Mexico: CFC cracks open beer market for craft brewers, limits exclusivity agreements

Mexico’s antitrust regulator, the CFC, announced Thursday it has made agreements with the nation’s dominant beer breweries, Grupo Modelo and Cuauhtemoc Moctezuma, that ends exclusivity agreements between the beer makers and distributors, cracking open the market for smaller companies like craft brewers. The two dominators together controlled about 95 percent of Mexico’s beer market, squeezing out smaller competitors through exclusivity agreements made with various pubs and liquor stores. The CFC imposed conditions on the market leaders, however, that puts time restraints and market caps on exclusivity agreements. Specifically, the breweries agreed not to make such agreements that exceed 25 percent of their points of sales terminals; in the next five years, that cap will be reduced to 20 percent, said the regulator. The CFC’s full press release can be read below.

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The CFC imposed conditions on brewers to open the beer retail market

CFC-08-2013

• All craft breweries will have open and unrestricted access to all restaurants, bars and taverns in the country.
• Cervecería Modelo and Cervecería Cuauhtémoc – the breweries which together control more than 95% of the Mexican market – will limit their exclusivity contracts with grocery and convenience stores as well as restaurants to a maximum of 25% of its point of sale terminals. This percentage will be gradually reduced to 20% in a period of five years.
• Subject to the aforementioned caps, only written exclusivity contracts with limited terms and clear termination rules will be valid. The companies must publish these rules in printed media and make them known to their clients.
• Breaching these conditions will accrue a sanction of up to 8% of the annual turnover in Mexico of the defaulting company.

Mexico City, July 11, 2013.- The Plenum of the Mexican Federal Competition Commission imposed remedies to exclusivity contracts in the beer retail market in restaurants, bars and taverns (open container) as well as in grocery and convenience stores (closed container). With these remedies, agreed by the agency with Cervecería Modelo and Cervecería Cuauhtémoc – the brewers that together control more than 95% of the Mexican market – the Commission decided to close an investigation it had previously opened in this industry.

According to article 10 of the Competition Law, exclusivity contracts may constitute anticompetitive conducts provided that they (i) are carried out by companies with market power, (ii) unduly displace competitors or impede substantially their access to the market and (iii) are not justified by efficiency gains which convey benefits to consumers.

In the case of the beer retail market, the Commission concluded that there could be efficiency justifications for having exclusivity contracts (for example, when the improvement or expansion of retail stores is financed). However, depending on the extent of this type of contracts, their existence may constitute an unjustified barrier to entry for new competitors.

To avoid this risk to the competitive process, the Commission decided to subject Cervecería Modelo and Cervecería Cuauhtémoc´s exclusivity contracts to the following conditions:

1. Craft breweries will be assured open and unrestricted access to all restaurants, bars and taverns. Exclusivity contracts celebrated by Modelo and Cuauhtémoc with these establishments cannot, under any circumstance, limit the sale of craft beer and small-scale commercial producers in the country.
2. All exclusivity contracts should be written, transparent, time-limited, and have clear contract termination rules. Without a written contract, no exclusivity obligation can be established. Modelo and Cuauhtémoc are obliged to publish these conditions governing exclusivity contracts in national circulation newspapers and make them known directly to the grocery stores, restaurants, bars and taverns they supply. Also they will set up a hotline for questions and complaints.
3. Exclusivity contracts may not exceed 25% of the total point of sales terminals to which they sell and this share will gradually decrease to 20% in five years. This ensures that exclusivity contracts will not constitute an entry barrier to other competitors, who will have access to the remaining point of sales terminals in favorable conditions.

In its decision, the Commission also established that an independent auditor will be responsible for verifying compliance with these conditions and will have to regularly report to the agency on the fulfillment of the aforementioned conditions. It is important to note that, according to the Mexican Competition Law, breaching them could accrue a fine of up to 8% of the annual turnover in Mexico of the defaulting company.

The resolution of Commission is in line with the settlement mechanism foreseen under article 33 bis 2 from the Competition Law. This mechanism, which is international practice worldwide and was strengthened through the legal reforms of 2011 as a complement to the increase in sanctions, allows for the efficient and expeditious solution of competition problems. Also, it avoids resorting to the litigation route which diverts resources from the agency and prolongs damages to efficiency and consumers.

The decision of Commission was taken with a 4-1 voting, with votes in favor from Commissioners Eduardo Pérez Motta, Rodrigo Morales Elcoro, Luis Alberto Ibarra Pardo and Cristina Massa Sánchez. Commissioner Miguel Flores Bernés voted against considering that the remedies “are not targeted at ceasing, removing, correcting the denounced practices, and, as such, do not result in the restoration or protection of the competitive process since the remedies are not appropriate nor affordable to not carry out, or in its case, annul the effects of the unilateral conducts investigated.”

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