What are Territorial Supply Constraints or TSCs in practical terms?
By refusing to supply particular products or limiting the number, range or languages used on packaging, large manufacturers limit what is available for sale in different countries and stop retailers seeking out the best deal.
They do this by forcing a retailer based in Country A to buy a product from a supplier’s branch in Country A. The retailer cannot go to Country B or C where the same multinational supplier is offering a better price or a wider choice. Retailers have no choice but to accept the conditions put forward by large brand suppliers as they must provide consumers with the products they expect to find in stores (usually referred to as must have products).
How is this affecting consumers and when?
A Commission study estimate that this is costing European consumers at least €14 billion.
This means some EU consumers are paying more for the same products compared to those in a neighbouring country, without this being justified by different costs or regulations, or simply cannot find certain products in their shop.
This affects EU consumers when they buy everyday products such as detergents, cosmetics, sweets and beverages. Making them pay more despite the pressures on their household budgets as inflation and the energy crisis takes its toll
Why is this unfair? Can the price differences be justified?
Treating retailers differently in some countries can be justified due to differences in taxes like VAT and labour costs, but as the European Commission study confirms, wide price differences cannot be fully explained by this.
On top of the fact this is costing consumers €14 billion, large manufacturers are using the Single Market to their benefit to find lower prices and take advantage of the wider choice it offers them.
They benefit from being able to source ingredients for their products everywhere in the EU and often produce in only a few factories in Europe. This brings their costs down.
If large manufacturers keep the benefit to themselves, would retailers do the same?
No. Because of strong competition on the market, retailers have no choice but to pass on price changes to consumers.
A retailer who does not have a ‘must have’ on its shelf, risks the customer going to its competitor. Conversely, a retailer who has a must have on its shelf at a competitive price, can attract that customer.
Why do prices of private label products also vary across Europe?
Private label prices differ for many reasons. For example, it may depend on where they are sourced and relate to differences in the cost of ingredients, labour, taxation, logistics, or national legislation.
Retailers often source products for multiple markets from the same supplier (something which large brands prevent by using territorial supply constraints), enabling them to benefit from economies of scale by asking for the same specification, uniform packaging and multi-language labelling, as much as possible. This creates efficiencies and means lower prices for consumers. At other times, their suppliers may produce them locally to account for national rules or local preferences.
The differences in prices relate to explainable differences in production costs – without the question mark over unexplained differences that several studies attribute to territorial supply constraints for non-private label products.
How can Territorial Supply Constraints be stopped?
We ask the EU Commission and member states to take decisive action to make Territorial Supply Constraints history using a combination of competition enforcement measures and guidance.
Competition cases send a strong signal on practices that should not take place on the market. In 2019, the European Commission fined AB Inbev, a beer company €200,000,000 for deliberate fragmentation of the beer market between Belgium and the Netherlands. An investigation into the practices of Mondelez was also launched in January 2021.
Competition authorities should also use the guidance provided by new competition rules specifying measures used by manufacturers to deter retailers from contacting distributors in other member states (Paragraph 204 of the vertical guidelines).
The EU Commission can also declare that that artificial market segmentation that prevents the circulation of products across borders is not acceptable practice and that large consumer goods manufacturers that restrict retailers’ freedom to find the best deal in the Single Market are against the Single Market rules and freedoms.
Accompanying the declaration with Commission guidance would help establish the types of practices that should stop, building on the findings of the AB Inbev case and the Commission study of TSCs. An annual review process involving both retailers and suppliers could help monitor whether behaviour changes and identify other sectors affected by TSCs.
What exactly does the European Commission need to do?
We ask the EU Commission and member states to take decisive action to make Territorial Supply Constraints history, by:
- Making better use of competition enforcement measures (e.g. through investigations like that into AB Inbev’s deliberate strategy to fragment the beer market).
- Declaring as not acceptable the practices that artificially segment the Single Market and prevent the circulation of products across borders; building on the findings of the AB Inbev case, the Commission study of TSCs and the vertical guidelines.
- Monitoring the progress in stopping TSCs through an annual review process.