An interesting development has occurred internationally regarding the issue of retail shelf space control and management. On January 5, Israeli Antitrust Authority (“IAA”) General Director Dror Strum announced the finalization of rules that prohibit, among other things, slotting allowances and category captaincy arrangements between large retailers and suppliers. Mr. Strum originally announced these rules in May 2003, but had provided time for industry to appeal.
Mr. Strum’s original report laid out major requirements for change in Israel’s highly concentrated food manufacture and retail industries. His report issued from the perspective that all monopoly should be prevented – not just monopoly used to unreasonably restrain competition. He also noted that large grocery retail chains’ profit margins were shooting up far in excess of the CPI and that the supplier end was characterized by dominance by one or two suppliers in several staple food categories. Moreover, an investigation conducted by the IAA found serious breaches of Israel’s competition law being enforced by formal and informal agreements among suppliers and retailers. Several specific instances cited included:
- Retailers agreeing not to introduce private label brands at the behest of competing dominant suppliers;
- Agreements between retailers and dominant suppliers that the supplier’s product would occupy more than half of the shelf space devoted to that category of product;
- Retailers agreeing not to permit competing brands to hold sales at the same time as a dominant supplier’s sale, and the supplier’s reciprocal agreement not to lower prices at other retailers; and
- Vertical minimum resale price maintenance and chargebacks by retailers for local price competition.
These and other anticompetitive practices, Strum concluded, required sweeping reform to prevent further concentration and increases in barriers to entry. The report’s specific guidelines are as follows:
- Retailers are to determine independently the quantity and identity of suppliers whose products they will display and sell. Retailers may not accept one supplier’s payments or discounts for the retailer’s agreement to limit access by competing suppliers.
- Retailers are to determine independently whether to sell private label products.
- Retailers may not agree to allocate to one supplier more than half the display area designated for a particular product category in which the supplier is dominant. Moreover, retailers may not grant exclusive access to off-shelf displays to one supplier for more than a brief period.
- Citing Conwood and Israel’s unusually concentrated food markets, the report forbids category captaincy – i.e., category management by a supplier. Only retailers may perform category management. Only retailers or consultants employed by retailers (and not connected to suppliers) may prepare retail displays.
- Discounts for meeting sales goals are strictly limited, and suppliers cannot price discounted units below cost.
- Retailers and suppliers may not enter into contracts setting the supplier’s (or its competitor’s) market share at the retailer.
- Retailers and suppliers cannot agree to limit competing suppliers’ or retailers’ responses to sales held by the contracting retailer or supplier.
- The report bans resale price maintenance, with an exception allowing suppliers to set maximum retail prices that are lower than the price previously afforded for the same product. Moreover, suppliers may use MSRP’s for newly launched products.
- Retailers may no longer demand that suppliers intervene with competing retailers regarding the competitors’ prices. Moreover, retailers may no longer charge “chargebacks for local price competition,” i.e., demand payments from suppliers to make up for the retailer lowering its price to meet local competition.
- Retailers may no longer provide to suppliers information on other suppliers’ wholesale prices, sales terms, or other similar information; and suppliers may no longer provide to retailers information about competing retailers’ purchase quantities, etc.
Note that the IAA’s guidelines generally apply to large retail chains and dominant suppliers only. The report defines “large retail chain” as any of four specific Israeli retail chains, and “dominant supplier” as any supplier that is a monopolist or that has supplied more than half of the general products of that type to a large retailer in the previous calendar year. Retailers and suppliers affected by the guidelines may approach the IAA for approval of individual agreements if they can show a pro-competitive effect.
A recent report from “Globes” newspaper states that Strum and the heads of Israel’s food companies have further agreed on a 45-day suspension of the ruling for additional negotiation. If the negotiations do not bear fruit, retailers and suppliers will have a six-month grace period during which to prepare for enforcement.
Authored by:
Jane Langdell Robinson
213-617-4261
JRobinson@sheppardmullin.com