Hub and Spoke arrangements: a comparative view

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Hub and Spoke arrangements a comparative view
Monday 15 November 2010, 17.00 19.00
Chair Michael Hutchings, OBE Speakers Javier
Berasategi, Berasategi Abrogados Thomas Lübbig,
Freshfields Bruckhaus Deringer Alastair Gorrie,
Counsel to SC Johnson, Counsel to Orrick Mario
Siragusa, Cleary Gottlieb Steen Hamilton LLP
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HUB AND SPOKE

• BIICL 15 NOVEMBER 2010
• MICHAEL HUTCHINGS
• INTRODUCTION

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TWO PREVIOUS SEMINARS

• 19 October 2009
• Legal Analysis
• UK Focused
• 19 April 2010
• EU Proposals
• Various NCA cases
• UK Supermarkets Code

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RESEARCH PROJECT

• BRIEF Legal analysis of hub and spoke
  agreements under UK competition law
• RESEARCHER Peter Whelan
• OUTPUT Article in European Competition Journal
  December 2009
• FUTURE WORK Explore themes from other EU
  countries

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THEMES FROM WHELAN RESEARCH

• Innocuous information exchanges may be
  anti-competitive
• Parallel cases in numerous EU countries
• Hub Spoke collusion is a feature of UK milk
  and tobacco cases
• Vertical information flows can be deemed to be
  horizontal
• High legal hurdle to establish unlawful
  horizontal collusion

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THEMES FROM SEMINARS

• Horizontal collusion requires higher standard of
  proof than vertical restrictions
• Conditional participation not enough the
  vertical agreement must be unlawful (e.g. RPM)
• RPM is easier to nail than HS (e.g. UK Tobacco)
• Margin protection practices RPM??
• Compliance requirements for trading partners
  including category management

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Hub spoke is dead welcome to the era of
retailer power

• Javier Berasategi Torices
• BIICL Hub Spoke Conference
• London, 15.11.2010

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• We used to live in a world where brand power
  was everything, but slowly and inexorably it is
  being replaced by retail power...The mountain
  here is the shelf a shelf in the supermarket, a
  shelf in a concept store or a shelf on the
  internet. Once the shelf was the place we proudly
  displayed our brands. Now its the place we fight
  to stay on. Now its the place we can be evicted
  from on the smallest whimWe believe this squeeze
  has taken us to a new type of world. Its clear
  that this new world has some big fish and some
  little fish. The biggest fish of them all is the
  global retailer. This new breed of super retailer
  increasingly gets its own way. It can decide to
  swim with the small fish or simply gobble them up
  and spit them out. The little fish are of course
  the brands.
• Thomassen, Lincoln, Aconis, Retailization
  Brand survival in the age of retailer power, 2006
• As retailers have grabbed power around the
  globe, theyve transformed private labels from
  price purchases into powerful brands with their
  own cachet. As a result, one powerful brand
  manufacturers like Nestlé and Procter Gamble
  now find themselves competing for shelf space
  with their biggest customers, like Tesco and
  Walt-Mart.
• Kumar Steenkampt, Private label strategy How
  to meet the store brand challenge, 2007

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Supplier-retailer relationships

• Conventional view seller power
• Inter-brand competition
• Intra-brand competition
• Modernization supermarket platforms
• Two-sided markets
• Supermarkets as hubs spokes
• Conclusions

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Conventional View

• Seller power and intra-brand competition EC
  Article 101(3) Guidelines (pars. 17-18)
• Vertical BER Guidelines
• RPM cardinal sin
• Listing fees supplier2supplier foreclosure
  (Guidelines, pars. 203-208)
• Category management supplier2supplier
  foreclosure (id., pars. 209-213)
• Retailer subcontracting manufacture of own brand
  is not a competitor (id., par. 27)
• Car BER oligopolistic market
• Multi-brand retailers
• Old BER access to 2 competing brands (essential
  facility?)
• New BER specific (low) market-shares for
  cumulative effect of parallel agreements test
  (40/30)
• Independent spare-parts manufacturers repair
  services

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Conventional View

• Seller power and inter-brand competition
• Hub spokes as a refined version of seller
  market power
• Collusion at the same chain level through an
  agent upstream/downstream
• N suppliers through a retailer
• purchase price to the retailer? Retailer pushing
  prices down
• purchase/retail price to all retailers? Retailer
  pushing other retailers prices up
• N retailers through a supplier RPM
• N retailers and N suppliers horizontal
  horizontal

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The olive oil decision (Spain)

• The Spanish Competition authority fined the
  Leading Manufacturer Brand (LMB) and several
  retailers for RPM in 2002-2004 (File 612/02,
  Aceites 2, annulled on appeal)
• The largest retail chain (Carrefour) objected and
  delisted the LMB
• Market shares in 2004 LMB, 35 retailer brands
  50 others 15
• Market shares 2009 retailer brands, 70 LMB,
  20 others 10
• In 2010 LIB market-share up Carrefour listed it
  again and low-price strategy (opposite of RPM)

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Modernization

• Retailers operate as platforms operating in
  two-sided markets (KatzShapiro, 1985 Rochet
  Tirole, 2001)
• Retailers and suppliers compete through branded
  products their dealings are horizontal
• Draft Horizontal Guidelines, commercialisation
  agreements, Section 6
• Supermarkets are hubs and independent and retail
  brands are spokes new forms of horizontal
  competition raise new collusion/foreclosure
  challenges
• Manufacturer - retailer (horizontal brand
  competition)
• Manufacturer buying alliance (horizontal brand
  horizontal retailer competition)
• Retailer label manufacturer-retailers (horizontal
  brand horizontal retailer competition) RLM
  tycoons (Cott, McBride, etc.)

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Modernization
Source PMLA
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Modernization

• Supermarket platforms as competitive bottlenecks
  multi-homed suppliers and single-homed shoppers
  (Armstrong, 2006)
• Single home shoppers switching costs (Diamond,
  1971 Klemperer, 1995) role of price frames
  (OFT, 2010) role of choice framing and
  intermediaries bias (OFT, 2010 Bennett
  Collins, 2010)
• Supermarket platforms have customers on both
  sides (see EC Mastercard decision) suppliers buy
  access, shoppers buy products
• Supermarket platforms are often special they
  keep traditional retailer functions in their
  favour facings, retail pricing (RPM ban)
• Intra-platform (product) competition high of
  product selection is made in-store and is
  influenced by supermarket-platform
• Inter-platform competition supermarkets compete
  for shoppers and, in rare instances, for
  suppliers (exclusive retail brand suppliers)

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Modernization

• The triangular hub spoke risk overshadowed by
  the supermarket platform dominance
• Suppliers incentive to collude or apply minimum
  RPM diminishes loss of market-shares to
  retailers brand and risk of retailer retaliation
  
• Large retailers incentives to force/induce
  suppliers into wholesale price increase or RPM to
  all retailers increase
• they enjoy access fee mark-up over smaller
  competitors
• the create a price gap with their own brands
  (NockeWhite, 2005)
• they control supplier/retailer deviation and
  punish it (Toys R Us ITWAL)
• Large retailers may unilaterally achieve this
  outcome
• they extract fees/transfer costs unilaterally
  (Cruz Roche, 1999 MezaShedir, 2009)
• they demand guaranteed margins/sales (Butz, 1993)
• they demand MFN protection (Butz, 1993
  TiroleRey, 2006)
• they create artificial gaps in retail prices
  (Oubiña et. al., 2000)

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Toys R US

• Toys R Us v. FTC, 221 F3d 928 (7th Cir. 2000) a
  retailer with just a 22 market-share forces main
  toy suppliers into exclusionary conduct towards
  some retailers
• Swindle contended that rather than there being
  "hub and spoke" arrangement directed by TRU or
  some other type of horizontal conspiracy among
  manufacturers, the "glue that held TRUs scheme
  together was each manufacturers individual
  decision not to cross its most important
  customers interests." The Commissioner
  concluded I am simply unable to find a
  horizontal boycott on the basis of this evidence.
  The gaps and ambiguities in the record require
  that I dissent from the conclusion that TRU
  orchestrated an anticompetitive horizontal
  agreement." (FTC Press Release, citing a
  Commissioners partially dissenting opinion)

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Chocolate cartel (Canada)

• Alleged chocolate cartel in Canada a wholesaler
  coop (ITWAL) threatened retaliation if suppliers
  did not increase prices to other retailer.
  According to Competition Authoritys document
• Cartel started with threat letter from ITWAL to
  manufacturers in order to have trade spending
  reducedAt the end of the day, it is only the
  suppliers control and discipline of trade
  spending that can restore the functionality of
  the marketplace. The problem is very serious and
  completely out of control on the part of the
  suppliers. I am being forced to reexamine how we
  operate in the market and I am not sure it would
  be in the best interests of Nestlé. I urge you to
  meet and take action before this chocolate bar
  bubble bursts.
• ITWAL regularly monitored progress from
  manufacturersFurther to my letter of February
  21, 2002, please find attached information
  forwarded by Members on product and pricing
  available from diverters. In view of the
  seriousness of the problem, I will forward
  information as received under the acronym,
  T.A.N., which stands for 'TAKE ACTION NOW!' I
  trust you will accept the information in the
  spirit with which it is intended. I look forward
  to meeting with you to learn what steps Cadbury
  is taking to address this problem.
• ITWAl threatened action if prices were not
  increased/supplies continued to specific
  retailers.

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Conclusions (I)

• The hub spoke tree is hiding the
  supermarket-platform forest
• Suppliers/retailers incentives to enter into
  hub spokes diminish/increase
• Large retailers non-coordinated practices
  replicate the same outcome
• Ban on RPM (regulation/competition law) helped
  emergence of supermarket-platforms!
• Should RPM be allowed? Is it too late?

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Conclusions (II)

• Are supermarket platforms reducing
  intra/inter-platform competition?
• One-side competitive bottleneck market power or
  market dominance?
• Even intense one-side (shopper) competition is
  compatible with sub-optimal competition on the
  other side (suppliers) balancing the two-sides?
• Platform brand integration compounds the
  anticompetitive risk platform neutrality?
• Compare antitrust regulatory intervention in
  other two-sided markets MIFs, TV advertising,
  call termination, international roaming, Apple,
  Internet neutrality

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How retailers see card platforms
MIF 3
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Source Eurocommerce
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How could suppliers see supermarket platforms?
Access fees 10, 20, 30, 40?
Retailers
Manufacturer Brands
Retail Alliances
Retailer Brands
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Javier Berasategi Torices
THANK YOU!
Email jb_at_berasategi.es Móvil 34 688 606 389

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