How to avoid antitrust pitfalls in distribution

Companies must be proactive in understanding and complying with evolving competition laws.

By Anicham Tamilmani

The Indian retail landscape is undergoing a shift. With the rise of online and quick commerce, Indian consumers now enjoy unparalleled convenience, getting everything from groceries to electronics delivered fast—no trips to stores or malls needed. Changing consumer preferences are also prompting manufacturers like HUL to increasingly turn to direct sales, while continuing with traditional distribution networks.

Businesses that once relied solely on distributors are now racing to speed up delivery by adopting a direct-to-consumer model. As manufacturers complement their traditional distribution networks with direct sales to consumers, they find themselves competing with their own distribution partners, straining the traditional manufacturer-distributor relationship. Distributors must now compete with the very firms who supply them goods for resale.

Naturally, distributors competing with their own manufacturer-suppliers are handicapped. Suppliers decide the margins for their distributors, and cap the maximum resale price. Armed with information on margins, suppliers adopting direct-to-customer sales may be tempted to squeeze their traditional distributors out of more lucrative customer segments- a strategy that may not only strain its relations with distributors but may also pique the competition watchdog- Competition Commission of India’s interest.

In a traditional distribution setup, manufacturers and distributors share a symbiotic and often collaborative relationship. Their interests are aligned- increase sales. When businesses adopt a dual distribution model—competing directly with their own distributors to meet the lightning-fast demands of today’s consumers—they collaborate and compete at the same time. Imagine a race where you're both teammates and competitors at the same time. Sharing information between manufacturers and distributors in this setup raises competition law risks.

This isn’t just an Indian challenge. Until recently, dual distribution agreements were mostly seen as fair game under the Vertical Block Exemption Regulation (VBER) in Europe. However, with the rise of digitization and direct sales, the subsequent amendments to the VBER and the European Commission’s revised guidelines on vertical restraints (Vertical Guidelines), dual distribution has quickly become a hot-button issue.

The original draft of the revised VBER initially proposed a 10 percent combined market share threshold for safe harbours in dual distribution agreements, a narrow limit that left most players out in the cold. But after an extensive stakeholder consultation (and some rethinking), a safe harbour is now available for information exchanges in dual distribution systems if the individual market shares of the relevant parties are below 30 percent.

The "safe" harbour in Europe also comes with some fine print: it doesn't apply if the exchange is (a) not directly related to the implementation of the vertical agreement; (b) not necessary to improve the production or distribution of the contract goods or services; or (c) fulfils neither of those two conditions.

In India, the Competition Act, 2002, prohibits anti-competitive agreements, including horizontal agreements (like cartels) and vertical agreements between businesses at different stages of the production chain. While cartels are typically assumed to harm competition, vertical agreements are usually assessed under the ‘rule of reason’ framework as they often serve legitimate business purposes.

While the CCI is yet to provide clear guidance on dual distribution agreements, its ruling in the Batteries Case involving Panasonic (manufacturer) and Godrej (reseller) sheds some light. The CCI classified their product supply agreement as a horizontal agreement and imposed fines, primarily because consumers viewed their products as direct competitors as Godrej sourced batteries from Panasonic and later sold them in the market under its own brand. In reaching this decision, CCI relied on the European Guidelines, acknowledging that vertical agreements between competitors can raise competition concerns similar to horizontal ones. As a result, communications between seller and buyer must be considered within the broader competitive context.

The European Commission's approach informs CCI’s practices. By first proposing a narrow 10 percent threshold under the draft VBER and later revising it to 30 percent with added qualifications, the European Commission has clearly signalled its concerns about the potential anti-competitive risks of dual distribution.

While India's market presents exciting growth opportunities with its accelerating pace, companies considering a dual distribution model should exercise caution. It’s crucial to carefully assess the information exchanged with distributors—understand what’s being shared, why, and whether it’s directly tied to the implementation of the vertical relationship. Be particularly mindful of avoiding granular price-related data and information on future plans. Companies must be proactive in understanding and complying with evolving competition laws. By focusing on transparency, ensuring that information exchange is necessary and beneficial to consumers, and seeking timely legal advice, businesses can mitigate the risk of violations.