Court retail ruling swells French legislative pressure

By Anita Awbi

- Last updated on GMT

Related tags Marketing

German discounter Lidl has become the second grocer this month to
bear the brunt of French legislation, in a move to protect
suppliers from the excessive demands of powerful retailers.

A court in Strasbourg fined Lidl €500,000 and ordered it to refund €480,000 to beleaguered suppliers, after it was found to have asked the suppliers to fund a new warehouse near Montpellier, France, in exchange for exclusive contracts that were not honoured.

And French supermarket group E Leclerc was ordered to refund €23 million to suppliers earlier this month in a similar incident.

The rulings come as regulatory scrutiny mounts over legislative changes to the Loi Dutreil (Dutreil Law) this January that will ratchet up the pressure on retailers.

The amendments will affect the way backroom margins are handled in a bid to transfer the savings made from unregulated deals brokered between suppliers and retailers onto consumer prices - without impacting on the profit margins of the manufacturers.

IGD's international programme manager Anne Bordier told​: "These kinds of things, as we have seen recently in French courts, have always happened because of legislation that needs to be enforced. But it is more poignant now because this area has come under a lot of criticism recently."

Laws governing supply have been in place in France since 1996, preventing retailers from selling below manufacturing cost in an effort to thwart price wars and protect smaller suppliers.

This motivated retailers to work hard to strike competitive deals in the backroom - incorporating product placement fees, marketing strategies and in-store promotional activity into purchasing contracts to maximise profits.

But the law's effectiveness to kerb uncompetitive behaviour has recently come under scrutiny as retailers and suppliers are increasingly at loggerheads over profit margins and pricing strategy, and the law courts step in to settle disagreements.

This matter, confounded by inevitable food inflation problems, has forced the government to initiate changes to existing law, which are due to come into effect at the start of 2006.

"The change is designed to cap back margins on the selling price,"​ Bordier said.

"There will always be backroom negotiations, but this law change is a recognition that it happens, it's more realistic."

A legal loophole means that currently profits made in backroom agreements - which can be up to 33 per cent - are not transferred to the retail price.

But under the new Loi Dutreil the backroom margin will be capped at 20 per cent, with any additional profits made readily available to re-invest into lowering consumer costs.

The switch from the existing Loi Galland to the new Loi Dutreil is intended to enable retailers to cut prices on branded food and drink for no extra cost to the supplier.

"Initially the aim of the [Loi Galland] was to try to divert a price war but because of the problem with the back margins retailers and suppliers moved negotiations somewhere else,"​ Bordier explained.

"The new law addresses this development."

But the effective enforcement of this law is yet to be proven. Critics say it is too complicated, and the logistical operation involved in implementing the 20 per cent rule is going to be tough.

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