Competition (Amendment) Bill 2005 Second Stage Speech - Dáil Éireann

26 January, 2006

A Cheann Comhairle,

I move that the Bill be read a second time.

Deputies will be aware that on 8^th of 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 what is termed “hello money”. These matters are all addressed in the Bill now before the House.

I welcome the fact that we have been able to bring forward this Bill speedily because 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.

Before I 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 us since 1956 and has been subject to periodic review since then. In 1987, the Order was amended to introduce a ban on grocery retailers selling products below their net invoice price and since that time, the Order has been the subject of intense debate.

Trade representatives and business interests defended the order on the grounds that it provided a level playing pitch and a stable business environment that enabled 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Other independent groups, such as the Competition and Mergers Review Group in 2000, also recommended that the order be repealed on competition grounds.

In March 2004, almost 12 months ago, the Consumer Strategy Group made a series of recommendations for the development of a new national consumer policy in Ireland. The CSG recommended the repeal of the Groceries Order in its entirety on the basis that it was not 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 grocery goods higher than they might be otherwise. I think it is fair to say that there was very little consensus around this view and supporters of the Order continued to oppose its removal.

Against this background of opposing viewpoints, 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 on the impact the order was having on a critical sector of the economy.

I wanted to collate the views not just of retailers and consumers, but also of suppliers, manufacturers, producers and others for whom the grocery trade is their very lifeblood. 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 resulting Report of the consultation process and their review of the Groceries Order was published in early November last.

The Report amounted to one of the most comprehensive reviews of the Order in the past 15 years or so. The report detailed the history of the Groceries Order, analysed its legal structure, examined changes in the structure of the grocery trade in the period since 1987, analysed the impact on prices and inflation and compared trends in that regard with other European countries. It also looked at the regulatory regimes throughout Europe and further a-field, and examined the situation in the UK where no ban on below-cost selling exists.

The evidence, argumentation, analysis, conclusions and 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.

I think the thing that surprises most people when examining the findings in the Report, is that the Groceries Order did not provide the type of protection that many people thought it did for either suppliers or for small independent retailers.

One of the most important findings of the Report is that the Groceries Order never operated as a ban on below-cost selling but rather as a ban on selling below net invoice price. The difference is critical for a number of reasons.

In first instance, the Irish grocery trade operates on the basis of substantial discounts and rebates paid to retailers, which are never placed on the invoice. These discounts were negotiated between retailers and their suppliers in a highly secretive, arbitrary and discriminatory manner. Retailers were free to pressurise suppliers into providing higher discounts and thus any protection afforded to suppliers was limited.

And because these discounts and rebates were never placed on the invoice in the first place, they could not be passed on to the consumers in the form of lower prices and they became part of the retailer’s profit margin.

In practice, by specifying a value for the goods on the invoice, suppliers were free to determine the price that the retailers could then charge consumers for those same goods. Retailers could be confident that there was a minimum price below which the competition would not sell and they were thus protected – not from unfair competition, but from all competition.

Frankly, it is little wonder that the trade have fought so hard and for so long to keep the Groceries Order in place. What sector of the economy wouldn’t give their right arm for that type of protection?

It has been argued that one of its greatest benefits of the Order was to prohibit predatory pricing in the grocery trade. That is simply not true. The Order makes no attempt whatsoever to define cost price and for that reason the order was simply incapable of addressing the issue of predatory pricing, which is all about selling below cost price.

The term “net invoice price”, which is used in the Order, is found to have no economic rationale whatsoever. It was no more than an administrative convenience. This is extraordinary given the impact the order was having on the trade and on consumer welfare generally.

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

Other findings in the Report are just as damning.

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 argument ignores the fact that H. Williams was itself a multiple. It is clear from media reports and contributions made to the Oireachtas at the time, and from later evidence given to the Restrictive Practices 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. The Groceries Order was actually made some months before the company went out of business.

In the 15 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, Centras and so on. The order was not protecting the small independent retailers and it was not preventing market concentration. Our grocery market is more concentrated than the market in Britain where there is no groceries order.

Since the mid-1990s, 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 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. 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 four kilometres of a petrol station, most of which have a convenience store attached. Almost 80% of rural households live within four kilometres of a supermarket.

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 to do with below-cost selling of groceries.

It is against the background of these findings that I bring the Competition (Amendment) Bill before the House. In addition to revoking the Groceries Order, the Bill proposes to amend the Competition Act 2002 to deal with practices such as unfair discrimination, advertising allowances and what is termed “hello money”.

By way of background, I should explain that the Competition Act 2002 prohibits anti-competitive behaviour in the economy generally. The Act is enforced by the Competition Authority. Prohibitions in the Act are divided into two categories.

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, where 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 or by section 5 because they are not the conduct of a dominant undertaking.

Section 1 inserts new 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, 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 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 section 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 of 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 30 of 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 section 30(4)(b) of the 2002 Act 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 45 of 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. Subsections (2) to (4), inclusive, apply standard interpretation provisions. Such provisions are also part of the new Interpretation Act that came into force on 1 January next. 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 regard to Short Title, collective citation and commencement.

There is no provision in the Bill to prohibit predatory pricing for the simple reason that such conduct is already prohibited by Section 5 of the Competition Act 2002, which outlaws abuse of dominance.

I have received a large number of representations claiming that the current law on predatory pricing is not strong enough and that there is a need to prohibit predatory pricing by non-dominant retailers. It has also been claimed that no large Irish retailer would be deemed to be dominant and that all such retailers would be free to engage in predatory pricing without fear of legal restriction.

These assertions are incorrect in a number of ways.

Predatory pricing by a non-dominant firm is a contradiction in terms. Attempting to prohibit predatory pricing by a non-dominant retailer would mean applying a definition of predatory pricing in the grocery trade that is different to the definition that applies in all other sectors of the economy, that is different to the definition enshrined in international case law and that is different to the definition applying in most other jurisdictions. It would also introduce a level of protection into the grocery trade that is not available in other sectors, is unjustified, and which would prevent pro-competitive low pricing strategies that benefit consumers. That is precisely what happened with the Groceries Order

Predatory pricing is clearly illegal under Irish competition law and it is punishable by fines of up to €4million or 10% of turnover. The Competition Act 2002 is based on Articles 81 and 82 of the EC Treaty. There is a strong body of case law which show that these provisions can be and are used to prohibit and punish predatory pricing.

Furthermore, dominance does not have to be assessed on a national basis. An individual supermarket outlet in a rural town, whether part of a multiple or not, could be considered dominant, within the meaning of the Competition Act 2002, and thus prosecuted if it engaged in predatory pricing.

The UK, as part of a major inquiry into the potential takeover of Safeway supermarkets in 2003, found grocery markets to be “essentially local”. Indeed, competition concerns in the retail sector are often assessed in terms of their effects on the local area.

The law on predatory pricing is stronger and broader than the words written in the legislative text. Departing from EU case law and attempting to define precisely predatory pricing in legislation would seriously weaken and undermine competition law in Ireland and harm consumers more than it would help them.

This is a short but very important Bill. The Groceries Order has been comprehensively analysed and been subjected to detailed legal and economic investigation. That analysis and investigation has shown that the order has not served the purpose for which it was intended and it did not protect many participants in the trade as was claimed. The Order was anti-competitive and acted against the interests of consumers.

The grocery business is about more than mere grocery stores. It is about all those involved in the production and distribution chain, right back to the factory floor and the farm gate. It is also about consumers. The reality is that for industry to survive and prosper in a global economy, it must be able to compete with the best. To that end, it is not just right and proper that we guarantee fair competition. It is essential that we do so. However, we will not do industry any favours by continuing to protect it from all competition on domestic markets. That is what the Groceries Order did and that is the type of protection some critics of this Bill would like to see remain in place.

Our competition laws are not designed to protect competitors. They are designed to protect competition. There is a world of difference between the two.

We must ensure that competition laws are kept under review and enforced vigorously when needed. That is why the Government has more than doubled the resources available to the Competition Authority in the past five years. It is the reason, moreover, we have provided the authority with an additional €750,000 in 2006 to boost its investigative and enforcement capacity. It is the reason we have brought forward the Competition (Amendment) Bill 2005.

I will be happy to expand on any of the foregoing and to clarify and answer any questions Deputies may have. In the meantime, I commend the Bill to the House.

ENDS

ETE1508