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The Hungarian Beer War: The Competition Authority Caught Between Two Fires

The Hungarian Beer War: The Competition Authority Caught Between Two Fires

Hungary
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In the Hungarian HoReCa sector, the question of how much competition there is in the market for beverage procurement has been on the agenda of the Hungarian competition authority and the political discourse for some time.

At the same time, the undoubtedly prevailing situation in the beer market has served as a trigger for legislative trends. In the summer of 2020, the public discourse intensified on the difficulty or impossibility for alternative, small breweries to enter the market, because multinational beer producers - using various direct or indirect anti-competitive instruments - have established contractual arrangements with participants in the HoReCa sector that make this task disproportionately difficult. In order to remedy this situation, the legislator has introduced an amendment to the law with the following objectives:

"The purpose of the proposal is to create the possibility to reduce the exclusive distribution contracts that are common practice in the on-trade (HoReCa) market. In the on-trade market, the large producers tie up the majority of the volume of sales by concluding exclusive agreements with smaller producers. The proposal reduces this restrictive effect on competition to the benefit of smaller market participants (e.g. small breweries)."

The proposal was finally adopted, and the legislator intends to resolve the legal concerns with the following legislative provision:

“Section 7/B of the Hungarian Trade Act

(2) A catering establishment selling beverages shall ensure the sale of beer, except beer sold on tap, soft drinks, fruit drinks, fruit juices and fruit nectars, mineral water and sparkling water (soda water) from at least two different manufacturers per product.”

This provision, which prohibits exclusivity clause, in principle gives small brewers the opportunity to enter market segments previously closed to competition. The Hungarian Competition Authority - at that time still in parallel with the legislative trend and the objectives set out therein - has set 2020 as the target date for the implementation of the new legislation. In October 2020, the Hungarian Competition Authority imposed a significant fine on Heineken's Hungarian subsidiary when it found that Heineken had not adequately justified its commitments to reduce the volume of beer sold under exclusive contracts, and fined the company HUF 75 million, In 2015, the GVH accepted a commitment (a quasi-competition plea deal) from the three largest Hungarian brewers, Dreher, Borsodi and Heineken, to gradually reduce the volume of beer sold to restaurants under exclusive contracts.

The fining was announced in a press release by the competition authority, which published the circumstances of the legal proceedings, and then, on the day after the press release of the fine imposed on Heineken, the competition authority announced (also publicly) that it was conducting an industry inquiry (which it said was to investigate, to what extent and how competition in the sector was distorted) to analyse the purchases of beverages by restaurants, pubs and other catering outlets in Hungary [the HoReCa sector].

Based on the above, the strong intervention of the Competition Authority shows that the economic interest of small brewers and the protection of consumer welfare by the Competition Authority coincided, i.e. that the entry of small brewers into the market increases consumer welfare.

The purpose of the Competition Authority's action and the amending legislation therefore coincide. After an eventful and intense competition authority intervention in 2020 - contrary to expectations - the competition authority remained silent for almost three years. The draft report on the outcome of the sector inquiry launched in 2020, was published by the Competition

Authority in February 2023.

The published draft may also raise concerns because it is not in accordance with the Competition Authority's earlier intentions in 2020, which have quasi-underpinned the legislative trends:

"The Competition Authority recommends that the legislator suspend the application of the provisions of Article 7/B(2) of the Trade Act until the end of the state of danger, as in its current form it imposes an excessive burden on already distressed, typically Hungarian-owned, catering establishments, while its expectations are not in line with consumer needs, based on the results of the market research carried out in the sector inquiry."

It is not surprising that some major small breweries have issued a joint and open letter in opposition to the Competition Authority's position, arguing at length about the position the draft report would put small brewers in.If we look at the issue from the perspective that the Authority, at the time of publication of the draft report, requested the suspension of the provision until the end of the state of danger, it raises further concerns for the Authority's position, as the state of danger in Hungary under the rules in force at the time of publication lasted until June 2023. In simple terms, the Authority asked the legislator in a draft non-final report to suspend a legislative provision for a couple of months. In this respect, the proposal in the draft report is therefore not only unreasonable, but also undermines the predictability of the legislation.

Although the situation has changed since then, the state of danger has been extended until 25 November 2023. While this fact reduces the seriousness of the concerns against the draft report, as the legislator has the possibility to suspend the provision for a longer period, the legislator has not yet acted on this possibility. It is therefore interesting to see whether the legislation in question will be suspended, given that small breweries argue that it would deprive them of an important stepping stone to the market.

The draft report's approach is therefore basically a welcome one for the HoReCa sector, but it is interesting that the competition authority is taking an otherwise restrictive approach to competition in another sector in order to maintain competition in that market. If we take into account the complexity of market processes, and assume that the competition authority's 180-degree turn is correct in terms of the bigger picture, we are particularly excited to see how the legislator will react in such a situation.

By Martin Kocso, Associate, Nagy & Trocsanyi

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