1 August 2009 by

When big is not necessarily bad: cigarette giant remains at large

The Competition Tribunal recently dismissed complaint proceedings brought by the Competition Commission and Japan Tobacco International Limited (JTI) against British American Tobacco South Africa Limited (BATSA).

The Complainants alleged that BATSA's agreements with retailers and other gatekeepers of the point of sale (POS) effectively prevented rivals from promoting their products in competition with BATSA.

Through its arrangements with retailers, BATSA effectively purchased the right to determine the position and space allocation for its own brands and those of competitors in cigarette dispensing units at the POS.

Space allocation and product positioning of competing brands in a retail setting are aspects of what is referred to as "category management", which retailers typically delegate to a major supplier in return for substantial payment. JTI, while supporting the notion of category management by one supplier on behalf of the category, objected to BATSA having appropriated any private benefit, arguing that BATSA was bound to manage the category objectively, purely with reference to the rate of sale of each cigarette brand. The Tribunal determined that it would be irrational for BATSA, having paid handsomely for the right to manage the category, to exercise that right on a purely altruistic basis, but suggested that suppliers, retailers and even consumers may nevertheless benefit.

Despite BATSA's category captaincy, the Tribunal found that rivals could influence BATSA's decisions, provided that they were willing to pay the retailers' asking price for the privilege. Here, the lower market share of rival brands belied the brand strength, resources and experience of the multinational tobacco companies that stood behind them. The Tribunal reasoned that JTI had the wherewithal to compete against BASTA in regard to promotional opportunities but had chosen not to do so. Instead, JTI sought to "fight its battles in the in the Competition Tribunal rather than on the more testing terrain of the market."

The Tribunal emphasised that in abuse of dominance cases, as well as those based on vertical restrictive practices, competitive harm must be illustrated by evidence of significant foreclosure. In addition, there should be a clear causal link between any foreclosure and the conduct concerned. In this case, after an exhaustive interrogation of the facts, the Tribunal concluded that neither legal test was satisfied. In the first instance, BATSA's rights were a "limited exclusive" so that it did not in fact have the ability to exclude rivals altogether. Exclusivity was in particular limited by the countervailing power of retailers, who would always insist that all cigarette brands were stocked in sufficient quantities to avoid stock-outs. Moreover, there was evidence that where rivals had sought to curtail BATSA's hold over the POS this was possible and that access to more vital promotional channels, such as entertainment venues, had been highly contested by all players. BATSA's conduct could therefore be distinguished from incentive schemes that resulted in rivals being excluded altogether from sales opportunities (such as those that South African Airways had implemented in regard to travel agents).

Additionally, the difficulty experienced by rivals in challenging BATSA's dominance appeared most likely to be as a result of strict regulation, which precluded above-the-line advertising and severely limited the opportunities for promotion.

The decision signals that the Tribunal intends to apply an effects-based approach to competition enforcement. It is both a dig at over-regulation as well as confirmation that dominant firms need not apologise for taking strong competitive measures to protect their position, and that where rivals prefer to take a knife to a gun-fight, competition law is not necessarily available to even the odds.

Chris Charter,
Director, Competition

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