Top firms’ sales tactics under scrutiny

Date: 09/09/1999

By Renée Cordes

A DECADE ago, Coca-Cola Co. promised EU anti-trust regulators that it would not offer rebates, discounts and other financial incentives to wholesalers for bumping competitors' beverages off their shelves to make room for Coke products.

That legally binding pledge has come back to haunt the US drinks maker, whose UK bottling unit, Austrian subsidiary and main bottlers in Germany and Denmark are under investigation by EU competition officials for allegedly establishing such schemes in several countries. These investigations have been prompted in part by complaints from rivals, although Coca-Cola has repeatedly denied any wrongdoing.

If found guilty of anti-competitive practices, Coca-Cola faces a fine of up to 10% of its annual revenue. That would be a severe blow to a company which only last week warned that third-quarter earnings would fall short of profits as it seeks to recover from a contaminated drinks scare that forced it to recall products across Europe. It was the fifth quarter in a row for which analysts have had to lower earnings forecasts.

The company is also under investigation separately by national competition authorities in Italy and Austria, although EU regulators point out that those cases involve rebate schemes at purely national levels as distinct from those allegedly orchestrated from company headquarters in Atlanta.

As European Commission officials spend the next few months sifting through more than 10,000 pages of documents in the Coca-Cola case, the message for market leaders in any industry is increasingly clear: good salesmanship is fine, but if you are already at the top of your sector, then it might get you into trouble.

Although it has long been common practice for manufacturers or others to induce wholesalers to buy their goods in bulk by offering rebates and other rewards, it is considered illegal if the company offering these incentives enjoys a dominant position - generally a 40% share or higher tends to raise eyebrows - and offers these incentives to discourage the wholesaler from selling a competitor's goods.

"Rebates is a very old bee in the Commission's bonnet," said Julie Nazerali, a competition lawyer at Beachcroft Wansbroughs. "But it is now looking at these practices in more detail."

The investigation into Coca-Cola is just one in a string of recent cases in which European dominant market players have come under fire for trying to undercut competitors through attractive offers to loyal customers, which regulators fear hurt consumers in the long run.

In 1997, the Commission fined Irish Sugar €8.8 million for allegedly abusing its dominant position in the Irish market by, for example, offering rebates to major food wholesalers. The Commission is now investigating Belgium's Interbrew, whose premises it raided this summer, amid allegations that the private brewer has been staving off competition in its home country by rewarding loyal customers with discounts and selling below market prices. The European Court of Justice will also decide in the coming months whether Unilever's exclusivity contracts with Irish ice-cream vendors violates EU competition law.

These kinds of practices are, of course, not limited to fast-moving consumer goods.

In July, the Commission fined British Airways €6.8 million for offering travel agents commission which, according to the institution, unfairly restricted sales by other firms. Officials said the rebate scheme discouraged travel agents from selling other airlines' services and warned that others running similar schemes could face similar fines.

Air carriers Alitalia of Italy and KLM of the Netherlands, which received EU clearance for their alliance last month, had to promise to refrain from tying in travel agents and corporate customers in Italy and the Netherlands with loyalty or other similar rebate schemes.

"Companies who have significant market shares have been put on notice that they have to be a little bit more careful as to how they structure distribution networks," said Fiona Carlin, a competition lawyer at Oppenheimer Wolff & Donnelly.

In Coca-Cola's case, the Commission is examining several kinds of incentive schemes. These include discounts for achieving a certain level of sales or growth, and those awarded on condition that the purchaser buys the entire range or a certain minimum amount of Coca-Cola products and/or reserves a certain proportion of total soft drink shelf space for Coca-Cola products. The Commission is also scrutinising supply agreements which force suppliers to sell Coca-Cola products exclusively, either on store shelves or from soda dispensers.

Outgoing Competition Commissioner Karel van Miert issued a stern warning to the American drinks giant after EU trust busters carried out dawn raids this summer on Coke's main bottling plants in the UK, Austria, Denmark, and Germany, prompted by complaints from rivals Virgin Cola and PepsiCo.

"A dominant company on any market cannot indirectly bully competitors by pushing its customers to buy less of the competitors' products," he cautioned. "The only rebates or incentives which a dominant company may grant are rebates which pass specific savings on to its customers."

A spokesman for Van Miert said that if Coca-Cola was able to stop competitors from selling their products, it would enjoy greater leeway in setting prices for Coca-Cola's goods, "which means that long term, consumers end up paying more".

The burden of proof rests entirely on the Commission to produce evidence of wrongdoing. But legal experts warn that it will be far from easy to assess the impact of such schemes on consumers. They warn that it may be difficult to prove that shoppers suffered financially from the company's actions, at least in the short term.

"It is arguable that the Coca-Cola rebates make market entry more difficult for others," said one. "It is quite hard to say that consumers actually suffered as a result of this. The Commission will have to look at this longer term. If Coca-Cola is successful then, over the long run, they will be able to ultimately increase prices."

Although it remains to be seen whether incoming Competition Commissioner Mario Monti will show the same zeal in quashing anti-competitive practices as his predecessor, there is no doubt that he will continue the fight he began five years ago when he took charge of the internal market dossier to ensure a competitive, functioning European single market.

Monti told members of the European Parliament's economic and monetary affairs committee last week that he intended to safeguard consumers' rights, as well as explaining to them more clearly how EU competition policy benefits them in their daily lives. "The best way to protect the citizen and the consumer is to ensure that markets work well in a spirit of competition," he said.

What better way to do that, say legal experts, than to ensure consumers get as wide a range as possible of goods and services from which to choose.

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