EU and UK revise key rules on distribution agreements for the first time in over a decade

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 them more 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 by which 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 new differences 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:

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, suppliers 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 new opportunities for retailers to distribute for new suppliers who were previously tied to one exclusive distributor.

Retailers will now also have more opportunity 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 networks, suppliers can legally impose restrictions on non-network retailers selling into reserved territories – but only where such networks are properly established. Accordingly, retailers should remain vigilant about any restrictions on where they are permitted to sell in all circumstances.  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.

Online sales

Unless retailers are selective distributors, they should not under any circumstances be restricted from making sales to individual customers 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 in maintaining 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 prevent all online sales – although some online sales restrictions are permitted in some circumstances (e.g., marketplace bans).

Retail price maintenance (RPM)

As before, retailers must always be free to determine their prices. If a supplier or distributor tries to set the retail price or stipulate a minimum retail price for a product, this is retail price maintenance - RPM – and represents a severe breach of competition law. RPM is very much on the regulators’ radar: the UK Competition and Markets Authority has imposed a number of fines in recent years. It also recently announced that it is actively looking for RPM cases to pursue – and warns that retailers must be compliant and could be subject to penalties. 

Retailers should therefore remain vigilant and always reject any attempts at RPM. The new rules helpfully provide more clarity about what is prohibited, particularly indirect means of RPM, e.g., minimum advertised prices, which prohibit retailers from advertising prices below a level set by the supplier.

It will be interesting to see whether these future facing rules stand the test of time, particularly with exciting new developments like consumer goods manufacturers starting to enter the metaverse, and who knows what else could be around the corner.

In the meantime, the new rules are a significant improvement on the previous outdated provisions. They offer more flexibility and clarity, are more practical, and more accurately reflect the developments in online distribution. However, international retailers should be aware of the key prohibitions, and emerging differences in the UK and EU when adopting a strategic approach to compliance.

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This article was also published in The Retailer, our quarterly online magazine providing thought-leading insights from BRC experts and Associate Members.

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