Turkey: Frito Lay Receives An All-Clear For Allegations Concerning Exclusivity, RPM Practices And Rebate Systems: The Board Decides Not To Initiate A Full-Fledged Investigation

The Turkish Competition Board's ("Board") reasoned decision1 on the preliminary investigation launched against Frito Lay Gida San. Tic. A.Ş. ("Frito Lay") is "hot off the presses." The Authority investigated a complaint received from a former sales chief of Frito Lay, alleging that the company had violated the Law No. 4054 on the Protection of Competition ("Law No. 4054") by excluding its competitors and by engaging in exclusivity practices.

Frito Lay is a Turkish subsidiary of PepsiCo, Inc. ("PepsiCo"). It is active in die "packaged chips" market through its Lay's, Ruffles, Doritos, Cheetos, A la Turca, and Cerezza brands, and in the "sugary products" market through its Rocco brand.

In line with its previous decisions concerning the same sector, the Board defined the relevant product market in this case as the "packaged chips" market. The Board then outlined the general characteristics of the packaged chips market and described it as a "tight oligopoly" market, in which the sales are mostly made by Frito Lay (through its Lay's, Ruffles, Doritos, Cheetos, A la Turca and Çerezza brands) and Doğuş Yiyecek ve İçecek Üretim Sanayi Ticaret A.Ş. (through its Patos, Cipso, Chips Master and Çerezos brands).

The Board's Substantial Assessment

The main allegation in this case concerned de facto exclusivity practices on the part of Frito Lay through its provision of certain discounts and incentives.

Having examined the available evidence, the Board ultimately determined that the complainant had failed to provide sufficient evidence in support of the allegations. The documents collected during the on-site inspections at Frito Lay's premises were also found to fall short of supporting or substantiating the exclusivity allegations. However, the Board decided that it would be useful to further analyse the various incentive schemes that Frito Lay had implemented for its sales points and distributors (including discounts) in order to determine whether these practices had led to de facto exclusivity.

Furthermore, the Board declared that, since one of the documents collected during the onsite inspection implied that Frito Lay had intervened in its distributors' resale prices, and given that the Board had previously examined resale price maintenance ("RPM") allegations against Frito Lay in 2007, a separate examination should be conducted as to whether Frito Lay had engaged in anticompetitive RPM practices. Accordingly, the Board conducted its ensuing assessment under two separate categories, namely: (i) abuse of dominance through de facto exclusivity behavior and rebate systems, and (ii) RPM practices through handheld terminals. As for the evaluation of dominant position, the Board did not provide a precise assessment as to whether Frito Lay enjoyed a dominant position in the relevant market, and opted to proceed directly with the examination of the practices mentioned above.

Assessment on de facto exclusivity and rebate systems

On the complainant's allegations that Frito Lay had implemented exclusive arrangements with its distributors, the Board found that the agreements concluded between Frito Lay and its distributors did not contain any exclusivity clauses. The Board also noted that the documents collected during the on-site inspections of Frito Lay's facilities did not imply or suggest that Frito Lay had engaged in exclusivity or exclusionary practices in the relevant product market.

That being said, the Board found that Frito Lay had established certain sales objectives for its sales points and had granted various incentives (such as discounts, free products, display prices and stands) to its sales points in order to incentivize them to reach and attain these sales objectives. In this regard, the Board decided that it was necessary to carry out a more detailed analysis as to whether Frito Lay's strategy had had an effect of de facto exclusivity and market foreclosure in the relevant market.

In its detailed analysis, the Board first mentioned that Frito Lay's strategy had enabled the salespersons of Frito Lay's distributors to receive higher premiums if they reached the relevant sales objectives, and thus, noted that the system increased the employees' motivation to increase their sales and achieve the sales objectives. In this regard, the Board first compared Frito Lay's growth objectives to the general growth level in the relevant market, in order to assess whether Frito Lay's investigated practices had an effect in the market. Accordingly, the Board concluded that Frito Lay's growth objectives were not significantly different from the general growth level in the market. Furthermore, the Board also conducted a separate analysis regarding the İzmir market (Turkey's third largest city), where Frito Lay had established higher growth targets compared to other regions. According to this analysis, the Board determined that: (i) Frito Lay's growth objectives had only been applied for the relatively short period of 5 months, (ii) Frito Lay had not implemented such an elevated growth objective prior to 2018, and (iii) there had been successful new entries into the market. Based on all of these considerations, the Board ultimately concluded that there were no grounds or factors that would lead the Board to initiate a full-fledged investigation against Frito Lay in connection with its rebate systems.

Assessment on RPM practices

As for the allegations that Frito Lay had engaged in RPM practices through handheld terminals, the Board stated that one of the documents collected during the on-site inspection indicated that the distributors' resale prices had been set by Frito Lay's headquarters, and that the distributors were not in a position to change or adjust the prices that were defined in (i.e., pre-loaded onto) the handheld terminals.

In this regard, the Board first referred to its previous Frito Lay decision2, where it had examined the RPM allegations against Frito Lay and decided to send an opinion letter to Frito Lay requiring it abstain from the investigated practices (on the basis of Article 9 of the Law No. 4054), rather than initiating a full-fledged investigation against the company. That decision had been based on the limited use of handheld terminals and the distributors' tendency to set different prices, even though the Board had concluded that the handheld terminal system used by Frito Lay had the potential to prevent distributors from setting their own resale prices. The Board also referred to another of its decisions3, in which it had once again evaluated Frito Lay's handheld terminal system and concluded that there were no grounds to initiate a full-fledged investigation against the undertaking, since the system under scrutiny gave distributors the ability to change the prices that had been defined (i.e., pre-loaded) in the handheld terminal system.

Pursuant to its assessment of Frito Lay's distributorship agreements in light of the legislative framework applying to such agreements, the Board determined that Frito Lay's agreements were in compliance with the Block Exemption Communiqué No. 2002/2 on Vertical Agreements ("Communiqué No. 2002/2"). The Board also conducted a separate analysis as to whether Frito Lay had intervened in its distributors' resale prices in practice through the meetings that it had held with the distributors. As a result of its examination, the Board concluded that there were no documents or information supporting the allegation that Frito Lay had determined the resale prices of its distributors, and thus decided not to initiate a full-fledged investigation against the company regarding the RPM allegations concerning handheld terminals.

In light of the foregoing considerations, the Board ultimately decided not to initiate a full- fledged investigation against Frito Lay, pursuant to Article 41 of the Law No. 4054.

Footnotes

1   The Board's decision dated June 12,2018, and numbered 18-19/329-163.

2 The Board's decision dated January 11,2007, and numbered 07-01/12-7.

3 The Board's decision dated July 18,2013, and numbered 13-46/588-258.



This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in March 2019. A link to the full Legal Insight Quarterly may be found here.

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