Introduction
National level
New legislation
Comment


Introduction

The European Commission and national competition authorities are showing increased interest in the food sector, and are working in parallel to tackle potential competitive concerns in the sector. Their efforts are predominantly motivated by the unbalanced negotiating positions of parties in the distribution chain, as well as by complex national regulatory frameworks and customary practices that effectively hinder competition.

In recent years the European Commission has conducted detailed structural analysis of the food sector and has also set up a dedicated taskforce within the Directorate General of Competition to scrutinise the sector more thoroughly. In December 2012 the commission's High Level Forum for a Better Functioning Supply Food Chain, established in 2010 to improve the competitiveness of the agro-food industry, issued its latest report, which recommended the possibility of developing new EU legislation aimed at avoiding unfair trading practices in the sector.

The most recent measure at EU level is a new study(1) assessing the impact on consumers of recent developments in the food retail sector; the commission is expected to issue its final report by the end of 2013.

National level

The Spanish Competition Authority has been active from an early stage in analysing the functioning of the food sector and has published the following reports:

  • "The Investigation of the Distribution Food Chain of Certain Fruits and Vegetables" (January 2004);
  • "Competition and the Food Sector" (June 2010); and
  • "The Relations Between Manufacturers and Retailers in the Food Sector" (October 2011).

In the 2010 and 2011 reports, the authority expressed the following concerns about competition in the sector:

  • the existence of a huge disparity between the production cost of food products and the final price paid by end consumers. The authority blamed the sheer number of parties involved in the food supply chain as one of the main reasons for this difference;
  • the increasing buyer power of retailers resulting from the concentration of the retail food sector in a small number of large retailers, which impose aggressive commercial conditions on food producers;
  • the increasing market power of retailers' own brands, which initially expanded consumer choice, but in the long term has contributed to the withdrawal of manufacturers' brands from the market and therefore to the strengthening of retailers' buyer power; and
  • the existence of a "chaotic" regulatory framework, which creates unnecessary legal barriers to new entrants.

In order to tackle these concerns, the authority strongly recommended that the government take immediate action to improve the situation by introducing legislation which was consistent with competition law.

Despite the recommendations laid down in the 2010 and 2011 reports, it was not until October 2012 that the Ministry of Agriculture proposed a legislative package to improve the status of the food sector to the Council of Ministers.

New legislation

The Bill for the Implementation of Measures to Improve the Functioning of the Food Chain is part of the proposed legislative package. The main elements introduced in this bill include the following:

  • Formal contractual conditions governing trading relationships – in order to introduce a more formalistic approach to trading relationships, the bill expressly identifies certain mandatory contractual elements,(2) including specification of:
    • the parties;
    • the purpose of the contract;
    • the duration of the contract;
    • payment conditions; and
    • reasons for termination.

These measures seek to improve legal certainty regarding the parties' rights and obligations. The inclusion of this provision in the bill recognises the authority's concerns as related in the 2010 and 2011 reports, where it highlighted that the majority of the contracts examined for the purpose of the reports were not set down in writing and failed to include certain customary practices frequently employed in contractual relationships between producers and retailers. Such lack of transparency and clarity is common in contractual relationships between large retailers and small producers. The authority welcomed this provision in its report of January 8 2013, in which it analysed the different measures to be introduced by the bill.

  • Abusive commercial practices – the bill prohibits the following practices that the authority identified in its 2011 report as potentially anti-competitive under certain circumstances:
    • the obligation imposed on producers to provide commercial payments or share the cost of promotional activities that were not explicitly agreed in the contract;
    • the exchange of sensitive commercial information which is unnecessary for the contractual relationship; and
    • unfair use of another party's brands, patented packaging and product presentation.

However, in its report the authority disagreed with a general ban on commercial payments and asserted the introduction of certain exceptions. The authority acknowledged that although certain commercial payments may be abusive and may weaken competition, they can also lead to efficiencies. In particular, the authority mentioned that certain types of commercial payment (eg, those used to assign shelf space or those required for stock control and supply purposes) should not be prohibited, since they act as incentives to distributors and producers for the maintenance of a more efficient food chain.

  • Code of good practice – the bill anticipates the drafting of a code that will regulate certain elements of trading relationships which are not currently expressly regulated. The content of the code will be agreed between representatives of the Ministry of Agriculture, sector associations and other organisations. The bill foresees the possibility for market operators to join other codes of practice that may introduce more detailed and demanding provisions than those included in this code. Although the authority has promoted the existence of codes of practice in the past – provided that they comply with competition law – it has stated that the combination of legislation with a self-regulating tool could seem "a bit strange". Similarly, the authority fears that the co-existence of several codes of practice may harm sector unity.
  • Food supply chain observatory – the bill will establish an observatory, which will be tasked with:
    • providing its opinion on the code of practice, which will ensure that all operators are aware of the provisions established therein; and
    • conducting studies and analysing the basis of price structure and other factors affecting this variable.
  • New penalties procedure – the introduction of a stricter penalties procedure is one of the most controversial aspects of the bill. The authority has criticised this provision and stated that it should not be included in the bill, since existing competition law and legislation that regulates unfair practices cover any potential infringement. However, despite the criticism, the bill retains these powers, including the possibility of imposing fines of up to €1 million as a result of proceedings initiated either by the Ministry of Agriculture or regional government departments.

The bill is now being discussed in Parliament. However, no major changes should be expected as a result of these discussions, since the Partido Popular (the party supporting the government, which supports this initiative) has a comfortable majority in Parliament.

Comment

The food sector is subject to the scrutiny of both the European Commission and national competition authorities.

Motivated by its interest in promoting a competitive food sector, the Spanish Competition Authority has prepared a number of reports on the subject and has intervened in the sector in order to tackle anti-competitive conduct (it has commenced seven infringement proceedings in the past two years).(3)

The new legislative package that the government is developing is not aimed at improving relationships between producers and large retailers, but more broadly the entire structure of the food industry. To this end, a second piece of legislation, aimed at promoting cooperative integration among other food-oriented entities, has been sent to Parliament for discussion and approval.

Other general regulatory initiatives aimed at introducing competitiveness in the food sector are in the pipeline, such as the Bill on Guaranteeing the Unity of the Market, which seeks to ease the process for opening establishments in different autonomous communities. This bill will allow companies that comply with the requirements for opening an establishment in one autonomous community to do so throughout the entire Spanish territory.

Meanwhile, the authority continues its crusade against competition barriers in the sector. To this end, it recently published a report entitled "Competition in the Service Provided by Wholesale Central Markets Supplying Perishable Foodstuff at their Point of Destination"(4) regarding the lack of effective competition between wholesale central markets. The authority underlined that the existing legal framework regulating such wholesale central markets (which has been in force since the 1960s) is outdated and should be modernised in order to enhance competition by eliminating unnecessary barriers for access to the management of such central markets.

Moreover, on April 29 2013 the authority issued an opinion on a government initiative (ie, the collaboration agreement between dairy producers, distributors and the Ministry of Agriculture) in relation to the commercialisation of sustainable dairy products. Although broadly supporting this initiative, the authority underlined the need for explicit confirmation that the agreement is subject to competition law and the need to treat the information exchanged between the parties to the agreement as confidential in order to avoid any potential anti-competitive practices.

It seems that the competition concerns that the authority has raised over the past few years in relation to the Spanish food sector have finally prompted the government to trigger reforms in the legal framework. The enactment of new legislation and the authority's determination to continue promoting effective competition in the food production sector will doubtless have a positive impact on a sector that is not as competitive as it potentially could be.

For further information on this topic please contact Casto Gonzalez-Paramo or Sara Salvador at Hogan Lovells by telephone (+34 91 349 82 00), fax (+34 91 349 82 01) or email ([email protected] or [email protected]).

Endnotes

(1) December 2012.

(2) This obligation is subject to the parties' turnover and the value of the transaction in question. There is an exception to this obligation when payment is made in cash; in such a case, it is mandatory only to issue an invoice.

(3) See the decisions in cases S/0107/08, Plataforma del mejillón; S/0167/09, Productores de Uva y Vinos de Jerez; S/0180/09, Conserveras; S/0231/10, Productores hortofrutícolas; S/0251/10, Envases hortofrutícolas; S/0289/10, Industria cárnica; S/0305/10, Uvas Denominación Origen Valdepeñas.

(4) January 31 2013.

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