Activity of the AMCU in Retail & FMCG

Sergey Denіsenko, Igor Kalaіda

Retail and FMCG companies affect most Ukrainian customers, and their pricing policies have the potential to impact the budget of any household in the country. Therefore, there is nothing strange about the fact that the Antimonopoly Committee of Ukraine has always paid great attention to businesses operating in retail and FMCG sectors.

Firstly, this is where abuse of the market power or a potential cartel have the most
negative and visible effect. Secondly, it is where the consequences of such abuse have the most potential to influence final customers. Thirdly, it is where the AMCU’s activity is most likely to be noticed by the average citizen, which can lead to a more efficient and thorough investigation but also to hasty conclusions. This article provides examples of both situations while dealing with the latest cases and investigations in the retail and FMCG as well as other relatively similar industries conducted by the AMCU in recent years.

 

Tobacco products. Season II episode I

At the end of 2016, the AMCU delivered its decision in a case on abuse of dominance on the Ukrainian cigarette distribution market. Tedis Ukraine (formerly Megapolis Ukraine) is the only Ukrainian distributor of cigarettes produced by four major tobacco companies (BAT, JTI, Philipp Morris and Imperial Tobacco), which ensures its market share of more than 99%. The AMCU ruled that Tedis Ukraine abused its position during 2013-2015 by performing the following actions:

— reducing the possible markup that can be set by its customers (both wholesale and retail dealers) by increasing its own markup as part of its wholesale prices (the maximum retail prices for cigarettes to be sold on the territory in Ukraine are fixed);

— not taking into account the transport costs of its customers who withdraw the product from the stores on their own (which also caused a reduction in the potential markup by customers);

— setting identical prices for both wholesale and retail traders;

— setting the same prices for the cigarettes purchased by other retail traders and those sold in one’s own retail stores;

— unilateral quantitative restriction of cigarettes that can be purchased by customers — in an  environment where other sources of supply are absent.

The authority imposed a fine of almost EUR 16 million; in addition, it obliged Tedis Ukraine to halt its anticompetitive practices and report to the AMCU on its pricing policies during the next three years (on a monthly basis). As of now, Ukrainian courts are still in the process of reviewing the adopted decision by the AMCU. Tedis Ukraine lost the case in the court of first instance, but then it appealed against the decision in the appellate court.

Following the analysis of the market after the case, the AMCU reported that as a result of its own actions,  total volumes of tobacco products shipped by tobacco producers to market players other than Tedis has risen to 15%.

Moreover, the AMCU recently announced commencement of a case against Tedis Ukraine and major tobacco producers regarding alleged anticompetitive concerted actions. According to preliminary comments by AMCU officials, the respective concerted actions were aimed at the establishment of a monopoly by Tedis Ukraine in 2011-2012. There’s still more to come on this story.

 

Pharma blockbuster

The AMCU completed the case investigation involving Alcon Pharmaceuticals LTD (a Swiss drug manufacturer) and four Ukrainian distributors of its products (BaDM, Venta, Alba Ukraine and Optima-Farm) in September 2016.

The said companies were found to have violated Ukrainian competition law by adopting different approaches to price setting for pharmaceuticals marketed via drug store chains and those sold under public procurement procedures in 2011-2013. The graphs published by the AMCU show the comparison between the nominal value (basic price stipulated in distribution contracts), the price at which the drugs are sold at drug stores and the price indicated during public procurement procedures. Notably, almost all of Alcon’s products marketed at drug stores were sold at a price lower than the nominal value (due to a discount system) — while the price of pharmaceuticals procured for budget funds significantly exceeded it.

For having applied different approaches to the price setting, the Swiss company and its Ukrainian counterparts have been obliged to halt the violation and pay a fine running to a total of EUR 55,000.  Notably, most companies involved paid the fine immediately after the AMCU had delivered its decision. The only company to bring a case to court has been BaDM; however, the court confirmed the AMCU’s findings in February 2017. 

Moreover, in mid-November 2017, the AMCU imposed fines on BaDM, Optima-Farm and Sanofi-Aventis Ukraine (the sole importer of pharmaceuticals produced by Sanofi). The total sum of fines for the violations that occurred during 2010-2011 amounted to almost EUR 5 million.

According to the AMCU, markets impacted by concerted actions involved 174 pharmaceutical products mostly used to treat arrhythmia, epilepsy, diabetes, and cancer diseases, as well as a number of over-the-counter drugs popular among Ukrainian customers. Of those 174, 27 did not have any substitutes on the market.

Parties’ terms and conditions in distribution contracts raised serious concerns. Such conditions include rebate schemes that have endorsed the distribution of pharmaceuticals which have already lost their patent protection and have many generic (and cheaper) substitutes. The AMCU concluded that the terms and conditions of such agreements may lead to the restriction of competition and prevent market access to generic products. Moreover, the violations also enabled Sanofi to set higher prices for its products during public procurement procedures.

By imposing the fines, the AMCU also took into account the social-economic effect of violations and ruled that “pharmaceutical products are socially important and any restriction of competition on these markets has a significant negative impact on the end customer”. All the parties have recently brought a case to court. However there has been no decision on the merits yet.

 

Never ending story of fuel and gas

In October 2016, the AMCU delivered its decision in the “fuel retail case”, which ended with the imposition of fines on six Ukrainian fuel station operators. The fines came to EUR 7.3 million in total.

The AMCU concluded that the operators of fuel marketed under the brands WOG, OKKO, Shell, Amic (formerly Lukoil Ukraine), Socar and Parallel had been implementing anticompetitive concerted actions during the period from January 2013 to January 2016.
In the AMCU’s view, the concerted actions were committed by means of simultaneous setting of the same prices at fueling stations; once one of the operators put up its retail prices for diesel fuel and 95 RON petrol, the others did so on the same or following day — while there had been (according to the AMCU) no objective reasons to do so.

Fuel retailers have also been accused of elaborating a non-transparent discount policy for individual customers. The AMCU designated various loyalty schemes as too difficult, making it impossible for customers to calculate the final price before choosing a certain brand of fuel. Moreover, the AMCU stated that by applying such difficult-to-predict discount schemes, operators partly sold the fuel at prices significantly lower than those indicated on information displays, thus avoiding fair price competition.

None of the undertakings concerned agreed with the AMCU’s findings. The decision has been criticized by relevant business players for several reasons: firstly, because of “not taking into account objective reasons for the price setting, such as devaluation of national currency and fluctuations on worldwide market of oil products”. Furthermore, the operators insist that the mere fact of simultaneous price correlation between undertakings does not necessarily represent an evidence of a cartel and parallel price setting “is common for civilized high-competitive markets and should not be confused with concerted actions”.

Furthermore, the AMCU also did not omit the dramatic increase of prices on gas fueling stations that took place in late summer of 2017. Several market players (including OKKO, WOG and BVS) are threatened with significant fines for the parallel hike in gas prices that amounted to almost 30-40%. According to the AMCU’s representatives, the regulator has already sent its preliminary conclusions in the investigation to the parties. It is anticipated that the hearings in the respective case will be scheduled for the beginning of March 2018.

 

End of retail case saga

A famous retail cartel case was initiated by the Antimonopoly Committee of Ukraine against 18 major Ukrainian food retail chains in 2013. The case is among most notable cases initiated by the regulator over the last few years due to the number of case participants and the amount of fines applied. Following the two year investigation by the AMCU and two and a half years of court proceedings, the respective decision of the AMCU has been successfully challenged by the majority of respondents in the case.

The AMCU failed to prove collusion by the parties via exchange of information through a professional marketing company which led to parties having access to sensitive commercial information of each other, enabling them to adapt their market behavior and change strategic plans based on such information.

The accusations made by the regulator that the practices of retail chains in dealings with suppliers with regard to contractual provisions on post payment, return of products as well as conclusion of marketing contracts leading to a rise in prices of goods appeared to be groundless.

Currently, two retail chains are retrying the case with the AMCU. However, in view of the fact that both the first and second court instances were in favor of retail chains, it is very likely that the AMCU will not ask for further cassation. 

One of the biggest triumphs of the retail cartel case is the practical rebuttal by  market players of the known presumption of the Antimonopoly Committee’s superiority in courts.

 

Sergey Denisenko, counsel at Aequo

Igor Kalaida, associate at Aequo