Birds Eye Wall's Ltd: A report on courses of conduct pursued by Birds Eye Wall's Ltd in connection with the supply of wrapped ice cream

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On 22 December 1997 the Director General of Fair Trading (DGFT) asked us under the provisions of the Competition Act 1980 (the Act) to investigate four courses of conduct in relation to the distribution of wrapped ice cream which he believed had been carried out by Birds Eye Wall's Ltd (BEW). The terms of reference are at Appendix 1.1. Under the pro-visions of the Act, we had to consider whether, during the 12 months ending on the date of the reference, BEW was pursuing the courses of conduct, whether BEW was thereby engag-ing in anti-competitive practices within the meaning of the Act, and if so whether those prac-tices operated or might be expected to operate against the public interest.

BEW supplies almost 70 per cent of wrapped ice cream in the UK. It distributes wrapped ice cream primarily through its dedicated distributors: distributors appointed by BEW on contractual terms which do not allow them to handle products which compete with BEW's products. Such distributors supply accounts (known as 'indirect accounts') for which they act as principal, by purchasing the product from BEW to sell on their own invoice to those accounts; they also deliver as agents to BEW's 'direct accounts'-accounts where the sales and invoicing activities are carried out by BEW.

In investigating the courses of conduct referred to us, we found no evidence that BEW had refused to supply other wholesalers. We did, however, find that BEW had sup-plied certain regional wholesalers on terms which were less favourable than those which it granted to its dedicated distributors. We also found that BEW had supplied wholesalers on a basis which provided them with other benefits less favourable than the benefits which BEW conferred upon dedicated distri-butors. Thus in giving responsibilities for BEW's exclusive freezer cabinets to dedicated distributors, BEW conferred upon them the benefit of regular contacts with retailers. Dedi-cated distributors were also remunerated for delivery to BEW's direct accounts in excess of costs. In addition, BEW paid discounts to its direct customers only when supply had been made through dedicated distri-butors. Finally, we found that BEW had also granted discounts to retailers who purchased BEW's wrapped ice cream from dedi-cated distributors, but not to retailers who purchased from other suppliers.

We found that each of these three courses of conduct being pursued by BEW had restricted and distorted competition between wholesalers, so reducing the ability of whole-salers (who were not dedicated distributors) to compete to supply BEW's ice cream. This in turn adversely affected the ability of those wholesalers to compete to supply non-BEW pro-ducts in so far as their inability to supply BEW's products (the leading brand) meant that their overall drop sizes would be smaller and their unit costs higher. Some retailers also pre-fer to use only one distributor of ice cream, and in that case they would have been more inclined to choose a dedicated distributor who could supply them on competitive terms with BEW's products, since they made up the leading brands.

Given the particular importance of distribution in the supply of wrapped ice cream, and the dependence of other suppliers on national and regional wholesalers, we found that each of the courses of conduct being pursued by BEW had restricted and distorted competition between manufacturers. We saw no evidence that these courses of conduct could be related to the cost of any additional services provided by the dedicated distributors to BEW. We concluded therefore that by pursuing each of the courses of conduct, BEW was engaging in an anti-competitive practice.

We found no offsetting benefits to the public interest from these anti-competitive practices: we do not believe that in the context of BEW's market power they can be justified by reference to the benefits to BEW of the dedicated distribution system. We believe that they each operated against the public interest by reducing competition between BEW's dedi-cated distributors and wholesalers, by reducing competition between manufacturers, and con-se-quently by reducing choice and competition at the retail level in the supply of wrapped ice cream. We therefore concluded that they each operated, and may be expected to operate, against the public interest.

We recommended that BEW be required to supply wholesalers on the same terms as dedicated distributors from 1 March 1999 and that those terms should be fully transparent, that BEW should not offer any discounts to retailers available only on purchases from dedi-cated distributors, and that it should not increase the remuneration of dedicated distributors for delivery to direct accounts. We did not believe it desirable or practicable within the scope of this reference to seek to remedy the other types of benefits to dedicated distributors we have identified. We do not believe that, in the light of the interlocking effects of other aspects of the market that fell outside our terms of reference, the measures we have proposed can comprehensively remedy the adverse effects of the practices we had to consider.

Throughout our inquiry, we were made aware by many in the industry of the restrictions imposed by the terms of reference. A number of much wider concerns about the industry were expressed to us, in particular about the exclusivity of the dedicated distributors and freezer cabinet exclusivity, neither of which was among the specific courses of conduct we were requested to examine. We also heard concerns about the revised contract and dis-count terms BEW introduced for dedicated distributors and other wholesalers during the course of our inquiry, but outside the reference period we were permitted to examine, and the risk that BEW might take its distribution in-house. The matters that gave rise to these con-cerns could be capable of having a detrimental impact on competition within the wrapped ice cream market. All of these concerns have been reinforced, in our view, by BEW's strong market power. We have suggested that if the DGFT believes the matters giving rise to these con-cerns are or might be distorting competition and are not being resolved, then he should give immediate and serious consideration to whether a wider review is necessary into the industry.

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