Monday, February 7, 2011

Bullies in the spotlight

"Predatory Nestle" by Ducky Paredes (original article appears here).

NESTLÉ S.A, one of the largest food and nutrition companies in the world, operates in 86 countries and employs 283,000 people. Here, it is Nestlé Philippines, Inc. (NPI).

NPI is once again the subject of complaints, filed by two of its Filipino distributors for allegedly engaging in predatory pricing and for two separate cases of perjury.

What is predatory pricing? Wikipedia defines it as "the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. If competitors or potential competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter the business."

What is surprising here is that the complaint of predatory pricing comes from its own distributors who feel that Nestle itself is the predator that would devour them.

The complainants are Service Edge Distribution, Inc.(SEDI) and its sister firm, FDI Forefront II Trading Corporation (FDI 2). The first has been Nestlé’s distributor for the Caloocan, Malabon, Navotas and Valenzuela (Camanava) area since December 2001 while the latter became the distributor for northwestern Quezon City in July 2003.

The predatory pricing complaint is based on Nestlé’s alleged violation of Article 186 of the Revised Penal Code. Docketed as I.S. No. XV-03-INV-10Q-06071, the case is now pending with Quezon City Assistant City Prosecutor Maribel Arriola. Among the respondents is NPI’s former chairman and CEO Doreswamy Nandkishore, now said to be with the Nestlé main office in Switzerland.

The two distributors say that Nestle, among other things, has been forcing them to sell the company’s products to their own clients at prices controlled and dictated by Nestlé. These price bulletins do not consider the actual cost of distributing these products, and other attendant expenses such as municipal taxes of up to 1 percent of sales. Distributors are compelled to follow the price bulletins under threat of termination of their distributorship contracts.

Apart from this questioned pricing strategy, the two distributors also accuse Nestle of withdrawing its promised marketing support. One specific instance cited was when Nestle allegedly ended the in-house financing of inventories that provided a 30-day credit line to distributors. Nestle used to extend its credit line to 45-60 days without penalty to align it with the actual periods within which the distributors’ own clients usually make the payments.

They said that in place of the in-house financing, and without consultation with its distributors, Nestlé Chief Financial Officer Peter Noszek unilaterally negotiated with different banks whereby the banks would provide distributors with revolving promissory note lines (RPNL) on a strictly 30-day credit limit. Since their own clients usually do not pay within 30 days, the distributors are forced to shoulder higher interest rates and other penalties that increase their operating costs. In effect, Nestlé shifted the cost of financing inventories from Nestlé to the distributors.

Among the allegations was that Nestlé Area Sales Manager Elisa Lupena, "in conspiracy with the other respondents even forced complainant FDI 2 to deliver new supplies to customers that owed FDI 2 more than P1 million in unpaid deliveries." Nestle’s Regional Sales Manager Jose Ceballos, "in conspiracy with his co-respondents, likewise ordered complainant SEDI to give a unilateral discount of five percent (5%) discount to George Cua of the Welcome Group of Quezon City."

The same discounts were purportedly ordered by Ceballos to be given to other wholesalers and supermarket customers in its area. These discounts resulted in losses for the distributors of P8.4 million in 2007 and P8.6 million in 2009. In spite of these losses and additional expenses, they were not allowed to go beyond the prices specified in the price bulletins. The complaint includes the accusation that although additional capital from borrowed money was infused into FDI 2 in compliance with the demand of Nestlé, the company still terminated the former’s distributorship agreement on December 21, 2007, or four days before Christmas Day. Thus, the firm was forced to stop operations and lay off its employees.

The perjury charges were an offshoot of the September 17, 2010 counter-affidavits of four top officials of Nestlé, The four are Nestlé Chairman and CEO John Martin Miller, Regional Sales Manager Jose Ceballos, Chief Financial Officer Peter Noszek, and Business Executive Manager for Liquid Beverages Shahab Bacani.

In their counter-affidavits, the four officials purportedly committed perjury and offered false testimony into evidence. These are alleged in several instances covering the issues of whether incentives and discounts are mere privileges or a matter of right, the infusion of additional capital in FDI 2 and the subsequent termination of its distributorship contract, the supposed indiscretions of Area Sales Manager Lupena, the mediation entered into by the contending parties, the granting of discounts to certain favored wholesalers as ordered by Lupena and Ceballos

The perjury charges also touched on the separate disbarment case filed by the distributors against Nestlé lawyer Aileen Cero for her alleged violation of the 2004 Rules on Notarial Practice (A.M. 02-8-13-SC) when she notarized a document concerning a negotiation wherein she was a participant.

Complainants also cited Nestlé’s claim that that it never acted in an oppressive, unjust or illegal manner in its dealings with its distributors. They referred to the judgment handed down by the Second Division of the Supreme Court in the case of Nestlé Philippines, Inc. vs. FY Sons, Inc. on May 5, 2006 under G. R. No. 150780.

Nestle filed the case in the Makati Regional Trial court which ruled against it and ordered the multinational to pay defendant FY Sons P1 million in actual damages, P100,000 as exemplary damages and P100,000 as attorneys fees.

Nestlé went to the Court of Appeals where it again lost. In fact, the CA even increased to P1.5 million the amount of actual damages that Nestlé was ordered to pay FY Sons. This was for the unjust termination of the distributorship agreement with FY Sons, unfair imposition of fines, and confiscation of the latter’s P500,000 time deposit to secure FY Sons credit purchases.

Nestlé elevated the CA decision to the Supreme Court but was again rebuffed when the High Tribunal, in a decision written by then Associate Justice Renato Corona, affirmed the ruling. The Supreme Court found Nestlé "at fault and (acting) in bad faith."

Banco de Oro (BDO) also sued Nestlé for P109.792 million in damages, together with its distributor, Interbrand Logistics and Distribution, Inc. The case involved hundreds of millions of pesos in loans and credit facilities that the bank extended to Interbrand on the strength of endorsements and certifications that Nestlé made concerning the financial standing and credit worthiness of its distributor. It turned out that the endorsements and certifications were fraudulently issued.

BDO charged the defendants of having "acted in utmost bad faith, and in wanton, fraudulent, reckless, oppressive and malevolent manner." In particular, BDO accused Nestle of having "knowingly made a false representation with intent to mislead the bank into renewing Interbrand’s credit facilities and allowing Interbrand to make further availments under the same to finance the purchase of (its) products which would eventually lead to (its) benefit".

Nestlé Philippines, Inc. is a member of the European Chamber of Commerce. We wonder if there is any action that this organization is contemplating in regard to this particular multinational considering the many complaints lodged against Nestlé Philippines, Inc..


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