Carrefour Supermarket in Kampala, Uganda
Supermarket chain Carrefour has been ordered to revise all its agreements with some 700 suppliers within a month after a tribunal found it has been exploiting traders.
Carrefour, Kenya’s second largest retail chain, will need to expunge up 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.
The clauses include forcing suppliers to pay a non-refundable fee to do business with it and compelling merchants offering the retail chain goods to provide extra rebates or discounts.
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.
Rebates, for instance, are widespread in the global retail industry and represent income from suppliers that can be used to offer discounts to shoppers.
Carrefour has been 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 rebates 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.
“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,” the tribunal said 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.
Suppliers say Carrefour has used the supplier contract to depress their earnings and gain market advantage through competitive pricing.
Since launching its Kenya operations in 2016, the franchise has grown far faster than expected, attracting a strong client base among the country’s expanding middle class even as homegrown competitors like Nakumatt and Uchumi faced strong headwinds, leading to their collapse.
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.
Orchards’ complaint to the CAK revealed that the supermarket operator requires its suppliers to pay a listing fee of Sh50,000 for each product sold in its stores.
Failure to pay the listing fee attracts a penalty of seven percent to eight percent of the outstanding amount.
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 Sh289,482 in form of rebates and Sh130,856 for loss arising from its unilateral termination of the yoghurt processor’s supply agreement in 2019.
Carrefour was also fined Sh124,768, calculated as 10 percent of the gross revenue it recorded from the sale of Orchard’s Cool Fresh brand of yoghurts in 2018.
Orchards filed the complaint on April 26, 2019, sparking a legal fight between the CAK and Carrefour that ended up at the tribunal.
The tribunal has specifically ordered Carrefour to remove listing fees and rebates in the contracts besides unilateral delisting of suppliers.
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.