Toughening retail conditions is not going to cause a change in the strict application of competition principles.
Retail conditions in the current Australian economic climate are weak. Consumers are taking a more measured approach to borrowing and spending than they have in the past. Bricks and mortar stores are being challenged by retailers with online strategies, and consumers are purchasing more goods over the internet than ever before. The average Australian consumer's purchasing behaviour is fundamentally changing.
In that context, the Australian Competition and Consumer Commission (ACCC) has been considering retail issues carefully, and in particular has been opposed at a policy level to any conduct which has the potential to impede the emerging competition offered through online retail.
The approach then of the ACCC to a recent application by a retail association seeking to set a minimum advertising price (MAP) for its members, has been to assess the application within the changing retail framework and, in light of its policies, reject the application. Here's how it played out.
In Australia, authorisation is a mechanism by which the ACCC may grant statutory protection to an applicant engaging in conduct which might otherwise contravene the Competition and Consumer Act (CCA). To grant authorisation, the ACCC must be satisfied that, despite the breach or likely breach of the CCA the authorised conduct is likely to result in a public benefit which outweighs any likely anticompetitive detriment.
The proposed conduct
Narta is an acronym for the "National Associated Retail Traders of Australia", a buying group of unrelated and therefore competing electrical goods retailers operating in Australia. Narta's members offer differentiated brands and alternatives in terms of price and non-price factors through product types, ranges and overall consumer experience. Narta represents a significant proportion of the retailers of electrical goods in Australia, including the major department stores David Jones and Myer.
Narta is involved in negotiating terms of supply for its members.
Narta sought an Authorisation for 10 years to allow its members to enter into, and give effect to, an amended version of the Narta Code of Conduct. Under the amendments, members would agree to abide by any MAP unilaterally set by Narta across a range of collectively acquired goods, although they would be able to advertise at prices at or above the MAP.
Central to Narta's application for Authorisation of a MAP was the issue of acquisition of "exclusive" consumer electrical products. These were defined by Narta as products which belong to the Beko brand; product models exclusively available to only one or a limited number of retail groups; and/or new release products. Such exclusive products are highly valued by retailers because of the inherent distribution restrictions.
Narta sought Authorisation for a MAP because:
- compared to other banner groups and large retailers, its members had difficulty in sourcing exclusive products unless they could guarantee consistent pricing across members; and
- Narta believed the access to those products would permit its members to compete on a "level playing field" with the banner and large retail groups. Access to the products meant access to the consumer.
Narta's strategy in introducing a MAP was to make the sale of goods to its members more attractive to suppliers, thus enhancing the offering of those members and enabling them to compete.
Effectively, Narta was suggesting that establishing a floor price for its members was going to lead to a better competitive position for those members, as more stores would have access to exclusive consumer electrical products.
However, it was also asking the ACCC to swallow the proposition that maintaining a floor price in members' stores would be better for consumers, and indeed, would have a public benefit that outweighed the anticompetitive detriment.
Narta's submissions on the Authorisation
The key submission underpinning the application for authorisation was that suppliers of exclusive products had indicated a desire for a consistent marketing message by retailers. This would offer brand protection for suppliers who were continually investing in research and development. Narta submitted that consistent advertised pricing was an integral aspect of the package that suppliers were demanding.
In the absence of the proposed conduct, Narta submitted that its members would be unable to provide consistent pricing messages to the market. The likelihood of Narta members therefore gaining access to exclusive products was diminished, and the ability of members to compete with other retailers in the relevant markets was compromised.
Narta further submitted that, in the absence of consistency, suppliers of exclusive products would be more likely to consider alternatives, such as limited product distributions, including to selected retail banner stores that could offer brand protection, opening supplier owned stores, and/or selling products through the "agency" model which permitted the supplier to directly control the pricing of products.
The loss of access to exclusive products would lead to a loss of consumers for Narta members.
Narta told the ACCC that a MAP would only be imposed where it was necessary to enable Narta to obtain supply of exclusive products, or products on preferential terms. For instance, a MAP would be imposed where it was necessary for Narta to:
- access a new release product at launch;
- qualify for a period of exclusivity or limited distribution of a new product at launch;
- negotiate access to an exclusive model for a promotional period; or
- access an exclusive house brand product (such as Beko).
Unlike other products, Beko products would be subject to a MAP for an indefinite period because Narta had an exclusive right to distribution in Australia.
Narta proposed setting the MAP according to current market conditions, focusing on competitor advertised prices of substitutable products and the projected levels of consumer interest. Narta did not intend to link the MAP to a supplier's recommended retail price or impose any other limitations or restrictions on a member's price at point of sale.
Narta made submissions that a number of public benefits were likely to arise from the proposed conduct, including:
- increased retail competition, as products would be available in more stores;
- increased consumer choice;
- enhancements to the competitive process through maintenance of diversity in the variety of retail channels; and
- improved competiveness of the retail supply chain.
Narta also said that the proposed conduct was unlikely to result in public detriment because:
- selling prices would diverge significantly from advertising prices;
- advertising prices are compared online by consumers;
- a MAP would only be applied to a small proportion of goods;
- members would not be required to stock products subject to a MAP; and
- the conduct would address the need for Narta members to respond to increased concentration in the relevant markets.
The ACCC's view of the proposed Authorisation
The ACCC rejected Narta's application on the basis that it was not satisfied that the proposed conduct was likely to result in any public benefit that would outweigh the likely detriment to the public.
Upon issuing its determination, ACCC Deputy Chair Dr Michael Schaper stated:
"The ACCC has denied authorisation because Narta's proposed conduct would be likely to result in significant public detriment by reducing competition between retailers and raising both the advertised and selling prices of electrical products."
In applying the "net public benefit test", the ACCC concluded that the proposed conduct was likely to result in minimal public benefits in the form of increased competition between retailers for the acquisition and retailing of exclusive products.
The ACCC also formed the view that there would be significant public detriments from the lessening of competition between electrical goods retailers, and in higher retail selling prices for products subject to a MAP. The extent of that detriment would be conditional on a range of factors, including the number of products subject to a MAP, consumer demand for MAP products, the availability and closeness of substitutes for MAP products, and the extent to which a MAP became the reference point for actual selling prices.
The ACCC agreed that without the proposed conduct some Narta members may not acquire exclusive products. However, it also thought that suppliers would decide which retailers to supply according to a range of factors, and whether or not a MAP was imposed was only one of the factors.
Further the ACCC took the view that:
- differentiation amongst Narta members in terms of overall retail offers could be a competitive advantage and would be desired by suppliers in certain instances;
- new suppliers, including overseas brands, would not necessarily be disinclined to use Narta members to enter the Australian market; and
- Narta members who had a "significant market presence" as "category dominant specialists" may not in fact be disadvantaged without a MAP. Those suppliers may have been able to acquire the exclusive products in any event.
With the proposed conduct:
- consistently advertised prices were not guaranteed, as members could elect to advertise at prices higher than the MAP, and the MAP would be set according to a range of dynamic factors; and
- intra-brand and inter-brand competition would be likely to lessen as advertising and sales prices would likely be at a higher overall level.
Impact on online trading
The ACCC was also clear in its view that there would be an impact on online trading, and the competition offered through online retailing would be lessened by the imposition of a MAP.
Online trading, and the competition it offers to bricks and mortar stores, is an issue the ACCC has been focused on for some time. The Chairman of the ACCC said in a recent speech that the ACCC would continue in its enforcement activities to give priority to "online competition and consumer issues including conduct which may impede emerging competition between online traders or limit the ability of small businesses to effectively compete online".
This policy flavour is certainly present in the ACCC's decision on the proposed Authorisation, although it also said that the impact on online trading was not pivotal to its decision-making process.
The ACCC noted that the imposition of a MAP would set the lowest price at which MAP products will be advertised. This eliminated Narta members' downward price flexibility, leaving room only for an increase in both advertised pricing, and potentially, selling prices through reference pricing to the MAP.
In the context of online sales however, there is no ability for a customer to negotiate price, which is a possibility in bricks and mortar stores. Accordingly, as consumers who browse online are able to view and compare prices offered by retailers quickly and easily, that price transparency provides an incentive to those retailers to set their prices at the lowest level. Where there was a MAP, that flexibility was removed. Online selling prices were likely to be higher with a MAP than otherwise, lessening the competitive constraint that online retailers would otherwise place on bricks and mortar retailers.
The MAP was also likely to disadvantage those Narta members who only operated online stores. They would be bound to a price likely to be set by reference to the costs of operating a bricks and mortar store, and would be obliged to maintain that price.
Online price comparisons were therefore unlikely to mitigate the effect of reduced price competition.
In Australia at least, toughening retail conditions is not going to cause a change in the strict application of competition principles. While the market may be changing, the ACCC does not intend to move away from the principle of "protecting competition" to "protecting competitors". These things are not the same, and the ACCC knows it well.
Retailers will need to continue to compete for the consumer dollar as best they can. The competition offered by online trading is squarely within the ACCC's considerations, and its effect, and any potential effects on it, will continue to be central to the ACCC's considerations about the retail market.
This article was first published in Competition Law Insight, 30 July 2013
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.