Why brand manufacturers take aim at European retail alliances

Brand makers and food retailers are at odds in a yes-or-no debate over whether supermarket alliances lead to lower prices for consumers. “AgeCore, Epic Partners and Coopernic are not buying groups,” says the AIM brand organization. But retailers are not impressed.

on the counterattack

A reminder: in June, a study titled International Retail Buying Groups: A Force for Good? The case of AgeCore/EDEKAillustrated how buying groups lead to lower prices for consumers. The report found that average monthly consumer prices for SKUs in a specific product category negotiated by the AgeCore retail alliance were on average 12% lower than similar SKUs outside AgeCore negotiations. The results appeared to be in line with some previous studies on the impact of shopping mixes and were enthusiastically shared by EuroCommerce, the European retailer advocacy group.

This was, unsurprisingly, against the grain of the brand manufacturers, who are now on the counterattack. The AIM Brand Association (in its entirety ‘Association des Industries de Marque’) caused the study by Professor Marcel Corstjens of the INSEAD business school to be critically reviewed by the economic consultancy firm Compass Lexecon. That counter-study, in a 10-page review, evaluates the study’s methodology and conclusions. Final conclusion: the report is flawed.

Purchasing organization 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 organization that negotiates discounts. In reality, however, AgeCore (like other retail alliances, such as Epic Partners and Coopernic) is an organization that acts as a service provider for international brand manufacturers, negotiating terms for these services as well as domestic sourcing agreements and rates. Consequently, AgeCore cannot have a direct impact on sales prices.

Therefore, AIM constantly calls these retail alliances ‘gatekeeper alliances’: they are not true purchasing organisations, they simply demand a kind of ‘access fee’ that entitles suppliers to negotiate with their members. Only after the brand owner pays that fee and begins negotiating on a national level with the various members of the alliance, there is the acquisition, but not jointly. If brand owners refuse to pay those fees, alliance members retaliate collectively in the form of delisting and boycotts.

According to AIM CEO Michelle Gibbons, these alliances are therefore “smoke and mirrors that harm end consumers by limiting their choices and stifling fair competition by artificially raising supply costs.”

Competition Rules

In the background is the lobbying work at European level, since 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. example. As that review is now significantly delayed, AIM is using this opportunity to push for a more precise definition of what exactly “joint purchase” is.

The intent is clear: with a stricter definition, alliances like AgeCore or Epic Partners could more easily be accused of collusion. It remains to be seen whether the European Commission will listen to the demands of the brand’s manufacturers. 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 for consumers.

bargaining power

According to AIM, many competition officials appear to have insufficient knowledge of how these retail alliances work. They mistakenly believe that access fees are discounts that are credited against national promotional or marketing services and therefore should ultimately lead to lower prices for the consumer. But that’s not how it works, brand makers argue: discounts are negotiated bilaterally with individual retailers. And while gatekeeper alliances like AgeCore, Coopernic and Epic are not transparent about what happens to market access fees, AIM says this money can no longer be spent on innovation, on making the supply chain more efficient, in promotions or in marketing.

Retailers believe they should be entitled to join forces to create a more level playing field when dealing with 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 relative bargaining power in local markets.

For example, Edeka has about a 27% share of sales in Germany. Faced with the collective exclusion of Edeka and other retailers from the Epic alliance, brand owners must carefully consider whether they can afford to resist paying the fees and lose access to a substantial part of European supermarket shelves. “Who has the most to lose if they don’t come to an agreement? The chocolate maker that can’t reach consumers through the shelves of a leading retailer? Or the supermarket that can still sell competitor chocolate bars or even focus sales on their own private label chocolate bars?”

Different business models

AIM also dismisses the argument that brand owners generate much higher margins than food retailers and thus clearly have the upper hand in trading with each other. “You can’t just compare different business models. Manufacturers are running factories across Europe, running production sites, R&D facilities and investing much more in innovation; they take different risks, they have a totally different level of capital employed, and that also leads to different margins,” says Gibbons.

“Retail alliances that actually buy and trade on behalf of their members can offer advantages for smaller retailers and, ultimately, consumers,” adds Gibbons. “But you have to make a distinction between alliances that actually buy together and those that don’t. AgeCore, Epic Partners, and Coopernic are not buying organizations.”

Territorial restrictions

AIM’s distinction between ‘real’ buying groups like Eurelec (of E.Leclerc and Rewe) and ‘superior’ alliances like Epic and Coopernic is artificial, says retail organization EuroCommerce. Both are covered by the same EU joint purchasing rules. “What ‘on top’ alliances do is guarantee manufacturers sales volumes and request a fee in exchange for services such as promotions and marketing efforts. This is a percentage of the list price for each of the markets,” says spokesman Neil McMillan.

The fact that the so-called on-top alliances do not buy themselves can be explained by the phenomenon of territorial supply constraints: international brand manufacturers require retailers to buy nationally and make centralized buying impossible, even if the products in question are normally produced in one or more factories. “Colgate Palmolive markets products throughout Europe, most of which come from a centralized production in Poland. However, you pay a very different price for a tube of toothpaste in Belgium than in Germany, for example.”

triple squeeze

The retail organization also frames the debate in current discussions of price increases: “Over the last nine months, we see that manufacturers’ margins, which were already very high, between 10 and 15%, have grown, while Retailer margins (on food usually 1-3%) have decreased, in some cases even less than 1%. This is because consumers have less to spend as a result of rising energy prices: they go to discount stores more often, they buy cheap private label brands more often, and they generally spend less because they can no longer afford it. This makes it impossible for retailers to pass on to consumers the requested price increases, often of 10% or more, demanded by larger brand manufacturers.

Retailers are caught in a triple squeeze, says McMillan. One: Manufacturers ask for more money than necessary, and retailers know whether or not these demands reflect actual input costs, 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 to finalize its review of horizontal competition rules signals major changes to the rules on joint purchasing.

Will continue, no doubt…

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