cartels, collusion, COMESA, East Africa

COMESA taste-tests its 1st investigation in beer market-allocation investigation

DID A 2017 DANISH/FRENCH BEER MERGER PRECIPITATE THE LATEST INVESTIGATIONS INTO POTENTIAL CUSTOMER-ALLOCATION AGREEMENTS IN THE COMMON MARKET?

By the Editor, with Terry Kehonji

The COMESA Competition Commission (“CCC”) has initiated investigations into four beer-producing companies in the common market, due to potential violations of the COMESA Competition Regulations. The companies involved include: Diageo, AB InBev, Heineken and Castel, which distribute their products in the common market for eastern and southern Africa (COMESA). Diageo is the largest shareholder of East African Breweries, whilst AB InBev manufactures Castle beer, popular in eastern Africa. The French wine & beer maker, Groupe Castel, had recently filed multiple merger notifications with the CCC, seeking the regulator’s approval of Castel’s takeover of Cepar Ltd., Raya Brewery Co., and Zebidar Brewery S.C., located in Mauritius and Ethiopia (both COMESA member states), respectively. Prior to its 2018 acquisition spree, Castel (through its parent company, B.I.H.) had filed a 2017 notification to seek the CCC’s blessing of its acquisition of shares in Carlsberg/Malawi.

Background of the investigations

An antitrust lawyer familiar with the CCC pointed AAT to the latter merger filing, from 14th December 2016, as a potential source of the present collusion inquiry. He notes the following: “I have reviewed the relevant merger decisions of the Commission and found the Castel/Carlsberg one to be of most interest or concern to the parties. Note that the CCC’s 4/2017 decision states expressly, at paras. 8-11: ‘the transaction raises some competition concerns in the relevant markets. Specifically, the CID noted that the transaction may result in coordinated effects between merged entity and SABMiller Africa Investments limited (SABMiller). This is because there is an affiliation between the acquiring undertaking, B.I.H and SABMiller … Further, at its 29th Meeting held on 15 March 2017, the CID observed that the beer market appeared to be partitioned in the Common Market. The CID noted that in most cases, it was rare to find competing firms producing beer products in one Member State or a firm operating in one country exporting its beer products to other Member States. The CID observed that Carlsberg beer produced in Malawi was not exported to neighbouring Member States and similarly, SABMiller products are not exported from neighbouring Member States into Malawi. The CID raised concern that beer products were not subject to free movement across borders in the Common Market …'”

Now, 4 years after said merger decision, the CCC has expressed that its basis of the inquiry relates to the manufacturers’ alleged market-allocation arrangements among themselves, which are not only limited to purely horizontal allocation agreements, but also include territorial restrictions in the vertical agreements manufacturers enter into with their distributors.

In antitrust parlance, market or customer allocation exists where horizontal competitors, active in the same market or line of business, allocate specific customers, products, or territories among themselves and essentially agree not to interfere with each other’s allotted share or customer base.

Pursuant to the “Notice of Investigation #1“, the CCC:

“has observed that the manufacturers have market allocation arrangements among themselves and/or territorial restrictions in their distribution agreements with third party independent distributors. The Commission has preliminary concerns that the market allocation and territorial restrictions reinforce national borders thus affecting trade between Member States and restricting competition in the Common Market. As such, the Commission will assess the agreements and existing arrangements to determine their effect in the Common Market and apply appropriate measures as per the Regulations.”

What are the possible violations?

The COMESA Competition Regulations, under Article 16, prohibit undertakings from engaging in practices or signing agreements that either affect trade between the COMESA Member States, or distort trade in the common market. In addition, under Article 19, the Regulations create an offence where rival or potentially rival undertakings engage in, among others, market or customer allocation agreements.

The Commission is therefore concerned that the agreements signed by the undertakings and between the companies and distributors are affecting trade between Member States and restricting competition in the COMESA common market. 

What is the effect of this inquiry?

Andreas Stargard
Andreas Stargard

According to Andreas Stargard, a competition-law practitioner with Primerio Ltd., the “commencement of this (first) investigation of 2021 does not necessarily mean that any company has violated the COMESA competition regulations, nor that any part of the brewers’ conduct is anti-competitive. An inquiry such as this (including its call for public input and comment from affected entities in the distribution chain) simply seeks to assist the Commission in its evaluation of the underlying market arrangements.” Interestingly, Stargard notes, “the CCC has previously opined that ‘there has been significant entry of market players in the beer industry in the Common Market and the beer market continues to be competitive.’ If one of the breweries were to seek my advice, I would start there — quote the CCC’s own statements from official decisions right back and ask, ‘Were you wrong then, or are you wrong now?’…” However, Stargard cautions, “the 2017 Carlsberg/Castel merger case does give you pause. The CID’s decision in that investigation expressly called for the parties’ production of further documents, namely (at para. 11): ‘the distribution agreements that exist between the parties and various distributors in the Common Market.”

Mr. Stargard notes that he would not be surprised if it was this transaction that brought the distribution practices of the various COMESA brewers into focus for the CCC staff, which has now materialized into a fully-fledged collusion investigation.

His Kenyan colleague, Ruth Mosoti, adds that: “Were we to represent any of the targets of this investigation, we would start evaluating the agreements that are being scrutinised from a baseline position of ‘no infringement‘, focussing decisively on the history and context of the contracts, whether and how they were in fact adhered-to and executed, and also — quite importantly in competition-law matters — evaluating their economic impact and competitive effect on the market, using expert economic input.”

As the CCC notice states, it will, “in accordance with the provisions of Part 3 of the Regulations, conduct an inquiry to determine whether the alleged conduct has as its object or effect the prevention, restriction or distortion of competition in the Common Market or in a substantial part of it.

Where the conduct of these companies is seen to be anti-competitive, the Commission will take suitable measures against the involved entities, including the potential imposition of significant fines and injunctions against the contravening business practices.

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