Changing perceptions of the large retail sector
Preceding article: Stop large retailers’ abuse, says the EESC
The commercial relations between large retailers and the suppliers of food products is a subject that is generating an increasing amount of interest not to mention concern. However, 10 years ago, it was a taboo not only for the EU authorities and institutions but for most journalists as well. This was the case despite the fact that the first attempts at legislation in this field in France date back to 1992 and that, as long ago as 1999 and 2000, the United Kingdom’s Competition Commission carried out an investigation into the abuses of large retailers towards their food suppliers, which concluded that supermarkets were guilty of abusing their buyer power (this term essentially refers to the ability of a buyer to secure more favourable buying terms than would be possible in a fully competitive market). In general, the large retail sector was considered to provide a useful public service that benefited everybody and whose development was a measure of a country’s economic health. The authorities and the media drew attention mainly to its unquestionable advantages, especially the fact that it allowed consumers to buy practically everything under one roof – and at competitive prices to boot – and to the facilities available (e.g. a sufficient number of parking spaces) and the services on offer. The situation has changed dramatically over the last five years or so and the European institutions have published numerous documents criticising this state of affairs.
The oligopolistic position of the large retail sector
The large retail sector began rapidly developing some 30 years ago and this evolution has been closely linked to the globalisation process. Indeed, the vast majority of the large retailers that currently control the retail market are multinational corporations. They are much better placed than SMEs to reap the benefits of the conditions afforded by globalisation.
The rapid growth of multinationals (including large retailers) often takes place at the expense of SMEs. In many sectors, the lion’s share of any given market is controlled by just a handful of large multinational firms. Along with the large retail chains, this also applies to the pharmaceutical and food industries, seed companies, oil refining companies, the banking sector and so on. These multinational corporations are not monopolies; in most cases, they face competition from other multinationals, or even SMEs, on the same market and are not therefore considered to have a dominant position.
Europe’s large retail companies are actively involved in conquering the global market. The British company Tesco, French retailers Auchan and Carrefour, German and Austrian multinationals such as Kaufland, Lidl, Metro or Billa, and the Dutch company Ahold, have all gained a foothold in numerous countries.
The result of all this is that a handful of large retail companies have firm control over the retail food markets in a variety of countries. In Germany, for example, four companies control 85% of the market; similarly, four large retailers control 76% of the UK market. In Austria, three retailers control 82% of the market, while in both France and the Netherlands 65% of the market is controlled by five companies and so on. This reflects the fact that while no single retailer may officially be defined as having a dominant position, the lion’s share of the market is controlled by three to five companies that represent an oligopoly.
There is no doubt that the members of these oligopolies compete with one another but only over their customers. Competition with regard to suppliers is scarcely apparent, especially where SMEs are concerned. Unlike their suppliers, who are far greater in number, the buyers (retailers) are spoiled for choice. In other words, the suppliers must make a huge effort and accept many concessions if they wish to deliver their products; the buyers, meanwhile select those suppliers who are the most “flexible” about their terms and conditions.
Nonetheless, while producers are right to expect a faire share of the sales margin as part of a loyal and healthy commercial relationship with their distributors they must also be attentive to the signals they receive from them about the requirements of consumers. Producers who are able to innovate and adapt the preparation and presentation of their products to meet demand will have greater bargaining power.
Thanks to their buyer power, large retailers are therefore able to impose their own terms, which are such that they often represent an abuse of buyer power. These contractual terms are also referred to as “abusive practices” or “unfair practices” and non-exhaustive lists of such practices have been drawn up on numerous occasions. As well as generating constant (downward) pressure on retail prices, late payments or excessively long payment deadlines, the use of such abusive practices by large multiples has completely changed the classic model of cooperation between suppliers and buyers. In simple terms, traditionally, the parties involved agreed on the volume and price of the goods to be delivered, and on other necessary terms and conditions, after which the supplier delivered the goods which were then paid for by the buyer. This model has been turned completely upside down with the advent of the large retailers. Today, suppliers – who receive less and less money for their products – are forced to pay more and more or to agree to other forms of compensation in return for access to the buyer’s services. This means that those who should be receiving money are actually receiving invoices instead. It is worth noting that the large retailers have successfully managed to impose this new model; it is now generally accepted and something that surprises nobody, least of all the competent authorities.
In general, the most common forms of abusive practice involve two aspects of buyer-supplier relations. The first involves the transfer – from the buyer to the supplier – of commercial costs, namely: promotional and marketing costs, store equipment costs, distribution and the management of individual stores. Retailers achieve this by imposing a variety of different payments on their suppliers such as listing fees or by charging for promotional leaflets. The second form of abusive practice involves large retailers passing on the cost of their business risk to their suppliers, which in practice means making retrospective changes to the agreed price based on how well the product in question sold to the customer. In this way, any differences compared with sales forecasts are borne by the supplier. This second objective is achieved thanks to a complicated system for establishing the final net price (various types of return bonus). These two mechanisms distort the simple business formula by which production costs are borne by the producer while the commercial costs are borne by the seller.
This new model for retailer-supplier relations was introduced on the pretext that there was a need for closer commercial cooperation in view of the increasingly tough competition in the retail sector. The large multiples’ reasoning is as follows: it should be in the suppliers’ interest to increase sales of their products and, for this very reason, it is absolutely right that they should participate financially in the commercial costs. Although this is by no means a vision that is shared by everybody, the suppliers are forced to accept these terms. However, the large retailers do not stop there and this form of wider commercial cooperation is subject to even more shocking forms of abuses. Either suppliers are overtly overcharged for services actually provided or the buyers invoice their suppliers for services that are purely fictitious. This last practice is referred to as “unjustified invoicing or billing” as there is nothing in return. To take but a few examples, such invoices simply mention “payment for stable cooperation”, “payment for issuing invoice”, “payment for settling invoice”, or even “contribution to the costs of the company party”. Incredible though it may sound, retailing multiples are known to have issued their food suppliers with invoices containing all of these headings and more.
Members of France’s National Assembly have identified more than 500 reasons used by central purchasing departments to extract such additional benefits from their suppliers.
According to the Confederation of the Food and Drink Industries of the EU (FoodDrinkEurope) and the European Brands Association (AIM), 84% of European suppliers to the large retail sector were victims of breach of contract in 2009; 77% were threatened with product delisting unless they gave the supermarkets unjustified benefits; 63% saw a reduction in their invoice price for no valid commercial reason; 60% were forced to make payments for which there was nothing in return.
The “supplier rebates” for which the large retail sector invoices its suppliers have made the pricing system completely unfathomable. Neither suppliers nor external observers are capable of identifying the actual purchase price. Business practices based on the “double profit margin” technique are causing serious problems for both consumers and suppliers. A more transparent system should be imposed.
Rapporteur: Mr Šarmír
European Economic and Social Committee
 One of the few experts at the time who dared to decry the abuses of the large retail sector was Christian Jacquiau, author of the book Les coulisses de la grande distribution and an article, published in Le Monde diplomatique (December 2002), under the headline “Racket dans la grande distribution à la française“.
 Consumers International, “The relationship between supermarkets and suppliers: What are the implications for consumers?”, 2012, p. 2.
 In 2009, 80% of the world’s seed market was controlled by just 10 or so companies while 25 years previously, hundreds of companies were involved in selecting and selling seeds. The same is true for agro-chemical companies.
 British Institute of International and Comparative Law, “Models of Enforcement in Europe for Relations in the Food Supply Chain”, 23 April 2012, p. 4.
 Consumers International, “The relationship between supermarkets and suppliers: What are the implications for consumers?”, 2012, p. 5.
 British Institute of International and Comparative Law, “Models of Enforcement in Europe for Relations in the Food Supply Chain”, 23 April 2012, p. 4.
 Christian Jacquiau, Racket dans la grande distribution à la française in Le Monde diplomatique, December 2002, pp. 4 and 5.
- SMEs Specializing In Retail Experiencing Falling Sales – XSM Introduced Website Development Services for the SMEs (virtual-strategy.com)
It is a well known fact that the SME sector of the USA accounts for most of the employment in the country, stated the Business Review. The news stated that SMEs specializing in retail are experiencing falling sales may be worrisome for most as the economy may be severely hurt because of this. These SMEs have not been able to compete with the larger retail chains lately and have seen a 2.6 percent decline. Employment has also been cut back to save up extra costs in order to keep prices low. A major reason for the declining sales is the use of online shopping these days. The news was posted on the 30th of December at bit.ly/WTNJdH and found that consumers find it more convenient to browse through brands and products on the internet and order online as well. Since large companies boast well designed websites and smaller ones don’t, most of the customers get attracted to these larger companies.
- Guest Post: Horsemeat Economics (zerohedge.com)
Once upon a time, banks were impelled to lend responsibly, because if they did not their balance sheets would become filled with trash, and they would face bankruptcy. Then they discovered that they could pull a ruse — lend irresponsibly, and pass off the risk to someone else. Purchasers of subprime mortgage-backed securities thought they were buying a AAA grade product, as that is what ratings agencies passed them off as being. But it turns out they were just buying unsustainable trash. It is, of course, possible that the subprime crisis could have been avoided had the price of oil and other commodities not risen so steeply and precipitously, squeezing consumers’ budgets.
Retailers claim to have been misled. Meat processors and food manufacturers claim to have been misled too. But somewhere along the line, someone is lying. Someone, at some point decided that horse was a cheaper alternative to beef, someone tested it for taste, to affirm that it would be taken as an acceptable substitute. And someone decided that horse would enter the food chain, and that consumers could be fooled into thinking that it was beef. Would that be possible with a local butcher? Would it be possible for unwanted substances to penetrate the food chain if the supply chain was much shorter?Maybe, but there are strong disincentives. With a shorter supply chain, it is not so easy to pass off the blame to someone else. If a local British butcher decides to substitute horse for beef, it would be more easily discoverable than if a sprawling multinational — whose abattoirs are located in Romania or Cyprus, but its customers in Britain, Spain, France and Italy — decided to do so. British abattoir workers would know, and might dissent. Butchers would be able to tell the difference, and most would have a serious problem with deceiving customers who they see face to face. A supermarket that sells meals packaged in plastic containers by other companies, has no such problem with deception. Customers don’t ever get to meet the person who butchered or cooked or shipped their ready meal. This provides a barrier of anonymity. There is no immediate embarrassment in deception carried out at distance. Simply, anonymity makes deception easier, and big, complex systems create anonymity.
- Meat scandal to trigger supply-chain reaction (theraconteur.co.uk)
The horsemeat scandal is a stark reminder of the critical necessity for brands to ensure the integrity of their supply chains, an increasingly difficult task considering the complex international nature of modern supply networks.
To combat threats to reputation and brand value, companies operating complex supply chains will have to become far more vigilant concerning supplier compliance and will find it necessary to build closer collaborative relationships with suppliers in order to fully understand lower tiers in the chain.
- Supermarkets ‘Now Take 58% Of Retail Spend’ (news.sky.com)
The Payments Council study found that 58p in every retail pound is handed to them, up from 46p a decade ago.
The changing trend shows that in the last 10 years supermarkets have taken an extra 26% of retail sector spending.
The Payments Council said the latest data also showed that the UK spent £58bn on entertainment last year, 60% more than in 2001 and outstripping growth in consumer spending by over a quarter.
- Five questions answered on the first appointed supermarket ombudsma (newstatesman.com)
The first ever Groceries Code Adjudicator (supermarket ombudsman) has been named today as Christine Tacon. We answer five questions on this newly created post.
What authority will the new supermarket ombudsman hold?
- Horsemeat burger scandal: history repeating itself | Felicity Lawrence (guardian.co.uk)
“You get what you pay for” applies to food as much as anything else, and the only surprise about the latest adulteration scandal, in which beefburgers at rock bottom prices turn out to contain horsemeat and traces of pig, is perhaps that they contain meat at all.
The trajectory of the scandal has a familiarity to it too. It began with the announcement on Tuesday evening by the Food Safety Authority of Ireland that it had detected other animals in 85% of all beefburger samples it had tested two months previously. Tesco Everyday Value beefburgers topped the adulteration league, being 29% horsemeat, but Lidl, Aldi and others were caught up in it too, with more than a third of all the beefburgers tested containing some horse.
The meat-processing companies from which the dodgy burgers originated include some of the largest in Europe. They supply most of the retail sector. So the Food Standards Agency in the UK and the big supermarkets have begun the frantic process of working out how many other supplies were affected and trying to trace the origin of the horsemeat. Consumers were the last to know, and many will have had a sense of deja vu.