Suspected anti-competitive conduct investigation related to the market for locksmith wholesale services

Transcription

1 Ref. No 494/ (9) Suspected anti-competitive conduct investigation related to the market for locksmith wholesale services The Swedish Competition Authority s decision The Swedish Competition Authority will not investigate the case further. The case Background In November 2013, the Swedish Competition Authority (the Competition Authority ) opened an ex officio investigation under Chapter 2 Section 7 of the Swedish Competition Act (2008:579) ( SCA ) and Article 102 of the Treaty on the Functioning of the European Union ( TFEU ), into a suspected violation of the prohibition of abuse of a dominant position by the ASSA ABLOY group on the Swedish market for locksmith wholesale services. The investigation was initiated based on information obtained by the Competition Authority in its merger review of ASSA Sweden AB s acquisition of Prokey AB. 1 During that investigation, the Competition Authority became aware of specific agreements that raised the question whether Copiax AB (Copiax), a subsidiary within the ASSA ABLOY group, applied volume commitments, loyalty rebates and rebates conditional upon exclusivity in its contracts with locksmiths and security companies (the Copiax customer contracts ). The Competition Authority became concerned that the contract terms could lock-in a substantial share of the demand on the market. The Competition Authority also received data that indicated that the group companies ASSA AB ( Assa ) and Copiax applied a pricing practice with respect to Copiax s competitor Prokey AB ( Prokey ) that amounted to a margin squeeze. 1 Reg. No. 437/2013 Assa Sweden AB/Prokey AB. KKV2000, v2.1, Address SE Stockholm, Sweden Visiting Address Torsgatan 11 Telephone Fax konkurrensverket@kkv.se

2 494/ (9) The Competition Authority concluded that there were grounds for suspecting that the conduct resulted in anti-competitive foreclosure of existing and potential locksmith wholesalers. The undertakings Assa Assa is a wholly-owned subsidiary of Assa Sweden AB and part of the international group ASSA ABLOY. Assa manufactures and sells safety products to, inter alia, the Swedish market. In Sweden, the ASSA ABLOY group is vertically integrated and active in the manufacturing, wholesale and installation of safety products. In 2016, Assa had a turnover of 1.3 billion SEK. Copiax Since 2008, Copiax is a wholly-owned subsidiary of Assa Sweden AB. Copiax is a wholesaler of locks and safety products, primarily to locksmiths and security companies that offer locksmith services as part of their business. As a locksmith wholesaler, Copiax provides products from a number of suppliers and operates throughout Sweden. In 2016, Copiax had a turnover of just over 1 billion SEK. The Competition Authority s investigation The Competition Authority has focused its investigation on two types of conduct suspected of constituting violations against the prohibition of abuse of a dominant position on the Swedish market for locksmith wholesale services. Firstly, the Competition Authority investigated whether Assa s and Copiax s pricing taken together constitute a margin squeeze. Secondly, it investigated whether specific clauses in the Copiax customer contracts, regarding volume commitments, loyalty rebates and rebates conditional upon exclusivity constitute exclusionary abuse. During the course of the investigation, Copiax revised its customer contracts. As of 2014, the Copiax customer contracts no longer contain binding individual volume commitments or individual rebates subject to a condition of exclusivity. Summary of investigative measures The Competition Authority commenced its investigation in November 2013 by carrying out an on-site inspection at the premises of Assa and Copiax. During the course of the on-site inspection, the Competition Authority applied for an authorization to expand the scope of the on-site inspection to include a broader suspected infringement. The Stockholm district court granted the Competition Authoritys s request. On appeal, the Market Court repealed that decision and denied the Competition Authority s application. 2 The Competition Authority 2 Decision of the Market Court, ASSA AB v Swedish Competition Authority, MD 2015:15, 28 October 2015.

3 494/ (9) decided to pause its investigation of the case pending the outcome of the appeal. As a result, the on-site inspection was not completed until January In the course of its enquiries, the Competition Authority required undertakings within the ASSA ABLOY group to provide information and documents concerning, inter alia, Copiax s customer contracts and their application, sales data, costs data and market conditions. In addition, the Competition Authority collected written information from, and held meetings with other manufacturers, wholesalers and locksmiths as well as with the locksmith industry association. Furthermore, the Competition Authority conducted various economic analyses, including quantitative analyses of contracts and sales data. The focus has been on examining whether an equally efficient competitor would be able to match Assa s and Copiax s prices; a so-called as efficient competitor (AEC) test. The main findings of the investigation are as follows. The market Safety products is a collective term referring to products designed to protect against or make theft, trespassing and similar transgressions more difficult. It may include lock systems, padlocks, skeleton keys, keycard locks and door closers. Safety products can be divided into three main categories: mechanical, electromechanical and electronic products. Over time, due to technical developments, mechanical products have become less important. Meanwhile, sales of electromechanical and electronic products are increasing. The development provides opportunities for new entrants and increased possibilities both for existing operators to expand their business and for new operators to establish themselves. The security market can be divided into two markets; (i) the primary market, ( construction market ), and (ii) the secondary market. The construction market includes products for installation in new buildings and larger extensions or reconstructions. The secondary market includes repairs, smaller extensions or reconstructions as well as replacements and upgrades of existing security solutions. The ASSA ABLOY group is the supplier of a large part of the existing installed base of safety products in Sweden; hence, there is a high demand for ASSA ABLOY products on the secondary market. Safety products can reach the market in various ways. The distribution channels of the products and the methods of sales vary between different product categories and customers. However, wholesale distribution is highly significant for the majority of products. Distribution of safety products to locksmiths and security installers takes place either directly from the manufacturer or through a wholesaler. Locksmith wholesalers sell to locksmiths and security installers, who in turn sell safety products and installation services to the end customers. The locksmith

4 494/ (9) wholesalers typically sell to the secondary market while the manufacturers, largely, sell to the construction market. Quality of service plays a significant role for installers in determining their choice of wholesaler. The wholesale service includes providing a wide range of products, offering products from different manufacturers, offering fast deliveries, storage, product knowledge and bundling of products. Among locksmiths, there is primarily a high demand for full assortment wholesale services. The wholesalers active in the security market are, to a large extent, specialised in servicing specific customer groups and they adapt their assortment to the demands of those customers. Wholesalers can be divided into locksmith wholesalers, electronics wholesalers, wholesalers for construction companies, wholesalers for door and façade manufacturers and wholesalers to hardware stores. Copiax and Prokey are the only wholesalers on the Swedish market who specialize in selling to locksmiths. Both undertakings offer the majority of the products and services demanded by locksmiths. Prokey established itself as a locksmith wholesaler in 2008, in connection with Assa s acquisition of Copiax. Similar to Copiax, Prokey is active in the wholesale sector of locks and safety products. Prokey s main office is located in Stockholm and they operate throughout Sweden. In 2016, Pokey s turnover was approximately 138 million SEK. Grounds for the decision Legal framework Chapter 2 Section 7 SCA and Article 102 TFEU prohibit a dominant undertaking from abusing a dominant position. Such abuse may in particular consist of the dominant undertaking limiting its production, restricting markets or technical development to the detriment of consumers. For conduct to be caught by the prohibition it is necessary to establish, firstly, the existence of a dominant position, and secondly, that the conduct constitutes an abuse of that dominant position. Relevant market and dominant position The Court of Justice has defined a dominant position as a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of consumers. A dominant position may be the result of a number of factors which, considered separately, would not necessarily be determinative. 3 3 Judgment in Case C-27/76, United Brands v Commission, EU:C:1978:22, p. 65.

5 494/ (9) In order to establish that an undertaking holds a dominant position it is necessary to define the relevant product market and the relevant geographic market. The relevant product market comprises all the products, which are regarded as interchangeable or substitutable by consumers by reason of the products price, function and intended use. The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area. 4 The definition of the relevant market takes as its starting point the narrowest market conceivable, often called the candidate market. Based on the candidate market, an analysis is made of whether demand-side and/or supply-side substitutability results in an expansion of the candidate market. In the present investigation, the Competition Authority defined the candidate market as the market for locksmith wholesale services. The Authority s findings have not indicated that this candidate market should be expanded, for the following reasons. To a certain extent, the manufacturers can substitute distribution by locksmith wholesalers with direct distribution to locksmiths. However, the form of distribution is selected based on what is considered to be the most efficient, and wholesale distribution brings cost benefits. There are also differences between direct distribution and wholesale distribution regarding, inter alia, product range, the size of orders, delivery time and service offerings. The manufacturers direct distribution is also to a large extent aimed at the construction market while the locksmith wholesalers mainly focus on the secondary market. In view of the above, the investigation indicates that direct sales of safety products complement the locksmith wholesale service offered by Copiax and Prokey. In addition, there are a number of other wholesalers with closely related businesses and a certain amount of overlap regarding product range. However, as described above, locksmiths, like other installers, have a demand for specialised full assortment services. Other security wholesalers offer a partially different product and service content compared to Copiax and Prokey, which indicates that they are not an equivalent alternative for locksmiths. Copiax and Prokey have customers all over Sweden but only marginal sales abroad. The investigation has not given any indications that Swedish security installers make their purchases abroad. 4 Commission notice on the definition of relevant market for the purposes of community competition law, EGT 1997/C 372/03, p. 7 and 8.

6 494/ (9) These circumstances indicate that the relevant market in this case consists of locksmith wholesale services in Sweden. In the investigation, the evidence gathered indicate that the ASSA ABLOY group has for a long time held, and continues to hold, a strong position throughout the distribution chain of the security market. Through its subsidiary Copiax, ASSA ABLOY potentially has a particularly strong position in the market for locksmith wholesale services. Furthermore, ASSA ABLOY possesses very strong trademarks and a large established base of installed safety products. These circumstances indicate that Assa holds a dominant position as a supplier to the locksmith wholesalers and that Copiax holds a dominant position on the market for locksmith wholesale services. The Competition Authority has not reached a conclusion on the definition of the relevant market. Nor has the Competition Authority reached a conclusion regarding Assa s or Copiax s positions on their respective markets. In light of the other findings in this investigation, it has not been necessary to reach definitive conclusions on these points. Abuse of dominance The holding of a dominant position is not in itself prohibited under competition law. It is the undertaking s abuse of such a dominant position which is prohibited according to Chapter 2 Section 7 SCA and Article 102 TFEU. An abuse of a dominant position is an objective concept. The concept relates to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition. 5 Such behaviour can constitute exclusionary abuse. Margin squeeze When a vertically integrated undertaking with a dominant position in the upstream market implements a pricing strategy that results in a so-called margin squeeze, this can lead to exclusionary effects. A margin squeeze occurs if a dominant provider in the upstream input market sets its wholesale price too high and retail prices too low such that competitors in the retail market, which rely on the input from the dominant provider, and which are as efficient as the vertically integrated competitor is, cannot earn a sufficiently high retail margin. In such circumstances, although the competitors may be as efficient as the dominant 5 Judgement in Case C-85/76, Hoffmann La-Roche v Commission, EU:C:1976:36, p. 91.

7 494/ (9) undertaking, they may be able to operate on the retail market only at a loss or at artificially reduced levels of profitability. 6 Exclusive agreements and loyalty rebates When a dominant company applies various forms of exclusive contracts and loyalty rebates, and thereby ties up a substantial share of the customers on a market, its conduct can lead to anticompetitive exclusion. Granting rebates to customers is not in itself a prohibited strategy of competing on price. Rebates can generate efficiencies and can be beneficial to the development of competition and ultimately to consumers. However, if a dominant undertaking applies certain types of rebates there may be a risk of foreclosure of existing or potential competitors, to the detriment of consumers. If a dominant undertaking ties customers, by an obligation or promise on their part, to obtain all or most of their requirements exclusively from the dominant undertaking, this can amount to an abuse of a dominant position. The same applies if the undertaking applies a system of loyalty rebates, that is to say discounts conditional on the customer's obtaining all or most of its requirements from the undertaking in a dominant position. 7 Conduct of this nature can be capable of resulting in anticompetitive foreclosure. Economic analysis of Assa s and Copiax s prices and agreements Copiax s customer contracts included a number of price models, including volume commitments, loyalty rebates, rebates subject to a condition of exclusivity and various customer loyalty schemes. The contracts are concluded for one year and are negotiated individually with each customer. The Competition Authority has examined whether the customer contracts constituted exclusionary abuse. When assessing whether Copiax s customer contracts were capable of anticompetitive foreclosure, the Competition Authority has conducted an AEC test. The Competition Authority has analysed if ASSA ABLOY s pricing has had the ability to foreclose an equally efficient competitor to Copiax. The AEC test has been conducted in order to analyse if a hypothetical undertaking with Prokey s purchase costs for products from any of the companies within the ASSA ABLOY group, but with Copiax s cost structure in all other respects, would be able to compete with Copiax s end customer prices for Assa products, and still cover all of the additional costs for selling these products, including costs for handling, 6 Judgement in Case C-52/09, Telia Sonera Sverige, EU:C:2011:83, p Judgement in Case C-85/76, Hoffman-La Roche v. Commission, EU:C:1979:36, p. 89 and in case C-413/14 P, Intel v Commission, EU:C:2017:632, p. 137.

8 494/ (9) storage, personnel and distribution. 8 In this design, the test analyses any possible foreclosure effects of the suspected margin squeeze as well as any possible foreclosure effects of Copiax s customer contracts. The results of the AEC test do not show that the prices applied have been capable of excluding an equally efficient competitor. Furthermore, the Competition Authority has analysed whether Copiax has enforced the relevant clauses in the customer contracts, and if the customers have respected the clauses, to such a degree that their application could have resulted in anticompetitive foreclosure. The analysis of Copiax s customer contracts shows that the contracts cover a not insignificant share of customers in the locksmith wholesale services market. These customers represent an even bigger share of the locksmith wholesalers total sales. Furthermore, the analysis shows that the volume commitments cover a substantial share of the contracted customers total annual purchases. On the other hand, the analysis shows that many of Copiax s contracted customers were also customers of Prokey. Furthermore, the analysis did not show that Copiax has been withholding bonuses from customers who did not achieve their volume commitments. Nor has the Competition Authority found that Copiax gives preferential treatment to customers who make all of their purchases from Copiax compared to customers who purchase from both Copiax and Prokey. Taken together, the Competition Authority s analyses of price levels and of the application of the contracts have not given clear indications of a margin squeeze nor that the contracts have been capable of resulting in anticompetitive foreclosure. Conclusion In view of the above, the Competition Authority concludes that there are no reasons to prioritise further investigation. The Competition Authority therefore closes the matter. Separate action Pursuant to Chapter 7 Section 1 SCA, the Competition Authority s decision not to investigate the suspected anti-competitive conduct any further cannot be appealed. The decision of the Competition Authority not to investigate the matter further does not constitute a determination on whether the practice is in breach of the competition rules. 8 Cost and revenue data were collected from Copiax and Prokey s internal business and accounting systems.

9 494/ (9) However, companies affected by the decision may independently bring an action before a court to have the matter tried under Chapter 3 Section 2 SCA. A separate action against abuse of dominance under Chapter 2, Section 7 SCA (or Article 102 TFEU) is brought by an application for a summons to the Swedish Patent and Market Court. This decision has been taken by the Director General. The case was reported by Competition Counsellor Maria Bernhardsson. Rikard Jermsten Maria Bernhardsson