Inquiry Into the Quebec Beer Market

Backgrounder

April 29, 2003

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Background

The purpose of this document is to outline in general terms the findings of the Competition Bureau's inquiry into complaints received from certain microbreweries regarding alleged anti-competitive practices by the brewing companies Molson Canada (Molson) and La Brasserie Labatt Ltée (Labatt).

The Bureau's policies and practices regarding the treatment of confidential information limit its ability to disclose specific information obtained during the course of an inquiry. However, the general findings of the Bureau on the relevant issues are summarized below.

Overview of the Quebec Beer Market

Breweries

Molson and Labatt, Quebec's two main breweries, market nearly 90% of the beer sold in Quebec. Other market players include a number of commercial microbreweries, such as McAuslan Brewing Inc., Les Brasseurs du Nord Inc., Les Brasseurs GMT Inc., the Sleeman Brewing and Malting Co. Ltd. and Unibroue Inc. A number of craft brewers also have a presence in the market.

Consumption

Nearly $2 billion in beer is consumed in Quebec each year, or over 60 million 24-bottle cases. Approximately three quarters of the beer is purchased for home consumption at grocery stores, convenience stores and, to a minor extent, the Société des alcools du Québec. The remainder is purchased for on-premises consumption in bars, restaurants and other similar licensed establishments or at special events. Beer is sold mainly in bottles but is also available in cans and on tap.

The Complaints

The complainants maintained that Molson and Labatt were engaged in exclusive dealing and abuse of their dominant position by engaging in various anti-competitive acts in the Quebec beer market. Specifically, the complainants asserted that the introduction of new brands of beer and agreements entered into by Molson and Labatt with licensed establishments were harmful to the development of their business activities. Among the contract clauses criticized by the complainants were exclusivity clauses, shelf-space allocation clauses, clauses requiring establishments to sell certain brands at the same price as their competitors, clauses restricting advertising, and right of first refusal clauses.

Information Gathering

During the course of an in-depth inquiry initiated in August 2000, the Bureau obtained court orders from the Superior Court of Quebec pursuant to section 11 of the Competition Act (the Act) requiring approximately ten Quebec breweries and the major grocery store chains in Quebec to produce documents and information relating to the alleged practices being investigated and their impact on competition. The initial set of orders covered the period from 1995 to 2000 and, in March 2001, brought in thousands of documents, including contracts entered into by Molson and Labatt. Upon examination of the data by Bureau staff and experts, the Bureau requested that another set of orders be issued to answer questions raised in the case. The complementary orders made it possible to bring the information up to date as of late September 2001. During the course of its inquiry, the Bureau also met with the complainants, other microbreweries, various industry stakeholders and a large number of licensed establishments. All of the information was then carefully analysed by Bureau staff and by independent experts.

The Analysis Under the Competition Act

The purpose of the Bureau's inquiry was to determine whether major market players were engaging in anti-competitive acts that were or would be harmful to competition. If that were the case, the Bureau could ask the Competition Tribunal to issue an order directing those players to cease their anti-competitive practices.

More specifically, the facts alleged in the complaint pointed to potential violations of sections 77 and 79 of the Act. Section 77 prohibits exclusive agreements when they are required by a major company or because they are widespread in a market and, as a result, competition is or is likely to be lessened substantially. Section 79 describes the abuse of a dominant position and prohibits a company (or group of companies) that controls a market from acting in a manner that would eliminate, penalize or discourage competitors, with the result that competition is or is likely to be prevented or lessened substantially.

Market Power

The information collected, particularly as related to manufacturing processes, marketing techniques and consumer habits, enabled the Bureau to eliminate other alcoholic beverages from its analysis. The Bureau also found that the various brands (over 100 sold in Quebec) and beer segments (discount, regular, specialty) were not sufficiently distinct from one another to constitute separate markets. Consequently, the Bureau adopted beer as the relevant product market for the purpose of its inquiry.

Similarly, an examination of brewing regulations, distribution systems and the historical development of the brewing industry led the Bureau to consider the entire province of Quebec as the relevant geographic market.

As indicated earlier, Molson and Labatt together account for nearly 90% of beer sales in Quebec. The two breweries are also the largest in Canada. In addition, Molson and Labatt have by far the broadest range of brands, and no other Quebec brewer has a comparable sales and distribution network or production capacity. Molson and Labatt are the only two members of the Association des brasseurs du Québec [Quebec brewers association] and are likely to consider or to represent their interests as being the same as those of the industry in general. These facts support the argument that Molson and Labatt have a certain market power in the Quebec beer market.

Market Practices Observed

Regarding the practices alleged in the complaint, the Bureau's inquiry revealed that some of them were indeed taking place. The analysis of the contracts collected from brewers and licensed establishments indicates that Molson and Labatt had entered into agreements with several of their clients that included clauses restricting their competitors. The analysis also showed that such contracting practices in general were becoming increasingly widespread and were covering an increasing volume of beer in Quebec.

In the on-premises consumption sector, the Bureau inventoried clauses giving certain brewers exclusive rights for their products. The exclusive dealing could cover all beer formats or just draught brands. Right of first refusal clauses were also found.

In the home consumption sector, the Bureau inventoried clauses giving certain brewers a percentage of shelf space, exclusive rights in certain places (such as coolers and refrigerators) or preferred positioning. Clauses stipulating price parity between certain brands were also found.

It should also be noted that a number of retailers maintain discretion over a portion of their shelf space. Access to non-contract display space for microbrewery products is left to the retailer's internal management. However, the Bureau noted that internal management could be influenced to varying degrees by brewers, notably when they take part in category management at the invitation of the retailers.

The Bureau's analysis does not, however, support the argument that Molson and Labatt introduced fighting brands or that they engaged in predatory pricing.

Effects on Competition

In this part of its examination, the Bureau concentrated its analysis on the impact that Molson and Labatt's contracting practices could have on competition. It is important to note that the Bureau's mandate is not to protect a specific competitor but rather to promote competition as a whole.

The Bureau examined the situation for all of Molson and Labatt's competitors over the period from 1997 to 2001 and took into consideration, among other things, their revenue, volumes, costs, investments and competitive initiatives, such as the introduction of new brands. Molson and Labatt's rivals did not all have the same experience during the period studied, but the evidence across all competitors does not indicate that their competitive position was substantially lessened or prevented during the period. For instance, over the period, the microbreweries increased the number of brands they offer, and some invested in additional capacity.

The Bureau notes, however, that several terms and conditions of the contracts signed by Molson or Labatt may, in certain contexts, have a negative effect on competition. The evidence collected, reflecting the market conditions both during the period studied and currently, does not support the argument that these contracting practices substantially harm or will harm competition. However, over the medium to long term, if the contracting practices of Molson and Labatt, giants in the Quebec industry, were to become more widespread or to intensify, it could very likely have a negative effect on competition in the beer market.

Conclusion

Based on the facts established in its examination of the complaints filed and for the various reasons given above, the Bureau has concluded that the evidence does not currently support making an application to the Competition Tribunal. As a result, the Bureau has terminated its examination, pursuant to section 77 and 79 of the Act.