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Musgraves Ltd/Licensees and Franchise [1994] IECA 354 (19th September, 1994)
Competition
Authority decision of 19 September, 1994 relating to a proceeding under Section
4 of the Competition Act, 1991.
Notification
Nos. CA/18/92E and CA/19/92E - Musgraves Ltd
Licensee
and Franchise Agreements
Decision
No. 354
INTRODUCTION
1. Musgraves
Limited (Musgraves) notified two types of standard agreement relating to the
operation of grocery retail outlets on 30 April, 1992. These agreements
involve Musgraves, trading as SuperValu and Centra Distribution (Musgraves),
and 352 licensees (licensee agreements) on the one hand and Musgraves and 18
franchisees (franchise agreements) on the other.
THE
FACTS
(a)
Subject of the Notification
2. The
notifications involve two types of standard agreements between Musgraves and a
number of individual grocery retailers. The essential feature of the
arrangements is that the retailers undertake to purchase all of their
requirements from the range of merchandise offered by Musgraves. All of the
retailers trade under either the SuperValu or Centra name. There are actually
four standard agreements. Two of these are with retailers who own their own
stores and these are referred to as licence agreements. There is a separate
licence agreement for SuperValu and Centra retailers, although the two
agreements are virtually identical The other two agreements are with retailers
who operate stores which are owned by Musgraves. These are referred to as
franchise agreements. Again while there are different agreements for Super
Valu and Centra stores, the agreements are virtually identical. There are over
350 licence agreements and less than 20 franchise agreements.
(b)
The
Parties
3. The
parties to these agreements are Musgraves, 352 independent retailers (the
licensees) and 18 franchisees. Musgraves is a holding company. Its divisions
trade almost exclusively in the grocery business. Musgraves Distribution Ltd.,
a wholly owned subsidiary of Musgraves, carries on the business in Northern
Ireland.
4. At
the retail end of the grocery market, retailers linked to Musgraves operate
under the SuperValu and Centra names. SuperValu and Centra are known as Symbol
Groups i.e. groups of independent retailers who operate under a common group
name. The SuperValu and Centra Distribution division of Musgraves acts as a
wholesaler supplying the retail outlets from two warehouses in Cork and Galway
and a central billing system is in operation. Musgraves also operate nine cash
and carry outlets.
(c)
The
Product and the Market
5. Musgraves
provides a wholesale service, including central billing arrangements, for
grocery goods to independent retailers. The retailers buy directly from
Musgraves or alternatively they purchase their requirements under the central
billing system from suppliers nominated by Musgraves.
The
Wholesale Market
6. According
to the Fair Trade Commission, (1) there were four major wholesale groupings in
1991. These groups were members of the Irish Association of Distributive
Trades (IADT). IADT members represented 54 wholesale companies which operated
140 warehouses in 1990. Of these 39 were delivered and the remaining 101 were
cash and carry outlets. Inaddition, the ADM/Londis group operates a wholesale
company which is owned by retailers, and a number of smaller wholesalers.
7. The
delivered warehouses are largely concerned with servicing symbol shops in the
various retail symbol groups. Cash and carry outlets represent a source of
supply for independent grocers. In the 1991 review there was evidence to
suggest that the cash and carry business was becoming less significant with a
growing demand from retailers for wholesalers to provide credit and delivery
services.
8. Musgraves
also operates a central billing arrangement with its symbol group retailers.
Under this system, goods are delivered by suppliers to individual retailers
rather than to the wholesaler's warehouse for onward delivery. The supplier
then bills the wholesaler for all deliveries to the symbol shops. The
wholesaler pays the supplier and collects the money from its individual retail
customers. The advantage of this arrangement to the wholesalers is that it
allows them to trade in goods of a relatively short shelf-life which could not
be stored indefinitely in their warehouse. For the retailers, it gives some of
the benefits of bulk-buying which they would not otherwise be in a position to
avail of.
The
Retail Market
9. Retail
grocery outlets include both independent small retailers, retailers connected
to particular wholesalers as well as outlets owned by the supermarket
multiples. Details of the number of retail outlets associated with symbol
groups as well as retail outlets operated by the multiples are given in Table 1.
Table
1: Numbers of Retail Outlets
Multiples 1986 1990 1991
Dunnes
41
51
50
Powers
69
68
69
Superquinn
11
12
13
L
& N
14
16
18
Roches
Stores
6
7
7
H
Williams
33
-
-
Total
174
154 157
Symbols
ADM
Londis
78(a)
85(a)
90(a)
Musgraves
380
370 371
Associated
National
Distributors
(Mace)
320
193
(b)
BWG
Foods (Spar,
Wisebuy,
Family Value)
425
406
(b)
Total
Symbols
1203
1054
999
Notes:
(a) Londis symbol shops only. (b) Separate figures for these groups were
not available.
Source:
FTC, (1991) and Checkout Yearbook (1993).
(i)
Multiples
10. There
are five multiple groups which between them operated 157 retail outlets in
1991. These are Quinnsworth, Dunnes Stores, Superquinn, L&N and Roches
Stores. Only two ofthese, Quinnsworth and Dunnes could be regarded as
operating nationally. In terms of turnover and market share these two are far
larger than the other three multiple groups who operate on a regional basis and
have far fewer stores.
(ii)
Symbol Groups
11. Symbol
group shops are groups of independent retailers who operate under a common
group name. Among the major symbol groups operating in the grocery trade are
SuperValu, Centra, Mace, Spar, and Wisebuy. There were almost 1,000 symbol
group stores in the State in 1991. The symbol group shops are organised by a
wholesaler or group of wholesalers, from which the retail members purchase a
large part of their supplies. The retail members of symbol groups benefit from
membership in a number of ways, such as being able to get and offer cheaper
prices arising from bulk purchasing by the group members as a whole, combined
advertising, other group promotions and the benefits of a common logo. There
are over 370 stores attached to the two Musgrave symbol groups. This total has
changed very little since the mid 1980's. There has in membership of the
groups. SuperValu stores tend to be larger than Centra ones. Roughly 35% of
the Musgrave affiliated stores trade as SuperValu outlets with the balance
operating under the Centra name.
(iii)
Independents and Other Retailers
12. The
majority of independently owned grocery outlets do not belong to any of the
symbol groups. While most of these are single shop operations this category
includes some operators with a number of stores. Independent stores range in
size from small corner stores to supermarkets comparable in size to those
operated by the multiples.
13. There
are in addition a sizeable number of stores specialising in certain foodstuffs.
These include butchers,greengrocers and tobacco, sweets and newspaper shops
(TSNs). These are not grocery stores in the strictest sense. It is clear,
however, that grocery stores are in competition with butchers and greengrocers
for particular segments of the food market. Similarly there has been an
increased tendency for TSNs to stock a small but significant range of grocery
products. Many petrol stations now have forecourt shops which also stock a
range of grocery products. These latter two groups would certainly appear to
be competing in the convenience store segment of the grocery market.
Table
2: Estimated Market Shares December 1992
Quinnsworth 10.0
Crazy
Prices
10.5
Powers
Total
20.5
Dunnes
Stores
24.0
Superquinn
4.0
L
& N
3.5
Roches
Stores
2.0
Total
Multiples
54.0
SuperValu 12.0
Centra
4.0
Musgrave
Total
16.0
Spar
4.0
Mace
3.0
Londis
& Other
Symbols
4.0
Total
Symbols
27.0
Other
Outlets
19.0
Source:
Checkout Yearbook 1993.
14. No
accurate assessment of market shares within the grocery trade is easily
attainable. However, estimated market shares included in the Checkout yearbook
for 1993 indicate that the five multiple groups accounted for 54% of the total
national grocery trade. Three of the five groups have a share of less than 5%
with Dunnes and Powers accounting for 44.5% of the market. The symbol groups
accounted for 27% of the market at the end of 1992 with the Musgraves
affiliated SuperValu/Centra stores, the largest symbol group, having 16% of the
total, of which 12% was attributed to SuperValu stores. Their market share is
far higher than that of the other symbol groups which between them had only 11%
of the market. Of the multiples, only Dunnes Stores and the Powers Group have
a larger share of the market. Musgraves indicated that they did not know the
source of the Checkout data and produced alternative figures suggesting that
their market share was lower than stated in the Checkout Yearbook.
(d)
THE
ARRANGEMENTS
15. Musgraves
notified four agreements - the standard SuperValu and Centra licensee
agreements and the standard SuperValu and Centra franchisee agreements.
The
SuperValu Licensee Agreement
16. The
licensee agreements are entered into with independent retailers who own their
own stores and agree to undertake the obligations in the licensee agreements.
The most important provisions in the standard SuperValu licensee agreement are
detailed below.
17. Under
the agreement Musgraves, trading as SuperValu undertakes:
- to
allow the retailer to operate as a SuperValuoutlet,
- to
supply a SuperValu fascia sign,
- to
sell to the retailer the range of merchandis which Musgraves Ltd. stocks at the
scheduled wholesale price ruling at the date of delivery, and
- to
provide the retailer with promotional material on a regular basis.
18. The
retailer's obligations under the agreement are contained in Clause 3. The most
important of these are:
"(a) pay
an entrance fee of
to the wholesaler
(b)
to
display the authorised SuperValu fascia sign
in
a prominent position on the premises
(c)
purchase
all his/her/its requirements from the
range
of merchandise offered by the wholesaler
(d)
to
support those suppliers nominated by the
wholesaler
from whom there is a group discount
available
on a Central Billing and Retail Rebate Scheme.
(e)
support
the SuperValu Group promotional
programme
including the following:
(i)
To
display all point of sale material supplied by the Wholesaler in the manner
stipulated by the Wholesaler.
(ii)
To
pay a weekly contribution towards SuperValu marketing costs, the amount to be
decided by Musgraves Ltd. trading SuperValu & Centra Distribution and the
Retailer to be bound by all such decisions in all respects absolutely.
(iii) To stock and display all SuperValu brands
at
the price recommended by the wholesaler"
19. Clause
5 of the standard licensee agreement provides for purchasing fixtures and
fittings for the SuperValu and Centra outlets:
"The
retailer agrees to purchase all equipment (fixtures and fittings) from
suppliers nominated and approved by the Wholesaler, and used in his premises,
and further agrees to use the SuperValu corporate colours as specified by the
Wholesaler".
20. Clause
12 contains restrictions relating to the sale of the licensee's premises.
"In
further consideration of the financial, commercial and trading assistance given
by the Wholesaler to the Retailer, the Retailer further agrees and covenants
with the Wholesaler as follows:
(i) Not
to transfer, sell, assign, let, sub-let, or otherwise dispose of the premises
or the retail business carried out therein to a competitor of the Wholesaler.
(ii) In
the first instance if he/she/it decides dispose of his/her/it's interest in
the premises to offer to the Wholesaler the first option to purchase the
premises at a price to be agreed between the parties. In default of agreement
the price shall be determined by an independent valuer nominated by the
Wholesaler and approved by the Retailer, such price to be determined on the
basis of the then prevailing market value for the premises, with vacant
possession having regard to the location of the premises. The Wholesaler shall
have one month from the determination of the price as aforesaid to enter into
Agreement for sale to purchase the same.
(iii) After
termination of this Agreement, not to carry on the trade or business of
retailer of the type of goods commonly sold by the Retailer from the premises
for a period of one year from the date of termination within a radius of one
mile from the premies......"
21. Clause
14 provides for termination of the Agreement:
"(a)
Either party shall be entitled to terminate this Agreement by giving three
months notice in writing to the other party, which termination shall not affect
the accrued rights up to the date of termination of either party under the
Agreement.
(b)
In the event of the Retailer exercising his rights as aforesaid the Retailer
shall be immediately bound by all provisions of Clause 12 hereof."
22. The
standard Centra licensee agreement is identical to this apart from the omission
of clause 3(a) (see para. 18).
The
Franchise Agreements
23. The
standard franchisee agreements deal with the situation where Musgraves owns the
store and enters into a type of tenancy agreement with the franchisees.
Franchisees are termed ´Managers' in the agreements. The SuperValu and
Centra franchisee agreements are identical.
24. The
franchisees are required to comply with the provisions of the standard licensee
agreements in addition to the undertakings given in the franchisee agreements.
25. The
franchisees give a series of undertakings to Musgraves. These undertakings
deal with, inter alia, exclusive purchasing, promotion, insurance, service
charges, trading laws, non-compete clauses and repairs. The following
provisions are included:
"2(ii)
To take all supplies of grocery products and all other allied products at all
times for sale in the business to be carried on hereunder from a supplier or
suppliers approved by the Company.
(iii)
To take from the Company or a supplier or distributor authorised by the
Company, all supplies and other commodities such as advertising material, trade
notices, items, paper products and packaging bearing a trade mark or logo of
the Company, and miscellaneous equipment incidental to the preparation,
advertisement supply or presentation of the business as the Company may
prescribe same to be willingly supplied by the Company at prices, which shall
at all times be reasonable having regard to the cost thereof to the Company.
If payment of any Invoice due to the Company is overdue all other Invoices and
payments due by the Manager to the Company shall immediately become due and
payable and interest on such unpaid amounts shall accrue at the rate of 1.5%
per month...
(v)
The Company shall insure and keep insured throughout the term of this
Agreement with an Insurance Company of repute the premises together with all
stock thereon, and all equipment and fixtures and fittings therein, and shall
also insure against all claims for Public Liability and Employers Liability
together with such consequential loss, together with cash in transit and on the
premises at a level which shall be fixed at the discretion of the Company and
shall further insure and continue to keep insured such risks as the Company may
at its sole discretion deem to be prudent and practical in the circumstances of
this Agreement and in the circumstances of the ownership and operation of the
shop. The company shall furnish to the Manager copies of the Insurance
Agreements entered into by it and shall also furnish to the Manager the amount
of the Premiums payable in respect of such Insurance it shall arrange. The
manager shall pay to the Company on presentation of the said premiums the
amount which has been discharged by the Company in respect of same and this sum
shall not be deemed to form any part or portion of the Management Charge herein
referred to.
(vi)
The Manager shall pay to the Company a Service Charge representing a
percentage of the total sales of the Manager exclusive of V.A.T. on the
premises during each accounting month. The Service Charge shall be the
percentage amount agreed between the Company and the Manager and shall be paid,
together with V.A.T. thereon at the rate of within ten days of the end of
each accounting month. If the payment of the Service Charge is overdue, all
other Invoices and payments due by the Manager to the Company shall immediately
become due and payable and interest on such unpaid amounts shall accrue at the
rate of 2% per month. In the event of the Manager and the Company failing to
agree as to the percentage figure which is to be the Service Charge within a
period of twenty one days the Company may forthwith and without further notice
to the Manager, terminate this Agreement and same shall be forthwith determined
and void and of no effect....
(x)
The Company has the right to nominate the accountant to act for the manager to
ensure proper books of account are kept. The Accountant nominated will be
acceptable to Company and Manager and will at all times be the Managers
accountant.
The
rate of service charge is subject to alteration in line with fluctuations in
the AA bank rate.
The
service charge rate can be based on either of the following:
(a) %
of turnover excluding VAT
(b) Interest
at AA rates on total cost of premises,
renovations,
equipment and fees outlaid by the Company.
This
Agreement is for a period of
after which the manager has the option to purchase the property at a cost to
include original cost of premises including fees, renovations, equipment and
fees on sale. This option will be at the discretion of the Company.
(xi)
To allow the company or its Accountants or other duly authorised Agents of the
company to examine during business hours at its own expense the books and
records of the Manager. The Manager will keep complete and accurate books and
records of the operation of the business at the Managed Premises, and will keep
them available for the Company to inspect upon request for 24 months. In the
event of such examination disclosing an error in the computation of the total
gross sales made from or on the Managed Premises to an extent in excess of 2%
the Manager shall bear the expenses of the examination forthwith, and shall
forthwith pay any deficiency on the Service Charge which may be disclosed on
such examination, together with any interest payable thereon.
(xii)
To allow the Company's authorised personnel to enter the Managed Premises at
all times during business hours to inspect and examine the Manager's stock,
operations and facilitate for the purpose of determining whether the Manager
has complied with his obligations under this agreement and with the standard
prescribed by the Company.
(xv)
Diligently and continuously to perform the services forming part of the
operational system prescribed by the Company for the Managed premises in strict
compliance with the provisions of this Agreement.
(xvi)
To keep the Managed Premises open and in normal operation each and every day
of the week including Saturdays and Sundays for such hours as shall be agreed
between the Company and the Manager or in the event of disagreement such hours
as the Company may reasonably direct.
(xix)
Not except as herein authorised during the continuance of this agreement
either alone or in association with or in the employment of any other person
engage or be concerned directly or indirectly in any business or employment in
the field of the grocery business or businesses allied or associated thereto
except with the express authority in writing of the Company which authority
shall not be reasonably withheld.
(xx)
Not for a period of one year from the determination of this Agreement either
alone or in association with or in the employment of any other person to engage
or be engaged directly or indirectly in any business in the field of the sale
of groceries or any business allied thereto within a radius of one mile of the
Managed Premises, where the Managed Premises is in a a city and five miles of
the Managed Premises where the managed Premises is elsewhere other than a city.
(xxii)
To have and use on the Managed Premises only such cash registers as are
supplied thereto by the Company. The said cash registers shall remain and
always be the exclusive property of the Company. The said cash registers shall
have two keys, one of which shall be retained by and be the exclusive property
of the Company. The Manager hereby agrees not in any way to interfere with the
mechanism or working of the said cash registers, and by virtue of the execution
of this Agreement acknowledges that the Company and/or its designated
representative may at any time have access to the said cash registers for the
purposes of checking same, and in particular, for the purposes of checking the
tally rolls thereon, then such checking and inspection shall be carried out in
the presence of the Manager or in the presence of a representative to attend
such inspection or checking of the cash registers shall not in any way preclude
the Company or its designated representative from carrying out such checking
and examination. The property in the said cash registers shall vest totally in
the Company and the Company shall insure same in the full replacement value,
and shall be at liberty from time to time or any time to remove whatever cash
registers are placed in the managed Premises and to replace same with other
cash registers. No other cash registers whatsoever shall be kept or used on
the Managed Premises.
(xxv)
The Company shall, at it's own discretion, carry out such repairs and renewals
which it shall deem fit, proper and reasonable in order to maintain the Managed
Premises at the standards which would be appropriate for such premises. Prior
to carrying out such repairs and renewals the Company shall agree same with the
Manger, but in the event of the Manager disagreeing with the company as the
necessity of repairs and renewals shall be carried out with the least possible
disturbance to the Manager. The costs of the said repairs and renewals shall
be a charge against the accounts of the Manager, and shall be payable on
presentation of the Invoices in respect of same.
26. Clause
3 of the standard agreements set out the circumstances in which the agreements
shall cease to have effect. Such a situation could arise if the franchisee
fails to observe the stipulations and agreements contained in Clause 2.
Bankruptcy and default in payment for goods and other matters would also bring
about a termination of the agreement. There is also a limit on the duration of
the agreements:
This
agreement shall cease and determine upon the happening of any of the following
events, without notice being served by either party, namely;
(a)
The affluxion of 10 years from the date hereof, provided however, and it is
hereby agreed between the Company and the Manager that this Agreement shall
continue so long only as the Manager holds his appointment as Manager of the
SuperValu Franchise of the Company.
27. Post-termination
provisions are also included in this Clause:
On
the determination of this Agreement whether by affluxion of time or otherwise,
the Manager shall forthwith discontinue any or all use of the name SuperValu
and any other of the trade marks or logos referred to in this Agreement or any
equipment or items bearing the name or trade mark of the Company or the logo
thereof, and shall forthwith remove from display all advertisements, signboards
or name plates supplied or used in connection with the exploitation of this
Agreement, and shall not in any way whatsoever use the name of nor similar kind
or routine service or method of selling grocery products whereby the public
could be misled into believing that are in any way associated with the
marketing from the Managed Premises or any other Premises.
(e)
Submissions
of the Parties
28. Musgraves
submitted that the agreements were pro-competitive in their effects on the
market and did not prevent, restrict or distort competition in any goods or
services in the State. The agreements were stated to be pro-competitive
because they allowed retailers supplied by Musgraves to compete effectively
against the multiples. The undertakings given by the licensees and franchisees
were said to be necessary to facilitate the success of the operation.
29. Musgraves
submitted that the arguments they presented in support of an application for a
licence were also applicable to the application for a certificate. They stated
that they believed that the agreements between Musgraves and its licensees and
franchisees contributed to improving the distribution of goods and to economic
progress. They claimed that this was supported by the fact that they had
increased the market share in recent years. This increase in share was due,
inter
alia
,
to the competitiveness of the retailers when compared with the multiples. The
agreements improved the efficiency of the distribution of goods by bringing
about a close and mutually beneficial relationship between the wholesaler and
the retailers. The cost of transferring goods from the suppliers to consumers
was reduced as a result of the agreements.
30. The
benefits of technical and economic progress were brought to many small rural
communities and were not confined to urban areas. The relationship brought
about by the agreements has allowed the development of expertise in scanning,
re-ordering of stocks and handling of goods, which was appropriate for
operation by independent retailers. It had been possible, by making these
agreements, to bring the benefits of modern technology to many independent
businesses who would have found it very difficult to avail of these benefits on
their own and would have been at risk of experimenting with untried, and over
costly, or unsuitable systems
31. Consumers
in remote areas gained because they were able to obtain their groceries at the
same prices as those in urban areas. Before the advent of the type of trading
exemplified in the agreements, there was a significant variation in the prices
paid for many grocery items in urban and rural areas. Consumers in urban areas
gained from the proximity to them of many of the SuperValu retailers thus
obviating the cost and time of travelling to a multiple. Consumers gained from
a greater diversity of services from supermarkets than had been available.
These included:
(a)
the willingness to deliver goods which have benefited many consumers,
(b)
longer opening hours including Sunday opening which has benefited many persons,
(c)
the generally higher standard of service resulting from the presence of the
owner of the enterprise in the store.
32. Consumers
also gained from the vigorous competition which Musgraves had provided for the
multiples and had forced multiples to compete strongly on price and to improve
their services. This was particularly important in the period since the demise
of H. Williams and Tesco when there were only two national multiples. The
agreements could not be shown to have eliminated competition in a substantial
part of the market given their market share. Even in the convenience sector
there were many competitors, including other symbol groups such as Spar, Mace,
Londis as well as many independent traders and the petrol retailers. While the
market share of Musgraves varied from place to place, the effect of the
agreements did not eliminate competition in any part of the country. In all
parts of the country there was competition to Musgraves. Nor was there any
products or product range where Musgraves had a monopoly of the market.
Musgraves submitted detailed argumentation in support of a number of the
restrictions contained in the agreements.
Exclusive
Purchasing - Clause 3(c)
33. In
relation to the exclusive purchasing requirements, Musgraves stated that the
wholesaler earned its income from sales to the retailers. There was no other
payment by the retailer other than the payment by the retailer for the goods
(apart from the payment by the eighteen franchisees of a sum equal to the
interest on the value of the premises occupied by them). The payment for the
goods comprised the price of the goods, which was the same to all retailers,
and a handling charge, which was on a scale and had a slight advantage for
larger outlets to recognise economies of scale. About half the margin before
the Long Term Allowance was earned from the handling allowance. If the
retailer did not purchase the goods, the wholesaler was not remunerated for the
services provided to the retailer.
34. The
essence of the concept was that the combined purchasing power of the retailers
enabled the best possible prices to be obtained from suppliers. This enabled
the
retailers
to compete more effectively. If any individual retailer purchased separately
from the wholesaler, the whole group was weakened and the viability of all
might be threatened. No individual retailer would be able to purchase more
cheaply than Musgraves across the range of merchandise. By attempting to do
so, retailers would put their viability at risk.
Support
Suppliers - Clause 3(d)
35. In
connection with the requirement to support suppliers nominated by them,
Musgraves stated that there were many products where it was more practicable to
have them delivered direct to the retailer than to be delivered from a central
warehouse. Examples of these were fruit and vegetables, dairy products and
fresh products generally. These could be centrally billed. It was possible
for Musgraves to negotiate arrangements with suppliers of many of these
products which incorporated service levels, quality standards, promotion
schemes, lower credit risk, reduced sales representative cost, lower interest
cost on outstanding debt, etc. which could be shared between the wholesaler and
the retailer and which would enable the retailer to obtain the goods at lower
prices than would be possible if the retailer purchased separately. Musgraves
were also able to negotiate credit terms, thus allowing the retailer proper
working capital to expand and develop the business. Retailers purchasing
independently from suppliers often obtained little or no credit, which impacted
heavily on their development and expansion opportunities. The central billing
arrangements with suppliers encouraged them to deliver to remote areas.
Central billing resulted in a substantial reduction in a retailer's
administration costs, as the vast majority of the work was done centrally by
Musgraves thus allowing the retailer to be more competitive in retail price
levels.
Pricing
- Clause 3(c)(iii)
36. Musgraves
stated that the requirement to stock and display all SuperValu (or Centra)
brands at the price recommended by the wholesaler applied to own brands with
the Musgraves names rather than the supplier's name on the product. These
tended to be known value items. These products were nationally advertised and
were chosen in order to compete with the remainder of the trade. It was
essential that the products should be sold at the prices advertised nationally.
If they were not, the image of the symbol would be devalued to consumers. In
practice, because these tended to be low margin items, the majority of
retailers sold them at the recommended price. Musgraves had no objection of
any kind to the retailer selling the products at less than the recommended
price. The restriction was on selling at more than the recommended price for
the reasons given above. It was believed that this restriction was also
indispensable to the success of the concept.
37. The
Authority queried Musgraves in connection with an article in the October 1992
edition of Retail News. This involved an interview with Mr. Pat Herlihy,
described as operations director at Musgraves. In this interview Mr. Herlihy
described how retailers order their stock from Musgraves using hand held
computer terminals. The report then stated that:
´These
display the relevant product, price and margin information on each of the lines
in the warehouse'. Musgraves were asked how this conformed with earlier
information provided by them that retailers were free to set their own prices
and margins. In their reply they indicated that the prices shown were only
recommended prices and that retailers were free to set their own prices. They
also claimed that this was similar to the long accepted practice of suppliers
recommending prices to the trade. They indicated that this differed from the
arrangements in respect of own brands which are dealt with elsewhere.
Musgraves indicated that Retailers were provided with suggested retail prices
and suggested gross margins for all goods sold, but were free to sell below
these prices if they so wished, so long as the item was not on promotion (i.e.
nationally advertised). In a letter dated 6 April, 1993, Musgraves indicated
that the arrangements in relation to pricing which applied to a licensee also
applied to a franchisee.
Equipment
- Clause 5
38. Musgraves
submitted that they in all cases nominated two suppliers for the retailer to
choose from. The reason for this clause was to ensure that the equipment
obtained by the retailer met the standards required from a Musgraves retailer.
The service was also valuable because it prevented the retailer from purchasing
unsuitable equipment or purchasing from unsuitable suppliers. The combined
experience of the group was made available to any new retailer or to any
retailer updating the equipment.
Restriction
on Re-sale of Premises - Clause 12
39. Musgraves
argued that these clauses were to protect the wholesaler in the event of the
retailer deciding to end the agreement. They were similar in their effect to
clauses found in many employment contracts. In addition to protecting the
wholesaler they also protected the other retailers as any significant reduction
in the number of retail outlets would mean a reduction in the viability of the
whole group. Essentially, Musgraves invested in the Musgraves symbol brand
names. These names, because of their reputation, brought customers to the
shops. They considered that it was reasonable for Musgraves to protect its
investment by restricting the retailer from disposing of the premises to a
competitor of Musgraves. The second part of the clause, obliging the retailer
to give Musgraves first refusal on the premises, was fair to the individual
retailer while ensuring that Musgraves was able to protect their investment.
The third part of the clause ensured that the retailer was not able, after
receiving a fair price for his/her business, to restart the business again
within a mile from the premises sold.
40. Musgraves
argued that a number of EU block exemptions were relevant to these agreements.
These were:
(1)
1983/83 Exclusive distribution
(2)
1984/83 Exclusive purchasing
(3)
4087/88 Franchising
(4)
556/89 Know-how licensing
They
stated that, while in many respects, the Musgraves agreements could be
classified as exclusive distribution agreements or exclusive purchasing
agreements, it was apparent that these regulations were intended to apply to
manufactured goods being distributed by exclusive distributors. Nevertheless
many of the arguments made by the EU in justifying these block exemptions
applied equally in the case of the notified agreements. Similarly, the
Franchise Regulation had a general applicability to the form of agreements
being notified but not all of the requirements of the Regulation were met by
the agreements. The know-how licensing regulation had also some relevance for
this notification. In effect, it was the know-how of Musgraves which was being
made available to the retailers and which, inter alia, ensured their success.
Franchise
Agreement
41. In
relation to clause 2(v) of the standard franchise agreement, which provides for
the organising of insurance by Musgraves, it was submitted that adequate
insurance on stock was essential in Musgraves' interests. Musgraves nominated
a small number of insurance brokers to provide insurance services to their
franchised outlets. The use of these brokers was supported by the notifying
parties on the basis that it was more convenient and efficient to obtain
insurance services in this manner. In order to ensure that the nominated
broker remained competitive, Musgraves sought quotes every 2/3 years from a
number of brokers, the one deemed to provide the best cover, having regard to
rates and quality of service, was then recommended to all retailers, not just
the franchisees. Approximately one-third of the licensees insured through the
recommended broker although they were not obliged to do so.
42. Musgraves
reserved the right to inspect the franchisee's stock at any time under Clause
2(xii). Musgraves stated that as the franchisee does not make any form of
capital investment, some assurance of compliance with trading conditions was
essential. It has claimed that the "operational system" referred to in clause
2(xv), involved conditions relating to standards of hygiene, point-of-sale
materials as well as assurances that all legal requirements were being met.
There was no separate document setting out the operational system.
(f)
EU
Regulations
43. Eu
Regulation No. 1983/83, of 22 June 1983, is a block exemption regulation which
applies Article 85(3) of the Treaty of Rome to categories of exclusive
distribution agreements. The regulation entered into force on 1 July 1983 and
it expires on 31 December 1997.(2). The main features of the regulation are
summarised in the Authority's Category Licence for Exclusive Distribution
Agreements.(3). The regulation applies to agreements involving only two
parties in which one agrees to supply only the other with certain goods for
resale within the whole or a defined area of the common market. The exclusive
distributor - the purchaser may undertake to purchase complete ranges or
minimum quantities of the goods, to sell the goods under trademarks or packed
and presented as specified by the supplier, and to engage in sales promotion,
involving advertising, maintaining a sales network or stock of goods. The
Regulation provides that distributors must be free to set their own prices.
44. EU
Regulation No. 1984/83, of 22 June 1983, is a block exemption regulation which
applies Article 85(3) of the Treaty of Rome to categories of exclusive
purchasing agreements. The regulation entered into force on 1 July 1983 and it
expires on 31 December 1997.(4). The main features of the regulation are
summarised in the Authority's Motor Fuels Category Licence.(5). The general
provisions regarding what is and is not permissible are very similar to those
of Regulation 1983/83. The exclusive purchasing agreement, however, must have
a maximum duration not exceeding five years, although it may be renewed, and it
must not cover more than one type of goods which are not connected to each
other either by their nature or by commercial usage. Under the terms of the
Regulation the reseller must be free to set prices.
45. EU
Regulation No. 556/89 of 30 November 1988, is a block exemption regulation
which applies Article 85(3) of the Treaty of Rome to categories of know-how
licensing agreements. It came into force on 1 April 1989 and applies until 31
December 1999.(6). Know-how, for the purpose of this regulation, is defined as
"a body of technical information that is secret, substantial and identified in
any appropriate form."
46. The
regulation exempts agreements involving the transfer of know-how from the
provisions of Article 85(1). The regulation recognises that such agreements
are pro-competitive and have beneficial effects on the economy by facilitating
the transfer of technology and boosting innovation. The regulation lists
obligations of a restrictive nature that benefit from automatic exemption
pursuant to Article 85(3) of the Treaty. A know-how licensing agreement to
which only two undertakings are party and which contains one or more of these
obligations is exempt from the provisions of Article 85(1). Obligations
included are requirements that the licensee not divulge the know-how to third
parties, grant sub-licenses, assign the license or exploit the know-how where
it remains secret after termination of the agreement. A number of obligations
involving territorial rights and protection are also included.
47. EU
Regulation number 4087/88 of 30 November 1988 is a block exemption regulation
which applies Article 85(3) of the Treaty of Rome to categories of franchising
agreements. It came into force on 1 February 1989 and remains in force until
31 December 1999.(7). Franchising agreements essentially consist of licences
of industrial or intellectual property rights (trademarks or names or know-how)
to be exploited for the purpose of selling goods or providing services to
end-users in premises of uniform appearance and with the same business methods.
48. The
Block Exemption applies to agreements which contain at least one of a number of
specified restrictions including that of territorial protection granted by the
franchisor and the obligation on the franchisee not to deal in goods competing
with those manufactured by the franchisor or bearing its trademark. The
regulation also contains a list of restrictions which, if present in an
agreement, prevent the application of the exemption. This applies in
particular to market sharing between competing manufacturers, clauses unduly
restricting the franchisee's choice of suppliers or customers and to cases
where the franchisee is restricted in determining its prices.
(g)
Subsequent
Developments
49. Following
a meeting with representatives of the Authority on 16 June 1992, Musgraves
proposed the following amendments to the licence agreement. In relation to
clause 3(e)(iii), Musgraves submitted that the wording of the clause should be
amended to read:
"To
stock and display all SuperValu brands, either at or below the price
recommended by the Wholesaler".
50. Musgraves
proposed the insertion of an additional clause in the standard licensee
agreement as follows:
"The
retailer hereby covenants with the Wholesaler so long as this Agreement is in
force (a) to carry on his business as Supermarket Operator from the premises
(b) and further that he shall not, without the consent of the Wholesaler, which
consent shall not be unreasonably withheld, carry on the business of
Supermarket Operator in another premises in the Republic of Ireland. In
consideration of the terms of this Agreement, the retailer acknowledges and
agrees that such restriction is reasonable and valid".
51. The
Authority informed Musgraves of its concerns regarding several aspects of the
agreements. Following discussions, Musgraves proposed a number of further
amendments to the licencee agreements in a letter dated 16 November 1993.
These are set out below.
Clause
3(e)(iii)
´To stock and display all SuperValu brands. The retailer can set his
own retail prices, the prices being circulated by the wholesaler being merely
suggestions. The
retailer,
is, however, recommended not to exceed the recommended prices.'
Clause
5
´(i)
in order to ensure compatibility with the wholesaler's computer based systems,
to purchase all equipment which interfaces with the computer systems from one
of two suppliers nominated by the wholesaler,
(ii)
for all other equipment, to comply with the wholesaler's standards and
specifications for the equipment and the presentation of the contract premises
and transport.'
Clause
12
It was proposed to retain the existing clause 12(i) which prevented the
transfer of sale of the premises to a competitor of Musgraves. In addition the
following amendments were proposed.
12(ii)
´the licensee undertakes that if he wishes to sell the premises he will
inform the wholesaler of his intention and allow the wholesaler to offer to
purchase the premises on the same terms as all other parties.'
(iii)
the licensee agrees to give the one year's notice of his intention to sell the
premises to a competitor of the wholesaler.'
In
place of the old clause 12(iii) which included a one year post term ban it was
proposed to include a new clause 12(iv) which stated that:
'the
licensee agrees not to engage, directly or indirectly for six months after the
expiry or termination of this agreement, in any similar business in the same
area [or in any other area where he would be in competition with another
SuperValu outlet].'
In
the case of the franchise agreements Musgraves proposed the following
amendments. Musgraves proposed amending clause 2(v), so as to allow the
franchisees to arrange their own insurance, subject to a requirement that
Musgraves determine the appropriate level of insurance required and for the
franchisee to produce evidence of insurance. Clause 2(x), would be amended to
allow the franchisees to appoint their own auditors subject to Musgraves
agreement which would not be unreasonably withheld. Musgraves proposed
reducing the post-term non-compete provision in clause 2(xx), from 12 to 6
months and its scope from 5 miles to 1 mile in country areas, thereby making it
the same as in city areas. Musgraves proposed adding to the end of clause
3(i), the words ´except where the know-how has become generally known or
easily accessible.'
52. It
was indicated to Musgraves that most of the proposed amendments were acceptable
to the Authority. It was pointed out, however, that as Musgraves recommended
prices for most of the goods sold by the retailers and as the retailers could
not exceed such prices for goods on promotion, clause 3(e)(iii) as amended
should apply to non-own brand goods also. It was also indicated that while a
six month post-termination non-compete clause was acceptable the remaining
provisions of clause 12 were not. It was also pointed out to the parties, that
while they had sought to justify these provisions on the grounds that Musgraves
had borne the cost of building and developing the stores and should therefore
be protected against their being sold to competitors, in fact the vast majority
of stores were owned by the retailers themselves and it was they who had paid
for their construction and development.
53. Musgraves
then submitted further amendments to the agreement in a letter dated 14
February 1994. These were as follows:
Licensee
Agreements
Clause
3(e)(iii)
To
stock and display all SuperValu brands. The Wholesaler provides recommended
selling prices as guidelines. The Retailer is, however, recommended not to
exceed the recommended prices of SuperValu and other brands when they are on
promotion.
Clause
5
To substitute for existing clause 5.
(i)
In order to ensure compatibility with the wholesaler's computer systems to
purchase all equipment which interfaces with the computer systems from one of
two suppliers nominated by the Wholesaler,
(ii)
for all other equipment, to comply with the Wholesaler's standards and
specifications for the equipment and the presentation of the contract premises
and transport.
Clause
12
To substitute for the existing clause 12.
In
further consideration of the financial, trading and commercial assistance given
by the Wholesaler to the Retailer, the Retailer further agrees and covenants as
follows:
(a)
where the Retailer has purchased the site or premises from the Wholesaler, or
where the Wholesaler has made the site or premises available to the Retailer,
(i)
If it is decided to dispose of the Retailer's interest in the premises in the
ten years after purchase, to offer to the Wholesaler the first option to
purchase the premises at a price to be agreed between the parties. In default
of agreement the price shall be determined by an independent valuer nominated
by the Wholesaler and approved by the Retailer, such price to be determined on
the basis of the then prevailing market value for the premises, with vacant
possession having regard to the location of the premises. The Wholesaler shall
have one month from the determination of the price aforesaid to enter into an
Agreement for Sale to purchase the same.
(ii)
after the expiry of ten years, the Retailer undertakes that if he wishes to
sell the premises he will inform the Wholesaler of his intention and allow the
Wholesaler to offer to purchase the premises on the same terms as all other
parties.
(b)
where the Retailer has not purchased the site or premises from the Wholesaler,
(i)
the Retailer undertakes that if he wishes to sell the premises, within ten
years after the date of this agreement, he will inform the Wholesaler of his
intention and allow the Wholesaler to offer to purchase the premises on the
same terms as all other parties.
(ii)
after the expiry of ten years from the date of this agreement, if the Retailer
sells the premises without allowing the Wholesaler to offer to purchase the
premises the Retailer undertakes to give one year's notice of the determination
of this agreement.
(c)
the Retailer agrees not to engage, directly or indirectly, for a period of one
year after the expiry of this agreement, in any similar business within one
mile of the Premises.
Additional
clause 13(b)
existing clause becomes clause 13(a). The Retailer hereby covenants with the
Wholesaler so long as this agreement is in force (a) to carry on his business
as Supermarket Operator from the premises, (b) and further that he shall not,
without the consent of the Wholesaler, which consent shall not be unreasonably
withheld, carry on the business of Supermarket Operator in another premises in
the Republic of Ireland. In consideration of the terms of this agreement the
Retailer hereby acknowledges and agrees that restriction is reasonable and valid.
54. The
Authority wrote to Musgraves on 21 February 1994 asking for an explanation for
the change in the proposed wording of clause 3(e)(iii). In a reply, dated 4
March 1994, Musgraves stated that they had re-considered the wording proposed
in their letter of 16 November 1993. They now felt that such wording would
have a considerable effect on the group and they could not accept it. The
wording of 16 November stated that retailers were free to set their own prices
but were recommended not to exceed the recommended price of SuperValu own
brands when they were on promotion. Musgraves argued that although the revised
wording did not explicitly state that retailers were free to set their own
prices it was implied. Nevertheless they went on to state that the reason for
changing the proposed wording was because Musgraves wished the recommended
prices in the case of goods on promotion to be maximum prices. They advanced
various arguments to justify their setting maximum prices.
Franchise
Agreements
55. Clause
2(v)
- in substitution for existing clause 2(v).
(i)
The franchisee shall insure and keep insured throughout the term of this
agreement with an insurance company of repute, all stocks in the premises and
all equipment and fixtures and fittings therein, and shall also insure against
all claims for Public Liability and Employers Liability together with such
consequential loss, together with cash in transit and on the premises, at a
level which shall be fixed at the discretion of the Company and shall further
insure and continue to keep insured such risks as the Company may at its sole
discretion deem to be prudent and practical in the circumstances of this
agreement and in the circumstances of the ownership and operation of the shop.
(ii)
The Manager shall furnish to the Company a copy of the policies and the
acknowledgement that cover is in place for a period of 12 months, at least two
weeks before the renewal date of the policy. If the Manager fails to provide
the required evidence of insurance, the Company may insure all of the
franchisee's risks temporarily and all charges arising from such insurance
shall be paid to the Company by the manager on presentation of an invoice for
such charges. Such charges shall not be deemed to form any part of the
Management Charge herein referred to.
Clause
2(x)
- in substitution for existing clause 2(x).
The
appointment of an Auditor by the Manager shall be subject to the agreement of
the company which agreement shall not be unreasonably withheld.
Clause
2(xx)
- in substitution for clause 2(xx).
Not
for a period of one year from the determination of this agreement either alone
or in association with or in the employment of any other person to engage or be
engaged directly or indirectly in any business in the field of sale of
groceries or any business allied thereto within a radius of one mile of the
Managed Premises.
Clause
3(i)
- in substitution of second paragraph of clause.
On
the determination of this agreement whether by affluxion of time or otherwise,
the Manager shall forthwith discontinue any or all use of the name SuperValu
and any other of the trade marks or logos referred to in this Agreement or any
other of the trade marks or logos referred to in this agreement or any
equipment or items bearing the name or trade mark of the company or the logo
thereof, and shall forthwith remove from display all advertisements, signboards
or name plates supplied or used in connection with the exploitation of this
agreement, and shall not in any way whatsoever use the name of nor similar kind
or routine service or method of selling grocery products whereby the public
could be misled into believing that are in any way associated with the
marketing from the Managed Premise or any other Premises except where the
know-how has become generally known or easily accessible.
56. The
Authority issued a Statement of Objections to Musgraves on 26 April 1994
indicating its intention to refuse their request for a certificate or licence
in respect of the notified agreements. Musgraves responded in a letter dated
26 May 1994 with further arguments in support of their request. An Oral
Hearing was held on 28 June 1994 at which further arguments were advanced by
Musgraves.
57. With
regard to clause 3(e)(iii) Musgraves argued that it was absolutely essential in
their view, for the competitiveness of the SuperValu and Centra stores, that
Musgraves should be able to specify the maximum prices of goods on promotion
regardless of whether they were own brand or suppliers' brands. They
considered that there was nothing anti-competitive in a supplier or a
wholesaler being able to determine a maximum price. They then proposed a
further amendment to clause 3(e)(iii) as follows:
To
stock and display all SuperValu brands. The wholesaler provides recommended
selling prices as guidelines. The retailer
must
not
exceed the recommended price of the SuperValu and other brands when they are a
nationally advertised promotion.
Musgraves
stated that if they or any of the other wholesalers with symbol groups could
not set maximum prices for goods on promotion, there would be no meaningful
future for group trading.
58. In
relation to the proposed amendments to clause 12 Musgraves argued that it did
not give them an option to purchase but merely allowed them to bid for the
premises in a fair way. They submitted that it would provide them with a
minimum protection against a takeover of outlets by stealth without their ever
having the opportunity to purchase the outlet.
ASSESSMENT
59. The
Authority is charged with deciding whether to issue a certificate or a licence
to agreements notified to it. It accepts amendments to notified agreements
and, where such amendments have been made, it decides whether the amended
agreement satisfies the criteria for a certificate or licence. In this
instance the parties have proposed a large number of possible amendments
following indications from the Authority that certain clauses in the notified
agreements did not, in its view, meet the requirements for a licence. These
various proposals have not fully dealt with the Authority's concerns. The
Authority has therefore taken a decision in respect of the notified agreements
as these are the agreements before it. For purposes of clarity it gives its
views concerning a number of the proposed amendments. Considerable time has
been expended in dealing with the present notifications. In particular the
parties have been given numerous opportunities to propose amendments. It will
not be possible to repeat this in future cases.
(a)
Section 4(1)
60. Section
4(1) of the Competition Act states that ´all agreements between
undertakings, decisions by associations of undertakings and concerted practices
which have as their object or effect the prevention restriction or distortion
of competition in trade in any goods or services in the State or in any part of
the State are prohibited and void'.
(b)
The Parties and the Agreements
61. The
notified agreements involve Musgraves plc and a number of independent retailers
- ´the licensees', and ´the franchisees'. The latter group operate
SuperValu or Centra outlets which are owned by Musgraves. Musgraves and the
licensees are engaged for gain in the grocery business and are therefore
undertakings within the meaning of Section 3(1) of the Competition Act. The
franchisees are engaged for gain in the supply of grocery goods and the
provision of associated services since they keep any profit made after meeting
costs and paying the service charge to Musgraves. Franchisees are risk takers
- they are involved in buying stock for resale with no guarantee that a profit
will be generated from turning over the stock acquired. In the Authority's
view, franchisees are also undertakings within the meaning of the Act.
(c)
Applicability of Section 4(1)
Standard
SuperValu Licensee Agreement
Purchasing
Requirements
62. The
primary feature of the agreement, which is contained in Clause 3, is that the
licensee is obliged to purchase his requirements from Musgraves or a supplier
appointed by Musgraves. Therefore this provision constitutes an exclusive
purchasing arrangement which lasts for the duration of the agreement. The
Agreement is of indefinite duration although there is provision for its
termination. Clause 14 allows either party to terminate the agreement by
giving three months' notice in writing to the other party.
63. Under
Clause 3(c) and 3(d), licensees are required to purchase from Musgraves or from
suppliers nominated by them. In this respect it should be noted that
SuperValu/Centra are the third largest retail grocery operation in Ireland
behind Dunnes Stores and Powers (see table 2) with outlets throughout the
State. The exclusive purchasing requirement has a twofold effect. It
restricts retailers from buying from anyone other than Musgraves or suppliers
approved by Musgraves, thereby preventing licensees in the Musgraves operation
from obtaining goods on more favourable terms than they can get through
Musgraves. In addition, it denies many suppliers of grocery goods and allied
products and services the opportunity of dealing with a considerable proportion
of the retail grocery market other than through Musgraves. Freedom of choice
in the supply and distribution of grocery goods is, in the Authority's view,
restricted to an appreciable extent as a result of these agreements. The
Authority considers, therefore, that these provisions have the object and
effect of preventing, restricting or distorting competition in goods in the
State, and offend against Section 4(1) of the Act.
64. The
Authority believes that an exclusive purchasing agreement must be considered in
its economic and legal context and as part of a network of such agreements by
one supplier, and if necessary, as part of a series of networks of several
suppliers.
65. While
each individual agreement might generally have relatively little effect on
competition, all the licence agreements together form a network of restrictive
agreements for the distribution of grocery and associated products and
services. No licensee can purchase their requirements from anyone other than
Musgraves, or a supplier recommended by them, for a relatively long period of
time. This tends to introduce a considerable degree of rigidity into the
market and makes it more difficult for a new entrant to the market to trade
successfully. Musgraves stated that they listed all national suppliers and
supported many local suppliers so that many suppliers had the opportunity of
selling to the group's retailers.
66. Essentially,
this notification concerns exclusive purchasing, however, elements of group
buying are also involved. In this context, the EU Commission, in its decision
on the National Sulphuric Acid Association (8), found that the rules of a joint
buying pool for the purchase of sulphur infringed Article 85(1) of the Treaty
but exempted the arrangements under Article 85(3). Under these rules, each
member was required to purchase at least 25% of its sulphur requirements from
the pool. The Commission stated that:
"Each
member of the Pool, to the extent he is committed to purchasing through the
Pool, is prevented from competing with other Pool members to obtain more
favourable terms from the suppliers than those obtained by the management
committee."
"To
whatever amount the member is committed, he is deprived of the choice to
negotiate terms and conditions with the suppliers...".
67. The
Commission also noted the effect of such arrangements on suppliers stating that
because Pool members were committed to purchasing through the Pool, suppliers
in the Community were excluded from selling directly to those members and
therefore at least 21% of all sulphur imported by UK acid-makers would be
supplied to one outlet, i.e. the Pool. In this case suppliers are prevented
from negotiating for business directly with the SuperValu and Centra retailers
- they must deal with a single purchaser, Musgraves.
68. In
the Intergroup Decision (9) the EU found that Article 85(1) did not apply to an
arrangement whereby an intermediary known as Intergroup acted on behalf of
national SPAR chains in purchasing and selling goods. The Commission noted
that the Spar chains were free not to use Intergroup's services when making
purchases and they were free to determine their prices and resale terms. The
Commission concluded that the agreements did not have substantial effects on
competition and that the freedom of choice in both supply and demand in respect
of the products concerned was not affected by the agreements to any appreciable
extent. In that instance, however, purchases by Intergroup accounted for a
very small proportion of sales of Spar stores. Such considerations do not
apply here. Consequently, the exclusive purchasing arrangements offend against
Section 4(1).
Pricing
Provisions
69. Clause
3(e) of the standard licensee agreement providesthat the SuperValu retailers
supported the Promotional Programme. Clause 3(e)(iii) requires the licensee to
stock and display all SuperValu brands at the price recommended by Musgraves.
Musgraves own brand goods account for 15% of dried goods sold by the retailers.
70. Musgraves
submitted that SuperValu brands are usually low margin items which are
nationally advertised. They stated that they had no objection to retailers
selling the products at less than the recommended prices - the restriction was
on selling at more than the recommended price. The clause, however, states
that the retailer is obliged to stock and display all SuperValu brands at the
recommended prices. If a retailer was not to comply with this obligation, he
could be considered to be in default of the agreement and Musgraves would have
grounds for termination under Clause 7. In these circumstances, the scope for
retailers to sell SuperValu brands at anything other than the recommended price
is extremely limited. While Musgraves claimed that they had no objection to
retailers selling such items at a lower price, clause 3(e)(iii) specifically
required retailers to display the goods at the recommended price. Retailers
cannot sell at lower prices while observing this clause. Even if these prices
were not binding, resellers might believe that they were binding or that they
should be followed given the wording of this clause. The Authority regards
anything which enforces, or is conducive to, resale price maintenance as a
serious restriction on competition.
71. The
Court of Justice decision in Pronuptia indicates that the communication by the
supplier to the retailer of recommended prices does not contravene Article
85(1) ´provided that there is no agreement or concerted practice that the
distributor observe those prices.' The exclusive distribution and exclusive
purchase block exemptions provide that the distributor or reseller must be free
to determine prices and terms of resale. Similarly the franchise block
exemption allows the franchisor to recommend prices but provides that the
franchisee must be free to determine prices.
72. In
Papiers peints de Belgique the Court of Justice upheld a Commission decision
that an agreement between wallpaper manufacturers, which required retailers to
display the lists of prices fixed jointly by the manufacturers, and not to make
any public announcement of rebates on these prices, while allowing them to
grant rebates in particular cases on a regular basis, was in breach of Article
85(1).(10). In Hasselblad the Court upheld the Commission decision that
measures designed to restrict price advertising were in breach of Article
85(1).(11).
73. The
arrangements involve an agreement between a wholesaler and a large number of
retailers on the prices which apply to a range of products. In the Authority's
view, the obligation on the retailers to display own label products at the
recommended prices is likely to result in selling at those recommended prices
and this is a form of resale price maintenance and therefore offends against
Section 4(1). It also restricts the retailers' ability to advertise lower
prices and for this reason also offends against Section 4(1).
74. National
promotions may include non-own brand products as well as own label products.
Musgraves have submitted that ´retailers are provided with suggested
retail prices and suggested gross margins, but are free to sell below these
prices if they so wish, so long as the item is not on promotion ...'. The
retailers are, in effect, required to adhere to the prices set by Musgraves for
goods that are on promotion. This applies to both own brand and non-own brand
products. Therefore the points made above in relation to own label goods apply
equally to non-own brand products and the pricing policy used by Musgraves in
respect of these products while on national promotion offends against Section
4(1). In the Authority's opinion this provision is tantamount to a formof
resale price maintenance for such goods and it offends against Section 4(1).
75. As
pointed out Musgraves also include recommended prices for all other goods
stocked in their warehouse on their hand-held computer terminals (see para.
37). Although this practice is not specifically provided for in the notified
agreement, the Authority believes that it forms part of the total relationship
between the parties and that it should be considered in this context. This
agreement is not between a supplier and its distributors. Musgraves is a
wholesaler and organises a central billing arrangement for the SuperValu and
Centra retailers. The only reason advanced to justify the recommending of
prices by Musgraves is that the recommending of prices by suppliers is a long
accepted practice. The Groceries Order, while allowing suppliers to recommend
prices, does not allow wholesalers to do so. Consequently the arrangement is
not in line with long accepted practice. The Authority accepts that Musgraves
is not acting purely as a wholesaler in the context of the notified agreements.
It is to a degree akin to a franchisor in that it has established and developed
a uniform system for grocery retailing under the SuperValu and Centra names.
The Authority believes therefore that there is nothing anti-competitive in
Musgraves recommending prices
per
se
in the context of these agreements. It notes, however, that under EU law,
suppliers are only allowed recommend prices provided there is no concerted
practice that retailers observe these prices. Given that retailers are
required by the agreement to display own brand items at the recommended price,
and to adhere to recommended prices for all items on promotion, the Authority
is concerned that they might also believe that they had to observe the
´recommended prices' for other goods. Such provisions also offend
against Section 4(1).
76.
Musgraves proposed amending clause 3(e)(iii) to provide that the retailer
would stock and display all SuperValu brands, be free to set his own prices but
would be recommended not to exceed the recommended prices for such goods. In
the Authority's opinion such a provision would not offend against Section 4(1)
since it leaves retailers free to set their own prices. The wording is in line
with that accepted by the EU Commission for franchise agreements in Pronuptia.
77. Musgraves
then changed their proposal. Specifically the reference to retailers' freedom
to set their own prices was dropped. The new proposal referred to Musgraves
providing recommended prices as guidelines and retailers being recommended not
to exceed these in the case of SuperValu brands and others when they were on
promotion. When asked why they were making this further change Musgraves
stated that they wished to be able to fix the maximum prices at which their
retailers could sell. They claimed that otherwise the group's image would be
damaged. They also referred to the speed with which individual prices could
change in the grocery business and the requirement that as a competitor they
would need to respond to this. They stated that: ´Musgraves has the
ability, by using its computer system, to inform all its retailers of the new
maximum price while ensuring that the retailers are still obtaining an overall
margin which allows them to stay in business.' They referred to a report
prepared for the OECD Secretariat which stated
inter
alia
that there was a difference between fixing minimum and maximum prices and that
maximum prices could be used to eliminate double mark-up problems thereby
increasing efficiency. (12)
78. The
Authority believes that such a provision would offend against section 4(1)
since, according to Musgraves, its aim is to enable Musgraves to set maximum
prices, which means that retailers are not entirely free to set their own
prices. In the Authority's opinion the setting of maximum prices in this
fashion by a wholesaler such as Musgraves constitutes a formof price fixing
which is anti-competitive. The independent retailers must be free to set
prices, as setting prices on the basis of their own commercial judgment is an
essential feature of the competitive process. In seeking to set maximum
prices, Musgraves are going beyond what the EU Commission accepted as
legitimate for a franchisor in Pronuptia i.e. they may recommend retailers not
to exceed the recommended price. The Authority notes Musgraves statement that
their computer system allows them to inform retailers of new maximum prices
while ensuring that they are still obtaining an overall margin which allows
them to stay in business. If Musgraves arrangements allows them to lower the
maximum prices of some goods and ensure adequate margins for the retailers,
this implies that other prices must rise to maintain the overall margin. It is
for the individual retailer to decide upon the appropriate prices for the
products he sells and upon his margins. The State has abolished price controls
including the setting by it of maximum prices, relying instead on the
competitive process to ensure that prices to the consumer are kept as low as
possible. The Authority believes that in such circumstances, wholesalers or
any other third party cannot be allowed to establish maximum retail prices for
those retail outlets supplied by them.
79. There
is also a danger that a maximum price could quite easily become the minimum
price. This reinforces the problems caused by allowing a wholesaler to set
maximum prices. Musgraves referred to a study prepared for the OECD
Secretariat to justify the selling of maximum prices. The report on
franchising indicates that three of the twenty four members of the OECD allow
franchisors to set maximum prices. The study also points out, for example, that:
´All
countries are very suspicious of restrictions that aim to limit the
franchisee's freedom to choose their own price, and it is difficult to find
another topic where there is such unanimity. Resale price maintenance
isvirtually always unlawful. Only more limited restrictions - such as the use
of recommended prices - are tolerated and even then sometimes only in
exceptional circumstances such as promotional campaigns for the introduction of
new products.' (13)
80. The
present arrangement is not a pure franchise agreement although Musgraves
dispute this point. Musgraves themselves have pointed out that the agreement
does not satisfy all the criteria of the EU Franchise Regulation. Therefore,
the propositions advanced in the study are not directly applicable. The
Authority does not in any case accept the arguments made in the study cited by
Musgraves. The Authority believes that its views on setting maximum prices are
consistent with those of competition authorities in the vast majority of OECD
countries.
Equipment
-Clause 5
81. Clause
5 of the standard licensee agreement as notified, requires retailers to
purchase all fixtures and fittings from suppliers nominated and approved by
Musgraves. Musgraves submitted that they nominated two suppliers for the
retailer to choose from. Musgraves indicated that this clause was included to
ensure that equipment obtained by the retailer met the standards required from
a SuperValu/Centra retailer.
82. This
requirement had the effect of restricting the retailer in selecting suppliers
to carry out work in the retail outlet. On the supply side, it denied
suppliers, other than those already approved by Musgraves, access to business
available in SuperValu outlets. These suppliers have the opportunity to become
approved by Musgraves every 2/3 years. To the extent that this happens there
is a possibility that competition could arise. The Authority accepts that
Musgraves are entitled to seek to maintain standards in those retail outlets
affiliated to their symbol group. However, itconsidered that SuperValu
retailers should be free to choose suppliers of these services provided the
products supplied conform to Musgraves standards especially as ownership of the
equipment rests with the licensee. In the Authority's view this clause
offended against Section 4(1).
83. Musgraves
have proposed amending clause 5. Except in the case of equipment which
interfaces with their computer system the retailers may purchase equipment from
any supplier. The only requirement is that such equipment comply with
Musgraves specifications and standards. Such a provision does not offend
against section 4(1). The retailers would still have to obtain equipment
which interfaces with the computer system from one of two suppliers named by
Musgraves. This provision offends against section 4(1) for the same reasons as
the original clause 5.
Post-termination
Restrictions - Clause 12
84. Clause
12 as notified required the licensee (i) not to sell the business to a
competitor of Musgraves, (ii) to give Musgraves first option to purchase the
business and (iii) not to compete in the grocery trade within a limited radius
of the business for one year. Clause 12 makes selling the business to
competitors of Musgraves impossible and it seeks to enforce a non-compete
clause of one year on the licensee. The licensee is also bound by this clause
if he terminates the agreement under clause 14.
85. The
effect of the requirement not to dispose of the business to a competitor of
Musgraves is to prevent competitors, whether existing ones or new entrants,
from acquiring retail outlets and thereby extending market share. Its object
therefore is to prevent, restrict or distort competition. This requirement is
unlikely to affect competition to any significant degree in the short term as
the likelihood is that only a small number of retailers will wantto sell their
business at any one time. Nonetheless, over time this requirement could have a
significant effect on competition. Once an outlet becomes a SuperValu outlet,
it is likely to remain under that name as long as it continues as a grocery
outlet. This introduces a considerable amount of rigidity into the market and
makes it difficult, in particular, for new entrants to successfully enter the
market. It is relevant that the restriction applies to almost 400 grocery
outlets located nationwide, with an estimated 16% of the grocery market.
Musgraves argued that it was misleading to aggregate the SuperValu and Centra
stores in this way. Nevertheless the fact remains that the total number of
SuperValue and Centra stores is more than twice the number of stores currently
owned by all of the multiple groups combined. While some of these outlets may
be small, together they represent a significant proportion of all the
supermarket outlets within the State. The number of SuperValu stores alone is
greater than the numbers of the two largest multiples combined. The Authority
does not believe that Musgraves are entitled to seek to prevent the stores
being acquired by a competitor in this way. In the case of licensees,
Musgraves do not own the stores. The object of this clause is to ensure that
outlets which have become part of the SuperValu group are not subsequently
acquired by another group or multiple, and thus it has both the object and the
effect of restricting or distorting competition and offends against Section 4(1).
86. Clause
12(ii) requires the retailers to give Musgraves first option on the purchase of
premises being disposed of. In this connection, the Authority has considered
the implications of the judgment of the High Court on 1 May, 1991, in the case
of Texaco (Ireland) Limited v. Thomas Farrell and Esso Ireland Ltd. Blaney J.
held that a pre-emption clause in a solus agreement, whereby the dealer had
first to offer his premises for sale to Texaco, was in restraint of trade and
was void. It should be noted that Musgraves do not make any major investment
in the licensees' shops and therefore should not bein a position to dictate how
these outlets are used once the licensee agreement is terminated.
87. If
the retailer cannot sell the outlet to a competitor of Musgraves under 12(i)
and the premises has been designed as a grocery outlet, its value to potential
buyers in other markets may not be as great as it would be to people in the
grocery trade. This reduces the likelihood of the licensee getting a fair
price for the premises and increases the probability that the outlet will
continue within the Musgraves operation. Clause 12(ii) reinforces the
restriction contained in clause 12(i). It also offends against Section 4(1).
88. Clause
12(iii) requires the retailers not to carry on the trade or business within a
radius of one mile from the outlet for a period of one year. The one year
non-compete clause would be acceptable where Musgraves had purchased the
business including goodwill. The Authority has ruled in a number of decisions
relating to the sale of a business that a non-compete clause of two years
duration is acceptable. However, if Musgraves have not purchased the business
they should not be permitted to keep the licensee out of the market by virtue
of this provision. They may prevent him using the SuperValu name - to the
extent the goodwill of the business is associated with that name, it belongs to
Musgraves. Clause 12(iii) provided that the retailer could not operate as a
grocery retailer from the premises for twelve months after termination of the
agreement. The Authority considers that such a post-term restriction
represents a restriction on competition which offends against Section 4(1). It
notes that EU Exclusive Purchase and Exclusive Distribution Block Exemptions do
not allow such post-term restrictions. The Authority can see no reason for
allowing such a restriction in this case. In the Authority's opinion the
retailer is entitled to operate as a grocery retailer following termination of
the agreement whether as an independent or as part of another symbol group. In
the Authority's view clause12 and each of its parts restrict competition and
offend against Section 4(1) of the Act.
89. Musgraves
have proposed a number of amendments to clause 12. Firstly they proposed that
the licensee would be required to inform Musgraves of any intention to sell the
premises and to allow it to purchase the premises on the same terms as all
other parties and to require the licensee to give one year's notice of
intention to sell to a competitor. As the original clause 12(i) remained under
this proposal, the amendment appeared superfluous. Its object and its likely
effect is to prevent competitors acquiring those premises and thus to restrict
competition. It therefore, would offend against Section 4(1). They also
proposed reducing the post-term non-compete clause to 6 months. They sought to
justify this on the grounds that the EU franchise Regulation allows a post-term
non-compete clause for up to one year for the purpose of preventing former
franchisees exploiting the know-how of the franchisor which had been provided
under the terms of the agreement. While the Authority accepts that the
arrangements have some elements of a franchise agreement, it does not believe
that the know-how provided to the retailers by Musgraves is sufficient to
justify a post-term non-compete clause. Thus even a six month restriction
would, in the Authority's view, offend against Section 4(1).
90. Musgraves
subsequently proposed an alternative amendment to clause 12. This would
distinguish between premises sold or provided to the retailer by Musgraves and
those which were not. In the former case, the retailer would, if he decided to
sell the premises within ten years of acquiring it, be required to give
Musgraves first option to purchase the premises. After ten years if the
retailer wished to sell he would have to inform Musgraves and allow them to
offer to purchase the premises at the same price as anyone else. The Authority
accepts that, where Musgraves have sold premises to retailers, they have
invested substantially in the developmentand/or construction of such premises
in the expectation that they would benefit from such premises being operated as
part of their symbol group for some period of time. Consequently, the
Authority does not believe that a requirement that the retailer would have to
give Musgraves first option to buy back the premises if he wished to sell
within ten years, would offend against Section 4(1). After ten years the
Authority can see no reason for restricting the retailer's freedom to sell to
whoever he chooses. There is no justification for allowing Musgraves any
advantage over any other would be buyer. The object is to try to prevent other
retail groups from purchasing the store and this would be its most likely
effect. Thus it would offend against Section 4(1).
91. In
the case of premises not acquired from Musgraves they proposed that, where the
retailer sells the premises within ten years of the commencement of the
agreement, he must inform Musgraves, and allow them to offer to purchase the
premises on the same terms as anyone else. After ten years if they do not
inform Musgraves of their intention to sell they must give one year's notice of
intention to terminate the agreement. The Authority again concludes that the
object, and the most likely effect, of such a provision is to prevent Musgraves
competitors from acquiring the premises. Thus it would also offend against
Section 4(1).
92. Musgraves
then proposed that the post-term non-compete clause remain at 12 months as
originally notified. The Authority has already stated that such a restriction
would
offend
against Section 4(1).
93. Musgraves
also indicated that they wished to amend the licensee agreement by inserting an
additional clause 13(b) under which the licensee agreed to operate his business
from the premises and not, without Musgraves consent, which should not be
unreasonably withheld, carry on the business of supermarket operator in another
premises in the State. The Authority accepts that such a restriction is
designed to prevent retailers from using know-how supplied by Musgraves or
commercial information relating to prices, promotions and other activities
other than as part of the SuperValu or Centra symbol group. It would not
therefore, in the Authority's opinion, offend against section 4(1).
Standard
Centra Licensee Agreement
94. Clauses
3(b), 3(c) and 3(d)(iii), of the Centra licensee agreement are identical to
clauses 3(c), 3(d) and 3(e)(iii) respectively of the SuperValu licensee
agreement. Similarly clauses 5 and 12 in both agreements are identical. Each
of these provisions offends against Section 4(1) for the reasons set out in the
previous paras.
Standard
SuperValu and Centra Franchisee Agreements
95. Clause
2(ii) of the standard franchisee agreements contain the purchasing
restrictions. Under this clause the franchisees are obliged to purchase all
their requirements from Musgraves or suppliers approved by Musgraves. The
franchisee agreements, and therefore this requirement, last for a period of ten
years. Musgraves own these outlets. They could operate these stores themselves
in which case supplies would be obtained exclusively from Musgraves. They
cannot be compelled to grant access to their stores to competitors as they have
made a significant investment in such stores. If Musgraves choose to grant to
someone else the right to operate one of their stores then a requirement for
that individual to obtain their supplies through Musgraves does not offend
against Section 4(1).
Pricing
Arrangements
96. The
pricing provisions contained in clauses 3(d)(iii) and 3(e)(iii) of the Centra
and SuperValu licensee agreementsrespectively also apply to SuperValu and
Centra franchisees, i.e. they must stock and display all Musgraves own brands
at the price recommended by the wholesaler. The arrangements relating to
non-own brand products on national promotion and to the prices of all other
goods also apply to franchisees. As already stated such arrangements offend
against Section 4(1) of the Act.
Supply
of Equipment
97. Clause
2(iii) requires franchisees to take ´all supplies and other commodities
such as advertising material, trade notices, items, packaging material, bearing
a trade mark or logo of the company, and miscellaneous equipment incidental to
the preparation, advertisement, supply or presentation of the business' from
Musgraves or a supplier or distributor authorised by Musgraves. Musgraves have
submitted that such an arrangement is designed to ensure standard format and
quality. In addition they have stated that these goods can be obtained from
one of three suppliers who are obliged to tender for the provision of these
goods every 2/3 years. This does not offend against Section 4(1) for the same
reason as in the case of clause 2(ii).
Insurance
98. Clause
2(v) of the standard franchise agreement provides for the provision of
insurance services. These services are organised by Musgraves and paid for by
the franchisees.
Musgraves
have a right, as owners of the premises, to make the necessary insurance
arrangements for them. As they are extending credit to the franchisees on
stock supplied they are entitled to satisfy themselves as to the adequacy of
insurance cover on such stock. However, this Clause restricts suppliers of
insurance services, other than those approved by Musgraves, from dealing with
the individual retailers. In addition, the franchisees are prevented from
making their own stockinsurance arrangements and from trying to negotiate
better terms with insurance companies. The Authority believes that the
franchisees should be free to do so, subject to satisfying Musgraves that the
stock is adequately insured, and therefore this Clause offends against Section
4(1) of the Act. Musgraves have proposed to amend this clause to enable the
franchisees to choose their own insurer subject to satisfying Musgraves that
adequate insurance arrangements for stock are in place. Such a provision would
not offend against Section 4(1).
Service
Charges
99. Under
Clause 2(vi) of the standard franchisee agreements, the franchisee is required
to pay a service charge to Musgraves based on a percentage of total sales
during each month. Musgraves have stated that this payment is to cover the
interest charges on the franchisees' premises. The Authority is satisfied that
this provision does not offend against Section 4(1).
Accounting
Requirements
100. Clause
2(x) provides for the nomination of an accountant by Musgraves to act on behalf
of the franchisee. The accountant nominated must be acceptable to both
Musgraves and the franchisee. Franchisees are independent operators and as
such should be allowed to appoint accountants to act on their behalf subject to
the provision that these individuals are acceptable to Musgraves. Accordingly,
the Authority is of the view that clause 2(x) offends against Section 4(1).
Musgraves proposed to amend this clause to allow the franchisee to appoint an
auditor of their choice, subject to Musgraves approval and in that case it
would no longer offend against Section 4(1). Clause 2(xi) allows Musgraves to
examine the franchisees' books and records during business hours. These
clauses allow Musgraves to monitor their investment in the franchisees'
business. They also require franchisees to maintain proper records thereby
facilitating the operation of a successful business. They do not restrict
competition and so do not offend against Section 4(1).
Inspection
of Business
101. Clause
2(xii) allows Musgraves to inspect and examine the franchisee's stock and
operation. Clause 2(xv) requires franchisees to perform the services forming a
part of the operational system prescribed by Musgraves. Musgraves are entitled
to inspect their own premises and to seek to ensure that the standards
prescribed in the agreement are being adhered to. Accordingly, these clauses
do not restrict competition and do not offend against Section 4(1).
Opening
Hours
102. Clause
2(xvi) of the standard franchise agreement provides that the retail outlet
shall remain open every day, the hours of opening to be agreed between
Musgraves and the retailer. In the event of dispute, Musgraves' view on
opening hours will prevail. There is a possible restriction on the dealer in
deciding his own opening hours, however, it is in the interests of both parties
to agree on the optimum opening hours as both the retailer and Musgraves stand
to benefit from such an agreement. Provided that the hours are agreed with the
franchisee, this provision does not restrict the franchisee in determining
opening hours, and does not offend against Section 4(1).
Non-involvement
in Grocery Business
103. Clause
2(xix) provides that franchisees cannot be involved, except with the approval
of Musgraves, in the grocery business otherwise than as a manager of a
SuperValu or Centra outlet for the duration of the agreement. Implicit inthis
provision is the concept that the franchisees should not compete against the
business of which they are an integral part. This clause restricts the freedom
of franchisees by preventing them setting up as competitors of SuperValu/Centra
in the grocery business. However, it ensures that the franchisees devote all
their efforts to the running of the franchise retail outlet. In addition, the
small number of franchisees means that the potential effect of this restriction
on competition is negligible. Therefore this clause does not offend against
Section 4(1).
104. Clause
2(xx) of the standard franchisee agreement provides that once the agreement has
been terminated, the franchisee cannot be engaged in the grocery business for a
period of one year within a one mile radius of the outlet, in a city, or a five
mile radius, if the outlet is located in a rural area. It should be noted that
there is no sale of business involved here and that the franchisee cannot
operate from his previous place of business because this is owned by Musgraves
and in all likelihood will continue to be operated as an Musgraves retail
outlet by another franchisee or licensee. Accordingly, any goodwill generated
by use of the Musgraves trade marks, logos, etc., will work to the benefit of
the new retailer. The franchisee may have generated goodwill of a personal
nature through knowledge of and dealings with local people. The Authority is
of the view that this element of the goodwill properly belongs to the
franchisee and that he should be allowed to benefit from his efforts in this
respect and that a non-compete clause is not warranted in this instance.
Accordingly, this provision offends against Section 4(1) of the Act. Musgraves
proposed to reduce the duration of this clause to 6 months, but subsequently
changed their mind. They also proposed reducing its geographic scope to a one
mile radius of the premises in country areas. Such proposals would still
offend against Section 4(1).Cash Registers
105. Clause
(xxii) provides that only cash registers which are supplied by Musgraves may be
used and they shall remain the property of Musgraves. Each cash register has
two keys, one of which is retained by Musgraves. Musgraves reserve the right
to obtain access to the cash registers at any time for the purposes of checking
the tally roll and can also remove them at any time and replace them with other
cash registers. In the Authority's opinion this clause does not offend against
Section 4(1).
Repairs
and Renewals
106. Clause
2(xxv) provides for the repair and renewal of franchisees' premises by
Musgraves. Musgraves may insist on this work being carried out if the
franchisee disagrees about the need for it. The cost of the work is borne by
the franchisee. As owners of the outlets the Authority believes that Musgraves
are entitled to make provision for the repair and renewal of their premises.
Accordingly, this clause does not offend against Section 4(1) of the Act.
Termination
107. Clause
3 of the standard franchisee agreements contains provisions for the termination
of the agreements as well as post termination provisions. The Agreements may
cease to have effect if the franchisee fails to observe the stipulations set
out in Clause 2. Bankruptcy and default in payment for goods would bring about
termination of the agreement. They may also lapse after a 10 year period. If
an agreement between Musgraves and a franchisee lapses, Musgraves as owners of
the premises would be likely to enter into a subsequent agreement with another
franchisee for the operation of the outlet. Therefore the competitive
situation would remain unchanged. The provisions in clause 3 relating to
cessation of theagreements do not offend against Section 4(1).
108. Clause
3 also includes post-agreement provisions. One of these provisions seeks, in
the future, to prevent franchisees from using a method of selling grocery goods
similar to that operated under the SuperValu/Centra names. Know-how acquired
by the franchisees over the duration of the agreement could be generic in
nature therefore it would not belong, in any technical sense, to Musgraves and
they could not seek to enforce a provision on this basis. This provision is
acceptable to the extent that the SuperValu/Centra method of selling grocery
products is unique to that operation. Van Bael and Bellis note, in relation to
the EU block exemption on franchising agreements that "it is forbidden to
prevent the franchisee from continuing to use the licensed know-how after
termination of the agreement, where the know-how has become generally known or
easily accessible".(14). In the Authority's opinion, this provision may have
the effect of unfairly restricting franchisees in any subsequent attempts they
might make to re-enter the grocery business by preventing them from using
knowledge of a generic nature gained through operating a SuperValu or Centra
outlet. Accordingly, it offends against Section 4(1) of the Act. Musgraves
have proposed to amend this clause to exclude know-how which is easily
accessible. Such a proposal would not offend against Section 4(1).
Applicability
of Section 4(2)
109. Under
Section 4(2), the Competition Authority may grant a licence in the case of any
agreement or category of the agreements which, ´having regard to all
relevant market conditions, contributes to improving the production of goods or
provision of services or to promoting technical or economic progress, while
allowing consumers a fair share of the resulting benefit and which does not -
(i) impose
on the undertakings concerned terms which arenot indispensable to the
attainment of those objectives;
(ii) afford
undertakings the possibility of eliminating competition in respect of a
substantial part of the products or services in question'.
Standard
SuperValu Licensee Agreement
Exclusive
Purchase Requirement
110. The
exclusive purchase arrangements in clauses 3(c) and (d) of these agreements
contribute to reducing cost and improving the distribution of grocery goods.
The combined purchasing power of the retailers through Musgraves enables the
best possible price to be obtained from suppliers. This enables the retailers
to compete more effectively.
111. Consumers
benefit to the extent that some part of the savings accruing to the retailers
is passed on in the form of lower prices. They also benefit from the provision
of additional services such as free delivery provided by SuperValu/Centra
stores. The Authority accepts that consumers have gained from the competition
which Musgraves has provided for the multiples particularly in rural areas.
112. Musgraves
earns its income from sales to the retailers. There is no payment by the
retailer other than payment for the goods. If the retailers order stock other
than through Musgraves, the whole group is weakened and its viability would be
threatened. Accordingly, the Authority believes that the purchasing obligation
is indispensable to the attainment of the objectives of the agreement.
113. Musgraves
has a significant share of the retail grocery market, 16%. Nevertheless,
others, e.g. Dunnes Stores and Powers, have larger market shares and there are
numerous othercompetitors in the market. The Authority's view therefore is
that the purchasing requirements do not afford Musgraves the possibility of
eliminating competition in respect of a substantial part of the market.
114. The
exclusive purchase agreement will last for as long as an agreement between
Musgraves and a licensee is in force. The standard licensee agreement can be
terminated at any time by the licensee although there is no specific duration
for the agreement. The Authority agrees with the view of the EU Commission
that if exclusive purchase agreements were of indefinite duration, this would
effectively block competing suppliers and distributors access to any retail
outlets permanently. However, given the fact that provision is made for the
termination of the licensee agreement, the requirements for a licence in
Section 4(2) are satisfied.
Pricing
Practices
115. The
Authority does not believe that the requirement in Clause 3(e)(iii) to stock
and display all SuperValu own brands at the price recommended by Musgraves
contributes to an improvement in the provision of services or to promoting
technical or economic progress. It believes that such benefits essentially
derive from the purchasing arrangements and the associated central billing
system. Given that the Authority does not consider that the pricing provisions
lead to any efficiency benefits, consumers, by definition, do not benefit from
such gains. The Authority also concludes that the requirements are not
indispensable for SuperValu to derive the benefits from operating as a symbol
group. Accordingly, the requirements for granting a licence under Section 4(2)
are not satisfied. Similarly the Authority considers that the requirement to
sell those goods which are on national promotion at the price set by Musgraves
also amounts to resale price maintenance. This requirement does not satisfy
therequirements for a licence for the reasons given above.
116. In
coming to the conclusion that the price arrangements do not satisfy the
criteria for a licence the Authority has taken account of the fact that, in
over 30 years, the EU Commission has virtually never exempted such arrangements
from the prohibition contained in Article 85(1). It can see no good reason for
departing from well established EC precedents in the present case.
117. Franchise
agreements do not benefit from the EU block exemption on such agreements if the
franchisee is restricted in determining prices. On this basis, the licensee
agreement would not be exempt under EU regulations. The Authority believes for
the same reasons that the proposed amendment, which would allow Musgraves to
set maximum prices, would not satisfy the requirements for a licence.
Equipment
118. The
arrangements for the provision of fixtures and fittings in Clause 5 of the
Agreement is important to the efficient operation of the Musgraves
organisation. In view of the experience of Musgraves in arranging for the
provision of this type of service, it is likely that the retailers will be
helped rather than hindered in their efforts to modernise, maintain and operate
retail outlets by the involvement of Musgraves. Consumers may benefit from the
economies of scale involved in organising these services for a large number of
retail outlets as opposed to their provision on an independent basis.
119. The
arrangements help to safeguard the identity and reputation of the network
symbolised by the SuperValu name. However, the Authority does not believe that
these obligationsare indispensable to the attainment of the objectives of the
agreement. It believes that the standards Musgraves seek to attain can be
achieved in a less restrictive manner.
120. While
these requirements have an effect on suppliers of fixtures and fittings in any
attempts they make to generate business in the Musgraves outlets, the Authority
believes that it is likely that they do not result in the elimination of
competition in a substantial part of the market in question. Nonetheless, all
the requirements in Section 4(2) are not satisfied and a licence cannot be
granted.
121. Under
the proposed amendment to clause 5 only the restriction requiring retailers to
purchase equipment which would interface with the computer system from one of
two suppliers would offend against Section 4(1). The Authority believes that
this would meet the requirements of Section 4(2).
Post
Agreement Provision - Clause 12
122. Clause
12 of the licence agreement sets out the post agreement provisions which
prevent (1) licensees selling their premises to competitors of Musgraves, (2)
require that first option on the purchase of the premises be given to Musgraves
and (3) prevent licensees trading as independents in the locality for a period
of one year.
123. In
the Authority's view this clause does not contribute to improving the
distribution of goods or provision of services or to promoting technical or
economic progress. As there are no clear gains in efficiency, no benefit
derives to consumers. The Authority does not regard these clauses as
indispensable to the overall arrangement.
124. Although
the EU block exemption on franchising agreements allows a post term non-compete
clause of up to 1year to protect the franchisee's know-how, the Authority
considers that the provision in this agreement is designed to prevent
competition and not to protect know-how. Accordingly, it would not benefit
from the EU block exemption even if it came within its scope. The exclusive
purchase block exemption does not permit such clauses. Clause 12 fails to meet
the requirements of Section 4(2). The Authority believes that this is also
true of the various amendments proposed to clause 12 which were found to offend
against Section 4(1).
Standard
Centra Licensee Agreement
125. The
Authority concludes, for the same reasons given in connection with the standard
SuperValu licensee agreement, that:
(i) the
exclusive purchasing requirement in Clause 3 satisfies the requirements for the
issuing of a licence under 4(2) of the Act;
(ii) the
pricing arrangements in Clause 3(d)(iii),
the
provisions relating to fixtures and fittings in Clause 5 and the post agreement
provisions in Clause 12 fail to meet the criteria in 4(2).
Standard
Franchisee Agreements
126. The
pricing requirements for licensees also apply to franchisees. The Authority
considers that for the same reasons outlined in paras. 115-117, the
arrangements as they apply to franchisees do not satisfy the requirements of
4(2).
127. Clause
2(xx) of the standard franchise agreements prevent franchisees from engaging in
the grocery business for one year within a limited radius of the premises.
This provision seeks to ensure that any new Musgraves franchisee does not face
competition from the outgoing franchisee for at least one year. This has the
effect of restrictingcompetition which is not in the interests of consumers.
The benefits that arise from the overall arrangements will not be adversely
affected by the removal of this provision. The Authority's view therefore is
that it is not indispensable to the overall arrangements. This clause does
not fulfil all the requirements of Section 4(2).
THE
DECISION
128. Musgraves
and the SuperValu and Centra licensees and franchisees are all undertakings and
the notified agreements between Musgraves and the various licensees and
franchisees are agreements between undertakings. The requirement that the
licensees obtain all of their supplies from Musgraves or a supplier nominated
by them offends against Section 4(1). The exclusive purchase obligation,
however, satisfies the requirements for a licence. The following provisions of
the notified agreements also offend against Section 4(1) for the reasons set
out above.
The
SuperValu Licensee Agreement
- Clause
3(e)(iii)
- Clause
5
- Clause
12
The
Centra Licensee Agreement
- Clause
3(d)(iii)
- Clause
5
- Clause
12
The
Franchisee Agreements
- Clause
2(v)
- Clause
2(x)
- Clause
2(xx)
- Clause
3
The
Authority considers that none of these provisions satisfy the requirements for
a licence as set out in Section 4(2). (15) The Authority therefore refuses to
issue a certificate or grant a licence to the licensee agreement between
Musgraves Limited and the SuperValu and Centra licensees, (CA/18/92E) and to
the franchise agreement between Musgraves Limited and the SuperValu and Centra
franchisees, (CA/19/92E), notified on 30 April 1992 under section 7 of the
Competition Act.
For
the Competition Authority
Patrick
Massey
Member
19
September, 1994
NOTES
(1)
Fair Trade Commission : Report of Review of the
Restrictive Practices (Groceries) Order, 1987,
Stationery Office, Dublin, 1992), P1 8304.
(2)
Commission Regulation No. 1983/83, OJ L173 30.6.1983,
P1.
(3)
Competition Authority Decision No. 144, 5 November 1993.
(4)
Commission Regulation No. 1984/83, OJ 173, 30.6.1983 P5.
(5)
Competition Authority Decision No. 25, 1 July 1993.
(6)
Commission Regulation No. 556/89, OJ L461, 4.3.1989, P1
(7)
Commission Regulation No. 4087/88, OJ L359, 28.12.1988,
P46
(8)
Commission Decision of 29 July 1980, OJ L260, 3.10.1980,
P24.
(9)
Commission Decision of 14 July, 1975, OJ L212, 9.8.75.
(10)
Case No. 73/74 [1975], ECR 1491.
(11)
Case No. 86/82, [1984], ECR 883.
(12)
OECD (1994); Competition Policy and Vertical Restraints:
Franchising Agreements, OECD, Paris.
(13)
P.162.
(14)
Competition Law of the EEC, second edition, Van Bael
and Bellis, P169.
(15) The
Authority believes however, that the proposed amendments to clause 5 of the
licence agreements would meet the requirements for a licence. Similarly the
proposed amendments to clauses 2(v), 2(x) and 3 of the franchisee agreement
would not offend against Section 4(1).
© 1994 Irish Competition Authority
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