DISTRIBUTION AND INTERNET The Impact of Internet on Agency, Distributorship

1. DISTRIBUTION AND INTERNET The Impact of Internet on Agency, Distributorship and Franchising Agreements 2008 Annual Meeting of the International Distribution Institute 6th and 7th June 2008 Turin - Italy

2. The Impact of Internet on Agency, Distributorship and Franchising Agreements Marketing products and services through Internet Internet sales by selective distributors and franchisees

3. A French example : decision 07-D-07 rendered on 8.03.2007 relating to practices implemented in the cosmetic and personal hygiene products sector Facilitation of online sales Undertakings given to withdraw a ban on internet sales Carol XUEREF 6th June 2008

4. The Conseil de la concurrence decided on its own initiative (ex officio referral) in June 2006 to analyse the lawfulness of the conditions imposed by certain cosmetic product companies (representing 53 % of the French market) for selling their products via the internet.

5. According to the Conseil de la concurrence, the aforementioned practices breached Article 4 of the EU Commission Regulation n° 2790/1999, which prohibits « the restriction of active or passive sales to end users by members of a selective distribution system operating at the retail level of trade », as well as the Commission’s Guidelines on vertical restraints dated 13th October 2000, which states that « every distributor must be free to use the internet to advertise or to sell products […]. An outright ban on internet or catalogue selling is only admissible if there is an objective justification ».

6. The companies all resorted to a selective distribution system through which their products were sold via approved distributors (chemists, parapharmacies, special counters at department stores), which were selected for the quality of their retail outlets and the level of staff qualifications required for giving appropriate counselling. As part of the procedure, ten companies committed to change substantially the clauses of their selective distribution contracts for online sales by approved distributors. The aim was to reconcile respect of the brand image, guaranteeing product quality and accessing approved distributors for this medium in light of the specificities of the products and advice necessary to use them.

7. The ten companies committed to change their behaviour involving the removal of the requirement that their products would be sold exclusively at a physical sales point and thus authorising sales on the internet. The companies, however, subjected the authorisation to distribute their products on the internet to various conditions. For instance, the companies required their distributors (i) to set up a quality website, with a technical design and appearance complying with the brand’s graphic charter, and (ii) to mention on the website the addresses of physical sales points or a permanent access to a hotline, staffed by qualified pharmacists and which guaranteed a response to consumers’ questions within 24 hours.

8. The quality of the website is a common concern for all the companies, which naturally require the respect of their brand image. In this respect, some of the conditions put forward by the authorities were of concern : requirements to create a website, which is exclusively dedicated to the sale of products which require counselling ; the need to have a payment point reserved for the products, detailed requirements as regards product presentation (description, size and weight of the pictures), compulsory resort to a webcam to visualise the customer, etc..

9. The manufacturers accepted to simplify the contract clauses, without undermining the respect for the brand image. Alternatives to conditions included for example for the requirement of a dedicated website the substituion of a dedicated page as part of a virtual store. Some companies went even further, in accepting the principle of platform selling under certain conditions.

10. Conditions relating to hotline availabilities The creation of a hotline via telephone or email offers (or both) and via internet, a personal counselling service given by a chemist. The operating conditions of the system (timetables, maximum time period for reply) were reduced.

11. Restrictions or limitations on quantities or prices The Conseil de la concurrence believed that the manufacturers’ restrictions on the number of products likely to be purchased via an internet order could restrict parallel trade. It observed that this requirement did not exist for real outlets and stressed that intra-network trade between approved distributors should not be limited. Some of the companies concerned then committed themselves to increase the anticipated quantitative thresholds and others to simplify autorisation mechanisms, notwithstanding, certain fraud involving internet sales.

12. Referencing of search engines Most companies concerned removed the prohibition to use their corporate name or their brand as a keyword in so called « usual » search engines and a certain number of changes were brought to clauses relating to payment.

13. The commitments taken by the ten companies lead to the development of online sale of parapharmaceutical products. The consumer are able to compare prices of different brands and also to use more easily intra-brand competition, i.e. competition between different approved distributors for a single brand product.

14. The proceedings before the Conseil de la concurrence came after two decisions concerning bans on internet selling within selective distribution networks in the watches sector (« Festina » July 2006) and in the hi-fi and home cinema sector (October 2006). In these decisions, the Conseil de la concurrence stated that a supplier can reserve the right to sell online to the members of its network, but cannot prevent those members from using this sale method.