The FEBEA s comments on the European Commission. electronic commerce Issues Paper. ( Opportunities in Online Goods and Services: Issues Paper )

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The FEBEA s comments on the European Commission electronic commerce Issues Paper ( Opportunities in Online Goods and Services: Issues Paper ) These are the initial comments by the members of the

1 The FEBEA s comments on the European Commission electronic commerce Issues Paper ( Opportunities in Online Goods and Services: Issues Paper ) These are the initial comments by the members of the FEBEA 1 to the European Commission within the scope of the on line retailing Round Table set up by the Commissioner Mrs. Neelie Kroes, which it will expand upon in the forthcoming debate on the review of Commission s Regulation (EC) No. 2790/1999 on vertical restraints 2. The Perfume and Cosmetics Industry wishes to highlight both its attachment to the principles of selective distribution established at the European Community level and its openness to the development of the digital economy by respecting these principles. The products of the Perfume and Cosmetics Industry are currently distributed through many different channels according to their type and nature: (i) non selective distribution channels (i.e. the mass market), (ii) selective and (iii) exclusive distribution networks, (iv) franchise networks (v) direct sales by manufacturers and finally (vi) distance selling (mail order, e-commerce). The consumer gives each of these channels different quality values, particularly in terms of service, brand image and technicality. Practically, these channels use a large variety of retail outlets such as: hyper and supermarkets, local convenience stores, independent perfume shops, specialist chains, franchises, pharmacies and parapharmacies, department stores, hairdressers, beauty salons, as well as distance selling (through catalogues, tele-shopping, and websites). E- commerce is therefore already an integral part of the distribution of Perfume and Cosmetic products. This variety of retail outlets combined with a particularly dense territorial meshing provide the consumer with an optimum choice for each of his/her purchases in terms of his/her needs, desires and capacities. 1 The FEBEA is a trade association of manufacturers of Perfume and Cosmetic products distributed in France. 2 Commission Regulation (EC) No. 2790/1999 of December 22, 1990 concerning the application of Article 81.3 of the Treaty to categories of vertical agreements and concerted practices, OJ L 336 of December p. 21.

2 The authorized retail outlets of selective distribution networks, the outlets of exclusive distribution networks and franchise networks are differentiated inside this vast offer. All these networks (here covered by the generic term of selective distribution ) notably set themselves apart from the mass-market networks by the type of the products they distribute. The selective distribution of these products is also accompanied by highquality presentation and tailored advice offered to the consumer. The Community courts held in their Lancôme 3, Yves Saint Laurent and Givenchy 4 judgements specifically concerning beauty products distributed using selective distribution methods (hereafter the Beauty Products ), that selective distribution was a legitimate requirement for them. This requirement is based on the need to ensure that the consumer's perception of the notions of prestige and technicality (to which is directly linked the tailored advice given) inherent in these products, is safeguarded, as well as the benefit to the manufacturer by preserving its brand image in order to protect the returns on its promotional investments. It was thus held that the authorized retailer shall display these Products to the consumer in a way which enhances their aesthetic and functional specificity in a setting which corresponds to their luxurious and exclusive nature matching their brand image 5. The FEBEA reiterates that its members have always had a constructive approach to the growth of e-commerce. Many Beauty Product brands are already accessible to the consumer within the framework of selective distribution on the websites of their authorized retailers. The constant growth in the Beauty Product market (whether in terms of value, volume, references and ranges) shows to what extent the consumer uses all the consumption opportunities open to him or her. Although the distribution of Beauty Products on the Internet has played a relatively small role in this development up until now, its strong potential means that it will inevitably play a more significant role in the future. The FEBEA wishes to enhance the growth in this type of distribution in the joint interest of its members and the consumer bearing in mind that it will always be up to the consumer to choose the network he or she wishes according to the type and quality of the products sought. Although the FEBEA wishes to benefit from the economic opportunities connected with the development of this new distribution channel, it also considers that it is necessary, in the consumer's interest, to reconcile the growth in e-commerce with the selection criteria of the retail outlets to notably ensure that the offer of Beauty Products sold on the Internet satisfies the legitimate criteria of quality and safety. 3 ECJ, judgement of 10/07/1980 SA Lancôme et Cosparfrance Nederland BV c. Etos BV et Albert Heyn Supermart BV case 99/79 [1980] ECR CFI case. T-88/92, Groupement d'achat Edouard Leclerc c. Commission [1996] ECR II-01851, Groupement d'achat Édouard Leclerc c. Commission [1996] ECR II-01961, these two cases are commonly referred to as Yves Saint Laurent and CFI, case. T-87/92 BVBA Kruidvat c. Commission [1996] ECR II-01931, commonly referred to as Givenchy. 5 A member of the FEBEA points out that 25% of its annual turnover comprises sales of new products. This is explained by the dynamism of the R&D and the considerable amount of innovations in Beauty Products. This high level of innovation requires that the consumer be properly informed in order to be able to use such new Products in an optimum way.

3 In practice, the growth in the e-commerce of Beauty Products which are distributed in selective distribution networks involves increased risks for consumers such as lowering the distribution quality, free riding and counterfeiting, which mean that this type of distribution must respect selective criteria which are at least as stringent as the physical selective distribution criteria. The FEBEA will therefore briefly consider the solutions which could be envisaged to protect the consumer from each of these risks and to safeguard the advantages which the selective distribution of Beauty Products provides consumers with today. Preserving the coherence of the qualitative criteria of the selective distribution networks for the consumers benefit Both the Commission and the Community courts have from the outset explicitly recognised that selective distribution systems are a particularly appropriate form of distribution for: i. Prestigious products with a certain value and/or with a strong brand image which are more effectively distributed in high quality environments under specific conditions. This is a case of many perfumes, make-up and care products. ii. Products with a high technicality where purchasers benefit from the availability of the tailored services and advice during purchase. This is the case of dermocosmetic products and professional products. An ever-increasing number of products include all these characteristics. To consumers, Beauty Products which are sold by authorized retailers are separate from the other ordinary, more bottom of the range and often less technical products distributed by the Mass Market. This positive perception by consumers can only exist and subsist in a selective environment which respects the essential characteristics of Beauty Products and corresponds to consumers expectations. The FEBEA considers that practicable solutions already exist and are currently implemented by both the manufacturers and the authorized retailers in order to preserve the selective environment in the context of new forms of distribution such as the E-Commerce. The luxurious image of Beauty Products as well as their technicality would clearly be jeopardised by any generalised distribution where neither the manufacturers nor the consumers could ensure that the products were sold under the appropriate conditions. Any impairment to the presentation of the Beauty Products or the advice during their sale, would be prejudicial to the nature of the products and, in the end, to consumers themselves. The FEBEA consequently reaffirms that Beauty Products are by nature intended to be sold within the framework of a selective distribution system which is besides largely beneficial to consumers and the economy. As these products by nature require a selective distribution system based on quality criteria, these criteria must be respected and coherent whatever the type of authorized retail outlets (physical or online) to ensure uniformity and non-discrimination, these conditions being in addition required by Community courts.

4 This implies that the head of a selective distribution network can impose qualitative selective distribution criteria on online sales players which are the on line counterpart of the traditional criteria for physical distribution by necessarily adapting them to this new retail channel. The distributor shall therefore design a high-quality site under the manufacturers supervision, which enables this tailored advice to be given under conditions identical to those of a physical retail outlet. The retail outlet must also preserve all of its value using new technologies, based on non-discriminatory and proportional criteria. However, experience shows that the quality of the website cannot replace the knowledge deriving from direct contact with the clientele acquired in physical retail outlets. It is indeed within this physical framework that the distributor improves his know-how in terms of welcoming and knowledge of the clientele, presentation and advice. The distributor can only acquire the specific skills needed to serve its clientele from its experience acquired in physical distribution which it will then use to operate its distribution website in an optimum way both for the brand and the consumer. In a coherent selective distribution system, online sales can only be conceived as the extension of physical distribution, which it must necessarily be complimentary to and interactive with. Protecting the consumer from the risks of free riding As explained above, the specific nature of Beauty Products requires them to be marketed in a selective distribution system which increases the consumer s welfare by respecting qualitative criteria. These products not only compete over price but also in terms of advice, image, innovation and product offer which all contribute to increasing the consumers surplus. These criteria inevitably mean that the service and the sales effort associated with Beauty Products are essential parts of the offer to the consumer. It is therefore commendable and legitimate for a selective distribution system to be organised so that the consumer is guaranteed an optimum level of service freely chosen by the manufacturer in accordance with its sale strategy. Inversely, a lower level of service would reduce the consumers surplus. The FEBEA wishes to ensure that online distribution is not misappropriated by deviant free rider type behaviour. The lack of discrimination and fair competition concerning the service provided as well as the sales effort between authorized retailers must therefore be guaranteed, irrespective of the distribution channel (physical/online). In other words, it is important to prevent certain distributors avoiding the sales effort and the service to the consumer which would adversely affect the whole of the distribution system. The investment required by distributors (e.g. by providing tailored advice which requires employing a properly qualified sales force) could be appropriated by other distributors acting as free riders. In the FEBEA s view, this considerable challenge justifies online distribution being reserved for authorized retailers which already run a physical retail outlet (when appropriate, following a certain period of time) in order to guarantee their expertise in terms of service and sales effort. This approach should result in pure players and online sales platforms being refused.

5 The admission of pure players (and even more so online sales platforms) would indeed lead to free riding, which in a first instance would result in a substantial fall in the average quality of the service offered. Opening the doors to pure players would break the symmetry in which all the authorized distributors of products are placed concerning the offer of services (physical and online) and the costs of operating the system. The pure players, which are the only distributors able to make large economies of scale and range, as a result of their lack of activity in physical distribution, would impoverish the network by eliminating the small sized retailers in favour of large scale national distributors only. A reduction in inter and intrabrand competition, not only in terms of tailored advice but also in terms of price, is also to be feared, once again to the detriment of the consumer. By benefiting from the investments in know-how and advice in the sale of Beauty Products by physical distributors, the pure players would, thanks to their zero service costs, sell products to consumers who had received tailored advice in physical stores. This tailored advice involves the consumer being able to test, touch and smell the product in the store before purchasing. This aspect is paramount because of the very large number of new Beauty Products introduced on the market each year. Secondly, this would simply result in the advice disappearing because the companies which continued to provide the consumer with a tailored service would stop doing so, as a result of the unfair competition by the pure players and the online sales platforms which will avoid this. These investments indeed represent the fixed costs which would be passed on in the products sale price, therefore widening the gap with the pure players lower cost structure. This free riding would therefore discourage physical distributors and manufacturers from continuing to invest in the selective distribution of Beauty Products. Finally the disappearance of services in the distribution of Beauty Products would lead to a drop in investment (R&D, marketing) with the consumer consequently suffering a reduction in the offer. This would be even more prejudicial to the consumer because selective distribution enhances a very large number of products in a sector where a large part of the competition involves innovation. These benefits would inevitably disappear in the long run as a result of such free riding. It appears that free riding threatens the very existence of selective distribution and Beauty Products leading to a loss of consumer welfare which results from such type of distribution. Protecting the consumer against the risks of counterfeiting and the growth of the grey market by guaranteeing the consumer authentic products without risks for health or safety Beauty Products are cosmetic products within the meaning of Community and national legislation and are therefore highly regulated concerning safety in their manufacturing process, distribution and use. Selective distribution networks are essential for preserving the safety of Beauty Products because they ensure that the statutory consumer protection provisions are respected, thereby contributing to consumers confidence in these products whether in physical or online outlets.

6 The Internet undeniably plays a role as an accelerator for counterfeiting 6. The multiplication of the number of websites can only aggravate this phenomenon, to the detriment of the consumer because of his/her inability to differentiate counterfeiting from authentic Beauty Products. It must be added that online sales platforms do not guarantee the genuine identity of the authorized retailer (or its authenticity, if alleged by false authorized retailer), as these platforms cannot guarantee the complete identification of the original distributor. The anonymity inherent to online sales platforms unquestionably favours the sale of products from parallel channels (grey market) and counterfeiting. This is very harmful to the integrity of the selective distribution networks and the brand image of Beauty Products. They threaten consumers health and are even more detrimental to consumers pockets because grey market or counterfeit products are sold at increasingly high prices. In addition, apart from the question of anonymity, the platforms also increase the risk of free riding inherent to the development of pure players. It was these considerations which led the French Competition Council justifying the prohibition of this distribution channel 7. Nowadays, the consumer tends to be more concerned about the environment and his/her health and safety and should be praised to do so. This is why he/she justifiably seeks Beauty Products which strictly respects both European and national legislations. The FEBEA underlines that the selectivity of distribution networks is a pledge that legitimate health and safety concerns have been respected. It considers that the consumer must be guaranteed an optimum safety and traceability for Beauty Products which are sold online. Based on this consideration, the FEBEA favours the implementation of competition rules that would enable the heads of selective networks to be able to refuse to approve pure players, and even more so online sales platforms. It appears that only the websites of authorized retailers with prior expertise and established experience of physical sales outlets are able to guarantee the consumer what he or she is buying and from whom he or she is buying it. * * * 6 According to a study by the European Alliance for Access to Safe Medicines (Alliance européenne pour l accès à des médicaments sûrs, l EAASM), 62% of the drugs sold on the Internet are either counterfeits, substandard products, or generic drugs produced by manufacturers without the necessary authorisation. Only 38% of the drugs marketed online are authentic or of standard quality, but 16% of these drugs are illegally imported into the European Union. EAASM, The Counterfeiting Superhighway, There is nothing to suggest that Beauty Products which are also subject to specific public health legislative constraints would fare any better. 7 Decision of the Competition Council No. 07-D-07 dated March

Case T-19/92. Groupement d'achat Edouard Leclerc v Commission of the European Communities

Case T-19/92. Groupement d'achat Edouard Leclerc v Commission of the European Communities Case T-19/92 Groupement d'achat Edouard Leclerc v Commission of the European Communities (Selective distribution system Luxury cosmetic products) Judgment of the Court of First Instance (Second Chamber,