Competition (Amendment) Bill 2005 Second Stage Speech by Minister Micheál Martin TD - Seanad Éireann

Competition (Amendment) Bill 2005 Second Stage Speech by Mr Micheál Martin TD, Minister for Enterprise, Trade and Employment - Seanad Éireann – Tuesday 13 December, 2005

A Cathaoirleach,

I move that the Bill be read a second time.

I am particularly pleased to have the opportunity to bring this Bill before the Seanad at this time.

On 8 November last, I announced that the Government had decided to revoke the Restrictive Practices (Groceries) Order in its entirety. This decision can only be implemented by means of an Act of the Oireachtas. Thus, the revocation of the Groceries Order is one of the principal purposes of this Bill.

I also announced on 8 November that I intended to bring forward changes to the Competition Act 2002 to deal with certain practices in the grocery trade including resale price maintenance, unfair discrimination, advertising allowances and “hello money”. These matters are all addressed in the Bill now before the House.

I am particularly pleased that it has been possible to introduce this Bill a little over a month after the announcement of the Government’s decision to revoke the Groceries Order.

It is in the interests of both the public and participants in the grocery business that the regulatory situation in the trade is clarified quickly following the decision to revoke the Groceries Order.

Any element of uncertainty regarding the regulatory regime and its enforcement is detrimental, not only to the public interest, but also to the principle of better regulation.

However, before I go on to explain in detail the structure and scope of the Competition (Amendment) Bill, I would like to say something about the background to the Bill.

The Groceries Order has been with another or us in one form since 1956. For the best part of 50 years it has been a source of controversy and heated debate. That debate intensified in the period since 1987 when the Order was amended to introduce a ban on grocery retailers selling products at below their net invoice price.

In that time, trade representatives and business interests have trenchantly defended the Order on the grounds that it provided a level playing pitch and a stable business environment that enabled even the smallest suppliers and retailers to survive alongside the major international multiple operators.

On the other hand, those representing the interests of consumers, including the Competition Authority and, more recently, the new National Consumer Agency, have argued strongly for the removal of the Order on the basis that it was anti-competitive and acted against the interests of consumers.

Other independent Groups, such as the Competition & Mergers Review Group in 2000, recommended the repeal of the Order on competition grounds.

The issue was brought into sharp focus in March last as a result of the Report of the Consumer Strategy Group, which made a series of recommendations for the development of a coherent national consumer policy in Ireland. The CSG recommended the repeal of the Groceries Order in its entirety on the basis that it was not, as it was almost always described by its supporters, a ban on below cost selling.

According to the CSG, the Order operated as a ban on selling below net invoice price and in so doing, kept the prices of our grocery goods higher than they otherwise might be.

Supporters of the Groceries Order were vehemently opposed to this recommendation and described the CSG Report as flawed and the evidence and analysis presented by the Group as flimsy.

It was against this background that I decided to engage in a public consultation process in order to ascertain the detailed views of all those who might have an interest in the matter. I was concerned to ensure that we would have a structured debate on the future of the Order.

I also wanted to ensure that we had as much hard evidence as possible as to the impact the Order was having on one of the most critical sectors of the economy. What happens in the grocery trade has consequences right down the supply chain from the consumer and the retailer through the distribution network to the suppliers and primary producers.

Following the consultation process, my Department prepared their Report and Review of the Groceries Order. Where specialist economic expertise was required to assist in assessing the 600 or so submissions received, my Department ensured that this was available to them through one of the country’s largest universities. Legal advice on issues arising was available through the Attorney General’s Office.

My Department’s final Report constituted a comprehensive review of a piece of legislation that has been with us for almost 50 years.

The Report looked in detail at the history of the Groceries Order – how and why it had come into being.

It analysed the legal structure of the Order and compared what it actually did with the claims that had been made for it over the years.

It looked at the structure of the grocery trade, particularly over the years since 1987 when the ban on selling below net invoice price had been introduced.

It analysed the impact on prices and inflation and compared trends in that regard with other European countries. It looked at the regulatory regimes throughout Europe and further afield, and it examined the situation in the UK where no ban on below cost selling exists.

It was a claim made almost universally by those who supported retention of the Order than one of its greatest benefits was that it prohibited predatory pricing in the grocery trade. Consequently, in a critically important chapter, the Report examined in detail the phenomenon of selling below cost and explained in depth what predatory pricing means.

The evidence, the argumentation, the analysis, the conclusions and the recommendations set out in the Report, are the basis for the changes proposed in the Bill before the House today.

It is appropriate, therefore, that I outline briefly some of the key findings of the Report.

The Groceries Order does not, and has never, operated as a ban on below cost selling.

It is a ban on selling below net invoice price. The difference is crucial because the Irish grocery trade operates on the basis of substantial discounts and rebates paid to retailers, which are never placed on the invoice in the first place. Such discounts and rebates cannot therefore be passed on to the consumers in the form of lower prices.

Interestingly, no one in the trade was prepared, as part of the public consultation process, to reveal the full extent of such discounts. This clearly underlines the secretive way in which such discounts operate and the critical way in which they are regarded by the trade.

Furthermore, the terminology used in the Order to ban selling below net invoice price was found to have no economic rationale whatsoever. It was no more than an “administrative convenience”.

This is nothing short of extraordinary given the impact the Order was having on the trade and on consumer welfare generally.

More importantly, the term “invoice price” as defined in the Order has no relationship to cost price. In fact, the Order makes no attempt whatsoever to define cost price. For that reason, the Order was simply incapable of addressing the issue of predatory pricing, which is all about selling below cost price.

Thus one of the greatest so-called benefits of the Groceries Order has been shown to be nothing more than an illusion.

It had been argued that the H. Williams Group, which went of business in the 1980s, was a victim of predatory pricing and that the Groceries Order had been introduced as a direct result of the company’s closure and as a means of protecting smaller retailers from the power of the multiples. This latter argument ignores the fact that H. Williams was itself a multiple.

However, neither of these claims is supported by an analysis of the historical evidence.

It is clear from media reports and contributions made to the Oireachtas at the time, and from later evidence given to the Restrictive Practice Commission, that the closure of the H. Williams Group was as much the result of its weak financial position as it was of any price war.

And the Groceries Order was actually made some months before the company went out of business.

In the fifteen years after the 1987 Order came into being, there was a decline of some 20% in the number of grocery stores in the country. Almost 2,500 stores had closed by 2002.

In the meantime, the market became more concentrated as a result of the significant growth of the symbol groups – the Spars and Centras and so on. The Order was not protecting the small independent retailers and it was not preventing market concentration.

Our grocery market is actually more concentrated than the market in Britain – where they have no Groceries Order.

Since the mid nineteen-nineties, the rate of food inflation in Ireland has been three times the rate in the UK and almost twice the EU average. Supporters of the Order said that this was the result of the higher cost of doing business in Ireland. Why then is the rate of inflation in the clothing sector virtually identical to the rate in the UK? That is not easily explained.

Indeed the most obvious explanation may well be the correct one; the Irish grocery trade is protected from competition.

We have been told that if we get rid of the Groceries Order, we will end up like the UK where 70% of towns and villages have no shop.

The Report clearly demonstrates that this statistic has no basis in fact. Indeed, access to groceries in the UK is shown to be excellent.

Nearly 90% of rural households in England live within 4km of a petrol station, most of which have a convenience store attached.

Almost 80% of rural households live within 4km of a supermarket.

And the Ghost Town Britain Report, about which we heard so much during the debate on the Order, is actually found to argue that the price of fresh meat and vegetables in edge-of-town supermarkets is often higher than in local, independently owned outlets.

Ghost Town Britain is an anti-globalisation argument and has nothing at all to do with below-cost selling of groceries.

The further one delves into the depths of the Order, the more one discovers that, far from the successes that are claimed for it, the Order actually put a floor under the price of groceries and drove all vestiges of price competition out of the grocery trade.

Far from providing a level playing pitch, the Order has encouraged a highly secretive, arbitrary and discriminatory system of discounts in the grocery trade by which those retailers with the most muscle got the best deals but were unable to pass on the benefits of that buying power to consumers because the law said it would be illegal to do so.

Far from encouraging a better deal for consumers, the Order protected the grocery trade from competition and eliminated every possible incentive to save costs, generate efficiencies and deliver value for money.

And for the past 18 years, Irish consumers were denied the benefits of competition by a system that allowed manufacturers and wholesalers to determine, often inadvertently, the minimum resale price of the goods supplied to retail customers.

This was the case because the law said that the price on the invoice was the minimum price that retailers could charge the public for the products in question.

This system was exacerbated by a system of off-invoice discounts that could not be passed on to consumers.

And all of this was happening despite the fact that resale price maintenance had been illegal in this country since 1958.

It is against this background that I bring the Competition (Amendment) Bill before this House. In short, this is a Bill that will improve consumer welfare and offer all of us a better deal for the future.

The Groceries Order did more than control the price of grocery goods. It did, as my Department’s Report acknowledges, seek to limit certain practices in the grocery trade which might be considered to be unfair.

That is why, in addition to revoking the Groceries Order, this Bill proposes to amend the Competition Act, 2002 to deal with practices such as unfair discrimination, advertising allowances and “hello money”. The provisions of the Bill apply only to the grocery sector.

By way of background, I should explain that The Competition Act 2002 prohibits anti-competitive behaviour in the economy generally. It is enforced by the Competition Authority.

Prohibitions in the Act are divided into two categories as follows:

Section 4 prohibits agreements and concerted practices that have the effect of distorting competition. The undertakings participating in such activity do not have to be dominant for their activity or conduct to be captured by the provisions of Section 4

Section 5 prohibits similar unilateral conduct (i.e. no agreement or concerted practice is necessary) on the part of dominant undertakings.

The purpose of the amendments contained in the Competition (Amendment) Bill 2005 is to strengthen the existing provisions of the 2002 Act by prohibiting certain unilateral conduct on the part of non-dominant undertakings in the grocery trade.

These are practices which it is feared might emerge following revocation of the Groceries Order and which might not be captured by either Section 4 of the 2002 Act (because the conduct does not involve agreements or concerted practices) or by Section 5 (because they are not the conduct of a dominant undertaking).

Section (1) of the Bill inserts the following Sections into the 2002 Act:

Section 15A includes new definitions. ‘Grocery goods’ are defined as food and drink for human consumption, including alcohol but excluding anything sold in a restaurant or bar. This definition will cover the vast bulk of products sold in conventional grocery stores.

A ‘grocery goods undertaking’ is defined as any undertaking engaged in the production, supply or distribution of grocery goods.

A ‘retailer’ is defined as anyone who sells grocery goods to the public.

Section 15B (1) prohibits resale price maintenance in regard to the supply of grocery goods. Resale price maintenance is the practice whereby manufacturers or suppliers specify the minimum prices at which their goods may be resold. This practice was prohibited by Section 3 of the Groceries Order. Notwithstanding this fact, however, the provisions of the Order preventing sale below invoice price actually legitimised the practice, a contradiction which my Department’s Report suggested had the potential to bring the Irish statute book into disrepute. This Section simply restates a prohibition that has been around since 1958.

Section 15B (2) is designed to prohibit unfair discrimination in regard to the supply of grocery goods. This means that a supplier cannot offer preferential terms to one buyer over another when the transactions involved are equivalent in nature. This simple provision replaces the hugely convoluted and ineffective provisions in the Groceries Order that did not operate as intended and allowed discrimination into the trade by means of secretive and arbitrary payment of off-invoice discounts. The language used in 15B (2) is based on language already in Section 4 of the 2002 Act.

Section 15B (3) prevents an undertaking from forcing another to pay for the advertising or display of grocery goods. Article 18 of the Groceries Order prevented the payment of such ‘advertising allowances’ in all cases. This Bill takes a slightly different approach by preventing any undertaking from being forced into making such payments. This would not prevent collaborative advertising arrangements which are mutually beneficial to the participants and which promote competition by bringing the availability of grocery goods to the attention of consumers.

Section 15B (4) prohibits a retailer from forcing a supplier to pay “Hello Money”. This is the practice whereby a retailer demands a payment from a supplier before agreeing to stock that supplier’s products. As in Article 18 the Groceries Order, the circumstances in which the practice will be prohibited include on the opening of a new store, an extension to an existing store or a change of ownership of a store. However, this Bill seeks to amend a serious flaw in the Order by specifying a period of time – 60 days - during which the prohibition applies.

Section 15B (5) replicates language already used in Section 4 of the 2002 Act and states that the conduct described is only prohibited when it has the object or effect of preventing, restricting or distorting competition in the grocery trade – either in the State or in any part of the State.

Section 15C provides a right of action for any party aggrieved by prohibited conduct. Such a right allows the party to apply to the Circuit Court or the High Court for injunctive relief and damages, including exemplary damages. The Competition Authority will have a right of action under this section.

That completes the new part being added to the Competition Act.

Section 2 of the Bill applies Section 30of the Competition Act 2002 in respect of the right of action specified under Section 15C of the Bill which I have already outlined.

Specifically, it applies to Section 30(4)(b) which does not allow the Authority to delegate the power to initiate legal proceedings to a member of the Authority or a member of staff of the Authority

Section 3 applies Section 45of the Competition Act 2002, which contains provisions in respect of authorised officers of the Competition Authority and their warrants of appointment.

Section 4 (1) of the Bill then revokes the Restrictive Practices (Groceries) Order, 1987.

Section 4 (2) to (4) applies standard interpretation provisions. Such provisions will also be part of the new Interpretation Act that comes into force on 1 January next and they are replicated here for avoidance of any doubt.

Section 5 contains further repeal provisions in respect of the Statutes listed in the SCHEDULE to the Bill. These Statutes are confirming Acts in respect of Orders made under the former Restrictive Practices Acts and which are now redundant.

Section 6 contains standard provisions in relation to short title, collective citation and commencement.

At this point, I would like to address the issue of predatory pricing. There is no reference or prohibition on predatory pricing in this Bill for the good and simple reason that predatory pricing is a practice that is already prohibited by Section 5 of the Competition Act 2002.

Any debate on this topic must be predicated on the basis that when we are talking predatory pricing, we are all talking about the same thing.

Predatory pricing is below cost selling on a persistent basis by a dominant firm with the purpose and intent of trying to get rid of or damage competitors.

Predatory pricing is wrong; it is illegal; and it is punishable under the Competition Act by fines of up to €4m or 10% of turnover and imprisonment for up to five years.

Those who would criticise the 2002 Act and who argue that it is incapable of tackling predatory behaviour are forgetting that the law is much stronger and broader than simply the words written in the legislative text.

The 2002 Competition Act is designed to be analogous to Articles 81 and 82 of the EU Treaty. European case law supports the use of these analogous provisions to prohibit and punish instances of predatory pricing. That is the law.

Consequently, any attempt to use this Bill to amend the Competition Act to define or redefine predatory pricing could seriously weaken the Act by taking such conduct outside the scope of the existing body of European case law. With my hand on my heart, I don’t think that as legislators we want to go down that road.

And that is why I say let us call a spade a spade. Let us be clear what we mean by predatory pricing.

The term predatory pricing, which has the specific meaning I have outlined, has been used by some as a sort of generic term, or perhaps even a form of code, for all forms of low pricing strategies employed in the grocery trade.

There are many who would love to continue to make such pricing strategies illegal. Why? Because such pricing strategies are the manifestation of real competition. They threaten consumers with nothing more than better value.

The argument that we need to eliminate all forms of low cost selling in order to protect the trade from predatory pricing is disingenuous.

If the argument were to prevail, it would result in our replacing the provisions of the Groceries Order with similar provisions in the Competition Act to prevent all forms of low pricing in the grocery business.

In so doing we would run the risk of weakening the Competition Act and of sacrificing the prohibition that it contains in regard to genuine predatory pricing.

That would leave us all very much the poorer. We would have got rid of one anti-competitive Groceries Order and replaced it with another. We, or our successors, will be back here in ten or fifteen years time having this same debate.

This Government is opposed to introducing that sort of anti-competitive measure. Let us get on with offering Irish consumers the better value they deserve.

This is a short Bill but it is a very important Bill. The Groceries Order has now been comprehensively analysed; it has been subjected to detailed legal and economic investigation. That analysis has shown that, in recent years, the Order has not been serving the purpose for which it was intended.

Whatever protectionist philosophy might once have justified the continuing in existence of the Order, it has long since passed into the annals of our economic history.

The Order is from another era. To apply an apt term, the Groceries Order has passed its ‘best before’ date.

The grocery business is about more than just grocery stores. It is about all those involved in the production and distribution chain right back to the factory floor and the farm gate. But it is also about consumers.

The reality today is that for industry to survive and prosper in a global economy it must be able to compete with the best. We will not do industry any favours by continuing to protect it from competition on domestic markets.

It is right and proper that we guarantee fair competition. But the way to do this is through our competition laws. We must ensure they are kept under review and enforced vigorously when needed.

That is why this Government has more than doubled the resources available to the Competition Authority in the past 5 years. That is why for 2006 we have provided the Authority with an additional €750,000 to boost its investigative and enforcement capacity.

And that is why we have brought forward the Competition (Amendment) Bill 2005.

I commend the Bill to the House.

Ends

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