In the decision of the Competition Authority published today No. 64/2008 has concluded that Hagar (which operates the Bónus chain of supermarkets, among others) abused its dominant market position through actions aimed at its competitors in the food market. The Competition Authority considers that Hagar's breach of Article 11 of the Competition Act was serious and liable to cause significant competitive harm to business and the public.
The investigation into this matter began in mid-2006 after the Competition Authority had sought views and received reports of possible breaches by Haga of section 11 of the Competition Act, as discussed in more detail below.
Article 11 of the Competition Act prohibits any abuse of a dominant position in the market. For this provision to apply, the relevant market must be defined and the position of the undertakings on it assessed. Hagar has, in handling the case, completely rejected that the company was dominant. The Competition Authority therefore had to consider this issue and the decision contains a detailed analysis of the food market.
The Competition Authority concludes that the relevant market in this case is the sale of so-called groceries (i.e. products that meet consumers' daily needs) in supermarkets. Haga's view that fast-food restaurants, petrol stations, kiosks, bakeries and other specialist shops are its competitors was not accepted, as such establishments do not satisfy consumers' general need for a wide range of groceries. The geographical markets in question are considered to be the capital region and certain areas in the countryside. The Competition Authority's decision examines the market share of Hagar, Kaupás (which operates, for example, Krónan and Nóatún), Samkaup and other competitors in this market. The Competition Authority's investigation revealed that Hagar has a dominant market share. At the end of the investigation period, Hagar's share was around 50.1% nationwide. This share has grown significantly in recent years at the expense of other competitors. In the capital region, the company had a market share of around 60%. The competitors' market shares were much smaller. In light of this share, among other factors, the Competition Authority's assessment in the case is that Hagar is in a dominant market position.
Haga's infringement of competition law consists of the so-called below-cost pricing that the company resorted to in 2005 and 2006. This practice essentially consists of a dominant company selling products below cost. Such abnormal pricing can, among other things, lead to smaller competitors being driven out of the market or to a reduction in price competition with the dominant company. Even if consumers benefit in the short term from receiving a product or service at a very low price, the disruption to competition caused by such an abnormal price reduction by a dominant undertaking, in the long term, leads to a reduction in competitors, higher prices for consumers, lower service or quality, and a reduction in consumer choice. Competition law is, among other things, intended to ensure that effective competition benefits consumers in the long term.
Haga's breaches occurred during the so-called discount supermarket price war, which began in late February 2005 when Krónan, owned by Kaupáss, introduced a price reduction of up to 25% on the most common categories of groceries. Representatives of Krónan stated that these price cuts were made to establish more effective competition in the food market. Haga's Bónus stores publicly declared that they would „defend their position“ and stick to their pricing policy of always offering the lowest price on the market. Subsequently, the aforementioned price war broke out, most notably in the pricing of dairy products. The price war lasted until 2006.
The Competition Authority obtained extensive data on the sale and pricing of dairy products during this period from Hagar, Kaupás, Samkaup and Mjólkursamsalan.
This investigation shows that Hagar has abused its dominant market position by selling milk and dairy products below cost in Bonus stores. The main dairy products were sold at a substantial loss, which resulted in the Bonus stores as a whole operating at a loss. Hagar has stated in the media that their loss from the price war was approximately 700 million kr. The Competition Authority therefore considers that the pricing constituted an unlawful below-cost sale and that the conduct was intended to maintain and unreasonably strengthen Haga's position in the market for the sale of groceries in supermarkets. Furthermore, the investigation shows that the infringements were extensive. Haga's actions were intended to exclude its main competitors, such as the low-cost grocery stores owned by Kaupás (Krónan) and Samkaup (Nettó and Kaskó), from competition and thereby weaken those companies as competitors in the market.
The pricing policy pursued by Bónus is also considered relevant. It is well-established in competition law that dominant undertakings may have an interest in engaging in below-cost pricing in order to build a reputation and send a message to competitors that it is not worth competing with them vigorously. The evidence in the case shows that Bónus did not content itself with merely matching its competitors' prices, but repeatedly undercut them, with the company's actions even going so far as to provide customers with the most common dairy products free of charge for a period. The Competition Authority is of the opinion that by means of undercutting in this case, Hagar has effectively cemented its reputation such that no competitor will be permitted to offer consumers products at a lower price than that offered in Bonus stores on a permanent basis. Is this behaviour, and the reputation it entails, likely to reduce the chances of Bónus's competitors engaging in price competition with the company's stores in the future in a similar manner to that of the price war. The application of the Bónus stores' pricing policy in this case therefore does not increase competition, but rather weakens it in the long term. It is expected that the Competition Authority's decision will reduce barriers to competition in the food market and create the conditions for all companies in the market to compete vigorously through normal market practices.
It is both natural and desirable for a dominant company to meet and engage in price competition. Haga's actions in this case, however, were not in keeping with the strict duty that rests on dominant companies and went far beyond their right to meet competition. By undercutting its competitors in all instances, even when it means operating at a loss, smaller shops and retail chains are thus shown, in word and deed, that it is uneconomic for them to compete with Bónus on the basis of price, as a better offer will always be made, regardless of the cost basis. Such conduct harms the long-term interests of consumers because it prevents effective competition in the food market.
With reference to the serious nature of Haga's infringement and the significant consumer interest in competition in the food market, the Competition Authority considers in its decision that a fine of 315 million krónur is appropriate.
Background information
Other observations on the food market – overview:
In December 2005, the Competition Authority presented a report that the competition authorities in the Nordic countries had prepared on their respective food markets. In addition, the Competition Authority presented its own priorities for monitoring the food market in Iceland for the coming period and gathered views on the state of the food market in meetings with numerous companies and stakeholders. Following this, the Competition Authority has launched several investigations into the food market. These include:
The proceedings in this case
The investigation into this case, which concluded today, began in mid-2006 after the Competition Authority received reports of possible breaches by Hagur of Article 11 of the Competition Act. The case has involved extensive data collection from all of the country's main supermarkets. Evidence has also been obtained from the Director of Taxation and the Milk Marketing Board. In 2007, the Competition Authority compiled a detailed statement of objections, which addresses the definition of the market, the position of the companies within it, and a description of Haga's alleged infringements. The document was sent to Haga for comment on 5 November 2007.
On 29 November 2007, the Competition Authority received a letter from Hagar demanding that the authority withdraw its objection document of 5. November 2007, and that the case be consolidated with another case which began with the aforementioned search at, among others, Hagur on 15 November 2007. Hagar argued that the circumstances of the case had changed completely, as two separate cases concerning Hagar were now under consideration, both relating to the same conduct. In a letter dated 4 December 2007, the Competition Authority rejected this request from Hagar. Reference was made, among other things, to the fact that these were two separate and unrelated cases. On 12 December 2007, Hagur appealed this decision of the Authority to the Competition Appeals Board. By ruling of the Competition Appeals Board in case No. 8/2007 Hagar hf. v. The Competition Authority, 11 January 2008, was a case in which Hagar's appeal against the Competition Authority's decision to reject its request for the consolidation of cases was dismissed by the panel.
In February 2008, Haga submitted comments on the Competition Authority's statement of objections. The Competition Authority then wrote to Hagur requesting an explanation for the company's position that the retail chain Bónus had not been afforded an opportunity to be heard in the matter, and that the letter of objections should have been addressed to Bónus rather than Hagur. A response was received from Haga on 14 March. After reviewing and examining Haga's arguments and reasoning, the Competition Authority reached the aforementioned conclusion today.
See the decision for details No. 64/2008.
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