Changing perceptions of the large retail sector

Changing perceptions of the large retail sector

Preceding article: Stop large retailers’ abuse, says the EESC

Commercial relations

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. File:EESC logo.svgHowever, 10 years ago, it was a taboo not only for the EU authorities and institutions but for most journalists as well[1]. 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[2]). 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.

chilwell retail park

chilwell retail park (Photo credit: victuallers2)

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[3], 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[4].

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[5]. 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.

English: Tesco Supermarket Thirsk By far the l...

Tesco Supermarket Thirsk By far the largest retail outlet in Thirsk. Depite this, the town has a number of thriving food retailers in the town centre. (Photo credit: Wikipedia)

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.

Abusive practices

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.

English: Homebase, Avenue Retail Park, Cardiff...

Homebase, Avenue Retail Park, Cardiff This is one of many national retailers’ premises located along Newport Road west of the Rhymney River. Premises are set back several tens of metres from Newport Road, with free parking in between. (Photo credit: Wikipedia)

In general, the most common forms of abusive practice involve two aspects of buyer-supplier relations[6]. 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[7].

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[8]. A more transparent system should be imposed.

Rapporteur: Mr Šarmír
European Economic and Social Committee

[1]              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“.

[2]              Consumers International, “The relationship between supermarkets and suppliers: What are the implications for consumers?”, 2012, p. 2.

[3]              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.

[4]              British Institute of International and Comparative Law, “Models of Enforcement in Europe for Relations in the Food Supply Chain”, 23 April 2012, p. 4.

[5]              Consumers International, “The relationship between supermarkets and suppliers: What are the implications for consumers?”, 2012, p. 5.

[6]              British Institute of International and Comparative Law, “Models of Enforcement in Europe for Relations in the Food Supply Chain”, 23 April 2012, p. 4.

[7]              Christian Jacquiau, Racket dans la grande distribution à la française in Le Monde diplomatique, December 2002, pp. 4 and 5.

[8]              EESC opinion A better functioning food supply chain in Europe, OJ C 48, 15.2.2011, pp. 145–149.




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About Marcus Ampe

Retired dancer, choreographer, choreologist Founder of the Dance impresario office and archive: Danscontact-Dansarchief plus the Association for Bible scholars, the Lifestyle magazines "Stepping Toes" and "From Guestwriters" and creator of the site "Messiah for all". - Gepensioneerd danser, choreograaf, choreoloog. Stichter van Danscontact-Dansarchief plus van de Vereniging voor Bijbelvorsers, de Lifestyle magazines "Stepping Toes" en "From Guestwriters" en maker van de site "Messiah for all".
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