The study was conducted in response to an allegation of anti-competitive exclusive dealing in the supply of soft drinks to school tuckshops. It focused on two main issues:
- to what extent are the supply arrangements currently in existence between suppliers and school kiosk operators acting as barriers to entry and preventing or hindering suppliers from entering the school kiosk soft drink market, and the wider Hong Kong soft drink market; and
- what, if any, detriments to consumers (students) arise from the arrangements in terms of their effect on retail prices, choice of product, and the level of service.
It is estimated that the supply of soft drinks to the school kiosk market is less than 5% of the wider Hong Kong market. Nevertheless, the Council considers that its importance in terms of developing market presence (through promoting product awareness and brand loyalty in the younger generations) cannot be discounted.
School kiosks are operated in a number of ways, ranging from very small non-commercial outlets managed by a school caretaker or retired staff, to those operated by soft drink suppliers, or by catering companies.
In the study, the Council found that exclusive arrangements are entered into by two major soft drink suppliers for supply of product to the range of primary and secondary kiosks. Under such arrangements, school kiosks would stock only the exclusive supplier's brand of product in return for a favorable discount rate.
The Council has found no evidence that either supplier refuses to supply to non-exclusive kiosk operators, but the discount rate that these non-exclusive operators can obtain is less favorable.
The Council has assessed the effect of the existing arrangements in the school kiosk market and is of the opinion that these arrangements deliver benefits to both schools and kiosk operators, and do not pose any substantial impediments to competition in the market. While there were some limitations on choice, it found that the cost advantages of exclusive supply were translated into lower prices for pupils.
Any anti-competitive detriments that might arise would only come about through excessive duration of a tied supply agreement. Accordingly, the Council has put forward a package of recommendations that support the existence of the exclusive arrangements, but introduce some measures to ensure that the benefits are translated into lower prices and that the freedom of entry into the market is maintained.
On Freedom of Entry
- The Education Department should advise school management to set a clear policy for determining how their kiosks are to be operated.
- If a school's management decides to open their kiosks to commercial operations, the policy needs to be transparent, and schools need to apply a competitive tendering (or quotation) process for the choice of kiosk operator, or for the supply of soft drinks to the kiosk. It is recommended that the period of the contract for supply should not extend beyond three years, and should only be one year if there are no additional services or investments required beyond simply operating a kiosk or supplying soft drink.
- If school management decides to make other arrangements, for example to have a school caretaker or retired staff operate the kiosk, it is advisable that the terms of the operation be clearly defined. Continuance of the contract should also be subject to satisfactory performance, so as to ensure quality of service and that competitive prices are offered.
On Product Choice
- The Education Department guidelines should clarify that choice of product and the range of brands to be made available in school kiosks are matters to be left at schools' discretion.
- School management should indicate clearly in tender or quotation documents their order of priority on choice of brand or nutritional needs.
- In those cases where schools tender or seek quotations, they should include a clause in the specifications for the supply of kiosk services (as distinct from the supply of soft drinks only) that bidders should provide a proposed price list of products to be offered in kiosks. The list could serve as a reference base for schools to use in ensuring that products sold in kiosks are at reasonable prices. A successful bidder for a tender would then be subject to scrutiny on this provision during the period of the contract, and when it attempts to re-tender for the kiosk at the end of the contract.
- In those cases where kiosks are not put out to tender, for example where it is only a very small operation management by the school caretaker, or retired staff, it is advisable that schools still apply a form of price monitoring by their School Tuckshop Committees.
The Education Department has, in the past, issued guidelines to aid schools on the operation of tuckshops. Schools are encouraged to run their tuckshops and to supervise the operation by School Tuckshop Committees with reference to the guidelines.
The Council stressed that a balance has to be achieved in addressing two factors - the possible detrimental effect on competition and limited choice on the one hand, and the efficiencies which result in lower costs, and therefore prices, on the other.
The Council has consulted the Education Department, soft drink suppliers and subsidized school councils, in the course of the study.