| Case summary: |
The Competition Tribunal dismissed the application by the Competition Commission to impose a fine on British American Tobacco South Africa (BATSA), of up to 10% of its annual turnover, for abusing its dominance by engaging in exclusionary acts in contravention of sections 8(c), and 8(d)(i) of the Competition Act.
Both the Competition Commission and the complainant JT International South Africa (JTI), referred a complaint to the Tribunal. They allege that BATSA, a wholly owned subsidiary of British American Tobacco plc, is dominant in the market for the supply of manufactured cigarettes in South Africa.
They further allege that certain agreements concluded between BATSA and selected cigarette retailers (BATSA’s “trade investment” agreements) and certain of BATSA’s retailer incentive programmes (“Vecta” and “Sprint” programmes) incentivised the retailers to market and sell BATSA brands irrespective of the price and/or quality advantages that competitor brands may offer consumers over BATSA brands and irrespective of customer demand.
It was also alleged that these agreements and programmes ensure that BATSA secured preferential, alternatively exclusive, access to the point of sale for promotional purposes. It is these latter allegations – BATSA’s alleged dominance of the points of sale – that were most vigorously pursued by the applicants. This conduct, insist the applicants, redounds to the ultimate detriment of cigarette consumers whose choice is restricted and who, in consequence of this reduced competition, are obliged to pay higher prices than would otherwise be the case.
JTI additionally alleges a violation of Section 5(1) of the Competition Act, claiming that BATSA is in a vertical relationship with the various retail outlets and that certain agreements concluded between the cigarette manufacturers and retailers have the effect of substantially preventing or lessening competition.
The Tribunal says, “To sustain an allegation that Section 8(c) or (d) of the Act has been contravened it must be established that the conduct in question has given to rise to anti-competitive effects. We have further determined that these effects may be reflected in direct consumer harm or that such harm may be inferred from significant foreclosure. For its part Section 5 of the Act – the prohibition of restrictive vertical practices which JTI contends BATSA has contravened - explicitly requires a showing that the complained of agreement between vertically related parties has had the effect of substantially preventing or lessening competition.
”After an exhaustive examination of the evidence, and contrary to the preconceptions with which many may approach an abuse of dominance allegation against a firm with a near monopoly market share, we do not believe that the applicants have discharged the obligation to show harm to competition”.
The Tribunal says “…not only can we not identify consumer harm or find significant foreclosure arising from BATSA’s promotional activities, we cannot even ascribe harm to competitors from the allegedly anti-competitive conduct.
The Tribunal examines the allegations of anti-competitive conduct along four dimensions.
Firstly, it examines the general claim that contravention of category management principles (ie the organising of retailing shelf space for the benefit of the retailer) be treated as evidence of anti-competitive conduct. Secondly, it examines the factual evidence on foreclosure, thirdly it briefly examines certain of the origins of the difficulties that BATSA’s rivals have in growing their market shares. Finally, it investigates whether the conduct complained of has given rise to cognisable efficiency gains.
With regard to the contravention of category management the Tribunal says, ” .. we will examine the contention that the payment of incentives to secure additional space and a preferential position on the cigarette dispensing units, or, indeed, on retail shelves in general, is indeed anti-competitive. This is effectively the applicants’ theory of harm”.
The Tribunal says, a “widespread and longstanding practice has promoted the knowledge that all cigarette brands are available at all outlets at which cigarettes are sold. This widely known fact vitiates the promotional function of the POS display, it is a limitation on the impact of the exclusive – a blind person may confidently approach the cigarette POS and ask for his brand of choice, confident that it will be made available to him. Promotion, the exercise of influence over the brand chosen, clearly comes from elsewhere.
“The theory of harm advanced by the applicants – essentially predicated on the contravention of category management principles – does not survive scrutiny. Far more persuasive is the view of Klein and Wright in which category management is viewed as the purchase by the category manager of a limited exclusive, a purchase which may, to a lesser or greater degree, be injurious to the interests of one or another competitor but which maximises the joint profitability of both retailers and manufacturers
“..it appears that JTI believes that BATSA should be willing to provide its rivals with the relatively ‘small’ free ride that will accrue to players with a small market share should BATSA adhere to pure category management principles. But why should BATSA provide any free service to its rivals?
“We… think that JTI should compete for its market share, rather than have us order the elimination of critical platforms of competition”.
“Much of the applicants’ case is predicated on the strictly limited universe that the regulatory environment allows for cigarette promotion. We are told… that regulation has confined cigarette promotional opportunities, indeed marketing opportunities, to the retail POS. We are further told that BATSA has been able to impose its requirements upon the retailers because the latter lack the countervailing power necessary to resist BATSA. The basis for this claim appears to lie in BATSA’s huge market share which allegedly makes BATSA a must-have supplier for all cigarette retailers.
”Properly construed, the BATSA trade investment agreements, the hallmark of which is the constrained right that it has purchased over promotional opportunities at the POS, is a species of exclusive agreement. Critically, this includes the right to determine, within limits, the amount of space allocated to competitor brands and the positioning of those brands within the CDUs. The agreements also frequently include the right to determine the display of secondary promotional material at the POS. The right is granted against the payment of cash incentives, bolstered by the provision of free merchandising architecture at the retail POS.
“However, this right, and therefore the exclusive itself, is limited. The retailer retains ultimate control over the POS. This includes control over the listing of new products and also over the form of the planogram, the map that lays out allocations of space and position on the CDU. No retailer has granted BATSA an exclusive right to the POS, and nor, as far as we know, has this been contemplated by BATSA itself. The nature of the product (characterised by a strong demand for variety and therefore a large number of brands with low market shares) and the consequent interests of the retailers strongly militate against granting a full exclusive to any manufacturer even one with as large a market share as BATSA.
“Furthermore, … it is eminently possible to draw an inference of pro-competitive consequences arising from the limited exclusive agreements that BATSA have concluded with the retailers. It is likely that at least part of the incentive payments used to purchase the limited exclusive are passed through to consumers. And then there is the very significant investment by BATSA in merchandising architecture…. the maintenance of an orderly cigarette POS, the very existence of the vending machine channel which, as we have noted, is predicated on the incentives paid by the cigarette companies, most notably, BATSA, and the significant improvement – which is common cause – in the stocking situation, notably the reduction in out of stock situations.”
The applicants have, for the overwhelming part, sought to rely on proof of significant foreclosure in order to infer anti-trust harm. As elaborated at length we do not believe that significant foreclosure has been established. It is our view that were manufacturers of the size and with the brand portfolios of JTI and PMI to make a determined effort to penetrate this market, then there is sufficient access to promotional opportunities – in organised retail, in independent convenience and in HORECA (entertainment venues) – to reduce, through competition on the merits, the foreclosing effects of BATSA’s limited exclusive in organised retail and in vending machines, its trade investment programmes in independent convenience, and its exclusive arrangements with selected HORECA venues. Our conclusions are partly based on evidence that shows that where BATSA’s rivals have been prepared to expend effort and resources, they have accessed promotional opportunities. In addition, there is evidence to the effect that POS promotion is not the only mechanism for cigarette marketing and, again, it has been shown that when JTI has engaged in price and quality (brand re-launches) competition, then it has made inroads.
“Although the Tribunal does not accept the applicant’s contention that significant foreclosure of promotional opportunities has occurred as a result of BATSA’s conduct, we will briefly examine certain of the origins of the difficulties that BATSA’s rivals have in growing their market shares. We will show that the reasonable probability is that their travails are attributable the regulatory environment.”
The Tribunal says the applicants have also sought to rely on what they believe to be Camel’s indifferent performance as evidence of the foreclosing effect of BATSA’s conduct. We should note at the outset that BATSA’s rivals have, in the period under question, maintained or increased their market share. Nor, indeed, has it been established that Camel’s performance has been disappointing. The contention that Camel has performed poorly overall is based upon its own vastly exaggerated expectations of its performance. The inference to be drawn is that JTI’s disappointing performance derives from the superior product offering of BATSA or its superior competitive strategy, or, simply, the advantage of incumbency and a long established dominant brand.
“The correlation that the applicants seek to draw with BATSA’s trade investment programme is not persuasive…. there is no satisfactory method for ascribing causation. There is, on the other hand, good reason for looking for the culprit, if culprit there be, in that set of public interventions that had as its avowed purpose the elimination of cigarette promotion and that was bound to do its work more rapidly and effectively than the private interventions of BATSA.
“There is indeed another likely source of Camel’s travails and that is Marlboro, a large, albeit unseen and unheard, presence in this hearing. …these are clearly direct competitors for what appears to be a very large market.
“Given that the allegations of anti-competitive conduct have not been sustained, we do not have to examine the efficiency gains” says the Tribunal.
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