The Effects of the Recent Decision by the Turkish Competition Board on Market Chains and Their Suppliers

January 2022 Ecem Süsoy Uygun
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Introduction

During the COVID-19 pandemic, competitive concerns about the pricing behavior of chain markets, manufacturers, and wholesalers engaged in the retail trade of food and cleaning supplies led to an investigation (“Investigation”) by the Turkish Competition Authority (“Authority”). The comprehensive Investigation process and the subsequent decision[1] of the Turkish Competition Board (“Board”), which had a wide repercussion on the public opinion, reveals the current competition law approach towards the retail sector.

Retail and Supply Sector

The Fast-Moving Consumer Goods (“FMCG”) retailing which is the subject of the Decision is defined as the service of selling products such as food, beverages, personal care products, cosmetics and cleaning products to end users, which have high shelf turnover rates, are stocked for a short time and are constantly consumed. In order to categorize the large number of actors operating in FMCG retailing, a distinction is generally made between the traditional channel (grocery stores, gas stations, dried nuts and fruit shops, kiosks, pharmacies, and perfumeries) and the organized channel (supermarkets, hypermarkets and discount markets). According to the decision, the components of FMCG retailing is retail services and the retail chains that provide these services.

In addition to this, the vertical agreements between retailers and the manufacturers/suppliers from whom they source the products they sell constitutes the supply leg of the market.

Supply markets are divided into two main groups: (1) food and (2) cleaning/hygiene. The producers/suppliers under Investigation also fell into these two categories.

Relevant Product Market and Geographic Market

Within the scope of the Investigation, an examination was made of the undertakings that carry out the retail sale and production/supply of food and cleaning/hygiene products. However, the relevant product market was not defined based on the grounds that it will not change the outcome within the scope of the case.

The suppliers/manufacturers party to the Investigation supply products to retailers in almost every region of Turkey. However, on the grounds that the definition of the relevant geographic market will not change the outcome, the relevant geographical market was also not defined in the Decision.

Competitive Concerns and Violation Determinations of The Board

Many determinations about the leading retail market chains and suppliers are included in the Decision. These determinations generally relate to the fact that competitor retailers exchange information among themselves, while suppliers act as a kind of hub and determination of resale price. The main determinations made in the Board’s decision can be summarized as follows:

  • Competitor retailers were aware of each other's price transition decisions in advance through direct or indirect contacts between them. They engaged in coordination and maintained coordination of price transitions (and sometimes price increases).
  • Competitor retailers coordinated prices and price transitions through suppliers for various branded products. There was transfer of information about transition dates and amounts to competing markets, again through suppliers. This included sharing competitively sensitive information such as future-oriented prices, seasonal activities and campaigns.
  • Retailers, acting through their suppliers, ensured that prices were "corrected" by "interfering" with the prices of undertakings to reduce or increase prices. There was continuous monitoring of agreement compliance through punishment strategies such as issuing returns invoices to suppliers. Thus, the undertakings in question were party to an agreement or concerted practice that also exhibited the characteristics of a hub and spoke cartel in order to determine the retail sale prices of the aforementioned products.
  • For their part, suppliers obtained competitive, strategic information about their competitors from the downstream market both by monitoring the shelf prices through employees and by making direct requests from retailers.

Defenses Made by the Investigated Parties

Both the suppliers and chain markets which were alleged to be parties to an agreement or concerted practice that exhibited hub and spoke cartel characteristics, and suppliers alleged to have committed violations of resale price maintenance, made written and verbal defenses regarding the determinations made against them. These defenses were of both a procedural and substantive nature. Some of them are briefly mentioned below:

  • The retailers argued that direct communication between competitors could not be shown as it had not been demonstrated that competitively sensitive information was shared with supplier(s) with the intent of sharing it with other retailers. Therefore, the mandatory elements in the hub and spoke cartel were not satisfied.
  • The retail sector is not suitable for a cartel agreement due to its unique characteristics.
  • Statements regarding price transitions contain estimations and predictions can be easily made when the operation and structure of the market are taken into account. In addition, the parallel pricing behaviors observed can be explained by pursuance of the market leader's price or by barometric price leadership. Finally, the Authority failed to consider discounts offered during the COVID-19 pandemic period, and only certain products were selected and evaluated.
  • The behaviors under Investigation do not indicate a hub and spoke cartel; they can be classified as resale price maintenance or information exchange. Hence the administrative monetary fine should be determined accordingly.
  • The sales revenue from the limited number of products to which the possible infringement claims are related covers only a small part of the total sales revenues; this situation should be considered as a mitigating factor when determining the fine, or a fine should be calculated based on the turnover of these product groups.

Decision: A Record Administrative Fine

In consequence of the comprehensive Investigation, the Board imposed administrative fines amounting to 2.7 billion TRY in total on undertakings that it deemed to have violated Law No. 4054 on the Protection of Competition (“Law No. 4054”). Thus, one of the highest administrative fines in the history of Turkish competition law was imposed. As stated in the Decision, the Board decided as follows:

  • Competitor retail chains facilitated coordination of price transitions through direct or indirect contacts through common suppliers, shared competitively sensitive information, interfered with competitor prices through suppliers, and constantly monitored compliance with collusion between undertakings through penalizing strategies such as issuing return invoices to suppliers in case of non-compliance. Thus, they violated Article 4 of Law No. 4054, which prohibits cartel-like agreements or concerted practices which aim to determine retail sales prices and which exhibit hub and spoke features.
  • In addition, one of the suppliers under Investigation colluded with retailers regarding shelf prices and price transitions. In this context, a supplier that mediated the sharing of competitively sensitive information such as retailers' future prices and price transition dates violated Article 4 of Law No. 4054. It did this through agreements or through concerted actions that took the form of a hub and spoke cartel. Because the supplier clearly aimed to determine retail sales prices, it was jointly and equally held liable with the retailers for this violation.

Conclusion

It seems that the effects of the Board's Decision on Turkish competition law will be discussed for a long time. This is due to the fact that the defendants are expected to appeal, as well as the importance of the decision for those interested in the Board’s approach to hub and spoke cartels and information exchange in the retail sector. After the Board's devastating fine of 2.7 billion TRY, there is no doubt that the retailers and suppliers operating in the sector will act with greater care in the future. However, in the retail sector, which requires comprehensive information and data analysis to compete, undertakings will need a guide in order to fully comply with competition law rules.


References
  • The reasoned decision of the Board dated 28.10.2021 and numbered 21-53/747-360.

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