Finland: 30% Limit Proposed In The Finnish Retail Sector To Determine Dominant Position

Background

The Finnish Competition Authority ("FCA") published a study on the daily consumer goods sector in Finland in the beginning of 2012. According to the FCA study, the market structure in the daily consumer goods sector in Finland is the most concentrated in Europe. The market shares of the two largest retail groups in the sector, the S Group and K Group, are 45% and 35%, respectively. According to the study, the retailers use their strong position with respect to suppliers in many ways that are considered to be in the so-called grey area when it comes to the application of competition law, but no clearly prohibited competition restraints were found.

The main issues relate to the retail groups' buying power of concern to the suppliers were the gratuitous marketing allowances, the transfer of risk to the suppliers and the reinforcement of the position of retailers with private label products. The suppliers feel that they do not obtain any value for the marketing allowance they have paid other than the opportunity to be included in the retailers' product categories. In addition, the retailers have transferred their own risk to the suppliers, commonly with repurchase requirements for unsold products. According to the suppliers, retailers often price brand products above private label products, a practice which distorts competition.

In addition to the above-mentioned views of the suppliers, the FCA points out that it is also important to estimate other factors influencing the consumers' choice of retail outlet. The regulations concerning the location of retail outlets, the authorities responsible for zoning and the supply of supplementary services located in connection to the retail outlets all play an important role in the creation of equal competition conditions in the Finnish retail sector. The FCA study also reveals that there are significant advantages in the concentrated market structure in the daily consumer goods sector due to increased efficiency. However, these gains do not necessarily reach consumers.

The proposal

The European Commission's Europe 2020 strategy identifies a need for increased competition in Finland's service sector, especially in the retail sector. In addition, the Finnish Government's structural policy statement of March 2012 requires an improvement in the effectiveness of competition, particularly in retail and construction sectors. The Finnish government has thus initiated a broad-based project to promote healthy competition in Finland.

The programme seeks to reduce the shortcomings caused by the centralised structure of the daily consumer goods trade by adding a new section to the Competition Act, according to which a daily consumer goods trade operator would be considered as occupying a dominant market position in the daily consumer goods sector if its market share in Finland exceeded 30 per cent. This means that in the current markets the K and S Groups would need to take into consideration the provision preventing the abuse of dominant market position in their activities. The proposal was introduced in September, and it is currently under preparatory work in the Ministry. According to the proposal, this measure would improve the supervision of the centrally operated daily consumer goods sector. The proposal would not prevent businesses from growing or competing through traditional means in order to attract consumers. Nor would the proposal affect the established principles for evaluating abuse of dominant position.

Reception of the proposal

The proposal received a mixed reception. Naturally, the large retailers oppose the proposal. According to the S Group representative, if implemented, the proposal would lead to price increases and decrease the selection of domestic products, meaning that the amendment would benefit most the importers and the largest international foodstuff producers, not consumers and local suppliers. The smaller of the two large retailers in Finland, the K Group, sees the proposal as unfair because provisions on abuse of dominant position would be applicable to them, even though they are a smaller player than the S Group.

The Minister of Labour, Lauri Ihalainen, who is responsible for competition policy issues in the Finnish Government, supports the proposal. He wants to increase the authorities' possibilities to supervise the retail trade and to step in when necessary. Also, the Ministry of Agriculture and Forestry as well as the Ministry of Finance support the proposal. The Finnish Bar Association ("FBA") finds the proposal to be clarifying in determining which retailers are affected by the dominant position provisions. Without taking a stand on whether the 30% limit is functional or not, the FBA takes notice of the need to further clarify which regional units are taken into account when determining whether retailers have a dominant position in the market.

Although the FCA itself acknowledges that there are some problems in the retail sector, it does not seem to be sure whether the proposed measure is the best way to react to those problems. According to the FCA's statement on the proposal, the FCA thinks that it is important to identify what exactly are the problems that this measure is intended to solve and then to create a tailored solution for those problems. The FCA also emphasizes that the proportionality of the measures compared to the problems is important. The FCA points out that the measure may lead to an increase in complaints to the FCA and thus significantly increase its work load. Also, the neutrality obligation might freeze the functioning and development of the markets. The FCA recommends further investigating the possibilities of the existing legislature in prevention of distortions to competition, for example, the Unfair Business Practices Act. The leading Finnish Competition lawyers, represented by the Finnish Association of Competition Law broadly agree with the FCA. In its statement the association also points out that the proposal's claim that established case law in the area of abuse of dominant position will be applicable is misleading.

Unlike the FCA, which is quite critical towards the proposal, the Consumer Agency supports it. The FCA and the Consumer Agency will be merged in early 2013. The merger is intended to enhance the importance of consumer and competition affairs in society and to streamline administration. According to the Ministry of Employment and the Economy, the purpose of the new agency will be to ensure a healthy and functioning market where enterprises and other players act responsibly and with regard to consumer interests. The current statutory duties of the authorities involved will not be changed. The new Competition and Consumer Agency will have separate divisions for competition affairs and consumer affairs. Since the FCA and the Consumer Agency have different views on the abovementioned proposal, it will be interesting to see whether this merger will affect the authorities' policy on competition matters in general and in retail sector in particular.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.