More threats of vertical price restraints to Filipino consumers

Aside from the fact that local distributors have to scramble to meet sales targets set by multinationals who compel them to sell their products at a minimum price, distributors are also pressured to market these products more aggressively. Remember, with vertical price restraints, multinationals, such as Nestle, set a low price for their products without factoring in the actual distribution costs of their distributors or retailers. Distributors work harder to sell these products to show consumers that, hey, it may be cheap or cheaper, but it’s still good quality. Impressions are everything.

Unfortunately, distributors are usually stretched to the limit since the margin for profit is so minimal when vertical price restraints are imposed. What could potentially happen, and is no doubt happening, is that distributors have to cut down costs at the expense of quality, particularly quality of service. Picture how transportation companies still insist of having old, broken-down buses plying EDSA with drivers racing each other from stop to stop to get more passengers. In the same way, quality is compromised for products distributed, precisely because distributors, in bearing the costs alone, do not have the means to provide anything better or to actually follow through on the consumer impression of the product. In the end, quite obviously, it is the Filipino end users who suffers or is short-changed.

Can you really blame the distributor? Remember, these are usually and typically Filipino SMEs who have to cater to the whims and are practically compelled to follow the pricing schemes set up by companies like Nestle.

In other countries, there are already factors and determinants used by courts to determine whether a vertical agreement is reasonable or not. What we have here is simply the fact that we adhere to the Rule of Reason. But as to how we can determine what is reasonable or not – Philippine law is almost entirely silent. This is why the recent call to pass tougher and more comprehensive anti-trust regulations must be prioritized by our legislators. Only the government now can step up to protect SMEs and consumers from certain practices that companies like Nestle have been getting away with for years.

Impact of vertical price restraint on Filipino consumers

Foreign multinationals in the Philippines, such as Nestle Philippines, which are in the habit of setting minimum prices for their products to be sold by local distributors and retailers, without factoring actual distribution costs, actually threaten to short-change consumers.

When the multinational sets a low price, the local distributor and retailer has to work harder to erase that market impression that a cheap product is of inferior quality. The Filipino SME, which is typically the distributor or retailer for such giants like Nestle, are pressured to more aggressively market the goods so that consumers will associate those goods with a high level of service and high quality.

In the end, unfortunately, only the manufacturer benefits from such vertical arrangements. On the part of the distributor, profit margins remain at a minimum as they have to pour in more for marketing and promotional initiatives – in addition to the distribution and operational costs. Bearing costs for these aspects also means that the distributor may no longer have the means, manpower, and capabilities to actually provide the high level of service associated with how the products are marketed. The Filipino end user, or consumer, ends up paying more for goods because of aggressive marketing, only to receive lower quality service simply because the distributor is not equipped to provide anything better in the first place.

These vertical agreements, most commonly executed through the practice of vertical price restraint, are prejudicial to all parties concerned – except for the manufacturer. Otherwise, such arrangements will just result in productive inefficiency. Productive inefficiency occurs when there is higher production costs incurred, with no competitive forces to reduce costs to the lowest possible level. This is precisely why there is such a strong and urgent need to pass a stronger and tougher anti-trust law to monitor and safeguard against such vertical arrangements.

A CRITIQUE OF PHILIPPINE ANTI-TRUST LAWS

Atty. Lorna Patajo-Kapunan was a resource speaker at the second "Understanding Anti-Trust" Public Forum held at the Philippine Senate last February 10, 2011. Atty. Kapunan gave a detailed and very informative talk on previous and existing anti-trust laws in the Philippines, the issues surrounding what she described as these "scattered" provisions, and the need for a comprehensive anti-trust framework. A brief outline of Atty. Kapunan's presentation during the public forum appears below:

A Critique of Philippine Anti-Trust Laws

by Atty. Lorna Patajo-Kapunan

Senior Partner

Kapunan Lotilla Garcia & Castillo Law Offices

Various Existing Anti-Trust Laws in the Philippines

• THE PHILIPPINE CONSTITUTION, Article XII, Section 19
• The Revised Penal Code of the Philippines, Article 186
• The New Civil Code of the Philippines, Article 28
• Republic Act No. 7394, the "Consumer Act of the Philippines"
• Republic Act No. 7581, the "Price Act"
• The Corporation Code of the Philippines, Section 79
• The Intellectual Property Code of the Philippines
• Republic Act No. 8479, the "Downstream Oil Industry Deregulation Act of 1998"
• Republic Act No. 7042, the "Foreign Investments Act of 1991"
• Republic Act No. 8762, the "retail Trade Liberalization Act of 2000"

Problems of the Current Anti-Trust Laws

• All laws relating to anti-trust are scattered in different codes.
• Existing anti-trust laws do not provide for clear-cut guidelines, elements/requisites or evidence to determine whether an act constitutes unfair competition, monopolistic behavior or restraint of trade.
• Lack of judicial experience in determining anti-trust laws, caused also by inadequate laws.
• Need for proper body to determine whether there was any violation of anti-trust laws.

"In the case of SEDI and FDI 2 vs. Nestle Philippines, Inc., the DTI refused to assume jurisdiction over an administrative complaint for violating Article 186 of the Revised Penal Code, which is a trade and industry law. DTI itself is confused with its jurisdiction when it ruled that the proper office to assume jurisdiction is the DOJ because Article 186 of the Revised Penal Code is a penal law."

• Codification of anti-trust laws into one statute.
• Recognition of the rise of Small and Medium Filipino Enterprises (SME) and the need for protection.
• Clearer protection against vertical agreements which have the effect of restraining trade.

• Definition of vertical price restraints and predatory pricing.
• Recognition of the disadvantage of vertical price restraint to the distributor or retailer.
• Recognition that protection from vertical price restraint is not a novel concept as other countries have protected against such form of anti-trust practice.

Proposed Bills

• Senate Bill No. 1 (Senator Juan Ponce Enrile)
• Senate Bill No. 123 (Senator Sergio R. Osmena III)
• Senate Bill No. 175 (Senator Antonio "Sonny" F. Trillanes IV)
• Senate Bill No. 1838 (Senator Miriam Defensor Santiago)
  

Filipino SMEs similar to martyred wives for sticking it out with vertical price agreements with MNCs

If it is has been established (here and here) that vertical price agreements in the Philippines are obviously huge burdens on Filipino distributors and retailers, then why do these guys stick it out with the multinational corporations (MNCs) to begin with?

Well, in the case of Nestle, its distributorship agreements usually promise market support to its local distributors/retailers. Armed with these promises, the SMEs pour in hundreds and thousands of pesos in setting up their operations, and in fulfilling their end of the distributorship agreement. Having infused so much capital to get their operations underway, it is often difficult for these Filipino SMEs to stop midway, call foul, and just back out of the whole thing. Not only would there be breach of contract involved, but these SMEs, naturally, hang on in the hope of turning a profit, and to avoid any further loss of investment. In short, their hands are tied. Plus, there is always the threat of having the multinational pre-terminating or refusing to renew the distributorship before the SME recovers from its investment.

Such vertical agreements also have an impact on consumers. From the point of view of the SMEs, once Nestle, for instance, sets a minimum price, the Filipino retailer/distributor generally has to market the goods more vigorously and creatively since lower prices are usually associated with lower quality. This is especially problematic when marketing and promotional support from the manufacture wanes throughout the existence of the distributorship agreement. So the Filipino SME, like a martyred spouse, sticks it out with the abusive other half.