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29 January 2015
In recent years the food sector has attracted attention from the European Commission and various national competition authorities. Slovenia is no exception: the Competition Protection Agency has already investigated several potential infringements. As a result, three major food retailers accepted commitments in May 2009 following a price-fixing investigation. Mercator – one of the three retailers – accepted another set of commitments a month later, following an investigation into an alleged abuse of its dominant position. Both sets of commitments were in force until Summer 2014.
In 2012 the agency initiated a comprehensive study of the sector. Its findings were only recently published in a brief press release.(1) On the basis of Article 26 of the Prevention of Restriction of Competition Act, the agency sent out extensive questionnaires to bakeries, the meat processing industry, the milk industry and suppliers of edible oil on one side, and larger retailers on the other.
Based on these surveys and publicly accessible data, the agency concluded that retailers generally enjoy a much stronger bargaining position relative to suppliers. However, the agency provided no concrete practices for the sector to follow, which is a concern for competition.
The agency recognised that suppliers cannot adjust their end prices to reflect the rise in raw material costs, as retailers categorically reject any kind of price increase. Even when proposed changes are finally accepted, they typically come into force after several months of delay, which puts suppliers in a difficult position, as they must bear the extra costs throughout the transitional period.
The agency further observed that retailers which are unsuccessful in negotiations often resort to charging extra bonuses and contributions for their services and demanding increased rebates. One of the most commonly identified unfair practices was the enforcement of special promotional prices outside an agreed promotional period. Further, suppliers are affected by lengthy payment periods, which average between 30 and 35 days when dealing with discount retailers and between 60 and 90 days when dealing with classic retailers.
In the long run, suppliers substitute their losses from other sources, mainly by introducing unfavourable terms for weaker retailers that have no real buying power. This creates a so-called 'waterbed effect' and causes long-term net losses for consumers, as weaker retailers cannot keep up with competition and can experience de facto market foreclosure.
In recent years, private labels in both the budget and premium sectors have won a significant number of Slovenian consumers. Suppliers and retailers agree that private labels bring instant short-term advantages for consumers, as they provide a choice of solid quality products at lower prices.
According to the agency, it is still unclear whether private labels will cause long-term harm to consumers. The agency has recognised that sales of private-label products may reduce the sales volumes of traditional brands, which could result in a loss of diversity for consumers, as the latter may slowly become redundant. The introduction of private labels has also increased retailers' superiority. As the consumption of traditional brands decreases, retailers gain even greater negotiating power, since branded products are no longer considered 'must-haves'. Where suppliers provide retailers with both their own brands and private-label products, retailers gain additional negotiating power due to their familiarity with the actual cost structure of the product.
Since April 2014 – when amendments to the Agriculture Act were adopted – the agency has assumed additional competences in relation to newly imposed conduct rules in the food sector. The amendments also established a new monitoring authority in the form of a supervisor of relations in the food supply chain, which monitors everyday relations and practices in the sector and works closely with the agency.
The Agriculture Act outlines acts that are considered illicit practices when they are enforced by undertakings that hold significant market power (eg, not upholding agreed payment deadlines and conditioning further purchases on extra payments, bonuses and rebates). The term 'significant market power' is not linked to the concept of dominance in the Competition Act; the degree of market power that will trigger extra scrutiny has not been determined.
Should the supervisor identify an illicit practice, the agency can impose a fine of up to €18,000 on the undertaking concerned and a fine of up to €1,800 on the responsible officer of the undertaking. If the illicit practice also breaches the Competition Act, the agency can initiate antitrust proceedings, which can lead to antitrust fines.
The agency concluded that there is a clear need for further day-to-day monitoring of the sector and for ongoing assessment of market practices in order to prevent potential restrictions or distortions of competition.
The Agriculture Act (which is not yet enforced) sets out further limitations for undertakings that possess 'significant market power' – a term that remains undefined and will be established only by forthcoming practice. Future developments should also help to clarify the raison d'être of the supervisor, whose duties and tasks remain vague.
It remains to be seen whether these changes will influence the agency and whether there will be further investigations in the food sector. Any investigations will be interesting from a procedural standpoint as, following the 2014 amendment to the Competition Act, the agency must seek a court order before conducting a dawn raid (for further information please see "Court finds agency dawn raids unconstitutional and orders new law").
For further information on this topic please contact Eva Škufca at Schoenherr by telephone (+386 1 200 09 80), fax (+386 1 4260 711) or email (email@example.com). The Schoenherr website can be accessed at www.schoenherr.eu.
(1) The press release was published on December 4 2014.
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