The implosion of the AgeCore alliance is sharpening the conflict of interests between supermarkets and brand manufacturers: multinationals are demanding action against abuse of power, while food retailers are defending the free market. Warning: even bigger buying groups may be in the making.
14 billion euro per year
Edeka’s and Intermarché’s departure from the powerful retail alliance AgeCore sent shock waves through the European food retail industry. Suddenly, all existing buying alliances are shaken up. This has led to a small PR war. AIM, the European brands association, sent out a press release warning about the consequences of a “musical chairs” of alliances within food retail. “Edeka’s move to Everest, a new Dutch-based alliance with e-player Picnic, creates a whole new phenomenon in European retail, with the possibility of abuse spreading across physical and digital shelves,” said AIM’s Director General Michelle Gibbons.
EuroCommerce, the interest group of European retailers, reacted promptly: “Retail alliances help powerful global brand manufacturers promote their products and help retailers mitigate the effects of the active fragmentation of the internal market by brand manufacturers, which costs consumers at least 14 billion euros per year,” said Director General Christian Verschueren. He is referring to the so-called “territorial supply restrictions” that manufacturers apply: even within the European single market, prices for the same product can vary significantly, but retailers are prevented from placing orders outside their own country.
AB InBev, for example, was fined 200 million euros in 2019 because the brewer made consumers in Belgium pay too much for its lager Jupiler between 2009 and 2016. The company prevented retailers from buying the product for a lower price in the Netherlands. A form of abuse of power that goes against the principles of the free movement of goods.
Controversial practices
The logic behind retail alliances is clear: food retailers are usually active in a limited number of countries, while multinationals often operate worldwide. The margins of brand manufacturers are up to ten times higher than those of retailers. Supermarkets say they have little resistance to unilaterally imposed price increases. In 2020, a report requested by the European Parliament already concluded that retail alliances are not a source of unfair competition. “Buying alliances between retailers have become an essential part of grocery supply chains. They can offer consumers lower prices on everyday groceries and personal care products,” said European Commissioner Margrethe Vestager at the time.
However, some buying alliance practices are controversial. When major multinationals such as Pepsico, Nestlé, Mars, Douwe Egberts and Coca-Cola were targeted one by one by AgeCore’s orchestrated boycotts between 2018 and 2020, it was hard to ignore. Products from the involved companies temporarily disappeared from the shelves at Colruyt in Belgium, Edeka in Germany, Intermarché in France, Coop in Switzerland, Conad in Italy and Eroski in Spain. It was unprecedented. In France, supermarket chain Intermarché must now defend itself in court against an accusation of abuse of power through AgeCore. The alliance is said to be demanding high fees for which there is no real quid pro quo. Eurelec, the alliance between E. Leclerc and Rewe, was also fined in France for similar practices.
Concentration and purchasing power
There are some arguments in favour of retailers being dominant in the trading relationship with their suppliers. To start with, there is a trend towards concentration in the food retail market. In many countries, the top three hold more than three-quarters of the market. And scale implies purchasing power. Also, retailers have more control over the sales process (many purchasing decisions are made at the store level), they have more data on customer behaviour (information is power), and they compete directly with brand manufacturers through their own brands. A large retailer can sometimes account for up to 20 per cent of a manufacturer’s turnover, while, the other way around, a large supplier will hardly account for 2 to 3 per cent of the retailer’s turnover. So there is an imbalance.
However, according to EuroCommerce, this is not the case: individually, purchases by retailers from a supplier of a global brand represent only a tiny fraction of the supplier’s global turnover, usually well below 5 per cent. In many product categories, an individual manufacturer can hold up to 80 per cent of the respective market. This should be the criterion for assessing relative bargaining power. The organisation points out that retailers operate in a highly competitive market: consumers could easily go to a competitor if a retailer does not have a “must-have” product on its shelves. Suppliers also have a larger choice regarding product distribution and are increasingly selling directly to consumers.
Retailers act like Robin Hood
And these arguments also make sense. In fact, when we look at the figures, there is one striking fact: brand manufacturers are systematically beating retailers on crucial indicators such as net profit margin, return on investment, shareholder value and market capitalisation. In other words, if retailers were so powerful, they still fail to convert that power into economic or financial performance – even if they are members of a buying association. This is because retailers do not manage to hold on to the advantages that they command from their suppliers: they immediately pass on the price reductions to their customers, the shoppers, in the form of price cuts and promotions. This is what marketing professor Marcel Corstjens calls the ‘Robin Hood syndrome’ in his book Penetration (2015): what retailers ‘steal’ from the rich multinationals, they give to the poor consumers.
Retailers do have a certain amount of power over their suppliers, but not over their industry peers. The competition is cut-throat. Food shoppers are highly volatile: they can easily switch between different stores if they get a better deal elsewhere. Price competition is thus an obvious tool. After all, it is very difficult for retailers to truly differentiate themselves: because of their high fixed costs (real estate and staff, among others), they have to appeal to the largest possible group of consumers. And if they manage to make a difference by offering a specific service or innovation, the competition is quick to copy it. So their power is very relative.
“Transatlantic alliances on the way”
In a recent interview with German Retail Blog, Marcel Corstjens points out that the governments that impose high fines on retailers do very little to address the obvious abuse of power by multinationals. “Retailers have done a lousy job in defending their point of view, while the likes of Nestlé, Mars and Coca-Cola have an excellent lobby with the EU and national competition authorities,” he thinks. “Parliamentary commissions are composed of elected public officials who are probably eminent politicians but unfortunately often have limited knowledge of the trade and its complicated web of interactions. It’s like apprentice electricians trying to inspect a nuclear power station. They don’t seem to grasp something very fundamental: retailers are doing exactly what regulators want, i.e., they are supplying consumers with good and affordable products.”
He does not expect the end of AgeCore to mean the end of retail alliances in general. On the contrary: “I believe that buying alliances will become much larger and that we might even soon see some transatlantic ones between major European and US retailers. Here both parties could focus on the 70 or so global brands who offer a similar set of portfolios on both sides of the Atlantic.”
