Hub and Spoke arrangements:
a comparative view
Monday 15 November 2010, 17.00 – 19.00
Chair: Michael Hutchings, OBE
Speakers:
Javier Berasategi, Berasategi & Abrogados
Thomas Lübbig, Freshfields Bruckhaus Deringer
Alastair Gorrie, Counsel to SC Johnson, Counsel to Orrick
Mario Siragusa, Cleary Gottlieb Steen & Hamilton LLP
www.biicl.org
HUB AND SPOKE
BIICL 15 NOVEMBER 2010
MICHAEL HUTCHINGS
INTRODUCTION
TWO PREVIOUS SEMINARS
• 19 October 2009
– Legal Analysis
– UK Focused
• 19 April 2010
– EU Proposals
– Various NCA cases
– UK Supermarkets Code
RESEARCH PROJECT
• BRIEF: Legal analysis of hub and spoke
agreements under UK competition law
• RESEARCHER: Peter Whelan
• OUTPUT: Article in European Competition
Journal December 2009
• FUTURE WORK: Explore themes from other
EU countries
THEMES FROM WHELAN
RESEARCH
• Innocuous information exchanges may be
anti-competitive
• Parallel cases in numerous EU countries
• “Hub & Spoke” collusion is a feature of UK
milk and tobacco cases
• Vertical information flows can be deemed to
be “horizontal”
• High legal hurdle to establish unlawful
horizontal collusion
THEMES FROM SEMINARS
• Horizontal collusion requires higher standard of proof
than vertical restrictions
• Conditional participation not enough – the vertical
agreement must be unlawful (e.g. RPM)
• RPM is easier to nail than H&S (e.g. UK Tobacco)
• Margin protection practices = RPM??
• Compliance requirements for trading partners
including category management
Hub & spoke is dead:
welcome to the era of retailer power
Javier Berasategi Torices
BIICL Hub & Spoke Conference
London, 15.11.2010
“We used to live in a world where brand power was everything, but slowly and
inexorably it is being replaced by retail power...The mountain here is the shelf: a
shelf in the supermarket, a shelf in a concept store or a shelf on the internet.
Once the shelf was the place we proudly displayed our brands. Now it’s the place
we fight to stay on. Now it’s the place we can be evicted from on the smallest
whim…We believe this squeeze has taken us to a new type of world. It’s clear
that this new world has some big fish and some little fish. The biggest fish of
them all is the global retailer. This new breed of super retailer increasingly gets
its own way. It can decide to swim with the small fish or simply gobble them up
and spit them out. The little fish are of course the brands.”
Thomassen, Lincoln, & Aconis, Retailization – Brand survival in the age of retailer
power, 2006
“As retailers have grabbed power around the globe, they’ve transformed private
labels from price purchases into powerful brands with their own cachet. As a
result, one powerful brand manufacturers like Nestlé and Procter & Gamble now
find themselves competing for shelf space with their biggest customers, like
Tesco and Walt-Mart.”
Kumar & Steenkampt, Private label strategy – How to meet the store brand
challenge, 2007
8
Supplier-retailer relationships
• Conventional view: seller power
– Inter-brand competition
– Intra-brand competition
• Modernization: supermarket platforms
– Two-sided markets
– Supermarkets as hubs & spokes
• Conclusions
9
Conventional View
• Seller power and intra-brand competition: EC Article 101(3) Guidelines
(pars. 17-18)
– Vertical BER & Guidelines
• RPM: cardinal sin
• Listing fees: supplier2supplier foreclosure (Guidelines, pars. 203-208)
• Category management: supplier2supplier foreclosure (id., pars. 209213)
• Retailer subcontracting manufacture of own brand is not a
competitor (id., par. 27)
– Car BER: oligopolistic market
• Multi-brand retailers:
– Old BER: access to 2 competing brands (essential facility?)
– New BER: specific (low) market-shares for “cumulative effect of
parallel agreements” test (40%/30%)
• Independent spare-parts manufacturers & repair services
10
Conventional View
• Seller power and inter-brand competition
– Hub & spokes as a refined version of seller market power
– Collusion at the same chain level through an agent
upstream/downstream
• N suppliers through a retailer
– purchase price to the retailer? Retailer pushing prices
down
– purchase/retail price to all retailers? Retailer pushing
other retailers’ prices up
• N retailers through a supplier: RPM
• N retailers and N suppliers: horizontal + horizontal
11
The olive oil decision (Spain)
• The Spanish Competition authority fined the Leading Manufacturer
Brand (LMB) and several retailers for RPM in 2002-2004 (File
612/02, Aceites 2, annulled on appeal)
• The largest retail chain (Carrefour) objected and delisted the LMB
• Market shares in 2004: LMB, 35%; retailer brands 50%; others 15%
• Market shares 2009: retailer brands, 70%; LMB, 20%; others 10%
• In 2010 LIB market-share up: Carrefour listed it again and low-price
strategy (opposite of RPM)
12
Modernization
• Retailers operate as “platforms” operating in two-sided markets
(Katz&Shapiro, 1985; Rochet & Tirole, 2001)
• Retailers and suppliers compete through branded products: their dealings
are horizontal
– Draft Horizontal Guidelines, commercialisation agreements, Section 6
• Supermarkets are hubs and independent and retail brands are spokes:
new forms of horizontal competition raise new collusion/foreclosure
challenges
– Manufacturer - retailer (horizontal brand competition)
– Manufacturer – buying alliance (horizontal brand + horizontal retailer
competition)
– Retailer label manufacturer-retailers (horizontal brand + horizontal retailer
competition): RLM tycoons (Cott, McBride, etc.)
13
Modernization
Source: PMLA
14
Modernization
• Supermarket platforms as competitive bottlenecks: multi-homed suppliers and
single-homed shoppers (Armstrong, 2006)
• Single home: shoppers’ switching costs (Diamond, 1971; Klemperer, 1995); role
of price frames (OFT, 2010); role of choice framing and intermediaries’ bias (OFT,
2010; Bennett& Collins, 2010)
• Supermarket platforms have customers on both sides (see EC Mastercard
decision): suppliers buy access, shoppers buy products
• Supermarket platforms are often special: they keep traditional retailer functions
in their favour: facings, retail pricing (RPM ban)
• Intra-platform (product) competition: high % of product selection is made instore and is influenced by supermarket-platform
• Inter-platform competition: supermarkets compete for shoppers and, in rare
instances, for suppliers (exclusive retail brand suppliers)
15
Modernization
•
The triangular hub & spoke risk overshadowed by the supermarket platform dominance
– Suppliers’ incentive to collude or apply minimum RPM diminishes: loss of market-shares
to retailers’ brand and risk of retailer retaliation
– Large retailers’ incentives to force/induce suppliers into wholesale price increase or RPM
to all retailers increase:
• they enjoy access fee mark-up over smaller competitors
• the create a price gap with their own brands (Nocke&White, 2005)
• they control supplier/retailer deviation and punish it (Toys R Us; ITWAL)
– Large retailers may unilaterally achieve this outcome
• they extract fees/transfer costs unilaterally (Cruz Roche, 1999; Meza&Shedir, 2009)
• they demand guaranteed margins/sales (Butz, 1993)
• they demand MFN protection (Butz, 1993; Tirole&Rey, 2006)
• they create artificial gaps in retail prices (Oubiña et. al., 2000)
16
Toys R US
• Toys R Us v. FTC, 221 F3d 928 (7th Cir. 2000): a retailer with just a
22% market-share forces main toy suppliers into exclusionary
conduct towards some retailers
– “Swindle contended that rather than there being "hub and
spoke" arrangement directed by TRU or some other type of
horizontal conspiracy among manufacturers, the "glue that held
TRU’s scheme together was each manufacturer’s individual
decision not to cross its most important customer’s interests."
The Commissioner concluded: “I am simply unable to find a
horizontal boycott on the basis of this evidence. The gaps and
ambiguities in the record require that I dissent from the
conclusion that TRU orchestrated an anticompetitive horizontal
agreement." (FTC Press Release, citing a Commissioner’s
partially dissenting opinion)
17
Chocolate cartel (Canada)
•
Alleged chocolate cartel in Canada: a wholesaler coop (ITWAL) threatened retaliation if
suppliers did not increase prices to other retailer. According to Competition Authority’s
document:
– Cartel started with threat letter from ITWAL to manufacturers in order to have trade
spending reduced:“At the ‘end of the day,’ it is only the suppliers’ control and discipline of
trade spending that can restore the functionality of the marketplace. The problem is very
serious and completely out of control on the part of the suppliers. I am being forced to
reexamine how we operate in the market and I am not sure it would be in the best
interests of Nestlé. I urge you to meet and take action before this chocolate bar ‘bubble
bursts.’”
– ITWAL regularly monitored progress from manufacturers:“Further to my letter of February
21, 2002, please find attached information forwarded by Members on product and pricing
available from diverters. In view of the seriousness of the problem, I will forward
information as received under the acronym, T.A.N., which stands for 'TAKE ACTION NOW!' I
trust you will accept the information in the spirit with which it is intended. I look forward to
meeting with you to learn what steps Cadbury is taking to address this problem.”
– ITWAl threatened action if prices were not increased/supplies continued to specific
retailers.
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Conclusions (I)
• The hub & spoke tree is hiding the supermarket-platform forest
• Suppliers’/retailers’ incentives to enter into hub & spokes
diminish/increase
• Large retailers’ non-coordinated practices replicate the same
outcome
• Ban on RPM (regulation/competition law) helped emergence of
supermarket-platforms!
• Should RPM be allowed? Is it too late?
19
Conclusions (II)
• Are supermarket platforms reducing intra/inter-platform
competition?
– One-side competitive bottleneck = market power or market
dominance?
– Even intense one-side (shopper) competition is compatible with
sub-optimal competition on the other side (suppliers): balancing
the two-sides?
– Platform & brand integration compounds the anticompetitive
risk: platform neutrality?
• Compare antitrust & regulatory intervention in other two-sided
markets: MIFs, TV advertising, call termination, international
roaming, Apple, Internet neutrality…
20
How retailers see card platforms
[MIF: 3%]
Source: Eurocommerce
21
How could suppliers see supermarket platforms?
[Access fees: 10%, 20%,
30%, 40%?]
Retailers
Retailer
Brands
Retail
Alliances
Manufacturer
Brands
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THANK YOU!
J a v i e r B e r a s a t e g i To r i c e s
Email: jb@berasategi.es
Móvil: +34 688 606 389
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