German Federal Cartel Office imposes fine against Rossmann for below-cost selling

26 March 2007

Christian Schwedler

The German Federal Cartel Office (FCO) has imposed a fine of €300,000 against Rossmann. The drugstore chain was found to have offered various products below cost in 2005. The FCO has taken this controversial measure to save smaller competitors from being squeezed in a highly competitive market.

According to the investigations of the FCO, Rossmann offered a total of 55 products from various producers on more than 250 occasions well below its own costs. The investigation required an exceptional effort by the FCO, as it had to take into account not only the net price of the products, but also all purchase terms and conditions with price relevance. Therefore, it investigated all advertising costs contributions, discounts and flat-rate allowances and allocated them to all products delivered by each distributor.

In the past, there have been extensive controversies about the legality of pricing below costs in Germany. In general, intensive price competition is very welcome within a market economy. Consequently, it is difficult to determine the circumstances under which price competition might be an infringement of competition law. For a long time there has been a rather restrictive approach towards the prosecution of offering below-cost selling set out by the German Federal Court of Justice. However, the amendment of the German Act against Restraints of Competition (ARC) in 1998 added a provision to the Act, which was meant to facilitate the control of systematic pricing below costs. § 20 paragraph 4 of the ARC now requires that an undertaking with superior market power shall not hinder small or medium-sized competitors by occasionally offering goods or services below-cost price, unless there is an objective justification for this.

The below-cost offerings by Rossmann did not merely occur occasionally, but systematically. This behaviour increases the risk that small and medium-sized competitors might be squeezed out of the market, although they are efficient in principle but not able to withstand a strategy of calculated losses. In the long term, this would lead to a market position of the remaining market participants that is no longer controlled by competition.

Rosmmann’s below-cost pricing is one response to severe cut throat competition on the German drugstore market. The market is stagnating and the four big players on the market – Schlecker, Rossmann, Ihr Platz and dm – are fighting hard to take market share from each other. The situation is getting even more intense, as discount supermarkets are entering the market too. As Rossmann claims, the infringing prices in 2005 were a direct reaction to the pricing of the discount supermarket chain Lidl. But pricing in reaction to a competitor is no objective justification in the sense of § 20 para. 4 ARC, as the German Federal Court of Justice decided in its leading decision “Wal Mart” in 2003. Consequently, the FCO attacked the pricing of Rossmann in an effort to save the smaller competitors in this battle of giants.