Beer and petrol industries fight to stay ‘vertical’

Date: 19/09/1996

By Tim Jones

THE beer and petrol industries are keeping an unusually close eye on the deliberations of European competition officials.

Since the advent of the single market, every major company has established a presence in Brussels to protect and promote its interests.

But, when it comes to these two industries, the European Commission has the power to do for them what the Bosman case did for football - instigate a revolution.

This is because both industries operate so-called 'vertical restraint' agreements which tie distributors to producers.

This means, for example, that many dealer-owned service stations sell only Royal Dutch/Shell fuel, while Heineken or Interbrew distribute their beers through loan-tied bars in return for marketing assistance.

Normally, this kind of agreement would be outlawed under Article 85(2) of the Treaty of Rome.

However, Article 85(3) allows block exemptions from these rules if the agreement helps improve the distribution of goods in the exempted sectors and ultimately benefits consumers. At the same time, the retailer should also get a specific commercial advantage from the deal.

Such clearance was given to both beer and petrol distribution 12 years ago, but this must be renewed at the end of 1997.

The Commission has drafted a consultative Green Paper on the subject, which is now due for publication in October. This will be distributed to all interested parties, who will then have six months to submit their observations.

Industry observers believe delays in publishing the Green Paper, which was originally due to be approved by the full Commission in June, mean that the block exemption will have to be extended temporarily into 1998 while work on the review is completed.

The Green Paper will contain a summary of the recent approach taken by the Commission and the European Court of Justice to the issue, observations on current trends in distribution techniques and a number of policy options for dealing with vertical restraints in future.

It is common knowledge that many Commission officials are sceptical about the current arrangements, feeling that they are less relevant given the changes that have taken place in various markets over the past decade.

They argue that the creation of the internal market, the end of the Uruguay Round world trade negotiations and new marketing methods have made the need for such deals less pressing.

For example, in the beer industry, some observers and independent landlords feel that the existing arrangements exclude new entrants from the market and make it more difficult for brewers to break into other member states (see table below).

The exemption covers pub or bar tenants/lessees who operate separately from their landlords, but are still obliged to promote and sell their beers. Managed houses are not affected because managers are employees of the brewery concerned.

Loan ties - where brewers make low-interest loans to distributors - are used in Germany, France, Spain, Belgium and the Netherlands. Property ties - where leasehold properties are provided at cheap rents - are also common in Germany, Belgium and the Netherlands.

Independent pub companies which lease their premises want the freedom to be able to buy beer in the free market. More than this, they resent some of the obligations imposed on them by long leases.

For example, in Germany only 2&percent; of the beer available for sale comes from non-German European brewers. Similarly, Denmark, Belgium and the Netherlands are dominated by a single national brewer, while two or three big players have carved up the British market.

“This kind of pattern could be repeated everywhere in Europe if the exemption is lifted,” said a representative of a European brewer. “Look at what has happened in the US and Australia.”

In the US, three giant brewing groups control 90&percent; of the market and a single brand, Budweiser, accounts for half of all sales.

If the exemption is revoked, the brewing companies will no longer be able to rely on selling their products directly to tied tenants and experts warn this could lead to the closure of bars in thinly-populated rural areas and deprived parts of inner cities.

Eric Frankis, a breweries analyst at ABN-AMRO Hoare Govett in London, believes the most likely outcome of non-renewal would be that brewers would cut the price charged to the free-trade level to retain the business and try to offset this with a rent increase.

He warns that any advantage to a free tenant from being able to shop around for beer on the free market could be outweighed by the huge increase in rent which the brewer would be forced to demand to recoup lost income.

UK brewing giant Bass - which recently announced the take-over of Carlsberg-Tetley to control 40&percent; of the British market - is fighting hard to maintain the exemption.

Bass believes that the property tie arrangement, under which brewers are allowed to oblige lessees to sell their beer, should stay.

“It provides consumer choice and choice for small- and medium-sized enterprises, and it provides security for both lessees and brewers without inhibiting market access to new market entries,” says the company.

Arrangements are similar in the distribution of petrol - and the oil companies have the same attachment to the existing system.

Industry lobbyist Europia says that since the early Eighties, fierce competition in the retail sector has enhanced consumer expectations, while investment costs have risen.

“The consequence of these developments is that the retail service station industry needs reassurance that long-term investments will not be threatened and that relations with dealers will remain stable,” said a spokesman.

In other words, maintain the exemption.

Again, the exemption does not apply to company-owned and operated sites but to dealer-owned arrangements. These independent businessmen sign agreements with the oil companies to sell only their brand of petrol.

The advantage to the dealer is that he gets a long-term supply of fuel from a well-established and responsible company. At the same time, he receives marketing support, including help with the sale of motor fuel, and perhaps the provision of a car wash and a shop.

“It would not be in the interests of our marketing strategy if these dealers were selling different brands at the same outlet,” said a representative of a leading European petroleum company. “For companies like ours, the brand is the most precious asset it has.”

The top three international private-sector companies operating this system are Esso, Royal Dutch/Shell, BP and Mobil.

Growing competition in this sector is ensuring increased integration. For example, BP and Mobil recently formed a giant distribution joint venture under which Mobil's 3,300 service stations in Europe will in future be branded in BP green while carrying Mobil fuels.

However, some national markets are dominated by local companies. In Spain, Repsol has 50&percent; of the distribution market and Agip in Italy has 40&percent;, while Fina in Belgium and Elf and Total in France have a major presence in their markets. There are small independent companies, but even they do not buy their fuel directly on the spot market for energy. Instead, they tend to buy from the bulk facilities of the major oil companies.

Once the Green Paper is in the public arena, the industries concerned will begin lobbying the Commission even harder than they are already to ensure that these arrangements survive into 1998 intact.

While the Directorate-General for competition (DGIV) is keeping its cards close to its chest, officials recognise that this could be its last chance for a decade to reform these accords.