Minister Micheál Martin announces repeal of the Groceries Order

“The Groceries Order has acted against the interests of consumers for the past 18 years and it is now time for consumer interests to prevail”

The Minister for Enterprise, Trade & Employment today (Tuesday, 8 November, 2005) announced that he had secured the approval of the Government for the repeal of the Restrictive Practices (Groceries) Order 1987 in its entirety.

Announcing the decision, the Minister said: “This is an important day for the Irish Consumer. It is a liberating day for competition policy in Ireland. The single most important reason for getting rid of the Groceries Order is that it has kept the prices of the vast majority of grocery products in Ireland at an artificially high level by allowing suppliers to specify minimum prices below which products cannot not be sold.”

In addition, the Minister announced that the Government has agreed to shortly publish new legislative proposals to strengthen the provisions of the Competition Act, 2002 to specifically prohibit the fixing of minimum retail prices by suppliers (resale price maintenance), unfair discrimination, and the payment of advertising allowances and “hello money.”

The Minister has also asked the Competition Authority, in cooperation with the Director of Consumer Affairs, to review and monitor the structure and operation of the grocery trade for the foreseeable future to see how it responds to the new legislative environment.

The Minister has also published his Department’s Report of their Review of the Operation of the Order, which is a comprehensive analysis of the issue. (www.djei.ie/commerce/consumer/groceriesorderreport.htm)

“Very simply, the Groceries Order has acted against the interests of consumers for the past 18 years and it is now time for consumer interests to prevail. There really was no option available to the Government other than a decision to revoke the Order.”

Minister Martin went to say that the Order was an extremely complex piece of legislation that was hugely contrary to all the principles of better regulation.

“It has been difficult to enforce, and compliance with key provisions was only token in some respects. It was flawed in a whole host of ways that are clearly identified in the report,” he said.

He continued: “One of the key aims of the current Order which was introduced in 1987 was to prevent below cost selling by larger retailers in a manner that that would damage their smaller competitors. Unfortunately, key provisions and terminology in the Order designed to achieve that objective has been identified in the Report as no more than an “administrative convenience.” It is simply no longer acceptable that State intervention in a key sector of our economy should be based on an administrative convenience with no economic rationale to support it whatsoever.” (See Note for Editors)

“Predatory pricing is an anti competitive practice and is outlawed by the provisions of the Competition Act. The Groceries Order, on the other hand is incapable of addressing the threat of predatory pricing in any sort of proportionate way”.

And he continued, “The Order was introduced to do other things as well. It was designed to protect the position of the independent retail grocer. Instead, we lost nearly 2,500 grocery stores in the first 15 years of the Order’s operation.”

“It was designed to prevent the market becoming more and more concentrated in the hands of fewer, bigger retailers. But instead, our market is now more concentrated than it was in 1987 and is actually more concentrated that the British market where no ban on below cost selling exists.”

“Since first introduced in 1956, the Order was designed to ensure fair trading conditions in the grocery trade. Yet as far back as 1987, it was acknowledged that key provisions of the Order, which are still in force today, were being applied in a secretive, arbitrary and discriminatory manner.”

It is abundantly clear that the Order has achieved none of its objectives. Indeed, it has been spectacularly unsuccessful by failing dismally to do what it says on the tin.”

Referring to other findings in the Report, Minister Martin said: “Although the case for getting rid of the Order does not hinge on the inflation analysis contained in the Report, it is startling to note that since the mid-nineties, Irish food inflation has been three times that of the rate in the UK. “

“Furthermore, the eight countries in the EU who can be considered to have a ban on below cost selling of one form or another have the eight highest rates of food inflation in the same period,” the Minister added.

Finally, Minister Martin drew attention to the Report’s comprehensive findings that emphatically reject claims that 70% of towns and villages in the UK have no local shop. In fact, almost 87% of rural households in England live within 4km of a petrol station – most of which have a convenience store attached and 79% of rural households in England live within 4km of a supermarket.

ENDS

ETE 1450

NOTES FOR EDITORS

An “administrative convenience” (Paras 2.11 – 2.15 of Report)

This is a reference to the prohibition in Article 11 of the Groceries Order on “selling below net invoice price”.

The term “net invoice price” was intended as a definition of “cost”. It was introduced into the Order in 1978 in order to facilitate prosecutions of the offence as then existed of “advertising below cost.”

It was recognised at the time that the “net invoice price” of a product did not reflect the actual cost of the product because of the practice in the grocery trade of suppliers providing discounts and rebates that were not shown on the invoice.

The High Court confirmed in a 1979 judgement that “net-invoice price” could not be taken to include such off-invoice discounts and rebates and as such did not represent true cost.

In 1987, the term was retained in the Order and was defined having regard to the meaning ascribed to it by the High Court judgement.

It was never any more than an administrative convenience arising out of the difficulty in finding any other acceptable definition of cost.

Selling Below Cost & Predatory Pricing (Chapter 7 of Report)

Predatory pricing is defined around the world as the act of a dominant firm. It involves the sale of product below some measure of cost for the purposes of eliminating or harming competitors.

In Order for predatory pricing to succeed, the predator must at some point be able to increase prices to whatever level is necessary in order to recoup his losses.

It follows that not all low prices, and certainly not permanently low prices, can be considered predatory.

The Report concludes that selling below cost for the purpose of measuring whether or not predation exists means selling below the purchase price of the product including all discounts, rebates, allowances or suppliers payments however and whenever paid. There is international case law to support this conclusion.

Forms of low or below-cost selling which can be considered legitimate are identified in the Report as including:

promotional selling and loss-leading,

Matching a competitor’s prices

Disposing of old or perishable stock,

Test-marketing of new products

Off-Invoice Discounting

This is a practice prevalent in the trade by which suppliers provide retailers with discounts, rebates or allowances on the purchase price of products they are supplying. Such payments are not shown on the invoice that accompanies the goods to the retailer’s premises at the time of sale.

The Competition Act, 2002

Section 4 of the Act prohibits agreements or concerted practices that have the effect of preventing, restricting or distorting competition. These would include price fixing, limiting supply or applying dissimilar terms to similar transactions.

Section 5 prohibits any undertaking from abusing its dominance in the market for goods in the State or in any part of the State. So for example, a small retailer in a rural town could be considered dominant if the market for groceries was such that consumers would not travel outside the town to buy groceries.

Specific abuses prohibited include price fixing, limiting supply or applying dissimilar terms to similar transactions.

Predatory pricing is an abuse of dominance under Section 5.

Under Competition law, if a retailer believes they are the victim of predatory pricing they have a number of legal options including;

Make a complaint to the Competition Authority, which has the powers to investigate and take legal action including bringing an injunction,

Seek a private injunction in the High Court to stop the illegal activity, and;

Seek compensation in the courts for any damage done, either following a successful Authority court case or as a private right of action.

The Competition Authority has extensive powers and a dedicated Division of expert staff which investigates allegations of companies abusing a dominant position. The circumstances of each allegation are unique and each complaint is assessed on a case-by-case basis.

Resale Price Maintenance

This is an anti-competitive practice by which suppliers seek to specify minimum prices below which their products may not be sold. It is prohibited by Sections 3& 4 of the Groceries Order. However, by complete contradiction, Article 11 of the Order legitimises the practice by specifying that a retailer cannot sell below the price on the invoice.

By putting a price on the invoice, a supplier effectively fixes the minimum resale price. This is the essence of resale price maintenance.

Resale price maintenance would be an abuse of dominance under Section 5 of the Competition Act (price fixing).

Unfair discrimination

The Groceries Order permits a supplier to offer supplementary terms – effectively off-invoice discounts. The Report concludes that these are applied in secretive, arbitrary and discriminatory way.

Unfair discrimination would be an abuse of dominance under Section 5 of the Competition Act (applying dissimilar terms to similar contracts).

Advertising allowances and “hello money”

These are anti-competitive practices by which a supplier pays a retailer for advertising, stocking or providing prominent display space for the supplier’s goods.

They are practices that would be regarded as an abuse of dominance under Section 5 of the Competition Act.

Why, then is Competition Act to being amended to strengthen prohibitions against these practices if they are already covered by Section 5 ?

It is necessary to ensure that these practices are prohibited also by Section 4 of the Act when exercised by firms that are not dominant.

As things stand, Section 4 prohibits agreements and concerted practices and there is some doubt as to whether or not these practices would be considered to be “agreements or concerted practices” if exercised unilaterally by participants in the trade.

Views of Director of Corporate Enforcement (Para 6.10 of Report)

The views of the Director of Corporate Enforcement as expressed in the course of the public consultation process included the following:

“…if – as I understand it – a practice has developed whereby certain invoices are drawn up on a basis which suggests that a different form of transaction is recorded to that which actually occurs in practice, it seems to me that, in some instances at least, there may be potential breaches of Section 202 [of the Companies Acts]. In other cases, it seems conceivable that even if no criminal breach of Section 202 occurs, the company’s books and records may be less than fully reflective of the true form and substance of the company’s transactions. From a company law perspective, it is difficult to see how that can ever be advantageous.”

The Director points out that his office has no empirical evidence as to whether off-invoice discounting is leading to actual infringements of the Companies Acts or of what the impact or extent of such breaches might be. He goes on to note that the Consumer Strategy Group confined themselves to saying that such practices may be encouraged by the 1987 Order – rather than that they are encouraged by it. According to the Director, this does not allow his Office to take a firm view in relation to the matter. The Director concludes, however:

“Nonetheless, it does seem desirable to us that if the Order is being retained, it should be amended to remove any direct or indirect inducements therein which may lead companies to cause their primary books and records (including invoices) to be kept on any form of artificial basis.”

ENDS