FCA accomplished Sector Inquiry on Buyer Power of Supermarkets

30.8.2007

In late 2003, the FCA (Federal Competition Authority, Vienna) started its sector inquiry analysing the buyer power of the big supermarket chains on the Austrian market. The inquiry has been triggered off by anonymous complaints and media reports about allegedly abusive supply chain practices. To gather the necessary information the FCA sent questionnaires to 180 market participants, both on the supply and demand side. Since a significant number of companies refused to provide information regarding business terms and conditions, the FCA - in order to enforce the undertakings' obligation to provide the information needed to accomplish the inquiry - initiated proceedings at the Cartel Court in February 2005 which lasted until late 2006. Due to these procedural difficulties, the FCA abstained from requesting any additional information and concluded the inquiry in June 2007 with the subsequent main results:

The grocery sector in Austria is - also compared to other European markets - highly concentrated. The main competitive constraint ensues primarily from discount shops. The entry barriers are high, as reflected in the low number and limited expansion of new market entrants in recent years.

The inquiry, focused on specific upstream procurement markets, brought forward strong evidence for the existence of buyer power. A thorough inquiry into the single procurement markets is necessary to assess the degree of buyer power on each of them. The strong economic dependence of suppliers is evident, mainly because of the high quantities procured by the leading supermarkets on the one hand and the lack of alternative large-scale distribution channels on the other hand. Replacing significant sales quantities by shifting distribution to other sales channels, e.g. to exports, is therefore often not a viable option. The loss of a big customer may consequently entail heavy financial losses. If there are neither strong brands ("must-stock"-products) nor other forms of countervailing power on the supply side, the buyer power of the retailers is almost unlimited. If the supply side is highly fragmented, if there are no alternative sales channels, if brand awareness is not distinctive but private label products directly compete with branded ones, buyer power of retailers is strengthened.

The positive effects of buyer power, like efficiency gains, have to be taken into account insofar as they increase consumer welfare. The effects on consumer welfare depend on competition on the level of competition on the sales markets.  Possible negative effects on consumer welfare, such as reductions in product variety and innovation caused by a decrease in investments have to be taken into account.

Such a decrease in investments may also be caused by uncertainties in business relations and consequently the result situation. It became apparent that terms and conditions between suppliers and retailers often lack clarity, stability and reliability. Arrangements, such as in particular retroactive rebates or discounts, significantly reduce the planning security of suppliers. This may result in a reduction on investment and innovation.

Establishing abusive behaviour requires sound factual and economic evidence and cannot be produced easily, however. In any event, because of the market situation described above, the grocery sector will certainly stay under strict scrutiny by the FCA - accordingly it will thoroughly assess any well-founded evidence on allegedly abusive conduct in the sector. The investigations in the course of the sector inquiry have shown that suppliers are - to say the least - very reluctant to provide such information in fear of retaliatory measures such as the de-listing of products.

Finally, another possible anticompetitive effect ensuing from enhanced buyer power is that smaller retailers may suffer a further loss in competitiveness in relation to their suppliers and that market entries are hampered. In effect, this may still enhance concentration and hence buyer power.

In conclusion, it should be pointed out that the importance of effective competition in the grocery sector to consumer welfare requires intensive and continuous surveillance by the competition authorities, particularly regarding those procurement markets characterised by a high degree of buyer power.

A comprehensive summary of the inquiry is available here (only in German).