Carlsbergs standard agreements in the Horeca-sector

On 26 October 2005, the Danish Competition Council (”DCC”) adopted a decision that renders legally binding commitments from Carlsberg Denmark A/S (“Carlsberg”) concerning Carlsberg’s beer agreements with Danish hotels, restaurants and cafes etc. (“horeca-sector”).

It is the expectation of the Danish Competition Authority (“DCA”) that the commitments, which will remain in force until 31 December 2007, will enhance competition on the Danish beer market to the advantage of the consumers.

Subject matter of the case
In a preliminary assessment, the DCA considered certain business practices of Carlsberg in the supply of beer relating to exclusivity requirements to be of concern under Section 6 of the Danish Competition Act/Article 81 EC and Section 11 of the Danish Competition Act/Article 82 EC. In response to this preliminary assessment, Carlsberg offered to abide by a set of commitments designed to remedy the concerns raised by the DCA. The DCA found that Carlsberg’s commitments meet the aforementioned competition concerns and, on this basis, on 26 October 2005, the DCC adopted a decision that renders the commitments legally binding on Carlsberg.

Parties
Carlsberg Breweries A/S encompasses the Carlsberg-group’s joint activities with regard to beer and CSDs (carbonated soft drinks). The Carlsberg-group’s brewery activities in Denmark are carried out through its subsidiary, Carlsberg Denmark A/S, the largest Danish supplier of beer, CSDs and mineral water to the outlets in the Danish horeca-sector.

Investigated practices
The DCA investigated Carlsberg’s practices in the following areas: (1) equipment-exclusivity and (2) outlet-exclusivity.

Procedural steps

• On 28 September 2000, Carlsberg applied, in accordance with Section 8 and 9 of the Danish Competition Act, for a negative clearance or, failing this, an individual exemption with regard to its beer supply agreements with the horeca-sector. The notification only included agreements which are entered into with outlets to which Carlsberg supplies draught beer.
• On 20 February 2004, the DCA adopted a preliminary assessment according to Section 6 and 11 of the Danish Competition Act, which, stating the DCA’s concerns, was notified to Carlsberg.
• After the entry into force of Council Regulation 1/2003 on 1 May 2004, the DCA, acting on its own initiative, continued the proceedings with a view to adopting a decision also under Articles 81 and 82 EC. Accordingly, the preliminary assessment was redrafted in order to take account of Articles 81 and 82 EC. The conclusions in the redrafted preliminary assessment were – apart from the legal basis – the same as in the first preliminary assessment.
• Subsequently, the DCA and Carlsberg entered into negotiations, and on 5 September 2005, Carlsberg submitted commitments to the DCA. On this basis, the DCA sent a draft commitment decision to the European Commission.
• On 26 October 2005 the DCC adopted a decision that renders Carlsberg’s commitments legally binding.

Preliminary Assessment

The relevant market
In the DCA’s preliminary assessment, the relevant product market was identified as being the one of sale of branded beer to the horeca-sector. This preliminary view on the product market definition was based on the fact that in the horeca-sector only branded beer is sold, whereas both branded and non-branded beer are sold in the retail trade. Furthermore, in the horeca-sector a large part of the beer sold is draught beer, whereas no draught beer is sold in the retail trade. Moreover, the sale of beer in the horeca-sector is linked to the provision of additional services. Finally, the sale of beer to the horeca-sector is affected by the prohibition in the Law on Restaurants and Hotels against breweries owning or financing beer outlets.
In the DCA’s preliminary assessment, the relevant geographic market was identified as being national (Denmark). This preliminary view on the geographic market definition was based on the unique national tax and duty regulations, the unique return and deposit system for beer containers (bottles, cans etc.), and national/local beer preferences.

Dominance
In its preliminary view, the DCA took the view that Carlsberg was dominant within the meaning of Section 11 of the Danish Competition Act and Article 82 EC. Carlsberg is, with a market share of [69-74] %, by far the largest supplier of beer to the Danish horeca-sector. The second largest supplier of beer to the Danish horeca-sector is Royal Unibrew. Together the two breweries have a market share of [95-99] %. Royal Unibrew operates with agreements similar to Carlsberg’s agreements.

The investigated agreements
In addition to its standard price list and trade terms and conditions, Carlsberg has entered into individual written agreements with its draught beer customers. It is these agreements which have been investigated by the DCA.

Installation agreements: Carlsberg has entered into installation agreements with a large part of its customers in the horeca-sector. Carlsberg’s sale to these outlets accounts for [38-42] % (2003) of the total sale of beer to the horeca-sector. According to the agreements, Carlsberg will place a draught beer barrel installation (or a beer drive installation) at the disposal of the outlet free of charge on the condition that the beer installation is only used for Carlsberg’s beer (equipment-exclusivity). The agreements can be terminated by both parties with 6 months notice for draught beer barrel installations and 12 months notice for beer drive installations.

Carlsberg’s largest competitor Royal Unibrew has entered into similar installation agreements with outlets for [6-10] % of the total sale of beer in the horeca-sector, which means that [44-52] % of the total sale of beer to the horeca-sector is covered by Carlsberg’s and Royal Unibrew’s installation agreements.

Cooperation agreements: Carlsberg has entered into cooperation agreements on marketing support with [] of the larger outlets with installation agreements. Carlsberg’s sale to these outlets accounts for [20-25] % (2003) of the total sale of beer to the horeca-sector. The size of the marketing support granted to the outlets depends on the individual outlets’ contribution to the brand value of the Carlsberg-products. The cooperation agreements are concluded for a period of 3-5 years.

Exclusive purchase agreements: Carlsberg has entered into exclusive purchase agreements with a smaller part of the outlets with installation agreements. Carlsberg’s sale to these outlets accounts for [6-10] % (2003) of the total sale of beer to the horeca-sector. According to the agreements, the outlets receive marketing support from Carlsberg on the condition that the outlets are not selling beer from competing suppliers (outlet-exclusivity). The main part of these agreements provide for exclusivity only on draught beer. However, a limited number of the agreements provide for exclusivity also on bottled beer and CSDs. The last-mentioned agreements (sponsorship agreements) cover [1-3] % (out of the [6-10] %) (2003) of the total sale of beer to the horeca-sector and are typically concluded on the basis of a bidding contest. The exclusive agreements are concluded for a period of 3-5 years.

Practices raising concerns
In the preliminary view of the DCA, the provisions in Carlsberg’s agreements with the horeca-sector on: (1) equipment-exclusivity; and on (2) outlet-exclusivity raise concerns.

The DCA’s investigation shows that the sale of draught beer is of great importance in the horeca-sector. In outlets with a draught beer installation the sale of draught beer constitutes up to 80 % of the total beer sale. Moreover, the DCA found that it is unlikely that an outlet operator who has an installation agreement with Carlsberg will replace or supplement Carlsberg’s beer installation - supplied free of charge - with a beer installation owned by the outlet operator himself or a third party. Therefore, according to the DCA’s preliminary assessment, the installation agree-ments will often amount to de facto outlet-exclusivity. In other words, the equipment-exclusivity unduly hinders the outlets from turning to Carlsberg’s competitors and, thus, reduces the competitive pressure on Carlsberg.

The DCA has gathered evidence which shows that the size of marketing support granted from Carlsberg to an outlet rises with the volume Carlsberg-beer sold by the outlet. Therefore, according to the DCA’s preliminary assessment, the marketing support may contribute to the foreclosure effect connected with Carlsberg’s installation agreements. The DCA’s decision, however, does not cover marketing support, rebates etc. from Carlsberg to the outlets.

According to the DCA’s preliminary assessment, the exclusive purchase agreements are a part of and enforce a parallel network of agreements between Carlsberg (and Royal Unibrew) and the outlets which lead to the foreclosure of Carlsberg’s competitors.

Effect on trade between EU-states
In its preliminary assessment, the DCA considered that, since the outlets which have entered into installation agreements and/or exclusive purchase agreements with Carlsberg are not free to buy and offer beer products from suppliers competing with Carlsberg, these suppliers are, regardless of the geographic position, restricted in their supply to the outlets in the Danish horeca-sector. Therefore, trade between EU-states may be appreciably affected by Carlsberg’s agreements.

Commitments proposed on 5 September 2005

On 5 September 2005 Carlsberg submitted a set of commitments within the meaning of Section 16a of the Danish Competition Act.

According to the commitments, Carlsberg’s customers will have the option to terminate their installation agreements and cooperation agreements with Carlsberg without any penalty at any time with a 3 months term of notice. However, as regards beer drive installations it is possible for Carlsberg to agree on a non-cancellation period of maximum 3 years from the time the installation has been completed. According to the figures DCA has received from Carlsberg, this non-cancellation period results in 0.5 % of the outlets being de facto tied to Carlsberg. In the event of termination, normal costs of dismantling the beer installation shall be borne by Carlsberg.

Carlsberg will continue to place beer installations at the disposal of the outlets free of charge. In the future, however, Carlsberg will ensure that it is always possible to make place for a second beer barrel installation at the bar counter. Moreover, an outlet with a draught beer barrel installation will be entitled to buy the installation from Carlsberg after a period of 5 years (switching). The take-over price is 18 % of the installation’s original value. Branded Carlsberg-items are not included in this switching-possibility.

An outlet with a beer drive installation will be entitled to buy the installation from Carlsberg after a period of 12 years after the effective date of the first installation agreement or cooperation agreement on the beer drive installation (switching). The take-over price is calculated as for draught beer barrel installations. However, the tank itself can be sold at market value.

Carlsberg is only allowed to postpone a customer’s right to switching in two cases: (1) where Carlsberg makes major re-investments or new investments in the beer installation (upsizing); or (2) where Carlsberg dismantles a beer installation (except for the tank) and replaces the installation with a new and smaller installation (downsizing). It is a prerequisite for postponing the date of switching, that Carlsberg has specifically informed the customer that he may, as an alternative, choose either to terminate the present agreement, or to desist from upsizing or downsizing and keep his original right to switching.

With regard to installation agreements and cooperation agreements which are already in force at the time of the DCC’s decision to make the commitments binding on Carlsberg, the possibilities for switching are more limited. However, these “existing agreements” are expected to be replaced by “new agreements” with a right to switching within a short period of time.

Carlsberg has the right to enter into pilsner draught beer exclusivity agreements for a period of maximum 3 years. The sale of beer through these agreements cannot exceed 4.5 % of the total annual sale of beer to the horeca-sector.

Furthermore, Carlsberg has the right to enter into sponsorship agreements with exclusivity for all beer types for a period of maximum 5 years. The sale of beer through these agreements cannot exceed 2.0 % of the total sale of beer to the horeca-sector.

Assessment and conclusion
With Carlsberg’s commitments only a very limited part of the market will be tied to Carlsberg. First of all, the term of notice in the installation agreements and the cooperation agreements has been shortened considerably. According to the commitments, the agreements can be terminated with 3 months notice except for a very limited number of agreements. Before, the agreements contained a 6 months term of notice, and in many cases, in particular agreements with the attractive outlets, the agreements could not be terminated the first 3-5 years. Without these long term agreements, the foreclosure effect of Carlsberg’s agreements is reduced.

With a term of notice of 3 months approx. [85-95] % of Carlsberg’s customers have the possibility of terminating their agreements with Carlsberg with short notice and enter into new agreements with Carlsberg’s competitors. The 3 months period is stipulated taking into consideration the time of dismantling the installations.

Carlsberg has confirmed that it will ensure that it is always possible to make place for a second draught beer barrel installation – not owned by Carlsberg - at the bar counter. In this connection, Carlsberg has confirmed that it will be possible for an outlet to close a tap on a draught beer barrel installation owned by Carlsberg when a second installation owned by the outlet or by one of Carlsberg’s competitors is installed. Carlsberg will, however, at the same time evaluate whether its installation shall be down-sized or taken down. In other words, the outlets will not automatically be in breach of their installation agreements with Carlsberg if they close a tap on one of Carlsberg’s installations.

Switching is now possible. The possibility for switching will to a large extent improve the competition conditions on the market, in particular for the smaller breweries, which cannot themselves offer beer installations to the outlets. Carlsberg has previously refused switching, and sale of beer installations amongst the breweries has not previously been practiced.

A purchase price of 18 % of the beer installation’s original value is a good bargain if the installation is in good repair. Carlsberg has stated, that it has no intention of cutting down on the maintenance of its beer installations when the time for switching is approaching. This possibility of switching on favourable terms works as an incitement for the outlets to purchase Carlsberg’s beer installations. The purchase can be financed by a competitor to Carlsberg. This will enhance competition.

Switching is possible after 5 years. The DCA has fixed the 5 year period taking into consideration that there has not previously been a tradition for switching in Denmark. There is no market for “used” installations as is know from other countries, and Carlsberg has not made any recording of its investments in its beer installations. The price at which switching will be possible, will in most cases be lower than the real value of the beer installation.

Moreover, at the time of switching Carlsberg’s competitors will compete for the outlets which have proven most successful. If switching is possible already after a very short period of time, Carlsberg’s competitors will be able to take unduly advantage of Carlsberg’s investments. The 5 year period is, thus, fixed in order to give Carlsberg some coverage for the risks that the company is taking by being investor number one.

Therefore, it is the DCA’s view that the short termination periods and the possibility for switching considerably reduce the barriers which have previously existed for either replacing or supplementing a Carlsberg beer installation with an installation owned by the outlet itself or a third party.

It is no longer possible to enter into agreements with full outlet exclusivity (except for a very limited number of exclusive sponsorship agreements), and the exclusivity allowed is limited to pilsner draught beer. This reduces the foreclosure effect considerably, since the outlets will always be able to sell non-pilsner draught beer and beer on bottles from Carlsberg’s competitors.

The limitation of the exclusivity to pilsner draught beer is to the advantage of, in particular, the smaller breweries wishing to introduce new beer brands on the Danish market. Beer of the pilsner type is still the dominating beer type, but new beer types (non-pilsner) are becoming more popular amongst the consumers. The new micro-breweries might, thus, concentrate their efforts on non-pilsner beer.

The pilsner draught beer exclusivity is agreed with outlets where Carlsberg has made large investments. The exclusivity secures Carlsberg a certain profit of its investments. Without such – limited – exclusivity, Carlsberg’s incitement to make large investments in the outlets would be limited. At the same time, the beer-sale from these outlets is relatively large and, therefore, there is room in the outlets for the sale of non-pilsner draught beer and beer on bottles produced by Carlsberg’s competitors. It is possible for Carlsberg to stipulate, that its pilsner draught exclusivity agreements cannot be terminated the first 3 years.

With regard to the sponsorship agreements, the foreclosure effect is limited. First, Carlsberg has only entered into a very small number of agreements. Second, the agreements are normally concluded after a tender where Carlsberg is competing not only with other breweries but also with other companies than breweries. Carlsberg is obliged to send information to the DCA in order for the DCA to monitor the number and extent of Carlsberg’s sponsor agreements.

The reason for the exclusivity in the sponsor agreements is the huge investments which are made in relation to a sponsorship. The investments are made in consideration of exposure of a trade mark. Exposure “on site” is an important element in Carlsberg’s efforts to create a link between a sport or music arrangement and Carlsberg’s brand. This link will be considerably weakened if other beer brands than “Carlsberg” were sold in the outlet. Without exclusivity it will not be interesting for Carlsberg to make large investments in the sponsorships. Therefore, the exclusivity is only agreed where it is necessary in order to protect Carlsberg’s extraordinary large investments in sponsorships. It is possible for Carlsberg to stipulate, that its sponsor agreements cannot be terminated the first 5 years.

The Commitments are made binding until 31 December 2007. After this period, the DCA will make an evaluation of the commitments’ effect on the market, i.e., whether the commitments in practice have met the concerns expressed by the DCC.