'Pay-to-stay' deals - where's the harm?

Competition analysis:

The news that Premier Foods has received cash payments from its suppliers in return for ongoing business has led to much discussion over the use of 'pay-to-stay' deals. Nicholas Spearing, head of the London antitrust group at Milbank, Tweed, Hadley & McCloy, considers the key issues and finds that the matter is not as clear cut as some critics have claimed.

Original news

Food producer criticised for making suppliers pay to do business.

Daily Telegraph, 5 December 2014: Premier Foods, the producer of food brands such as Mr Kipling, Oxo and Bisto, has been criticised for asking its suppliers to pay money or lose business with it.

What are 'pay-to-stay' deals and what's the possible theory of harm?

Pay-to-stay fees are lump sums paid by manufacturers to become or remain a listed or preferred supplier, usually to a retail chain. Similar payments include 'slotting allowances' (to secure particular shelf space, visibility or access for new products) and promotional contributions (to defray the cost of cut-price offers).

Theories of competitive harm attributed to (at least some) pay-to-stay deals include:

  • increased barriers for smaller suppliers unable to afford the payment
  • foreclosure of competing retailers, as suppliers concentrate on the retailers they have paid
  • higher wholesale prices from the paid-up suppliers, feeding through into higher retail prices, and
  • less money for supplier R&D and quality improvement

Are these arrangements always risky?

The analysis is not straightforward. Supplier payments may benefit consumers through access to a wider range of goods, as a result of:

  • the retailer not having to bear the entire risk of new product failure (and being more inclined to accept entry/range expansion as a result)
  • reduced supplier list enjoying greater volumes, with scale and commitment benefits, and
  • supplier 'bids' for listing and/or space providing a helpful signal to the retailer as to likely product appeal and profitability

Premier Foods recently attracted adverse comment on its pay-to-stay scheme. Here, payments were made by those supplying for the manufacturing process, rather than for retail listing. The above theories of harm may not differ substantially, whether retailers or manufacturers receive pay-to-stay fees. In each case, non-paying (or non-paid) competitors may be foreclosed. Price effects may be passed down the chain. However, the same range of countervailing consumer benefits may not be available. What works for shelf space in the supermarket (multiple, innovative consumer offers) may not transpose to the largely unbranded world of ingredient inputs.

What do the UK authorities have to say about these kinds of arrangement?

The Competition Commission (as it then was) looked at supplier lump-sum payments as part of its groceries market investigation in 2008. It broadly recognised that smaller/weaker suppliers were likely to come under pressure as a result of such payments. It accepted that smaller retailers might suffer higher prices from suppliers forced into harder terms with the major multiples.

The Competition Commission concluded:

'In general terms, we do not consider that obtaining lump sum payments from suppliers distorts competition between grocery retailers or between suppliers, with the exception of the possible effect of these payments on small suppliers.'

Nevertheless, the resulting Groceries Supply Code of Practice (GSCOP) provides that a grocery retailer 'must not directly or indirectly require a supplier to make any payment as a condition of stocking or listing that supplier's grocery products' unless the payment is in relation to a promotion or represents reasonable risk sharing on a new product line.

The GSCOP restrictions do not apply to payments other than those made to grocery retailers. Food (and other) manufacturers' requests for listing fees from their own suppliers will need to be assessed against the theories of harm outlined above. The same will apply to non-grocery retailers seeking such payments.

To sum up?

Frequently, pay-to-stay deals will be treated as part of the normal cut and thrust in a competitive market. They do not appear to be an enforcement priority either in the UK or Brussels. In assessing regulatory risk, much will depend on the market shares of the participants and the importance of their business to other players in the supply chain. Where a supplier or retailer is dominant, adverse effects on competition and consumers are likely to be more marked. This requires particular caution under both UK and EU law. Payments that deliver effective exclusivity will be judged accordingly. Competition risk will be further heightened where the scheme generates few demonstrable efficiencies or consumer benefits.

Interviewed by Jenny Rayner.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Originally featured on Lexis PSL Competition

Filed Under: Market news

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