Retailers put a higher markup on local goods / Article

IN SHORT:

• KP has completed research on the market of egg, fish, milk, meat, grain and bread products.
• Retailers apply a higher markup to Latvian chicken and fish than to imported goods.
• Certain products are also priced cheaper than imported goods.
• Retailers’ private label goods are significantly cheaper, although they are no different from independent brand goods.
• Gaps have been identified in cooperation agreements between buyers and suppliers.

KP Chairman Juris Gaiķis stated that the obtained data have been discussed both with the responsible institutions of the industry, as well as with producers and traders: “We hope that they will serve policymakers as a reliable source for data-based decision-making and food supply chain participants for honest cooperation.”

The markup for Latvian chicken is 196% higher

During market monitoring, KP found that doctor’s sausage, fresh chicken and fresh fish produced in Latvia are charged an average higher markup at the retail stage than equivalent goods produced outside of Latvia. For example, doktordesa produced in Latvia was on average 16% more expensive than doktordesa produced outside of Latvia.

On the other hand, the markup applied to local fresh chicken at the stage of the retail supply chain has been on average 196% higher compared to imported chicken.

Also, the KP study concluded that retailers priced certain local meat, egg and fish products cheaper on average than products produced outside of Latvia. Namely, during the considered period, fresh pork produced in Latvia was priced on average 1.64% cheaper than that produced outside of Latvia, while in the period from January to April 2022 and from April to May 2023, fresh pork produced in Latvia was priced 140% more expensive than produced outside of Latvia.

However, the observed differences in the mark-up of imported and local meat, egg and fish products are not as significant as KP found in previous studies for dairy products, bread and grain products.

Retailers’ own brand goods are significantly cheaper

Purchase prices of private label products – fresh pork, doctor sausage, fresh chicken, eggs, fresh fish – produced by the manufacturer to the retailer’s order as a chain private brand product,

are significantly lower than equivalent purchase prices of goods of independent brands.

It is not uncommon for a supplier to produce both the retailer’s private label products and, at the same time, the manufacturer’s independent brand products, which are identical in composition.

The production costs of such goods are equivalent, but their purchase prices differ significantly. It is at the production stage that the product forms all production, packaging and other costs, whereas at the retail stage, sales are ensured, where the costs associated with it are formed. However, KP found that an increasing proportion of the markup is formed precisely at the retail stage.

Consequently, retailers, taking into account their influence on the market, must be especially careful to treat their suppliers accordingly in situations where the same supplier produces goods of its own independent brand as well as own-brand goods, which are also identical in composition. for fair trade practices.

Gaps are identified in cooperation agreements with suppliers

In the final part of KP market monitoring, all available contracts concluded between buyers of egg, fish, milk, meat, grain and bread products and their suppliers were analyzed.

Analyzing the contracts submitted by buyers and suppliers, the KP found that in some of them, the buyers erroneously indicated the criteria for the settlement deadline for agricultural and food products.

Therefore, KP invites buyers to set the date of delivery of goods and not the date of issuance or receipt of accompanying documents as the starting reference point for the payment term of agricultural and food products in the terms of contracts with suppliers.

KP established that buyers have the right to unilateral amendments to contracts when agricultural and food products of inadequate quality are delivered, when suppliers do not adequately fulfill their obligations and cannot prevent violations of contract provisions, as well as buyers have the right to unilaterally amend the price lists of marketing or marketing services.

KP calls on retailers to carefully evaluate the information provided to suppliers on procurement forecasts regarding new and unknown agricultural and food products in order to avoid cases of return of agricultural and food products and thus not to transfer economic risks to the supplier.

In certain contracts, the KP found that, compared to suppliers of agricultural and food products registered outside Latvia,

In the contracts of suppliers registered in Latvia, significantly larger contractual penalties are provided for non-compliance with quality and safety requirements and for violations of commercial secret regulations.

KP calls on retailers to review the terms and amount of contractual penalties for non-compliance with quality and safety requirements and for violations of trade secret rules set out in contracts with suppliers of agricultural and food products registered in Latvia, in order to balance the economic risks between suppliers of agricultural and food products registered in Latvia and outside of Latvia. Also, the KP reminds that in connection with the assessment of the proportionality of the amount of the contractual penalty in the daily cooperation of the market participants, they can use the self-assessment tool developed by the KP for buyers to evaluate fair trade practices and apply justified contractual penalties.

CONTEXT:

During 2022, food prices increased in all major food groups. Bread and cereals, meat and its products, dairy products, vegetables and eggs had the most significant impact on the increase in the average price level.

Competition supervisors started monitoring several markets last year in order to analyze retail conditions, including explaining the actual reasons for price stability.