Italy: Competition Issues in the Italian Market for Infant Formulae

The Italian competition Authority (the "Authority") has recently completed two investigations into the infant formulae industry after having received complaints from consumers about excessive prices.

The first investigation dealt with the acquisition of Mellin Spa (controlled by the Italian food group STAR) by Koninklijke Numico N.V. ("NUMICO").The deal which the Authority believed capable of creating a collective dominant position in the infant formulae markets has been conditionally authorised.

The second investigation aims to ascertain whether there exists an agreement between infant formulae manufacturers to co-ordinate their commercial policies with the aim of distributing their products only through pharmacies, in order to help keep prices high. This investigation is pending.

Both the investigations relate to the same infant formulae markets: i) infant formulae ii) follow-on formulas and iii) special formulae (that is, those milks which are used in particular circumstances).

The Authority found that these markets are highly concentrated¹ and with a high degree of price transparency². These conditions are normally viewed with suspicion by competition Authorities.

Despite infant formulae being a homogeneous product, in terms of nutritive properties, consumers perceive it as a medicinal product and are not greatly influenced by price.

According to the Authority such perception is due to a number of factors. Demand is essentially driven by the advice given in hospitals and, in general, by paediatricians to parents. In this regard, the Authority notes that the companies do not need to make great efforts in promoting and advertising³ their products to final consumers. However, they do invest in promoting their products to paediatricians, as well as by providing free supplies of infant formulae to the hospitals, given the influence that such "channels" have on consumer choice. This perception may be strengthened by the fact that infant formulas are sold mainly through pharmacies (supermarket's sales account for less than 10%).

The above factors have been taken into account in both investigations.

The Authority has recently completed the in-depth investigation on the acquisition of MELLIN by NUMICO. The Authority has granted a conditional clearance on the basis that, if fully implemented, NUMICO's commitments would be able to eliminate the competition concerns resulting from the concentration.

The NUMICO's commitments are essentially aimed at increasing the presence of infant formulae in the modern distribution "outlets".

Under the Italian merger control rules, the Authority must examine proposed concentrations to ascertain whether they create or strengthen a dominant position on the domestic market with the effect of eliminating or restricting competition appreciably and on a lasting basis. If as a consequence of a concentration such negative effects should occur in the market, the Authority must either prohibit the concentration or authorize it laying down the necessary measures to prevent such consequences.

According to the Authority, without the commitments undertaken by NUMICO, the notified transaction would have otherwise produced structural changes by creating a collective dominant position in the infant formulae markets, with the effect of allowing the main infant formulae manufacturers to achieve a stable "collusive equilibrium" enabling them to keep higher prices in the market.

NUMICO's commitments include terminating the sale in Italy of its brand, Nutricia, sold through pharmacies in order to decrease NUMICO's presence in that channel, and starting to distribute its other two infant formulae brands, Milupa and Mellin, through the modern distribution (that is, supermarket). NUMICO will also decrease prices for these infant formulae and special milks.

Despite a conditional clearance being completely unexpected, what matters now is to see whether the commitments will be fully implemented and, most important, whether the desired effect will be effectively achieved.

However, it may be that the commitments undertaken by NUMICO to increase the distribution of infant formulae in the modern distribution and to decrease prices for some of them will be followed by other infant formulae manufactures. Therefore it is reasonable to expect the increase of the distribution of baby and infant formulae in the modern distribution (supermarkets).

The real issue is, however, whether this will be followed by a consistent decrease of prices, which are, in some cases, double those in other countries. Price decreases may be achieved either autonomously by the infant formulae manufacturers if they should decide to compete effectively on the prices and the quality of their products or, secondly, as a result of the competitive dynamics which the commitments in the present decision may prompt, for example with the increased buyer power of the supermarkets.

At its meeting on 8 July 2004, the Italian Authority resolved to commence an investigation⁵ into several infant formulae manufacturers⁶ with the purpose of ascertaining whether there exists an agreement between them to restrict competition in breach of Article 81 EC.

Article 81 EC prohibits agreements and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market.

The current investigation is a similar to one which the Authority completed in 2000 with the conclusion that an anti-competitive agreement had been established between the principal manufacturers (Nestlé Italiana, Heinz Italia-Plasmon, Nutricia, Milupa, Humana and Abbott) to prevent infant formulae from being sold through the main supermarket and chain stores, and to ensure that their products would only be sold through pharmacies, in order to maintain high prices. At that time the Authority imposed fines totalling some 6 billion lire (approximately E3 million), which amounted to about three per cent of the turnover generated in the infant and special milk markets by the companies concerned.

Like the previous investigation the starting point of the new investigation was once again the difference in consumer prices between Italy and other Member States. The investigation has shown, in fact, an average price difference of about 150%. Considerable price differences were also observed in Italy in regard to a same product depending on the channel. Furthermore, the investigation has shown an average price increase of 13% between 2001 and 2003 (with peaks of 20%).

The European Court of Justice has held that parallel conduct cannot be regarded as furnishing proof of concertation unless concertation constitutes the only plausible explanation for such conduct. However, it is necessary to bear in mind that, although Article 81 EC of the Treaty prohibits any form of collusion which distorts competition, it does not deprive economic operators of the right to adapt themselves intelligently to the existing and anticipated conduct of their competitors.

The Authority has observed that manufacturers centralise their production in one Member State before then putting their products on European markets under different brands⁷. This means that production costs of each manufacturer are the same regardless of the market where the products are ultimately sold. The Authority believes that such high price difference could not be either justified by production or marketing costs.

This case is the first where the Authority has enlisted the co-operation of the Competition Authorities of the other Member States of the EU under the Community Regulation 1/2003 (which came into force on 1 May 2004). Investigations have been conducted simultaneously on the premises of the companies concerned not only in Italy, but also in France, Germany and Spain, in light of the fact that, despite the considerable price difference between Member States, there were no parallel imports from countries where prices were lower than in Italy.

The Authority concluded its preliminary investigation by finding that "since there appears to be no economic justification for this, the fact that prices in Italy are considerably higher than those charged by the same companies of the same products in other European countries appears to be due solely to coordination between the commercial policies of the baby milk producers. In fact the conduct at issue is based on the partitioning of the markets as well as on barriers to the imports, having thus the effect to determine higher prices in the Italian market".

The investigation is still pending. It seems that the parallel investigations did not provide the Italian competition Authority with the smoking guns, that is, the proof that an express agreement existed.

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