6th October 1998 OECD ROUND TABLE ON RETAIL BUYING POWER OCTOBER 29-30, 1998 BIAC ROOM DOCUMENT

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1 Business and Industry Advisory Committee to the OECD OECD Comité Consultatif Economique et Industriel Auprès de l l OCDE 6th October 1998 OECD ROUND TABLE ON RETAIL BUYING POWER OCTOBER 29-30, 1998 BIAC ROOM DOCUMENT Large Retailers will claim that Global Manufacturers are larger than Global Retailers world-wide and that therefore, Global Manufacturers exert more power than Retailers on a global basis. Theoretically, this may be correct, however, in practice a Retailer who has 15% to 25% of a relevant market can represent some 15% to 25% of a Supplier's sales in that market, whereas the Supplier, even the very largest, is unlikely to represent more than 1% to 2% of the Retailers purchases. Retailers have absolute discretion as to what products are stocked on their shelves, at what prices they are sold, the amount of shelf space and promotional activity they receive, which of course includes manufacturer brands as well as private brands. Suppliers live constantly under the threat of a total de-listing or withdrawal of support if they do not concede to the requests of Retailers. If a Retailer withdraws support from a Supplier by reducing shelf space, increasing retail selling prices, withdrawal of promotional activity, refusal to list new products, the Suppliers business with that Retailer can reduce by 50% to 75% without adversely effecting the Retailer's business. Because the Retailer can concentrate their efforts on the Suppliers branded competitor and/or their own Private Label, which can be achieved without the adverse re-action of Consumers and little or no loss of business. 13/15 chaussée de la Muette Paris France Tel. (33) Fax (33) / biac@biac.org - VISIT OUR WEBSITE

2 2 If a Supplier loses 50%-75% of their business with a major retailer it has a dramatic effect on their overhead costs and therefore the Suppliers viability and/or the RSP's they can sell to competing Retailers. EXAMPLES: Non cost related benefits demanded by the retailers:- 1) Increases in off invoice allowances e.g. promotional allowance, listing allowance, end of month, quarter, year, rebate allowance, without performance related targets. 2) Special invoice price to allow the retailer compete with one or more of their competitors at RSP's and achieve a specific profit margin. 3) Deferral of a price increase until their Competitor RSP's have increased on shelf. 4) Un-approved extended credit terms. 5) Return for credit to the Supplier of in store damaged product which was received by the Retailer in good condition. All Suppliers have suffered from one or more of the above non-cost justified demands from time to time. They are, however, extremely reluctant to voice their experiences publicly as it is so easy for Retailers to re-act adversely to the Suppliers product range while doing little damage to their own assortment, as OECD has found out with the reluctance of individual Manufacturers/Suppliers to discuss this matter openly with them in front of their retail customers. It is very difficult to control retailer buying power under Competition Law, it can be more easily controlled under Fair Trading Law as was suggested by IBEC Competition Council [Jan '97] to the Competition and Mergers Review Group which is also considering the Restrictive Practices [Groceries] Order 1987.

3 3 ANNEX TESCO PSL BUYING POWER In Ireland at present we have the extraordinary situation of Tesco taking over Power Supermarkets Limited. Power Supermarket had 25% of retail grocery business in the Republic of Ireland, however, the Tesco U.K. buying power means that the new Tesco Ireland and U.K. have a buying power 12/14 times the size of the total Irish market [population 3.5M]. Tesco are trying very hard to be good Irish corporate citizens, however, they hold the view, understandably, that the Tesco buying price for International Brands should be based on their U.K. buying price, adjusted for trading in Ireland. In practice this means if the Power Supermarket price was cheaper than Tesco they demand a rebate on their U.K. business. If the Power Supermarket price was dearer than that of the U.K. they demand a discount on their Irish price. These negotiations by and large have taken place in the U.K. and the Manufacturer/Supplier finds it very difficult not to comply because of their significant buying power in both markets. This buying power makes it extremely difficult for other Irish retailers to compete against Tesco whose buying power is some 50 times greater than their nearest retail competitor.

4 4 EXTRACT from IBEC (IRISH BUSINESS AND EMPLOYERS CONFEDERATION) COMPETITION COUNCIL SUBMISSION ON THE GROCERIES ORDER 31st January 1997

5 5 Executive Summary IBEC Competition Council Submission on the Groceries Order The Minister for Enterprise and Employment has asked the Competition and Mergers Review Group to consider the position of, inter alia, the Restrictive Practices (Groceries) Order, The IBEC Competition Council considers that it is essential that the provisions of the ban on below cost selling and the requirement in relation to the payment of suppliers' accounts be retained. The Council wishes to also retain the other Fair Trade provisions in the Order. This submission recognises that it may be desirable to incorporate the provisions of the Groceries Order in a new Fair Trading Groceries Act or as an amendment to the Competition Act The IBEC Competition Council believes that the Competition and Mergers Review Group should recommend to the Minister that a Fair Trade Groceries Act should be introduced. In our opinion, the beneficial effects of the Order and the effects of removing the Order are as shown below: Beneficial Effects of the Order: 1. The rate of increases in food prices in the first five years after the ban on below cost selling was introduced was lower than in any five-year period commencing with 1947 (Statistical Appendix 1). 2. The rate of increase in the food price index has been lower than the increases in the CPI since 1987 (Statistical Appendix 2).

6 3. The rate of increase in the food price index has been significantly lower than in the UK or the average E.U. since 1985 (Statistical Appendix 3) The retailers margin on sales of food has not increased (Statistical Appendix 4). 5. Since the Order was introduced, the production of the food and drink industries has increased by over 50% (Statistical Appendix 6). While there are many reasons for this increase, the Competition Council believes the stability brought about by the Order has made a significant contribution. 6. Employment in the food and drink processing industries fell from 1981 to Since 1990, employment has increased by 3,000 persons (Statistical Appendix 5). Similarly, the increased employment is, we believe, partly due to the fair trading environment brought about by the Order. Effects of Removing the Order: 1. Our analysis shows that total employment in the retail sector and associated sectors could be reduced by up to 23,000 persons. 2. Consumer prices, in time, would, we believe, increase by more than the "All Items" Index because the greater market concentration would lessen competition. 3. There would be a loss of competitiveness by Irish producers, leading to a reduction in exports of food products. This loss of competitiveness would be brought about by unfair trading conditions in the home market. 4. There would be harmful effects on other retail sectors as multiples would attract customers from hardware, gardening and similar outlets by below cost selling of food. 5. The entry of British multiples would be facilitated, with further harmful effects for employment in the food processing sectors and the development of food exports because British multiples require delivery of their goods to a warehouse in Britain for delivery by them to their Irish outlets. This would seriously disadvantage Irish suppliers and producers.