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The Competition Authority imposes a ISK 315m administrative fine on Hagar for serious violations of the Competition Act

12/19/2008

Hagar_logoThe decision of the Competition Authority, published today, states that Hagar (operator of the Bónus retail chain, among others) has abused its market-dominant position through actions directed at the company's competitors in the food retail market. The Competition Authority is of the opinion that Hagar's violation of Article 11 of the Competition Act is serious and of such a nature as to cause considerable competitive damage to the economy and the general public.

The investigation of this case began in the middle of  2006, after the Competition Authority had obtained opinions and received information about Hagar's alleged violation of Article 11 of the Competition Act (cf. further discussion below).

Hagar in a market-dominant position:
Article 11 of the Competition Act prohibits any form of abuse of a market-dominant position. In order for this provision to apply, the competitive market relevant to the case in question must be defined and the position of undertakings in the market assessed. Hagar, during the conduct of the case, has categorically denied that it holds a market-dominant position. As a result, the Competition Authority was required to examine this point. The decision contains a detailed analysis of the food retail market.

The Competition Authority has reached the conclusion that the market in this case involves the sale of groceries (i.e. goods that meet the daily requirements of consumers) in grocery stores. Hagar's opinion that fast-food outlets, petrol stations, sweet stores, bakeries and other specialist stores should be regarded as Hagar's competitors was not accepted, as such stores do not meet the general consumer requirements for a wide range of groceries. The geographic markets considered in the case are the Reykjavík metropolitan area and specific areas in the rest of the country. The Competition Authority's decision examines the market share of Hagar, Kaupás (operator of Krónan and Nóatún, among others), Samkaup and other competitors in this market. The Competition Authority's investigation revealed that Hagar holds a dominant position as regards market share. At the close of the investigation period, Hagar held a share of approximately 50% in the entire country. Hagar's share, moreover, has grown considerably in recent years at the expense of other competitors. The company had a market share of approximately 60% in the Reykjavík metropolitan area. The market share of the company's competitors was much less. In light of this market share, it is the assessment of the Competition Authority in this case that Hagar holds a market-dominant position.

Illegal predatory pricing – serious violation of Article 11 of the Competition Act:
Hagar's violation of the Competition Act consists in the predatory pricing that the company employed in 2005 and 2006. ‘Predatory pricing' is, in general terms, a type of conduct where a market-dominant company sells goods for less than their cost price. Such unnatural pricing can have the effect that small competitors are driven out of the market or that they shy away from price competition with the dominant company. Even if consumers enjoy short-term benefits by obtaining goods or services at very low prices, the disruption to competition caused by such unnatural price reductions by a market-dominant company generally results, in the long term, in fewer competitors, higher prices for consumers, less service or lower quality, and a smaller range of goods for the consumer to choose from. The purpose of the Competition Act is to ensure active competition for the benefit of the consumer in the long term.

Hagar's violation:
Hagar's violation occurred during a price war between low-price stores that began at the end of February 2005 when Krónan, owned by Kaupás, announced price reductions of up to 25% in the most common grocery categories. The representatives of Krónan stated that these price reductions were in order to establish more active competition on the food retail market. Hagar responded with a public announcement to the effect that Bónus would “protect their territory” and stand by its pricing policy of always offering the lowest prices in the market. The price war subsequently broke out, and was most pronounced in the pricing of dairy products. The price war continued into 2006.

The Competition Authority collected extensive data on the sale and pricing of dairy products during this period from Hagar, Kaupás, Samkaup and MS Iceland Dairies (Mjólkursamsalan).

This investigation showed that Hagar abused its market-dominant position by selling milk and dairy products for less than cost price in Bónus stores. The principal dairy products were sold with considerable margin loss. This meant that the Bónus stores as a whole were operating at a loss. Hagar has stated in the media that its loss from the price war amounted to approximately ISK 700m. Therefore, it is the opinion of the Competition Authority that the pricing involved illegal predatory pricing and that the conduct of Hagar had been of such a nature as to maintain and strengthen by unnatural means Hagar's market position with respect to the sale of groceries in the food retail market. Moreover, the investigation showed that the violations were substantial. Hagar's actions were designed to exclude main competitors, such as low-price stores owned by Kaupás (Krónan) and Samkaup (Nettó and Kaskó), from competition, and thereby weaken the companies as competitors in the market.

Bónus's pricing policy in the case has serious effects on competition
The pricing policy operated by Bónus is also considered to be relevant. It is a well known fact in competition law that market-dominant companies can benefit from using predatory pricing to create a reputation for themselves and send a message to competitors that it does not pay to compete too vigorously. It is a fact in this case that Bónus did not find it sufficient to match the prices of its competitors. Instead, Bónus repeatedly reduced its prices to a greater extent than its competitors. The company even went so far as to give customers common dairy products free of charge for a while. It is the opinion of the Competition Authority that, by using predatory pricing, Hagar firmly established the reputation of Bónus as a store that would never allow itself to be undercut by its competitors for any length of time. This conduct, and the resulting reputation, is likely to reduce the chance that Bónus's competitors would, in the future, try to compete with the company's stores over prices in the way that they did during the price war. Bónus's pricing policies in this case do not, therefore, increase competition, but rather weaken it in the long term. The decision of the Competition Authority is expected to reduce competition obstacles in the food retail market and create conditions enabling all companies in the market to compete fully using reasonable marketing actions.

It is both normal and preferable that a market-dominant company attends and participates in price competition. The actions of Hagar in this case, however, were not in accordance with the strong obligations of market-dominant companies and went far beyond the company's authorisations to react to competition. By using predatory pricing against its competitors in all cases, even when such action means a loss in its own operation, smaller stores and retail chains are shown by word and action that it does not pay to compete with Bónus on the basis of prices, because Bónus will always offer a better price, irrespective of cost criteria. Such conduct damages the long-term interests of consumers for active competition in the food retail market.

Penalties:
With reference to the serious nature of Hagar's violation and to the great interests of consumers with respect to competition in the food retail market, the Competition Authority, in its decision, has determined that a fine amounting to ISK 315m is appropriate.

Background information 
Other investigations of the food retail market – summary:
In December 2005, the Competition Authority presented a report prepared by the Nordic competition authorities on the food retail markets in their respective countries. At the same time, the Competition Authority presented the points that it would focus on itself in its monitoring of the food retail market in Iceland over the next few years, and collected opinions on the status of the food retail market at meetings with a large number of companies and interested parties. Subsequently, the Competition Authority engaged in a number of investigations into the food retail market. These include:

  • Report No 2/2008, Vigorous development – the opening of markets and strengthening of economic activities, from 27 November 2008, contains a discussion on 15 important competitive markets, analyses of obstacles preventing companies from beginning or growing their operations in a market, and recommends solutions. Food retail markets are discussed in detail, both in general but also specifically as regards milk and dairy products and markets for meat and eggs.
  • Report No 1/2008, Supplier business-contracts and other co-operation between companies in the food retail market, from 20 May 2008, details the results of a comprehensive examination of business contracts between suppliers and retailers and, among other things, comes to the conclusion that many of their provisions may be contrary to the Competition Act. Suppliers and retailers are advised to review the contracts with this in mind. In connection with the report, the Competition Authority has embarked on more detailed examinations of the contracts of specific suppliers.
    The above report No 1/2008 specifically addresses the labelling of food products with recommended retail prices. Among other things, the report includes details of the price survey carried out by the Competition Authority to examine the effect of such labelling. It indicates that recommended retail-price labelling by suppliers limits competition between grocery stores. Subsequently, the Competition Authority initiated investigations of this practice with respect to specific companies.
  • In March 2008, an investigation was initiated into whether the Federation of Icelandic Trade, the Farmers Association of Iceland and individual farming associations had disrupted competition on the foodstuffs market.
  • In its Opinion No 1/2008, from 4 March 2008, the Competition Authority submitted a recommendation to the Minister of Agriculture that steps be taken to abolish customs tax on feed mixtures.
  • In Decision No 10/2008, The violation of the Competition Act by the Federation of Icelandic Industries and the Icelandic Federation of Trade and Services, from February 2008, the Federations were fined a total of ISK 3.5m for unlawful collusion in connection with the reduction of VAT on foodstuffs.
  • In June 2007, the Competition Authority initiated an investigation into whether Mjólkursamsalan ehf. and Osta- og smjörsalan sf. had violated Article 11 of the Competition Act by their actions against Mjólka ehf. The District Court of Reykjavík authorised a search of the premises of Mjólkursamsalan. The investigation of this case has been delayed due to disputes as to whether the employees of the Competition Authority are competent to handle the case. Earlier this year, the Supreme Court ruled that there were no grounds for disqualification.
  • In November 2007, the Competition Authority embarked on extensive investigations into the possible unlawful collusion of retail stores and suppliers. Also under examination is the possibility of a violation of Article 11 of the Competition Act through coercion or unjustified business terms as regards suppliers or competitors. As a result of information received by the Competition Authority regarding the possible violation of the Competition Act by companies operating in the food products market, the Authority was granted authority by the District Court of Reykjavík to perform searches of the premises of the companies. The raids were performed on 15 and 30 November 2007. Legal proceedings are underway.
  • In Decision 39/2006, Complaint submitted by Mjólka ehf. on the abuse of a market-dominant position by Osta- og Smjörsalan sf., the Authority reached the conclusion that the company had abused its market dominant position with respect to Mjólka.
  • With Opinion No 1/2006, Public competition restrictions in the dairy industry, a recommendation was submitted to the Minister of Agriculture that various actions be taken to strengthen competition in this field.

Legal proceedings in this case:
The investigation of this case, which ended today, began in the middle of 2006 when the Competition Authority received information of Hagar's alleged violation of Article 11 of the Competition Act. The case has involved extensive data collection from all the main grocery stores in Iceland. Data has also been collected from the Directorate of Internal Revenue and Mjólkursamsalan. In 2007, the Competition Authority compiled a detailed statement of objection discussing the definition of the market, the position of companies in it, and a description of Hagar's alleged violations. The document was sent to Hagar for comment on 5 November 2007.

On 29 November 2007, the Competition Authority received a letter from Hagar demanding that the Authority retract its statement of objection from 5 November 2007 and that the case be merged with another case that began with the raid on the premises of Hagar, among others, on 15 November 2007. Hagar considered that there had been a complete change in the circumstances of the case as there were two cases involving Hagar being processed and that they involved the same conduct. Hagar's demand was refused by a letter from the Competition Authority dated 4 December 2007. Reference was made to the fact that two separate and unrelated cases were involved. On 12 December 2007, Hagar submitted the Authority's decision to the Competition Appeals Committee. With the decision of the Competition Appeals Committee in case No 8/2007, Hagar hf. vs the Competition Authority from 11 January 2008, Hagar's appeal against the decision of the Competition Authority to refuse Hagar's demand for the merge of cases was dismissed by the Committee.

In February 2008, Hagar's comments on the statement of objection were delivered to the Competition Authority. Subsequently, the Competition Authority sent a letter to Hagar requesting explanation of the company's view that the retail chain Bónus had not enjoyed its right to protest in the case and that the objection document should have been sent to Bónus and not to Hagar. A reply was sent by Hagar on 14 March 2008. After a review and investigation into Hagar's views and reasoning, the Competition Authority reached the above-stated conclusion.

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