European Union: European Commission E-Commerce Report: Greater Reliance On Selective Distribution And Possibility Of Enforcement Action For Restrictions Of Online Sales

The European Commission recently published the much anticipated preliminary report in its e-commerce sector inquiry. The report was initiated in response to rapid growth in online sales activity over recent years and signals renewed commitment on the part of the EU in enforcing competition rules in the e-commerce sector.

  • Introduction
  • Consumer goods
  • Digital content

Introduction

The report identifies two clear trends as consumer goods manufacturers react to this growth: (i) they are looking to vertically integrate; and (ii) they are increasingly relying on selective distribution networks.

The Commission has also uncovered evidence of widespread contractual restrictions affecting online sales which give rise to serious competition law concerns and which are likely to be the subject of further enforcement action following completion of the inquiry.

This newsletter summarises the findings of the report, dealing separately with: (1) Consumer goods; and (2) Digital content, both of which we consider will be of interest to Japanese companies, especially in consumer, manufacturing and online sectors.

The Commission's findings follow engagement (in the form of questionnaires) with a large number of retailers (both on and offline), manufacturers, online market places, price comparison websites and payment service providers.

Consumer Goods

Parameters of competition and the manufacturers' response to increased online activity

The Commission examined the parameters of competition in consumer goods e-commerce and it found, perhaps unsurprisingly, that whilst product quality is perceived as the key differentiator by manufacturers, retailers view price as the most important parameter of competition.

Nonetheless, the inquiry revealed a range of concerns about the impact of online sales growth on pricing, with two clear trends emerging:

  • first, many manufacturers have chosen to vertically integrate in order to both compete and retain control of their product offering downstream; and
  • second, manufacturers are increasingly implementing selective distribution networks or toughening up their criteria for admitting distributors to an existing selective network.

Increased vertical integration

Vertical integration is a common response amongst manufacturers to increasing online activity downstream. It allows them to benefit from that growth and to claim back some control over downstream pricing. For example, sixty-four percent (64%) of manufacturers have opened an online shop over the last ten years as a reaction to the growth of e-commerce. This trend is particularly marked in relation to the supply of cosmetic and healthcare products, where 85% of manufacturers are vertically integrated to some extent.

Growth in selective distribution

Manufacturers are also turning to selective distribution in response to online growth in order to protect their market positioning, preserve brand image or to ensure that the online sales environment reflects the reputation of their brand.

Over half of manufacturers now use a selective distribution network and such networks are being used to distribute a greater range of products than before.

The Commission saw evidence of a wide range of selection criteria being used, including requiring manufacturer approval for promotional or marketing campaigns, or committing not to sell online or via discount websites, third party platforms or price comparison websites.

Some of the practices observed raise important competition law questions which the Commission is likely to examine as part of separate future investigations. For example some manufacturers operating selective distribution networks may not be applying their selective criteria fairly or uniformly to all discount retailers, even if such retailers were to satisfy all relevant selection criteria.

Other distribution models

The report also points to interesting changes in the channel mix used by retailers. In particular, some pure online retailers are increasingly looking to open physical stores, in part to allow consumers to collect products ordered online, but also to obtain supplies from manufacturers that refuse to deal with pure online retailers.

Half of manufacturers also use exclusive distribution to some extent, but they do so on a targeted basis, for example in particular territories or for particular products, rather than systematically across their business.

Distribution via an agency model was found to be very rare, although less so in respect of the distribution of clothing and shoes.

Restrictions of online sales

A range of restrictions of online sales were identified and retailers reported that a number of such restrictions were imposed upon them contractually:

  • 42% of retailers reported being subject to contractual pricing limitations or recommended resale pricing;
  • 18% reported being prevented contractually from selling on marketplaces;
  • 8 – 11% reported being prevented contractually from selling cross-border; from selling on their own website; from appearing on price comparison websites; or from advertising online.

Many such restrictions give rise to potential competition law concerns and may be the subject of further enforcement activity by the Commission following the conclusion of the current inquiry. Some of these restrictions are considered further below.

Contractual restrictions on cross-border sales

Contractual restrictions on cross-border sales were observed in all product categories considered by the Commission and ranged from outright bans on retailers selling outside of a given territory to less direct measures such as obligations to translate the retailer's website into the languages of all territories where goods will be resold.

Such restrictions are likely to infringe competition law and further enforcement action by the Commission seems likely.

Contractual restrictions on selling via marketplaces

Contractual restrictions on selling via marketplaces ranged from outright bans to restrictions on sales via marketplaces that do not meet quality standards. Around half of respondents to the Commission were aware of many such restrictions in operation. Justifications put forward by manufacturers in relation to such restrictions included the need to protect brand image, the need to combat the sale of counterfeit goods and the need to provide adequate customer service.

The report acknowledges the current uncertainty in Europe about the compatibility of such restrictions with competition law and the fact that a preliminary ruling from the Court of Justice has been requested by a German court called upon to consider the question (Case C-230/16 Coty Germany GmbH v Parfümerie Akzente GmbH).

Whilst the Commission does not condone all such marketplace bans, it does take the view that each must be considered on its specific facts.

Contractual restrictions on selling via price comparison websites

Some restrictions prevent promoting via price comparison websites or prevent retailers from actively providing pricing data to such websites or using the manufacturer's brand name on price comparison websites.

Although the Commission notes that such restrictions limit retailers' ability to use this avenue to promote their goods, the report also acknowledges that price comparison websites are not a sales channel in themselves and there is little indication that the Commission intends to take further enforcement action.

Pricing restrictions

Retailers reported that the practice of manufacturers recommending a resale price is common. Whilst not problematic in itself, this practice can give rise to competition concerns if this also involves monitoring of the retailer's pricing by the manufacturer, or pressure from the manufacturer to adhere to those recommended prices.

The Commission saw evidence of widespread monitoring of retail pricing by manufacturers and of adherence by retailers to manufacturers' recommended pricing. Arrangements of this nature give rise to a clear concern that manufacturers and retailers may be engaging in resale price maintenance in breach of competition law and the Commission is likely to pursue enforcement action in this area.

Digital Content

The Commission also sought engagement from digital content providers, including broadcasters, mobile and web TV operators, and rights holders such as producers and media agencies.

The report identifies three particular trends in the provision of online content services:

  • online transmission creates opportunities by allowing for lower transmission costs;
  • online transmission allows user interfaces via multiple devices; and
  • online transmission is leading to innovation and experimentation.

Nonetheless, the key driver of competition in relation to the distribution of digital content remains content quality. Digital content providers therefore reflect consumer demand for quality content into upstream wholesale demand for that content and yet the terms on which such content is licensed remain largely unchanged.

In particular, contractual restrictions on licensed transmission technology, release timing and licensed territories are still common which may make it harder for new entrants to secure content licences. Furthermore, many providers are required by right holders to prevent access from users in other EU Member States by means of geo-blocking.

The duration of many current licensing agreements, coupled in particular with provisions permitting automatic renewal or first negotiation rights, may also act as a barrier to new entry.

The Commission appears to recognise the complexity of the distribution of digital content online and the need to consider each case on its specific facts. Further enforcement action in relation to potential competition infringements isn't ruled out.

Competition Commissioner Vestager has stated publicly that she is considering opening an investigation into the alleged geo-blocking of online video games. However, considerably less is said in the report about enforcement action in relation to digital content than is said about possible infringing conduct in relation to the online distribution of consumer goods.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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