What is the Law on Trade needed for?

23.12.2009

Andrey Goltsblat, Managing Partner,Goltsblat BLP

One of the factors compelling the state to regulate retail trade relations is the behaviour of the retail network giants. They can and often do pursue a strict range policy with respect to suppliers, attempting to apply screening methods to limit their numbers. Should the legislation influence this process?

In many developed countries, no specific laws on retail trade exist at all but, as a rule, a number of different special laws are in effect. They support competition in trade, classify trade enterprises, establish rules governing their operations, and so on. Within Europe, there are such EU rules as the Community competition rules to vertical Competition Policy. Self-regulation acts are also in place. In Britain, for instance, a Voluntary Code of Conduct towards suppliers has been in effect for supermarkets since 2002. Active discussions are now under way for updating it and making it more stringent. Yet there is no special law on trade.

In France, on the contrary, since 2004 there has bee a Trade Code that, among other things, regulates relations between manufacturers and trade networks. In addition, on 4 August 2008, a Law on modernisation of the economy was passed, being designed, in part, to protect competition in the trade sphere. It also establishes a number of restrictions on mergers in this area, essentially in the form of limits to domination. For instance, a merger between two or more trade enterprises must be reviewed by the regulating authority if the global turnover of the merging companies reaches €75 million or if the turnover of these companies on France’s domestic market reaches €15 million. The Code establishes a number of special restrictions on trade firms holding dominant positions. In particular, such firms have to refrain from making “loyalty payments”, stipulating some goods as a condition for others, and substantial overpricing. France has imposed probably the strictest measures against abuse of dominant position in retail trade and the authors of the Russian law seem to have been inspired precisely by the French example. Yet account should be taken of the way court practice in France in fact greatly mitigates the effect of the legislation. For instance, in reality, judges may satisfy a claimant’s claim against a dominant trading company if it can prove that there is no alternative way of entering the market. Everything is quite flexible.

The foreign legislator makes more frequent use of notification for organising trade, but also, sometimes, a permission procedure. A municipality may, for instance, approve or not approve construction of a gigantic supermarket. And, it must be said, city authorities have sometimes introduced restrictions on international trade networks in the form of maximum retail area. This is the case in some US cities for trade centres selling foodstuffs. Has this benefited consumers? Hardly. Imagine the city authorities limiting Auchan stores in favour of Perekryostok.

The law on trade in Russia is largely a result precisely of the stand-off between suppliers and giant retail networks (retailers), so the discussions focuses on rules concerning a variety of restrictions on retail networks in the sphere of civil law and anti-trust regulation of trade relations. What are these restrictions? For example, trading giants are now required to make public their conditions for selecting suppliers (on their websites or at the request of potential suppliers). Another requirement is that the remuneration for fulfilling the terms of the contract cannot exceed 10%. It is also prohibited to establish discriminatory conditions in relation to suppliers or to impose a number of bonus-related provisions on them. And so on.

What does all this mean? That, if the selection conditions are not observed, the retailer may be accused of establishing discriminatory conditions.

At the same time, the retailer has to rack its brains to avoid having to conclude supply agreements with a multitude of suppliers all meeting the set requirements. After all, ultimately a choice has to be made between them. In principle, the Law proposes that the retailer, when making this choice, consider a series of services on the part of the supplier: supply volume and steadiness, the quality of the goods and logistics conditions. And, in practice, the majority of standard supply contracts concluded by major retail networks abide by these rules. The only exception consists in the commercial conditions, which traditionally include the length of payment deferment, bonuses (remunerations) and various services. So I believe that, apart from these supplier “selection criteria”, supply contracts will change little.

One more important and controversial innovation is that the Law imposes a limit on a retailer’s development when the trade network reaches 25% of the monetary volume of all food products sold during the previous financial year within constituent entities of the Russian Federation. What exactly is the problem? A number of questions arise here.

First, does this rule mean that a network selling over 25% of the volume of all food products on the market will also be restricted in purchasing (leasing) retail area for selling non-food products? For instance, the Auchan Sad space selling garden products?

Second, will not such a rule impede development of civilised retail trade on individual territories? Let us say, if a network selling more than 25% at the level of the constituent entity of the Russian Federation is unable to open new stores in individual, smaller administrative-territorial units? After all, the consumers are interested not in the store sign but reasonable prices and the range of goods offered.

This rule, supposedly called on to combat individual trade networks monopolizing the market, seems to me to be very controversial, too.

In addition, while promising to protect all categories of supplier, the Law “forgets” to regulate certain major issues. For instance, for small and medium-sized suppliers, the question of logistics services remains open. The Law includes no extra requirements in this respect. Yet, in practice, payments to trade networks for logistics services exceed all other payments. This might apply, for example, to payment for so-called cross-docking, when the supplier delivers goods to a distribution centre and pays for storage of the goods their and their subsequent delivery to the actual network stores. At the same time, the goods are accepted and ownership of them transferred to the retailer only in the stores themselves, not at the distribution centre.

To sum up: there can be no doubt that the Law is needed but, in my opinion, it is in need of more work, taking the opinions of both suppliers and retailers into consideration. It seems as if they were not listened to properly. In general, there is still a lot here that needs thinking about.

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