03.12.2021

Is Ukrainian business able to overcome non-competitive conditions in the food trade market?

The non-market conditions of cooperation, which have developed due to significant delays in payments for products supplied by manufacturers, have been troubling Ukrainian business for years. Representatives of the Ministry of Agrarian Policy and Food of Ukraine, representatives of think tanks, manufacturers of milk, bakery products, agricultural products, beverages, meat products, seafood, etc. discussed at the round table how to organize work with retail chains more effectively.
The participants noted that there is a situation in Ukraine when in certain regions there are evidences of the prevailing market power of certain retail chains. Taking advantage of this situation, they impose unfavorable terms of cooperation on the agricultural manufacturer or processor. The proportion of retail chains in the total sales of food products in Ukraine as of July 1, 2021, is over 70%.
Such retail chains unreasonably postpone payments for the delivered products. Often the manufacturer has to wait for money for their goods for 90 or even 120 days (and in fact the payment may come to the manufacturer even for 160 days), which leads to a constant shortage of working capital. For retail chains, in turn, these funds become interest-free loans, which they use for the time they need.
As a result, Ukrainian manufacturers, who create jobs and produce products with significant added value, become uncompetitive in relation to foreign suppliers of similar products, which have cheaper financial resources. The market is being gradually monopolized, as each new supermarket forces the small shops around it to close.
This minimizes the profits of agricultural manufacturers and processors, freezes their working capital - this reduces opportunities for manufacture development. According to market experts, about $5 billion (if we take into account the excess of 30-day delay) is laundered working capital from all manufacturers, and they are used interest-free retail chains. Also, some networks are disappearing with significant financial resources of manufacturers, there are dozens of such cases over the past 10 years.
At the same time, European manufacturers have cheaper loans, receive significant subsidies and benefits, and often  even prepay from our retail chains. Taking in account financial resources for Ukrainian business and delays in networks - the Ukrainian manufacturer, only because of this, loses 8-10% in the price competition. Such conditions eliminate the possibility of development for Ukrainian manufacturers, do not promote payment discipline and do not protect the competitive environment.
As a result, market distortion harms all citizens of Ukraine - it leads to higher product prices, reduces the number of jobs in Ukraine, worsens the trade balance and has an overall negative impact on the country's economy.
This problem has been resolved in the EU. For years, they have a Directive of the European Parliament and of the European Council on unfair commercial practices between agricultural and food enterprises. It prohibits actions that may be interpreted as unfair in the relationship between buyers and suppliers.
In Ukraine, in order to improve the state of protection against unfair competition, establish a fair distribution of added value in the producer-processor-consumer chain, ensure food security, it is necessary to amend the legislation, aimed at implementing EU Directive 2019/633

Following the round table, the participants formed a set of proposals, the implementation of which will lead to solving these problems and resolving the situation:
1) Legislatively limit the deadlines for settlements for the purchase of goods from food suppliers, provide for liability for violation of these rules and effective control by the State Tax Service and the Antimonopoly Committee of Ukraine.
2) Determine that advertising, marketing, logistics services, services for the preparation, processing, packaging of food, other services related to the food sale to the final consumer - may be provided by a business entity only on the basis of a separate contract with a food supplier on trade cooperation, on a voluntary basis.
3) Determine the list of conditions that should be prohibited in the sale (supply) contract
4) Provide that the trade entity that owns the retail chain bears subsidiary liability for the obligations of trade entities related to the relationship of control within the meaning of Article 1 of the Law of Ukraine "On Protection of Economic Competition".
5) Provide additional functions for the Antimonopoly Committee of Ukraine to be able to monitor breaches of contracts between manufacturers and retailers and apply penalties to violators.
 

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