Nestle Philippines gets away with vertical price restraint in the Philippines but NOT in its mother country!!!

It is actually ironic how Nestle Philippines can get away with vertical agreements here in our country when its head office, based in Switzerland, is governed by very stringent anti-trust laws.

In fact, the U.S. even adapts a more liberal approach than Swiss law with respect to vertical price restraint agreements. Vertical agreements are not illegal per se in the U.S., but the court there considers economic effects of such agreements when applying the Rule of Reaosn to determine whether vertical price restraint is anti-competition or not. There is a little more flexibility.

Under Swiss law, vertical agreements are considered threats to competition if those agreements eliminate competition through retail price fixing or minimum retail price imposition. In Switzerland, in applying the Rule of Reason, the Swiss Competition Council has more specific guidelines, and considers both the economic and social impact of vertical price restraint agreements.

Sadly, in the Philippines, we can’t even judge whether our anti-trust law is liberal, like in the U.S., or stringent, like in Switzerland since there is no comprehensive regulation in the Philippines which directly tackles the issue of retail price fixing, minimum retail price imposition, or vertical price restraints. We only know that we are supposed to apply the Rule of Reason as well, but the big question is: How do we apply the Rule of Reason here?

Without a better anti-trust law, companies like Nestle will continue getting away with certain practices here which would otherwise not fly in other countries. Even the hands of our judiciary are tied. Without any guidelines, how will our courts determine what is reasonable or not?

This is why the call for a tougher, stronger, and more comprehensive anti-trust policy in the Philippines is something that should be taken seriously by those people supposedly advocating it. Walk the walk. Otherwise, our country will just continue to be a dumping ground for unfair and illegal practices condoned in other parts of the world.

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.

Manila Standard responds to Nestle allegations

"That party line on impeachment" by Emil Jurado
Published on 23 March 2011, Manila Standard Today, TO THE POINT (original article may be viewed online here).
*In reaction to Nestle's response here.

"Allow me to congratulate Nestle for its 100th year in operation in the Philippines. According to its CEO John Miller, “one hundred years of service to the Filipino consumer is a great source of pride within Nestle Philippines,” and that the company’s centennial “signifies its continuing commitment to the country.”

Well said, Mr. Miller. Unfortunately, there are many Filipinos—ironically, your very own distributors—who assert that your presence here in the Philipines has been anything but a service. These entrepreneurs initially held on to the promise of your company’s international reputation, only to find out latter on that Nestlé operates quite differently here in the country.

I summarize many of the woes experienced by Nestle distributors in my column last March 11. Edith de Leon, head of Nestlé’s corporate affairs office, wrote the Manila Standard Today an official response “categorically rejecting the assertions” mentioned in my column.

I read the points cited by Ms. De Leon very carefully, hoping that Nestlé could provide some clarity on the issue. More importantly, I wanted to hear what they had to say about the company’s being constantly regarded as the poster boy of corporate bullying in the Philippines. However, she must have had too much Nestlé coffee as her reply was filled with generic motherhood statements, as well as some “facts” which left me scratching my head. Santa Banana, is this what we can expect from Nestlé in the next 100 years?

* * *

Let’s rewind a bit and analyze Nestle’s rejoinder to my column. First, Nestlé implies (quite creatively) that the cases filed against it by Service Edge Distribution Inc. (SEDI and Forefront II Trading Inc.) were dismissed by the Department of Trade and Industry for “lack of merit.”

The fact is, the Order dated Jan. 5, 2011 clearly stated that the dismissal was due to “lack of jurisdiction.” I also understand that not a single case filed by SED1 and FD2 against Nestle has been dismissed.

Perhaps, it is the same tactics that have gotten several perjury cases filed in Quezon City and Makati courts. These cases were filed against top Nestlé executives that include, aside from Mr. Miller, Shahab Bachan and Doreswanby Nandkishore. My gulay, is the Nestlé head office in Switzerland aware of what’s happening here?

Second, to dismiss the complaints filed by these distributors as “unfounded” is to have a rather short memory. It was only five years ago that the Supreme Court itself (Nestle Philippines Inc. vs. FY Sons Inc. May 5, 2006 G.R. No. 150780) ruled that FY Sons (yet another distributor) was “lured to invest huge sums of money, time and efforts” by Nestlé only to have the latter “breach the distributorship agreement by committing various acts of bad faith such as, but not limited to, failing to provide promotional support, and concocting falsified charges to cause the termination of the distributorship agreement without just cause.”

If this sounds painfully familiar, it’s because Nestlé distributors are still singing the exact tune now. Fact two.

Third, Nestlé claims that it cannot possibly be accused of predatory pricing simply because its goods are not the cheapest in the market. Likewise, there is this assurance that its pricing policy are “compliant with the laws as well as recognized standards of trade practice in the country.”

* * *

At last, Nestlé and I agree on something: its goods are certainly not cheapest in the market. But if a company imposes vertical price restraint agreements with its distributors, isn’t that predatory pricing as well? My friends, who are experts in marketing, point out that this practice of setting a minimum price by which its distributors are required to sell Nestle products does not take into consideration the operational costs which are shouldered by the Filipino SMEs. Turning out a profit then becomes an immense struggle, considering capital outlay and lack of marketing and promotional support from the multinational.

Furthermore, how can Nestlé possibly be “complying with the country’s laws and standards” when there is no standard on vertical price agreements to begin with? To date, Philippine courts have no actual guidelines for determining whether or not predatory pricing has occurred or whether a vertical price agreement is restrictive of trade and monopolizes competition. Fact three.

Finally, the company assures the public that its activities are conducted “in compliance with Nestlé Corporate Business principals adhering to fairness, transparency and compliance to laws and regulations.” Perhaps as far as Nestlé Philippines is concerned, yes. But, considering its main headquarters is in Switzerland, a vertical price restraint is patently against the standards of the Swiss Competition Council.

Santa Banana, this appears to be a case of the hand doing something that the head is not aware of!"

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.

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.

New anti-trust law should tackle the unfair practice of vertical price-fixing

Since there has been much buzz about the need to pass a tougher anti-trust law in the Philippines, our legislators should pay special attention to the issue of vertical price-fixing. Also known as vertical price restraints, this occurs when a manufacturer sets a minimum price for its distributors and retailers, coupled with the threat of refusing to deal with the manufacturer’s distributor or retailer when the latter fails to charge at least the minimum prices set by the manufacturer.

In these kinds of vertical arrangements, the manufacturer is, in effect, a playground bully who leaves the smaller, more helpless classmates with no choice but to turn over their lunch money. Naturally, in this scenario, the smaller, more helpless classmate is the Filipino SME who typically act as the distributors and retailers for large multinationals such as Nestle, P & G, Johnson & Johnson, and the like.

Vertical price agreements fall within the ambit of predatory pricing which is generally considered illegal across most countries since it obviously hampers free competition. In predatory pricing, prices are set by a company which are below previous rates and below average costs. Nestle Philippines, for instance, has existing agreements wherein a minimum price is set (which its distributors and retailers are supposed to follow when selling the Nestle products to the end users) which does not factor in the average costs it takes for the Filipino SMEs to distribute and get these products to the consumers in the first place.

Why then do these Filipino SMEs enter into such agreements in the first place? The answer is because there is often the promise of initial marketing and promotional support by Nestle or the multinational, and because these small Filipino companies have already put in much capital to lay down the infrastructure for the business. They hang on in the hopes of turning a profit. Given the obvious strength multinationals such as Nestle wields compared to Filipino SMEs, then the only way to deal with such “bullies” is to pass a tougher anti-trust law.

Need for new anti-trust law to protect Filipino SMEs from predatory pricing!!!

Predatory pricing seeks to eliminate competition. It is unfair and illegal. It hampers free and fair competition because sale of products at low prices causes a loss, with the only possible rational for such low prices is the elimination of the company’s competitor in the long run and the capture of market share.

One wonders why this should matter when the loss is perceived to be borne by the company which set the low price rates to begin with. In actual practice here in the Philippines, this loss is never borne by the company (i.e. the multinational) but by its distributors and retailers (i.e. the Filipino SMEs). Multinationals such as Nestle Philippines sets a low price without considering previous price bulletins it has imposed on the Filipino SMEs (supposedly their “partners” in “growth” and “profit”), and, more importantly, without considering average total costs of distribution. These distributors/retailers have to eke out whatever minimal profit they can get from these arrangements, and it is not uncommon for these Filipino SMEs to operate at a loss.

Really, the most alarming aspect in the spread of vertical price fixing agreements in the Philippines is its impact on local SMEs. The common scenario is that you have a large multinational such as Nestle Philippines who has a distributorship or retail agreement with a Filipino SME. When this kind of company makes use of vertical price fixing agreements, the Filipino SME has no choice but to sell the Nestle products, for instance, to consumers at low prices – with complete disregard as to the actual costs borne by the SME to actually get or distribute these products to the market.

This is out and out bullying. As a country, we will never be able to move beyond providing distributorship and BPO support to these multinationals unless there is greater protection for the Filipino SMEs!!!

Lawmakers call for tougher anti-trust law

There has been much noise from our lawmakers on the need for a tougher anti-trust law in the Philippines. Rep. Eduardo Gullas, of Cebu, has been very vocal about pushing for an anti-trust law that would protect both consumers and businesses from wrongful and unfair competition in commerce. Senator Sergio Osmena III and Senator Juan Ponce Enrile have drafted bills for a stronger anti-trust policy and have been holding public forums for greater understanding of our current anti-trust issues. This is no doubt in response to President Noy Noy Aquino’s call for Congress to pass a new anti-trust law in his first State of the Nation Address last July 2010.

It is high time too. In truth, there is no comprehensive anti-trust policy and regulation in the country – at all. While there have been much reforms by way of liberalization, deregularizaton, and privatization to encourage free trade and open markets, anti-trust regulation in the Philippines is unfortunately completely behind compared to our foreign counterparts.

Rep. Gullas has stated that he favors new legislation patterned after the tough anti-trust laws of the United States. Actually, anti-trust laws in European countries such as Switzerland crack down even more than U.S. courts with respect to certain practices. Take the concept of vertical price-fixing, also known as vertical price restraints, which is not unfamiliar in Philippine economy.

The U.S., Switzerland and the Philippines adhere to the Rule of Reason doctrine in determining whether a company is liable for vertical price-fixing. However, the U.S. takes on a more liberal approach whereas Switzerland has more stringent standards and even has a Competition Commission which determines whether there is vertical price restraint involved. In the Philippines, there are no such determinants, and hardly if any case law providing for guidelines on how to apply the Rule of Reason.