European Regulators Aim To Help The Little Guy By Following UK Model
While, Back In The US, Target, Walmart And Amazon Act Out… Only Better
Business Models Can Empower Producers
Jim Prevor’s Perishable Pundit, May 22, 2018
In Europe, there is a proposal afoot to restrict “unfair trade practices” by large retailers in order to protect suppliers. The Financial Times wrote about the issue here:
Brussels is proposing a crackdown on powerful food buyers that force predatory terms on small suppliers, in a move to protect producers that has alarmed some large European retailers.
Phil Hogan, EU agriculture commissioner, will on Thursday unveil a package of reforms to ban “unfair” contract terms and empower national authorities to police the conduct of big buyers such as supermarkets and food production companies.
The proposal would set minimum standards so member states can take action “to protect the more vulnerable [suppliers] in the food chain,” said Mr. Hogan in an interview with The Financial Times. “If there are not unfair trading practices happening, then they [buyers] have nothing to fear,” he added.
Many small-scale food producers, such as dairy farmers or fruit growers, work on tight margins and have little bargaining power when they deal with the large companies that buy their products. This leaves them vulnerable to being squeezed on contract terms they have little choice but to accept.
These small suppliers are also hesitant to complain for fear of being labeled a trouble maker or excluded from future deals.
The model seems to be the law in the United Kingdom:
Mr. Hogan singled out the UK’s groceries code adjudicator set up four years ago as “a wonderful example” of what can be done.
The body monitors the 10 largest UK food retailers and their relationships with their direct domestic and international suppliers. They work with companies to address concerns but can also consider confidential complaints, make binding recommendations and levy fines of up to 1 percent of annual turnover.
After an investigation of Tesco’s payment terms in 2015, it made recommendations that all UK retailers had to implement. It recently launched a second investigation into practices at the Co-operative Group.
The proposal seems somewhat modest:
The commission proposal would ban unilateral or retroactive changes to contracts and outlaw taking longer than 30 days to pay suppliers of perishable products.
Another group of arrangements would only be acceptable if both buyers and sellers agreed.
Though it is not obvious it really makes much difference, most of the food and ag groups will support such rules. For example, making unilateral retroactive changes to contracts is already prohibited. Any vendor could sue, and win, if a buyer unilaterally makes unjustified deductions on an invoice. But that doesn’t stop retailers from doing it.
Just recently in the US — a much less concentrated market than in Europe or, certainly, in the UK — Target decided to demand 2 percent rebates from many vendors, even when the price had been set long ago by contract.
It is one thing to send all vendors a note that they should calculate any future offering prices to include a rebate. Vendors may not like this, as it complicates their business to have to offer customized pricing, and some vendors aren’t sophisticated enough to sustain such a system, so the retailer might buy product at a cheaper price.
But to do it on already negotiated contracts is just unethical business.
Yet Target got away with it, and others have as well, because the vendors — and often these are not small vendors; they can be the biggest names in the industry — feel they can’t assert their rights. If they do so, they run the risk of being shut out of future business opportunities.
Nothing in these new European regulations will change this dynamic.
Other retailers are asking things of vendors that are impossible or violate the law. Walmart, for example, gave a presentation in February in which it outlined its demand that vendors help it be at least 15% less expensive than competitors at least 80% of the time.
Of course, if Walmart can operate efficiently, is willing to accept lower margins, etc., there is no problem with Walmart pricing as it pleases. But the role of vendors in helping Walmart achieve this goal is literally prohibited by the Robinson-Patman Act, which requires buyers in the same class of trade to be charged the same prices.
In the famous Federal Trade Commission vs. Morton Salt case, the FTC decided the Act required that discounts reflect actual savings to the vendor, not just arbitrarily offering discounts to the biggest buyers.
So vendors are legally prescribed from helping a big retailer such as Walmart to be cheaper than smaller retailers. So what, precisely, does Walmart think vendors should do? Break the law?
Amazon is making crazy demands on vendors as well. Its business is driven by technology that focuses on keeping Amazon a bargain for consumers. So, if its algorithms see that Costco is selling a master package of 20 boxes of raisins at $5 or 25 cents each, Amazon will price its raisins at 24 cents each, then ship the raisins for free to households that buy its Prime service. Then Amazon will try to beat up the vendor because Amazon is losing money! This is on top of the fact that Amazon is not buying the wholesale size package that Costco is, and Amazon is shipping a different item to consumers!
Laws such as those proposed in Europe may help on the margin, but, fundamentally, what really has to happen is that vendors must offer unique products that consumers want, branded in an identifiable way. If consumers love a Driscoll’s blackberry and will accept no substitute, then Driscoll’s can say no to retail shenanigans.
Produce vendors who sell undistinguished product — with common genetics, without consumer brand preference — will soon find that no law can protect them.