Big retail chains make last ditch bid to block new market abuse rules

Photo: Jan Rosenauer

On many issues a compromise can be found, but on a proposed new amendment aimed at curbing retailers’ possibilities to abuse their dominant position on the market against suppliers there appears to be no meeting of minds. Retailers want the proposed changes scrapped and warn of the likelihood of higher prices and foreign retailers quitting the country if this does not happen. The Czech competition office says the new rules are a vital part of its toolbox to counter the abusive behavior of the big retail chains.

Photo: Jan Rosenauer
A delegation from the Czech Confederation of Commerce and Tourism will on Thursday will make what looks like a last ditch plea to prime minister Bohuslav Sobotka. The delegation from one of the most powerful business groupings in the country has a clear target in its sights, the proposed amendment to the law on significant market power.

In short, the amendment drawn up by the Czech competition office seeks to fine tune a previously law, which is judged to have largely failed, and finally get to grips with the problem of powerful retailers sealing abusive deals and contracts with suppliers. This is what the president of the confederation, Marta Nováková, had to say about the upcoming meeting with the prime minister. “We would like him to think about the reasons why we are against the act about significant market power. The situation within the Czech Republic and in Europe is really different and it is not time for this.”

The confederation numbers the Czech Republic’s biggest retailers, the likes of Kuafland, Lidl, Penny Market, Makro, Ahold, and Tesco to name a few, among its members. And one of its main arguments is that abuse of dominant position is not an issue here as in many other European countries. In fact, the confederation points out that around 10 big retails chains command around two-thirds of the market for food and drinks. In other countries, such as Germany and Britain, there are as few as three or even two major retailers.

And Marta Nováková says that laws on a similar line to those that are now proposed in the Czech Republic have been tried and failed in Hungary and Slovakia. Retailers that are found guilty of abusing their position can be fined up to 10 percent of their annual sales. She says that the result in Hungary has been that many big name retailers have sought to quit the country with the stark result that there is less competition on the market than before. Nováková adds that in Slovakia the big supermarket chains have decided to shun local producers of food and drinks just in case they get into trouble with the law. Purchases of Slovak produced food and drink fell by 3.0 percent as a result last year, she says.

Marta Nováková,  photo: Czech Television
And she argues that with the same sort of law in the Czech Republic the same sort of results could follow: “These multinational chains will maybe leave the Czech Republic, as they are leaving Hungary. And they will choose a different type of purchasing system. There is no other possibility if they will be penalized by our government or just by the [competition] offices. They will not have any other possibility than choosing other suppliers, European suppliers, or leave the country if the conditions are so bad.”

And the supermarkets maintain that they are being picked on with this specific legislation. Suppliers, they say, can and do abuse their dominant position as well in particular with regards to small and mid-sized companies. The president of the confederation of commerce and tourism, which boasts more than 600 companies employing around half a million people in its membership, says the latest proposed amendment is not so much about addressing a specific problem as making a political point and making life difficult for big retail chains. “I remember a time before the Velvet Revolution in the Czech Republic, I was a retailer at the time. I think that nobody wants this situation that everything will be regulated, prices, margins…I think that the left wing of our parliament asked for this type of regulation, It is not just about the act about significant market power, I think this type of regulation is going to continue in the future.”

The chain gang

“These multinational chains will maybe leave the Czech Republic, as they are leaving Hungary.”

But the Czech competition office is adamant that real abuses are taking place and that in many cases victims are afraid to speak out because of ‘the fear factor’ that they will be replaced on the list of suppliers. The abuses are many. They include forcing suppliers to pay for advertising campaigns which do more to boost the retailer than sales of their specific products, payments for prominent positioning of goods in the store, and contracts which are retroactively renegotiated by supermarkets if sales of goods are not going as well as expected.

Hynek Brom is one of the top officials at the Czech competition office. He argues that the proposed amendment will restore some balance to the relations between retailers and suppliers that has been missing in the past. “Kaufland has the position in the Czech market as the biggest discount supermarket. It has a market share of 11.3 percent for the whole of the market. Therefore it has great power against the suppliers and they do not have a possibility to change [their main purchaser]. And the law on significant market power gives support to suppliers against this power of the discount retailers.”

Brom says that one milestone case showing how one Czech retailer abused suppliers will be made public in the Autumn. Cases of abuse against major retailers Ahold and Kaufland have already been completed by the office with around another four cases still in the pipeline. He says the proposed amendment should result in bringing abusers to book faster with cases perhaps being closed in two years instead of three as is the case now. The retailers say that optimism is countered by the experience in Slovakia where the result has just been more cases bogged down in lengthy legal disputes in the courts.

Hynek Brom,  photo: archive of ODS
The Federation of Food and Drink Industries of the Czech Republic, which represents producers, says there are clear signs that supermarkets have been abusing their market position from the basic economic figures from the sector. It says the biggest Czech supermarkets have been going from strength to strength over the last decade and seen their turnover rise every year with the exception of 2010. Their margins have almost doubled over the period and food prices have generally risen. But the producers of food and drink have largely seen their market stagnate. The message according to the producers is that supermarkets are grabbing a bigger share of the profits at their and consumers’ expense.

Squeeze on producers

One solution that is being offered in the Czech Republic is for retailers and suppliers to sign up to a code of practice which would oblige all sides to abide by a set of fair play rules and agree to an ombudsman or industry mediator in cases where the two sides cannot agree. A Europe-wide move, the Initiative for Fair Trade, which has such aims was launched in the Czech Republic at the end of May. It has been backed by major retail groups such as Ahold and suppliers, such as Nestlé.

“And the law on significant market power gives support to suppliers against this power of the discount retailers.”

But the Czech competition office is doubtful whether any voluntary code can really work without someone at the end of the line being able to impose a penalty. That view is shared by Czech member of the lower house of parliament Margita Balaštiková, the deputy chairwoman of the ANO party and member of parliament’s agricultural committee. She pointed out, perhaps ironically, that a voluntary code of practice for the retail sector had failed to produce the right results in that land of gentlemen, Great Britain, and stood little chance of producing better results in the Czech Republic.

And she was fairly confident that the new rules will get through parliament largely unscathed. That was the case at the first reading on Tuesday, but the full legislative process is far from completed. “I think there is enough political support. When these issues were discussed in the agricultural committee the members of parliament were more or less in favour. I understand there is an urgency to get things done. I also understand the other side of the argument from the opposition, which would like to leave everything without restrictions. But people break the laws and we have to amend these laws. People are just human and we unfortunately have to regulate some things. People are not responsible enough that they can exist without any laws at all.”