The European Commission published a report on 10 December recommending, among other things, ‘vigorous and coherent enforcement of competition’ in the food supply markets by the EU antitrust authorities.  

The report is the culmination of a move to assess the functioning of the food supply chain in the EU that began in May of this year, prompted by the sharp rise in consumer food prices over the preceding months.  

The Commission observes that, in the light of the current economic downturn, ‘it is more important than ever to ensure that downwards movements in commodity prices are transmitted to consumers without delay and to raise the competitiveness of the agricultural, food processing and distribution sectors’. Moreover, the focus on the food industry is entirely consistent with the Commission’s increasing tendency to examine high-impact, consumer-facing markets.  

The report may have important implications for operators at all levels of the food supply chain in the EU, including producers, processors, distributors and retailers. With its finding that competition in the markets is sub-optimal, and its identification of specific practices that may give rise to concerns, the report lays down a marker for (even) closer scrutiny from the EU antitrust authorities – at both Commission and/or national level – in the coming months.  

Although the report itself was prepared by the Commission’s Directorate General for Economic and Financial Affairs (DG ECFIN), any further action on competition matters would, in all likelihood, be led by the Directorate General for Competition (DG COMP), albeit in consultation with DG ECFIN.  

Potential competition issues identified  

The report highlights some key features of the competitive environment in the food markets, including:

  • disparities in bargaining power at various levels of the supply chain, such as the lack of power among agricultural producers, contrasted with the position enjoyed by food producers offering ‘must-have’ brands; and  
  • a general trend towards consolidation across the industry – for example, in some product categories at the producer level – and across the retail sector generally (evidenced by the growth of large, cross-border retail chains).  

Against that backdrop, the report goes on to identify a number of specific industry practices that may give rise to competition concerns and therefore ‘may merit closer assessment’:  

  • the use, by producers, of single branding obligations (which limit the retailer’s ability to source from other suppliers within a given product category) and various tying practices;  
  • exclusive supply obligations used by retailers, preventing the supplier from selling to other buyers (including certification schemes, to the extent they may create the same effect);  
  • ‘buying alliances’ and purchasing agreements; and
  • the increased presence of retailer ‘own label’ products, which may lead to foreclosure of existing and potential competing (branded) suppliers.  

Importantly, the practices listed above are not automatically considered anti-competitive; rather, their legality depends on a detailed, case-by-case analysis. A given practice may, in fact, be found to be pro-competitive, particularly where efficiencies can be demonstrated.  

In contrast, the Commission reiterates that cartels among competitors and resale price maintenance (ie vertical price-fixing) constitute hard-core infringements of the competition rules.  

Other issues identified  

In addition, the report recommends further consideration of a number of other areas, including:  

  • effective enforcement of consumer protection rules governing unfair commercial practices (eg misleading advertising) and unit pricing;  
  • national regulations and restrictions on matters such as entry to the markets, the ability to compete on price and shop opening hours; and  
  • better provision of information to consumers, authorities and market operators, by setting up a system to monitor EU food prices.  

What can the Commission do?  

In recent times, the Commission has carried out a number of investigations into allegations of anticompetitive conduct by specific players in the food industry. For instance, in July of this year it carried out ‘dawn raids’ on a number of traders and distributors of cereals and other agricultural products, on suspicion of cartel activity. And, in October it imposed cartel fines totalling €60.3m on two banana suppliers – that investigation was initially triggered by a third supplier ‘blowing the whistle’ on the cartel (in return for which it obtained full immunity from fines).  

At member state level, the UK Office of Fair Trading is currently investigating a number of retailers and suppliers for alleged price-fixing across a range of consumer products. Several other national competition authorities – including in Austria, Belgium, the Czech Republic, France, Germany, Italy and Spain – have also undertaken investigations in the sector. In many instances, these investigations have involved dawn raids.  

The Commission – and national competition authorities – will undoubtedly continue to deal with alleged infringements on an ‘ad hoc’ basis, as and when they arise. However, in highlighting a range of structural and behavioural issues that permeate the entire food supply chain, the report also paves the way for the Commission to carry out a more systemic, ‘root and branch’ review of the industry across the EU. Its power to do so comes in the form of a so-called ‘sector inquiry’.  

Scope of sector inquiries  

DG COMP has recently carried out inquiries into the following sectors: pharmaceuticals; financial services (namely business insurance and retail banking); and energy (namely gas and electricity).  

A sector inquiry gives the Commission wide-ranging powers of investigation. Its extensive information and data requests impose substantial burdens on a company’s time and resources and any failure to provide adequate responses may be punishable by fines. The Commission also has the power to interview individuals.  

Moreover, the pharmaceuticals sector inquiry was launched by way of dawn raids at the premises of several companies. Although the use of this power in a sector inquiry context has been severely criticised in some quarters, Commission officials have publicly defended the approach and indicated that they would not be deterred from using it again if and when appropriate.  

At the conclusion of the inquiry, the Commission publishes its findings and can make recommendations for action. However, it does not, in a sector inquiry, have the power to impose sanctions or remedial measures on individual companies.  

That said, if at any stage of the inquiry the Commission considers there to be evidence of anti-competitive conduct in breach of article 81 (ie a cartel or other anticompetitive agreement or concerted practice) or article 82 (abuse of a dominant position) of the EC Treaty, it will launch an independent investigation of the companies concerned or recommend that a national competition authority does so. Infringements of those provisions are punishable by substantial fines.  

Timing and next steps  

It is difficult to predict precisely what the Commission will do next and on what timescale. To launch a sector inquiry would be the most interventionist option, and DG COMP may feel encouraged to do so by knowing it has the backing of DG ECFIN and, most likely, the European Parliament and European Council.  

On the other hand, a sector inquiry is a major and lengthy undertaking for the Commission, and a number of circumstances may militate against a new inquiry at this time. First, the present Commission’s term of office is due to expire in autumn 2009, meaning that the political will for a new sector inquiry may, for now at least, be diminished. Second, a substantial portion of the Commission’s finite resources is currently devoted to matters arising from the financial crisis (notably state aid issues). Third, the pharmaceuticals sector inquiry is still ongoing and is scheduled to occupy the Commission until spring 2009.  

The report indicates that further findings on competition in the food industry are expected in early 2009 from the High Level Group on the Competitiveness of the Agro-Food Industry, which comprises a cross-section of stakeholders from the EU institutions, member states and the food industry itself.  

And, in the longer term, it is proposed that the European Council revisit this matter in December 2009. By then, the new Commission will be in office and may bring fresh perspectives and enforcement priorities on these issues.  

What does all of this mean for business?  

In signposting the prospect of future regulatory scrutiny, the report gives industry players an opportunity to ensure they are as well prepared as possible to deal effectively with any upcoming investigations. There are a number of practical steps that companies may wish to consider:

  • reinforce the company’s internal competition compliance policies;  
  • introduce (or refresh) compliance training programmes across all levels of management and staff, including dawn raid procedures;  
  • given the potential reputational harm associated with being dawn raided, develop a communications and crisis management strategy to be used in that situation; and  
  • if practicable, conduct a (high-level) review of any existing documents relating to the issues highlighted in the report, including identifying materials that may benefit from legal privilege (and are therefore not disclosable).  

While these steps are essentially defensive in nature, there may also be positive, strategic opportunities for companies to help shape the future regulatory landscape – for instance, by participating in any consultation around reform of national regulations. Therefore, companies may wish to give advanced thought to any substantive changes they would like to see and the most effective manner in which to present their views.