The Retailer Winter Edition 2023

THE RE TA I L ER

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THE NEW FACE OF VERTICAL DISTRIBUTION - A MAKEOVER THAT WAS LONG OVERDUE

Rhiannon Pugh Senior Associate CMS

Siobhan Kahmann Of Counsel CMS

Graeme Young Partner CMS

E U and UK revise key rules on distribution agree ments for the first time in over a decade

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Distribution systems The new rules clarify that suppliers can appoint more than one exclusive distributor for a given customer group or territory. In the EU, suppli ers can have up to five exclusive distributors, while there is no limit in the UK – although the number must be ‘proportionate’ to the investment required. This presents potentially newopportunities for retailers to distribute for new suppliers whowere previously tied to one exclusive distributor. Retailers will now also have more opportu nity to join a selective distribution network, within which suppliers only supply approved distributors who meet specific criteria, and the appointed distributors supply only to end-users or other distributors within the closed network. Such networks were previously uncommon in some sectors as they tended to focus on luxury products, but luxury criteria are no longer required. Within exclusive or selective distribution net works, suppliers can legally impose restrictions on non-network retailers selling into reserved territories – but onlywhere such networks are properly established. Accordingly, retailers should remain vigilant about any restrictions on where they are permitted to sell in all circum stances. Indeed, illegal territorial restrictions are still subject to scrutiny by regulators and the wider market: in December 2022, EuroCommerce launched a SingleMarket4All campaign calling on the European Commission to tackle territorial restrictions that prevent a retailer in one EU country from importing a product from a manufacturer’s branch in another EU country, even if the supplier is selling at a cheaper price or offering a wider choice in other EU Member States.

New rules on distribu tion agreements provide clarity and offer more flexibility but there are now key differences between the UK and EU.”

Globalisation and digitalisation continue to reshape businesses – creating new markets, breaking down barriers, and blurring supply chains and routes to market. Authorities are trying to keep pace with these developments, modifying rules governing distribution to move with the times, making themmore user-friendly, while at the same time offering appropriate consumer protection. The UK and EU competition distribution rules were updated in June 2022 from the previous versions introduced over a decade ago. They regulate how businesses get their products to market, whether through direct online sales, their own stores, third party platforms or more traditional distribution arrangements. June 2023 is the deadline bywhich businesses need to ensure their existing distribution agreements comply with the new legislation, which will come around quickly. Retailers should therefore be reviewing their contracts now to ensure compliance but also to take full advantage of the increased flexibility on offer. Businesses also need to be aware of the effect that important newdifferences between the EU and UK regimes could potentially have on their international distribution strategies. The risk of fines for breach is generally higher for suppliers and online platforms, but retailers should always be mindful of the risk areas in their day-to-day business to reduce their own exposure. There are three main areas which retailers should be aware of:

Online sales Unless retailers are selective distributors, they should not under any circumstances be restricted from making sales to individual cus tomers via unsolicited requests/approaches. Retailers should be aware that examples of such restrictions under the new rules have developed in line with emerging digitalisation trends and include sales via an online store to customers that are not specifically targeted by the seller. Regulators are keen to protect physical shops following the success of e-commerce and the added effects of the pandemic on high streets. Under the new rules, suppliers can now charge retailers different wholesale prices for products to be sold online versus in a physical shop - which had been previously illegal - and so recognises the greater costs inmaintaining high street stores. However, any price difference must account for genuine investments or costs related to the type of distribution. Despite the need to protect high street sales, the rules still do not permit suppliers to pre vent all online sales – although some online sales restrictions are permitted in some cir cumstances (e.g., marketplace bans).