News, 10 January 2012
According to the FCA study on buying power in the daily consumer goods trade published today, retailers use their firm position with respect to suppliers in several ways that may be considered questionable for sound and effective economic competition. The FCA hence finds that there is a clear need for further investigations into the practices of the trade.
Examples of the strong position of the grocery retailers include in particular the use of gratuitous marketing allowances and the transfer of risks to suppliers. Effects that are harmful for competition may also be related to the increasing number of the retailers' own brands (so-called private label products), combined with the strong position of retailers in category management.
The FCA investigated the phenomena related to the use of buying power with questionnaires directed retailers and the food industry. The industries included were the meat processing, bakery, mill and pet food industries. In addition to the responses to the questionnaires, the FCA also used other signals obtained from the market and the studies of the European Commission and the European Central Bank on the structure and practices of the markets considered. The financial situation of the actors and the role of foreign trade were also examined.
Gratuitous marketing allowance remarkably common
The majority of the suppliers who responded to the FCA’s questionnaire do not feel that they obtain any value for the marketing allowance they have paid other than the opportunity to be included in the retailer's product categories. It is the view of the industry representatives that, frequently, the value offered in return for the marketing allowance is not agreed upon.
Gratuitous marketing allowances may induce price increases because suppliers seek to pass on all their cost increases to purchase prices. The practice is particularly harmful for the entry of new businesses and hence the competitive situation in the entire field. In addition, gratuitous allowances may have a wider impact on the weakening of price competition in the field.
Own risk transferred to suppliers
The study explored several ways in which retailers transfer their own risk to suppliers. Repurchase requirements for unsold products are the most common way. For example, of the respondents in the bakery and pet food industries, three-thirds announced that they had met with repurchase requirements from the retailers. With such a transfer of risk, the increased uncertainty typically results in production cuts and pressure to increase prices. The suppliers’ willingness to innovate may also decrease.
In addition to suppliers, the transfer of risk may also have an impact on those competing actors at the retail level who are in a weaker position: if one retailer succeeds in transferring risks to the supplier, this may result in the supplier seeking to obtain better conditions when negotiating with relatively weaker retailers. This may have impacts which further undermine the position of the weaker actors (so-called waterbed effect).
Private label products reinforce strong position of retailers
The increase in the number of private label products benefits consumers because it increases product variety and lowers prices. However, problems may occur in the long run, as the retailers have such a strong position in category management and pricing. Moreover, as a manufacturer of private label products, a retailer is able to obtain better information about new brand products, in addition to which they have better information than before about the cost structure of products. All this further reinforces the strong position of retail in relation to suppliers.
According to the suppliers’ responses, retailers often price brand products above private label products. According to the study, this phenomenon and the possible competition distortions created by it could possibly be prevented by the suppliers’ maximum resale price maintenance. However, it is difficult to present tenable estimates about the possibilities and incentives of the supplier level to include conditions on maximum resale price maintenance into the agreements.
A complex problem not easily solved
To summarise, it may be stated that the highlighted practices between retail and the suppliers lie in a so-called grey area when it comes to the application of competition law. No clearly prohibited, hard core restraints on competition were found.
The buying power of retail does not in itself automatically mean the lack or distortion of competition. However, the nature of the detected phenomena and their apparent prevalence clearly motivate further measures to be taken.
In addition to practices related to buying power, it is also important to estimate other factors influencing the consumers’ choice of retail outlet, such as the practices related to the placement of the retail outlets and the supply of supplementary services located in connection to them. The regulations concerning the location of retail outlets, the authorities responsible for zoning and for example the alcohol retail monopoly have a major effect on the creation of equal competition conditions in the Finnish retail trade.
Read the English version of the FCA report
Director General Juhani Jokinen
Senior Research Officer Tom Björkroth
and Senior Research Officer Heli Frosterus