In a stunning move by the CCI – Competition Commission of India, the governing body which oversees various types of anti-competitive actions taken by various companies and corporates, imposed a fine of Rs. 200 Crores on Maruti Suzuki India Ltd., India’s largest automobile maker by volumes, for limiting the quantum of discounts offered by its dealers to end-user customers. It was found by CCI to be in contravention of the provisions of Section 3(4)(e) read with Section 3(1) of the Competition Act, 2002, in what is said to be a landmark judgement in the consumer retail business. Reacting to the CCI order, Maruti Suzuki said: “We have seen the order dated 23 August 2021 published by the CCI. We are examining the order and will take appropriate actions under the law. The MSIL has always worked in the best interests of consumers and will continue to do so in the future.”
According to an anonymous complaint received by the autonomous body in 2019 purportedly by a dealer of the company, the dealer network of the company were restricted by the Principal (MSIL) not to offer additional discounts than what was provided for and already approved by the Company. For passing additional benefits to car buyers, such as accessories or cash discounts, the Dealer had to get an explicit written approval from the Company failing which penalties were imposed, including suspension of supplies. The Dealers, according to allegations, were constantly being monitored through “Mystery Shopping Agencies”, who reported malpractices and deviations to the Principal with audio and video evidences such as an audio transcipt or videos of such engagement by the staff of the Dealers. In other words, the company has a “Discount Control Policy” indulging in anti-competitive conduct of “Resale Price Maintenance” according to CCI. This was adjudged anti-competitive since the “trader” was not allowed to operate their business according to their own wishes & convenience and was strictly enforced in cities and towns where there were more than 5 dealers.
While restricting competitiveness in any business is condemnable, what is stunning in this verdict especially, is how the SOPs – standard operating procedures of a Principal which is in the business of Retailing of products, have been interpreted by the law enforcing agency. This could have some serious repurcussion in the USD 850 Bn Retail Industry in India, where thousands of brands have franchised their business operations to lakhs of Franchisee Partners (Dealerships in case of the Automobile Industry). International brands like Levis, Benetton, Adidas and many more entered India through the single brand FDI route in the 90s and operated their retail business through Franchises. While in most cases, the MRP – Maximum Retail Price is fixed, as per the MRP Act of India, the consumer and the retailer mutually decide on the final price of the transaction. In fact, several categories of products, especially in CDIT, such as Flat panel TVs, Laptops, Washing Machines and even Mobile phones do not have a MRP regime for several years now, rather the retailer decides on the selling price (to the consumer) almost on a case to case basis. Brands like Apple, through their distribution network have a strict Price regime, which means that Authorised Resellers cannot offer additional discounts to customers, which includes add-ons or accessories. This is their way of controlling the competitiveness among the distribution partners.
In case of apparel, which is the most franchised format among all consumer goods, there is no such gag-order by the principals, though the Franchise Partners maintain best case pricing and offer no more than a 10% discount to preferred customers on a need basis. In case of F&B brands such as Subway or Rajdhani, the Franchise Partner is mostly at will to offer add-on to loyal customers, though professing such offers through mass media or social media are restricted by the parent brand / company.
In the uber-competitive automobile industry, hungry-for-discount customers bargain a lot across brands as well as within the Dealer network of a Brand. In most cases, the final decision to buy a model or a brand is solely dependent on the soft corner the buyer develops with a particular dealer, save for those who do not have such a choice in smaller towns, unfortunately. However, the Dealers try to appease the appetite of customers as much as they can, though they are strictly governed by the regulations imposed by their Principals. The order by CCI in this case is not just misleading for the entire Franchising Industry but can also cause enormous confusion to customers as well, as they may demand preferential and differential treatment across various outlets which sell the same brand, which are run by Franchisees.
The Industry has been quite well self-governed and it is in the best interest of all partners in the ecosystem – the Manufacturer, the Operator (Franchisee / Dealer) and the Customer to decide on the best pricing option, of course without causing an adverse impact for the buyer. This case could be very interesting to watch for the consumer retail industry, how MSIL would respond and thereafter, how other OEMs – Original Equipment Manufacturers would react to the situation. And of course, Manufacturers and Brand Owners across the segment from F&B to Tyres, Apparel to Ice Cream Parlours and so on. With a growing fondness of the Indian consumer diaspora by internationally acclaimed brands, such rulings may have an adverse impact when global brands decide to enter and operate in India through a Franchise network.
We shall keep writing on this case in times to come.