You could say it was the dog food deal that came back to bite them in the ass.

French anti-trust authority said Tuesday it will fine Swiss food company Nestle SA, Mars Inc. and Colgate-Palmolive Co. a combined EUR 35.3 million (46.7 million) for anticompetitive behavior.

The French anti-trust body, Autorite de la concurrence, said the three companies will be fined for “limiting competition on the markets for dry food for dogs and cats in specialized retailers” in France between 2004 and 2008.

That’s known as price-fixing to you and me.

Goodfellas

Nestle Purina Petcare France SAS, a unit of Nestle (Friskies, Alpo, Waggin Train), Royal Canin SAS, a unit of Mars (Pedigree, Whiskas, Nutro), and Hill’s Pet Nutrition SNC, a unit of Colgate-Palmolive (Science Diet and Prescription Diet Pet Food), will be fined EUR 19 million, EUR 11.6 million and EUR 4.7 million respectively.

The authority also said that these amounts include a reduction in the fines of 18% for Nestle and 20% for Mars, as they didn’t deny the charges and took steps to conform to anti-trust regulation.

The three companies not only put in place a system that resulted in price-fixing, but the wholesaler-distributors were given fixed territories that also reduced competition, leading to higher prices, according to the French Autorité de la concurrence.

Prix Fixe

What is price-fixing? Before you start conjuring visions of the Mafia back in the day when they ruled the market for booze, cigarettes, drugs and any other vice worth cornering the market on and visions of Columbian cartels, in this case it’s not cocaine – but cat food  – in the fix.

The conspiracy between the three pet food behemoths was to inhibit price competition by fixing prices to  sell their products at a certain price point that fraudulently prevented other businesses from being able to compete in the open market. Price fixing violates competition law because it controls the market price or the supply and demand of a good or service. This prohibited other (smaller) pet food companies from being able to compete against the pet food giants in the price-fixing agreement, which prevented the consumer from being able to expect the benefits of free competition.

Cartels and cat food

Instead of the pet food giants competing with each other, the cartel members (Nestle, Mars and Colgate) rely on each others’ agreed course of action, which reduces their incentives to provide new or better products and services at competitive prices. As a consequence, pet food consumers end up paying more for less quality.

Less for more, more or less

I already have a problem with cheap pet foods and I don’t mean the fixed-price kind of cheap, but when I find out that Nestle, Mars and Colgate conspired to defraud consumers based on their back-room price-fixing scams, I have to assume that this example of criminal behavior is indicative of a larger pattern of corruption that extends all the way to the product itself.

Pet food manufacturers whose greed and corruption is so entrenched that their priority is profits at any price, including breaking the law, would probably not hesitate to cut corners in other areas where costs could be trimmed – in particular the quality of ingredients. It goes without saying that the cheaper the ingredients (economically and nutritionally) the higher their profits.

Paying for a promise

The Wall Street Journal reported on the scandal today saying,

“Mars acquired premium dog and cat food maker Royal Canin in 2001 to boost its pet care unit, which already included Pedigree, Whiskas and Nutro.

The pet market has been big business for consumer products companies. Consumer research firm Packaged Facts expects overall sales to grow to more than $70 billion in 2014 from $53 billion in 2009, with strong demand for products and services that enhance pet health.

Price increases have underpinned the growth of the market. While sales volumes haven’t grown much, owners have proven willing to pay more for foods that promise better ingredients and better health for their pets”, said David Lummis, senior pet market analyst for Packaged Facts.

“In the past,” he said, “you were crazy if you were to spend the levels people are now spending on products—premium pet foods, vet services, hip replacements, mood medications for pets. It’s all over the market.”

SOURCES:

Nestlé, Mars, Colgate Fined for Pet-Food Price-Fixing, Wall Street Journal

Cartels; an Overview, European Union