COMPETITION AUTHORITY

Competition Authority Decision of 12 December, 1996 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No CA/833/92E - Bewleys Coffee Machines 2.

Decision No. 473

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Competition Authority decision of  12 December 1996 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification no. CA/833/92E  ‑ Bewleys Coffee Machines 2.

Decision no. 473

Introduction

1.	This decision involves a standard loan agreement relating to the use of Bewleys coffee machines by caterers, etc. The agreement was notified on 30 September, 1992 by Bewleys Coffee Ltd with a request for a certificate under Section 4 (4) of the Competition Act, 1991 or, in the event of a refusal by the Competition Authority to grant a certificate, a licence under Section 4 (2). 

The Facts

(a) The subject of the Notification

2.	The notification concerns a standard coffee machine loan agreement between Bewleys Coffee Ltd, the owner and supplier of the coffee machines, leased out by the company to various customers in the catering industry and also for the provision  of coffee for use in those machines. In effect this agreement relates to 'medium and large' coffee machines, while a separate agreement relating to small machines was the subject of a separate notification.  

(b) The parties involved

3.	Bewleys Coffee Ltd is a wholly owned subsidiary of the Campbell Bewley Group Ltd. The Group is involved in various businesses including contract catering, the operation of retail shops and cafes and in the wholesale supply of coffee, tea, and speciality breads and confectionery.  Bewleys cafes were first opened in 1840 and now there are 21 Bewleys cafes, five of which are owned by the Group and the rest are franchisees using the Bewley’s name.  The Group also has a “Coffeeman” franchise in the U.K. which operates as suppliers of coffee and dispensers to restaurants and offices.  The Group is also involved in three joint ventures, one with Aer Rianta to operate a catering business, one with Butlers Irish Chocolates and one to market Bewleys Irish Creme liquer in the USA. It had other catering contracts abroad in the Middle East.  Bewleys Hotel, a 70 bed hotel was recently opened by the Group.  The services division of the Group is responsible for the retail and catering contracts and accounts for four fifths of its turnover.  The products division oversees the wholesale coffee and tea business, accounting for the balance of the Group’s turnover.  The turnover for the Campbell Bewley Group for the year ending December 1994 was £55m.  The other parties to this standard agreement are the hundreds of customers in the catering industry such as cafes, hotels, pubs, restaurants, offices and shops. 

(c) The products and the market

4.	The products involved in this notification are coffee machines for use in the catering business such as cafes, pubs, restaurants, hotels, offices and shops and the supply of  ground coffee for use in those machines. There are  a number of other suppliers of machines and ground coffee operating in the market including Robert Roberts, Douwe Egberts, Melita and Johnson Bros. as well as a number of smaller suppliers. New suppliers can enter this market easily as the cost of the machines is not prohibitive and supplies can be obtained both within the State and from outside.  While there are different brands of ground coffee competing with each other and acting as substitutes for each other, the caterer who enters a loan agreement for the use of a specific coffee machine is restricted to using the brand of ground coffee supplied by the company that owns the machine, for use in that particular machine. The average order per month for customers with the medium sized machines is 2.5 cases (or 30 per year) and the average order per month for customers with the larger machines is 7 cases per month (or 84 per year). 

5.	The market in this case is that of the supply of coffee machines and ground coffee for use by the catering trade in the State.  Bewleys have estimated that their share of the market for roast and ground coffee, (that is all catering outlets that sell roast and ground coffee and not just outlets that have machines provided by a supplier on similar terms, but relates to all ground and roast coffee consumed away from home), is [  ]%, Robert Roberts is [  ]% and that Douwe Egberts, Melita and Johnson Bros. together have [  ]%. The share held by other competitors in this market is said to be insignificant. Bewley’s estimated their share of the entire market for catering coffee (including roast, ground and instant catering coffee) to be [   ]%.  Bewleys have also estimated their turnover from the relevant market as £[   ] million, Robert Roberts as £[    ] million and Douwe Egberts, Melita and Johnson Bros. together as £[    ] million in 1991. According to the Annual Services Inquiry for 1991 there were 6,450 public houses and off-licences, 1,050 hotels and guesthouses and 1,292 restaurants and cafes operating within the State.  Bewley’s stated that they have agreements with approximately 2,600 users for their various types of coffee makers.  

(d) The agreement

6.	The agreement is a standard loan agreement for the supply of (medium and large) coffee machines to customers in the catering industry and for the exclusive use of Bewleys ground coffee in those machines. The coffee machines remain the property of Bewleys. The customers also agree to purchase a specified minimum amount of coffee - an average of 2.5 cases per month or 30 per annum for medium sized machines and 7 cases per month or 84 per year for larger machines - from the company. Each case of coffee contains 5 kilograms and this yields between 480 and 720 five fluid ounce cups depending on the strength of the coffee required by the customer. Under the agreement the customer is prevented from using any other brand of coffee, except those supplied by Bewleys, in their machines.  The machines must be insured by the customers for a specified amount while on their premises, Bewleys will install, test and service the equipment. The payment term specified is [   ] days. If the premises changes ownership, then the customer is required to inform the supplier in advance. Clause 9 of the agreement provides for a duration for the agreement.  However, in practice, Bewleys do not insist on compliance with this provision with the result that its customers are not required to take the machines for any minimum or maximum period.  The agreement can be terminated by the supplier without notice if the company is wound up, goes into liquidation, an order is made against the goods of the customer, etc. then the supplier has the right to enter the premises and repossess the equipment. Bewleys has concluded agreements with hundreds of customers [     ] for the medium and larger coffee machines and ground coffee and they expect to conclude agreements with many other customers in the future. The cost of the coffee machines to the company is £[      ] for the medium one and £[     ] for the larger machine. 

(e) Submissions of the parties

7.	Bewleys submitted, in support of their request for a certificate, that the arrangements did not have the object or efect of preventing, restricting or distorting competition since the agreement did not foreclose competition as the customer was free to terminate the agreement at any time and enter into a similar arrangement with another supplier. In particular, in respect of the agreement for the larger machines,  the practice was that the provisions of clause 9 were not completed. Bewleys did not require its customers to take the machines for any fixed period of time. If a customer requested them to remove the machine supplied by them, they would do so immediately. They asserted that the restriction only applied to the use by the customer of Bewleys coffee in Bewleys machines, which were supplied to the customers free of charge. The customer was free to use other brands of coffee in its business, but not in the equipment supplied by the company. They maintained that there was strong competition in the market for the goods and services provided. Bewley's stated that they were not rigid in their application of the minimum purchase requirement for supplies of coffee and they said that they would look at a purchaser's orders over a twelve month period. The level of the minimum order was dependent upon the size of the coffee machine and the minimum purchase order was calculated by reference to the cost of the machine. They also maintained that they would generally continue with an arrangement where a customer had complied substantially with the minimum purchase requirement. Bewley's also supply ground coffee to customers who do not have an agreement with the company and who own or lease their their own machines (other than from Bewleys).  

8.	They submitted that the provisions of EC regulation 1984/83 applied to the restrictions contained in the agreement, since only two undertakings were involved,  the re-seller agreed to purchase certain specified goods for resale from the supplier, the re-seller undertook to purchase minimum quantities of the goods and the agreement was of short-term duration in that it was terminable by the purchaser merely by ceasing to order the goods from Bewleys and returning the equipment. 

Assessment

(a) Section 4(1)

9.	Section 4(1) of the Competition Act states that `all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State are prohibited and void'.

(b)	The Undertakings and the Agreement

10.	 Section 3(1) of the Competition Act defines an undertaking as `a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.' Bewleys Coffee Ltd is engaged inter alia for gain in the business of the roasting, blending and packaging of coffee for supply to the catering trade and retail outlets. The other parties include cafes, pubs, restaurants, etc.  who are engaged for gain primarily in the catering industry. Consequently, they are all undertakings within the meaning of Section 3(1) of the Competition Act. The agreement is therefore an agreement between undertakings.  

(c) Applicability of Section 4(1)

11.	The notified agreement constitutes a standard agreement for the loan of equipment, namely a coffee machine, from the supplier to the customer for use in the catering trade. The supplier has many hundreds[     ] of such agreements. As part of this agreement, the customer is required to purchase a minimum quantity of one of the supplier's products, that is 2.5 cases for medium sized machines and 7 cases for the larger machines of ground coffee, for use with the coffee machine. No other brand of coffee can be used with the coffee machine provided by the supplier except the supplier's own brand of ground coffee. The supplier has provided the equipment at no charge to the customer as part of the arrangements. The customer is not prevented from selling other brands of coffee from their premises, provided the supplier's equipment is not used for this purpose.  The clause (9) relating to the duration of the term of the agreement was usually not completed, but the notifying party has stated that the agreement can be terminated at any time by the customer. They also claimed that the EC Regulation No. 1984/83 applied to the arrangements, but the Authority does not accept this claim since the product purchased from the supplier is not re-sold as a product as such, but is re-sold for consumption on the premises of the customer as part of a service. 

12.	The primary purpose of the arrangements is to enable Bewleys to sell its ground coffee, and simultaneously, the image/reputation of its product, to as many catering premises as possible for onward sale to the public. Bewleys has supplied a coffee machine to the caterer for this purpose at no charge and in return, Bewley's requires the caterer to use only Bewley's brand of ground coffee in this machine. This exclusivity requirement (clause 3), that only Bewley’s coffee is used in Bewley’s coffee machine, is necessary to guarantee that the coffee-consuming public is actually being served Bewley’s coffee and not another competitor’s brand of coffee. This provision cannot be viewed as being a restriction on competition since neither Bewley’s nor the consumer could otherwise be certain that the coffee being served is actually Bewley’s coffee, as claimed by the caterer, and not some other brand.  If an alternative brand of coffee of a lesser quality was served from Bewley’s coffee machine, it would mean that the image and reputation of Bewley’s coffee would be damaged as a result. The caterer benefits from this arrangement by having a well-known quality coffee brand available on their premises as part of their service. The objective of this provision is to protect the image and reputation of the supplier’s product and the supplier’s property and therefore it is not anti-competitive.  

13.	The exclusivity requirement does not prevent the caterer from purchasing and serving any other brand of coffee from the premises, but is merely prevented from using it in the coffee machine supplied by Bewley’s. If the caterer is not satisfied with the arrangement with Bewley’s, then there are other suppliers competing in this market who can offer an alternative option.  The cost of purchasing a coffee machine is not prohibitive and machines may also be leased out from catering equipment suppliers. The agreements do not, in the Authority’s opinion, result in the foreclosure of a significant segment of the market.  In Delimitis the European Court of Justice held that exclusive purchase agreements should not be regarded as anti-competitive unless they contributed to the foreclosure of the market.  In some cases, it might not be economical for the caterer to have two coffee machines operating in the same premises.  In general, however, the relatively small size of the machines means that it would be relatively easy for an outlet to install a second machine.  Competition is not restricted because the caterer is not tied to the agreement and can terminate it at any time and acquire another coffee machine and another brand of coffee.  In the High Court in 1992, Justice Keane in his judgment in the Mars Ireland v. H.B. Ice Cream concluded that where a freezer cabinet had been provided free of charge to retailers by H.B. for the storage of its products, H.B. were entitled to prevent competitors from benefitting from the cabinet arrangements, which he considered was an infringement of H.B.’s property rights.  

14.	The caterer is also required to purchase a minimum quantity of the supplier's product monthly. The level of the minimum order is dependent upon the size of the coffee machine (an average of 2.5 cases per month for medium sized machines and 7 cases per month for larger machines) and the minimum purchase order is calculated by reference to the cost of the machine to Bewley's.  The company has stated that they do not stick rigidly to the specified quantity, but would take the customer's previous record into account. There is no charge to the caterer for the use/lease of the equipment from Bewley's, and the supplier obtains a return on its investment, i.e. the coffee machines, in the form of the (minimum) orders for its ground coffee it receives from its customers. This minimum requirement is not prohibitive given the possibility that the caterer can terminate the agreement at any time if dissatisfied with it. The minimum monthly order for the medium sized machines would yield a maximum of 1,800 cups of coffee and the minimum monthly order for the larger machines would yield a maximum of 5,040 cups of coffee.  This would appear to be a relatively small amount for any catering establishment and so the minimum order would not appear to exclude the likelihood of other brands of coffee being used in other machines.

15.	Bewleys maintain that they have  [   ]% of the market for the consumption of roast and ground coffee outside of the home and [   ]% of the market for all catering coffee. The remainder of the market is comprised of Robert Roberts with [   ]% and Douwe Egberts, Melita and Johnson Bros. together have [  ]%. Bewley’s have [    ] agreements for the smaller coffee machines and [      ] for the larger machines. Given that the numbers of public houses and off-licences were 6,450, hotels and guesthouses were 1,050 and restaurants and cafes were 1,292 in 1991, and assuming that these numbers may have increased since then, it is unclear how Bewley’s estimated their share of this market. By its own reckoning, Bewleys has three times the market share of its nearest competitor and three times the market share of the next four competitors combined for ground and roast coffee.  While Bewleys may have a large share of  this market, the agreements cannot be taken as a restriction on competitors entering the market since the terms of the standard agreement do not bind the caterers to Bewley’s as they are free to terminate the agreement at any time.  Consequently, the arrangements do not prevent, restrict or distort competition in the State and therefore do not offend against Section 4(1) of the Competition Act, 1991. 

The Decision

16.	In the opinion of the Authority, Bewleys Coffee Ltd and its customers in the catering trade are undertakings within the meaning of Section 3(1) the Competition Act, 1991 and the notified coffee machine loan agreement is an agreement between undertakings. In the Authority's opinion, the notified agreement does not offend against Section 4(1) of the Competition Act, 1991. 

The Certificate

17.	The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the coffee machine loan agreement between Bewleys Coffee Ltd and its customers in the catering trade notified under Section 7 (1) on 30 September, 1992 (notification no. CA/833/92E), does not offend against Section 4 (1) of the Competition Act, 1991.   

For the Competition Authority

Patrick Massey
Member
12 December 1996.