Graco’s RPM notification cops a spray

The Australian Competition and Consumer Commission (ACCC) has recently released a rare draft notice of its intention to revoke a resale price maintenance notification.

Graco Australia Pty Limited (Graco Australia) lodged its RPM notification with the ACCC on 21 March 2023 to allow it to require its distributors to advertise certain products at or above a minimum specified price (the proposed RPM conduct).  The products include airless and air-assisted paint sprayers, ranging from entry-level to professional trade products.  Upon commencement, the notification would allow Graco Australia to engage in the proposed RPM conduct without engaging in resale price maintenance (RPM) – an offence under the Competition and Consumer Act 2010 (the CCA).

Ordinarily, the legal protection provided by an RPM notification commences 14 days after lodgement, unless the ACCC issues a draft notice objecting to the RPM notification within that 14-day period.[1]  A draft notice issued after this 14-day period will not have the effect of removing the legal protection afforded by the RPM notification – it is not until the 31^st day after the final notice is given (or any later date specified in writing by the ACCC) that the legal protection afforded by the RPM notification will cease. In this case, Graco Australia has agreed with the ACCC not to engage in the proposed RPM conduct until the ACCC has concluded its review of the RPM notification.

The ACCC notified Graco Australia of its intention to revoke the RPM notification on 31 August 2023, and expects to publish its final decision as to whether to revoke the RPM notification in October or November this year.  To assist with its decision, it has invited submissions in response to the draft notice from Graco Australia and interested parties.  It has also offered Graco Australia the opportunity to request a conference to discuss the draft notice.

Graco Australia’s RPM notification

Graco Australia sought to engage in the proposed RPM conduct on the basis that it would reduce the capacity of certain retailers of Graco Australia’s paint sprayers to sell its products at discounted prices, without providing adequate pre- and post-sale services for its suppliers.  Graco Australia was concerned that certain retailers, particularly online retailers, were free riding on the retail services provided by full-service retailers.

Full-service retailers may invest time and effort with a potential customer, only for them to make their purchase at a discount from a retailer that has not invested in training or retail services.  Graco Australia submitted this free riding may cause harm to the public by reducing the training provided to end users of its “complex” products and reducing the adoption of better painting techniques.  The proposed RPM conduct would reduce the potential for this free riding to occur by preventing discounting.

The ACCC’s reasons for revoking Graco Australia’s RPM notification

In assessing the RPM notification, the ACCC applied the “net public benefit test” in section 93(3A) of the CCA by comparing the likely future with and without the proposed RPM conduct.

1. Relevant areas of competition: The ACCC did not consider it necessary to precisely define the relevant area of competition, but noted that traditional paint application equipment, such as brushes and rollers, were unlikely to be a competitive constraint on paint spraying equipment. It also made its own market inquiries, which indicated that the market for the supply of paint spraying equipment in Australia is highly concentrated.  Two established brands dominate the market: Graco Australia dominates the professional/contractor segment and Wagner dominates the DIY (or “consumer”) segment.
2. Future without the proposed RPM conduct: The first step is for the ACCC to form a view as to the future without the proposed RPM conduct. The ACCC noted the strong current commercial position of Graco Australia.  It considered that, in a future without the proposed RPM conduct, “Graco Australia will have a strong commercial incentive to continue to run spray equipment demonstrations at distributors’ stores and at industry events to maintain and grow its position in this sector as well as the size the sector overall by educating commercial painters about the benefits of using spraying equipment (over traditional paint application methods).”
3. Future with the proposed RPM conduct – public detriments: The ACCC then considered the future with the proposed RPM conduct, namely:
   • • Higher prices for Graco Australia’s products covered by the RPM notification: The ACCC considered the primary harm likely to arise from the proposed RPM conduct would be the loss of price competition between retailers selling Graco Australia’s products. The ACCC noted this detrimental effect is likely to be smaller where “the product is subject to strong rivalry from competing products”.  This was found not to be the case, on the basis that two companies dominate the segregated market, which is characterised by high levels of brand loyalty, no credible threat of significant new entry and the fact that manual paint-application products do not provide an effective competition constraint.
     • Higher prices for competing products: The second effect is a reduction in price competition for products that compete with Graco Australia’s products, particularly in a concentrated market with the absence of an effective competitive constraint provided by substitutes. As a result, consumers will pay higher prices for paint spraying equipment across the market.
     • Loss of product range and choice: On balance, the ACCC concluded that the impact on retail product range and choice is unlikely to be significant. Some suppliers with limited floor space may choose to stock more of Graco Australia’s products once they are subject to a higher margin in the absence of discounting.  However, others may limit or cease stocking Graco Australia’s products if they are unable to attract customers based on pricing strategies.
4. Future with the proposed RPM conduct – public benefits: Graco Australia submitted in its RPM notification that there would be three key public benefits resulting from the proposed RPM conduct: (1) increased supply of retail services and reduced free riding across distributors, (2) encouraged innovation in retail services and (3) encouraged innovation in products.  The ACCC did not consider the first-mentioned public benefit proposed by Graco Australia, but instead considered a related public benefit: the potential for increased service-based competition in relation to the relevant products.  The ACCC acknowledged that the proposed RPM conduct would be likely to improve levels of retail services to a limited extent.  However, based on market inquiries, it found that the current levels of retail services provided were already sufficient and there was “little evidence of a free rider problem making these levels of service commercially unsustainable”.  The ACCC considered the public benefit of increased innovation in products and retail services together, rather than as two separate benefits.  It found that Graco Australia’s submissions in relation to [both] public benefits resulting from innovation largely appeared to restate the retail service-related benefits considered in the first-mentioned public benefit above.  It ultimately considered that the proposed RPM conduct was unlikely to lead to an increase in product innovation.
5. Balance of public benefit and detriment: In rejecting the proposed RPM notification, the ACCC was ultimately satisfied that the likely public benefit provided by improved service levels at higher prices would not outweigh the  likely public detriment caused by those higher prices.  While only some customers will benefit from the additional services, all customers will be paying higher prices and customers in this market are price sensitive.

Key takeaways

If the ACCC follows through with revoking the RPM notification, this will be only the third time the ACCC has done so since the RPM notification regime was introduced in November 2017, following the Harper Review.[2]  There have been nine RPM notifications lodged since the RPM notification regime was introduced. Three suppliers in Australia are currently covered by notifications in force on the ACCC’s public register.

The ACCC Deputy Chair, Mick Keogh, stated in the media release that the ACCC “will move to revoke RPM notifications” where stipulating a minimum advertised price for retailers will either:

• limit the ability or incentive for retailers to compete; or
• increase the risk of co-ordinated conduct between manufacturers,

resulting in higher prices and reduced choices for consumers.

The following day, the Commissioner of the ACCC, Gina Cass-Gottlieb, noted that the ACCC had observed an increasing prevalence of RPM conduct in the past year in her address to the Law Council Annual Competition and Consumer Law Workshop.  The Commissioner noted the harm of RPM “is a particular concern in a higher inflationary environment, and when many Australians face cost of living pressures.”

The relatively extensive nature of the ACCC’s consultation and review process in respect of this RPM notification is also reflective of the ACCC’s current focus on RPM.  The ACCC spent approximately five months investigating the likely effects of the proposed RPM conduct prior to issuing the draft notice.  In accordance with its usual practice, the ACCC invited submissions from a range of potentially interested parties likely to be affected by the proposed RPM conduct.  However, on receiving only one written response, the ACCC conducted a number of site visits, where it obtained oral submissions from a further eight interested parties, including retailers and distributors of Graco Australia’s products, as well as Graco Australia’s main competitor (Wagner).  This is the first time the ACCC has obtained oral submissions to supplement the written submissions it has received.

On this basis, corporations and individuals that are contemplating engaging in conduct that may constitute RPM should be wary of the ACCC’s scepticism of applicant’s claimed benefits and willingness to test those claims with market participants, including competitors and downstream firms. This will be particularly the case where the applicant operates in an industry characterised by a high degree of market concentration.

Image credit: GreenPaintBucketRome, November 2006 / TangoTango, Wikimedia / CC3.0 / Remixed to B&W and resized.

[1] CCA s 93; Competition and Consumer Regulations 2010 (Cth) reg 9(b).

[2] See the ACCC’s RPM notification register. RPM notifications lodged by Meredith Dairy Pty Ltd and Stanley Black & Decker Australia Pty Ltd were revoked by the ACCC in 2019 and June 2020 respectively.