Opinion of the Committee of the Regions on the 'Green Paper on vertical restraints in EC competition policy` (97/C 244/08)

THE COMMITTEE OF THE REGIONS,

having regard to the Commission Green Paper on vertical restraints in EC competition policy (COM(96) 721 final);

having regard to the decision taken by the Commission on 30 January 1997, under the first paragraph of Article 198c of the Treaty establishing the European Community, to consult the Committee of the Regions on the matter;

having regard to its decision of 8 March 1996 to direct Subcommission 1 for Local and Regional Finances to draw up the relevant opinion;

having regard to the draft opinion (CdR 114/97 rev.) adopted by Subcommission 1 on 14 May 1997 (rapporteur: Mr Ricca);

having regard to Articles 85 to 90 of the Treaty on European Union,

unanimously adopted the following opinion at its 18th plenary session on 11 and 12 June 1997 (meeting of 12 June).

1. Introduction

1.1. The green paper focuses primarily on vertical restraints in the distribution chain, but does not tackle issues relating to motor vehicles, commercial agents or licensing of intellectual property which are or will be subject to separate provisions.

1.2. Vertical restraints are market access agreements between producers and distributors and can be used pro-competitively to promote market integration and efficient distribution, or anti-competitively to block integration and competition.

1.3. Treaty Article 85 states that:

'The following shall be prohibited as incompatible with the common market: all agreements between undertakings ... which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market...

(These) provisions may, however, be declared inapplicable in the case of ... any agreement ... which contributes to improving the production or distribution of goods or to promoting technical or economic progress...`.

1.4. Just as vertical restraints can either promote or hinder the creation of a real single market, so they can either facilitate or hamper international trade, the European Union being the world's largest trading block.

2. The current situation

2.1. The prohibited agreements are automatically void [Treaty Article 85(2)] unless exempted under paragraph 3 of the same article.

2.2. The Commission has exclusive competence to grant exemptions and has set up a system by which it is notified of agreements for which an exemption or negative clearance (certifying that the agreement does not infringe Article 85) is sought.

2.3. The number of notifications is so high that the Commission is unable to deal with more than a small proportion: consequently, it has decided to use 'block exemptions` as an instrument to give legal certainty to companies entering into vertical agreements.

2.4. Certain categories of agreements are specified which generally fulfil the conditions contained in Treaty Article 85(3) and are therefore automatically exempted.

2.5. The Commission has identified different types of distribution system, adopting an exemption regulation suitable for each of them.

2.6. The regulations currently in force concern:

- exclusive distribution (Regulation (EEC) No 1983/83) ();

- exclusive purchasing (with special provisions for beer and petrol) (Regulation (EEC) No 1984/83) ();

- franchising (Regulation (EEC) No 4087/88) ().

Where an agreement of one of the three above-mentioned types conforms to the block exemption, notification of the Commission is not necessary for an exemption.

2.7. The Commission also identified a further type of distribution: selective distribution, for which a series of individual decisions has been made, since no 'mass` problem was involved.

2.8. The Commission, concerned that competition should not be distorted, has thus far pursued a policy of applying Article 85(1) relatively widely; however, it now declares a review of this policy to be necessary because the regulations governing vertical restraints will soon expire and because major changes have occurred in distribution methods. It is therefore necessary to see whether or not the approach to this question should be changed.

3. Role of national competition authorities

3.1. Considerable diversity is noted between national provisions on competition.

Nine Member States (Belgium, France, Greece, Ireland, Italy, Luxembourg, Portugal, Spain and Sweden) have followed the Community approach, introducing national laws similar to Article 85 establishing a general prohibition but allowing for exemptions.

A number of Member States, however, apply such laws using criteria different from the Commission's.

In the remaining six Member States (Austria, Denmark, Finland, Germany, Netherlands, United Kingdom), law on restrictions of competition does not resemble Community law.

Antitrust law in the USA does not seek market integration: its aim is to promote consumer welfare.

In the USA, Canada and a number of Member States there is no notification system for restrictive agreements, based on the premise that vertical agreements are a priori lawful.

4. Structure of distribution

4.1. The structure of distribution varies considerably from sector to sector, either in the degree of concentration or in organization. In addition there are significant differences in size and structure between Member States even within the same sector.

4.2. Distribution is a dynamic sector, employing 22 million people and accounting for 4,5 million businesses (3,4 million in retailing, 1,1 million in wholesaling).

4.3. Distribution is experiencing a trend towards concentration, reflecting a similar trend in manufacturing. In most of Northern Europe large retailers account for over 50 % of retail sales, although the growth of the hypermarket format, which is expanding rapidly in Southern Europe, is slowing down in Northern Europe.

4.4. The whole nature of distribution has been changed by the information technology revolution, which provides the information basis for improved management of retailers and facilitates direct contact between manufacturers, suppliers and public sales information systems.

5. Petrol and beer

5.1. The number of petrol stations is in decline with an increase in the average size of each outlet and of the investment needed (increased size, environmental protection and increased facilities), accompanied by the growth of non-petrol aspects (shops with a range of consumer goods in addition to car accessories and lubricants).

5.2. The structure of brewing varies greatly between Member States: in the traditional beer-drinking countries distribution contracts are a normal commercial instrument, but the use of exclusive purchasing contracts in these Member States cannot be said to have an impact on the intra-Community beer trade or on market access. Beer imports do not generally differ between those countries where sales are tied and those where they are not.

5.3. While there is, in some places, an upward trend in off-sales (via supermarkets for consumption off the premises), consumption of draught beer remains high, in some cases representing the mainstay of local consumption.

5.4. These agreements lead to durable cooperation between the parties allowing them to improve the quality of the goods and services, and enable them to bear the significant investment required to maintain the character of establishments for the sale and consumption of drinks in line with customers' expectations.

6. Options contained in the Green Paper

6.1. The Green Paper envisages four options for a review of the rules:

- Option I: maintaining the current system, including the special arrangements for beer and petrol;

- Option II: while retaining the current system, changes would be made to the regulations governing block exemptions by extending their scope and making them more flexible, and reducing the number of cases requiring notification. The special arrangements for beer and petrol would remain in force;

- Option III: more focused block exemptions, introducing an upper limit (40 % of market share) for eligibility for exemptions;

- Option IV: introduction of a 'negative clearance presumption` for parties with a market share of less than 20 %; above this threshold Options II or III would apply.

7. General comments

7.1. In assessing such a complex issue, the Committee of the Regions standpoint must be that of those it most closely represents - in other words, consumers - and must therefore base its assessment on whether or not any restrictive practices are damaging to competition and consequently to the disadvantage of consumers.

7.2. From this point of view, vertical agreements are not in themselves a cause of distortion: some are, while others, on the contrary, have a positive effect on market competition and on the quality of the final product offered to consumers.

7.3. The anti-competitive effects of vertical restraints have a definite but limited impact on competitive markets, which serves to boost their economic efficiency and is consequently beneficial for consumers.

8. Comments on large retailers

8.1. Is the trend to concentration a good thing in itself? The effect of concentration is to strengthen the position of distributors in relation to suppliers, and to encourage the development of distributors' own trademarks.

8.2. The creation of national, European or even global supply alliances has led to the growth of major distribution groups, integrated or otherwise, and to sometimes strained relations between manufacturers and distributors.

8.3. Does this concentration of power among large retailers have any interest in protecting consumers, or is it more concerned, over the long term, to defeat competition and speed up the process of concentration in the retail sector?

8.4. Rapid concentration is driving small traders, who account for 95 % of EU commercial undertakings, out of the market and has a negative social impact which, although not immediately quantifiable, generate social costs in terms of the following:

- large retailers usually move out of traditional town centres towards the outskirts (better access, parking facilities, but also increased traffic, etc.);

- a general movement away from town centres is triggered - the reduced presence leads to reduced protection;

- the most vulnerable (e.g. the elderly) are penalized in terms of access to the distribution system;

- the direct relationship with the consumer breaks down;

- the quality of products and their availability may be reduced;

- consumer assistance during the both post-sales and pre-sales advice phases may be jeopardized.

9. Comments on beer supply agreements

9.1. The intra-Community beer trade is showing signs of health, rising from some 10 million hl in 1985 to over 20 million in 1994, accounting for 51,3 % of total EU beer exports (39 million hl) and the use of exclusive contracts has not hindered the European beer market.

9.2. The beer sector displays a high level of tied-up capital: the investment/return ratio stands at about 2, and the investment/gross profit ratio varies between 15 and 20. Breweries therefore have a medium- and long-term approach to returns on investment and, bank on the continuity and stability of local outlet markets.

9.3. These investments permit a network of premises to be maintained, providing not only employment but also opportunities for social and community contacts which are of great importance in rural zones. They also help to keep some traditions alive (the French café would disappear without the investments provided by tied beers, which are the backbone of bistrot sales).

9.4. Consumers have a choice of products, bottled or draught, at reasonable prices and with guaranteed quality, freshness and service.

9.5. The financial support given by the brewers to managers - ranging from financial contributions and free loan of equipment to supplies on credit - provided without the guarantees normally demanded by credit institutions, gives them the opportunity to set up a small-scale, low economic risk, business which is at the same time an important economic factor. This also limits the chances of infiltration by improper financial backers (usury, etc.).

9.6. Beer distribution contracts offer small and medium-sized establishments margin for competition which is not dependent on the usual means of market promotion, such as television advertising.

9.7. If the existing rules were changed, only the most economically successful sales points might survive, with loss of jobs and narrower choice for consumers and a squeeze on one of the main social factors.

10. Comments on selective distribution agreements

10.1. The cumulative effect of the mushrooming of selective distribution networks, which is acting against real competition, must be considered.

In some cases (such as cosmetics) a situation has been created in which consumers are obliged to pay excessively high prices for products which are available in only a few sales points, which are not in competition with each other. In this case, the consumer is also paying for selectivity.

11. Conclusions

11.1. The Committee of the Regions considers that the multi-faceted nature of the question of vertical restraints in EC competition policy makes it difficult to select a single option which is not highly debatable for one sector or another.

11.2. It would place special emphasis on the need to ensure that Article 85 continues to be applied consistently and uniformly in the area of vertical restraints throughout the Community.

11.3. Whichever option is selected, agreements - such as those for beer - which have proved beneficial in terms of efficiency and market penetration because they permit more competitive distribution of the product through the use of substantial investments, must be safeguarded.

11.4. It would be better to analyze the market impact of agreements rather than assessing what form they take.

11.5. Consideration should be given to the possibility of granting more favourable treatment to vertical restraints which are backed by significant investment.

11.6. Views other than those of manufacturers and distributors should be brought into the process of assessing benefit to consumers - in other words, consumers themselves. Thought should perhaps be given to setting up a consumer council (see also Committee Opinion on the Communication from the Commission on priorities for consumer policy 1996-1998) ().

11.7. The introduction of a consumer council covering the effects of vertical restraints should go hand-in-hand with the creation of monitoring and assessment mechanism.

11.8. In relation to options III and IV, the introduction of market share thresholds only makes sense if these are expressed in terms of the entire Community market without being broken down by national markets, in order to ensure the same approach (currently non-uniform) applies among all countries, without putting some Member States at a relative disadvantage.

11.9. The Committee of the Regions believes that ultimately the option which should be selected is Option I, maintaining the current system, on account of the advantages listed in the Green Paper, accompanied by the following recommendations:

- greater flexibility, a less interventionist approach, and a broader overall view in defining block exemptions;

- a sharper focus on the economic effects of agreements;

- a re-examination of the provisions governing selective distribution in relation to the transparency and objectivity of the criteria for admission and arbitrariness on the part of producers, the continued use of selective distribution for products when it is no longer justified, and the cumulative impact of the mushrooming of selective distribution networks;

- protection of SMEs' interests;

- no general change to the Community rules governing binding agreements between brewers and their outlets.

Brussels, 12 June 1997.

The Chairman of the Committee of the Regions

Pasqual MARAGALL i MIRA

() OJ L 173, 30. 6. 1983, p. 1.

() OJ L 173, 30. 6. 1983, p. 5.

() OJ L 359, 28. 12. 1988, p. 46.

() OJ C 337, 11. 11. 1996, p. 49.