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CCI Acknowledges Manufacturer’s Right To Select Distributors -Dismisses Allegation Of Refusal To Deal By Online Distribution Platform Against Britannia – Antitrust, EU Competition



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Article by MM Sharma, Head Competition Law &
Policy Practice, Vaish Associates, Advocates, New Delhi,
India

To ensure freedom of trade by all market participants is one of
the statutory mandates of the Competition Act, 2002 (the Act) in
India and this includes the right of a manufacturer to choose, not
only its distributors but also the mode of distribution of its
products. This fundamental premise has been reiterated in India by
the Fair Market Regulator, the Competition Commission of
India(“CCI/Commission”) in a recent
decision, discussed here.

Can a manufacturer be compelled to provide equitable terms of
business to an online distributor or to supply its most famous
branded products to the distributor at par with existing offline
distributors in all circumstances? Can competition law ensure
competitive margins for a distributor by restraining selective
distribution to its disadvantage by a manufacturer and does every
distributor has a legal right to be provided fair, equitable and
non- discriminatory terms of business by the manufacturer under the
competition law? Another off shoot could be whether a manufacturer
has a legal obligation to give parity in its business terms to both
offline and online mode of distribution? More precisely, whether an
online distribution platform can enforce parity in terms of
supplies with other existing offline /physical modes of
distribution of a manufacturer /supplier on its platform?

These are some of the questions which the CCI has recently
considered in a case filed by an online B2B platform against
Britannia Industries
Ltd.(“OP/Britannia”) in the biscuit
market in India. CCI, vide its order dated 16th June 2022 has dismissed
the allegations of refusal to deal against the
Britannia in the market for Biscuits
in India.

The information in the case was filed by Hiveloop
Technologies Pvt. Ltd
., Bengaluru
(“Informant”) which is running a
Business-to-Business (“B2B”) online
trade platform/marketplace with the name
Udaan‘, which allows retailers and
businesses to source merchandise from the manufacturers, brands,
labels, importers etc. directly.

Background

Informant stated that among all Britannia’s biscuit brands,
‘Good Day’ and ‘Marie Gold’ are the fastest moving
and highest demanded in the biscuits segment and stated to be the
Stock Keeping Units (hereinafter, ‘SKUs’),
and thus, are ‘must have’ stock for any distributor and
contribute 80% of the Britannia total revenue. The Informant
suggested the bifurcation of biscuits industry in three segments as
‘mass segment biscuits (valued at below Rs. 100 per Kg.),
mid-premium segment (valued at Rs. 100 per Kg.) and premium segment
(valued at more than Rs. 100 per Kg.) and had averred that these
segments are clearly distinguishable in terms of Section 19(7)(b)
of the Competition Act, 2002 ( the Act) . Further based on this
segmentation, the Informant suggested the relevant market as the
“market for mid-premium segment biscuits in
India”.
Informant quoted the data of A.C. Nielsen in the
Forbes Cover Story and stated that Britannia wielded a market share
of approximately 30.8% for FY 2017-18, 31.2 % for FY 2018-19, and
32.1% for FY 2019-20 in the broader biscuits market and submitted
that Britannia hold significant market share to cause an
appreciable adverse effect on competition (AAEC) in the
market.

Allegations by the Informant

It was alleged by the informant that Britannia is providing the
supply of its fast-moving SKUs in a very restricted manner to it
.It was further alleged by the Informant that despite multiple
rounds of discussions and meetings, Britannia categorically denied
providing the Informant: (i) the requisite quantity of SKUs due to
which the Informant was unable to meet the demand on its platform,
(ii) the requisite quantity of cheaper/smaller quantity product
variants for these brands that drive the maximum demand in the
market, and (iii) access to SKUs for other Tier 1/Tier 2 cities
where such products are high in demand which was a clear case of
constructive refusal to deal on the part of Britannia,
which is having an appreciable adverse effect on the market. The
Informant also alleged that Britannia is not giving its products in
geographical markets where informants supply network will create
efficiencies in the market. It was alleged that due to the shortage
of supply by Britannia the informant had to procure such products
from the open market, which increased the final cost to the
retailers, which further restricted the Informant’s freedom to
engage with SMEs on its platform.

Further it was alleged that not only did Britannia agree to
supply only 50% of the demand raised by the Informant but also
restricted its supplies to a list of cities proposed by it, which
characteristically exhibited a very low demand and where Britannia
had a comparatively lower presence. It was alleged that
Britannia’s treatment of the Informant was not only highly
restrictive but also discriminatory, given that Britannia continues
to fully fulfil its supply obligations to its other wholesale
distributors. The existing arrangement being forced upon the
Informant was, therefore, a clear case of refusal to deal, and such
arrangement causes appreciable adverse effect on competition in
India, which was in contravention of Section 3(4)(d) read with
Section 3(1) of the Act.

Based on the above allegations, the Informant alleged that it
had been subjected to Two-fold restrictions by Britannia:

  • Refusal to deal in cities where there was high demand and
    hence, requirement for more B2B efficiencies

  • Limited SKUs being made available for must stock items even for
    those Tier 2/3 cities that were proposed by Britannia itself.

Further. while referring to the impact of such conduct, it was
submitted that due to non-availability of supplies of SKUs,
retailers would fail to procure these products on the
Informant’s platform which was evident from an increasing
number of null-search results. As a result, many retailers would
abandon the platform altogether. The additional input cost borne by
the Informant for securing supplies of Britannia’s products to
meet demand on platform, and denial of discount schemes by
Britannia was creating effective barriers for the Informant to
effectively compete and sustain in the relevant market on an equal
footing with other distributors.

Britannia response

Britannia in its response submitted that informants had made
self-contradicting statements, whereas on one hand Informant states
that it is only a B2B platform, on the other hand, it alleged that
Britannia’s refusal to supply its products to it directly and
compelled it to buy Britannia products directly from the open
market.

It was disclosed by Britannia that there is a sister
concerns/group company of the Informant, (Granary Wholesale Pvt.
Ltd) engaged in B2B businesses and was listed as seller on the
Informant’s platform and was dealing with Britannia and this
fact was not disclosed in the information. It was Granary with
which Britannia was dealing and Informant was unknown entity for
Britannia before gaining the knowledge of the information before
CCI. It was further submitted by Britannia that Informant has no
locus standi to raise any grievances arising out of a
business relationship between Granary and Britannia.

Further it was submitted that there was no agreement between
other distributors and Britannia to not deal with Granary/informant
as envisaged under Section 3(4) of the Act. It was also submitted
Britannia, as a manufacturer. has autonomy to choose its vertical
partners/distributors and it had a robust network of distributors
throughout the country and not dealing with the Informant did not
cause or was likely to cause any AAEC in the market of Biscuits in
India.

Analysis of the Commission

At the very outset Commission noted that the Granary formed an
important part of the engagement with Britannia and the Informant
never disclosed any fact related to the procurement of
Britannia’s biscuits for its platform in the Information and
impressed upon the Commission that due to alleged conduct of
Britannia, Udaan is compelled to procure Britannia’s biscuits
from open market in order to meet demand raised on its platform by
the retailers.

On the issue of the Locus Standi of the Informant the Commission
relied on the judgement of Hon’ble Supreme Court of India in
the case of Civil Appeal No. 3100/2020 Samir Agarwal vs. CCI
& Other
s and held that the locus of the informant/Udaan
cannot be doubted but emphasized that Informant ought to have
approached the Commission disclosing the correct facts pertinent to
the case rather than waiting for Britannia to put facts on records.
The following observations of CCI are pertinent in this context for
future: “any party which comes before the Commission
should disclose true and complete facts which is in its knowledge
at the time of filing of the Information, more so when such
Information becomes relevant in the context of some relief that may
be availed of or any detriment that may accrue to any person. Such
a requirement cannot be obviated by raising the plea of a single
economic entity”. ( Para 39).

More importantly , on the issue of the relevant market the
Commission noted that though for the purpose of the analysis under
Section 3(4) (d) of the Act, defining the precise relevant market
is not necessary but still considered its previous decision
pertaining to this market in Re: Tamil Consumer Products Distributors
Association and Britannia Industries Ltd.
And observed
that when, at the distributors’ and retailers’ level, all
kinds of biscuits, are available in a price/quality continuum,
there is no occasion to segment the market further merely because
some sub-brands of biscuits are more popular across consumers and,
in the view of the Informant, are SKUs. Defining a narrow product
market merely on the factors of popularity of a few sub-brands may
not be appropriate to the facts and circumstances of the case. The
Commission disagreeing with the Informant on the segmentation of
the biscuits market held that prima facie the
relevant market
can be stated as the market for
the biscuits in India.

On the issue of the market power of Britannia, acknowledging its
vast network of distributors, as well as considering the presence
of Britannia’s reach throughout India on the strength of a wide
distribution network, and considering its approximately 32% market
share in the biscuits market, closely followed by its competitor
Parle (approximately 27% market share), CCI observed that it
cannot be said that Britannia does not have any market
power
.

However, on the allegations of abuse of the market power and
specifically regarding the allegations regarding constructive
refusal to deal and the same causing AAEC in the market, the
Commission held that, the Informant, other than averring that
there is an inter se arrangement between Britannia and its
distributors to restrict the Informant from dealing with certain
brands and biscuits of Britannia, has not provided any evidence and
is a mere conjecture
. Further, the fact that the Informant has
been able to source the biscuits to some extent to fulfil the
demand of retailers coupled with the fact that Britannia affirmed
that it has not instructed its distributors not to deal with the
Informant may tend to show that no vertical restraints have been
imposed within the meaning of Section 3(4)(d) of the Act. Regarding
the allegation that the absence of adequate supplies of the famous
brands of its biscuits by Britannia to the Informant has caused
AAEC in the relevant market, CCI held that in the absence of any
specific allegation of any distributor of Britannia exiting from
the market, no market foreclosure could be contemplated as alleged.
The Commission also noted the presence of many other B2B online
platforms like the Informant, such as Arzooo, Flipkart Wholesale,
Amazon Business etc. which followed almost similar business model
as that of the Informant and therefore, the Informant could not
claim to have devised some unique business model.

Lastly, on the general issue the autonomy of
manufacturer to choose its partners in business, the following
observations of CCI
are worth reproducing as these seem to
lay down guidelines for future cases:

A careful balanced approach is, thus, required to deal with
the issue, having regard to the fact that what is the ill
(perceived or actual) that can be likely remedied. From a
competition perspective, business decisions to engage or not to
engage with a downstream entity such as the Informant has to be
seen in the context of likely AAEC, should the upstream entity
choose not to deal with the downstream entity.
the
Commission is of the view that there must be some autonomy
available to the manufacturers to deal with their goods the way
they want, in alignment with their business requirements. Nobody
can ask for an absolute right to deal with a particular business.
Similarly, there is no absolute right of refusal. This will depend
upon the facts and circumstances of the case, even a dominant
entity, at times, has the freedom to refuse to conclude contract
based on objective justifications. ….
free exercise of
right of manufacturer may only be limited to the extent of making
competition prevail in the market.”

In the above context, the Commission considered the factors as
enumerated in Section 19(3) of the Act and noted that there are
apparently no barriers to entry either in the manufacturers’
market nor in the distributor’s market, considering the
presence of large number of biscuit manufacturers (including
foreign entrants in recent years) in the upstream and large number
of distributors of Britannia in the downstream market. Moreover,
there appears to be no existential threat or foreclosure as regards
Granary and the Informant, considering that the Informant is an
online B2B platform catering to multiple product segments across
the country and is not significantly dependent on Britannia’s
products.

CCI also observed that the Informant has not been able to
demonstrate prima facie that non-supply of certain brands of
biscuits by Britannia has impeded competition in the distribution
chain ..there was nothing to show that either the retailer or the
end consumer have faced any supply constraints and therefore held
that no positive direction can be given to Britannia to directly
deal with the Informant
. The Commission, mindful that a
large distribution network provides more choices to retailers and
consumers, held that it cannot stretch this concept too far to
support establishment and survival of every downstream entity in
the fold, having regard to the underlying product and the existing
conditions in the market. Moreover,
selective
distribution is an industry practice and one of the business
strategies adopted by businesses.
This falls within
the domain of reasonable autonomy given to any trade participant,
which autonomy, however, is not absolute.

Finally based on the above reasoning, CCI concluded that
Informant had not been able to demonstrate any exclusionary
practice by the Britannia and accordingly directed the case to be
closed under section 26(2) of the Act.

Comment: This decision by CCI, though may
not be final as appeal may be filed against it by the Informant yet
assumes significance in the present time when more and more
manufacturers are opting for online distribution to supplement the
existing offline distribution channels. CCI in this case has
rightly accepted the fundamental premise that a manufacturer has a
natural and legal right to select its mode of distribution subject
only to the condition that while doing so it must not upset the
prevailing competition in the market or cause AAEC in the relevant
market. This case also seeks to cast a duty upon information
providers/complainants before CCI to come clean and not suppress
any vital facts in Antitrust proceedings.

Note: This article first appeared on the Antitrust & Competition Law Blog on 2 July
2022

Specific Questions relating to this article should be addressed
directly to the author.

© 2020, Vaish Associates Advocates,

All rights reserved

Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy
Marg New Delhi-110001 (India).

The content of this article is intended to provide a general
guide to the subject matter. Specialist professional advice should
be sought about your specific circumstances. The views expressed in
this article are solely of the authors of this article.



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