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The future of exclusivity clauses after Peters Ice Cream was fined $12 m for anti-competitive dealingPeters Ice Cream inserted an exclusivity clause in a Distribution Agreement to prohibit its distributor from distributing ice cream for competitors. The Federal Court found the clause was anti-competitive and fined Peters Ice Cream $12 m. In this article we examine the Distribution Agreement and the exclusivity clause, the Federal Court’s findings on Exclusive Dealing Conduct, and draw conclusions on the future of exclusivity clauses. A marketing commentary follows. Summary When Peters Ice Cream appointed an independent distributor in 2014, it inserted a strict confidentiality clause in the Distribution Agreement to protect its know-how. For extra protection, it inserted an exclusivity clause to prevent the distributor from distributing ice cream product for competitors. The exclusivity clause caught the attention of the Australian Competition & Consumer Commission (ACCC). The ACCC considered the exclusivity clause was exclusive dealing conduct and an illegal restraint of trade because it was likely to substantially lessen competition in the ice cream market. The ACCC prosecuted Peters Ice Cream for exclusive dealing in contravention of s 47(1) of the Competition and Consumer Act 2010 (the CCA). Peters admitted the contravention, and the Federal Court of Australia ordered Peters Ice Cream pay a penalty of $12 million. The decision is Australian Competition and Consumer Commission v Australasian Food Group Pty Ltd [2022] FCA 308 (25 March 2022) (Moshinsky J) The Distribution Agreement and the exclusivity clause Peters Ice Cream (Australasian Food Group) is an Australian manufacturer and supplier of ice cream products, including single serve ice cream and frozen confectionary products. Its brands include Connoisseur, Drumstick, Maxibon and Frosty Fruits. Its turnover in Australia in the 2019 calendar year was $337.5 milion. In major metropolitan and regional areas, Peters uses its own fleet of trucks (with eutectic refrigerated bodies) to deliver single serve product to retailers. But in most regional areas in Australia it is not commercially viable to use its own trucks to deliver product to petrol and convenience store retailers (P&C Retailers) because volumes are small and distances are long. P&C Retailers include BP, Coles Express, Caltex, 7-Eleven, Woolworths Petrol, United, Night Owl and Puma. There are 6,995 P&C Retailers in locations in Australia. They are a material market, accounting for just under 50% of single serve ice cream sales. See images below of in-store displays. Peters entered into a Distribution Agreement with PFD Food Services on 21 November 2014, to distribute its single serve product to P&C Retailers in regional areas. PFD is a wholesale food distributor and is the largest distributor distributing nationally. Because it was a major supplier, the distributor agreed to Peters Ice Cream’s request to insert an exclusivity clause into the Distribution Agreement. It was:
Peters said that it inserted the exclusivity clause for these reasons:
It would be fair to say that Peters Ice Cream’s main objective was to increase market share in a competitive market for single serve ice cream. It succeeded. The exclusivity clause played an important role in promoting Peter’s products and increasing sales. The ACCC was concerned about the anti-competitive nature of the exclusivity clause because three small Australian ice cream producers who had approached PFD to distribute their single serve ice-cream and iced confectionary to the P&C Retailers market, complained to the ACCC their approaches had been rejected. They were: Bulla which produced Cadbury branded products and choc tops, the Nieve Company which produced Gelativo, and Pure Pops which produced Pure Pops natural ice blocks. In each case, PFD refused their requests because of the exclusivity clause, and because Peters refused to give its consent to PFD to distribute competitor product. The Federal Court’s findings on Exclusive Dealing Conduct Peters Ice Cream agreed with the ACCC that it had contravened the competition law by engaging in Exclusive Dealing Conduct, and the Court made a declaration in these terms:
The Court turned to the appropriate penalty. The key admission was that the conduct had the likely effect of substantially lessening competition. As not all exclusive dealing conduct will have that effect, the full text of the Court’s findings is reproduced: “the Exclusive Dealing Conduct had the likely effect of substantially lessening competition in the Market, in circumstances where … during the Relevant Period: (a) Peters and Streets were the two largest suppliers of Single Serve Ice Cream Products (SSICP) in Australia. They were each other’s largest competitor. Together, they had over 95% of sales of SSICP in the Route Channel [P&C Retailers, food service outlets] and 62% of the Grocery Channel [supermarkets] …; (b) there were significant economies of scale and scope in manufacturing and supplying SSICP; (c) there were significant barriers to mobility for potential competitors in the supply of SSICP; (d) national P&C Retailers … comprised a material part of the Market; (e) Bulla, The Nieve Company and Pure Pops … were looking for opportunities to supply SSICP to national P&C Retailers during the Relevant Period, (f) the Exclusive Dealing Conduct had the likely effect of raising the existing barriers to entry to the Market because: (i) PFD was a national Distributor and was able to distribute products to most national P&C Retailers’ outlets; (ii) if manufacturers used a single national Distributor (rather different distributors in different areas or a network of distributors such as Countrywide or NAFDA) the administrative and financial burden of dealing with Distributors would be lower; (iii) some P&C Retailers (including some national P&C Retailers) had a preference for PFD; (iv) Distributors generally imposed a minimum order quantity (MOQ) per delivery, either expressed as a dollar value per delivery (eg, $200) or a number of units per delivery (eg, four cartons per delivery) that manufacturers were required to satisfy in order for a Distributor to deliver an order to a P&C Retailer. Generally a Distributor imposed an MOQ when it was not already visiting a store for any manufacturer. Since PFD was already distributing products to many national P&C Retailer outlets, it was less likely than other Distributors to require manufacturers that sought to enter or expand in the Market to meet MOQs for the distribution of SSICP to national P&C Retailer outlets; (v) Bidfood [another distributor] distributed to 777 of 6,995 P&C Retailers; (vi) Countrywide members and NAFDA members did not supply SSICP to all national P&C Retailer outlets, though some Countrywide members and some NAFDA members had existing P&C Retailer distribution arrangements; (vii) Streets’ agreements with its Distributors prevented those Distributors from distributing the SSICP of Streets’ competitors. (g) the Exclusive Dealing Conduct operated throughout the Relevant Period for five years, in each of Western Australia, Tasmania, the Australian Capital Territory and PFD’s Darwin distribution centre distribution zone, and in regional areas in Victoria, New South Wales, Queensland and South Australia and, from 3 August 2015, Adelaide; (h) PFD was approached by Bulla, the Nieve Company and Pure Pops to distribute new SSICP to some national P&C Retailers. However, PFD advised that it could not distribute Bulla and Pure Pops SSICP due to its exclusivity arrangement with Peters; and (i) absent the Exclusive Dealing Conduct, one or more potential competitors were likely to have entered or expanded in the Market by distributing some SSICP through PFD to one or more national P&C Retailers.” The Court ordered Peters Ice Cream to:
The future of Exclusivity Clauses Not all exclusivity clauses will be anti-competitive. An exclusivity clause will contravene the CCA if it has the likely effect of substantially lessening competition in a market. In this case, Peters Ice Cream along with Streets Ice Cream dominate the market for single serve ice cream and frozen confectionery products in Australia. As such, Peters had market power to force distributors and retailers to deal with it exclusively, which it used in this situation. It was not stated why the distributor in this case agreed to the exclusivity clause, but it was clear that substantial business would come its way if it did so. The decision applies to suppliers and distributors which have a large market share when they supply or distribute food, drinks, snacks, confectionary and all other items found in petrol and convenience stores, grocers and supermarkets. There is a difference between appointing a sole distributor and an exclusive distributor. A business may appoint a sole distributor and achieve commercial benefits from doing so. A business can use an exclusivity clause if they are small and do not dominate a market. But a business which is so dominant in a market that it could lessen competition cannot appoint an exclusive distributor or use an exclusivity clause because that is likely to be engaging in anti-competitive dealing. The ACCC is targeting exclusive arrangements by firms with market power that impact competition as one of its compliance and enforcement priorities for 2022/23. Images and marketing commentary follow. These images taken by the author of ice cream fridges in
petrol and convenience stores and in a supermarket
illustrate various point-of-sale displays.
FMCG (Fast Moving Consumer Goods) brands commonly use
agents and distributors to deliver their products to market.
The commercial drivers are cost, fleet, and people
management. Marketers aim to maximise sales and market share at every buying occasion. A buying occasion is a marketing term used to describe every opportunity that a consumer has to purchase a product based on their regular, scheduled activities such as travelling to and from work, weekly grocery shopping, or fuelling up the car at the petrol station. Product distribution strategies are designed to capture consumer buying occasions. For example, a consumer may regularly purchase their preferred brand of ice cream at the petrol station as a special treat every week when they fuel up the car. If their preferred ice cream is not available, they may product ‘switch’ and try a different brand. This is a disaster for the marketer whose product was not available. Not only have they wasted the marketing dollars used to attract the consumer, but they have lost the sale, and the consumer has now sampled the competitor’s product. Brands worry about their competitors interfering with the ‘last six feet of the sale’ which is when the customer is in-store and walking towards the display cabinet to select their product. In marketing terms, it is the ‘Place’ - one of the Four P’s (Product, Price, Promotion and Place). ‘Place’ includes availability, channels to market, distribution, retail store selection and shelf placement. The exclusivity clause inserted by Peters Ice Cream into their Distribution Agreement with PFD Food Services had the effect of choking their competitors’ access to important buying occasions at petrol stations and convenience stores. So, what could Peters Ice Cream have done and what you can do to increase market share without breaking the law?
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