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Nestlé: Abusive Clauses

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In 2006, the Portuguese Competition Authority sentenced Nestlé to pay a fee of one million euros as it was proved the practice of illegal clauses in the contracts of its supply of coffee.

Evidences showed that the contracts of Nestlé were violating the antitrust laws, due to the fact that it was restricting competition in the market of coffee consumption that was not at home.

These contracts were made between Nestlé and the Horeca distribution channel, the latter being the sector of food service industry, which consists of establishments that prepare and serve food and beverages.

In order to understand the case in question, it is necessary to understand the economics behind the violation of these antitrust laws. It is important to underline that Nestlé and the Horeca channel came in agreement between clauses that jeopardize the vertical structure of the sector when Nestlé applied vertical constraints in the contracts. These vertical constraints are denominated exclusive dealing, more specifically exclusive supply, due to the fact that the Horeca channel was restricted to buy its products to resell from one single supplier: Nestlé.

So, it is worth noting the importance of the vertical agreements and what are the impacts to the consumers that lay in the bottom part of the structure.

In this kind of vertical structure, the producers do not sell their products directly to the final consumers; instead they need to provide their goods to the retailers who are the ones responsible for the distribution to the public in general. Often, producers find it necessary to make agreements with the retailers in order to force the latter into behaving in a certain matter.

Returning to the case in study, Nestlé imposed certain clauses that forced Horeca channel to stay exclusively in business with them by an uncertain period of time, combined with a mandatory quantity of coffee purchased.  This meant that Horeca could not resort to other suppliers for an indeterminate period of time. Furthermore, Nestlé imposed that after 5 years of contract, if the distributors had not bought the minimum quantity agreed, they were forced to continue under contract, with the penalty of paying restitution.

These types of contracts lead to a lack of competition between producers of coffee, as the Horeca channel could not chose to buy from others suppliers. This led to a decrease in intrabrand competition. The investigation showed that the market for immediate consumption of coffee (the one in question) was provided by four big companies: Nestlé, Delta, Segafredo e Multicafés; and the distribution was made by Horeca. As such, the market for this immediate consumption of coffee was the distribution provided by Horeca and the geographical market was Portugal.

After the investigation provided by the Competition Authority, Nestlé was forced to pay a fee of one million euros and to eliminate all those clauses (contracts with duration above 5 years, as described above) for their contracts from that moment on. 

 

Maria Almeida #637

Competition Policy

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Author: studentnovasbe

Master student in Nova Sbe

One thought on “Nestlé: Abusive Clauses

  1. By reading this post, the main idea I get is that Nestlé was convicted mainly by not specifying duration in its supply of coffee contracts. The fact that it was imposed a mandatory quantity for the retailer in a contract under an uncertain period of time may lead to a foreclosure of the market at the producer level, as an agreement of exclusive supply often does.

    But, the time dimension of the contracts could be emphasized as a very important factor to analyze this case. I would say that the unspecified duration of the contract should not only be seen as a way to keep the retailer Horeca exclusive for Nestlé forever, resulting in a reduction of competition, but also as an unsafe dealing for the retailer, since the producer may unexpectedly jump out of the deal. If the retailer had committed to specific investments related to the sale of the product, when there is a sudden stop of the agreement, the investments made would give the retailer no value. Therefore, the specification of the contract’s period is needed to avoid opportunistic behavior.

    It is referred in the post Nestlé: Abusive Clauses that this kind of vertical constraint lead to a “decrease of intrabrand competition”. Perhaps, the adequate expression in this case is a decrease of interbrand competition, to present a situation of an exclusive supply agreement resulting in restriction to competition between different producers. This kind of vertical restraint is anti-competitive, because it is excluding the existent rivals, as well as avoiding entry of new producers. But how does this actually impact consumers? Less competition means low variety of coffee choices and higher price than in a model close to perfect competition.

    Beatriz Luís, #648