“A decade after the envisaged completion of the internal market, there is still a huge gap between the vision of an integrated European Union economy and the reality as experienced by European citizens and providers. The barriers affect a wide variety of service activities across all stages of the provider’s activity and have a number of common features, including the fact that they often arise from administrative burdens, the legal uncertainty associated with cross-border activity and the lack of mutual trust between Member States.”
Ten years on, the opening statement of the 2006 Services Directive still resonates for sectors covered by the legislation, especially retail.
That trade barriers remain in the EU single market will be no surprise to anyone (regrettably). But barriers are all the more toxic when they confine fast-evolving sectors like retail. E-commerce has shaken up the whole industry and yet, it’s just the onset of the sector’s transformation in years to come. As consumer patterns become more complex, the structure of the retail landscape will have to adapt – just as legislation. Stores still account for over 90% of retail sales even in the most mature online markets but focusing on sales allocation is misleading. E-commerce does not make brick-and-mortar any less relevant – quite the opposite. With the need to integrate online and in-store sales, online businesses increasingly recognise the value of having a physical presence.
Retail establishment – Unjustified, disproportionate barriers persist
The adoption of the Services Directive in December 2006 resulted in legal and administrative barriers to retail activities being abolished or partially reduced. A number of requirements to open a retail outlet were banned (Article 14), plain and simple, such as the obligation to demonstrate the existence of an economic need or market demand. Some other requirements have to be simultaneously 1) non-discriminatory, 2) justified by an overriding reason relating to the public interest and 3) do so in a manner which is not disproportionate, in order to be compatible with the Directive (Article 15); for instance, requirements fixing a minimum number of employees. All in all, a major step to improve the functioning of the single market for retail.
Member States have since reformed their legislation to be in line with the Directive, however, national, regional and local restrictions to retail establishment remain widespread in the EU, and the hat-trick enshrined in Article 15 appears hard to score in practice.
A 2016 European Commission study concluded that some EU countries impose rules that could qualify as a prohibited requirement under Article 14, either because they act as an economic needs test, or because they could allow the involvement of competitors in the authorisation process.
In many EU countries, requirements subject to evaluation under Article 15 “seem difficult to justify […] because they amount to a ban on certain types of retail outlets or on outlets exceeding a certain size. In some Member States the procedures impose requirements that are to be considered as disproportionate, […] because they include authorisation schemes with complex, lengthy and costly authorisation procedures, lack of transparency and/or discretionary decisions,” explains the study. Not to mention the plethora of overriding public interest reasons invoked by Member States to restrict retail establishment, on which the EU has no or very limited competence, such as urban planning.
Commission’s efforts – What has been done so far?
Mindful of these concerns, the Commission, decided to give priority consideration to the retail sector in January 2013. In an Action Plan for European retail, the Commission reaffirmed its commitment to apply a “zero-tolerance policy” to eliminate remaining cases of non-compliance with the Services Directive. The message: rest assured we will open infringement proceedings against non-compliant Member States if that’s what it takes.
At least that’s what we thought. The Commission decided that only the requirements banned under Article 14 are within the scope of its zero-tolerance policy when, actually, the vast majority of the remaining barriers are covered by Article 15. The European Court of Auditors reported in March 2016 that there had been only nine infringement cases for non-conformity of national law with the Services Directive since its introduction in 2006 (all sectors combined) – a “low” figure that is “not consistent” with the Commission’s zero-tolerance policy, say the Auditors. The Commission argues that this is a logical consequence of the use of pre-infringement systems (so-called EU Pilot).
The Commission has also been trying to influence Member States to remove barriers through country-specific recommendations (CSR), in the context of the European Semester. In May 2016, out of the eight Member States which have been recommended to increase competition in services, six have been specifically called on to do so in the retail sector. Yet there is no evidence that CSRs are more effective than infringement procedures, and figures are not very encouraging. In September 2016, the European Parliament reported that EU countries fully or substantially implemented only 4 out of 95 of the recommendations adopted more than a year earlier. Besides, some Member States have been urged to increase competition in the retail sector every single year since the first CSRs in 2011 (cf. table here).
Policy shopping list – Commission fine tunes new initiatives
Ten years after the adoption of the Services Directive, retailers still face disproportionate restrictions and customers still face different conditions when buying across borders, especially online. The European Commission appears committed to break down those barriers. The EU executive endorsed a legislative proposal in May 2016 to tackle discriminations based on customers’ nationality or place of residence, as forbidden by the Services Directive (Article 20). There’s more to come, notably a reform of the procedure whereby Member States must notify the Commission of new regulatory measures affecting services – expected this December – and an improved online portal providing easier access to information for firms wishing to do business in another EU country.
Most significantly, retail is the only economic activity which had been granted a sector-specific initiative in the revamped strategy for the single market published in October 2015. The Commission will set out best practices to facilitate retail establishment and reduce operational restrictions in 2017. The aim is twofold, 1) encourage Member States to reform rules that restrict competition, and 2) provide guidance about the Commission’s priority-setting for enforcement policy in the sector. The latter is essential and serves the purpose of silencing those who claim that soft instruments will have no effect in practice. In other words, here’s how you should reform; if you don’t, we’ll make you reform. This sounds pretty much like yet another “zero-tolerance policy” though, but with the notable difference that the best practices are expected to capture not only the requirements banned under Article 14 of the Services Directive, but also those covered under Article 15.
Retail is changing – Omni-channel makes reform pressing
Reform is needed, especially in light of the structural shift the sector is undergoing with the emergence of omni-channel retail, whereby online and in-store sales benefit cumulatively from integrated operations. Far from diminishing the role of the physical store, digital retail is expanding it; most omni-channel strategies are anchored on store portfolios, with their value extended from being a point of sale to the backbone of omni-channel operations. New ways of combining online and offline sales are only just emerging, and legislation must be shaped so as to stimulate innovation instead of constantly playing catch up with retail.
Nearly all market players have incorporated the goal of becoming omni-channel into their business plans, although few have achieved full integration at this point in time. This requires considerable investments throughout the whole value chain, and a regulatory framework which promotes coherence between the rules governing in-store sales and those governing online sales. The brick-and-mortar versus e-commerce debate is long dead.
We have seen action plans to support traditional retail, strategies to boost e-commerce, even programmes to revive cities. Most of them are still being rolled out on the ground at this point in time, like the EU Urban Agenda, or still need to be adopted, like the e-commerce initiatives. Yet for Europe to catch up and even outdo the US, what we need next is an integrated blueprint for European Retail, where brick-and-mortar and e-commerce become inseparable.
Photo by Lorene Farrugia