Retail store chain, Carrefour, has received an order to revise all its agreements with about 700 suppliers within a month after a tribunal found it has been exploiting traders. Carrefour will need to remove up to to six items from its supplier contracts that are said to give the store the power to offer ultra-competitive pricing to boost sales and increase market share.
Carrefour was found to be in breach of the law for forcing suppliers to post their own staff at its outlets at the expense of the traders. It was also accused of rejecting goods already delivered.
The order by the Competition Tribunal, which largely affirmed earlier decisions taken by the Competition Authority of Kenya (CAK), sets a major precedent in the retail sector and could be relied on to remove similar trade practices among other players. It also risks upending some longstanding norms in the retail business, with consequences that will also be felt by consumers.
Carrefour has been widely known as the most aggressive in offering discounts on a wide range of goods, suggesting that it could be tapping its rebates reserves to grow sales. Elimination of the offers could therefore see the retailer scale down its price cuts and bring its pricing closer to most of its competitors.
A complaint filed with the regulator by Orchards Limited, a yoghurt processor, established that Carrefour charges its suppliers a series of fees to enjoy access to its shelves besides imposing other terms that transfer commercial risks to its partners. Orchards’ complaint to the CAK revealed that the supermarket operator requires its suppliers to pay a listing fee of Ksh. 50,000 for each product sold in its stores.
“The appellant shall amend all current supply agreements relating to its Carrefour Hypermarkets in Kenya within the next 30 days hereof with a view to expunging all offending provisions, specifically clauses that provide for, lead to or otherwise facilitate abuse of buyer power,” stated the tribunal in the orders issued on April 20.
Buyer power means the ability of a purchaser to extract more favourable terms from a supplier on whom it can also impose significant opportunity costs by, for example, delaying payments.
Thursday, the retail chain came out fighting, promising to take the battle against the competition watchdog and the tribunal to the High Court. “Carrefour has only received the decision of the tribunal this afternoon and intends to appeal it to the High Court,” the retailer said in a statement last evening.
The CAK investigations were prompted by complaints from Orchards, which claimed its contract had been severed because it had failed to meet the tough supply terms. The authority found Carrefour had wronged Orchards and ordered the retail chain to compensate the supplier of yoghurt for unilateral contract termination.
According to the Orchards’ complaint, Carrefour required suppliers to pay a further rebate of 10 percent on the second delivery of supplies to new branches. The charges cost Orchards hundreds of thousands of shillings and Carrefour was ordered by the tribunal to refund the amounts within 30 days.
The retailer will repay the supplier Ksh. 289,482 in form of rebates and Ksh. 130,856 for loss arising from its unilateral termination of the yoghurt processor’s supply agreement in 2019. Carrefour was also fined Ksh. 124,768, calculated as 10% of the gross revenue it recorded from the sale of Orchard’s Cool Fresh brand of yoghurts in 2018. Failure to pay the listing fee attracts a penalty of 7% to 8% of the outstanding amount.
Carrefour becomes the second major retailer to be investigated for abuse of buyer power after Tuskys, which was found to be withholding supplier payments beyond their due date.