Is there a Carrefour monopoly in Indonesian retailing?

Since its first stored opened in central Jakarta in 1998, Carrefour has quickly expanded to 37 stores across Indonesia, reaching annual sales of 627 million Euros by 2006. However, the rise of Carrefour has not been seamless. In 2005, Carrefour paid a Rp1.5 billion (US$148,515) fine due to its behavior deemed as abuse of its dominant market position which damaged wholesalers through ‘minus margin’. The French-owned retail giant is now once again in troubled waters.

This time, the problem started with a recent acquisition in January by Carrefour of a local supermarket operator, PT Alfa Retailindo (Alfa). Thanks to this Rp 674 billion (US$58.6 million) transaction, Carrefour acquired a 75 per cent share of Alfa, which has 29 supermarkets in Indonesia, with annual sales reaching Rp 3.6 trillion (US$310 million) in 2006.

However, in doing so, Carrefour may have violated Law No. 5/1999, which restricts monopolistic and other forms of unhealthy business practices. KPPU, the Indonesian Business Competition Supervisory Commission, suspects that, the giant retail company has violated clause No.1 of chapter 17 of the law restricting businesses from acts leading to monopolistic practices, chapter 25 forbidding businesses from exploiting market dominance to control trading terms, and chapter 28 prohibiting businesses from undertaking mergers and share-buying that can lead to monopolistic practices. If the regulator finds fault, Carrefour could be fined up to Rp 25 billion (US$2.5 million).

More specifically, clause No. 2 of chapter 25 of the law says that a market share of 50 per cent (or more) indicates possible monopolistic practices. Consequently, the calculation of Carrefour’s share in the relevant markets became a focal point. KPPU’s research suggests that Carrefour dominates 66.73 per cent of shares in the upstream market, up from 44.74 per cent prior to the acquisition. In stark contrast, Carrefour disputes this figure with AC Nielsen’s numbers indicating Carrefour’s market share is merely 7 per cent even after the acquisition.

Such difference seems too large to make sense. To solve this puzzle, one has to ask what is the definition of relevant markets, i.e. the denominator used to calculate market share. In this case, Carrefour’s market definition is likely to cover mini-markets and traditional retailers. In contrast, KPPU emphasizes the differences in the characteristics of modern markets, and defines only supermarket and hypermarket retailing as the relevant markets. In addition, AC Nielsen’s research also gave emphasis to the grocery and foodstuffs category. Consequently, the different market definitions contribute to the large discrepancy in the calculation of Carrefour’s market share.

It is not difficult to see that such heated debate over whose market definition is more appropriate is predominantly due to its implication on whether Carrefour’s market share has exceeded the 50 per cent threshold, which in turn leads to the allegation of monopolistic practice. However, put the case into the broader context of competition law enforcement, and one quickly realizes that market shares per se may not be an informative indicator of threat to competition posed by a business.

This is because a market shares-based analysis assumes that the competitive influence of businesses within the market is in direct proportion to their market shares. However, in industries consisting of differentiated products, such as the retail of general merchandise, the real market strength of a business is the extent to which a significant proportion of customers view Carrefour and other retailers as close competitors. Market share alone can be misleading.

While KPPU’s public assessment is ongoing, it is important to look beyond and consider the broader objective of fostering a healthy business environment, which is the whole purpose of anti-monopoly law enforcement. The key point is how to ensure a clear, predictable, and transparent process that is aimed at protecting businesses and the public from anticompetitive behavior, and punishing abusive and monopolistic behavior.

Therefore, the main consideration should rest on the consequence of acquisition, compared against the likely competitive position if the merger was not to proceed. In KPPU’s defense, the commission has questioned Carrefour’s businesses practice that is potentially anti-competition, such as charging suppliers sizeable opening, listing and promotion fees. More attention should be channeled in this direction. The right questions to ask should be would the merger have the effect, or likely effect, of substantially lessening competition in the relevant markets? Are new entrants allowed to enter and expand? Can acquirer block competitors through misuse abuse their market power, even against restrictive covenant or planning laws?

Written by: Sherry Tao Kong, ANU & Palmira Bachtiar, SMERU
http://www.eastasiaforum.org/2009/09/10/is-there-a-carrefour-monopoly-in-indonesian-retailing/