COMPETITION AUTHORITY

Competition Authority Decision of 27 July 1999 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/4/99 - Tennant & Ruttle Distribution Ltd/The Wrigley Company Ltd

Decision No. 566

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Competition Authority Decision of 27 July 1999 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/4/99 - Tennant & Ruttle Distribution Ltd/The Wrigley Company Ltd

Decision No. 566

Introduction

1.	Notification was made on 24 May 1999 with a request for a certificate under Section 4(4) of the Competition Act, 1991 or, in the event of a refusal by the Authority to grant a certificate, a licence under Section 4(2) in respect of an agreement between Tennant & Ruttle Distribution Ltd and The Wrigley Company Ltd.

The Facts

(a) Subject of the Notification

2.	The notification concerns an exclusive distribution agreement dated January 12, 1948 whereby Tennant & Ruttle Ltd is appointed the sole distributor for Wrigley’s Chewing Gum within the state.

(b) The Parties Involved

3.	Tennant & Ruttle Distribution Ltd (“Tennant & Ruttle”), Unit 2, Allied Industrial Estate, Kylemore Road, Dublin 10, is a distributor of confectionery and other products in the Republic of Ireland. Other confectionery products distributed include Ferrero, Oatfield, Chupa Chups, Hershey and Lily O’Brien’s. Tennant & Ruttle also distribute, inter alia, Duracell batteries, Douwe Egberts coffee and Capri Sun and Squeez orange drinks. The turnover of Tennant & Ruttle in 1996 amounted to IR£28.8 million, of which IR£12.45 came from Wrigley products. Until recently, Tennant & Ruttle were part of Allegro Ltd. and accounts are not available for 1997 and 1998. The Wrigley Company Ltd (“Wrigley’s”) of Estover, Plymouth, Devon, PL6 7 PR, is a chewing gum manufacturer. It is a subsidiary of the William Wrigley Jr. Company, Chicago. In 1998 the William Wrigley Jr. Company made net earnings of US$304 million on a turnover of US$2,004 million.

(c) The Product and the Market

4.	The agreement relates to the distribution of chewing-gum products. The parties estimate that the Irish market for chewing gum and bubble gum was worth approximately £14 million in 1997. Of this, Wrigley’s products account for over 95%. The main competitors are Warner Lambert, with the Dentyne and Stimorol brands of chewing-gum and the Bubbloo brand of bubble gum, and Leaf, with the Leaf brand of bubble gum. The Hollywood brand is also a competitor.

5.	The notifying party argued that the relevant market was the wider one of confectionery products in general. They stated that the product was sold as a counter-line product in retail shops and clearly competed with other confectionery products such as chocolate, sweets etc. It was interchangeable with sweets, mints, liquorice and chocolate-based products, and was priced in the same broad range. The notifying party stated that the recommended retail selling price of Wrigley’s chewing gum in the Republic of Ireland was close to the sterling prices in the UK, and was therefore cheaper than in the UK taking into account the exchange rate. They argued that this indicated that Wrigley’s were unable to achieve any advantage from having over 95% of the chewing/bubble gum category in Ireland. The price at which Wrigley products were sold in Ireland was influenced by the price of other confectionery products, and Wrigley’s was positioned so as to compete with these products. 

6.	The total confectionery market was worth IR£328m in 1997 (at retail selling prices). Of this amount, IR£100m (30%) was for sugar confectionery and IR£228m (70%) for chocolate confectionery. Of the sugar confectionery products, approximately IR£14m (14%) related to chewing/bubble gum. The notifying party estimated its own share of the total confectionery market, including Wrigley’s products, as 12%. The market leader was Cadbury’s, with 33%, followed by Nestlé/Rowntree with 24% and Mars with 21%. Other companies held 12% of the market.

7.	The Authority considers that the product market in this case is the chewing gum/bubble gum market. The geographic market is the State.

(d) The Agreement

8.	The agreement is an exclusive distribution agreement between Tennant & Ruttle and Wrigley’s. It consists of a letter dated 12 January 1948 from Wrigley’s to Tennants, appointing them as “sole Distributors for Eire for Wrigley’s Chewing Gum”, and a reply from Tennant & Ruttle dated 16 January 1948 agreeing to the terms. The letter refers to a “selling commission” to cover distribution costs, and to various selling prices and terms and conditions. According to the letter, Tennant & Ruttle will distribute to the wholesale trade, and the letter sets out terms for such distribution. It also states Wrigley’s’ understanding of the terms on which the wholesaler will sell to the retailer, and the retailer to the customer, noting that “... as there is no regulation of Wholesaler and Retailer profit, as well as consumer selling price in your country, the margins of profit to the trade will be sufficient.” The letter states that “This agreement will remain in force until March 31st 1948, or such time as the Eire Government determine a new duty or package tax, at which time, the entire agreement will be reviewed.” Tennant & Ruttle is not to handle any competitive lines of chewing gum.

9.	The notifying party has stated that, over time, the practice in relation to the agreement has changed. They state that it is fully understood by The Wrigley Company Ltd. that it is not permitted to determine the prices at which Tennant & Ruttle Distribution Ltd. sells the products or the prices at which the retailer sells the products. Tennant & Ruttle Distribution Ltd recommend resale prices to wholesalers and retailers, and the price list informs the wholesalers and retailers that they are free to set their own resale prices. They supplied a copy of the price list including this notice to the retailer. They pointed out that the price list made no reference to margins arising from applying the recommended price. In addition, there was no requirement that the retailer display the recommended price, and no inducement offered to secure compliance with the recommended price.

10.	The notifying party has stated that the sales by Tennant & Ruttle are made to wholesalers and retailers on a non-exclusive distribution basis. There are no formal agreements with resellers apart from the conditions of sale included with a request for credit facilities. The agreement prevents Tennant & Ruttle from handling any competing lines of chewing gum. The Wrigley company employs four merchandisers in the Irish market. These merchandisers report to Wrigley and are paid by Wrigley. The merchandisers do not take orders; they concentrate on point-of-sale materials and obtaining the most appropriate positions in retail stores. Wrigley is also responsible for the advertising of the products in the Irish market and directly places the orders for advertising.

(e) Submissions of the Parties

11.	The parties stated that the notification arose from the Competition Authority category certificate/licence in respect of agreements between suppliers and resellers. The agreement had been previously notified to the Authority (CA/711/92E). The Authority considered that the agreement came within the scope of its Category Licence in respect of Exclusive Distribution Agreements. It informed the parties accordingly on 13 April 1994. 

Arguments in support of issuing a certificate

12.	The parties submitted that the question of whether a certificate or licence were applicable depended on the definition of the market. If the market were for confectionery products, Wrigley products accounted for less than 20% of the market. If, however, the market were defined as that of chewing/bubble gum, then the category certificate/licence in respect of agreements between suppliers and resellers did not apply. Nevertheless they believed that there was a strong argument for the issue of a certificate. Tennant & Ruttle did not sell competing products. They essentially acted on behalf of the Wrigley company. Because of their other confectionery products, they achieved distribution efficiencies which were passed on to consumers and to Wrigley. Essentially they acted as agents on Wrigley’s behalf. There was no restriction on competition arising from the arrangement with Wrigley. The agreement did not have the object or effect of preventing, restricting or distorting competition and did not contravene Section 4(1) of the Competition Act. 

13.	The parties pointed out that if Wrigley’s were to distribute their own products in the Irish market, there would be no agreement and no need to notify the Competition Authority. The granting of exclusive distribution arrangements to Tennant & Ruttle improved the efficiency in the distribution of goods and services. It enabled manufacturers to concentrate on production while delegating the distribution function to a specialist reseller. Tennant & Ruttle possessed the necessary organisation and dealer contacts. The arrangements facilitated the promotion of sales, the development of intensive marketing and continuity of supplies and they resulted in the rationalisation of distribution.

Arguments in support of granting a licence

14.	The parties stated that, even if there was a market for chewing/bubble gum only, the agreement clearly improved the distribution of goods. A fair share of the improvement in distribution was passed on to consumers. The agreement did not impose on either party any terms which were not indispensable to the attainment of the objectives of improving efficiency and distribution, nor did it afford the undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.

The Assessment

(a) Section 4(1)

15.	Section 4(1) of the Competition Act, 1991 prohibits and renders void 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.

(b) The Undertakings

16. 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 and distribution of goods or the provision of a service.” Wrigley’s is engaged for gain in the production of chewing-gum and is an undertaking. Tennant & Ruttle is engaged for gain in the provision of distribution services and is an undertaking. The agreement is an agreement between undertakings and has effect within the State.

(c) Applicability of Section 4(1)

17.	The question of the effects of vertical restraints on competition has been considered in detail by the Authority in its Category Certificate and Licence in respect of Agreements between Suppliers and Resellers (Decision No. 528 of 4 December 1998). In that decision, the Authority stated its view that, on the basis of current economic thinking, vertical restraints in general should not be considered to be a priori anti-competitive. While negative effects could arise, these were unlikely to have any significant economic effects in the absence of any significant degree of market power at either supplier or distributor/retailer level. The Authority took the view that, where neither supplier nor reseller had a market share in excess of 20% of the relevant market, non-price vertical restraints did not contravene Section 4(1) and were therefore certifiable. Where either party had more than 20%, but less than 40%, of the relevant market, the vertical agreement might have some anti-competitive effect, but nevertheless such arrangements led to improvements in efficiency in the distribution of goods and services, as a rule allowed customers a fair share of the resulting benefit, were normally indispensable to the attainment of these objectives and did not afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question. In these circumstances such agreements were licensable.

18.	As the market is defined as that for chewing gum/bubble gum, the agreement is not covered by either the Category Certificate or Category Licence and must be assessed on its own merits. The case involves a supplier with 95% of the market entering into an exclusive distribution agreement with a distributor which has no other involvement in the market. If the agreement did not exist, Wrigleys could, of course, distribute its own product directly to the shops; however, there are obvious advantages to the retailers in being able to obtain a broad range of products from a single distributor. 

19.	In the particular circumstances of this case, the Authority has come to the conclusion that the agreement does not have the object of restricting competition, and in fact has no effect on competition in the Irish market. It therefore does not contravene Section 4(1) of the Competition Act, 1991, as amended.

(d) The Decision

20.	In the Authority’s opinion, Tennant & Ruttle Distribution Ltd and The Wrigley Company Ltd are undertakings within the meaning of Section 3(1) of the Competition Act, 1991, and the notified agreement is an agreement between undertakings. In the Authority’s opinion, the notified agreement does not have the object or effect of preventing, restricting or distorting competition and therefore does not contravene Section 4(1) of the Competition Act, 1991, as amended.

The Certificate

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 Supply Agreement between Tennant & Ruttle Distribution Ltd and The Wrigley Company Ltd notified to it on 24 May 1999 (Notification No. CA/4/99) does not contravene Section 4(1) of the Competition Act, 1991, as amended.

For the Competition Authority,

Isolde Goggin
27 July 1999