MEPs working on the ‘unfair trade practices’ directive risk handing a series of victories to food multinationals in the name of ‘fairness for all’, argues Christian Verschueren
Christian Verschueren is the Director-General of EuroCommerce
Should Nestlé, Unilever, or the Coca-Cola Company be protected against Carrefour, Tesco, or Metro? The European Parliament is about to vote for this, by making fundamental changes to a proposed EU law on how players in the supply chain deal with each other.
The European Commission’s original proposal on so-called ‘unfair trading practices’ aimed to protect weaker players in the food chain, i.e. farmers and small food processors, when they sell to larger co-ops, big multinational food manufacturers and retailers.
It imposed strict terms and conditions, such as shorter payment terms for perishable foods or a prohibition of last-minute cancellation of orders. All fairly logical and acceptable, and something all companies, including retailers, should be applying anyway.
But, under the guise of ‘fairness for all’, big food multinationals have succeeded in getting the European Parliament to extend those restrictions – and add many more that have nothing to do with helping farmers – to protect them from robust, but healthy, negotiations with retailers.
Their argument goes as follows. If we strengthen by law the negotiating position of big manufacturers in the food supply chain vis-à-vis large retailers, then big manufacturers will be able to demand higher prices and these will trickle down to their suppliers, in particular, farmers.
But would it really? Professor Tommaso Valletti, a chief economist in the European Commission, seriously doubts it : ‘A large manufacturer that would leverage [a] regulation [of UTPs] to pressurize the retailers to increase prices at which retailers buy from the manufacturer has no obligation or incentives, and is unlikely, to share with its own suppliers the extra benefits it would obtain from such regulation,’ he says.
In 2015, the International Monetary Fund looked at whether reducing taxes on businesses and the wealthy in society would stimulate business investment in the short-term and benefit society at large in the long term. It found that there was no trickle-down effect, but rather that the rich would get richer.
Valletti echoes this: ‘Covering by EU law the commercial relations between large food manufacturers and large food retailers would probably only increase the already high margins of large suppliers’.
Sharing their profits with their own suppliers is simply not on their agenda. Food companies have even acknowledged this. Pressure from activist shareholders has led them to set objectives for even higher margins.
Nestlé publicly announced for 2020 a target for its operating profit margin of 17.5% to 18.5%, up from 16.5% in 2017. Unilever generated last year an operating profit margin of 16.5% and set the goal to reach 20% by 2020. Kraft-Heinz has a reported net margin of 26%.
So, where will these profits trickle down?
Politicians arguing for ‘fairness for all’ may live to regret the direction in which the money will actually flow. Higher profits will simply trickle down to the shareholders of the big food multinationals, and European farmers, who are meant to benefit from consumers paying more for food, will see nothing.
Compare a few numbers for big food multinationals and the largest European retailers: net margins near 22% vs. 1-3%; market capitalisation about 8-10 times higher for manufacturers than for retailers.
No retailer in Europe makes up more than 2% of the global turnover of a multinational food manufacturer, whose products retailers have to have on their shelves if they are not to lose customers.
So who needs protection from whom? Retailers already face daily demands for unjustified price rises from large multinationals. Strengthening the position of these manufacturers against retailers will only delight the multinationals’ shareholders.
Consumers, on the other hand, will be dismayed. If retailers have to accept higher prices, they will be unable to absorb these, and consumers will have to pay higher prices for a broad category of well-known products at the check-out.
Valletti again: ‘Regulating commercial transactions between large players could reduce the pressure that large customers can exert on large manufacturers to reduce their margins and imply significant market disturbance because of their broad impact on the market and, ultimately, on consumer prices’.
Not exactly an example of ‘fairness for all’, and a dangerous shift towards supply economics.
Instead of relying on retailers to serve consumers and citizens, and negotiate low prices with suppliers, and promote organic products and produce from local agriculture, consumers will have to take what farmers and manufacturers decide to produce at the price and under the conditions they set.
Farmers will continue to supply what they want to produce, not what consumers want.
The EU should have a serious look at whom it is protecting when it regulates the supply chain.