Vertical Violations in Retail Sector: Competition Board’s Nestlé Decision

Nestlé’s Activities and Distribution System

Nestlé is ultimately solely controlled by Nestlé S.A. Nestlé is an undertaking engaged in supplying and selling food products in the fast-moving consumer goods market. Nestlé is active in producing, marketing and selling a wide range of food and beverage products in the categories of chocolate, confectionery, breakfast cereals, dairy products, coffee products, baby nutrition products, pet food and healthy nutrition products.

Some products sold and marketed by Nestlé are imported directly as final products, while others are produced in Nestlé’s factories in Turkey. Independent suppliers produce another part of Nestlé’s products through contract manufacturing.

Nestlé also has an out-of-home consumption channel, referred to as Nestlé Professional (“NP” or “out-of-home consumption channel”). In this channel, Nestlé offers customers customized food and beverage solutions such as restaurants, hotels, cafes, educational institutions, military facilities, fast food outlets, automatic beverage and food machine operators. In this context, Nestlé S.A. carries out its retail sales in Türkiye through Nestlé Turkey and operates in the out-of-home consumption channel through NP.

Nestlé’s Resale Price Maintenance Practices

In the decision, it is evaluated whether Nestlé has interfered with the resale prices of its distributors as a result of various practices.

Firstly, Nestlé argued that the relevant product market for the RPM claims in the present case should be limited to the NP channel and considered sales, marketing and distribution activities in the out-of-home consumption channel. However, the Board determined that the evidence obtained within the scope of the file was related to both Nestlé’s retail channel and NP channel. In this context, the defense that the subject matter of the investigation was only associated with the NP channel was not accepted; therefore, no distinction was made between Nestlé’s sales channels.

As a result of its evaluation concerning RPM allegations, the Board assessed that Nestlé had determined the profit margins, discount rates and sales prices of certain products of various distributors.

The decision includes the defenses raised by Nestlé concerning RPM claims and the Board’s detailed explanations. Although Nestlé argued that the rebates granted by Nestlé were reflected in the resale prices of its distributors, the Board emphasized that this did not give rise to a requirement for the supplier to impose RPM practices on its distributors.

After evaluating the evidence in the file, the Board determined that besides stating that it would not provide additional discounts, Nestlé guided its distributors regarding resale prices. The Board also confirmed that Nestlé warned its distributors against applying prices below the ones mentioned in the price lists and discounts beyond the approved rates. Subsequently, the Board revealed that distributors received Nestlé's approval while they were selling to customers. The Board considered that such conducts constitute actions aimed at determining the minimum sales prices of distributors.

In addition to the aforementioned practices, the Board stated that Nestlé closely monitored the prices in the market and that the evidence in the file demonstrated Nestlé’s willingness and determination to implement RPM practices. In particular, the Board determined that (i) Nestlé had indicated that it did not wish to see the market distorted, (ii) it monitored compliance with the prices it set, and (iii) it used various enforcement mechanisms, such as refusal to supply goods. 

In addition, the Board clarified that Nestlé was involved in its distributors’ product sales processes. The Board concluded that through this process, Nestlé determined not only the discount rates to be applied by its distributors, but also the discount rates to be applied by its distributors to their customers. Therefore, the Board acknowledged that Nestlé implemented RPM practices. The Board emphasized that the main competitive concern related to Nestlé’s RPM practices is that they eliminate the distributors’ freedom to set their own sales prices.

The Board also assessed that there is no requirement of a sanction mechanism, pressure, or incentive applied to buyers for the existence of an RPM practice. In addition, the Board ruled that Nestlé’s practices violated Article 4 of the Law No. 4054 on the Protection of Competition (“Law No. 4054”), as the determination of the resale prices of the buyer by the supplier constitutes a competition violation by object, regardless of whether it has any effect on the market.

Nestlé’s Territorial and Customer Restrictions 

In the decision, it is evaluated whether various restrictions Nestlé imposes on its distributors through contractual provisions or in practice constitute territorial or customer restrictions within the meaning of Article 4 of Law No. 4054.

Concerning territorial and customer restrictions, Nestlé stated that the sale of NP products to retail customers caused problems between the retail and NP business units, NP’s sales were negatively affected by this situation, and Nestlé’s retail and NP distributor agreements did not contain exclusivity. Nestlé further stated that while distributors could sell to any customer they wish, it is desired that retail and NP products are sold to customers in the channel to which they belong in the market as such a system would increase the sales and service quality of Nestlé products. Subsequently, Nestlé mentioned that it did not impose any active sales restrictions for its distributors in the retail and NP channels. In addition, Nestlé argued that it did not impose any passive sales restrictions on its distributors.

Within the scope of its assessment, the Board stated that there is no causal link between the fact that an undertaking has positioned its sales channels differently due to its commercial policy and the practice of restricting the active and passive sales of its distributors. The Board referred to subparagraph (b) of the first paragraph of Article 4 of the Communiqué No. 2022/2 on Block Exemption on Vertical Agreements (“Communiqué No. 2002/2”) and reminded that active sales may be restricted if an exclusive region or customer group is assigned regarding the regions or customers to which the buyer will sell the goods or services subject to the agreement. In this context, the Board examined the agreements concluded between Nestlé and its distributors covering the period of all correspondence that may constitute evidence that Nestlé imposed territorial and/or customer restrictions on its distributors and determined that there was no exclusivity relationship between Nestlé and its distributors. Therefore, the Board assessed that Nestlé would not be free to restrict the active sales of its distributors. However, the Board found evidence in the present case, indicating that Nestlé restricted the active sales of its distributors and imposed territorial or customer restrictions.

In addition, based on its review of the evidence, the Board considered that Nestlé had also imposed passive sales ban on its distributors. The Board stated that the internal policies applied by Nestlé to its distributors within the scope of the incentive strategy for distributors to sell to the customer group they specialize in did not eliminate the determinations and assessments that Nestlé imposed a passive sales ban on its distributors and did not justify Nestlé’s passive sales restrictions. Moreover, the Board considered that the internal harmonization efforts to eliminate the inconsistency between the current distributor agreements concluded between Nestlé and its distributors and the current practice did not eliminate the finding that Nestlé could not benefit from the group exemption in the current situation.

In conclusion, the Board assessed that Nestlé’s RPM practices aimed to restrict competition among its distributors and that Nestlé prevented active and passive sales by restricting regions and customers as a violation of Article 4 of Law No. 4054. The Board decided to impose an administrative fine on Nestlé, stating that Nestlé's aforementioned practices do not benefit from the group exemption set forth by Communiqué No. 2002/2 and the relevant practices could not be granted individual exemption.

Conclusion

In order not to face allegations regarding RPM and territorial/customer restrictions that result in a violation of Article 4 of Law No. 4054, it is crucial that undertakings, especially those operating in the retail sector, take utmost care in their relations with their distributors. Although it is observed that undertakings may try to rebut these allegations on commercial grounds, the Board is sensitive in its interpretation of the evidence. In this context, defenses regarding the internal functioning of the undertakings, the structure of distribution channels and the internal organization of the undertakings are generally not deemed sufficient for the Board to change its opinion on the existence of a violation. Therefore, it is important that undertakings do not exceed the scope of Law No. 4054 in their commercial practices. Otherwise, they may face serious allegations of violation and be involved in long-lasting investigation processes.