The Competition Council (hereinafter – the CC) examines in its market surveillance the cooperation between traders and suppliers during promotional activities carried out by market players to attract consumers.
Marketing promotions to attract consumers
In view of the significantly increased prices in the food sector, various promotions and even price-fixing measures are offered in the fight for consumers. Consumer shopping habits have also changed in line with the price increases, with more thoughtful purchases, shopping by list, changes in attitudes towards retailers’ private labels and, of course, the growing importance of promotions. The CC’s study on shopping habits for everyday consumer goods found that the majority of people in Latvia (59%) have promotional products in their shopping basket. More often, promotional goods are chosen by survey respondents who spend more than half of their monthly household budget on food and essentials, as well as by respondents who shop most often at Lidl or Maxima shops.
Various price reduction campaigns are organised on a daily basis. Considering that there are risks in the organization of promotions for retailers to unfairly use their power in their relations with agricultural and food suppliers, the CC carried out market surveillance for the period from 2021 to July 2023.
The promotional price effectively becomes regular price
In its market surveillance, the CC found that promotions are organised so regularly that the promotional price often becomes the standard price of the product. In particular, goods with a long shelf life, i.e. 80–90% of the total volume of goods, are frequently purchased from suppliers at the promotional price. Purchasers stock up on these goods and sell them after the promotional period at the regular price, generating additional income. Simultaneously, the CC’s market surveillance revealed that not all promoted goods reached final consumers at the promotional price.
Furthermore, considering the substantial volume of food wastage, the CC encourages retailers to offer goods expiring within the next 24 hours at a significant discount on a separate stand. Presently, retailers sell goods with a very short remaining shelf life at a 40–50% discount. Nonetheless, the CC posits that, given the scale of food product disposal (in 2022, retailers disposed of more than EUR 11 million worth of products excluding VAT), end consumers could derive greater benefits if such items were discounted even more substantially (up to 90%).
Realisation of goods after the promotional period
During its market surveillance, the CC identified instances in which suppliers and commercial purchasers failed to establish a mutual agreement in their cooperation documents on the post-promotion treatment of goods acquired at the promotional price but not sold during the promotion period. Instead, the default assumption is that these goods can be traded at the regular price after the promotion concludes. The CC deems this practice incompatible with the Prohibition of Unfair Trading Practices Law.
Frequently, during negotiations involving standard ‘promotion forms’, purchasers incorporate a disclaimer regarding the handling of the goods after the promotion period. It is evident that such a disclaimer in a standard promotion form does not signify a mutually agreed-upon arrangement in good faith between the two parties. Instead, it suggests that the supplier is expected to accept the terms of the promotion while the purchaser unilaterally decides how to dispose of unsold promotion goods. The CC’s market surveillance concluded that, in 90–95% of cases, certain market participants prearrange with the supplier, before the promotion, that any surplus will be sold at the regular price after the promotional period.
In the CC’s view, it is impermissible for the promotional price to effectively become the regular delivery price unless there is a mutually agreed-upon written agreement to this effect. Commercial purchasers are obligated to strategize promotions in a manner that ensures the sale of goods within the promotion period. If surpluses occur after the conclusion of the promotional period, they should be sold at a discounted price, or, as stipulated in a written mutual agreement, the difference should be refunded to the supplier, equivalent to the promotional price and the regular price.
Cost of regular promotions effectively makes the basic price of the product more expensive
Suppliers routinely provide various payments to commercial purchasers, such as volume bonuses, logistics bonuses, marketing payments, and penalties. These payments, including marketing fees, contribute to the overall cost of the goods as they are incorporated into the price structure. Consequently, more frequent advertising and marketing activities contribute to an increase in the overall product cost.
The CC’s conclusion is that, in nearly all cases, marketing and advertising services for a sales event are directly funded by the supplier. In reciprocation, the retailer contributes to the overall promotion of the trade, which may include activities such as shaping the public image of the chain, maintaining premises, delivering quality customer service, and organising promotions and campaigns. However, in the view of the CC, the costs of marketing services in organizing a promotion should not automatically be borne by the supplier alone.
Information asymmetries and inaccurate forecasts
The asymmetry of information flows between suppliers and commercial purchasers in organizing sales promotions is evident. In particular, suppliers make their offers on prices and quantities on average five to seven weeks before the start of the promotion, while the commercial purchasers confirm or reject the promotion on average two, sometimes even one week before ordering the goods. Given the specified expiry dates for food products, extended periods of uncertainty are neither reasonable nor fair to suppliers. This uncertainty poses challenges for suppliers in planning their business and introduces financial risks. In the CC’s view, if suppliers face sanctions for non-compliance with the deadlines for organizing trade promotion events, commercial purchaser should be equally subject to sanctions for equivalent breach of the deadlines. Furthermore, the time limits for both parties should be established in accordance with the principles of proportionality and good faith.
When organising promotions in shops, commercial purchasers often provide purchasing forecasts, aiming to offer the supplier indicative information on the expected order volume. Conversely, when suppliers make forecasts, they share information on available stock. Although these forecasts are considered non-binding and a transaction may be concluded for a volume of goods significantly below or above the forecasted amount, it is typically the supplier who bears the negative consequences of such collaboration, including penalties for non-delivery of goods in a specified volume. In cases where the ordered quantity for a promotion exceeds the forecast, and the supplier has contractually notified the non-delivery of the goods in the specified quantity but is penalised for it, the penalties imposed by the purchaser may be seen as inconsistent with the principles of fair trade. At the same time, commercial purchasers are not sanctioned for making inaccurate forecasts, despite the frequent occurrence of such inaccuracies in practice.
In order to mitigate the risks, the CC encourages traders and suppliers to establish a mutually agreed-upon quantity of promotional products, creating a binding commitment for both parties and facilitating transparent business planning. Additionally, market participants could explore the adoption of more convenient digital solutions over time. This may involve the implementation of dedicated digital platforms where suppliers and commercial purchasers can effectively coordinate the organization of the promotions.
Retailers should act in compliance with the principles of good faith and fair dealing
The CC urges suppliers, especially those with less experience, to carefully consider the formulation and approval of cooperation terms in writing, avoiding agreements that could lead to adverse consequences in the near future.
Retailers are advised to refrain from exerting undue pressure on all suppliers, recognizing the potential imbalance in their positions and the dependence of suppliers on the retailer’s decisions. Both retailers and commercial purchasers should adhere to the principles of good faith and fair dealing in their daily interactions, irrespective of the turnover provided by a particular business partner or its potential future contribution.
Following the conclusion of market surveillance, the CC sent invitations to 22 market participants to encouraging them to adopt the suggestions for future trading practices.
INFORMATION
The market surveillance covered the period from 2021–2022, as well as June to July 2023. Information was collected from 40 suppliers and 30 commercial purchasers, including retailers.
Additionally, a consumer survey was conducted to understand consumers’ shopping habits and the impact of traders’ organized promotions. The survey was carried out by the market and social research centre “Latvijas Fakti” and surveyed 1215 Latvian residents aged 18 and over who buy food and necessities in person at non-specialised retail outlets.
The market surveillance also gathered information from other EU member States on the regulatory framework for the organisation of promotions and the expiry dates for the sale of agricultural and food products.