French retail chain Carrefour has suffered a major blow in Kenya after the Competition tribunal held that it abused its market power in what is set to be a big relief to more than 700 local suppliers.
The decision comes weeks after the retail giant suffered similar fate in its own home country after it was fined Sh230 million in March by a Paris Commerce Court for unfairly pressing suppliers for discounts during its annual contract negotiations.
The Competition Authority of Kenya (CAK) welcomed the decision noting that it goes further to attend to the persistent problem of abuse of buyer power in the retail sector, which Parliament identified following the collapse of some major players with suppliers' unresolved payments.
"The Authority is of the opinion that this Ruling will go further to provide suppliers in this sector with a credible position to negotiate for better terms with buyers, thereby ensuring continued supply of goods and services to the ultimate benefit of consumers," Ms Priscilla Njako, the Manager, buyer power department at CAK said.
Carrefour has been on the crosshairs of the CAK for the last two years after Orchards Limited, a dairy processer that sells yoghurt, filed a complaint with the competition watchdog, accusing the retailer of abuse of buyer power.
Carrefour went ahead to remove the firm's products from its shelves when the two companies were still negotiating the 2019 contract.
What is worse, the dairy processor was left with a stock of packaging materials that were procured to satisfy Carrefour's standards, and therefore could not be utilised elsewhere.
Carrefour has also been demanding free samples of merchandise from suppliers and proceeds to sell them.
To have products on the retailer's shelves, suppliers are required to pay a rebate as a listing fee or what they also call a support fee of Sh50,000 for every listing of their products.
Then they are required to pay an additional seven to eight percent discount.
To get products into its new branches, suppliers are also required to part with another 10 percent discount upon delivery of their products.
That is not all. Orchards revealed that it was also required to part with an additional discount of 1.25 percent on all annual sales.
In 2018, Carrefour introduced a 'progressive rebate', which was to be calculated from the annual sales or turnover of the supplier.
Carrefour would unilaterally make the deductions of the various rebates from the invoices of the suppliers.
Carrefour also requires suppliers to deploy their own staff to its shops, further transferring a cost that it should take.
Pain for suppliers
What was also causing pain for suppliers was that these discounts are paid on top of the agreed margins per the price list agreed upon, which means that the retailer makes money from both the supplier and the shopper.
Carrefour also refused to accept a new price list from the supplier and on various occasions refused to take full delivery of goods it had ordered.
In cases where goods were nearing expiry, the retailer returns them to the supplier, thereby transferring the full commercial risk to the suppliers.
"There was no provision in the contract allowing this kind of returns and neither had the supplier been pre-warned about such action," the ruling by the competition tribunal reads.
The Competition Authority ruled in February 2020 in favour of the company and ordered the retailer to amend its supply agreements within two months.
It ordered the French retailer to expunge all offending clauses that proved for, lead to or otherwise facilitate abuse of power.
This required the firm to scrap application of listing fees, rebates and requirements on suppliers to post staff to Carrefour hypermarket stores except for circumstances approved by the authority.
It also wanted the retailer to end the practice of transferring the commercial risk by returning deliveries to suppliers as well as stop refusing products ordered except in circumstances approved by CAK.
It also wanted the retailer to refund the rebates deducted from the invoices of the firm, in a decision that opened up the firm to similar actions by other suppliers.
Abused market power
This forced the retailer, through its parent company, Majid Al Futtaim Hypermarkets Limited, to file an appeal at the competition tribunal. But the tribunal, in its ruling dated April 20, 2021, also found that the retailer had abused market power.
"In conclusion, by virtue of the evidence before this tribunal, we are of the considered view that the 1st respondent's (The Competition Authority) finding, that the appellant (Majid Al Futtaim Hypermarkets Limited) abused buyer power based in evidence and the law," the tribunal ruled. The tribunal has now given the retailer 30 days to amend the offending clauses in the contracts.
Buyer power refers to the influence exerted by a business over a weaker trading partner in the upstream market with the intention of securing more favourable terms at the other party's expense and which would not be possible in a competitive market.
The Competition Act does not make it a contravention to possess buyer power, but it is illegal to abuse it where it exists.
Abuse of buyer power exists when a buyer delays payment without justifiable reasons in breach of contractual terms, unilateral termination (or threat of termination) of a commercial agreement without notice as well as a buyer's refusal to receive or return goods without justifiable reasons.
Transfer of costs that should ordinarily be borne by a buyer to its suppliers by imposing a requirement on them to fund the cost of a promotion as well as demanding preferential terms that are unfavourable to suppliers or demanding suppliers limit products sold to competitors is also an abuse of buyer power.