Irish Competition Authority Decisions

COMPETITION AUTHORITY

 

Competition Authority Decision of 25 June 2001 relating to a proceeding under Section 4 of

the Competition Act, 1991

Notification No. CA/3/00 – Cadbury Ireland Sales Limited / Retailers / Standard Loan

Agreement

Decision No: 590

Price £0.90, ( €1.14 )

£1.40, ( €1.77 ) including postage

 

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Competition Authority Decision of 25 June 2001 relating to a proceeding under Section 4 of

the Competition Act, 1991

Notification No. CA/3/00 – Cadbury Ireland Sales Limited / Retailers / Standard Loan

Agreement

Decision No: 590

Introduction

 

1. A notification was made by Cadbury Ireland Sales Limited (Cadbury) on 17th July 2000 with a

request for a certificate under Section 4(4) of the Competition Act, 1991, or in the event of a

refusal by the Competition Authority (the Authority) to issue a certificate, a licence under

Section 4(2) in respect of a standard loan agreement for the lease of display equipment.

 

The Facts

(a) Subject of the Notification

 

2. The notification concerns a standard loan agreement (the Agreement) for the lease of display

equipment between Cadbury Ireland Ltd1 and individual retailers. The display equipment is for

the use in retail stores for the exclusive display of Cadbury impulse confectionery. The display

equipment allows the temperature of the confectionery products to be controlled. The territory is

the State.

 

(b) The Parties Involved

 

3. Cadbury of Coolock, Dublin 5, manufacturers, markets, imports and distributes confectionery

products in the State. Its ultimate parent is Cadbury Schweppes plc whose registered office and

group headquarters is 25 Berkeley Square, London W1X 6HT. Cadbury Schweppes plc is a

confectionery and soft drink company with worldwide sales for the financial year that ended 2nd

January 2000 of Stg£4,234 million.

 

(c) The Products and the Markets

 

4. The products covered by the Agreement are impulse confectionery, which is typically

chocolate based.2 This appears to include: chocolate bars, which may or may not be filled, such

as Cadbury’s ‘Dairy Milk’; and chocolate combined with other ingredients, such as Cadbury’s

‘TimeOut’. The Agreement refers to the purchase of these products for immediate consumption,

usually through retail outlets. There are approximately 20,000 retail outlets in the State, of

which Cadbury serves [ ] directly and [ ] indirectly through wholesalers.

1 Cadbury Ireland Limited owns Cadbury Ireland Sales Limited. It is the latter that made the notification, although

the Agreement is between Cadbury Ireland Limited and individual retailers. As indicated in paragraph 3 below the

ultimate parent of both Cadbury Ireland Limited and Cadbury Ireland Sales Limited is Cadbury Schweppes plc.

2 [ ]

 

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5. According to the information submitted by Cadbury there are 24 audited suppliers of impulse

confectionery in the State. However, they vary considerably in importance. In 1999 the market

shares of the leading suppliers were as follows:

 

Supplier Market Share

(%)

Cadbury [ ]

Nestle [ ]

Mars [ ]

Kraft Jacob Suchard [ ]

Ferrero [ ]

All Other [ ]

Total 100

Market size is measured by volume terms – packs defined as a single consumer unit such as a bar

of chocolate. In value terms the impulse confectionery market turnover based on retail prices of

£163 million.

 

 

6. Ten products according to market research presented by Cadbury appear to be ‘acceptable

alternatives’ to ‘chocolate and sugar’. These alternatives include ice cream, yoghurts, crisps and

nuts, biscuits, fresh fruit, noodles/nachos/pizza and so on. It is not clear that these ‘acceptable

alternatives’ should be included within the same market definition as impulse confectionery.

Impulse ice cream, for example, is considered a separate market.3 Furthermore, the products

covered by the Agreement appear to be chocolate based, rather than the wider definition used in

the market research of ‘chocolate and sugar.’ Thus the Authority for the purposes of this decision

considers the relevant market impulse confectionery.

 

 

7. The Cadbury Cool Display Unit (the Cool Unit) that is the subject of the Agreement is the

display equipment supplied by Cadbury to retailers to display impulse confectionery products.

The Cool Unit differs from existing wooden display units of Cadbury and other impulse

confectionery manufacturers in that wooden display units store impulse confectionery products

at the ambient temperature. The Cool Unit [4] allows temperature controlling of confectionery

products. The objective in supplying the unit is to enhance the eating quality of confectionery

for customers.

 

(d) The Notified Agreement

 

8. The Agreement between Cadbury5 (the lessor) and the retailer (the lessee) for the lease of the

Cool Unit is for a year and on each anniversary of the execution of the Agreement, unless

otherwise terminated, it shall be renewed for a further year (Clause 1). However, at any time

either party may terminate the Agreement by giving 30 days notice in writing (Clause 7).

3 See, for example, Masterfoods Ltd t/a Mars Ltd v H.B. Ice Cream Ltd and HB Ice Cream v Masterfoods Ltd t/a

Mars Ireland, decision of 28th May 1992. High Court 1990 Nos 3359P and 1264P (Keane J), published in ILRM,

1993 at page 145.

4 [ ].

5 As mentioned in Note 1 above the Agreement is between Cadbury Ireland Limited and individual retailers.

 

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Cadbury may also terminate the Agreement for other reasons such as the retailer fails to make

rental payments or becomes bankrupt (Clause 6).

 

 

9. The retailer agrees that the Cool Unit will be used exclusively for Cadbury’s products (Clause

 

3.2) and situated in an agreed position within the retail unit (Clause 3.1). The retailer will keep

the Cool Unit:

• Clean (Clause 3.4);

• In continuous operation (Clause 3.5);

• Maintained only by a representative or agent of Cadbury (Clause 3.7); and,

• Insured (Clause 5).

The retailer also agrees:

• To keep and provide sales data to Cadbury as required of products displayed and sold

from the Cool Unit (Clause 3.8);

• Not to sell, offer for sale, assign rent, mortgage or in any way dispose of the Cool

Unit without the prior written consent of Cadbury (Clause 3.15); and,

• To ensure that the premises on which the Cool Unit is kept is not sold, mortgaged or

disposed of without giving Cadbury 28 days notice in writing (Clause 3.9).

The Cool Unit shall at all times remain in the ownership of Cadbury (Clause 4).

 

 

10. A schedule to the Agreement sets the rental rate that the retailer shall pay Cadbury (Clause

2). The copy of the Agreement notified to the Authority did not contain this Schedule. Under the

Agreement as notified the Cool Unit may be either a 50” or 70” model in length. However, the

notifying party subsequently informed the Authority that the Cool Unit is available in 36”, 48”,

54” and 60” model lengths, the same sizes as the wooden display units.

 

(e) Submissions by the Notifying Party

Arguments in support of issuing a certificate

 

11. The notifying party (Cadbury) contends that the Agreement does not have the object or effect

of preventing, restricting or distorting competition within the State to any appreciable extent.

This view is based on the following assertions:

• The impulse confectionery market is competitive;

• The exclusive use of the Cool Unit does not foreclose competition as competitors can

supply confectionery in conventional units;

• There are no barriers to entry in the market for display equipment; and,

• Clause 7 of the Agreement allows either party to the Agreement to terminate the

Agreement at any time by giving 30 days notice in writing.

 

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The notifying party cites the Delimitis judgement6 to support the contention that exclusive

purchase agreements should not be regarded as anti-competitive unless they contributed to the

foreclosure of the market.

 

 

12. The notifying party cites on a number of previous Authority notification decisions to argue

that the Authority has consistently taken the view that an arrangement does not breach Section

4(1) of the Competition Act, 1991, as amended, by virtue of being an exclusive agreement.7

Drawing on the reasoning in two Authority decisions concerning Bewley’s coffee machines,8 the

notifying party argues that the Agreement does not restrict or distort competition where an

exclusivity requirement does not prevent the retailer from selling other brands of confectionery.

Furthermore the retailer may terminate the Agreement at any time.

 

 

13. The notifying party argues that the exclusive use of the Cool Unit can be justified due to the

following:

• Cadbury would have no commercial incentive to develop and supply the Cool Unit if

competitors could use the display unit at no cost;

• The impulse confectionery market is highly competitive;

• Exclusive use does not restrict competition because this display equipment is not

essential to store confectionery. This contrasts with the Masterfoods v HB Ice Cream

case, where a freezer was necessary for the storage of the product – impulse ice

cream;9 and,

• Competitors are free to develop their own display equipment.

The purpose of the Cool Unit is to enhance the quality of Cadbury’s products.

 

 

14. The notifying party claim that Cadbury is not dominant in impulse confectionery and even if

it were the Agreement does not constitute an abuse of that position.

 

 

15. The notifying party argue that where an agreement does not have an appreciable effect on

trade in Ireland the Authority may issue a certificate. A number of reasons are put forward to

support the view that the Agreement does not have such an effect:

• The only restriction contained in the Agreement is the exclusive use of the Cool Unit

for Cadbury’s confectionery;

6 See the Stergios Delimitis v Henninger Brau AG decision of 28th February 1991. Case C- 234/89, published in

ECR page I-0935.

7 Competition Authority Decision of 10th March 1994, No 288, University College Dublin/The Governor and

Company of the Bank of Ireland; Competition Authority Decision of 12th December 1996, No 472, Bewleys Coffee

Machines 1; Competition Authority Decision of 12th December 1996, No 473 Bewleys Coffee Machines 2;

Competition Authority Decision of 12th September 1995, No 421, Adidas/FAI; Competition Authority Decision 17th

June 1998, Decision No 511, First Rate Bureau De Change Ltd., /Minister for the Marine; and, Competition

Authority Decision of 29th February 2000, Decision No 583, Connaught Airport Development Limited and Knock

Cargo Handling Limited.

8 Decisions 472 and 473. See Note 5 for details.

9See note 2 above and Masterfoods Ltd v H.B. Ice Cream Ltd and HB Ice Cream v Masterfoods Ltd t/a Mars

Ireland, opinion of the Advocate General Cosmas of 16th May 2000. Case C-344/98.

 

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• The exclusive use of the Cool Unit does not prevent, restrict or distort competition on

the market for impulse confectionery products or the market for display equipment;

• The retailer is not tied to Cadbury and may terminate the Agreement at any time;

• Exclusive use of the Cool Unit does not foreclose any market; and,

• There are no barriers to entry to the market for impulse confectionery or for display

equipment.

Thus, for these reasons, the notifying party does not think that the Agreement has an appreciably

affect on trade in the State.

 

Arguments in support of issuing a licence

 

16. The notifying party submitted arguments in support of the granting a licence. However, the

Authority is of the opinion that the grant of a licence does not apply in this particular instance.

 

Assessment

(a) Section 4(1)

 

17. Section 4(1) of the Competition Act 1991, as amended, states that “all agreements between

undertakings, decisions by associations of undertakings and concerted practices which have as

their object or effect the prevention, restriction or distortion of competition in trade in any goods

or services in the State or in any part of the State are prohibited and void.”

 

(b) The Undertakings and the Agreement

 

18. Section 3(1) of the Competition Act defines an undertaking as “a person, being an individual,

a body corporate or an unincorporated body of persons engaged for gain in the production, supply

or distribution of goods or the provision of a service.” Cadbury Ireland Sales Ltd and Cadbury

Ireland Ltd are engaged in the production and distribution of goods for gain and are therefore

undertakings within the meaning of the Act. Retailers are engaged in the sale of goods for gain

and are therefore undertakings within the Act. The Agreement is an agreement between

undertakings. The Agreement has effect within the State.

 

(c) Applicability of Section 4(1)

 

19. The Agreement is between Cadbury and individual retailers for the rental of the Cool Unit

for the display of Cadbury impulse confectionery for sale by the retailer. The Cool Unit enables

impulse confectionery to be stored at a temperature that Cadbury’s research suggests consumers

prefer compared with the ambient temperature at which impulse confectionery is usually

purchased. Thus the Cool Unit is an instance of non-price competition and if successful should,

other things being equal, give a competitive edge to Cadbury and improve the welfare of

consumers.

 

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20. There are, however, attributes of the impulse confectionery market and Cadbury’s role in that

market that may raise competition concerns. The impulse confectionery market is highly

concentrated, with the leading three firms accounting for [ ] per cent of the market.10 Impulse

confectionery products are heavily advertised, consistent with high levels of product

differentiation. There is also evidence of some economies of scale in production.11 These

characteristics are not consistent with Cadbury’s claim that there are no barriers to entry in

impulse confectionery.12 Finally, Cadbury accounts for [ ] per cent of the impulse confectionery

market – the largest market share in this market. The market share of Cadbury’s reflects the fact

that it accounts for 11 of the top 20 selling chocolate ‘singles’ in the State.13 Cadbury’s position

is aptly summarised in its promotional material – “Cadbury’s unrivalled confectionery

advertising spend and supreme brand portfolio has resulted in a profile unlike any other.”14

 

21. An important potential concern is that the Agreement may foreclose the market to other

manufacturers of impulse confectionery, thereby strengthening the position of Cadbury as the

market leader. However, it must be remembered that:

• The Cool Unit is not essential for the sale of impulse confectionery;

• Cadbury’s already supplies to retailers wooden units for the exclusive use of

Cadbury’s products of similar dimensions to the Cool Unit although there is a slight

increase [ ] in terms of the height of the Cool Unit [ ];

• The retailer is not compelled to rent the Cool Unit and will continue to be supplied by

Cadbury’s and sell their products at an ambient temperature. In other words, the

decision by the retailer not to take a Cool Unit does not influence Cadbury’s decision

to supply any customer;

• If the retailer does rent the Cool Unit then the retailer can terminate the Agreement by

giving 30 days notice in writing; and,

• If the Cool Unit is successful in enhancing the market share of Cadbury – because of

consumer preferences – then Cadbury’s competitors can be expected to respond with

similar or improved display units.15

These factors militate against Cadbury foreclosing the market for impulse confectionery under

the terms and conditions of the Agreement.

 

 

22. Cadbury’s considers the exclusive nature of the Agreement is necessary in order to promote

innovation and product improvement. If other undertakings were able to use the Cool Unit

without charge then this would remove the incentive for Cadbury (or any other impulse

10 See paragraph 5 above.

11 For a discussion on the points raised in this and the previous sentence see J Sutton (1991) Sunk Costs and Market

Structure. Cambridge, Mass: MIT Press. Pp. 266-275. Note the discussion in the text refers particularly to impulse

confectionery where chocolate is combined with other ingredients. Of the case study’s reported in Sutton Ireland

resembles the UK.

12 See paragraph 15 above.

13 For details see Checkout Ireland’s Yearbook and Buyers Guide 2001, p.14. Singles would appear to include both

chocolate bars and chocolate combined with other ingredients.

14 See Checkout Ireland, August 2000, p. 37.

15 And not because consumers and retailers become locked in to Cadbury products as discussed, for example, in

paragraph 24 below.

 

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confectionery undertaking) to innovate. Cadbury would not be able to appropriate the benefits of

its research. To write a contract that would allow others access might be difficult both to

construct and monitor compliance by the retailer. There would also be concerns that any such

contract might be used to facilitate co-ordination and co-operation between the leading firms in

the industry.

 

 

23. The line of reasoning outlined above is consistent with earlier Authority decisions concerning

Bewley’s coffee machines.16 In these instances and the Agreement under consideration here, the

undertaking seeking the certificate is the leading undertaking in the relevant market. One

difference, however, is that whereas Bewley’s was one of several different suppliers of coffee

machines, Cadbury is the only supplier of the Cool Unit, there being no other impulse

confectionery undertaking offering similar display equipment. However, if the Cool Unit offers

a decisive advantage over existing equipment display units that store impulse confectionery at an

ambient temperature, then a competitive response can be expected. As the Authority has noted,17

“It is, however, an essential feature of competition that firms will attempt to gain some edge over

their competitors. That is fundamental to the competitive process.” It is only where the

Agreement could be shown to prevent or exclude other impulse confectionery undertakings from

entering or remaining in the market that the Agreement could be deemed anti-competitive.

 

 

24. In Delimitis18 the European Court of Justice held that exclusive purchase agreements should

not be regarded as anti-competitive unless they contributed to the foreclosure of the market. In

some cases it might not be possible for a retailer to have a Cool Unit and at the same have

sufficient space for the display of impulse confectionery from other undertakings, albeit at an

ambient temperature. Nevertheless the length of the smaller Cool Unit is now 36” rather the 50”

as originally notified.19 However, as noted above, the retailer is not tied to the Cool Unit and can

terminate the Agreement at any time. Furthermore the retailer has the option of displaying

impulse confectionery at ambient temperatures, rather than entering into an agreement for the

rental of the Cool Unit. Should events develop such that there are grounds for believing that the

Cool Unit agreement contributes to foreclosing the market then the Authority would have to

consider whether this constituted a material change of circumstance and thus provide grounds to

revoke the certificate granted below.

 

 

25. Finally, it should be noted that retailers who sign the Agreement pay a fee to Cadbury for the

rental of the Cool Unit, except where high volumes are purchased.20 Irrespective of whether or

not they have a Cool Unit, the same terms and conditions of supply apply to the retailer. As a

16 Decisions 472 and 473. See Note 7 above for details.

17 Adidas/FAI, Note 7 above, paragraph 12.

18 See Note 6 above.

19 According to the notifying party, there is a high cost involved in customising a Cool Unit [ ]. Conversely, there is

a low cost involved in customising the current wooden units. Therefore Cadbury does not intend to customise the

Cool Unit to the same extent as it currently customises the wooden units. Cadbury recognises that retail outlets have

different requirements. Therefore, while it is not intended to customise Cool Units to individual retailers precise

requirements, Cadbury intends to provide a range of sizes that should serve its retail customers requirements.

20 According to the notifying party, the objective in charging rent for the Cool Unit is to recover the capital cost of

each unit. Cadbury does not intend to charge a rental levy for the Cool Unit to its retail customers where high

volumes are purchased as the investment in the Cool Unit will be recovered by the high volume purchased. For

retail outlets where low volumes are purchased, it is intended that Cadbury will charge a cost-effective rental levy

that will aim to recover the cost of the Cool Unit.

 

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result the Agreement does not appear to apply dissimilar conditions to equivalent transactions

with other trading partners thereby placing them at a competitive advantage. This was a concern

in the Masterfoods v HB Ice Cream case.21

 

(d) The Decision

 

26. In the Authority’s opinion, Cadbury Ireland Sales Limited and individual retailers are

undertakings within the meaning of Section 3(1) of the Competition Act, 1991, as amended, and

the notified Agreement is an agreement between undertakings. In the Authority’s opinion the

arrangements did not have, as their object or effect, the prevention, restriction or distortion of

competition within the State or any part of the State and thus does not contravene Section 4(1) of

the Competition Act.

 

The Certificate

The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession,

the standard loan agreement for the Cadbury Cool Display Unit between Cadbury Ireland

Limited and individual retail outlets that attribute most of their turnover to tobacco, sweets and

newspapers notified on 17th July 2000 (Notification No. CA/3/00) does not contravene Section

4(1) of the Competition Act 1991, as amended.

For the Competition Authority

Paul K Gorecki

Member

25 June 2001

21 See Note 9 above.