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Investigations

Inquiry reports

1989

 


Black & Decker: A report on the course of conduct pursued by Black & Decker in relation to the supply of power tools and portable work-benches intended for domestic use

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Summary



On 8 March 1989 the Office of Fair Trading (OFT) published a report1 on the practice of Black & Decker (B & D) of withholding, or threatening to withhold, from retailers supplies of power tools and portable work-benches intended for domestic use. B & D followed this practice if a retailer was selling below a minimum margin of 12.5 per cent and if such low prices were being used for promotional purposes. In so doing, B & D was relying on the provisions of section 13 of the Resale Prices Act 1976 (RPA), which provide that a supplier may lawfully withhold supplies of goods from a dealer if he has reasonable cause to believe that the dealer has been using them as loss leaders. The OFT found B & D's course of conduct to be anti-competitive, and referred the matter to us on 18 April 1989 (see Appendix 1.1 for the terms of reference).


B & D told us that its practice of withholding or threatening to withhold supplies from retailers which it considers to be loss leading began in 1986, when nine of the company's top 50 accounts threatened to stop selling its products at the low margins then prevalent. Following the introduction of the practice, those retail companies had chosen to continue to stock B & D's goods, and the total number of its outlets, which had fallen by 34 per cent between 1979 and 1984, had recovered.


This case involves two distinct but interrelated markets, one involving competition between the manufacturers of domestic power tools and work-benches, and the other involving competition between the various types of retailers who sell them to the final consumer. In the first, B & D has lost market share but still has a very strong position, supplying about two-thirds of the reference goods, by value, compared with one-fifth supplied by Bosch. Competition in the United Kingdom market is part of the world-wide competitive strategy of a number of large firms based in the United States, Europe and Japan. B & D's pricing structure means that its `going prices' at the retail level yield its retailers low margins, offering an opportunity to competitors; on the other hand the strength of its long-established position ensures B & D wide distribution and economies of scale. In the second, retail market, B & D's policy undoubtedly prevents large retail chains from offering B & D products at prices appropriate to their own competitive strategies. We do not accept B & D's contention that its practice is pro-competitive because it maintains the widest possible range of outlets, and provides collection points for servicing its products. We believe that it is for the retailers to determine retail selling practices and prices and that a return, even in a limited way, to resale price maintenance would reduce competition. We conclude that the practice is anti-competitive.


In considering the public interest, however, we must take into account the fact that section 13 of the RPA explicitly permits action against loss leading. This results in the possibility of a conflict between the freedom of retailers to determine prices and the retention by manufacturers of at least some element of control over those prices. In our view section 13 is to be regarded as a limited exception to the basic principles of the RPA, which prohibit the individual maintenance of retail prices. It is not appropriate to determine when loss leading occurs by applying general criteria, as B & D does: each case must be examined individually. We do not consider that there is any one single appropriate gross margin that can be used to determine whether a product is being sold for the purpose of making a profit.

If B & D's practice continues, and retailers remain restricted in the extent to which they can reduce prices on reference goods, this will, in our view, inevitably establish and maintain a minimum price for the reference goods at all retail outlets. We also believe that if B & D were allowed to continue with its practice other manufacturers might start to apply it to their own products so that many branded goods would again be affected by a form of minimum price maintenance. We conclude therefore that the practice is detrimental to the public interest in maintaining innovative and competitive retail markets.

We conclude that the appropriate remedy is for B & D to cease to notify to retailers or otherwise publish anything which includes formally or informally, or in any way makes known, a standard minimum gross margin in relation to its goods. This would not, in our view, preclude B & D from taking action under section 13 of the RPA in relation to the individual circumstances of a retailer.

We believe, however, that there are considerable difficulties about section 13 of the RPA. Not only is its definition of loss leading difficult to apply; a second difficulty centres on the price at which supplies withheld from a large retailer to deter loss leading are eventually resumed. In today's competitive retail markets, any such resumption would be likely to result in a price which would have to be matched by other retailers. We therefore recommend that the provisions of section 13 of the RPA be reviewed.








Full text



Contents

Chapters

 
Chapter 1 Summary
Chapter 2 The market
Chapter 3 Black & Decker
Chapter 4 The practice and the views of Black & Decker
Chapter 5 The views of retailers, manufacturers and other parties
Chapter 6 Conclusions
  List of signatories

Appendices

 
(The numbering of the appendices indicates the chapters to which they relate)
1.1 The reference and background
3.1 B & D United Kingdom operating results
3.2 B & D United Kingdom: summarised balance sheets
6.1 The Resale Prices Act 1976



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