition rules.
- In its Report, the Commission concludes that Platform Bans do not necessarily amount to a hardcore restriction of competition within the meaning of Article 4 of the VBER because they do not generally amount to a de facto prohibition of sales via the internet (which would in turn be seen as a hardcore infringement) as there are alternative ways of selling online (e.g., through retailers’ own websites) which a Platform Ban does not prevent. While Platform Bans may not be in line with competition law under any circumstances (and the degree to which they might infringe competition law would depend, in particular, on the relevant market size of both the manufacturer and retailer concerned, the type of product and the distribution system within which the restriction occurs), the Commission’s position regarding Platform Bans expressed in the Report can be interpreted as potentially loosening up enforcement policy in this area.
It should be noted that the Commission indicates in the Report that it intends to conduct a targeted enforcement in the e-commerce sector in the near future aimed at those business practices with the greatest potential to harm competition. Against this background, it is wise for manufacturers to take a close look at the relevant distribution terms in their agreements with retailers in order to minimise risk exposure.