Overview
The case of Peter’s ice cream involved the point between the defendant, Peter’s ice cream, and the Anti-competitive consumer act, where the company had bridged these acts during the operation. According to the case that was presented in the court, the company had been charged with anti-competitive actions in its engagements with its major distributor company, PDF food service PTY Ltd. These allegations of anti-competitive behavior were a result of the agreement of exclusivity between the two companies. Peter’s company was a major manufacturer and distributor of ice cream in the Australian market. At the same time, PDF Food was a major distributor of dry foods and ice cream in Australia. The two parties had been involved in an agreement of exclusivity where the PDF distributor was not to distribute the market or purchase other brands of ice cream and sell in the markets that Peter’s ice cream operated. At the same time, these regions would be adjusted over time. The case was presented in court, and both sides were argued. However, the company Peter’s ice cream was found guilty of anti-competitive actions, and it was awarded a penalty of a$ 12 million (CGW Lawyers, 2022). The ruling followed the evidence of anti-competitive actions that indicated an attempted monopolization of the markets through exclusive actions. The report will outline both sides of the case, examine the evidence presented by the defendant and the ACCA, and come up with a recommendation on the judgment that was given.
Relevant Market
The ice cream market in Australia is one of the most growing industries in the country. The market managed to generate a total revenue of a$1.8944 billion dollars in the country’s total revenue. In an analysis of its growth, the industry has also been experiencing an increasing annual growth rate following the changing consumer preferences for ice cream and frozen foods. The report on the CAGR indicates in 2016 to 2021, the industry had an annual rate of 3.1%. At the same time, productivity levels have been growing over the past years. The annual CAGR for the production from 2016 to 2021 was 2.3%, where the industry was able to produce a total of 248.8 Million Kg of the products. The market structure for the industry is not a monopoly as it is dominated by two sectors, Peter’s and Streets, which make up 95% of the total market share (Cordato, 2022). Therefore there is still no firm that has a monopoly over the markets. However, due to the high levels of market share, the two companies hold a great influence over the prices of the products. At the same time, the companies enjoy a huge market share and consumer preference.
Monopoly and Market Power
According to the case that was presented, there were no dangerous probabilities that Peter’s ice cream was using the exclusivity clause to gain monopolistic status in the ice cream markets. The monopolistic activities involve the use of pricing to flash out the competition and then later adjust its prices later for the sake of regaining the profits that were lost in the predatory pricing. In the case of Peter’s ice cream, there was no evidence of these actions regarding the ice cream issues. The company did not use any pricing strategies to get ahead of the competition. However, its exclusivity affected the level of competition in the market that it operated.
Market Share and Market Growth
The growth of the market share is not an indicator of anti-competitive behavior in the markets. Therefore there was no evidence that the growth of the company’s markets was a move towards anti-competitive behavior. Since the sale of Peter’s ice cream to a UK firm in 2012, the company had a market share of 31.7% of the value in the Australian markets. At the same time, the company had a lower revenue back then. However, after the acquisition and the exclusivity deal, the company was able to grow its value and market share exponentially. As per the analysis conducted, the company, together with Streets Ice Cream Company, had managed a total market share of 95% in Australia. The company had grown in terms of sales, and the revenue went up to 102.9 million Australian dollars over the period. The evidence of the rapid growth of the company may present some insight on the causes of the success. These may be due to the anti-competitive behavior of the company against the other manufacturers of ice cream, which resulted from the agreement with PDF distributors (Dorgan, 2023). This growth may have been influenced by the easing of the competition in the areas that Peter’s ice cream company supplied its ice cream in the market. The agreement would have prevented the sale of the rival brands in the markets and hence would have led to higher sales.
Barriers of Entry
The case of barriers of entry would refer to any activities of the company that may lead to hardships of the entry of new manufacturers in the industry. These activities may be either directly committed by the company or may result from the scale of their production. The analysis of the case of Peter’s ice cream had evidence of the company’s activities creating the barriers to entry.
One of the barriers identified in the market was the nature of the market share of the company. The evidence from the analysis of the market share indicated that the combination of the Streets ice cream and Peter’s made up to 95% of the total market share in the Australian ice cream industry. At the same time, the two companies had a combined market share of 62% in the grocery channel in the Australian market (ltd, and 2022). The company, therefore, operated in an oligopolistic type of market. These presented the barriers of entry for the new entrants as these companies only left a total of 5% of the market share for the rest of the competitors to compete over. At the same time, there were other companies that were in operation and hence competed over the rest of the 5% market share left by the two giants in the industry. Hence a new company would have no chance of successfully entering the markets as there are no markets for selling their products. Therefore there were barriers to entry due to the size of the company.
The other causes of barriers to entry for the industry resulted from the operations of the company in terms of the scale of its manufacture. The process of manufacturing ice cream products requires huge capital investment. It requires investment in the equipment for the manufacture of the ice cream products as well as the site for locating operations. The entry into the business also requires the company to hire staff for the sake of operation (Matějová et al., 2014). Hence the initial investment cost for the industry is relatively higher. These factors may not have been influenced by Peter’s ice cream as they are industrial barriers of entry. However, the activities of the company may have increased the barriers.
Another issue that the company led to barriers to entry is the scale of operation. The company enjoys huge volumes for its production. The company is, therefore, able to enjoy the economies of scale from the operations. The economies of scale are the cost that the company saves when it operates in huge volumes. These costs for the company included the discounted costs of raw materials. Due to the scale of the operation, the company was able to negotiate better terms of supplies from the distributors. At the same time, the company was able to save its costs in the manufacturing process. The production of goods requires some levels of inputs for conversion to the finished products. In this process, there are some fixed costs that are applied to the production (Carlino, 2012). Companies that operate on a large scale are able to use the same fixed costs in the manufacture of many items, and hence the fixed costs are divided over many products, which lead to cost savings. The ice cream company would therefore have resulting reduced costs of production at the end of the process.
These elements of advantage have positioned some barriers to entry for the new entrants in the markets affecting the productivity of the company. The beginner firms will have lesser scales of their productivity (Anwar & Ali, 2015). Hence the fixed costs will be shared over a few units of sales that are made in the end. Peter’s ice cream, on the other hand, enjoys some advantage in the market and is, therefore, able to distribute the costs leading to better prices for the products. The new entrants will not be able to do this and hence won’t be able to maintain the low prices for the items.
Another factor that led to barriers of entry for Peters is the company having a single distributor for its products, which is the PDF food distributor. Having multiple distributors of one’s product means that the company will negotiate the different costs on the basis of the distributor’s profitability. And hence depending on the scale of distribution, the company will have better terms or worse terms. In the case of Peter’s, PDF Foods was the main supplier of its products across all the markets in Australia. Therefore, the company was able to negotiate for better terms regarding the supply of ice cream.
The agreement of exclusivity also affected the barriers to entry due to the nature of the distributor industries in the markets for dry foods. According to the Australian markets, the major competitors for the industry were the PDF foods and also Bid food distributors. However, PDF distributors had a larger market share as they distributed their products across the country. This gave them more consumer preference for the retailers, especially the P&C and national retailers. At the same time, the distribution business has its own limits in terms of the size of the business. Bid food has some specific scale of distribution that a company has to reach in terms of the quantity of the food supplied in the market. Hence there was a need for the companies to have a certain level of market share in an area for it to supply. At the same time, the company also considered the costs and gains of supplying to a certain area before agreeing to supply. Therefore these factors increased the barriers of new entrants in the business as their scale did not enable them to supply to the markets as they couldn’t reach the minimum required quantity for supply. Bid food also had a smaller market share of 777 out of a total of 6995 retailers, which made most of the markets to be occupied by PDF Company. Therefore there was less competitiveness of the other firms and less chances of success through the use of the other distributors.
Finally, the evidence that the market agreement between the two companies created barriers to entry to the market can be shown by the case of Bulla, who wanted to extend their production and become the third competitor in the industry from Peter’s and Street ice cream companies. However, the analysis showed that in their own means, the distribution costs were very high for the company to cover. Hence there was a need for an external distributor who could cover these costs through their scale of supply. Therefore the company made their request to PDF to deliver their products to these areas. However, the distributor could not honor the requests as they had an arrangement with Peter’s ice cream, which made this a bridge of their agreement. At the same time, Nieve, another company, also wanted to expand its operations to new markets in Australia in 2016 (Zaurini, 2022). In the same case, the operation would require them to use an external distributor. The only choice was PDF, as it is supplied in most parts of the country. Therefore these efforts would have been possible without the exclusivity agreement between the two companies. Therefore there was some evidence of barriers to entry as a result of the agreement. At the same time, the consumer preference towards the brand was another cause of barriers to entry into the market. The company enjoyed a good reputation and a huge market share which offered barriers to new competitors.
The Australian Court’s Decision
The court found the company to be guilty of the anti-competitive activity in the markets through their arrangements in the industry. According to the court, the company was found guilty of only the charges for anti-competitive behavior, ana$12million for the exclusivity agreement (Federal Court of Australia, 2022). In my opinion, I feel like the company was also involved in intentions to monopolize as well in the market. This was based on the basis of the PDF distributor being the major distributor in the country. The control over the products the company supplied would lead to power over the markets as well.
Intention to Monopolize
The analysis of the evidence that was presented in the case showed that there was an intent for the company to monopolize its operations in the new markets and to be the only distributor in the regions where it enjoyed consumer preference. The company used an agreement with the major distributor PDF Foods to exclude the company from distributing or marketing any other product in their markets. As a result there, Peter’s ice cream company would be the only major manufacturer supplying its ice cream in these areas (Jery, 2022). The agreement first was against the competition and consumer act. At the same time, these activities would indicate the intention to monopolize the markets by driving away the competition. The company aimed to achieve this through the use of denying access to the markets for the rival companies. Peter’s Foods company would achieve this by controlling the only means of supplying the products in the markets, which would limit the ability of others to compete in the markets. The company succeeded in its actions as the other companies could not deliver to these areas.
Anti-competitive activities
The evidence that was presented in the court found Peter’s ice cream company to be guilty of anti-competitive action in their agreements with the distributor company PDF Foods on the basis of their delivery. The two parties had signed an agreement of exclusivity that outlined that PDF distributors would not be supplying products of rival companies in the markets that Peter’s enjoyed market dominance. These terms would be amended according to the markets that the company. In return, Peter’s was to adopt a one-distribution approach for its ice cream products in the market. The agreement took effect in November 2014 and went on up until December 2019 (Wade, 2022). As part of the initial agreement, PDF Company would not sell or market the products from the other companies in the Western Australia markets, Tasmania, Australian Capital Territory, Victoria, south Wales, Queensland, and South Australia. At the same time, in 2015, the company acquired a new market territory, Adelaide, which was also added to the list of territories under the exclusion clause.
Benefits and Loss Analysis
The court could not prove the actual profits or benefits in the form of financial benefits the company had gained from the arrangement with PDF Foods Company for the delivery of their products. The financial information on the changes in revenue that were brought by the exclusion clause could not be quantified. However, the growth of the company over the years of the clause would suggest this had something to do with the exclusivity agreement. However, the claims could be justified in regards to reduced levels of competition in the areas from the other major producers of ice cream.
These claims could be justified with the case of Bulla ice cream, which wanted to be the third competitor in the industry in 2015 with a plan to expand its operation within three to five years. The company had a target to expand its sales by 5% and would later increase this rate to 10% at the end of the 5 years. It expanded its sales in South Australia through the sale of single-service ice cream products (SSICP). The company later realized that the only way to expand to the national and P&C retailers was through the use of suppliers, as the costs were too high. The company approached the only distributor with more share of the markets PDF distributors in an attempt to increase its share in these areas (Owari, 2022). The company, however, dismissed their request as the exclusion act denied the company from distributing rival SSIP to the retailers. Hence the company lost its ability to expand to the new markets as a result.
Another company Nieve also had the same experience as it had its efforts on expanding its operation is 2016 to 2019. The company had specialized its supply of ice cream products to supermarkets and stores. However, the company wanted to expand its scales and get to new markets. This, however, would not be possible without an external distributor. The company also approached PDF and also didn’t get the supplier due to the exclusion act. Hence the agreement affected the normal competition in the markets which is against the antitrust laws.
Another company that was a victim of these activities was the Pure Pops ice cream which was the producer of the ice creams as well. The company also wished to expand to the P&C and national retailers. However, the Bid Food distributors had their barriers for supply based on the quantity of the products supplied in the markets. The only option would be using PDF foods which didn’t offer extreme limitations. However, the clause also prevented this.
Conclusion
The decision of the court to charge Peter’s ice cream company with the claims of anti-competitive acts in the markets was well justified in that the evidence presented would support the existence of these activities in the markets. The agreements of exclusivity for the supply of SSIP in areas that Peter’s had dominance affected fair competition as PDF food was the major supplier for the ice cream products. The court should have considered the charges of intent for monopolization as the actions of the company would have removed the competition from the business monopolizing the company in its territories. However, the law was effective in charging the company of anti-competitive claims.
References
Anwar, R. S., & Ali, S. (2015). Economies of scale. International Interdisciplinary Journal of Scholarly Research, 1(1), 51-57.
Carlino, G. A. (2012). Economies of scale in manufacturing location: theory and measure (Vol. 12). Springer Science & Business Media.
CGW Lawyers. (2022). Peters Ice Cream served up a $12 million penalty for anti-competitive conduct. Cooper Grace Ward. https://cgw.com.au/publication/peters-ice-cream-served-up-a-12-million-penalty-for-anti-competitive-conduct/
Cordato, C. P.-A. J. (2022, April 28). The future of exclusivity clauses after Peters Ice Cream was fined $12 m for anti-competitive dealing. Lexology. https://www.lexology.com/library/detail.aspx?g=37623e53-59f0-4293-a6c0-94c25debf4f5
Dorgan, N. (2023). Peters Ice Cream hit with $12m penalty after admitting anti-competitive conduct. Business News Australia. https://www.businessnewsaustralia.com/articles/peters-ice-cream-hit-with–12m-penalty-after-admitting-anti-competitive-practices.html
Federal Court of Australia. (2022). Australian Competition and Consumer Commission v Australasian Food Group Pty Ltd [2022] FCA 308 (25 March 2022). Austlii.edu.au. https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2022/308.html
Jery, J. (2022). The court finds nothing sweet about Peters icing out their competition. Www.holdingredlich.com. https://www.holdingredlich.com/court-finds-nothing-sweet-about-peters-icing-out-their-competition
Ltd, R., and M. (2022). Australia Ice Cream Market Summary, Competitive Analysis and Forecast, 2017-2026. Www.researchandmarkets.com. https://www.researchandmarkets.com/reports/5714845/australia-ice-cream-market-summary-competitive#:~:text=The%20Australian%20Ice%20Cream%20market
Matějová, L., Plaček, M., Krápek, M., Půček, M., & Ochrana, F. (2014). Economies of scale–empirical evidence from the Czech Republic. Procedia Economics and Finance, 12, 403-411.
Owari, S. (2022). Peters Ice Cream’s anti-competitive dealing leaves Australian ice cream lovers out in the cold. Www.linkedin.com. https://www.linkedin.com/pulse/peters-ice-cream-anti-competitive-dealing-leaves-lovers-howari/?trk=articles_directory
Wade, W. (2022, April 6). Peter suffers an ice cream headache after Federal Court orders a $12 million penalty for anti-competitive exclusive dealing. McCabe. https://mccabes.com.au/peters-suffers-an-ice-cream-headache-after-federal-court-orders-12-million-penalty-for-anti-competitive-exclusive-dealing/
Zaurini, R. (2022). Peters Ice Cream receives a chilling $12 million penalty for exclusive dealing. Www.ashurst.com. https://www.ashurst.com/en/news-and-insights/legal-updates/competition-law-newsletter-may-2022/cn05—peters-ice-cream-receives-chilling-12-million-penalty-for-exclusive-dealing/ Carlino, G. A. (2012). Economies of scale in manufacturing location: theory and measure (Vol. 12). Springer Science & Business Media.
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