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Competitive success and the law: The case of Tetra Pak
European Manapmrt /ouma/ Vol. 11, No. 2, pp. 190-200, Printed in Great Britain.
0263.2373193 $6.00 + 0.00. Pergamon Press Ltd.
1993.
CompetitiveSuccessand
the Law:
The Case of TetraPak RALF BOSCHECK,
Professorof Economics
and Strategy, IMD International,
In July 1991, the European Commission imposed its highest-ever fine for abuse of market power and restraint of competition against Tetra Pak, the Swedish/Swiss packaging company. Ralf Boscheck presents a case study of this decision arguing that the EC investigators may not have defined the market correctly and, in fact, may have misinterpreted the true basis of Tetra Pak’s competitive advantage. It is suggested that policy makers and companies must engage in dialogue over society’s welfare costs and benefits and corporate competitive advantage if competition law is to be efficient.
Lausanne
‘Tetra Pak: Swiss precision in seeing off its competitors’ read the headline of the Financial Times business law section on 25 July 1991. What followed was a brief summary of the charges which the EC Commission had brought against the Swedish/Swiss packaging company, which ultimately resulted in the highest fine ever imposed by Brussels’ competition policy authority: 75m ECU. Despite the record penalty, everything surrounding the case was rather ordinary and reflected the international trend towards increased investigations of charges of abuse of market power and restraints to competition. Initiated by a competitor, Brussels’ market analysis attested Tetra Pak to have a dominant position, against which a whole range of pricing, distribution and service decisions suddenly appeared to abuse the company’s competitive strength. Yet, also similar to other cases, it was by no means obvious whether EC investigators had defined the market correctly and to what extent the commercial and contractual relations, to which they objected, were in fact not necessary to maintain the economic viability of Tetra Pak’s operations. The following presents a brief company history based on publicly available information, including the documentation in support of the position taken by the EC Commission.’ The key evidence, as cited by the Commission, is represented, although an attempt is made to counter the EC’s strikingly negative attitude by presenting the data within, rather than outside of, its appropriate commercial context. This is to provide the basis upon which the reader may assess the validity of the EC’s verdict and Tetra Pak’s response, as presented in sections 2 and 3. Section 4 presents some basic comments on the case and the need for companies and policy makers to engage in a dialogue on what it takes to attain, sustain and exploit a competitive advantage, and at what costs and benefits to society at large. 1
Tetra Pak
Founded by Ruben Rausing and Erik Wallenberg in 1951, Tetra Pak had taken its name from its, at that time revolutionary, packaging system for the production of tetrahedron-shaped cartons. Since then, the company has come a long way in developing and marketing 190
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COMPETITIVE SUCCESS AND THE LAW: TETRA PAK
integrated packaging systems, ~cor~ra~ng packaging material, packaging machines, distribution equipment, as well as services and training, to uniquely meet the requirements of the liquid food market. For Tetra Pak, offering solutions to a customer’s entire packaging requirements translated into maintaining its technological edge, accepting a single-source res~nsib~i~ and cultivating a close customer liaison based on a ‘mutual goal: an efficient, well-functioning packaging line, providing maximum machine utilization’ (Company Report).
By the early 1990s Tetra Pak’s typical buyer was a European dairy. Seventy per cent of its packages were used for milk and milk products, the rest was accounted for by products as diverse as juice, fruit drinks, mineral water, table wine, soya products, coffee and coffee drinks, edible oils, sauces and soups. The 1991 acquisition of Alfa Lava1 - a global manufacturer of dairy and food processing equipment - both underlined Tetra Pak’s commitment to the dairy sector and strengthened its endeavour to further penetrate the broader market of liquid and semi-liquid food packaging. By January 1?92, the company generated 54% of its sales in Europe, 26% in Asia, 12% in North America, 5% in Africa and 3% in Oceania, and major initiatives were underway in Eastern Europe.
Box 1
Products and Markets Tetra Pak offered packaging material, machines (for sale or lease) and services for five types of aseptic and nonaseptic cartons. In general, cartons were suited for packaging a variety of liquid and semi-liquid foods, although market research indicated that in Europe some 70 to 90% of the cartons sold were in fact used for the packaging of milk and other liquid milk products. Although there were fairly major differences in consumer preferences between countries, 60% of all milk sold in the EC was supplied in cartons. Most milk entered the stores in a pasteurised form as fresh milk or, after ultrahigh temperature treatment under aseptic conditions, as UHT milk. As both types of milk product required different packaging machines and materials, and any eventual price change in packaging costs of either one of them was hardly sufficient to induce consumer switching (packaging material costs were only 10% of the final consumer price of the product), a recent industry study clearly segmented the carton machinery and material market on the basis of the type of milk they were supposed to wrap. In the mid-1980s - the only time for which data were available - Tetra Pak’s European market share in the thus defined aseptic and non-aseptic packaging segment had been estimated to be around 90% and 50% respectively. Others, including Switzerland’s PKL, held the
The Context of the European Food Packaging Sector in 1991
Raw Materials Highly Concentrated Capital Intensive Low to Medium Growth
Food Sector
Food Retail
Raw material Packaging Manufacturing Distribution Total Cost
12% 10% 47% 31%
Retail Alliances Scanner Technology Direct Product Profitability
Consumer
(DPP)
Ecology Convenience Price
100%
Sluggish consumer demand, estimated to grow by a mere l-2% pressures confronting Europe’s food packaging suppliers.
over the coming years, had heightened
a range of competitive
Suppliers: Glass, plastics, paper and metal producers had consolidated
capacities and seriously considered any oppo~unity that would dampen cost pressures and help to escape their inherent market cyclicality. Alcoa and Reynolds had been among the first to integrate into can production; BASF and Courtaulds were turning their resins into films: Feldmtihle and Bowater were examples of paper producers offering corrugated carton boards.
Buyers: The food retailing sector had been transformed
by pan-European acquisitions and the emergence of strong buying groups. In addition, the widespread use of information technology helped stores to evaluate the direct profitability of products on their shelves and thus added further to their bargaining power vis-&vis food manufacturers. Nevertheless, basic retail economics had not changed: cost savings could best be achieved in logistics, handling and inventory; store productivity was still determined by product-turn and hence appeal. Appealing to consumers, however, increasingly required a growing ecological awareness to be addressed. On the next level, food producers were counteracting retail consolidation by merging themselves. Industry analysts believed that the acquisitions of the late 1980s such as NestleIRowntree, BSNlHP Foods, NestkYBuitoni, BSNiGalbani or Kraft/General Foods, were merely foreshadowing a broader drive towards increased concentration, Whereas in the past the segment of highly-processed foods had already been fairly concentrated, the new merger wave affected less-processed-food producers as well. With retail buyers better positioned to squeeze their margins, but also with a Single Market expected to bring more distant consumers into reach, food producers were shopping around for ways to reduce input and operating costs, enhance product durability and quality, and add to their flexibility in meeting channel demands. A whole range of packaging materials and formats were likely to be displaced by others. In a relativety short period of time, the final consumer was expected to find a number of his customary products in new types of wrappings. Competition: Thus, sandwiched between strengthening buyers and suppliers, the European food packaging sector was bound to change. Some companies were accepting the challenges by merging for ‘synergies’, scale and market power; others sought to diversify into related as well as unrelated sectors; others would try to sustain a niche position against the encroachments of other packaging suppliers and materials. Which type of strategy ultimately would be successful and profitable was hard to foresee; only one thing was certain: preconceived notions of markets and businesses had to be re-evaluated under the overall impact of changing market forces.
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Box 2
The Tetra Pak Packaging Range Tetra Classic
Tetra Brik
Tetra Rex
Tetra King
Tetra Top
l Tetra Classic, the original tetrahedron-shaped carton, minimized packaging material and had been extremely 1950s; it was followed in 1961 by its aseptic version which permitted the storage and transport of perishable unrefrigerated conditions.
successful in the food products in
l Tetra Btik cartons, introduced in 1963, offered a modular shape that precisely met the stacking requirements of international loading pallets and, through this, effectively reduced the packaging portion of a truck’s total cargo weight to a mere 7’4’0; its aseptic version, introduced in 1969, improved distribution economies even further and since then has become the most widely used package for long-life products. l Tetra Rex, a more traditional package, was supplied, starting in 1966, as prefabricated flat blanks or formed, after the Tetra Pak principle, from a roll of packaging material in the Tetra Rex machine. Tetra Rex cartons were used worldwide for pasteurised products and gradually supplanted the non-aseptic brick as the main carton for fresh products. l Tetra King, introduced in 1978, combined light weight sturdiness and good insulation properties through the use of expanded polystyrene and its distinctive shape. The package was primarily used for milk, yoghurt and other dairy products, juices and wine. l Tetra Top, the most recent addition to the Tetra Pak product line, was recloseable of opening, pouring and reclosing.
and addressed
consumer
demands
for ease
remaining 10% of aseptic packages and machines. In the non-aseptic markets, Norway’s Elopak and PKL held 27% and 11% of shares, respectively; they were followed by a group of three smaller regionally concentrated carton suppliers as well as some ten machine producers, some of which had on occasion used Tetra Pak, Elopak or PKL as their European distributors.
base charge payable at the time of delivery, an annual rental payable quarterly in advance, and a monthly production rental calculated involving a utilization discount. Minimum leases ranged between three years (Denmark) and nine years (Italy). The company reserved the right to repurchase the equipment at a pre-arranged fixed price.
The Total Liquid Packaging System
At the same time, Tetra Pak provided high quality packaging material, accounting for 60-70% of the cost of the carton. The material included various types of laminates typically consisting of paper, polyethylene and aluminium foil, which made the package stiff, water-tight and insulated against light and oxygen. Three types of printing technologies were available to apply texts and graphic designs before outside coating. In 1992, twenty-nine packaging material factories were located across the globe, distributing directly to fillers. In only a few non-Community countries, licensees had been selected to supply material exclusively to Tetra Pak customers. Packaging material - supplied in rolls - was sold and invoiced on the basis of amount of cartons filled.
Tetra Pak’s packaging systems relied on a combination of a unique filling process, constantly improved machinery and a proprietary carton design. In a typical filling operation, machines drew packaging material from a roll, formed a tube, then sealed it in a standing column of liquid. Although the different packaging types required different machines, the basic concept of a continuous, closed and therefore extremely hygienic operation had been adapted to all of them. By comparison, PKL, the only other major competitor in the aseptic segment, delivered its brick-type Combibloc carton pre-shaped to the fillers; the same was true for Elopak’s Pure Pak carton, as well as PKL’s non-aseptic Combibloc, Quadrobloc and Pergabloc which competed with Tetra Pak in the non-aseptic segment. Six European assembly factories supplied Tetra Pak’s packaging machines and parts directly to customers in 112 geographic markets and were known for their high levels of quality control at each stage of production. The company guaranteed that every single component was tested and all machines were test run and subject to rigorous final inspection before delivery. Not one of the 6,520 Tetra Pak machines in operation in 1992 had been produced under licence, Tetra Pak’s machinery was either sold or leased. The leasing contract comprised a 192
Building on their packaging competence, Tetra Pak had extended its offer to include distribution systems which, while simplifying the customers’ product chain, gave the company some means of ensuring quality as perceived by the final consumer. To that end, a wide variety of conveyors, tray-packers, drinking straw applicators, wrappers and roll-containers was offered. In addition, Tetra Pak offered its ‘software’, encompassing plant layouts, computerized logistics studies and marketing assistance, to name only a few.
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COMPETITIVE SUCCESS AND THE LAW: TETRA PAK
Commitment to Ongoing Research and Development
Competitive and Flexible in Accommodating Customers’ Total Needs
Tetra Pak’s system solution concept committed to investments in R&D across the entire packaging and distribution process. Fourteen R&D centres in eight countries employed nearly 1,000 personnel to improve packaging material, processes and distribution systems. Five laboratories were dedicated to enhance and promote the environmental image of Tetra Pak’s packaging concept. So far the company could claim to fulfil three of the four options of waste management - source reduction, incineration with energy recovery and landfill; the fourth - recycling - was being investigated. AI I basic developments related to machines, cartons and processes, as well as modifications and secondary techniques, had been traced and were constantly upgraded. In addition, Tetra Pak scanned the market for technological improvements. In 1970, for example, the acquisition and integration of Selfpack, a mediumshed Austrian equipment manufacturer, had brought additional expertise in brick-type cartons and aseptic packaging systems which fuelled improvements in Tetra Pak’s existing sterilization technology. Similarly, the acquisition of Liquipak in 1986 gave access to a patent and an exclusive know-how licence for a new aseptic packaging technique which the company had codeveloped with Elopak for use in its Pure-Pak gable-top cartons. In 1991, Tetra Pak claimed over one hundred patents for cartons and at least an equal amount of patents for machines; some of these resulted from improvements developed by customers.
In 1991, Tetra Pak operated a network of three regional headquarters which coordinated the activities of 52 marketing companies with exclusive operating responsibility in at times quite distinct markets and competitive conditions. Countries differed with regard to established business practices but, more importantly, on account of the rate of consolidation that was taking place in their food manufacturing and retailing sectors, and the presence and strength of competitors and substitutes catering to these (see Exhibits l-3 for an indication). Across all of these differences, however, there was a shared conviction in Tetra Pak that superior client service was the only way that orders could be won and maintained. Aiming to further penetrate the broader market for non-carbonated liquids and semi-liquid foods, fillers had to be convinced to switch from packaging types as diverse as metal cans, glass and plastic bottles, plastic bags, metal pouches, as well as other types of aseptic or non-aseptic cartons. Hence, marketing started with providing visibility through advertising and winning key contracts with prominent dairies for reference. It demanded further skills and flexibility in structuring contracts that, for example, could provide finance through trade-ins of old machines - be it Tetra Pak’s or those of competing brands - or offered partial payment of machines through adjusted carton prices. In comparison to simpler industrial marketing operations, promoting an entire system solution to a wider audience required cooperation within the Tetra Pak group as well as commitment to long-term goals even at the expense of occasional losses. In the late 1970s and early 198Os, for example, penetrating the Italian market with the Tetra Rex carton to ultimately justify production there had required sales at below transfer costs. In 1985, the Italian carton producer, Tetra Pak Carta, could return the favour by accepting losses of Lir 728 suffered by its sister company Tetra Pak Italiana in the marketing of machines. Said the company report, ‘Such an acceptance reflects the benefits we draw from the installation of Tetra Pak machines’.
Insistence on Service Quality and Quality Control For Tetra Pak, its trademark provided identity and a commitment to superior performance. Hence the company conducted an ongoing campaign to protect its trademarks, Tetra Pak, Tetra Classic Aseptic, Tetra Brik, Tetra Brik Aseptic, Tetra Rex, Tetra King and Tetra Top. Nevertheless, equally important, the company enforced quality control and maintenance related to all those operations that had an impact on its market appearance. B? 1991, a network of 50 technical service centres and 22 technical training centres around the world enabled the, company to be on hand at any customer-location within a matter of hours. The company exclusively undertook any equipment configuration and repair of all sold, leased and subleased machines, and sometimes insisted on providing, free of charge, assistance, trainin:;, maintenance and updating services, if they were not requested by the client. Service work, as part of the, regular maintenance contract accompanying each m‘jchine, was offered at an up to 40% discount of the basic monthly charge subject to the number of cartons used on all of its machines. As a matter of policy, the guarantee given on the equipment applied only when the appropriate Tetra Pak packaging material and parts wt’re used. The company maintained a list of exclusive distributors by country who assured a steady stream of supply through contracts covering the entire period of machine use.
The Broader Picture By early 1991, Tetra Pak had become a major force in the food packaging industry. Observers wondered how the acquisition of Alfa Lava1 would help the company to leverage its key skills and assets. A few months later, these speculations were pushed aside by the need to address the results of an EC Commission’s investigation of Tetra Pak’s market behaviour.
EC Press Release, Brussels, 24 July 1991 2
The Commission Fines Tetra Pak for Abusing its Dominant Position in the Sector for Liquid and Semi-Liquid Packaging
The Commission has taken a decision condemning the Tetra Pak group for abusing its dominant position, in
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COMPETITIVE
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xhibit 1 Average
Carton Price relative to Italy index = 100
Rex 200
Italy Germany
q
100
0,
I
r
1981
1982
UK
-
Non-asentic
1983
1984
Brik
200
Italy
q
100
Germany UK
0 1981
1983
1982
Aseptic
1984
Brik
200
Italy Germany 100
•j,j
UK
0 1981
Source:
Adapted
1982
1983
1984
from OJEC, No L72158
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Exhlblt 2
Selling and Leasing Prices in Italy (at constant prices) (Horizontal Axes show Date of Contract)
Rex Machine
-
RC 6
180
60
1
‘07.80
I
‘07.80
t
I
07.80
07.80
I
02.81
t
03.81
,
,
11.81
05.81
I
06.81
1
,
07.81
10.81
Non-Aseptic
83.82
83.82
I
10.81
I
05.82
I
10.82
I
il.82
f
I
12.82
02.83
8
0.283
1
02.83
t
I
06.83
09.84
I
12.84
Brik fvfachine B8/WOO
03.82
Aseptic
I
01.82
06.82
86.82
‘09.83
Brik Machine AB 3/1000
80
“12.75
07.78
01.82
07.82
02.83
01.84
11.84
03.85
* = Leasing (base rental), others are sales
Source: Adapted
EUROPEAN
from OJEC No L72/62-66
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Exhibit 3
Base Rental relative to Index-Country in which lowest prices were charged
Rex Machine
-
Comparison of Machine Selling Prices relative to Index-Country in which lowest prices were charged
RC 6
Rex Machine
300
-
RC 6
200
200
Belgium
(2)
Germany
Italy (1)
(1)
Ireland (2)
100 UK (1)
Spain (2)
100 France (1)
0
0 1986
1985 Non-Aseptic
Brik Machine
1985 88
1986
Non-Aseptic
Brik Machine
B8
150
Ireland (2)
Italy (1)
Germany
Ireland (2)
100 (1)
Spain (2)
UK (1) 50
0 1986
1985 Aseptic
Brik Machine
1985 Aseptic
AB 3
300
1986 Brik Machine
AB 3
126 100 Denmark
(2)
Germany
(1)
80
Italy (1) Ireland (2)
60
UK (1) France (1)
1985
40
1986
196
Adapted
1986
1985
(1) Prices taken from price lists (2) Average prices
(1) Prices taken from price lists (2) Average prices
Source:
Spain (2)
from OJEC No L72159
Source:
EUROPEAN
Adapted
from OJEC No L72158
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breach of Article 86 of the EEC Treaty, in the market for liquid and semi-liquid packaging machinery and cartons. Tetra Pak, a Swiss-based company of Swedish origin, is the world’s largest supplier of liquid packaging m‘ichinery and cartons, with a near-monopoly of the community market for aseptic liquid packaging (‘longlife’ liquid products mainly preserved through UHT processing) and a considerable share of the Community market for non-aseptic packaging (used to store fresh liquids, often involving pasteurisation). In 1990, Tetra Pak had a consolidated turnover of some 3.6 bn ECU, roughly half of which was in the Community. About 90% of its turnover is generated in the carton market and about 10% in the market for packaging machines and related activities. Fc4owing a complaint from Elopak, one of Tetra Pak’s main competitors, the Commission has concluded that Tctra Pak has carried out a deliberate policy aiming to eliminate actual or potential competitors in the aseptic and non-aseptic markets in machinery and cartons, in persistent breach of the Treaty of Rome. The infringements have involved almost all products manufactured b!, Tetra Pak, and have had a damaging impact on competition in all EC Member States. In several cases, restrictive policies have been in place for over fifteen years, The infringements are summarized as follows.
Restrictive Contracts T&a Pak obliged customers, mainly dairies, to stay loyal to its products, at the expense of actual or potential competitors, through the use of restrictive clauses in its contracts. These included an obligation on users of Tetra Pak packaging machines to use only cartons made by Tetra Pak and supplied under its direct control. This enabled Tetra Pak to assure customer loyalty artificially, thereby excluding carton competitors and securing revenue on the sale of cartons for as long as each m‘tchine is in operation. In all cases, Tetra Pak made its product guarantees dependent on this commitment. This, together with other aspects of its policy (for instance, the fact that distribution of its products to dairies and other customers in the Community is performed exclusively by companies within the Tetra Pak gn)up), had the effect of prohibiting customers from using either competing brands or Tetra Pak’s own br,lnds acquired on potentially more competitive terms. Tetra Pak’s contracts also prohibited customers from modifying or moving its machines or attaching any apparatus to them. It reserved the exclusive right to maintain and supply spare parts for its machines, both those it sold and those it rented out. In many of its contracts, Tetra Pak also imposed a monthly charge to col’er maintenance, which it reduced according to the loyalty of its customers rather than charging them as and when maintenance was carried out. In all its contracts, Tetra Pak reserved the right to inspect labelling printed
on its cartons. In certain cases, it also demanded monthly reports from users on the consumption of its products and reserved the right to carry out surprise inspections. Tetra Pak customers were also obliged to obtain similar commitments from new purchasers before reselling Tetra Pak’s products. Tetra Pak allowed its packaging machines to be rented for a minimum of at least three years, and in the case of Italy nine years (initial rent), a condition which the Commission considers unacceptable given the speed of technological change affecting such machines. In order to enforce its contracts, it also reserved the right in Italy to impose discretionary penalties on companies of up to 10% of the initial rental fee or the equivalent of about one year’s rent.
Discriminatory and Predatory Pricing Tetra Pak’s restrictive use of contracts enabled it to segment the European market and thereby charge prices which differed between Member States by up to about 300% for machines and up to about 50% for cartons. In some cases, the initial rental fee of a packaging machine in one Member State would be higher than the purchase price in another. Evidence gathered during the Commission’s Inquiry also shows that, at least in Italy and the United Kingdom, Tetra Pak sold its ‘Rex’ non-aseptic products at a loss for a long time in order to eliminate competitors, and used the proceeds from its sales of ‘Brik’ aseptic cartons to subsidize the losses. In Italy, Tetra Pak sold Rex cartons for several years at up to 34% below cost price and sometimes at less than the cost of the raw materials used for its manufacture. This predatory pricing policy had serious consequences on Tetra Pak’s competitors, notably Elopak, which was obliged to close a new production facility in Italy.
Other Practices Towards Competitors In certain cases, Tetra Pak bought competing machines with the express intention of removing them from the market, and on other occasions obtained commitments from users not to use such machines or to restrict their use to within their premises. In Italy, it also sought to prevent competitors from advertising by obtaining an exclusive commitment from one Journal not to carry competing publicity for at least a year. In view of the number, gravity and, in several cases, the long duration of the infringements committed on the Community market and their serious impact on competition in the entire sector, the Commission decided to impose on Tetra Pak a fine of 75m ECU.
3 Tetra Pak Responds to European Commission Charges Lausanne, Switzerland, 24 July 1991- Tetra ously denied the charges announced by the Commission today regarding the competitive the company’s marketing practices. Tetra
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COMPETITIVE SUCCESS AND THE LAW: TETRA PAK
appeal against the decision to the European Court of Justice. Tetra Pak regards the fine imposed by the Commission as totally unacceptable. The charges are based on an investigation which dates back to 1983 as a result of a complaint lodged by a competitor in Italy. According to Bertil Hagman, President and CEO of the Tetra Pak Group, the Commission’s analysis was based on theory rather than reality because it failed to take into account the real dynamics of the marketplace in which Tetra Pak competes. ‘We operate daily in a highly competitive market where customers demand packaging systems that are efficient, safe and reliable,’ said Mr Hagman. ‘The Commission refers to the theoretical consequences of such practices as selling complete systems and vertical integration without reference to the unique combination of factors which food manufacturers require in order to achieve the high levels of safety and reliability necessary for products like milk and other liquid foods.’ Mr Hagman also indicated that the theoretical analysis made by the Commission has not correctly assessed the competitive forces which Tetra Pak has to face, and it has given a much too narrow definition of the relevant market. Tetra Pak’s market share in the EC liquid food packaging sector is 14% and this cannot by any means constitute a dominant position. ‘We know that our customers have access to alternative packages and packaging systems. There is a high degree of competition for our customers’ business both from other paperbased packaging systems and from alternatives such as glass bottles and plastic containers. Despite what the Commission believes, there is intense competition in this business.’ Meanwhile, Tetra Pak is in the process of implementing certain changes in its contractual arrangements with its European customers which meet some of the Commission’s concerns. These codify, for instance, the customers‘ abilities to choose between the purchase or lease of packaging systems within a framework of assuring the safety and reliability of the company’s packaging systems. According to Mr Hagman, ‘In pioneering the development of a cost-efficient packaging and distribution system, which greatly facilitates the transport and storage of liquid food products, Tetra Pak has definitely contributed to the free movement of goods within the EC. We will continue with this important mission and supply products and services of the highest quality and standards to our customers.’
4
Endnote
Enforcement records of international competition policy authorities show a marked increase in investigations of charges of restrictive business practice and abuse of dominance. Next to Tetra Pak, a long list of household names as well as industrial companies has been affected. 198
A review of policy discussions surrounding this development indicates that, what initially appeared to be merely a periodic surge in regulatory interest, indeed reflects a lasting trend towards more comprehensive and stringent competition controls.’ Companies trying to avoid prosecution need to understand how their relevant authorities define a potentially detrimental level of market power and which type of business practices are considered to primarily support abusive intentions. Unfortunately, despite the enforcement zeal, there are so far no generally applicable rules that companies could easily translate into compliance procedures to guide their daily operations. First, to the extent the national authorities stipulate market share benchmarks as proxies for market power, these standards not only differ country by country but are mostly applied with varying degrees of restrictiveness depending on the industry or the case at hand. Yet, even if one general threshold was absolutely binding internationally and across industries, there still remains room for judgement on how to define the relevant geographic and product market in which to measure a company‘s position. At a time when the apparent management folklore of ‘blurring industry boundaries’, ‘internationalizing markets’ and ‘competence-based competition’ increasingly turns into industrial reality, any review of recent EC case decisions illustrates the regulators’ difficulties in ident~ying the scope of the relevant markets. Second, as regards the evaluation of grey-area business practices, such as exclusive dealings, differential or below-cost pricing, or tied selling, harmonization efforts are underway to create legal certainty en bloc, that is through one, generally negative, judicial perspective. Yet, as all of these practices can potentially improve the economic efficiency of company operations and its commercial relations while presenting a lever for abuse, declaring them illegal per se would mean asking companies to choose between legally acceptable and economically efficient, and for that reason frequently established, business practices. Hence, most judicial systems provide for some sort of efficiency defence given economic arguments can be used to justify a digression from the competition standard. In this context, the Tetra Pak case makes for good if sobering management reading. Without defending the company’s at times questionable market behaviour or criticizing the regulator’s thinking in legal straightjackets, it remains worrisome to observe that identical data can easily lead to diametrically opposed interpretations. Was Tetra Pak’s strategy not intended to leverage the company’s skills and assets in supplying packaging material to milk producers so as to create a formidable and competent partnership for total packaging and distribution solutions? And did the required technology, marketing and especially pricing decisions not reflect the logic of portfolio management and the differences in profit potential across a country-product matrix over
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 2 June 1993
COMPETITIVE SUCCESS AND THE LAW: TETKA PAK
Tetra Pak’s ~mpetitive Build-up,
Protection and Leverage Core Competence?
Advantage
is due to
Complete Prevention of Inter-brand Intra-brand Competition?
of
and *
4 Product
lntr~u~tion
and Market
in
Penetration,
l
Price-Discrimination,
Cross-Subsidization,
Predation
keeping with Product Portfolio and Market Differences Extensive Patenting Improvements
and Ownership
Controlling
Manufacturing
Machine
. Monopolization
of all
and Pre-emption
of Technology
Market
Acquisition and Integration - Selfpack and Liquipack
of Technology
Hopefuls
Dependence
Targeting Key Account and Providing through (a.o.) Trade-ins
* Systematic
Finance
Meeting Diverse Customer Products and Services
Interest through
Exclusive
and Distribution
Sales Territories
. Exclusion of Potential Competition . Elimination of Actual competition and Creation of
In-house
of ~mpetition Destruction
(Elopak)
of Reference
for Buitoni
and Elopak Product
New
Prevention
Both interpretations come to grips with the causes of Tttra Pak’s essential insubstitutability, i.e. its competititheadvantage. Yet it seems that, for reasons of economic viability, the ‘positive’ rationalization, i.e. the sustained provision of a superior offer, can only insufficiently be divorced from the ‘negative‘ cause due to limiting access to alternative and economically viable sources of supply. The latter condition is inconceivable if the former is not fulfilled, and vice versa. The EC Commission not only neglects this point altogether, but constructs the narrowest market definition possible, in which the inirentor-innovator cannot help but dominate.
to Pre-empt
of Intra-brand
Unreasonable
Maintaining Brand/G~dwill and reducing Transaction Costs through One-time Shopping of Machines, Parts, Materials, Service and Guarantee
time? Did this strategy not require complete control over decisions along the business system to assure, maintain and improve product quality, which is vital for the protection of the company’s key asset - its brand - as well as consumer welfare? Would it therefore not be more appropriate to consider the complete system, rather than one specific application, the reference point in determining the relevant market against which Tetra Pak’s position ought to be assessed? This broader and more dynamic market definition would obviously reduce Ttrtra Pak’s position to a mere 14% share of the market - hardly characterizing dominance. Or - and this may be argued on the basis of the same data as well - has T&a Pak effectively leveraged its market dominance in aseptic milk cartons across its entire span of operations and, by using price discrimination, predation and exclusicnary contracts, eliminated existing and potential competitors?
Proliferation
Entry
Com~tit~on
Tying of Customers
to Prevent
Entry
On a wider scale, the case therefore highlights the need for companies and policy makers to engage in a dialogue on what it takes to attain, sustain and exploit a competitive advantage and at what costs and benefits to society at large. At a time when complexities and competitive pressures force companies to seek defendable positions within broadening networks of inter-company contractual relations, how will regulatory bodies assess the relationship between individual competitiveness and cooperative success? How will the relevant markets be defined? What will be considered a permissible means and legitimate span of control that any unit in the industrial value-adding chain may wield over the decisions taken by vertically related parties involved in production, distribution and consumption? Cases like the Tetra Pak decision seem to suggest that neither a static and narrow market view nor a restrictive interpretation of contractual arrangements suffice to assess the true welfare effects of market behaviour over time. Strange as it may seem, this means that regulatory reform has to finally return legitimacy to commercial viability, lest business be forced to choose between ‘economic efficient’ and ‘legally correct’ forms of organizing their production and exchange.
References 1. See Commission Decision,
24 July 1991, IV/31043: Tetra Pak II, Official Journal of the European Communities, No. 18.3.1992; No. L72/1-68, later abbreviated as OJEC.
2. See Boscheck (1993) Competitive Advantage - Superior Offer or Unfair Dominance? IMD Working Paper Service
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RALF BOSCHECK, IMD, Chemin de Bellerive 23, PO Box 915, CH-2001 lausanne, Switzerland Ralf Boscheck is Professor of Business Policy and Economics at the International Institute for Management Development, IMD, Lausanne. Next to his teaching and consulting . work in industry analysts and company strategy, he is involved in setting up 1MD’s Industry Resource Center which works with one key company in a selected range of sectors to provide for on-going industry and market monitoring, and competitor assessments. The focus of this work is on developing an integrated framework for industry and competition analysis, which helps to address a whole range of competitive interactions, from the dynamics of the global industrial base to the protection of the internal skill-sets of the successful firms. In the process, an attempt is made to bridge the apparently widening gap between company and public policy perspectives on what it takes to attain, sustain and exploit a competitive advantage and at what costs and benefits to society at large.
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0263.2373193 $6.00 + 0.00. Pergamon Press Ltd.
1993.
CompetitiveSuccessand
the Law:
The Case of TetraPak RALF BOSCHECK,
Professorof Economics
and Strategy, IMD International,
In July 1991, the European Commission imposed its highest-ever fine for abuse of market power and restraint of competition against Tetra Pak, the Swedish/Swiss packaging company. Ralf Boscheck presents a case study of this decision arguing that the EC investigators may not have defined the market correctly and, in fact, may have misinterpreted the true basis of Tetra Pak’s competitive advantage. It is suggested that policy makers and companies must engage in dialogue over society’s welfare costs and benefits and corporate competitive advantage if competition law is to be efficient.
Lausanne
‘Tetra Pak: Swiss precision in seeing off its competitors’ read the headline of the Financial Times business law section on 25 July 1991. What followed was a brief summary of the charges which the EC Commission had brought against the Swedish/Swiss packaging company, which ultimately resulted in the highest fine ever imposed by Brussels’ competition policy authority: 75m ECU. Despite the record penalty, everything surrounding the case was rather ordinary and reflected the international trend towards increased investigations of charges of abuse of market power and restraints to competition. Initiated by a competitor, Brussels’ market analysis attested Tetra Pak to have a dominant position, against which a whole range of pricing, distribution and service decisions suddenly appeared to abuse the company’s competitive strength. Yet, also similar to other cases, it was by no means obvious whether EC investigators had defined the market correctly and to what extent the commercial and contractual relations, to which they objected, were in fact not necessary to maintain the economic viability of Tetra Pak’s operations. The following presents a brief company history based on publicly available information, including the documentation in support of the position taken by the EC Commission.’ The key evidence, as cited by the Commission, is represented, although an attempt is made to counter the EC’s strikingly negative attitude by presenting the data within, rather than outside of, its appropriate commercial context. This is to provide the basis upon which the reader may assess the validity of the EC’s verdict and Tetra Pak’s response, as presented in sections 2 and 3. Section 4 presents some basic comments on the case and the need for companies and policy makers to engage in a dialogue on what it takes to attain, sustain and exploit a competitive advantage, and at what costs and benefits to society at large. 1
Tetra Pak
Founded by Ruben Rausing and Erik Wallenberg in 1951, Tetra Pak had taken its name from its, at that time revolutionary, packaging system for the production of tetrahedron-shaped cartons. Since then, the company has come a long way in developing and marketing 190
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integrated packaging systems, ~cor~ra~ng packaging material, packaging machines, distribution equipment, as well as services and training, to uniquely meet the requirements of the liquid food market. For Tetra Pak, offering solutions to a customer’s entire packaging requirements translated into maintaining its technological edge, accepting a single-source res~nsib~i~ and cultivating a close customer liaison based on a ‘mutual goal: an efficient, well-functioning packaging line, providing maximum machine utilization’ (Company Report).
By the early 1990s Tetra Pak’s typical buyer was a European dairy. Seventy per cent of its packages were used for milk and milk products, the rest was accounted for by products as diverse as juice, fruit drinks, mineral water, table wine, soya products, coffee and coffee drinks, edible oils, sauces and soups. The 1991 acquisition of Alfa Lava1 - a global manufacturer of dairy and food processing equipment - both underlined Tetra Pak’s commitment to the dairy sector and strengthened its endeavour to further penetrate the broader market of liquid and semi-liquid food packaging. By January 1?92, the company generated 54% of its sales in Europe, 26% in Asia, 12% in North America, 5% in Africa and 3% in Oceania, and major initiatives were underway in Eastern Europe.
Box 1
Products and Markets Tetra Pak offered packaging material, machines (for sale or lease) and services for five types of aseptic and nonaseptic cartons. In general, cartons were suited for packaging a variety of liquid and semi-liquid foods, although market research indicated that in Europe some 70 to 90% of the cartons sold were in fact used for the packaging of milk and other liquid milk products. Although there were fairly major differences in consumer preferences between countries, 60% of all milk sold in the EC was supplied in cartons. Most milk entered the stores in a pasteurised form as fresh milk or, after ultrahigh temperature treatment under aseptic conditions, as UHT milk. As both types of milk product required different packaging machines and materials, and any eventual price change in packaging costs of either one of them was hardly sufficient to induce consumer switching (packaging material costs were only 10% of the final consumer price of the product), a recent industry study clearly segmented the carton machinery and material market on the basis of the type of milk they were supposed to wrap. In the mid-1980s - the only time for which data were available - Tetra Pak’s European market share in the thus defined aseptic and non-aseptic packaging segment had been estimated to be around 90% and 50% respectively. Others, including Switzerland’s PKL, held the
The Context of the European Food Packaging Sector in 1991
Raw Materials Highly Concentrated Capital Intensive Low to Medium Growth
Food Sector
Food Retail
Raw material Packaging Manufacturing Distribution Total Cost
12% 10% 47% 31%
Retail Alliances Scanner Technology Direct Product Profitability
Consumer
(DPP)
Ecology Convenience Price
100%
Sluggish consumer demand, estimated to grow by a mere l-2% pressures confronting Europe’s food packaging suppliers.
over the coming years, had heightened
a range of competitive
Suppliers: Glass, plastics, paper and metal producers had consolidated
capacities and seriously considered any oppo~unity that would dampen cost pressures and help to escape their inherent market cyclicality. Alcoa and Reynolds had been among the first to integrate into can production; BASF and Courtaulds were turning their resins into films: Feldmtihle and Bowater were examples of paper producers offering corrugated carton boards.
Buyers: The food retailing sector had been transformed
by pan-European acquisitions and the emergence of strong buying groups. In addition, the widespread use of information technology helped stores to evaluate the direct profitability of products on their shelves and thus added further to their bargaining power vis-&vis food manufacturers. Nevertheless, basic retail economics had not changed: cost savings could best be achieved in logistics, handling and inventory; store productivity was still determined by product-turn and hence appeal. Appealing to consumers, however, increasingly required a growing ecological awareness to be addressed. On the next level, food producers were counteracting retail consolidation by merging themselves. Industry analysts believed that the acquisitions of the late 1980s such as NestleIRowntree, BSNlHP Foods, NestkYBuitoni, BSNiGalbani or Kraft/General Foods, were merely foreshadowing a broader drive towards increased concentration, Whereas in the past the segment of highly-processed foods had already been fairly concentrated, the new merger wave affected less-processed-food producers as well. With retail buyers better positioned to squeeze their margins, but also with a Single Market expected to bring more distant consumers into reach, food producers were shopping around for ways to reduce input and operating costs, enhance product durability and quality, and add to their flexibility in meeting channel demands. A whole range of packaging materials and formats were likely to be displaced by others. In a relativety short period of time, the final consumer was expected to find a number of his customary products in new types of wrappings. Competition: Thus, sandwiched between strengthening buyers and suppliers, the European food packaging sector was bound to change. Some companies were accepting the challenges by merging for ‘synergies’, scale and market power; others sought to diversify into related as well as unrelated sectors; others would try to sustain a niche position against the encroachments of other packaging suppliers and materials. Which type of strategy ultimately would be successful and profitable was hard to foresee; only one thing was certain: preconceived notions of markets and businesses had to be re-evaluated under the overall impact of changing market forces.
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Box 2
The Tetra Pak Packaging Range Tetra Classic
Tetra Brik
Tetra Rex
Tetra King
Tetra Top
l Tetra Classic, the original tetrahedron-shaped carton, minimized packaging material and had been extremely 1950s; it was followed in 1961 by its aseptic version which permitted the storage and transport of perishable unrefrigerated conditions.
successful in the food products in
l Tetra Btik cartons, introduced in 1963, offered a modular shape that precisely met the stacking requirements of international loading pallets and, through this, effectively reduced the packaging portion of a truck’s total cargo weight to a mere 7’4’0; its aseptic version, introduced in 1969, improved distribution economies even further and since then has become the most widely used package for long-life products. l Tetra Rex, a more traditional package, was supplied, starting in 1966, as prefabricated flat blanks or formed, after the Tetra Pak principle, from a roll of packaging material in the Tetra Rex machine. Tetra Rex cartons were used worldwide for pasteurised products and gradually supplanted the non-aseptic brick as the main carton for fresh products. l Tetra King, introduced in 1978, combined light weight sturdiness and good insulation properties through the use of expanded polystyrene and its distinctive shape. The package was primarily used for milk, yoghurt and other dairy products, juices and wine. l Tetra Top, the most recent addition to the Tetra Pak product line, was recloseable of opening, pouring and reclosing.
and addressed
consumer
demands
for ease
remaining 10% of aseptic packages and machines. In the non-aseptic markets, Norway’s Elopak and PKL held 27% and 11% of shares, respectively; they were followed by a group of three smaller regionally concentrated carton suppliers as well as some ten machine producers, some of which had on occasion used Tetra Pak, Elopak or PKL as their European distributors.
base charge payable at the time of delivery, an annual rental payable quarterly in advance, and a monthly production rental calculated involving a utilization discount. Minimum leases ranged between three years (Denmark) and nine years (Italy). The company reserved the right to repurchase the equipment at a pre-arranged fixed price.
The Total Liquid Packaging System
At the same time, Tetra Pak provided high quality packaging material, accounting for 60-70% of the cost of the carton. The material included various types of laminates typically consisting of paper, polyethylene and aluminium foil, which made the package stiff, water-tight and insulated against light and oxygen. Three types of printing technologies were available to apply texts and graphic designs before outside coating. In 1992, twenty-nine packaging material factories were located across the globe, distributing directly to fillers. In only a few non-Community countries, licensees had been selected to supply material exclusively to Tetra Pak customers. Packaging material - supplied in rolls - was sold and invoiced on the basis of amount of cartons filled.
Tetra Pak’s packaging systems relied on a combination of a unique filling process, constantly improved machinery and a proprietary carton design. In a typical filling operation, machines drew packaging material from a roll, formed a tube, then sealed it in a standing column of liquid. Although the different packaging types required different machines, the basic concept of a continuous, closed and therefore extremely hygienic operation had been adapted to all of them. By comparison, PKL, the only other major competitor in the aseptic segment, delivered its brick-type Combibloc carton pre-shaped to the fillers; the same was true for Elopak’s Pure Pak carton, as well as PKL’s non-aseptic Combibloc, Quadrobloc and Pergabloc which competed with Tetra Pak in the non-aseptic segment. Six European assembly factories supplied Tetra Pak’s packaging machines and parts directly to customers in 112 geographic markets and were known for their high levels of quality control at each stage of production. The company guaranteed that every single component was tested and all machines were test run and subject to rigorous final inspection before delivery. Not one of the 6,520 Tetra Pak machines in operation in 1992 had been produced under licence, Tetra Pak’s machinery was either sold or leased. The leasing contract comprised a 192
Building on their packaging competence, Tetra Pak had extended its offer to include distribution systems which, while simplifying the customers’ product chain, gave the company some means of ensuring quality as perceived by the final consumer. To that end, a wide variety of conveyors, tray-packers, drinking straw applicators, wrappers and roll-containers was offered. In addition, Tetra Pak offered its ‘software’, encompassing plant layouts, computerized logistics studies and marketing assistance, to name only a few.
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Commitment to Ongoing Research and Development
Competitive and Flexible in Accommodating Customers’ Total Needs
Tetra Pak’s system solution concept committed to investments in R&D across the entire packaging and distribution process. Fourteen R&D centres in eight countries employed nearly 1,000 personnel to improve packaging material, processes and distribution systems. Five laboratories were dedicated to enhance and promote the environmental image of Tetra Pak’s packaging concept. So far the company could claim to fulfil three of the four options of waste management - source reduction, incineration with energy recovery and landfill; the fourth - recycling - was being investigated. AI I basic developments related to machines, cartons and processes, as well as modifications and secondary techniques, had been traced and were constantly upgraded. In addition, Tetra Pak scanned the market for technological improvements. In 1970, for example, the acquisition and integration of Selfpack, a mediumshed Austrian equipment manufacturer, had brought additional expertise in brick-type cartons and aseptic packaging systems which fuelled improvements in Tetra Pak’s existing sterilization technology. Similarly, the acquisition of Liquipak in 1986 gave access to a patent and an exclusive know-how licence for a new aseptic packaging technique which the company had codeveloped with Elopak for use in its Pure-Pak gable-top cartons. In 1991, Tetra Pak claimed over one hundred patents for cartons and at least an equal amount of patents for machines; some of these resulted from improvements developed by customers.
In 1991, Tetra Pak operated a network of three regional headquarters which coordinated the activities of 52 marketing companies with exclusive operating responsibility in at times quite distinct markets and competitive conditions. Countries differed with regard to established business practices but, more importantly, on account of the rate of consolidation that was taking place in their food manufacturing and retailing sectors, and the presence and strength of competitors and substitutes catering to these (see Exhibits l-3 for an indication). Across all of these differences, however, there was a shared conviction in Tetra Pak that superior client service was the only way that orders could be won and maintained. Aiming to further penetrate the broader market for non-carbonated liquids and semi-liquid foods, fillers had to be convinced to switch from packaging types as diverse as metal cans, glass and plastic bottles, plastic bags, metal pouches, as well as other types of aseptic or non-aseptic cartons. Hence, marketing started with providing visibility through advertising and winning key contracts with prominent dairies for reference. It demanded further skills and flexibility in structuring contracts that, for example, could provide finance through trade-ins of old machines - be it Tetra Pak’s or those of competing brands - or offered partial payment of machines through adjusted carton prices. In comparison to simpler industrial marketing operations, promoting an entire system solution to a wider audience required cooperation within the Tetra Pak group as well as commitment to long-term goals even at the expense of occasional losses. In the late 1970s and early 198Os, for example, penetrating the Italian market with the Tetra Rex carton to ultimately justify production there had required sales at below transfer costs. In 1985, the Italian carton producer, Tetra Pak Carta, could return the favour by accepting losses of Lir 728 suffered by its sister company Tetra Pak Italiana in the marketing of machines. Said the company report, ‘Such an acceptance reflects the benefits we draw from the installation of Tetra Pak machines’.
Insistence on Service Quality and Quality Control For Tetra Pak, its trademark provided identity and a commitment to superior performance. Hence the company conducted an ongoing campaign to protect its trademarks, Tetra Pak, Tetra Classic Aseptic, Tetra Brik, Tetra Brik Aseptic, Tetra Rex, Tetra King and Tetra Top. Nevertheless, equally important, the company enforced quality control and maintenance related to all those operations that had an impact on its market appearance. B? 1991, a network of 50 technical service centres and 22 technical training centres around the world enabled the, company to be on hand at any customer-location within a matter of hours. The company exclusively undertook any equipment configuration and repair of all sold, leased and subleased machines, and sometimes insisted on providing, free of charge, assistance, trainin:;, maintenance and updating services, if they were not requested by the client. Service work, as part of the, regular maintenance contract accompanying each m‘jchine, was offered at an up to 40% discount of the basic monthly charge subject to the number of cartons used on all of its machines. As a matter of policy, the guarantee given on the equipment applied only when the appropriate Tetra Pak packaging material and parts wt’re used. The company maintained a list of exclusive distributors by country who assured a steady stream of supply through contracts covering the entire period of machine use.
The Broader Picture By early 1991, Tetra Pak had become a major force in the food packaging industry. Observers wondered how the acquisition of Alfa Lava1 would help the company to leverage its key skills and assets. A few months later, these speculations were pushed aside by the need to address the results of an EC Commission’s investigation of Tetra Pak’s market behaviour.
EC Press Release, Brussels, 24 July 1991 2
The Commission Fines Tetra Pak for Abusing its Dominant Position in the Sector for Liquid and Semi-Liquid Packaging
The Commission has taken a decision condemning the Tetra Pak group for abusing its dominant position, in
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xhibit 1 Average
Carton Price relative to Italy index = 100
Rex 200
Italy Germany
q
100
0,
I
r
1981
1982
UK
-
Non-asentic
1983
1984
Brik
200
Italy
q
100
Germany UK
0 1981
1983
1982
Aseptic
1984
Brik
200
Italy Germany 100
•j,j
UK
0 1981
Source:
Adapted
1982
1983
1984
from OJEC, No L72158
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Exhlblt 2
Selling and Leasing Prices in Italy (at constant prices) (Horizontal Axes show Date of Contract)
Rex Machine
-
RC 6
180
60
1
‘07.80
I
‘07.80
t
I
07.80
07.80
I
02.81
t
03.81
,
,
11.81
05.81
I
06.81
1
,
07.81
10.81
Non-Aseptic
83.82
83.82
I
10.81
I
05.82
I
10.82
I
il.82
f
I
12.82
02.83
8
0.283
1
02.83
t
I
06.83
09.84
I
12.84
Brik fvfachine B8/WOO
03.82
Aseptic
I
01.82
06.82
86.82
‘09.83
Brik Machine AB 3/1000
80
“12.75
07.78
01.82
07.82
02.83
01.84
11.84
03.85
* = Leasing (base rental), others are sales
Source: Adapted
EUROPEAN
from OJEC No L72/62-66
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Exhibit 3
Base Rental relative to Index-Country in which lowest prices were charged
Rex Machine
-
Comparison of Machine Selling Prices relative to Index-Country in which lowest prices were charged
RC 6
Rex Machine
300
-
RC 6
200
200
Belgium
(2)
Germany
Italy (1)
(1)
Ireland (2)
100 UK (1)
Spain (2)
100 France (1)
0
0 1986
1985 Non-Aseptic
Brik Machine
1985 88
1986
Non-Aseptic
Brik Machine
B8
150
Ireland (2)
Italy (1)
Germany
Ireland (2)
100 (1)
Spain (2)
UK (1) 50
0 1986
1985 Aseptic
Brik Machine
1985 Aseptic
AB 3
300
1986 Brik Machine
AB 3
126 100 Denmark
(2)
Germany
(1)
80
Italy (1) Ireland (2)
60
UK (1) France (1)
1985
40
1986
196
Adapted
1986
1985
(1) Prices taken from price lists (2) Average prices
(1) Prices taken from price lists (2) Average prices
Source:
Spain (2)
from OJEC No L72159
Source:
EUROPEAN
Adapted
from OJEC No L72158
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breach of Article 86 of the EEC Treaty, in the market for liquid and semi-liquid packaging machinery and cartons. Tetra Pak, a Swiss-based company of Swedish origin, is the world’s largest supplier of liquid packaging m‘ichinery and cartons, with a near-monopoly of the community market for aseptic liquid packaging (‘longlife’ liquid products mainly preserved through UHT processing) and a considerable share of the Community market for non-aseptic packaging (used to store fresh liquids, often involving pasteurisation). In 1990, Tetra Pak had a consolidated turnover of some 3.6 bn ECU, roughly half of which was in the Community. About 90% of its turnover is generated in the carton market and about 10% in the market for packaging machines and related activities. Fc4owing a complaint from Elopak, one of Tetra Pak’s main competitors, the Commission has concluded that Tctra Pak has carried out a deliberate policy aiming to eliminate actual or potential competitors in the aseptic and non-aseptic markets in machinery and cartons, in persistent breach of the Treaty of Rome. The infringements have involved almost all products manufactured b!, Tetra Pak, and have had a damaging impact on competition in all EC Member States. In several cases, restrictive policies have been in place for over fifteen years, The infringements are summarized as follows.
Restrictive Contracts T&a Pak obliged customers, mainly dairies, to stay loyal to its products, at the expense of actual or potential competitors, through the use of restrictive clauses in its contracts. These included an obligation on users of Tetra Pak packaging machines to use only cartons made by Tetra Pak and supplied under its direct control. This enabled Tetra Pak to assure customer loyalty artificially, thereby excluding carton competitors and securing revenue on the sale of cartons for as long as each m‘tchine is in operation. In all cases, Tetra Pak made its product guarantees dependent on this commitment. This, together with other aspects of its policy (for instance, the fact that distribution of its products to dairies and other customers in the Community is performed exclusively by companies within the Tetra Pak gn)up), had the effect of prohibiting customers from using either competing brands or Tetra Pak’s own br,lnds acquired on potentially more competitive terms. Tetra Pak’s contracts also prohibited customers from modifying or moving its machines or attaching any apparatus to them. It reserved the exclusive right to maintain and supply spare parts for its machines, both those it sold and those it rented out. In many of its contracts, Tetra Pak also imposed a monthly charge to col’er maintenance, which it reduced according to the loyalty of its customers rather than charging them as and when maintenance was carried out. In all its contracts, Tetra Pak reserved the right to inspect labelling printed
on its cartons. In certain cases, it also demanded monthly reports from users on the consumption of its products and reserved the right to carry out surprise inspections. Tetra Pak customers were also obliged to obtain similar commitments from new purchasers before reselling Tetra Pak’s products. Tetra Pak allowed its packaging machines to be rented for a minimum of at least three years, and in the case of Italy nine years (initial rent), a condition which the Commission considers unacceptable given the speed of technological change affecting such machines. In order to enforce its contracts, it also reserved the right in Italy to impose discretionary penalties on companies of up to 10% of the initial rental fee or the equivalent of about one year’s rent.
Discriminatory and Predatory Pricing Tetra Pak’s restrictive use of contracts enabled it to segment the European market and thereby charge prices which differed between Member States by up to about 300% for machines and up to about 50% for cartons. In some cases, the initial rental fee of a packaging machine in one Member State would be higher than the purchase price in another. Evidence gathered during the Commission’s Inquiry also shows that, at least in Italy and the United Kingdom, Tetra Pak sold its ‘Rex’ non-aseptic products at a loss for a long time in order to eliminate competitors, and used the proceeds from its sales of ‘Brik’ aseptic cartons to subsidize the losses. In Italy, Tetra Pak sold Rex cartons for several years at up to 34% below cost price and sometimes at less than the cost of the raw materials used for its manufacture. This predatory pricing policy had serious consequences on Tetra Pak’s competitors, notably Elopak, which was obliged to close a new production facility in Italy.
Other Practices Towards Competitors In certain cases, Tetra Pak bought competing machines with the express intention of removing them from the market, and on other occasions obtained commitments from users not to use such machines or to restrict their use to within their premises. In Italy, it also sought to prevent competitors from advertising by obtaining an exclusive commitment from one Journal not to carry competing publicity for at least a year. In view of the number, gravity and, in several cases, the long duration of the infringements committed on the Community market and their serious impact on competition in the entire sector, the Commission decided to impose on Tetra Pak a fine of 75m ECU.
3 Tetra Pak Responds to European Commission Charges Lausanne, Switzerland, 24 July 1991- Tetra ously denied the charges announced by the Commission today regarding the competitive the company’s marketing practices. Tetra
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COMPETITIVE SUCCESS AND THE LAW: TETRA PAK
appeal against the decision to the European Court of Justice. Tetra Pak regards the fine imposed by the Commission as totally unacceptable. The charges are based on an investigation which dates back to 1983 as a result of a complaint lodged by a competitor in Italy. According to Bertil Hagman, President and CEO of the Tetra Pak Group, the Commission’s analysis was based on theory rather than reality because it failed to take into account the real dynamics of the marketplace in which Tetra Pak competes. ‘We operate daily in a highly competitive market where customers demand packaging systems that are efficient, safe and reliable,’ said Mr Hagman. ‘The Commission refers to the theoretical consequences of such practices as selling complete systems and vertical integration without reference to the unique combination of factors which food manufacturers require in order to achieve the high levels of safety and reliability necessary for products like milk and other liquid foods.’ Mr Hagman also indicated that the theoretical analysis made by the Commission has not correctly assessed the competitive forces which Tetra Pak has to face, and it has given a much too narrow definition of the relevant market. Tetra Pak’s market share in the EC liquid food packaging sector is 14% and this cannot by any means constitute a dominant position. ‘We know that our customers have access to alternative packages and packaging systems. There is a high degree of competition for our customers’ business both from other paperbased packaging systems and from alternatives such as glass bottles and plastic containers. Despite what the Commission believes, there is intense competition in this business.’ Meanwhile, Tetra Pak is in the process of implementing certain changes in its contractual arrangements with its European customers which meet some of the Commission’s concerns. These codify, for instance, the customers‘ abilities to choose between the purchase or lease of packaging systems within a framework of assuring the safety and reliability of the company’s packaging systems. According to Mr Hagman, ‘In pioneering the development of a cost-efficient packaging and distribution system, which greatly facilitates the transport and storage of liquid food products, Tetra Pak has definitely contributed to the free movement of goods within the EC. We will continue with this important mission and supply products and services of the highest quality and standards to our customers.’
4
Endnote
Enforcement records of international competition policy authorities show a marked increase in investigations of charges of restrictive business practice and abuse of dominance. Next to Tetra Pak, a long list of household names as well as industrial companies has been affected. 198
A review of policy discussions surrounding this development indicates that, what initially appeared to be merely a periodic surge in regulatory interest, indeed reflects a lasting trend towards more comprehensive and stringent competition controls.’ Companies trying to avoid prosecution need to understand how their relevant authorities define a potentially detrimental level of market power and which type of business practices are considered to primarily support abusive intentions. Unfortunately, despite the enforcement zeal, there are so far no generally applicable rules that companies could easily translate into compliance procedures to guide their daily operations. First, to the extent the national authorities stipulate market share benchmarks as proxies for market power, these standards not only differ country by country but are mostly applied with varying degrees of restrictiveness depending on the industry or the case at hand. Yet, even if one general threshold was absolutely binding internationally and across industries, there still remains room for judgement on how to define the relevant geographic and product market in which to measure a company‘s position. At a time when the apparent management folklore of ‘blurring industry boundaries’, ‘internationalizing markets’ and ‘competence-based competition’ increasingly turns into industrial reality, any review of recent EC case decisions illustrates the regulators’ difficulties in ident~ying the scope of the relevant markets. Second, as regards the evaluation of grey-area business practices, such as exclusive dealings, differential or below-cost pricing, or tied selling, harmonization efforts are underway to create legal certainty en bloc, that is through one, generally negative, judicial perspective. Yet, as all of these practices can potentially improve the economic efficiency of company operations and its commercial relations while presenting a lever for abuse, declaring them illegal per se would mean asking companies to choose between legally acceptable and economically efficient, and for that reason frequently established, business practices. Hence, most judicial systems provide for some sort of efficiency defence given economic arguments can be used to justify a digression from the competition standard. In this context, the Tetra Pak case makes for good if sobering management reading. Without defending the company’s at times questionable market behaviour or criticizing the regulator’s thinking in legal straightjackets, it remains worrisome to observe that identical data can easily lead to diametrically opposed interpretations. Was Tetra Pak’s strategy not intended to leverage the company’s skills and assets in supplying packaging material to milk producers so as to create a formidable and competent partnership for total packaging and distribution solutions? And did the required technology, marketing and especially pricing decisions not reflect the logic of portfolio management and the differences in profit potential across a country-product matrix over
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 2 June 1993
COMPETITIVE SUCCESS AND THE LAW: TETKA PAK
Tetra Pak’s ~mpetitive Build-up,
Protection and Leverage Core Competence?
Advantage
is due to
Complete Prevention of Inter-brand Intra-brand Competition?
of
and *
4 Product
lntr~u~tion
and Market
in
Penetration,
l
Price-Discrimination,
Cross-Subsidization,
Predation
keeping with Product Portfolio and Market Differences Extensive Patenting Improvements
and Ownership
Controlling
Manufacturing
Machine
. Monopolization
of all
and Pre-emption
of Technology
Market
Acquisition and Integration - Selfpack and Liquipack
of Technology
Hopefuls
Dependence
Targeting Key Account and Providing through (a.o.) Trade-ins
* Systematic
Finance
Meeting Diverse Customer Products and Services
Interest through
Exclusive
and Distribution
Sales Territories
. Exclusion of Potential Competition . Elimination of Actual competition and Creation of
In-house
of ~mpetition Destruction
(Elopak)
of Reference
for Buitoni
and Elopak Product
New
Prevention
Both interpretations come to grips with the causes of Tttra Pak’s essential insubstitutability, i.e. its competititheadvantage. Yet it seems that, for reasons of economic viability, the ‘positive’ rationalization, i.e. the sustained provision of a superior offer, can only insufficiently be divorced from the ‘negative‘ cause due to limiting access to alternative and economically viable sources of supply. The latter condition is inconceivable if the former is not fulfilled, and vice versa. The EC Commission not only neglects this point altogether, but constructs the narrowest market definition possible, in which the inirentor-innovator cannot help but dominate.
to Pre-empt
of Intra-brand
Unreasonable
Maintaining Brand/G~dwill and reducing Transaction Costs through One-time Shopping of Machines, Parts, Materials, Service and Guarantee
time? Did this strategy not require complete control over decisions along the business system to assure, maintain and improve product quality, which is vital for the protection of the company’s key asset - its brand - as well as consumer welfare? Would it therefore not be more appropriate to consider the complete system, rather than one specific application, the reference point in determining the relevant market against which Tetra Pak’s position ought to be assessed? This broader and more dynamic market definition would obviously reduce Ttrtra Pak’s position to a mere 14% share of the market - hardly characterizing dominance. Or - and this may be argued on the basis of the same data as well - has T&a Pak effectively leveraged its market dominance in aseptic milk cartons across its entire span of operations and, by using price discrimination, predation and exclusicnary contracts, eliminated existing and potential competitors?
Proliferation
Entry
Com~tit~on
Tying of Customers
to Prevent
Entry
On a wider scale, the case therefore highlights the need for companies and policy makers to engage in a dialogue on what it takes to attain, sustain and exploit a competitive advantage and at what costs and benefits to society at large. At a time when complexities and competitive pressures force companies to seek defendable positions within broadening networks of inter-company contractual relations, how will regulatory bodies assess the relationship between individual competitiveness and cooperative success? How will the relevant markets be defined? What will be considered a permissible means and legitimate span of control that any unit in the industrial value-adding chain may wield over the decisions taken by vertically related parties involved in production, distribution and consumption? Cases like the Tetra Pak decision seem to suggest that neither a static and narrow market view nor a restrictive interpretation of contractual arrangements suffice to assess the true welfare effects of market behaviour over time. Strange as it may seem, this means that regulatory reform has to finally return legitimacy to commercial viability, lest business be forced to choose between ‘economic efficient’ and ‘legally correct’ forms of organizing their production and exchange.
References 1. See Commission Decision,
24 July 1991, IV/31043: Tetra Pak II, Official Journal of the European Communities, No. 18.3.1992; No. L72/1-68, later abbreviated as OJEC.
2. See Boscheck (1993) Competitive Advantage - Superior Offer or Unfair Dominance? IMD Working Paper Service
EUROPEAN MANAGEMENT JOURNAL Vol 11 No 2 June 1993
1993.
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COMPETITIVE
SUCCESS
AND THE LAW: TETRA PAK
RALF BOSCHECK, IMD, Chemin de Bellerive 23, PO Box 915, CH-2001 lausanne, Switzerland Ralf Boscheck is Professor of Business Policy and Economics at the International Institute for Management Development, IMD, Lausanne. Next to his teaching and consulting . work in industry analysts and company strategy, he is involved in setting up 1MD’s Industry Resource Center which works with one key company in a selected range of sectors to provide for on-going industry and market monitoring, and competitor assessments. The focus of this work is on developing an integrated framework for industry and competition analysis, which helps to address a whole range of competitive interactions, from the dynamics of the global industrial base to the protection of the internal skill-sets of the successful firms. In the process, an attempt is made to bridge the apparently widening gap between company and public policy perspectives on what it takes to attain, sustain and exploit a competitive advantage and at what costs and benefits to society at large.
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EUROPEAN
MANAGEMENT
JOURNAL Vol 11 No 2 June 1993