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					Study on the impact of private labels on the competitiveness of the European
food supply chain

Comments by AIM – the European Brands Association

The LEI study team delivered a number of useful empirical analyses in spite of less than
perfect terms of reference and limited resources. The latter meant that the team used mostly
high-level statistical data, which makes it hard to derive robust conclusions, and that the
range of categories in scope and of companies interviewed was narrow.

Some key issues, including the use of privileged information by retailers and their dual role
as customer and competitor, have not been addressed as the authors felt they should be
considered “under a broader view, where effects on overall social welfare and growth are
evaluated”.

Given the methodological caveats in the report, the category scope and data limitations,
including the lack of up-to-date data in some cases, and the narrow set of measures of the
level of innovation, a less sweeping conclusion than the one leading the report would have
been justified.

Among the key questions left unanswered by the study are the following:

     1. The Dual Role of the Retailer as Customer and Competitor
       What should be done to address the abnormal competitive situation whereby brand
       manufacturers must share sensitive information early with some of their main
       competitors: the retailers who market their own brands? Given that in a European
       survey conducted by AIM and CIAA in January 2011, 28% of the 686 respondents
       indicated that they had been exposed in 2009 to customers’ use of privileged
       information to develop their competing retailer brand, how can such abuses of the
       retailer’s conflict of interest be avoided? The detriment to innovation is illustrated in
       the chart below.

                         A dynamic fraught with risks
                    Retailer as Customer AND Competitor
                                                        Gives lead time to copy
                  Sharing the pipeline                  for retailer own brand
                  Sharing the                           Devalues competitive
                                              Tension




                  insight/knowledge                     advantage – category level
                  Sharing knowledge of                  Competitive advantage for
                  investment/performance                retailer own brand launch

                  Discourages further                   Own brand copy fosters
                  innovation/investment                 category commoditisation


                        Impact: reduces opportunity for return on
                           investment and major innovations
                                                                             AIM®
                                                                             AIM®
        The study recognises that brands are the main driver of innovation and that there is a
        risk to innovation from parasitic copying (“copycatting”) but, as mentioned above, it
        stops short of a wider analysis of the retailer’s conflict of interest as customer and
        competitor and its potential effect on overall social welfare and growth, possibly
        because of the narrow character of the terms of reference.

       2. A Tipping Point into Consumer Detriment?
          Brand manufacturers have no difficulty recognising that competition from retailer
          own brands, if fair, is healthy and can be a source of consumer benefits.

          At the same time, as the report explains (p. 42): “Retailers could have strong profit
          or strategic advantages to favour private labels over brands. It is important to
          consider how this favouritism may be exercised in practice. As a stream of academic
          studies suggest, it is the retailers’ power to set the retail marketing mix for in the in-
          store treatment of brands and private labels in regard to how they are priced,
          positioned and promoted relative to each other that can allow retailers to advance
          private labels at the expense of brands”.
          If the growth of retailer own brands is at least as much driven by supply than
          demand, under what circumstances could a high share of retailer own brands in a
          market lead to a tipping point with detrimental consequences in terms of choice,
          price, social impact and dynamic competition? In particular, the “dramatic” fall in
          new product introductions in Spain in the period from 2005 to 2009 would have
          deserved a closer examination in the report.

          If such a tipping point leading to consumer harm were found to exist, would there,
          or not, be a self-corrective response by retailers, in their long-term interest, to give
          more space to manufacturer brands? There seems to be no guarantee of this as the
          retail business generally requires a focus on the short term, so one can regret that
          this question was not addressed in the report either.


Other comments:
   • AIM agrees with the report’s analysis and conclusion that “a system of producer
      indications is not likely to have a substantial impact on innovation at the industry
      level”.

   •    Section 7 – Legal analysis
        We are concerned that the overall level of analysis and understanding of the available
        legal instruments contained in this section is poor. Some of the errors or inadequate
        characterisations are addressed in the Annex.



                                             ■ ■    ■    ■   ■




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              Annex: AIM comments on section 7 (Legal Analysis) of LEI study

We are concerned that the overall level of analysis and understanding of the available legal
instruments contained in this section is poor. In particular, there are a number of omissions
and inadequate characterisations which render what is presented misleading. Non-
exhaustively and in summary:

•   The basic framework that is established in section 7.1 is in itself misleading in that it
    explains that it will concentrate on "unfair contracting" in section 7.3. By way of
    example, competition law and codes of conduct such as GSCOP (which are covered in
    section 7.3) address numerous forms of unfair extra-contractual behaviour or unilateral
    action such as imposition of requirements not contained in contracts, unjustified delays
    in payments etc. Focusing on "unfair contracting" implies a narrow focus not reflecting
    the reality of the concerns that the available legislative tools seek to address;

•   The discussion of intellectual property protection in section 7.2.1 is prefaced by the
    observations on the degree of EU harmonization of intellectual property law. However
    this introduction is misplaced in a discussion of private labels, where the most important
    protection arises from the common law tort of passing off, which is far from harmonised
    and is not available in all Member States;

•   Section 7.2 gives high prominence to the protection afforded by the Unfair Commercial
    Practices Directive ("UCPD") but appears to misunderstand the basic principle that this
    legislation is only intended to afford protection to consumers and not other businesses
    (including other producers). Whilst the observation that Article 11 of the UCPD includes
    competitors as interested parties who may have a legitimate interest in combating unfair
    commercial practices is factually correct, in the context of the legislation they are only
    included in order to further the interests of consumers and not to protect their
    commercial interests. Further, in those Member States which have chosen to enforce the
    UCPD through the enforcement action of administrative bodies, competitor complaints of
    copycatting are likely to have very limited impact. It is misleading to imply (as the paper
    does at pages 127-128) that the UCPD introduces universal protection available to
    producers equivalent to that of passing off;

•   The adoption of the Draft Common Frame of Reference (“DCFR”) as a proxy for the state
    of private law in the EU Member States is an extraordinary choice. The European
    Commission itself describes the Common Frame of Reference initiative on its website as a
    "long term project". The DCFR itself is an academic document that is far from having
    any legal force or from implying harmonisation between Member States. The difficulty in
    focusing on the DCFR is illustrated by the example of Table 1 which highlights the
    provisions against "unfair exploitation". There is currently enormous variation in the
    applicable laws in this area in the various Member States, with some states offering no
    protection against unfair exploitation and others offering very different, stronger models,
    as illustrated in the examples of additional national legislation set out on pages 137-138
    of the draft report;

•   Remarkably, the discussion of competition law in section 7.3.2 omits any discussion of
    the treatment of buyer power in the European case law, which is the key concept relevant
    to relationships between producer and retailers;
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•   In other respects, the discussion of competition law matters is an unsatisfactory mix of the
    selective and the sweeping. To take three examples:

•   the discussion of merger cases comprises a close review of two cases which discuss
    private labels, from which the paper seeks to draw general principles, without any
    observations about the many other cases where the European Commission (and indeed
    other authorities) have also considered the role of private label products and come to
    differing conclusions depending on the specific nature of the product markets concerned;

•   category management is mentioned in a brief aside as a vertical agreement which may
    cause concern, without at all addressing the much more basic concerns that may arise
    from exclusivity ("single branding") and without setting out any of the context for why
    category agreements are legitimately used;

•   the sweeping statement that "even if the effects of the increasing number of private labels
    and foreclosure of suppliers could be an observed practice of all or a majority of retailers
    of the market, those measures will not be considered subject to European competition
    law, unless they result from agreed and joint policies established collectively by the
    retailers (Article 101 TFEU) or are practices by an undertaking that holds a dominant
    position" (emphasis added) is controversial and not supported by any reference to case
    law, Commission decisions or guidance materials.

•   The summary of GSCOP set out in section 7.3.5 omits the most important new
    developments introduced by the new code, namely the requirements for all contractual
    terms (in the widest sense) to be recorded in writing and for retrospective change to those
    terms to be prohibited. The implied characterisation of GSCOP as a good example of a
    voluntary code of practice is also misleading – compliance is mandatory for those
    retailers to whom it applies.

In all, section 7 does not adequately or clearly represent the existing legal framework.




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posted:10/7/2011
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