E-commerce: consumer brands may face greater scrutiny over online sales restrictions

• United Kingdom

• Competition, EU and Trade - Competition e-briefings
• Consumer

11-05-2017

On 10 May 2017, the European Commission published its long awaited final report in its e-commerce sector inquiry. The inquiry was launched in May 2015 to investigate concerns that businesses are restricting online sales with a view to limiting price competition and cross-border trade.

The final report appears to confirm the Commission’s concerns. Practices highlighted by the report as potentially problematic include exclusion of pure online players and the use of pricing software to monitor and adjust pricing.

On the back of the final report, the Commission has made clear it will take further enforcement action.

The Commission has already shown it is serious about stamping out restrictions of online sales, discounting and cross-border sales. In February 2017, the Commission launched investigations in the consumer electronics, videogames and hotel sectors.

This is a change of focus for the Commission, which for many years has pursued ‘horizontal’ cartels between competitors whilst leaving enforcement of ‘vertical’ pricing/resale restrictions to national regulators.

Businesses should take this opportunity to review their practices. The Commission has publicly welcomed that a number of leading clothing and other retail brands have reviewed their practices. Enforcement action is most likely for those businesses that fail to heed the warnings in the report.

Background to the sector inquiry

The inquiry was launched in May 2015 to investigate concerns that businesses are restricting online sales with a view to limiting price competition and cross-border trade.

The inquiry focused on consumer goods including clothing and shoes, consumer electronics, electrical household appliances, computer games and software, toys and childcare articles, media (books, CDs, DVDs and Blu-ray discs), cosmetics and healthcare products, sports and outdoor equipment and house and garden. It also covered digital content (not covered further in this briefing).

During the inquiry, the Commission gathered evidence from almost 1,900 businesses and reviewed over 8,000 contracts.

A preliminary report was published in September 2016. Read our briefing here. The final report largely confirms the findings of the preliminary report.

Consumer goods: main findings of the report

The report confirms that the growth of e-commerce over the last decade has had a significant impact on companies' distribution strategies and consumer behaviour.

The report highlights the following market trends:

• Price transparency has increased with online trade. This allows consumers to find the best deal online. But it may also result in free-riding between channels, if customers go into brick & mortar shops before purchasing products online, or vice versa.
• Price competition has increased both online and offline, as a result of customers’ ability to compare prices of products across several retailers online. Increased price competition is good for consumers. But it may impact competition on quality, brand and innovation.
• Increased price transparently allows businesses to monitor and adjust prices.
  • Two thirds of retailers use automatic repricing software to adjust their own prices based on observed prices of competitors.
  •  Brands can use pricing software to monitor and influence retailers’ prices.
• Online marketplaces are increasingly important. Over 30% of retailers sell via online marketplaces in addition to their own online shops, and 4% of retailers sell only via online marketplaces. Online marketplaces make it easier particularly for small retailers to reach a large customer base.

The report finds that the key brand responses to increased price transparency and competition over the last decide have been:

• 64% of brands decided to sell directly to consumers through online shops, putting them in direct competition with their retailers.
• Nearly 20% of brands set up new selective distribution networks, allowing them to set criteria that retailers must meet in order to sell their products and to prevent those retailers selling to unauthorised resellers. Furthermore, nearly 40% introduced new criteria relating to online sales.

• Some brands have resorted to contractual restrictions such as pricing restrictions, online marketplace bans, restrictions on the use of price comparison tools and excluding pure online players (almost half the brands operating selective distribution exclude pure online players).

The Commission recognises that some of these practices may be justified, e.g. to improve the quality of product distribution. But others may prevent consumers from benefiting from greater product choice and lower prices in e-commerce and therefore warrant Commission enforcement action.

What are the competition concerns?

The report highlights the following potential competition concerns:

• Excluding pure online players from selective distribution networks. The Commission acknowledges that the Vertical Agreements Block Exemption Regulation generally allows a brand to require that retailers operate one or more brick & mortar store(s). However, this may require further scrutiny in individual cases where there is no apparent quality or efficiency justification for the requirement.
• Pricing restrictions. “Various comments from retailers point to recourse to resale price maintenance by manufacturers.”
  • Pricing software makes it easier for brands to detect deviations from recommended pricing and may allow them to punish retailers who discount.
  • Pricing software may even limit incentives for retailers to discount in the first place, and may facilitate or strengthen collusion between retailers. “The availability of real-time pricing information may also trigger automatized price coordination. The wide-scale use of such software may in some situations…raise competition concerns.”
• Online marketplace restrictions. 18% of retailers reported having agreements with suppliers containing such restrictions, ranging from blanket bans on using online marketplaces to restrictions on using marketplaces that do not fulfil quality criteria. The question of whether an absolute ban on using online marketplaces is a ‘hardcore’ restriction on online selling is currently being considered by the highest European Court, with judgment expected imminently. The Commission’s own view is that marketplace bans do not generally amount to a de facto prohibition on selling online and should not be regarded as a ‘hardcore’ restriction of competition.
• Geo-blocking by retailers. The majority of geo-blocking restrictions result from unilateral business decisions of retailers, and the Commission acknowledges that a unilateral decision by a non-dominant retailer does not give rise to competition law concerns. However, 11% of retailers indicated they encounter contractual cross-border sales restrictions, which are problematic.

• Exchange of commercially sensitive data. E.g. pricing or quantity data might be exchanged between marketplaces and third party retailers; or between manufacturers with their own shops and retailers. In either case this can give rise to competition law concerns where those players are in direct competition with each other.

Comment

The Commission has made clear it will carry out further enforcement action of practices that limit consumer choice and prevent lower prices online.

That enforcement action might cover not only clear hardcore restrictions, such as a brand controlling retailers’ prices or preventing retailers making cross-border sales. The enforcement action may also challenge restrictions such as excluding pure online sellers from a selective distribution network, which in principle is permitted under the VBER.

As for repricing software, if used by a brand to monitor and influence a retailer’s pricing, or if used by competing retailers to monitor a price-fixing agreement, this is very likely to be problematic. However, there is a real question as to whether it could ever be problematic for a retailer (acting unilaterally) to use pricing software that ‘learns’ to coordinate pricing.

The Commission is evidently hoping to positively influence businesses’ behaviour, and persuade brands to remove restrictions on online sales and discounting. Interestingly, the Commission makes express reference to those brands that have already reviewed their practices.

Businesses should review their practices now. If they discover restrictions that may be problematic, they can significantly reduce their risk of large fines by removing those restrictions before the Commission inspectors come knocking at the door.