The European Commission looks set to endorse new rules that would make it easier for big brands like Louis Vuitton and L’Oreal to discriminate against online sales. The ostensible goal of this revised “vertical block exemption regulation”, or VBER in EU jargon, is to “boost the high street.”
But a quick look under the hood shows how these proposed measures could end up hurting the brick and mortar stores they aim to help – and harm consumers, retailers, and distributors. The proposed revised VBER rules reduce competition and disadvantage retailers who sell both online and in brick and mortar stores.
Consider two fundamental problems.
First, the new rules allow brand-owners to introduce strict new criteria limiting, or entirely prohibiting, retailers from selling their goods online. Under the current rules, brand-owners can typically only impose online sales restrictions that are “equivalent” to offline sales restrictions (Guidelines, para. 56), and necessary to preserve the quality of the goods. For example, if after-sales warranty or installation services are required for offline sales, those same requirements can be imposed online. The new VBER removes this important “equivalence principle” that prevents brand-owners from discriminating against online sales.
National competition authorities are concerned. They argue that current prohibitions on online sales restrictions are already difficult to enforce. New relaxed rules will make their jobs even harder. But the European Commission has ignored these concerns.
Second, the new rules allow brand-owners to require retailers to charge higher prices for the same goods sold online than in-person. This so-called “dual pricing” was previously prohibited as a “hardcore” anticompetitive restraint (Guidelines, para. 52). It would now be allowed under a broad exemption allowing such discrimination whenever the brand owner intends it to incentivize retail investment. In other words, suppliers can now require retailers to charge higher prices for identical goods sold online instead of offline.
Dual pricing reduces competition and leads to higher prices since offline sales no longer have to compete on price against online channels. That’s bad for consumers and for those retailers who benefit from online sales. It means that retailers must account to suppliers for their “offline stock” and their “online stock,” and will face a penalty when shifting from offline to online.
If this rule existed before Covid-19 then SMEs with stock for offline sale would have been effectively prevented from selling this stock online. Even now that brick-and-mortar retailers are reopening, many are moving online to reach new consumers and supplement their in-person sales. The new EU rules will make this harder.
Big brand-owners will benefit – and become free to discriminate against online sales channels. This reduced competition in turn means higher prices for all customers. Numerous studies have shown that SMEs disproportionately benefit from the scale and scope efficiencies that online marketplaces provide. Consumers who prefer to shop online, whether because of lack of mobility, disability, rural location, or lack of time, will lose out.
The proposed policy is counterproductive. More and more retail is moving online. With the use of mixed-reality AR/VR/XR technologies, online sales channels will increasingly be able to preserve the quality of the goods sold. Instead of taking a step backward, European regulators should look to the inevitable future.
There is still some time to avoid the harmful consequences of this discriminatory industrial policy against online sales channels. National competition authorities have provided input, and the European Commission is still finalizing its text. Calls to protect SME and omnichannel retailers are growing louder. Hopefully, EU lawmakers will listen.
Kay Jebelli is competition counsel to CCIA EUROPE. He has over ten years’ experience working in competition law, as a private practitioner, at DG COMPETITION, and in-house. He also lectures and speaks frequently on competition law and policy, including as co-host of the MONOPOLY ATTACK podcast.