EN Official Journal of the European Union C 175/57

Opinion of the European Economic and Social Committee on the ‘Developments in the retail industry and impact on suppliers and consumers’

(2009/C 175/10)

On 27 September 2007, the European Economic and Social Committee, acting under Article 29(2) of its Rules of Procedure, decided to draw up an own-initiative opinion on the

Developments in the retail industry and impact on suppliers and consumers.

The Consultative Commission on Industrial Change, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 18 November 2008. The rapporteur was Ms SHARMA.

At its 449th plenary session, held on 3 and 4 December (meeting of 3 December), the European Economic and Social Committee adopted the following opinion by 136 votes to 21 with 20 abstentions.

1. Conclusions, recommendations and proposals

1.1 High Volume Retail in the Europe plays an important role in term of its financial contribution to the economy, job creation and its diverse offer to consumers. More recently evidence, and allegations, have presented themselves on the impact of this growth. In the context of the Lisbon Strategy, reflecting competitiveness, growth and more and better jobs; this opinion has identified specific areas that should offer greater transparency and due diligence, within the industry as well as protection for retailer, suppliers, employees and consumers.

1.2 The EU Commission: DG Internal Market and DG Enterprise are all currently conducting research studies into HVR developments especially in the areas of margins, the length and stakeholders in the supply chain and the retail industry as a whole. DG Employment will look into the skills capacity requirements of retailing approaching 2020. The Committee offers its support in assisting the Commission wherever possible.

1.3 The Committee makes the following recommendations proposing measures which maintain growth and ensure healthy competition for retailers and suppliers, protect employees and additionally pass on a long-term benefit for consumers, all in consideration of sustainability.

1.4 The EESC will continue to track HVR developments, in particular by analysing developments among large retailers in smaller European countries and in relation to sectors not covered by the current study, such as the household electrics sector.

1.5 Following research commissioned by the EESC (1), it is clear that in Western Europe both in food and clothing, as well as other sectors such as DIY, sports, leisure and culture, there is concentration of HVR. However this is not, in the main, as a result of the impact of mergers, takeovers or acquisitions in the sector. Although large international retailers have emerged in recent years, retailing still remains a sector focused mainly at national level.

1.6 The growth and success of retail is a positive story for the European economy. Many retailers, once SMEs, have become more efficient, competitive, productive and more responsive to customer needs in order to succeed. Private models as well as cooperatives and social economy models have demonstrated growth. Many European businesses are now successful global companies, with new operations being set up in China, the United States, the Far East and Russia. Domestic strength has allowed the most successful firms to export their business models into some of the most challenging retail markets in the world. That has brought great benefits to employees, shareholders and indeed consumers in Europe who benefit through a wider product choice and competitive prices.

1.7 Retail is a dynamic, innovative and competitive sector that consistent national competition authority investigations have demonstrated to be vibrant and competitive (2). It is important that commercial success is not penalised, except when practices are involved which are incompatible with the completion of the internal market, in particular the existence of clear evidence of abuse of market power or harm to consumers in contravention of Article 81 of the EU Treaty. A competitive market is an effective way of protecting consumers and operating efficiency can bring further benefit. In a free and fair market place, retailers compete based on service delivery, product quality and value for money.

1.8 Even if there are understandable differences and disparities within an economic grouping of 27 states, the Committee feels there is a need for cooperation, or even coordination, at European level to allow trade to play its universal service role. Such a step could lead to a more harmonised European system for measuring and tracing commercial activity so as to provide greater encouragement for its development.

1.9 In order to reflect transparent operating procedures between suppliers and HVR the EESC would recommend further debate on the added value and legality under EU Competition Law of a voluntary Code of Practice governing retailer and supplier relations at Member State level as well as a clear and transparent analysis of the supply chain which has a multitude of stakeholders other than the primary supplier and the HVR.

1.10 The creation of a self regulatory Voluntary Code of Practice, supported with written contracts between retailer and supplier, covering transactions from throughout the supply chain, from ‘farm to fork’, could be introduced at national level.

1.11 Such a code should also enable more medium-sized, or even small and cottage, businesses in the production and services sectors to have a minimum set of guarantees when accessing HVR.

1.12 The Code would allow for and retain the current flexibility in trading and negotiations, allowing for sudden changes in conditions (i.e. inflation or oil prices), benefiting both supplier and retailer, but which would prevent HVR and/or large suppliers from exerting pressure or abusive practices.

1.13 Such a Code could include:

— Standard Operating Terms of Business between Retailer and Supplier, with a defined period of notice for any changes, in those terms to take effect, including termination of contracts.

— No retrospective reductions on agreed prices through applied pressure.

— No obligation through applied pressure to contribute to marketing costs or retailer costs above those agreed in the original contract.

— No compensation payments by suppliers for loss of retailer profits, unless defined and agreed in advance, or where the supplier has not delivered the required amounts.

— No return of unsold goods, except for specified reasons, and agreed in the terms of the contract.

— No payments for wastage, negligence or default above those in the original contract, where the specifics are unambiguous.

— No lump sum payments to secure orders or positions. In relation to promotions, all payments must be clear and transparent.

— All promotions must be agreed by both parties in advance with a clear period of notice, and written transparent terms surrounding the promotion.

— Forecasting errors by the retailer must not be passed back to the supplier, including during periods of promotion. Where forecasting is done in conjunction with the supplier the terms must be documented.

— The characteristics and conditions of production of the products sold — particularly imports — should be provided by producers and distributors in response to consumers' expectations.

— A written customer complaints procedure must be issued to the supplier as part of the contract terms.

1.14 This Code must be communicated to all purchasing and management staff within the retailer. Additionally, the retailers would be required to appoint an in-house code compliance officer, keeping records of contracts with suppliers and automatic notification to suppliers of changes in contractual terms.

1.15 Additionally, EESC would recommend at national level the appointment of a mediator to arbitrate on disputes, evaluate and monitor the implementation of the Code, with the power to gather information from all stakeholders and proactively investigate breaches of the Code. This proposal would be in line with the recommendation from the EESC in relation to the Small Business Act.

1.16 European legislation needs to be effectively implemented with regards to trading. However, in particular, defining payment terms must be modified to cover a maximum period for payment. Although current legislation exists it has been transposed at national level with minimal harmonisation or opt out clauses.

1.17 In reference to planning applications for HVR relevant government departments should design a ‘competition test’, such as the ‘need’ test or ‘town centre first’ policy for local authorities to assess competition between the various forms of distribution locally, current land covenants, infrastructure and community benefit. The aim here is to ensure that concerns are addressed regarding the existing and future diversity of commercial supplies, the essential cohabitation between local traders, HVR and shopping malls in population centres.

1.18 Retailing exists mainly at national level and as such, to ensure effective implementation of the Code a public authority (national competition authorities) should review at regular intervals any reports from the ombudsman of problematic practices, allowing them to request directly information from the retailers/suppliers and have a baseline analysis and record of progress in the industry. Where repeated allegations are occurring, legislation could be developed to address the problem. This public authority should also be encouraged to publicise to all stakeholders in the chain the use and benefit of such a code of practice and to enforce it.

1.19 As a concluding point, Members States should ensure the environment offers opportunities for high levels of competition between retailers, without prejudice to the need to ensure a balance between the different sectors and safeguard the urban order, thus creating benefits for the consumer through reduced prices and increased variety of choice.

2. Reasons

2.1 The CCMI promotes coordination and coherence of Community action in relation to the main industrial changes in the context of an enlarged Europe and ensures a balance between the need for socially acceptable change and the retention of the competitive edge for EU industry.

2.2 More recently evidence is presenting itself on the growth of the HVR sector and its impact and influence on society. In the context of the Lisbon Strategy, reflecting competitiveness, growth and more and better jobs; this opinion will identify specific areas throughout the length of the value chain, as far as the consumers, that may require EU interventions or mechanisms.

2.3 For the purpose of this opinion, the EESC commissioned a study which tried to set a definition for HVR (See Annex 1 London Economic Study). However as noted in the study, the parameters set on each trialled definition produced varying results. Due to the numbers of retailers exceeding the definition of an SME and the lack of statistics particularly in new Member States, the cumulative definitions have been used for the purpose of this opinion. High Volume Retailers (HVR) are firms having more than 5 % of market share or a turnover higher than €200m, employing 250 persons or more. Additionally it is valuable to analyse the top 5 firms in each market, as well as the private or social nature of the business model.

2.4 Additionally the study focussed on eight countries across Europe: UK, France, Germany, Spain, Italy, Romania, Poland and Czech Republic in both the food sector and clothing. Concentration is evident in other sectors including DIY, electrical, leisure and culture but is not covered in this report. The analysis made in this opinion is based on statistical evidence (3). Many additional studies have been made by varying sectors across the supply chain, including employees and consumers, and these have been referenced to highlight the complexities of gaining factual evidence and the volume of research conducted to date (4).

2.5 Large retailers across the EU are attracting more customers through the strength of their offer. Figures for 2005 show that Carrefour (France), Metro Group (Germany), Tesco (UK) and Rewe (Germany) have the largest market shares in Western, Central and Eastern Europe. In Germany, France, Ireland and Sweden the top 5 retailers made up more than 70 % of the grocery market in 2005.

2.6 Many HVR, including cooperatives and social economy models of retail, commenced trading as SMEs and many lessons could be learned by their spectacular growth. All have made significant contributions to the Lisbon agenda in terms of competitiveness, jobs and growth. HVR is supported by a strong and often a concentrated wholesale and manufacturing sector. Pressure from dominate suppliers impacts on retailers margins and the competitiveness of SME suppliers. It is hoped that the findings from the EU Commission studies into the retail market due over the next few years: DG Internal Market, and DG Enterprise will focus on the length and number of stakeholders in the supply chain, as well as the margin distribution across the retail industry as a whole.

2.7 Growth and new developments within the retail industry, including the arrival of speciality stores in the clothing sector, have major consequences for companies, including SMEs and independents, employees, suppliers and consumers. This CCMI own-initiative report reviews objective data on the development of the large scale retail sector during the last five years, concentrating on European HVR particularly in groceries, (food), and clothing.

2.8 Overview current situation in grocery and clothing:

— Retail sales of food amounted to EUR 754 billion in 2006 (5), representing an increase of 3.4 % in real terms from 2003. It can be seen that France, the UK, and Germany account for more than 65 % of the total sales, with Italy, Spain and Poland accounting for a further 30 %. Less than 5 % of the total spending occurred in Romania, Hungary and the Czech Republic combined.

— Data for retail sales of clothing is more difficult to obtain. Retail sales amounted to € 120 billion in 2006, having grown by 2.5 % in real terms since 2003. Almost all retail sales occurred in the UK, Germany, France and Italy, although this may be a reflection of the limited data availability in the New Member States.

— The retailers with the largest turnover at national level operate in the food sector. The largest operator, Tesco, is significantly ahead of its rivals, with 2006 sales EUR 10 billion higher than Carrefour in second place.

— When comparing food and clothing retailers the largest clothing firm (Marks and Spencer) appears only in 25th place.

— Many HVR classed as grocers also sell clothing, textiles and electrical items and their turnover cannot be assumed to be only on food.

— There has been an increase by more than 25 % sales of HVR in the food sector in both Italy and Spain, since 2003. HVR in Czech Republic and Romania also experienced a significant growth (albeit Romania started from an extremely low base).

— In the clothing sector, HVR are only present in three of the nine markets in the study. HVR in both Germany and the UK experienced steady sales growth (5 % and 3 % respectively). The one HVR in Italy however (the Benetton Group) saw a decline in sales in real terms between 2003 and 2006 (6).

2.9 The food & drink sector (groceries) globally is currently experiencing the fastest increase in its cost base (raw materials) for generations. Mainly grain prices, affecting staple diets and animal feeds due to global increased affluence, poor harvests and government — mandated biofuels targets affecting supply, will push prices to new heights impacting on the consumer.

2.10 Today a representative basket of products is significantly more expensive than in previous years and varies greatly across Member States. Recent increases in raw materials could deplete any profits for suppliers. For retailers operating on even smaller profit margins increases at the checkout impacts on inflationary figures in the Treasury, which then feeds very quickly into pay negotiations in the workforce. Shelf price inflation together with current rises in oil prices affect the whole supply chain and consumers alike and is currently a worrying scenario for all.

2.11 As consumers enjoy the freedom to move retailers due to the high competition, retailers do everything possible to increase efficiencies and economies of scale. Many suppliers have grown in size alongside the development of the retailer and valuable lessons can be learnt from their strategies.

The supply chain itself can be lengthy with margins added throughout the chain by stakeholders including distributors, packers, secondary producers, processors and wholesalers in both food and clothing.

2.12 The clothing sector across Europe shows relative price stability, particularly as a result of the slow growth in EU economy as a result of changing patterns of consumption, the liberalisation of international trade, consolidation of China as a leading clothing producer together with the increasing appreciation of European currencies. Additionally market dynamics are changing as traditional grocery supermarkets expand their non-food lines and particularly clothing and smaller speciality independent stores are replaced by chains such as Zara and H&M (7).

2.13 The evolution of the difference between prices in indices does not necessarily reflect the evolution of price spreads, which are the difference in the prices in levels (8). Moreover, one should be cautious on the type of conclusions drawn from this analysis. The differences in the evolution of prices do not necessarily reflect changes in the profit margins for producers and retailers. This is because prices are affected by many other variables, e.g.: changes in Value Added Taxes (9), wages, import prices or technical improvements could explain a drop, or increase, of consumer prices which could be unrelated with the prices producers receive.

2.14 European retailers share the view that achieving sustainable consumption and production is a key challenge for the future. Retailers witness, on a daily basis, the changing demands of their customers, the constantly evolving needs for suitable and accurate information, the rapid introduction of new eco-products, and ever ‘greener’ supply chain processes. In this context, European retailers are voluntarily proposing a Sustainable Consumption Action Programme, and Retailer Environmental Action Programme (REAP) whilst working closely with the European Commission in supporting the attainment of the EU’s 2020 climate change objectives.

3. Areas for Monitoring:

3.1 In order to alleviate the following concerns raised by civil society, future debate on the possible mechanisms that could be pursued would need to rely on clear and transparent reporting procedures of poor practice, and in all cases evidence being produced to support grievances. This applies to all stakeholders.

3.2 The Member States must guarantee levels of competition that ensure an appropriate development of all forms of trade, so as to create benefits for the consumer in terms of reduced prices and variety of choice.

3.3 Regulations promoting fair trading practices, applied at national levels can take into account local social preferences, such as opening hours or labour issues, and therefore the EESC recommendation of voluntary codes of practice need to be designed and applied at Member State level, especially as retail is very much a local market.

3.4 In the interests of ‘Better Regulation’ (10) there have been pro-competitive reforms at EU level to remove restrictive legislation and hence the EESC recommendation for self regulation by the industry. The establishment of a Code set by retailers at national level could be interpreted as aiding collusion between retailers, in effect anti-competitive. However public policy must aim at reviewing such codes as increasing transparency and due diligence for both retailer and supplier and in the long term increasing benefit for the consumer.

3.5 Retail and supply chain practices are subject to much allegation, and hence the EESC recommendation of the need for contracts and a Code of Practice at Member State level (see recommendations and conclusions) to address the claims by making the process more transparent, protecting both retailer and supplier, whilst allowing a mediator access to intervene if necessary.

3.6 Competition policy and other regulatory policies affecting the retail sector are complementary to trade policy. It appears that a major policy challenge is to strike a balance where retailers are allowed to exploit economies of scale in sourcing and operations, but not to exploit market power.

3.7 A further area for monitoring where the Code of practice could also be applied is on imports. Today imports in both food and clothing play a major role in market forces. The proportion of imported food is generally higher in the Western countries, with the proportion of imports in food consumption is in Eastern European countries quickly rising.

3.8 Western countries show a very high import penetration in the clothing sector (11). In many cases the percentage is greater than 100 %. This is because the total value of exports is greater than the total value of production, meaning that some goods are imported and then re-exported to other markets.

4. Retail Employees

4.1 The retail sector is of vital importance to the Lisbon strategy in terms of the number of people employed in the sector. DG Employment are currently conducting a research study on the identification of emerging competences and the evolution of future skills needs and employment in the retail and trade sector at the 2020 horizon. A similar study is being conducted on the textile, clothing and leather products sector. These two studies are part of a project covering 16 economic sectors all applying a common foresight methodology to identify future skills and employment evolution on the basis of scenario analysis.

4.2 Within the London Economics conducted study, around 1,2 million people are employed in HVR in the food sector in the UK. The remaining countries employ much less, but overall HVR in Western European countries employ a higher number of workers than Eastern European countries. The number of employees has increased since 2003 in every country except in France and the Czech Republic where it has remained constant.

4.3 The share of employment in HVR is very different across Europe. In the UK and Germany, HVR employ respectively more than 75 % and 60 % of workers in food and department stores whereas in Poland they employ about 20 % and in Romania less than 5 %.

4.4 Overall, female participation in the wholesale and retail sectors is higher than in the entire workforce across Europe but such difference is much higher in the 10 New Member States that in the EU15. The only exception is France that shows a lower share of women in the wholesale and retail sector compared to the economy as a whole.

4.5 There are some interesting differences in the age distribution between Member States. The UK, for example has a much higher proportion of young workers (aged under 25) than anywhere else, but also a higher proportion of workers older than 65 (although still a very small amount). Italy, the Czech Republic and Hungary have a lower number of young workers but have a higher proportion of workers aged 25-49.

4.6 Part-time work is higher in the wholesale and retail sectors than in the entire European economy, although there are important differences across countries, between and also the EU15 and NMS10.

Brussels, 3 December 2008. The President of the European Economic and Social Committee Mario SEPI The Secretary-General of the European Economic and Social Committee Martin WESTLAKE

(1) The evolution of the high-volume retail sector in Europe over the past 5 years, EESC CCMI, Prepared by London Economics http://www.eesc.europa.eu/sections/ccmi/externalstudies/documents/HVR_Final_Report_revised_with_annex.doc.

(2) UK Competition Commission investigation on grocery market:

http://www.competition-commission.org.uk/inquiries/ref2006/grocery/index.htm. The final version is expected to be published in the second half of 2008.

[2] Austrian Federal Competition Authority inquiry on Supermarket Buyer Power: http://www.bwb.gv.at/BWB/English/groceries_sector_inquiry.htm

(3) As 1.

(4) I) Impact of Textiles and Clothing Sectors Liberalisation on Prices, The Kiel Institute For The World Economy, Kiel, Germany. EU Commission, Trade. Final Report 2007-4-18, http://trade.ec.europa.eu/doclib/docs/2007/june/tradoc_134778.pdf.

II) Business relations in the EU Clothing Chain: from industry to retail and distribution. Bocconi University, ESSEC Business School, Baker McKenzie. Final report, October 2007 http://ec.europa.eu/enterprise/textile/documents/clothing_study_oct_2007.pdf.

(5) Internet shopping sales for retailers are included in the total sales figures and have not been addressed separately in this document as evidence shows although sales are expanding they constitute on 1-2 % of grocery sales in the UK.

(6) London Economics Interim Report; The Evolution of the High Volume Retail Sector in Europe over the past 5 years. February 2008.

(7) Bocconi University; Business Relations in the EU clothing Chain; October 2007 Final report, October 2007 http://ec.europa.eu/enterprise/textile/documents/clothing_study_oct_2007.pdf.

(8) For example, if producer prices are 100 and consumer prices are 200, a 10 % increase in both prices does not mean that the margin remains constant. Because of the different levels the margin would widen from 100 (200-100) to 110 (220-110).

(9) ‘The prices measured are those actually faced by consumers, so for example they include sales taxes on products, such as Value Added Tax, and they reflect end-of-season sales prices’, Harmonized Indices of Consumer Prices (HICPs) A Short Guide for Users, Eurostat, March 2004.

(10) http://ec.europa.eu/governance/better_regulation/index_en.htm.

(11) The clothing sector is defined as all products with in ‘manufacture of wearing apparel; dressing and dying of fur’.