France: The French Competition Authority Issues Two Opinions on the Mass Retail Food Distribution Sector

Following its decision to investigate the mass retail food distribution sector (see issue 461 and issue 464 of Community Week), the French Competition Authority (the 'Authority') has, on 7 December 2010, issued two opinions. 

The first opinion relates to entry barriers and obstacles to the movement of independent stores in the mass retail food distribution sector. Such obstacles consist of (i) regulatory burdens, (ii) the risks associated with planning permissions being challenged, (iii) the lack of suitable real estate for large store instalments, and (iv) the non-competitive behaviour of incumbent retail groups. 

Incumbent retail groups introduce non-compete clauses in their contracts for the sale of land which prohibit estate buyers from starting a competing activity.  The contracts also provide for priority rights which allow retail groups to buy back their commercial real estate. Such clauses may last up to 50 years. As a consequence, the level of concentration in various customer catchment areas is high as a retail group will often have very few competitors.

The Authority thus recommends removing the contractual obstacles to the movement of independent stores across retail groups. Contractual terms which impede such movement include:

• the excessive duration of contracts;
• the existence of overlapping terms in the various agreements entered into by affiliate stores with their retail group, which have the effect of binding that store to that specific retail group;
• the requirement for affiliate stores to pay deferred entry rights amounting to a percentage of the store's turnover and which are payable upon termination of the contract. This effectively dissuades the store from leaving the retail group at the end of the contract; and
• post-agreement non-compete and non re-affiliation clauses, which have the effect of preventing an affiliate store that decides to leave the retail group from setting up an activity in competition with its former group or from joining a competing retail group.

In practice, the Authority recommends (i) that non-compete clauses and priority rights in contracts for the sale of land be suppressed, (ii) that the duration of affiliation contracts be limited to five years, (iii) that post-agreement non re-affiliation and non-compete clauses be limited and (iv) that priority rights be prohibited. 

If these recommendations are not followed, the Authority will encourage legislative intervention.

In its second opinion the Authority examines "category management" agreements between suppliers and retailers, under which the supplier (the "category captain") provides commercial advice to one or more of its distributors regarding a specific category of product. 

The Authority considers that category management agreements may reduce competition in the sector.  The category captain sometimes participates in the introduction and positioning of products in stores and may take advantage of this privileged relationship with the retailer to influence the assortment and the merchandising of its products to the detriment of its competitors, especially the smaller ones.  In addition, the category captain could be tempted to denigrate its competitors' products when introducing them to the retailer.  These agreements also allow the parties to exchange commercially sensitive information on their respective commercial strategies.

Finally, the Authority identified a risk of collusion between retailers when the same supplier is a category captain for several retailers as he could serve as a central actor in a cartel by facilitating the exchange of information between retailers.

The Authority thus recommends that a best practice code be adopted under the supervision of the French commercial practices review panel ("Commission d'examen des pratiques commerciales").  In the meantime, anticompetitive practices should be assessed and prevented under the existing prohibition of abuse of dominant position and collusion regime. 

In order to improve transparency, the Authority recommends that the appointment of a category captain be made public, for example, through a tender for applications. In addition, the Authority recommends that category management agreements clearly set out each party's specific responsibilities.

To view Community Week, Issue 501; 10^th December 2010 in full, Click here.

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