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Carrefour in legal bind with supply chain

By Anita Awbi , 04-Jan-2006

Talks between global retail giant Carrefour and its suppliers are underway as new French legislation governing backroom deals and pricing strategy hits the statute books.

Legal amendments, which came into effect on January 1 under the Dutreil Law, have updated the French Commerce Code to redress the balance of power between manufacturers and distributors, while attempting to lower retail prices.

The law confirms the supremacy of the manufacturers' terms of sale, rather than the supermarkets' terms of purchase, effectively spinning the current system on its head.

By February 15 contracts must be drawn up that clearly state the relationship between suppliers and distributors, in a bid to expose supermarket manipulation.

The contracts should lay bare the backroom practice of 'marges arrières', where supermarket chains demand discounts from suppliers in return for agreeing to stock the manufacturer's goods, provide in-store marketing and offer preferential product positioning.

"This year the game is being closely fought," said Guy Yraeta, Carrefour's head of French hypermarkets, as the company is locked in fierce negotiations with its key suppliers.

He added that the world's second largest retailer aims to cut prices further this year. This puts pressure on the company to strike the best deal possible under the new legislation.

In December Carrefour CEO Jose-Luis Duran said suppliers were poised to raise prices by 4-6 per cent, while E Leclerc president Michel-Edouard Leclerc revealed that some big name suppliers including Proctor and Gamble and Unilever had proposed price increases of 5-10 per cent.

Before the Dutreil Law suppliers gave retailers discounts of up to 60 per cent, as in the ham and cooked meats sector.

Yet these discounts were not passed on to the consumer.

The new law requires such backroom savings to be reduced to 20 per cent this year and 15 per cent in 2007.

Any discounts received on top of these margins must be integrated into the price of the products, thus reducing prices for consumers and shrinking backroom benefits for retailers.

IGD's international programme manager Anne Bordier told FoodandDrinkEurope.com: "The change is designed to cap back margins on the selling price.

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

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 old law's effectiveness to kerb uncompetitive behaviour came under scrutiny as retailers and suppliers were at loggerheads over profit margins and pricing strategy, sometimes calling on law courts to settle disagreements.

This situation, confounded by inevitable food inflation problems, forced the French government to initiate legislative changes that were finally ratified last August.

But the effective enforcement of these changes 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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