Documentation

Competition Tribunal File No. CT-2007-001 COMPETITION TRIBUNAL IN THE MATTER OF the Competition Act, R.S.C. 1985, c.C-34, as amended; and the Competition Tribunal Rules, Can. Reg. SOR/94/290;

AND IN THE MATTER OF an application under Section 103.1 of the Competition Act by Sears Canada Inc. for leave to make an application under section 75 of the Competition Act relating to a refusal to deal by Parfums Christian Dior Canada Inc. and Parfums Givenchy Canada Ltd.

BETWEEN: COMPETITION TRIBUNAL TRIBUNAL DE LA CONCURRENCE SEARS CANADA INC. FILED I PRODUIT Applicant February 23, 2007 -and-Jos LaRose for I pour REGISTRAR/ REGISTRAIRE

OTTAWA, ONT I # 0004 PARFUMS CHRISTIAN DIOR CANADA INC. and PARFUMS GIVENCHY CANADA LTD.

Respondents

STATEMENT OF GROUNDS AND MATERIAL FACTS Overview of the Application 1. This application is brought by Sears Canada Inc. ("Sears") for leave to apply under section 75 of the Competition Act, R.S.C. 1985, c. C-34 (the "Competition Act") for an order requiring Parfums Christian Dior Canada Inc. ("Dior") and Parfums Givenchy Canada Ltd. ("Givenchy") to continue to supply products to Sears as they have for at least the last 14 years. Sears also requests an interim order requiring Dior and Givenchy to continue supplying products

3 of a section 75 order. Sears will be substantially affected in its business, losing the majority of a $16 million per year business, by Dior and Givenchy's refusal to deal. It is impossible for Sears to acquire adequate supplies of Dior and Givenchy product from the grey market or elsewhere. Sears is willing and able to meet the usual trade terms of Dior and Givenchy, and the products are in ample supply. There is a serious issue to be tried about whether the refusal to deal is likely to have an adverse effect on competition in the market, in that department store customers of these products will be deprived of any meaningful alternative to the selected retailer, The Bay, and will not be able to purchase products from the only retailer in this channel who will offer price discounts. 5. Similarly, there is sufficient credible evidence to give rise to a bona fide belief that Sears will be directly and substantially affected in its business, and moreover, that such affect will constitute irreparable harm to Sears. As a result of the Respondents' refusal to deal, Sears will lose a significant portion of the $16 million in revenues generated from the sale of Dior and Givenchy products - harm that cannot be compensated in damages, because the Tribunal cannot award damages. Sears will also suffer transaction costs in transitioning each of its cosmetics departments after having lost two of its leading brands. Sears will lose market share as a result of the refusal to deal, and will permanently lose customers. Sears will also lose cross-segment sales from shoppers who purchase other products at Sears in addition to their Dior or Givenchy purchases. Sears will be in a weakened bargaining position vis-a-vis other cosmetics and fragrances suppliers. Sears' reputation and market image will suffer as a result of the loss of Dior and Givenchy as a supplier.

4 6. The balance of convenience overwhelmingly favours Sears. The harm that Sears will suffer is palatable, as set out in the prior paragraph. By comparison, Dior and Givenchy will suffer no harm: they will simply continue a relationship that has spanned more than 25 years, in the same manner as before. They will be paid the same price as other retailers pay for their product. They will continue to profit from those sales, as they would if this market share was conferred to the most likely beneficiary, The Bay. The Parties 7. Sears is a company that was incorporated pursuant to the laws of Canada under the name Simpsons-Sears Limited by letters patent dated September 17, 1952, and was continued under the Canada Business Corporations Act by articles of continuance effective May 15, 1980. By articles of amendment effective May 31, 1984, Sears changed its name to Sears Canada Inc. 8. Sears is a multi-channel retailer with a network of 196 corporate stores, 178 dealer stores, and more than 1,850 catalogue merchandise pick-up locations. Sears publishes Canada's most extensive general merchandise catalogue and offers online shopping. 9. Dior is a company incorporated pursuant to the laws of Quebec with a head office located in Montreal, Quebec. It is a wholly-owned subsidiary of L VMH Moet Hennessy Louis Vutton ("LV MH"), a societe anonyme organized under the laws of the Republic of France. Dior is a manufacturer of women's fragrances and cosmetics, which are described in further detail below.

5 10. Givenchy is a company incorporated pursuant to the laws of Ontario with a head office located in Toronto, Ontario. It is also a wholly-owned subsidiary of L VMH. Givenchy is a manufacturer of women's and men's fragrances, which are also described in further detail below. The Cosmetic and Fragrance Market in Canada 11. The cosmetics and toiletries market in Canada is a $US1.1 billion per year industry. Retail sales of cosmetics and toiletries have remained relatively constant in the past five years, increasing by about 1% per year. Market observers expect that retail sales in this segment will increase significantly in Canada in the next five years, with a compound annual growth rate expected to be approximately 3.9%. 12. Dior and Givenchy are considered to be "prestige" fragrances and Dior is considered to be "prestige" cosmetics. Prestige Fragrances 13. Eighteen manufacturers, including Dior and Givenchy, occupy 73% of the entire market of women's prestige fragrances. Of those eighteen, there is no clear market leader: each has captured roughly the same percentage of the market. Dior and Givenchy each hold between 3 and 4% of the total market share in prestige cosmetics. Prestige Cosmetics 14. The "cosmetics" category is sometimes further subdivided into the "make up" market and the "skin care" market. The "make up" subcategory includes products such as blush, lipsticks,

6 foundation, and mascara. The "skin care" subcategory includes products such as face and eye creams, facial cleansers, toners, moisturizers, and serums. 15. There are only nine manufacturers that supply 87.5% of all prestige make up in Canada. Dior is one of them, occupying a market share of 3.2%. Similarly, there are only eight manufacturers that supply 88.3% of all prestige skin care products in Canada. Dior is one of them, occupying a market share of 3.6%. Competition in the Prestige Fragrance and Cosmetics Market 16. A number of factors limit competition in the prestige fragrance and cosmetics market in Canada. 17. First, there is the problem of substitutability of products. Consumers of prestige cosmetics and fragrances are intensely brand loyal. Fragrances, in particular, are considered to be "one of a kind" and not interchangeable with one another, in the same way that generic products are. Retailers of prestige cosmetics invest heavily in research and development in order to develop the most innovative and advanced products. Such products are marketed based on their specific attributes and are not interchangeable with other products. Additionally, many consumers consider using Dior to be a status symbol and will not switch to an alternative brand. 18. Second, there is the problem of selective distribution. Prestige cosmetics and fragrances are distributed only through a very select few number of retailers. Sears, The Bay, and Shoppers Drug Mart are the three retailers that principally supply the market. Throughout Canada, 72.6%

7 of all women's prestige fragrances, 73.6% of all prestige make up, and 76.8% of all prestige skin care products are sold by those three retailers. 19. Third, there is the problem of price competition. Prestige fragrance manufacturers in particular typically do not compete on price. Rather, they focus on advertising competition and celebrity endorsements. Because prestige fragrances and cosmetics are often not interchangeable, there is little reason for suppliers to compete on price. Retailing Prestige Cosmetics and Fragrances in Canada 20. As indicated above, there are very few retailers of prestige cosmetics and fragrances in Canada. 61.9% of all prestige women's fragrances, 64.4% of all prestige skin care products, and 68.8% of all prestige make up products are sold in department stores such as Sears. 21. The retail market of prestige cosmetics and fragrances in Canada in 2006 was divided as follows:

Retailer Fragrances - Women Fragrances - Men Sears 25.4% The Bay 34.5% Holt Renfrew 2.3% Les Ailes 0.1% Jean Coutu 2.8% London Drugs 2.2% Shoppers Drug Mart 12.7%

Make Up Skin Care 25.2% 18.5% 21.7% 31.6% 49.0% 42.3% 1.9% 5.0% 2.1% 0.2% 0.2% 0.2% 9.1% 4.8% 5.8% 1.3% 1.5% 1.0% 11.1% 6.1% 12.8%

8 22. As can be seen, there are only three major retailers of prestige cosmetics and fragrances, and the only meaningful retailers in the department store category are Sears and The Bay. 23. Before December 2006, Sears offered a number of different promotions in its cosmetics and fragrance departments, such as offering free gifts from Sears with cosmetic or fragrance purchases over $50 or offering ten "super bucks" to the first 300 to 500 customers into the store on "Super Saturday I Sunday" be used anywhere in the store, including cosmetics. These types of promotions are not unusual in the industry. 24. In December 2006, Sears held a number of events that resulted in percentage discounts on Dior and Givenchy product: a. From November 30 to December 3, 2006, Sears offered 15% discounts on all cosmetics products, including Dior and Givenchy. Consumers immediately reacted: Sears' cosmetics departments' sales increased by 33.2% over those four days. b. From December 7 to 10, 2006, Sears offered 10% discounts on all cosmetics products, or 15% discounts if the consumer purchased $75 in apparel. The cosmetics departments' sales increased by 2.1 % over those four days. c. From December 18 to 24, 2006, Sears offered 20% discounts on all cosmetics when customers used their Sears Card or Sears Mastercard. The cosmetics departments' sales increased by 10.1 % over those seven days.

9 25. The cost of these December discounts was entirely absorbed by Sears and directly increased the quantity of Dior and Givenchy sold. Sears' sales in Dior increased by 10.2% for the month of December compared to the prior year, and its sales in Givenchy increased by 2.1 % for the month of December compared to the prior year. 26. Sears is the only price discounter in the department store segment. Holt Renfrew does not discount. The Bay has not offered price discounts since 2002. The Bay and Shoppers Drug Mart may have complained to Dior and Givenchy about Sears'December 2006 discounts. 27. Price discounting was more prevalent in the drug store channel, with London Drugs and Jean Coutu offering regular price discounts, and Shoppers Drug Mart offering occasional price discounts on grey market product they obtained. However, as discussed below, similar to how Sears' supply was cut off - supply to London Drugs has been cut off and supply to Jean Coutu is uncertain. Dior and Givenchy Products at Sears Current Supply Arrangements 28. Sears carries approximately 500 stock-keeping units ("SKUs") of Dior product. Approximately 50% of those SKUs are in the make up category; 35% are in the skin care category; and 15% are in the fragrance category. Sears also carries 55 SKUs of Givenchy product. 29. Sears is required to adhere to Dior and Givenchy's usual trade terms. This includes paying what Sears believes to be the standard price for the product paid by all retailers. Dior and

10 Givenchy provide the retail selling prices for their products on their order sheets. Retailers purchase these products at a standard industry discount on the retail prices. The usual trade terms also require Sears to accept Dior and Givenchy's price increases, to have employees devoted to selling and marketing Dior and Givenchy product (a portion of their salaries are charged back to Dior and Givenchy), and to negotiate cooperative advertising amounts to be spent seasonally, and demonstrator support seasonally. Importance of Dior and Givenchy to Sears 30. Dior and Givenchy products are critical to Sears' operations for a number of reasons. 31. First, Dior and Givenchy form a key part of Sears' merchandising strategy. Sears has implemented a strategic initiative that focuses its merchandising strategy on "destination categories" in its retail stores. Cosmetics and accessories (including fragrances) is one of six major destination categories (the others being major appliances, home decor, home furnishings, and men's and women's apparel), where Sears has market leadership opportunities and can leverage its reputation for trust and service. 32. To be able to convey the message to the market that Sears offers a full complement of products in its cosmetic and accessory destination, it simply must supply Dior and Givenchy products. Since Dior and Givenchy are considered "better I best" brands, their presence in Sears' lineup is crucial to Sears' credibility. 33. In fact, in certain of Sears' flagship locations (such as the Toronto Eaton Centre store, the Pacific Centre (Robson) Mall in Vancouver), Dior is the central "magnet" and the very first thing

11 that customers see when they approach the store. These and certain other Sears stores have branded fixtured installations occupying 1,079 square feet of retail space, for which Sears has invested approximately $100,000, and for which there is no ready substitute. 34. Second, Dior and Givenchy are important to Sears in terms of revenue. In 2006, Sears sold more than $9 million worth of Dior product in its stores throughout Canada. It sold niore than $7 million worth of Givenchy product in that same time period. There are very few brands that can deliver this volume and the loss of these brands will significantly impact Sears' business. 35. It is not reasonable to assume that these sales will simply migrate to other brands. From 2004 to 2006, 30% of all Christian Dior shoppers who shopped on their Sears Card or Sears Mastercard purchased only Christian Dior cosmetics or fragrances, and none other. Similarly, 35% of all Givenchy shoppers who shopped on their Sears Card or Sears Mastercard purchased only Givenchy fragrances, and none other. Purchases by Sears Card or Sears Mastercard holders represent approximately 40% of all purchases in cosmetics. 36. Third, Dior and Givenchy are important to Sears to preserve its market share which has, over the past three years, been eroding to The Bay (the only other major department store retailer in competition with Sears). Sears' market share in cosmetics and fragrances decreased from 26.3% in 2004 to 23.5% in 2005, to 23.0% in 2006. Conversely, The Bay's market share has increased from 34.6% in 2004, to 38.1%in2005, to 39.2% in 2006. 37. Fourth, Dior and Givenchy are important to Sears because of cross-segment sales. As noted above, the cosmetics and accessories department is a destination category for Sears, and is

12 often a draw for customers into the store. When those customers purchase Dior or Givenchy products, they will frequently purchase other items from Sears. This is known as "cross-segment" selling. In 2006, Dior shoppers purchased approximately $14.9 million of merchandise (including the Dior products), and Givenchy shoppers purchased approximately $15.1 million of merchandise (including the Givenchy products). Subtracting the sales of the Dior and Givenchy themselves, Dior and Givenchy shoppers purchased an additional $5.7 million and $8.3 million worth of other merchandise at Sears, respectively. Sears' Prior Efforts to Cooperate with Dior and Givenchy 38. Historically, Sears has had a good relationship with Dior and Givenchy. The companies work together on co-operative advertising, whereby Sears advertises Dior and Givenchy products in return for a rebate on the cost of advertising. The companies have worked together on product displays, including the fixtured installations described above. 39. The cooperation between Sears, Dior and Givenchy continued with respect to improving profitability for Dior and Givenchy. For example, in 2006, Sears agreed with representatives of Dior and Givenchy that Sears would no longer order product for stores that were not selling $50,000 worth of skin care and make up products in any given year. This resulted in the discontinuance of supply to two Sears stores.

13 Dior and Givenchy's Refusal to Deal 40. In December 2006, representatives of Givenchy advised Sears that it was unable to supply product to its stores because of "shipping" issues. It is not unusual for a supplier to be unable to supply a product in a given month. 41. On January 18, 2007, representatives of Dior and Givenchy advised Sears' representatives that Dior and Givenchy would no longer do business with Sears - and were shutting down distribution of the brands to Sears. This was later confirmed in a letter by Dior and Givenchy's (then) counsel, wherein it was claimed that Dior and Givenchy were "rationalizing" the distribution of their fragrance and cosmetics businesses. 42. Sears believes that Dior and Givenchy's decision to refuse to deal was at least partly a response to Sears discounting their product. On November 1 and 9, 2006 respectively, Dior and Givenchy presented their spring 2007 marketing plan to Sears' buying team. There was no suggestion at these meetings that Sears was not meeting Dior or Givenchy's usual trade terms, or that there were profitability issues, or indeed, that Dior or Givenchy would cease supplying product. 43. There are currently approximately 600 purchase orders for Givenchy product that have not been fulfilled. 44. There is no legitimate basis for Dior and Givenchy's refusal to deal. Dior and Givenchy are charging the same amount for their product to Sears as they charge to the Bay. Sears is willing and able to meet Dior and Givenchy's usual trade terms, as it always has.

14 45. To the extent that a certain level of sales is necessary to meet the fairly minimal expenses of a portion of the wages of Sears employees working Dior counters, Sears has been willing to work with Dior and Givenchy to address profitability concerns. This includes closing low-sales stores, as described above. 46. However, it is not even credible for Dior and Givenchy to claim that their salary expenses are too high to maintain sales to Sears. Dior and Givenchy pay a 3% commission to Sears employees that sell Dior or Givenchy products. For Dior, that cost in 2006 was $271,239, and for Givenchy that cost in 2006 was $202,746. This is the same commission that Dior and Givenchy pay to any commissioned employee, whether at The Bay, Holt Renfrew, or Sears. As it expressly tied to sales, there is no basis to argue that a certain level of sales is necessary to maintain this cost. 47. The only other identifiable cost that is borne by Dior is a 50% subsidy of the hourly wage paid to Sears employees selling Dior cosmetics (Givenchy does not manufacture cosmetics so they do not pay this cost). In 2006, the total cost to Dior - on sales of $9 million - was $668,205, or 7.39%. It is unlikely that this percentage would be significantly different at The Bay. 48. Dior and Givenchy's claim that they must stop selling product to Sears for profitability reasons is also belied by the fact that two other product lines by their parent company L VMH -Guerlain and Make Up For Ever - are still being shipped by L VMH and there has been no suggestion that those product lines would be discontinued.

15 49. Dior and Givenchy's profits are unaffected by Sears' discounting practices. The "margin hit" is borne solely by Sears. None of those discounts are billed back to Dior or Givenchy. It therefore cannot be said that Sears' discounting has contributed in any way to the lack of profitability. To the contrary, given that sales have increased during those time periods, Dior and Givenchy's gross profits would have increased. 50. Sears has subsequently learned that Dior and Givenchy similarly terminated the supply relationship with London Drugs, and Jean Coutu's supply relationship with Dior and Givenchy is in question. Like Sears, London Drugs and Jean Coutu offered discounts to customers on Dior and Givenchy products in 2006. 51. Sears still has Dior and Givenchy product in inventory, but that inventory is depleting rapidly. As at February 17, 2007, Dior inventory at Sears was down 9.8% as compared to last year, and Givenchy inventory was down 27.2% as compared to last year. 52. Dior and Givenchy 2007 year-to-date sales at Sears already are significantly down: Dior by 1(96%, and Givenchy by 36.94% (which is significantly worse than any other fragrance). This drop in sales is attributable to the inventory shortages and out-of-stocks described above, lack of product support for Valentine's Day promotions, and gap in supply of Dior cosmetics. 53. This situation will become critical in the first week of March 2007. Givenchy currently has prime showcases, near the main entrance of the stores. With inventory levels decreasing, it is impossible to properly stock these merchandise showcases. If supply is not reinstated, Sears will be forced to decide whether to remove and/or relocate Givenchy products altogether from

18 Givenchy that will result in the lower impression of Sears and its position within the market. h. Eighth, Sears' reputation and market image will suffer. The cosmetic and accessory department is a destination category for Sears and it is essential that it carries a full range of prestige brands in order for Sears to maintain credibility with its customers. 57. Sears is unable to obtain adequate supplies of Dior and Givenchy products elsewhere in the marketplace. Given the volume of Sears' business, it is neither practical nor realistic for Sears to acquire adequate supply of Dior and Givenchy product in the grey market. As has been acknowledged by Dior's UK counterparts in representations to the UK Director General of Fair Trading, the grey market is an unsatisfactory substitute because the products may be in poor condition due to age or stocking in unsuitable conditions, the products may be counterfeit, there may be no assurance of continuity of supply, or there may be a diminished level of service. 58. Moreover, there is inconsistent gross profit with grey market product, and not all SKU's of Dior and Givenchy product are available on the grey market. For example, traditionally only fragrance is available on the grey market. Cosmetics are rarely available. As well, important marketing tools, such as testers or blotters, are not available for products purchased from the grey market. 59. Further, given the brand loyalty and lack of substitutability in Dior and Givenchy products with those of their competitors, it cannot be said that Sears could obtain "similar"

19 panoply of fragrance and cosmetics products from another supplier. Competition among suppliers of fragrances and cosmetics has not resulted in a marketplace that views those products to be interchangeable. 60. Sears is willing and able to meet the usual trade terms of the Dior and Givenchy, as it always has. 61. Dior and Givenchy's products are in ample supply. In fact, until this dispute arose with Dior and Givenchy, their performance in meeting Sears' inventory requirements was satisfactory. In addition, LVMH has not stated in any public filings that it is having any difficulties with production, and Sears' competitors are continuing to receive a full complement of Dior and Givenchy product. 62. Dior and Givenchy's refusal to deal to Sears will likely have an adverse effect on competition in the marketplace. The 20 to 25% market share currently occupied by Sears will likely be acquired by The Bay, who already holds a market share of between 30 and 50% in the prestige makeup and fragrance categories. The Bay will effectively be in a monopoly position. Holt Renfew, which would be the only other department store selling Dior and Givenchy, caters to the high end market and only has stores in the major Canadian cities. Therefore, for many consumers, The Bay will be the only department store in which they can purchase Dior and Givenchy. 63. Consumers will have only one choice of retailer per segment: Holt Renfrew for high-end department stores, The Bay for mid-range department stores, and Shoppers Drug Mart for drug