As FMCG retail1 sector plays a crucial role in Turkey's economy and has frequently been subject to political and economic discussions shaped in parallel to price increases for goods in the average consumer basket, the competitive framework, and market dynamics of FMCG (fast-moving consumer goods) sector are regularly monitored by Turkish Competition Authority (the "TCA"). To that end, the TCA has been conducting a new sector inquiry concerning FMCG retail sector, further to the former inquiry completed in 2012.
The TCA published its first sector inquiry report on FMCG retail sector ("2012 Report") on 24.05.2012. However, as it is a rare practice for the TCA to conduct multiple sector inquiries for the same sector, the TCA justifies itself by referring to the case handlers' information note submitted to the Board within the review of the acquisition of Tesco by Migros in 20172. The Preliminary Report provides that further to the information note in Migros/Tesco transaction, the Board realized that the structure and competitive landscape of the FMCG retail market has been subject to drastic changes after the 2012 Report and a new sector inquiry is needed mainly to specify the structural changes and market failures discussed over the last ten years.
After almost a 4-year work, on February 5th, 2021, the TCA published its preliminary FMCG sector inquiry report (the "Preliminary Report") on its official website. Given that the report has been published as a "preliminary report," it can be expected that the TCA will post a "final report" in the upcoming months (or next year). Having said that, the Preliminary Report is a 145-pager document and includes detailed information and definitive recommendations.
Before delving into the details of its findings and recommendations, it should be noted that as the Preliminary Report remarkably redacts almost all numerical data, which may have enabled us to analyze the findings of the TCA, regardless of whether the data can be objectively associated with any undertaking or deemed as commercial secrets. Such methodology also distorts the economic analysis by hiding even CR4 (four-firm concentration ratio).
Main Findings of the Preliminary Report on FMCG Sector Inquiry
Shift Towards Organized Channel: The Preliminary Report explicitly provides that even though the traditional channel consisting of chandlers, local groceries, buffets, and small/local markets remains relatively popular in Turkey, there has been a rapid shift towards organized retail channel (supermarkets, hypermarkets, discount markets, etc.) from the traditional retail in Turkey.
High concentration ratios: Under the Preliminary Report, the FMCG retail market is qualified as a "highly concentrated market" where the most significant part of the market is shared among the four major retailers (i.e., BIM, A101, Migros, and SOK) in Turkey whereas local and small markets are consistently losing market shares or even excluded from the market. As a result of the highly concentrated market structure, it appears that the profitability of big/national retailers has been continuously increasing where there is no significant entry into the market. Accordingly, the Preliminary Report claims that there has been a de facto high entry barrier into Turkey's FMCG retail market.
The potential competitive advantage of vertically integrated entities: The other structural issue covered within the Preliminary Report is the competitive advantage created by vertically integrated undertakings through acquisitions. Anadolu Group/Migros and Ülker Group/SOK-Bizim Toptan are mainly analyzed within the Preliminary Report. Although it is stated that the economies of scale and decreasing information asymmetry on the supply side allow the vertically integrated companies to develop well-directed commercial strategies and theoretically provide a more competitive advantage at the retail level, the TCA could not see numerical data demonstrating the positive impact of the increase in vertically integrated entities in Turkish FMCG retail sector.
Increasing market power of discounters: According to the TCA, "discount markets" drastically increased their market power over the last ten years by using their competitive advantage deriving from (i) private label products, which are mainly produced by small/medium size or local producers with significantly lower costs, (ii) small market sizes and flexible decision-making mechanisms tailored to the needs of local consumers and market dynamics.
Abuse of "buyer power" by retailers against suppliers: As private label products sold with lower prices have gained more popularity in terms of consumer preferences, retailers (particularly discounters) increased their market power and buyer power against suppliers that are getting more dependent on orders made by retailers for production of private label products. Abusive conduct by retailers through the use of buyer power against suppliers has created a negative impact on small and local suppliers' position in the market, although the global suppliers have not been vitally affected.
The Preliminary Report prefers to use vague language on the potential anti-competitive impact of abuse of buyer power by stating that
"even if it is not possible to conclude that such dependency negatively affects the competitive landscape of the market under current circumstances, it would also be not prudent to argue that there would be no anti-competitive impact deriving from the use of buyer power of retailers against suppliers."
In this respect, the Preliminary Report focuses on potential unfair commercial practices through abuse of buyer power by exemplifying the following practices:
- Charging additional fees such as listing or shelf fees by retailers against suppliers,
- Reserving the right to make unilateral changes in contracts with suppliers and threatening to stop trading if suppliers insist on enforcing the deal without making concessions against retailers,
- Long maturity periods creating financial uncertainty on the supplier side,
- Additional and unforeseeable costs imposed by the retailers on suppliers (e.g., passing on the damage risk for a product to the supplier before placement on the shelf).
Need for a broader definition of the relevant product market: the Preliminary Report argues that it is challenging to develop an absolute definition for a relevant product market as the market is significantly segmented and concerns with the trade of numerous products with similar commercial activities. Therefore, the Preliminary Report suggests a case-by-case analysis rather than suggesting alternative definitions. That said, the Preliminary Report provides significant findings different from the 2012 Report.
It is seen that the TCA evaluates the relevant product market under two main market level: (i) supply (upstream market) and (ii) retail (downstream market).
In parallel to the Board's decisional practice, the Preliminary Report also examines whether store sizes and store formats and business models could constitute accurate parameters for defining the relevant product market.
The Preliminary Report states that as long as other market players' product range is similar to the products sold in their stores, such players are deemed as competitors regardless of store size or format. The Preliminary Report also argues that consumers do not anymore attribute importance to store design or size to address their needs.
Further, the Preliminary Report also found that digitalization in FMCG retail sector lessened the importance of store format or size. In the same vein, according to the Preliminary Report, specific digital platforms offering retail services are considered as competitors by retailers even if they do not have any physical store.
As a result, the Preliminary Report shows a clear tendency to adopt a broad relevant market definition including supermarkets, hypermarkets, discount markets, and specialized markets (e.g., Watsons, Gratis, Rossmann, etc.), and even digital platforms offering retail services.
Need for a narrower definition of relevant geographic market: The Preliminary Report explicitly states that the decisive factor in defining the relevant geographic market is the distance of markets to consumers' locations. Although the Board's recent precedents developed in its Phase II review for certain acquisitions suggest that the relevant geographic market should be defined based on towns or districts, the Preliminary Report argues that the increasing rate of urbanization and traffic density along with parking issues in big cities may lead to the need for a narrower definition for the relevant geographic market in the retail level of FMCG sector.
Recommendations by the TCA
Recommendations set forth under the Preliminary Report in order to solve the structural issues can be summarized as follows:
- Presumption for concerted practices under Article 4 of Law No. 4054 on Protection of Competition ("Turkish Competition Act") could be used more effectively,
- In a potential investigation, the concept of "collective dominance" under Article 6 of the Turkish Competition Act could be considered,
- In terms of merger control analysis in the FMCG retail sector, the Board should develop a tightened approach and consider defining the relevant geographic market narrowing down to the neighborhood or smaller districts,
- In terms of merger control analysis, sector-specific turnover thresholds could be set forth while determining whether a transaction is subject to the approval of the Board,
- In terms of potential anti-competitive impacts of abuse of buyer power by retailers;
- Relatively lower market share threshold could be specified within Communiqué No. 2002/2 on Block Exemption for Vertical Agreements ("Vertical BER") merely for vertical agreements concerning FMCG retail market,
- Vertical agreements, including exclusivity clauses, could be reconsidered by considering the increasing buyer power of retailers. In this respect, for instance, agreements obliging the supplier to produce certain type products or packages only for the retailer party to such agreement might be prohibited,
- In terms of abuse of buyer power through unfair commercial practices;
- An independent administrative authority should be established and authorized to effectively implement relevant legislation prohibiting abuse of buyer power by retailers. This authority should also be authorized to conduct investigations and impose sanctions against the retailers infringing the applicable legislation. Accordingly, relevant legislation or regulation should be enacted.
- In this respect, the following practices should be prohibited;
- Maturity dates exceeding 30 days for perishable agricultural and food products,
- Maturity dates exceeding 60 days for other agricultural food products,
- Cancellation notification made in a short period for perishable foods,
- Payment requests which are not related to the transaction,
- Transfer of risk for lost and perished goods to suppliers,
- Avoiding to provide written approval to supply agreement further to the request by the supplier,
- Abuse of commercial secrets by buyers,
- Transfer of costs for examination on consumer complaints to suppliers.
- The following practices should be regulated;
- Return of unsold products,
- Paying for listing, shelving, and stocking fees by suppliers,
- Payment by a supplier for promotion,
- Payment by a supplier for marketing,
- Payment by a supplier for advertisement,
- Charging suppliers for personnel working to place supplier's products on buyers' shelves.
- As it is found that retailers are also competing with suppliers in terms of their private label products, and thus, they automatically get access to certain commercial secrets of suppliers, it should be ensured that retailers' purchase departments for private labels and branded products are entirely disintegrated through "Chinese Wall" arrangements,
- In order to protect small or local retailers' competitive position against big market chains;
- Purchase cooperation should be encouraged and benefit from individual exemptions,
- Local retailers should be encouraged to produce private label products through cooperation and benefit from an individual exemption.
1. The TCA refers to FMCG sector by using the term of "FMCG retail sector". Such preference does not exclude any level of the FMCG market, but the term of "retail" is intentionally used to emphasize that the main focus of the sector inquiry is on "retail" level other than producers or traditional wholesalers. Furthermore, the FMCG retail is defined under the Preliminary Report as all activities concerning the supply of final products subject to fast consumption to end-consumers.
2. The transaction was approved by the TCA with its decision dated 09.02.2017 and numbered 17-06/56-22.
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