By Lauralyn Kaziboni
The Competition Tribunal of South Africa (“Tribunal”) has dismissed the case between the Competition Commission (“Commission”), and SAB and 14 SAB-appointed distributors (ADs).1 The complaint was initially lodged in 2004 when Big Daddy, an ‘un-appointed’ independent distributor (customer) of SAB, alleged that SAB, the dominant upstream manufacturer of beer, was pricing beer at the same level for both the retail and wholesale/distributor levels of the market and was thus preventing independent wholesalers/distributors such as itself from making any profit. In South Africa, SABMiller has 7 breweries, 40 depots, 34 000 customers (retailers) and an estimated market share in clear beer of 90%. It is therefore a must stock product for distributors in the downstream ‘market for liquor distribution’ as defined in the proceedings. The Commission referred the case to the Tribunal in 2007 as a violation of sections 4(1) (b) (restrictive horizontal practice), 5(1) & (2) (restrictive vertical practices) and 9 (price discrimination by a dominant firm) of the South African Competition Act (the “Act”). We discuss the Tribunal’s findings under each of the sections below.
This matter highlights the challenge which can arise in abuse of dominance cases of accurately characterising the conduct complained of and framing it as a violation of specific sections of the competition legislation. This exercise can be confounded by the fact that often firm strategies do not fit neatly into one or more category of abuses as per the Act. The effects complained of may in fact be the result of a combination of dominant strategies that have the effect together of raising a rival’s costs or harming consumers, or both. In this matter, the Commission framed a case under several sections of the Act and took the view that the effect of the strategies employed by SAB reduced intra-brand competition, which refers to competition between dealers of the same manufacturer and not between different manufacturers (inter-brand). Although aspects of the same arrangements could also affect inter-brand competition in terms of effectively restricting distributors from carrying protects of rivals to SAB, this inducement aspect of the case was separated from the current enquiry for technical reasons.
The first aspect of the case had to do with the fact that SAB allocated territories to ADs through vertical arrangements where ADs could distribute only SAB beer, and only to specific allocated regions. SAB’s own depots, through which 90% of its beer production is distributed, did not compete in the areas serviced by the ADs although they were not prevented from doing so. The Commission argued that SAB had violated section 4(1) (b) by dividing markets through allocating customers and territories to these ADs, who were meant to be competitors to one another and direct rivals to SAB’s own distribution depots. However, the Tribunal established that the ADs were not sufficiently independent from SAB in a manner that would make them competitors to one another, and SAB’s own depots. This is partly because the ADs were created through SAB’s appointed distributor system which was formed in the 1980s to improve distribution to rural areas. Additionally, through their wholesale or franchise vertical agreements, SAB controlled important aspects of the ADs’ business including limiting them to distributing only SAB beer in specified areas, remunerating the ADs through a fee determined by SAB, influencing their marketing strategies and enforcing strict performance and reporting standards. In some cases, where an AD’s business failed, SAB would simply assume their operations or convert these businesses to SAB depots.
To the extent that the businesses of the ADs were effectively run as extensions of SAB’s own distribution functions, they were not considered by the Tribunal to be competitors at a horizontal level to one another and SAB’s own depots. This led to an extensive consideration of the nature of the vertical agreements held with ADs, and particularly the different terms offered to independent ‘non-appointed’ distributors vis-à-vis the ADs.
In this regard, SAB was accused of unlawful price discrimination in violation of section 9(1) of the Act. Specifically, ADs were paid a service fee for distributing SAB’s beer in the form of a discount on the retail price, while the independent distributors were not similarly remunerated for performing what the Commission alleged were the same functions. In this case the Commission had to show that SAB as a dominant manufacturer of beer was charging purchasers of its beer different prices for goods of the same grade and quality sold in ‘equivalent transactions’ with the effect of substantially preventing or lessening competition. The determination in competition law of what constitutes equivalent transactions is often a difficult and contentious exercise.
The Tribunal decided that the transactions between SAB and the ADs or independent distributors were not equivalent. SAB was purchasing the service of distributing beer from ADs while the ADs purchased beer from SAB. On the other hand, the independent distributors only purchased beer from SAB, and SAB did not purchase their distributing services in return. Furthermore, it was argued that the differential distribution service fee paid to ADs was to compensate them for the onerous contractual obligations they had to meet. The contractual obligations entailed meeting performance and service level requirements and providing universal service to all SAB customers. The requirements and remuneration were apparently different for non-appointed distributors, which necessitated different competitive strategies. For instance, while the ADs distributed SAB’s beer exclusively (although they were not required to), the independent distributors also stocked other beer brands in addition to SAB’s beer. In order to compete profitably independent distributors could either deliver a larger proportion of non-SAB products or they could charge a premium on SAB’s products. However, the latter could not be profitably executed as independent distributors would likely lose sales to ADs who sold SAB’s beer at the recommended price. At the same time delivery of a larger proportion of non-SAB products was not viable, as there was a preference for SAB beer in the market.
Taken together, these factors implied that the contractual relationships between SAB and the different groups of distributors were different, and that in effect this warranted differential treatment from SAB. The Commission argued that the specific terms of these vertical agreements also raised concerns in terms of a lack of competitive discipline on ADs from ‘rivals’ in other territories and a reduction in choice for customers. For instance, prices within the ADs’ territories were higher and customers were deprived of the choice of the best allocated supplier and hence lowest cost access to beer since the agreements granted exclusivity to individual ADs over specific geographic areas. The Commission considered this to be a violation of section 5(1) which speaks to an agreement between parties in a vertical relationship which has the effect of substantially preventing or lessening competition. SAB contested this argument through arguing that the current system allowed ADs to achieved economies of scale in distribution. The AD system ensured that the customers paid the lowest transportation costs when considering the full costs of transporting beer from the breweries to the depots (primary distribution), and then from the depots to retail customers (secondary distribution). Furthermore, SAB indicated that if the exclusive territories were removed, they could easily distribute using their own depots and not the ADs considering that SAB was already distributing 90% of their own products.
The Tribunal decided to dismiss this allegation on the basis that the Commission had not shown sufficient evidence to establish that distribution costs and thus the price of beer would have been lower if distributors in different territories were allowed to compete with one another on the prices offered to customers (based on lower distribution costs). Similarly, no benefits in terms of non-price competition were demonstrated if distributors from different territories were allowed to compete although the Commission had argued that service delivery was sub-optimal since customers could not select the most efficient AD for themselves (in terms of closeness and distribution schedule).
The vertical agreements also allowed SAB to recommend the selling price that ADs could offer to customers and above which they could not sell. This was apparently in order to prevent the ADs from taking advantage of their exclusivity in each region by charging higher prices to the detriment of consumers. According to the Commission this constituted a contravention of section 5(2) (which prohibits resale price maintenance) at the wholesale distributional level. However, it was found that although SAB’s IT systems monitored and controlled pricing, and did not allow distributors to offer discounts, distributors did offer discounts to customers and were not contractually prohibited from doing so.
Overall, having ruled against the Commission’s case on each of the alleged contraventions, the Tribunal identified two faults with the Commission’s case. Firstly, the case brought by the Commission concerned only 10% of SAB’s distribution system which would have made any possible intervention have little or no impact on intra-brand competition in the market as a whole. Secondly, the Commission was left to speculate on the possible effects of the conduct because there was no evidence of a time when the market operated differently. Establishing a substantial counterfactual is often difficult in cases where particular conduct has been the established practice in a market for a long period of time. In this case it proved difficult to estimate how much more efficient the independent distributors could have been had the vertical arrangements in the AD system not prevented direct competition between distributors in the market. The Commission has appealed the Tribunal’s decision to dismiss the case.
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Notes
1. Competition Commission and South African Breweries Ltd and SAB’s Appointed Distributors, case no. 134/CR/Dec07 (011148).