French supermarkets and their suppliers had until today (15 February) to finalise their pricing structures for the coming year. To describe the current standoff as an explosive logjam barely begins to describe the state of affairs, as Peter Crosskey reports.

The French government is trying to tackle retrospective discounting head-on by progressively capping year-end refunds based on sales volumes during the previous calendar year. The French tax year and the financial years of many manufacturing businesses are calendar years, so this is the season when fresh pricing is negotiated.

Retail pricing, always a sensitive issue, has been on the political agenda since presidential hopeful, Nicolas Sarkozy, was finance minister in summer 2004. At that time, retail inflation hit the headlines and the government made a high profile pledge to ensure that prices of core products would come down by 2%.

Legislators rapidly decided that an earlier attempt to impose some sort of order in the retail wrestling ring, the 1996 Galland law, needed overhauling. While wanting to retain the legal ban on selling goods below cost, they needed a reliable way of identifying a true cost price.

Year-end discounting both upsets this calculation and makes a market increasingly opaque as retailers flex their buying muscle in private. With eight years of discreetly collected and aggregated retrospective discounting data at their disposal, the 2004 lawmakers were also in a position to reveal that the sums involved had doubled.

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The government drew the conclusion at the time that: “these [year-end discounts] alone account for more than half the growth in retail margins”. The overall picture is distorted by high margin non-food sales on goods such as cosmetics and toiletries.

Somehow, policymakers also drew the conclusion that these payments represented overpricing by the suppliers. This money, they imagined could find its way back to consumers in the form of pegged, if not lower, retail prices.

The result is an official ready-made excuse, as if any were needed, for retailers to refuse to entertain any request for increased prices, genuine or not. The legislators’ fondly imagined notion that retailers would start to compete on their relative operational efficiencies rather than their arm-wrestling skills with suppliers is similarly ill-founded.

Were it that simple or even remotely likely to happen, no one would mind. In France, as elsewhere, there is a body of written terms and conditions. However enough concessions are wrung out of suppliers verbally to keep retailers’ margins in rude health.

In 2005, there were tales of discounts as high as 30% being applied, while last year a ceiling of 20% was imposed for the first time. The 2007 limit is 15%.

“The trouble is that retailers still only think in annual volumes. The idea of competing in other ways or even between themselves does not even enter their minds,” explained an industry observer.

If the legislators had transnational brand owners in their sights as they framed the current regulations, these large, lumbering targets will not take the brunt of the impact when the trigger is pulled. The aim was to enforce lower retail prices for core household products, primarily high profile brands: the result is additional trading standards monitoring.

The current government strategy is to encourage brand owners to standardise their prices to all retailers, regardless of sales volumes. However, the assumption that every supplier can charge every retailer the same price for every product is implausible, especially in the case of minutely differentiated own-label ranges.

In 2004 French government data recorded that brands belonging to French small to medium firms (SMEs) accounted for no more than 18% of retailer listings, compared to large corporate brands’ 60% share. Private label sales have been growing steadily, however: in 2004, they represented around a fifth of retailers’ sales.

Private label has long been a way of life for SMEs – they supply some 90% of French own-label listings, with French SMEs supplying 70% of the total figure. Keen to support the home team, the French government has been looking for ways to curb the power of large transnational brands.

Suppliers in all sectors and across France, if not Europe, find themselves forced to operate multi-layered accounting: after the official gross figure, there is a pre-tax total, a result net of tax, then net of year-end discounting. Referred to as “nette, nette, nette” in France, this figure is a closely guarded secret and gives a strong indication of a firm’s chances of staying in business for the coming year.