‘Our sector is characterised by high costs and low margins’: Retailers accuse ‘powerful multinationals’ of manipulating the unfair trading debate

By Katy Askew contact

- Last updated on GMT

Row over unfair trading intensifies ©iStock
Row over unfair trading intensifies ©iStock
European retailers and wholesalers have expressed anxiety that large branded food manufactures are trying to gain an advantage in supply negotiations by capitalising on the debate around unfair trading practices (UTPs) in the region.

In an open letter to the chair of the European Union’s Agriculture Council, Elisabeth Köstinger, the CEOs of 22 leading European retailers voiced “intense concern”​ at the “idea currently being promoted”​ by “powerful multinational food processors”​ that they need protection from retailers in pricing and supply negotiations.

Proposed UTP regulations – expected to come into effect by 2020 – aim to protect the weaker players in the food supply chain from exploitative terms. In particular, European regulators want to safeguard the interests of farmers and small and medium sized enterprises.

The European Parliament and Council of Ministers is currently considering a directive to tackle UTPs. Within this framework, the Special Committee of Agriculture (SCA) has said that the scope of the legislation - who it applies to - has become a sticking point.

Organisations representing the food industry have called on regulators to implement measures that will "protect​" all food makers, regardless of size.

A recent letter, signed by the European Farmers Association (Copa-Cogeca), European Brands Association (AIM), EFFAT (European Federation of Food, Agriculture and Tourism Trade Unions), Fair Trade Advisory Office (FTOA), FoodDrinkEurope, and IFOAM EU, called for a “clear definition​” of what an unfair trading practice is. “The essence of an unfair trading practice is the transfer, unilaterally, of excessive risk and unexpected costs on a supplier, by taking advantage of the buyer’s position as market gatekeeper.”

The letter continued with a call for UTP regulation to be applicable to all players in the food chain. “Unfair is unfair, regardless of the size of businesses: all actors in the food supply chain should be protected from unfair trading practices. Without this basic principle enshrined in EU law, any actor may be faced, directly or indirectly, with the effects of unfair trading practices,”​ it concluded.

'This will not benefit farmers'

This argument was rebuffed by the supermarket sector yesterday (17 September). The retail CEOs questioned both the legality and the economic consequences – for consumers, farmers and SMEs – of giving “one powerful set of players even more power”.

Collectively, the chief executives of retailers such as Ahold Delhaize, Auchan, Axfood, Carrefour, Colruyt, Edeka, ICA, Jerómino Martins, Kaufland, Lidl, Metro, Musgrave, Rewe and Spar asked Köstinger to seek a formal opinion from the Council Legal Service on the legality of such extended protection.

They argued that the EU’s original directive aimed to protect farmers and SMEs in their dealings with bigger buyers, whether manufacturers or traders, by limiting payment terms on perishable products, banning a few practices such as unilateral and retroactive changes to contracts or last minute order cancellations and allowing certain practices such as joint contribution to marketing and promotion campaigns provided that they have been agreed by the parties.

The retailers said that multinational manufacturers under the “false pretense of  fairness for all​” are calling for protections to be extended to large corporations. “If adopted, those amendments would considerably reduce the scope for practices that can benefit both parties and limit freedom of contracts. This will not benefit farmers,​” they insisted.

The letter stated: “Extending protection to large manufacturers, and covering service providers that do not buy or sell food products, will have a number of unintended consequences.”​ It also expressed concerns that this extension to big multinationals “raises fundamental questions of its compatibility with the legal base”,​ as an agriculture legal base needs to demonstrate a benefit to farmers.

Retailers ‘not the dominant player’

The retailers suggested that they are not, in fact, the dominant players in the supply chain.

Even the largest European retailers, they noted, have a market capitalisation of less than one-tenth the size of large industrial food processors, who operate across the world, and enjoy 15-30% net profit margin (EBIT) compared with the EBIT of large retailers of 2-4%. Moreover, no European retailer makes up more than 2% of the global turnover of these multinationals.

“The danger of this extension of scope has been clearly set out by the Commission, who warn that neutralising the ability of retailers to negotiate with large manufacturers will create significant market disruption, increased profits for manufacturers and higher prices for consumers,”​ the retailers stressed.

“The Commission has also stated that the benefit from these higher prices on highly processed industrial food products is unlikely to be shared with farmers or the other suppliers of these multinational manufacturers.”

The CEOs reaffirm their “very clear interest in treating suppliers, large and small, fairly”​. This is reflected in their commitment to the Supply Chain Initiative and their “strong support for agriculture policies aimed at helping farmers organise, become more innovative and competitive, and create sustainable supplies of attractive products that meet consumer demand”, ​they stated.

‘High costs and low margins’

The retail sector is facing a challenging period as it deals with increased digital competition.

Not only are retailers having to invest heavily to see off this threat – they are also large-scale employers in Europe, the letter stressed.

“Retailers are a key contributor to employment in Europe (…). Our sector is also characterised by high costs and low margins. The rapid growth of online sales is squeezing those low margins even further. Retailers are making huge investments to stay relevant in this digital age: new infrastructure and technology, new services, new business models. (…) Handing more profit to large multinational suppliers in this directive will intensify these pressures and further exacerbate risks in terms of employment,”​ the letter insisted. 

Related topics: Policy

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