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Category management - what are the competition law problems

What is category management?

Category management agreements are arrangements by which a retailer out-sources the provision of certain marketing services in relation to some goods (the category) to one of its suppliers (known as the category captain or category manager). Typically the supplier is the owner of a valuable brand for goods in the category. Such arrangements are commonly made by retail chains of supermarkets and others.

The OFT looked at category management briefly in its decision on the proposed merger of United Biscuits and Jacobs Bakery. It said that category management involved a leading supplier providing expertise to the retailer to help it to maximise the profitability of each of its product ranges. This may involve the “providing of research on the best way to market products, and what time and information on high and poor performers within the product range”.

Why do retailers use category managers?

A retail chain may decide to use one or more category managers because it cannot effectively provide the same quality of market research services in relation to goods in the category as can the category captain. In the UK supermarkets and other chains, such as DIY stores, typically have thousands of suppliers and it is unrealistic to expect them to be expert in the market research of all the product lines that they carry. The category captain however is in an ideal place to gather data on its own category of goods, and it will also be alive to all retail trends relating to that product group.

Why might the practice of category management be regarded as objectionable under competition law?

The legality of category management has not been closely analysed in the UK, despite being discussed in a couple of merger cases. At one stage it was planned to deal with it in the Supermarket Code of Practice but that has not happened to date.

The issues involved in the practice of category management that could raise competition law concerns are:-

• the supply by the retailer to the category captain of confidential information on all its suppliers in the category;
• the potential for misuse of the confidential information of its competitors by the category captain;
• the possibility that the agreement between the retailer and the category captain is a restrictive agreement in breach of competition law.
• the possibility that the category captain abuses a dominant position in the conduct of its captaincy.

Unlawful provision of information

In order to carry out its role effectively the category captain needs information on what products the retailer is selling and whether the overall sales volumes for the category are appropriate. This in turn means category captain needs to know which are the poor performers in the category. The reason for poor performance could be price related or it might be poor quality. It may simply be related to the way the category is displayed in the store or it might relate to bad publicity for products of the type in the category. The category captain may need to know more about prices of products and about complaints relating to the category and particularly for any poor performers within it. In order to assist the retailer with getting the most sales for the category the captain will need to know about future trends. It may want to know about new product launches of its competitors. This can result in the category captain acquiring the confidential trading information of its competitors.

It can be unlawful for a business to acquire the confidential information of a competitor and indeed for the competitor to provide such information. This is so where the information provision relates to commercially sensitive information or recent individualised market data. Whether or not information provision is actually unlawful will depend on the structure of the market concerned and the types of information provided. The test is usually whether the information reduces or removes a degree of uncertainty as to the operation of the market with the effect that competition between undertakings is restricted to an appreciable extent. Undertakings should pursue their own course of conduct on a market and should refrain from direct or indirect contacts with competitors which influence their competitive conduct.

Breach of the laws relating to information provision are usually dealt with under the Chapter I prohibition in the Competition Act 1998 and Article 81 of the EC Treaty. Breach of these provisions can lead to fines, capped at 10% of the group worldwide turnover of those involved; the possibility of private actions for injunctions and damages; and the invalidity of the agreement. It follows that, if it is commercially possible, it is sensible to have a Chinese wall at the category manager between the staff who provide the category management services and the staff who are responsible for sales. In practice this may not always be possible due to the size of the category manager’s undertaking. In those circumstances the types of information being provided by the retailer to the category captain must be carefully evaluated to avoid breach of the rules on information provision.

Legality of the category management agreement

It is clear from the issues which can arise on unlawful information provision that the retailer will want to be clear on the information it will provide the category captain and as to its use. However the agreement must also avoid other pitfalls - such as letting the recommendations and opinions of the category captain be any more than that. When considering if the category management agreement is lawful it is useful to see whether the services supplied by the category captain to a retailer can come within the block exemption on vertical agreements. The block exemption can only apply if the supplier has a market share of less than 30% and if there are no black clauses - such as price fixing clauses. In the case of category management this means that the retailer must not be obliged to implement recommendations of the category manager, for example in relation to pricing of goods in the category.

However even if the relationship is categorised as a vertical one in respect of the category management services themselves it is necessary to consider whether the relationship is also horizontal, so that the block exemption on vertical agreements does not assist. If the category captain is a supplier of product which is in competition with the retailer’s own brand offering then the arrangement is also a horizontal one. The category captain’s undertaking is in competition with the retailer as a supplier of product and in relation to the profit margin to be made on that product. There are detailed guidelines on the legality of horizontal relationships which need to be considered. The impact of application of the guidelines will depend largely on market structure and market power. Broadly the higher the market shares of category captain and retailer in aggregate the more problematic the relationship.

The OFT took a sanguine view of the nature of the relationship in the United Biscuits/Jacobs Bakery merger.

“it would not expect a retailer, (particularly a major supermarket chain) to permit itself to be disadvantaged by its choice of category manager or to adherence to any recommendations such that it resulted in a failure to provide an optimum product mix, maximising the overall profitability of (the range of the category”.

Abuse of a dominant position

Consideration needs to be given to the position where the category manager is the market leader and dominant. The captain must not be allowed to abuse its position when conducting the category management role - eg by suggesting that products of its competitors are not displayed as prominently as its own . This issue of abusive conduct by the category captain has been considered in the US in a number of cases but has not so far arisen in the UK.

key expertise

Geraldine Tickle
Partner
geraldine.tickle@martjohn.com

James Dilley
Partner
james.dilley@martjohn.com

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