Brand manufacturers and food retailers are diametrically opposed in a debate around whether supermarket alliances lead to lower consumer prices. “AgeCore, Epic Partners and Coopernic are not purchasing alliances”, brand organisation AIM boldly claims. Retailers, on the other hand, are unimpressed.
On the counterattack
A reminder: in June, a study entitled International Retail Buying Groups: A Force for the Good? The case of AgeCore/EDEKA, illustrated how purchasing alliancesdo lead to lower prices for consumers. The report concluded that average monthly consumer prices for SKUs in a specific product category, negotiated by retail alliance AgeCore, were on average 12 % lower than those of similar SKUs outside AgeCore-negotiations. The results appeared to be in line with some previous studies on the impact of buying combinations and were enthusiastically shared by EuroCommerce, the European retailers’ advocacy group.
This was, not surprisingly, against the grain of brand manufacturers, who are now on the counterattack. The brand association AIM (in full ‘Association des Industries de Marque’) had the study by Professor Marcel Corstjens of business school INSEAD critically reviewed by economic consultancy Compass Lexecon. That counter study, in a 10-page review, evaluates the methodology and conclusions of the study. Final conclusion: the report is flawed.
Purchasing alliance or gatekeeper?
The main objection concerns the fundamental premise of the price comparison: according to Compass Lexecon, the report incorrectly assumes that AgeCore is a purchasing alliance that negotiates discounts. Rather, the counter study says, AgeCore (like other retail alliances, such as Epic Partners and Coopernic) is an organisation that acts as a service provider to international brand manufacturers, negotiating terms for these services on top of national sourcing agreements and rates. Accordingly, AgeCore cannot have a direct impact on selling prices.
AIM therefore consistently calls such retail alliances ‘gatekeeper alliances’: they are not true purchasing organisations, they merely demand a kind of ‘access fee’ that entitles suppliers to negotiate with their members. Only after the brand owner pays that fee and starts negotiating at the national level with the various members of the alliance, there is procurement – but not jointly. If brand owners refuse to pay those fees, collective retaliation by alliance members follows, in the form of delistings and boycotts.
According to AIM’s Director General Michelle Gibbons, these alliances are therefore “smoke and mirrors that harm end consumers by limiting their choice and stifling fair competition through artificially increasing supply costs.”
Competition rules
Both study and counter study are (indirectly?) part of lobbying work, as the European Commission is working on a revision of the so-called “Guidelines on horizontal cooperation agreements”, which define when competition rules apply to cooperation agreements between companies – such as purchasing alliances, for example. As that revision is now significantly delayed, AIM is taking this opportunity to push for a more precise definition of exactly what “joint purchasing” is.
The intention is clear: with a stricter definition, alliances like AgeCore or Epic Partners could more easily be accused of colluding. Whether the European Commission will have ears to the brand manufacturers’ demands remains to be seen. Two years ago, a European Commission study concluded that alliances between large food retailers do not have a detrimental impact on agricultural prices or higher selling prices to consumers.
Negotiating power
According to AIM, many competition officials appear to have insufficient knowledge about how these retail alliances work. They mistakenly believe that the access fees are discounts that are credited against promotional or marketing services at the national level – and should therefore ultimately lead to lower consumer prices. But that is not how it works, the brand manufacturers argue: discounts are negotiated bilaterally with individual retailers. And while gatekeeper alliances like AgeCore, Coopernic and Epic are not transparent about what happens with the market access fees, AIM says that this money can no longer invested in innovation, in making the supply chain more efficient, in promotions or in marketing.
Retailers believe they should have the right to join forces to create a more level playing field when negotiating with the much larger multinationals, which often operate globally while supermarket chains only have a presence in one or a few countries. According to AIM, we should not look at absolute size, but rather at relative bargaining power in local markets.
For instance, Edeka has around 27 % share of sales in Germany. Faced with collective delisting by Edeka and other retailers in the Epic alliance, brand owners need to consider carefully if they can afford to resist paying the fees and lose access to a substantial share of European supermarket shelves. “Who has the most to lose if they do not reach a deal? The chocolate manufacturer that cannot access consumers through the shelves of a leading retailer? Or the supermarket that can still sell chocolate bars from competitors or even focus sales on their own private labels of chocolate bars?”
Different business models
AIM also brushes aside the argument that brand owners generate much bigger margins than food retailers, and thus clearly have the upper hand in mutual trading relationships. “You cannot simply compare different business models. Manufacturers are running factories across Europe, managing production sites, R&D facilities and investing much more in innovation; they take different risks, have a totally different level of capital employed, and that also leads to different margins,” says Gibbons
“Retail alliances that genuinely purchase and negotiate on behalf of their members can offer advantages for smaller retailers and ultimately consumers,” Gibbons adds. “But you have to make a distinction between those alliances that actually do joint purchasing and those that do not. AgeCore, Epic Partners and Coopernic are not buying organisations.”
Territorial restraints
AIM’s distinction between ‘real’ buying groups such as Eurelec (of E.Leclerc and Rewe) and ‘on top’ alliances such as Epic and Coopernic is artificial, retail organisation EuroCommerce states. They are both covered by the same EU joint purchasing rules. “What ‘on top’ alliances do is guarantee manufacturers volumes of sales, and ask for a fee in return for services such as promotions and marketing efforts. This is a percentage of the list price for each of the markets”, spokesman Neil McMillan says.
The fact that so-called on-top alliances do not buy themselves can be explained by the phenomenon of territorial supply restraints: international brand manufacturers require retailers to buy nationally and make it impossible to buy centrally, even though the products in question are usually produced in one or a few factories. “Colgate Palmolive markets products across Europe most of which come from centralised production in Poland. Yet you pay a very different price for a tube of toothpaste in Belgium than in Germany, for example.”
Threefold squeeze
The retail organisation also frames the debate in the current discussions on price increases: “Over the past nine months, we see that manufacturers’ margins – which were already very high at 10 to 15 % – have grown, while retailer margins (in food typically 1 to 3 %) have fallen, in some cases even under 1 %. This is because consumers have less to spend as a result of rising energy prices: they go to discounters more often, buy cheap private labels more often and generally spend less because they just can not afford it anymore. This makes it impossible for retailers to pass on to consumers the requested price increases of often 10 % or more being demanded by larger brand manufacturers
Retailers are in caught in a threefold squeeze, McMillan says. One: manufacturers are asking for more money than necessary – and retailers know if these demands reflect real input costs or not, because private label manufacturers tell them how much more expensive production is getting. Two: rising energy and other costs have hit retailers particularly hard. And three: consumers can no longer afford food inflation due to rising energy and other bills.
Finally, EuroCommerce does not believe that the European Commission’s extension of finalising its review of horizontal competition rules signals major changes on the rules around joint purchasing.
To be continued, no doubt…
