Carrefour faces CAK wrath over unfair supplier deals

The competition watchdog has fined Carrefour and ordered the French retail giant to review all its supply agreements within 60 days after the supermarket chain was found to be exploiting traders who supply it with goods.

The Competition Authority of Kenya (CAK) also ordered Carrefour, through its franchise holder, Majid al Futtaim’s (MAF), to expunge 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 forcing 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 suppliers. It was also accused of rejecting goods already delivered.

The regulator said that the retail chain has been abusing its buyer power and now risks a financial penalty equivalent to 10 percent of its gross sales, which stood at Sh14 billion in 2018, if it fails to review the “offending provisions”.

The French retail giant has already been fined Sh124,767 for exploiting yoghurt supplier, Orchards Limited, and the fine is equivalent to 10 percent of the sales generated from the dairy products supplied by the firm in 2018.

“All current supply agreements of Majid Al Futtaim Limited relating to its Carrefour Hypermarkets in Kenya be amended forthwith and in any event within 60 days of service of this order to expunge all offending provisions,” CAK Director-General Wang’ombe Kariuki ordered in a ruling seen by the Business Daily.

The retail giant has also been barred from delisting suppliers unilaterally without notice for failure to meet its stringent supply contract, according to the ruling shared by suppliers.

Buyer Power is the ability of a buyer to obtain terms of supply more favourable than a supplier’s ordinary contractual terms.

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 locally grown competitors like Nakumatt and Uchumi faced strong headwinds, leading to their collapse.

Carrefour often offers shoppers refunds if they can find cheaper equivalent items in stores run by Tuskys and Naivas, its local competitors who are respectively first and second in the retail rankings.

The chain has denied abuse of buyer power accusations, saying the contents in its supplier contracts were normal practices in the retail sector.

Supermarket chains in the West normally ask suppliers to make upfront payments, commonly referred to as the pay-to-stay or listing fees. The money is charged upfront to, apparently, gauge a supplier’s seriousness and confidence in their product and also as a form of security in case their product fails to sell.

Local merchants say the rules are potentially detrimental to the retail industry as it could lock out new and small firms that cannot raise the required fee.

CAK investigations were prompted by complaints from Orchards Limited, 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 jams, sauces, canned products and spices for unilateral contract termination.

When setting up shop in Kenya, Carrefour imposed extra rebates on sales made and which begin at 12 percent for whatever amount of sales with a maximum of 13 percent for turnovers of Sh26 million. Locally, suppliers set a recommended retail price for their products and approach retailers. Retailers then calculate how much profit they would want per item and in the end come up with a shelf price that meets the needs of both parties.

Carrefour’s proposal meant that over and above such gains, suppliers were to be paid their dues less this incremental extra rebate with negotiations happening only if sales targets were not met.

The Paris-based retailer was also demanding that suppliers pay at least Sh10,000 for every new item they launch in the market.

This amount was payable for every store where the goods were stocked, a rule that is a potential cash cow for the firm, given the number of new products being produced in the market.

Carrefour had also asked suppliers to commit to employing one merchandising attendant for each of their stores to man particular goods for two hours every day for six days.

Suppliers currently employ attendants to visit normal-sized outlets at least once per week while the bigger outlets get attended to about three times a week.

Besides, Carrefour demanded that suppliers exchange any item that had remained unsold for 45 days with another item of the same value that the retailer would choose.

In addition, suppliers of water, juices and carbonated soft drinks were required to part with Sh50,000 every month to have their products refrigerated in each of the upcoming stores.