French urged to consider Galland rethink

Related tags Hypermarket Retailing

France's loi Galland, the legislation which regulates the
relationship between suppliers and retailers, has come under fire
this month with both food manufacturers and supermarket groups
calling for a relaxation of the rules to help kick start French
consumer spending and the nation's ailing economy.

The legislation was introduced in 1996 with the principal aim of protecting suppliers from the might of the giant retail groups. Prior to Galland, retailers would be able to negotiate substantial discounts from their suppliers for the privilege of stocking their brand, giving them the flexibility to reduce their prices at the same time as maintaining their margins.

The problem was that this system favoured only the major players; smaller suppliers, who did not have the same room for margin manoeuvre as their larger counterparts, were unable to offer large discounts to the retailers, and as a result often found themselves without an outlet for their goods - or, worse, obliged to sell their products at a loss in order to get them listed by the major retail groups.

Galland was therefore designed to redress the balance in the supplier-retailer relationship by preventing the supermarket groups from selling products at below the recommended price set by the manufacturer - in other words, preventing them from passing on any discounts and thereby (in theory at least) removing the temptation to negotiate them.

But while Galland has certainly stopped the large hypermarket groups from embarking on major price wars - seen by the legislators as likely to kill off traditional store owners once and for all - it has not stopped them from profiting from their strong negotiating position with suppliers.

For bulk discounts have by and large been replaced by listing fees - a sum paid by the suppliers to the retailer in exchange for the right to sell its products through that store. These fees existed even before Galland, but a loophole in the regulation means that the legislation only requires such fees to be charged in exchange for a specific service (stocking a product on a gondola end, for example) and does not limit their size.

The result is that brand owners now find themselves having to pay substantial sums to the retailers for the privilege of getting their products onto the shelves - effectively undermining the position of strength that Galland was supposed to give them in their negotiations with the super- and hypermarket groups.

So is it just the food manufacturers that want a rethink of the regulations? Well, no. The retailers too are pressing for change, with high-profile campaigns from the likes of Carrefour, Auchan and Leclerc this year alone. Listing fees are all well and good, but greater pricing flexibility would be a much better long-term solution to maintaining profitability, they argue, especially given the current economic climate.

For France's leading hypermarket groups are struggling. Carrefour, the biggest French retail group and number two hypermarket operator after Auchan, recently reported a 3.7 per cent drop in first quarter sales at its hypermarket business in France, as customers switched to discount operators.

Discount stores stock predominantly own label goods, which they can retail for far less than the equivalent brands, and this has made them extremely popular in recent months as French consumers feel the effect of the ailing French economy. Being able to cut the price of branded goods, the hypermarkets argue, would allow them to better compete with the discounters.

Although most of the hypermarket groups also own the main discount chains (Carrefour owns Ed, Casino owns Leader Price, Intermarché owns Netto), the margins on branded sales are obviously much higher, and profitability will inevitably be affected if there is a long-term shift to cheaper formats.

At present, the only way in which the hypermarket groups can effectively reduce the price of branded goods is through money-off coupons, promotions or loyalty cards. Such schemes can be effective in stimulating consumer interest (as the huge take-up of Carrefour's recently launched loyalty card scheme shows) but are not seen as a long-term substitute for every day low prices.

French ministers have therefore found themselves bombarded by requests for a change in the law from both sides of the supplier/retailer fence. The retailers want greater flexibility to fix prices to compensate for fluctuations in the economy and to combat the threat posed to their margins by the discounters. Suppliers, on the other hand, want the thorny issue of listing fees cleared up.

Both sides, however, are calling for the same solution to the problem: that the listing fees be effectively 'invested' in lower consumer prices. That way, they argue, both retailer and supplier feel they are getting the best value for their money, with lower prices much more likely to attract new customers than loyalty schemes or short-term promotions.

ANIA, the umbrella organisation which represents France's food manufacturing industry, said this week that such a move "would give greater flexibility to commercial negotiations and promote commercial strategies designed to boost growth, demand and consumer purchasing power"​.

But Nicolas Sarkozy, France's new finance minister, has rejected this possibility, suggesting instead a new system of 'commercial relations' which he hoped would be in place by mid-June.

He argued that improving French consumers' purchasing power should be achieved not through the ability to reduce prices as a result of commercial negotiations (i.e. passing on discounts or listing fees) but rather through an across-the-board reduction in branded food prices.

Speaking during a visit to two Parisian hypermarkets last weekend, the minister said that he was willing to be flexible if he felt there was a similar desire on the part of the retail sector.

For example, store development programmes could be fast tracked if stores agreed to dedicate most of the additional floorspace to small food producers and growers, while greater flexibility on prices could be considered if companies agreed to wholesale reductions in the first place - which would either involve the retailers reducing their margins or the manufacturers lowering their selling prices.

Related topics Market trends

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