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LAW 'NONSENSE' SAY LARGE RETAILERS, BUT PRODUCERS ARE HAPPY

New law tackles retail chains

SLOVAKIA now has a law that will allow the authorities to keep a tighter grip on retail chains while also aiming to shelter suppliers from the power of large purchasers.

SLOVAKIA now has a law that will allow the authorities to keep a tighter grip on retail chains while also aiming to shelter suppliers from the power of large purchasers.

The government of Robert Fico described the legislation, which will become effective as of January 2009, an effective tool to "eliminate inapt conditions" in the relationship between suppliers and large purchasers. The Ministry of Economy tailored the legislation in response to the concerns of suppliers, who felt significantly disadvantaged by their relationship with retail chains.

However, retail chains argue that the legislation is one-sided, protecting only suppliers. According to observers, while the aim of the legislation might be legitimate the means used to achieve it are controversial.

The legislation will regulate the way contracts are concluded between retailers and suppliers, discount practices, and the return or exchange of goods to suppliers at their own cost.

The law in fact applies to the sale of products or services to end-consumers at prices lower than their production cost or the purchase price for which the goods were supplied to the retailer. The new law prohibits this practice in principle, though prices may still be trimmed on the basis of a specific agreement between the supplier and the retailer. The bill also limits the fees that retail chains can charge for stocking a product, its placement in a specific position in stores, or for other marketing costs.

The bill also caps cash and non-cash fees demanded from suppliers to cover the commercial activities of the retailer at 3 percent of the annual sales of the supplied goods to individual retailers per calendar year, according to the SITA newswire.

Retail chains could be fined up to Sk10 million for violating the regulations.

"The law is definitely an asset, since retail chains have been dominant," said Dušan Janíček deputy chairman of the Slovak Agriculture and Food Chamber, a suppliers' organisation, which has been calling for such legislation.

The law was necessary because, as things stand, once retail chains and suppliers agree on a price, suppliers face having to pay a number of additional fees, which can reach 4-19 percent of their revenues, Janíček told The Slovak Spectator.

"For example, they have had to pay for music [in stores], advertising and various marketing activities," Janíček said. "After the price had been negotiated, the suppliers often kept receiving invoices for things they did not want but had to pay for because these deals were part of the 'agreed-on conditions'."

Members of the chamber, who are food producers, sell 70 percent of their products through retail chains, said Janíček, adding that this trend will continue and the producers are therefore vulnerable. The retail chains are able to use the situation very cleverly to their own benefit, which is sometimes to the disadvantage of the consumer, he said.

"When there was a shortage of milk in Europe, for example in Germany, the retail chains immediately increased the price [to consumers] but continued to buy milk from suppliers at an unchanged price," Janíček told The Slovak Spectator.

According to Janíček, it was simply dictatorship by the stronger partner over the weaker one, with retailers dictating conditions. If they were unable to get their money from consumers, they got it from suppliers, making their stores profitable, he added.

Gabriel Csollár chairman of the Board of Directors of COOP Jednota Slovensko, the largest retail chain in Slovakia, said that the law is bad because it one-sidedly protects only one half in the trading relationship, namely the supplier.

"It [the law] is unable to resolve relationships in the market, but instead brings instability to these relationships," Csollár told The Slovak Spectator. "It limits contractual freedom and is unable to protect the consumer."

A free market and a healthy competitive environment can best protect the consumer, Csollár said.

According to Csollár, relations between suppliers and large purchasers have developed under new conditions since 1990, during which time the businesses of all participants have had to adjust to a new balance, reached via the functioning of market mechanisms.

"With this law, the government is roughly intruding on this fragile balance, which risks breaking it and might mean it could be only be restored by inflating prices," Csollár said. "The law might also result in a reduction in production by domestic food producers since there will be no interest in signing contracts with Slovak food producers. The availability of Slovak products on the domestic market would drop and they would be replaced by foreign products."

Though the state is not regulating prices, it is regulating private relationships in the market, which can result in inflated prices, he added.

"The law is an economic nonsense and we have to eliminate it," said Csollár.

Oľga Hrnčiarová, corporate affairs manager for Tesco Stores, told The Slovak Spectator that her firm has always managed to build good relationships with its business partners and that, thanks to this cooperation, its suppliers have been prospering.

"A law is certainly welcome if it results in business functioning transparently," Hrnčiarová told The Slovak Spectator. "However, it is a different issue if a law intervenes in the free market and deforms the business environment and supplier-purchaser relations."

According to Hrnčiarová, the law was not necessary because it has not brought benefits to any of the involved parties.

"In our opinion it goes against the efforts of the European Union, which has been trying to bring down trade barriers," Hrnčiarová said, adding that, naturally, Tesco will respect the law.

Problems resulting from the unbalanced trading position between suppliers and large purchasers such as retail chains were already subject to an existing law - the act on retail chains - which has been repealed by this new legislation, Ondřej Majer, a lawyer with Peterka & Partners Law Offices said.

"The aim of the new legislation can be considered legitimate, but the means that have been used are very controversial and inadequate," Majer told The Slovak Spectator. "The concept adopted - of 'inadequate conditions' as defined in the new legislation - is highly unsuitable."

Due to a high number of crucial legislative errors, it might cause substantial problems in applying the law in practice, not only for authorities enforcing it but also to enterprises in their day-to-day business practices, Majer said.

While the government has declared that the legislation will, in the end, improve conditions for end-consumers, Majer doubts that it will fulfil this aspiration.

"It is more likely that the new legislation will have adverse effects on consumers since it may increase retail prices," Majer said.

According to Majer, the previous legislation, the act on retail chains, was widely considered ineffective and unable to deter big market players from benefiting from their market power, to the detriment of small and insufficiently well-organised suppliers.

"It is questionable whether the new act will be more successful," he told The Slovak Spectator. "It is possible that it will bring more economic disadvantages, with substantial problems in its practical application, than advantages in the form of real improvement in the position of small suppliers."

The new legislation, in contrast to the former, does not concern only the abuse of market power by large retail chains, but can be applied to any purchaser. The reason for this change is probably the position of the European Commission, which has declared in the past that legislation focusing only on retail chains might be regarded as discriminatory, Majer said.

"The problem is that where the former legislation was considered to be very general and vague but focused only on large retail chains, the new legislation is explicit and casuistic but may be applied to almost all relationships between a supplier and a purchaser, not only to retail chains," Majer said. "The only criterion is the existence of 'economic dependence', the definition of which is extremely vague, even misleading."

According to Majer, the new act may be end up being applied, for example, even to small purchasers who do not have substantial market power.

As far as the legislation of other countries pertaining to the dynamics of supplier-large purchaser relationships is concerned, Majer said that European competition rules, as well as the national rules of different EU member states, prohibit the abuse of dominance.

"The problem is that large retail chains, although they have strong market power, cannot be considered to have a dominant position since there are always several purchasers in the relevant market, none of whom have a dominant position," Majer said.

For this reason legislation concerning the abuse of market power or economic dependence exists in various European states. A quite elaborate concept of abuse of economic dependence has existed in France, in its Commercial Code, since the 1990s and is often enforced by the public authorities, said Majer.

"Analogous concepts exist in Germany, the United Kingdom or Hungary," Majer told The Slovak Spectator. "By contrast, in the Czech Republic numerous attempts to introduce such legislation, prohibiting the abuse of economic dependence, have always failed. Nonetheless, these rules are much more elaborate than the new Slovak legislation and do not contain so many potential pitfalls."

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