Introduction
On March 30th, 2023 Turkish Competition Authority (“Authority”) published its Final Sector Inquiry Report Regarding Fast-Moving Consumer Goods Retailing (“Report”). Due to its one of a kind structure and its key role in the economy, the fast-moving consumer goods (“FMCG”) retail sector recently constitutes an important focal point for the Authority. Indeed, the developments in the FMCG sector are closely monitored by the Authority. In addition to numerous ongoing investigations in this sector, the highest administrative fine in the history of Turkish competition law has also emerged in this market. In this context, the Preliminary Sector Inquiry Report was previously shared with the public on February 5th, 2021.
The Report touches on many aspects of the FMCG sector. Specifically, the Report reveals the general structure and functioning of the sector as well as the reasons that led in the increase of concentration in the sector. The Report also discusses whether separate merger and acquisition notification thresholds for the retail sector are required. In addition, the effects of the purchasing power of the undertakings operating in the retail market are evaluated. The report focuses on the effects of abuse of purchasing power on competition and also offers solutions to eliminate the possibility of abuse of purchasing power. Moreover, the trend and rate of digitalization in the sector are examined. Also, some factors that may adversely affect the competitive structure of the sector in FMCG retailing are discussed, and evaluations about unfair commercial practices, company behaviors that may mislead consumers, production of special weight products and the connection of new store openings to population criteria are included in the Report. All in all, this article aims to summarize the Authority’s main findings regarding the FMCG sector, which are highlighted in the Report.
Growth in the FMCG Retail Sector
One of the main observations in the FMCG retail sector, as stated in the Report is that the share of the organized channel has increased in the past three years on the basis of turnover and number of stores. Also, the level of concentration in the market is rapidly increasing. More specifically, within the scope of the organized channel, the total market share of the four largest retailers (BİM, A101, Migros and ŞOK) in terms of turnover is mentioned as 77% in 2021 whereas this number was 26% in 2012.
The Authority determined that the concentration experienced in the sector is not realized through slow and unnoticed acquisitions, but through new store openings. It is stated in the Report that especially Migros and Carrefoursa tend to increase the number of their stores through mergers and acquisitions while local and regional markets lost their market shares. In the Report, it was concluded that there is no need to lower the merger and acquisition notification thresholds specifically for the retail sector since it was determined that the growth in this sector is realized organically, with the internal dynamics of the companies.
Retailers’ Augmented Purchasing Power in the Supply Market
As the market shares and market power of the largest four retailer undertakings with the highest market share increase, the purchasing power of these undertakings in the supply market also increases. The increase in the purchasing power signifies that retailers gain the ability to influence their commercial relations with their suppliers in their own favor.
The Report highlights that the retailers’ purchasing power is more effective on small-scale and local suppliers. Also, the effect of purchasing power is relatively more apparent when suppliers supply private label products to the retailer. It is further stated in the Report that BİM, A101, Migros and ŞOK are the retailers which generally sell private label products.
Subsequently, due to the increase in the purchasing power, claims that retailers engage in unfair commercial practices towards suppliers come to the fore. The Report considers that the retailers’ application of “supplementary invoice (for price difference)” should be banned. The supplementary invoice has been previously considered as an evidence in the Competition Board’s hub and spoke probes.
In line with the European Commission’s Directive on Unfair Commercial Practices dated 2019, the Report suggests measures to prevent the abuse of purchasing power. For instance, these suggestions among many others include the ban of (i) cancellation notifications made in a short time for perishable foods, (ii) buyer’s unilateral changes in contracts, (iii) the buyer’s abuse of trade secrets and (iv) transferring the cost of examining consumer complaints to the supplier.
The Report further emphasizes that it is important that regulations are implemented effectively and continuously. In this respect, the establishment of an independent unit for the follow-up and control of regulations is deemed as necessary in the FMCG sector. The Report suggests that this independent unit should be equipped with “super” powers, such as conducting on-site inspections, carrying out unannounced inspections, imposing administrative fines and ordering the termination of the violation. In this respect, it is possible to conclude that the Authority aims to establish a small Competition Authority-like regulatory body specific to the FMCG sector. However, considering the size of the FMCG industry, it seems that this new unit will likely include a high number of employees.
The Report also states that administrative fines to be applied in order to prevent unfair commercial practices should be deterrent. The Authority suggests that in order to provide deterrence, the administrative fine should be determined based on the undertaking’s turnover.
New Store Openings of Chain Markets
In certain regions of Türkiye, as there are closely situated chain stores belonging to the same group, it becomes difficult for a new retailer to enter this area. In the Report, it is evaluated that linking the new store opening permits of chain stores to the population criterion may have anti-competitive effects. Therefore, in terms of store openings, it is stated that retailers belonging to the same economic integrity within a certain distance may be prohibited from opening a second branch. In addition, it is considered that these undertakings can be prevented from making a takeover within the same distance.
This measure already constitutes a common practice for the fuel industry. However, in the FMCG retail market, in which thousands of stores operate, how these distance limits will be applied or whether they can be applied is another matter of discussion. In our opinion, it should be taken into account that there are serious differences between the fuel sector and the FMCG retail market in terms of both size and structure.
Regulations Regarding Discounts
According to the Report, the product subject to discount should be available in the store during the period, when it is announced that it will be discounted and must be sold at the discounted price announced during this period. It is stated in the Report that this regulation will be beneficial for both the protection of the consumer and competition.
Regulations Regarding Special Weight Products
In the Report, it is considered that agreements which set forth the production of special weight products for a single chain market should be prevented. It is a common practice to produce a certain size of product exclusively for one retailer, which defers from commonly known and standard packaging. The relevant agreements which are made exclusively, are likely to affect competition negatively, and these agreements can also lead to various illusions for consumers. Regardless of whether the weight, packaging, size differences can be easily perceived by the consumer, it is evaluated that the production of a certain package specific to only one retailer may be prohibited by a regulation.
Information Exchange Concerns Regarding Private Label Products
Taking into consideration its findings in the Preliminary Sector Inquiry Report, the Authority seems to have taken a step back regarding private label products. Instead of setting a general rule, the Authority decided to evaluate each and every case based on the dynamics of the relevant case.
Undoubtedly, private label products have a competitive role as they provide consumers with an alternative option other than the products of known suppliers. In fact, they provide positive effects in terms of price competition due to their affordable prices. However, the Report includes some groundbreaking findings on this subject due to the fact that the increasing buyer power of the four largest retailers leads to issues. According to the Report, suppliers producing private label products for retailers are not as strong at the bargaining table as they used to be. For this reason, it is evaluated that there is an abuse of buyer power by means of the retailers’ acquisition of some competitive information, including cost.
Due to the increase in the number of private label products in the FMCG retailing, it is considered that a possible exchange of competitively sensible information regarding private label products may have important consequences for the market. It is further evaluated that the so-called “Chinese Wall” practices which ensure the separation of communication channels, can be applied in order to limit the possible exchange of information between private label product producers and retailers. However, it is concluded that rather than totally separating the communication channels between the relevant purchasing units of the undertakings, case-specific evaluation can lead to healthier results.
Impacts of Digitalization in FMCG Retail Sector
The FMCG retail has started to digitalize much faster with the Covid-19 pandemic. In the Report, it is evaluated that this change will have impacts both on the size and shape of the competition in the sector. The effects of digitalization on competitive dynamics and competitor balances should be taken into consideration both in the determination of relevant product markets and relevant geographical markets, and in competition analysis. However, it is also considered that making these evaluations under the specific conditions of each concrete case will lead to more accurate results.
Conclusion
The Authority started breaking the rules in the FMCG sector in 2019. The process initiated with the Covid-19 pandemic had many impacts in this sector. Although prices were skyrocketing, the shelves were getting empty in the markets. In many countries, the FMCG sector, which has always been on the agenda with its positive aspects until then, were not reassuring this time. Therefore, states and institutions started taking sudden actions.
On the other hand, in Turkey, the FMCG sector operated better compared to European countries during the pandemic. In other words, during the pandemic in Türkiye, the FMCG industry began to change and transform mostly in a positive way. The Authority began to conduct many investigations during this period due to competitive concerns. Therefore, the initial findings stated in the Report refer to the characteristics of the FMCG industry during this controversial period.
The Report is noteworthy as it includes important insights of the FMCG sector as well as regulatory recommendations. It also sheds light on the Authority’s upcoming approach regarding undertakings operating in the FMCG retail market. It is possible to conclude that the usual practices existing in the FMCG sector will change in the future. However, we understand that the Authority is still open to further expand its knowledge in this sector. All in all, it is clear that the FMCG sector will go through various transformations in the upcoming year.