Competition Commission v South African Breweries Limited

• Jurisdiction: South Africa
• Judge: Davis JP and Molemela AJA and Rogers AJA
• Judgment Date: 02 February 2015
• Citation: 2015 JDR 0177 (CAC)
• Docket Number: 129/CAC/Apr14
• Court: Competition Appeal Court

Davis JP & Rogers AJA

Introduction

[1]

This appeal raises important questions both of law and in respect of the evaluation of evidence concerning the application of key provisions of the Competition Act 89 of 1998 ('the Act'). The first respondent ('SAB') is the largest clear beer producer in the country. The evidence suggests that it enjoys a market share of between 80% to 90 % of this market. The case which the appellant ('the Commission') has brought against it invokes ss 4(1) (b), 5 (1), 5(2) and 9(1) of the Act. It essentially concerns whether SAB, overwhelmingly the dominant firm in the designated market, engaged in various agreements or practices, some of which were in concert with second to fourteenth respondents, and all of which had the cumulative effect of substantially lessening or preventing competition in a downstream market, in a manner which causes harm to consumers, reducing consumer choice, increasing downstream distribution costs and increasing the costs of competitors to SAB.

The factual background

[2]

By 2010, SAB held seven licences for the manufacturing of beer, with an annual brewing capacity of 3.1 b litres. Its breweries are located in Port Elizabeth, Limpopo, Gauteng (three breweries), Kwa-Zulu Natal and in Cape Town. By contrast,

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its main competitor opened its first Brandhouse brewery in March/April 2010 with an initial capacity of but 3 million hectares litres.

[3]

SAB sells its beer products by way of a primary distribution network from its seven breweries to wholly owned depots as well as to appointed distributors being second to fourteenth respondents. A secondary distribution channel ensures that beer is distributed by the depots and appointed distributions ('ADs') to customers. Twelfth to fourteenth respondents have concluded franchise agreements with SAB whereas second to eleventh respondents have entered into wholesaler agreements with SAB.

[4]

According to an expert report compiled on 19 July 2010 by Genesis, on behalf of SAB, the core distribution system consists of some 40 wholly-owned distribution depots which are managed by SAB. They distribute around 90% of its beer volumes. This system regularly delivers to more than 30 000 licenced outlets, including restaurants, bars and liquor stores and sells to end-consumers. In addition, SAB avers that it utilizes the ADs to expand its distribution network into rural areas.

[5]

The main difference between the wholesaler and franchise agreements is that a distributor, holding a franchise agreement, is not required to fund the establishment of a fully-fledged distribution business upfront, and can buy equity over time. In addition, a franchise agreement, unlike a wholesaler agreement, has an initial term of ten years. Save for this distinction, there is no material difference between wholesaler agreements and franchise agreements.

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[6]

The relationship between the ADs and SAB can be summarised thus: An AD is assigned an exclusive territory to service. No other AD or depot is appointed or permitted to service this territory. Personnel of SAB are stationed at the relevant AD in order to conduct the marketing functions in respect of the AD area. ADs are required to adhere to strict service standards. These include (i) stocking the full range of SAB's products; (ii) holding three days' stock as forward cover; (ii) not selling beer that is more than a certain number of days old; (iv) stocking beer in a warehouse complying with certain requirements; (v) providing at least one delivery per week for each customer ordering at least ten cases per delivery; and (vi) compliance (to the score of a at least 80%) with SAB's operational and custom service audits and customer satisfaction surveys.

[7]

The ADs' operational systems are fully integrated into SAB's systems. Thus, customers of an AD place orders directly with tele-sales personnel of SAB. The ADs do not independently develop their own markets and then sell the product to that market at a margin. SAB provides the ADs with the training of management and staff and, where required, the funding on favourable terms.

[8]

The remuneration of ADs takes the form of two different fees. Firstly, ADs are paid a handling fee for every unit sold. This fee compensates the ADs for warehousing expenses and provides a reasonable return on related investments. Secondly, a delivery fee is paid to an AD for every unit delivered. This fee compensates the AD for delivery expenses and likewise provides a reasonable return on related investments.

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[9]

The contract that the ADs have entered into with SAB imposes upon them a restriction of operating in a defined geographical area and further requires that they serve all customers of SAB in that region who purchase a prescribed minimum quantity. It also restricts ADs to distributing beer products manufactured by SAB.

[10]

There is nothing in these contracts which prevents SAB from selling its products to firms which perform distribution functions and compete for the same customers as do the ADs. However, these independent distributors do not receive the same fees for distribution.

[11]

At the time that this dispute was heard before the Competition Tribunal, the primary distribution of beer involved the distribution from SAB's seven breweries to 40 wholly-owned depots and to 13 ADs, being second to fourteenth respondents. In total, 91% of all of SAB's beer production was distributed through its depots and the balance through the ADs.

[12]

The evidence suggests that, in certain circumstances, beer is distributed directly to customers but this only occurs when the customers are sufficiently large to receive a delivery from a 30-pallet truck and have the necessary equipment and labour to handle such direct deliveries. These direct deliveries account for approximately 2.6 % of the total distribution volume.

[13]

Expanding on the function of the ADs, they perform primarily the same services as the depots. They accept orders placed by customers in their respective

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distribution areas, they receive beer from the relevant brewery, which is then stocked in an insulated warehouse. They deliver the beer to customers, provide for customers to call and collect beer from their premises and they engage with the sales team of SAB in their designated areas. The ADs deliver quantities from a minimum of ten cases of beer and they do so at least weekly to customers in their defined area. Over the minimum prescribed size, they are obliged to deliver to all customers in their allocated area, regardless of where a customer is situated. Approximately 80% of the business of the ADs comprises the distribution of mainstream quarts. The size of the truck required to perform these deliveries is one that can transport 18 pallets; thus it is a large vehicle.

[14]

As indicated earlier in this judgement, SAB draws a distinction between primary and secondary costs. Primary distribution costs are the costs of distributing beer from its breweries either to the depots or to the ADs. By contrast, secondary distribution costs are the costs incurred in distributing beer from the depot or the ADs to retail customers. These costs are split into two; firstly, distribution to customers that are located within a 50 km radius and secondly costs incurred in delivery to customers located beyond the 50 km radius. The 50 km radius is considered to be a free delivery zone.

The core issues

[15]

This factual matrix gave rise to four separate issues which constitute the basis of the Commission's case:

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1.

In terms of s 4(1)(b)(ii) of the Act, the Commission argues that respondents are in a horizontal relationship with each other. The relationship is of such a character to justify the application of s 4(1)(b)(ii) of the Act to the distribution structure adopted by SAB.

2.

In the event that s 4(1)(b) of the Act is not applicable, the Commission contends that the respondents are in a vertical relationship; that is between SAB, as the manufacturer of beer, and the ADs as distributors of this beer. This relationship justifies a conclusion that there was a substantial preventing or lessening of competition as a result of these agreements entered into between SAB and the ADs.

3.

In terms of s 9(1) of the Act, the Commission contends that the sale of beer products by SAB to the ADs are equivalent transactions to the sale of bulk product by SAB to independent distributors, in circumstances where both the ADs and the independent distributors provide distribution services on behalf of SAB. It is argued that, as these transactions are equivalent, the favourable approach of SAB to the ADs represented discrimination against independent distributors which discrimination has the effect of substantially preventing or lessening competition in the relevant market.

4.

Section 5 (2) is invoked by the Commission to argue that SAB engaged in a practice of retail price maintenance.

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The horizontal case

[16]

The horizontal case brought by the Commission is based upon an alleged restrictive horizontal practice in terms of s 4(1)(b)(ii) of the Act. The section provides, inter alia: 'An agreement between or concerted practice by, firms or a decision by an association of firms, is prohibited if it is between parties in a horizontal relationship… (which) involves (ii) dividing markets, by allocating customers, suppliers, territories or specific types of goods or services.'

[17]

The Commission contends that SAB together with second to fourteenth respondents (the ADs), as independent firms, entered into an agreement which involved a division of the relevant market for the...