Press Release 10 September 2018

Press release 10 September 2018

Unfair Trading Practices – Fairness for farmers and consumers – not profit for multinationals

The SCA and Agriculture Council will be asked over the coming weeks to decide on a set of amendments presently being rushed through the institutional process, the most fundamental of which is to give large manufacturers, who operate all over the world, the same protection as small farmers and SMEs.

In a briefing note circulated to SCA members ahead of their meeting today, EuroCommerce raises major concerns over the legality and the unintended consequences of extending the scope of the directive to large suppliers, and calls on member state representatives to maintain the balance the Commission has sought in their proposal.

Christian Verschueren, EuroCommerce Director-General, said: “The Commission proposal is aimed at supporting farmers and small manufacturers: their own impact assessment presented strong evidence that further skewing the balance of power to massively profitable multinationals would put up prices and harm the consumer, with no evidence that any of the extra money earned by these industrial giants would be fed back to farmers.”

The EuroCommerce briefing note argues that:

 the proposal is based on Article 43(2) TFEU, and therefore needs to demonstrate a direct benefit to farmers and/or consumers. A transaction involving an industrial food product sold by a large manufacturer to a retailer ceased long ago being a transaction involving a farmer and thus cannot be covered under an agriculture legal base.

 the directive gives rights to suppliers, but none to buyers. In adding to the power and profits of the largest players in the supply chain, but giving no rights to buyers who are smaller than them, the important rights of equality and non-discrimination laid down in European law are being cast aside.

The full text of the statement is attached overleaf, along with facts and figures underlying the arguments in the statement, setting out the reality of how the food supply chain works.

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Contact: Kinga Timaru -Kast - +32 2 894 64 83 - [email protected] Neil McMillan - +32 2 737 05 99 - [email protected] www.eurocommerce.eu •••••••••••••••• ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• EuroCommerce is the principal European organisation representing the retail and wholesale sector. It embraces national associations in 31 countries and 5.4 million companies, both leading multinational retailers such as Carrefour, Ikea, Metro and Tesco, and many small family operations. Retail and wholesale provide a link between producers and 500 million European consumers over a billion times a day. It generates 1 in 7 jobs, providing a varied career for 29 million Europeans, many of them young people. It also supports millions of further jobs throughout the supply chain, from small local suppliers to international businesses. EuroCommerce is the recognised European social partner for the retail and wholesale sector.

Briefing 10 September 2018

Fairness for farmers and consumers – not profit for multinationals

The SCA and Agriculture Council will be asked over the coming weeks to decide on a set of amendments being rushed through the EP, the most fundamental of which, is to give large manufacturers, operating on a global scale, the same protection as farmers against practices of buyers.

The purpose of the Commission proposal is to support farmers and small manufacturers: their own impact assessment presented strong evidence that going beyond this would put up prices and harm the consumer, with no evidence that any of the extra money earned by the multinationals would get back to farmers.

The main argument put forward for extending the scope to large suppliers is that the directive should establish "fairness" throughout the supply chain, with no concern for whether this is legally possible or economically desirable.

Yet this directive establishes rights in only one direction - protection of suppliers but none for the people who buy from them. What happens if large multinational manufacturers are covered? Here are a few facts and questions:

 large food companies operate across the world; they have a market capitalization up to ten times even the largest European retailers. They dominate market segments of must-have products that retailers cannot afford not to have on their shelves. Even the biggest retailers make up no more that 2-3% of their global turnover. Who needs protection against whom?  on top of this, large multinational manufacturers fragment the single market by forcing retailers to purchase their products domestically, enabling them to maximise their profits at the expense of consumers;  these brands frequently seek to impose unilateral and unjustified price rises on retailers with the often-executed threat of stopping or disrupting deliveries; they force tying of products taking shelf space away from more competitive and innovative SMEs; restrict access to range in certain countries; etc. They are on record as promising their shareholders to squeeze their suppliers and distributors to raise their net profits. Is a large retailer asking for a better price - from a large manufacturer acting unfairly, or working on behalf of consumers?  large brands typically enjoy net margins (EBIT) of 15-30%; retailers on average 1-3%. If manufacturers impose a large price rise, retailers have to pass it on to consumers. Who is skimming off the lion's share of profits from suppliers and consumers?  their products are highly processed and far away from commodities produced by farmers. The price the manufacturers charge retailers, and what they (or the traders they use), pay the farmer, bear little relationship to each other. Who gains from skewing the negotiating power even more towards manufacturers to impose higher prices on consumers - the farmer or their shareholders?  large manufacturers use sophisticated financial instruments to manage risks linked to commodity price volatility, maximise profit and mitigate losses and are able to buy on the world market. What is their incentives to pass on the extra benefit to EU farmers?

The proposal is based on Article 43(2) TFEU, and what the large brands want has been clearly stated both by the Commission and the Council Legal Service as not possible under that legal base - a transaction involving an industrial food product sold to a retailer ceased long ago being a transaction with a farmer.

The directive gives rights to suppliers, but none to buyers. In protecting the largest players in the supply chain, but giving no rights to buyers who are actually smaller than them, the important rights of equality and non-discrimination laid down in European law are cast aside.

•••••••••••••••• ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• www.eurocommerce.eu

Extending the scope to relations between all suppliers and large buyers is an opportunistic attempt by large brands to hide behind the problems of small farmers to gain an even bigger slice of the cake for their international shareholders at the expense of Europe's consumers. European families (1 in 4 are living in poverty) depend on quality food at reasonable prices - an objective of the CAP rather neglected in this whole discussion.

Calls for yet more intrusive measures covering the whole supply chain and laying down a wide- reaching definition of UTPs will undermine subsidiarity and the legislation 20 member states have designed to suit their national situation. It will also impose heavy obligations on public authorities in the member states who consider that their systems work well without such intervention.

In the light of this, we call on member state representatives to maintain the balance the Commission has sought in their proposal.

Contact: Christel Delberghe - +32 2 737 05 91 - [email protected] Transparency Register ID: 84973761187-60

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2 Briefing 10 September 2018

Agri-food supply chain – key figures

Distribution of added value in the EU food supply chain

Commission figures (see chart below) show that retailers and wholesalers make up together about 32% of value added in the food supply chain, while farmers make up about 25% and processors about 30%. Retailers on their own make up less than 13% of total value added in the food supply chain, rather than the 50% sometimes cited.

Added value at other levels in the chain has no impact on the level of added value generated at farm level and cannot be used as a measure of possible bargaining power or concentration at any level in the chain1. The increased added value at processing and distribution and food service level rather reflects increased processing taking place at other levels in the chain reflecting consumer demand for more convenience (e.g. ready meals, etc.). Absolute values show that, over the same period, added value at farm level has actually slightly increased (by about 5%).

Distribution of gross value added per food supply supply stage in the EU, %

100 90 17.3 17.3 16.9 17.6 18.6 80 70 31.2 31.3 30.9 31.2 31.9 60 50 40 26.0 25.9 26.1 26.2 26.1 30 20 10 25.5 25.5 26.1 24.9 23.4 0 2011 2012 2013 2014 2015e

Food services Food retail and wholesale Food processing Agriculture

Source: DG AGRI, 2017

1 See Alan Matthews’ article “Farmers’ share of food chain value added” http://capreform.eu/farmers-share-of- food-chain-value-added/

Concentration is relatively low in retail and can be high in manufacturing

The Commission, in an in-depth review of the retail sector in 20142, identified that, in most Member States, concentration levels at retail level was low or moderate in most EU Member States: “modern retailers have expanded and increased their influence in most EU member states, but the situation remains heterogeneous across the different member states (…). In comparison to other sectors, retail concentration in the market for total edible grocery (including all types of shops) is relatively low”.

An analysis of supplier concentration shows that suppliers may strongly dominate certain product categories. For instance, suppliers’ market share in a large country like France further demonstrate market dominance in a number of product categories:

Water Soft Drinks Beers Nestlé 32.70% Coca Cola 51.40% Heineken 37.10% Danone 26.20% Suntory Or-Schw 20.30% Carlsberg 30.10% Alma 22.60% Retailer Brand 9.80% Anheuse 14.60% Retailer Brands 13% Pepsico 6.90% Retailer Brands 4.90% Tea Herbal tea Chocolate powder Unilever Lipton 41.20% Unilever 33.10% Nestlé 41.80% ABF Twinings 25.60% ABF 16.40% Mondelez 25.90% Retailer Brands 8.70% Retailer Brands 15.60% Retailer Brands 13% Roasted coffee Coffee pads Soluble coffee Mondelez 45.90% Douwe Egberts 35.90% Nestlé 59.10% Retailer Brands 19.70% Mondelez 29.70% Mondelez 18.10% Douwe Egberts 12.90% Nestlé 15.50% Retailer Brands 18.10% Retailer Brands 11.60% Source: Retailer Brands: serving consumers, SMEs and innovation - April 2016

In Austria, one supplier has 92% of the market for chewing gum; one has 90% of the market for sugar; one has 90% of the market for margarine; one has 82% of the market for carbonated soft drinks. (Source: Nielsen).

In Spain, the market leader for potato chips holds 81% of the market; soft drinks (86%); razor blades (93%); children’s juices (79%); bitter refreshments (78%); milk powder (74%). (La cadena agro- alimentaria en Espana - 2012).

In countries like Netherlands, Denmark or Finland, one dairy cooperative holds more than 80% market share in each of these markets.

Commission figures show that the top three suppliers may dominate certain product categories in several countries - Market share of the top three suppliers per product category:

2 http://ec.europa.eu/competition/sectors/agriculture/retail_study_report_en.pdf

ROM FR 72% 76% IT FIN SPA CZ 71% 81% 74% 74%

Cereals Coffee

DE 91% FIN 77% FIN ROM ROM DE 81% 90% 80% 75%

Baby Yogurt food

Source: DG COMP study on modern retail, based on Euromonitor Passport, EY Analysis, 2012 data

Comparing net margins shows that manufacturing remains more profitable

Retailers’ profit margins are on average between 1 to 3%. According to Deloitte figures, net profit margins for the top 250 global players would be on average 2.4% in the fast moving consumer goods segment.

Global manufacturers’ profit margins tend to be between 15–30% and their market capitalisation is higher:

Manufacturers Operating margin Market Number of EBIT (bn Company (EBIT/revenues, Capitalisation employees EUR) %)* (bn EUR) Nestle 13.2 16.5 201 323,000* Procter and Gamble 13.5 15.7 190 95,000* Unilever Group 8.9 16.5 128 161,000* Coca-Cola 6.6 21.2 164 61,800*** Anheuser-Busch InBev 18.9 33.5 184 182,915* Diageo 4.1 29.5 60 30,400* Mondelez 3.1 13.5 51 83,000*** Pepsi Co 9.5 17.0 137 263,000* Kraft Heinz 6 25.8 67 39,000*** Danone 1.6 13.0 44 104,843* Heineken 3.8 17.2 50 80,425* Altria Group 8.5 37.4 106 8,300* Sab Miller 5.1 29.2 63 70,000* Kellogg 1.7 15.1 21 33,000*** Simple average 21.5

*=Source: Annual Report **= Source: company website ***=Company Report to SEC

Retailers (grocery retailers) Operating margin Market Number of EBIT (bn Company (EBIT/revenues, Capitalisation employees EUR) %)* (bn EUR) 440,658* Tesco PLC 1.46 2.6 28.7 Carrefour 2.00 2.5 14.0 304,151* REWE Group 1.64 2.8 n/a 330,000** Auchan Holding SA 0.90 1.7 n/a 345,396* Ahold Delhaize 2.50 3.9 23.0 370,000* Mercadona 0.75 3.3 n/a 84,000* Jeronimo Martins 0.59 3.6 10.2 96,233* Sainsbury 0.73 2.4 10.5 181,900* Casino 1.03 2.9 5.6 226,606* Metro Group 0.85 2.3 4.0 155,082* Simple average 2.8

*=Source: Annual Report **= Source: company website

Retail and consumers

 On average, a large supermarket offers up to 50,000 products on a daily basis and hypermarkets even more. Retailers are entirely dependent on manufacturers of must-have products, and the balance of power is firmly in favour of the latter: even the largest retailers in Europe only represent a very small percentage of an individual global manufacturer’s total turnover (source: company information).

 Consumers visit 3-4 supermarkets regularly; while price is still the most important factor, others like location, quality, product availability and store hygiene influence consumer choice; in Germany, about one-third of customers switch to a different retailer if a specific brand is unavailable. (Source: IfH/BBE study for HDE/ Nielsen, 2009).

 Only 50% of new product introductions will remain on shelves after 6 months; 75% will fail after one year; 5-10% of new product will remain on shelves after 2 years (source: companies, Gfk, Nielsen);

 On average, 70-80% of foods sold in supermarkets are sourced within the Member State concerned (source: national federations). In Italy, more than 80% of food products are sourced local (88% for cheese and 80% for meat). The milk market

According to European Commission figures, in 2016, 16% of the milk produced in Europe ends up on retail shelves as drinking milk; the majority is processed as cheese (37%), butter (19%) and cream (10%), and (skimmed and whole) milk powder (10%).

In Germany: 37% milk produced in Germany goes on retailers’ shelves. Otherwise, 48% of milk is exported, 15% sold as an ingredient, 17% becomes drinking milk, 22% is milk powder and 47% becomes cheese. (Source: HDE).

According to European Commission figures, milk retail sales in Europe decreased by 5kg equivalent per capita between 2003 and 2016; substitute drinks are increasing in double figures; organic milk retail sales are increasing, while conventional milk sales are decreasing or remaining stable in most EU countries (Sources: Milk market observatory, Euromonitor, European Commission).

Productivity at farm level is higher in countries where farmers are better organised

Source: own calculations based on Eurostat

Key facts and figures on the Supply Chain Initiative

 Registrations: 390 companies from across the entire EU have already registered under the SCI. Taking into account the subsidiaries of international groups, 1.181 operating companies are signed up. 2 thirds of registered entities are SMEs. National dialogue platforms have been established in BE, DE, NLs, SK, FIN, CZ, PT and one is being established currently in EE.

 In 2017, the SCI strengthened its dispute resolution mechanism, appointed an independent chair, Michael Hutchings, and reviewed the rules of governance and operations in accordance.

 Key figures from the annual survey show that satisfaction with the SCI remains high among participants (70% of respondents reported a good level of satisfaction and 42% a very high level). 9 out of 10 companies have trained their staff members; over 37,000 people have been trained across Europe; 50% of SMEs have trained more than 10 persons; one in three large companies have trained more than 50. 84% of businesses have communicated their registration to their trading partners. In 2017, 10 companies reported having received 39 complaints; a large majority of these were solved within 4 months. Companies considered that the SCI helped them improve internal processes (32%), and improve their daily communication (28%). (Source: SCI annual report, 2018)

 Other activities include EU guidance on the principle of confidentiality, and an annual workshop. A lot of activity is reported at national level through national guidance and initiatives.

Mapping of UTP laws

In its report on unfair trading practices of 2016, the Commission provided an analysis of the various national frameworks and concluded that “given the positive developments in parts of the food chain and since different approaches could address UTPs effectively, the Commission does not see the added value of a specific harmonised regulatory approach at EU level at this stage”.

A more recent analysis shows that 20 EU countries have some form of legislation, some having adopted specific provisions, such as France, the UK, Romania, Hungary, Czech Republic, Italy or Spain; others have stretched existing provisions to the food supply chain (e.g. Germany, Austria, Finland); other countries have a voluntary scheme (e.g. Belgium, Netherlands, Estonia) or no specific scheme (e.g. Sweden, Malta, Luxembourg and Denmark). (Source: JRC report on unfair trading practices)

In a number of countries (e.g. the Czech Republic, Hungary, Slovakia, Romania, Poland or Bulgaria) retailers suffer from discriminatory and disproportionate legislation or very restrictive or rigid legislation making it difficult to negotiate with suppliers. This has harmed both retailers and suppliers and has not provided incentives to become more innovative or competitive.

Contact: Christel Delberghe - +32 2 737 05 91 - [email protected] Transparency Register ID: 84973761187-60