ARSEN DIDUR, Executive Director SMPU: Why our retail chains do not feel like to start working European style?

The strained relationship between food suppliers and retail chains has recently become even more acute than ever. Retailers for years have been ignoring dissatisfaction of their suppliers with neglecting their rights. Recently they noticed that this dissatisfaction has transformed into action, namely, the active participation of food producers’ associations in preparation of the bills aimed at the legislative regulation of these distorted business relationship.  Food associations have contributed to development of the bills aimed at legislative regulation of terms of payment and other important issues. They also introduced into the bills the provisions of the “Directive of the European Parliament and the Council 2019/633 of 17 April 2019 on unfair trading practices in supply chain enterprises”.

Finally, in September-October last year, Verkhovna Rada registered several bills (№6068, №6068-1, №6068-2, №6068-3 and №6155), designed to put an end to the dangerous trends appeared due to the advantages of retail chains due to their monopolistic position against their suppliers. These trends have already damaged economic stability of food producers, as retailers have practised long payment delays to use suppliers’ money for their own purposes as zero interest credits. Suppliers of raw materials to processing companies also found themselves in a threatening situation, because the payment delays to processors were cutting the opportunities of food companies to pay their suppliers on time.  And then there appeared the alarming signals of financial woes of the retail chains themselves. Because of their chronic debts to suppliers (for example, only to dairy companies they have a debt of more than 3 billion UAH ), the bankruptcies of some retail chains began. Then followed bancruptcies of some of their suppliers, who  lost the opportunity to collect the debt from the bankrupt retailer.

SMPU and other food associations’ participation in law making

The Union of Dairy Enterprises of Ukraine (SMPU) together with other associations of  food producers, realizing the seriousness of the situation, took an active part in the development of one of the mentioned bills, involving leading economists and the industry specialists.  Each of the mentioned bills registered by Verkhovna Rada had its pros and cons, which were hotly debated by stakeholders. The long lasting debates prevented the case from being completed, that is, prevented adoption of the law.  Therefore, in February this year, just before the war began, the food associations prepared proposals and submitted them to the Verkhovna Rada Economic Development Committee with a request to take them into account when considering the bills preparation for adoption as a law.

On February 24 the war began.  The tasks of defense, maintenance of the economy and guaranteeing food security for the citizens of the country came to the fore.  And that is why the immediate legislative regulation of the relationship between trade and food producers has become vital – it is important for maintaining stability of the food industry in wartime, for preventing dependence on food imports and for saving the domestic food industry.  SMPU believes that given the scale of the possible consequences of the still unregulated relationship between retail chains and their suppliers, the problem needs to be addressed urgently.

Considering the circumstances, it is surprising that lawmakers become very passive when it comes about the need to adopt the bills which will finally allow building relationships between suppliers and retail chains on the European model, remove the threat of collapse of the food supply chain and even help reduce prices, which are now quite high due to unreasonably high margins applied by the retail chains.

What is surprising that proceeding of the bills to adoption is being postponed by just those officials, whose direct duty is to take care of the solution of this problem related to food security and promote the adoption as soon as possible.  The range of the reasons for postponing looks diversified. It includes martial law (“now it’s not a proper time”), calls not to apply legal mechanisms to regulate business relations (“business must solve problems on its own”), and invitations to more discussions  (“the problem needs to be discussed in more details, everything should be weighed, and then, perhaps…”).

Position of SMPU

SMPU position on this matter is as follows: it is just the martial law that dictates the need for the urgent adoption of the bill that will avert the threat of disruptions in the supply of food.  In wartime it is very important.  Calling for the adoption on the bill, food producers do not require any special conditions for themselves.  The main thing they want to achieve is a guaranteed payment for their products on time, at a time that is reasonably correlated with a product date of expiry.  They also believe that trade should not shift the costs, which are purely trade related, on the shoulders of suppliers.  Also contracts should not contain artificially imposed services and vague wording that allow networks to practice ingenuity – for what else to take money from the supplier.  Adoption of the bill regulating these issues will work for the benefit of the economy and our citizens.

As for the claims that business must solve its own problems and settle relationship with partners – yes, we agree.  But this does not apply to cases where one of the partners is a business heavyweight and a monopolist, and the other has no one to sell their goods except this monopolist.  This is a classic situation for abuse of a monopoly position. To settle such sirtuations there are laws and the Antimonopoly Committee.  Involvement of the state in such cases is legal and justified, because this situation distorts the market, harms everyone in the supply chain and threatens food security of the country.  State has to protect citizens from the consequences of such situations.

The calls “let’s discuss it again” look as another attempt to continue intentional  slowing down the adoption of the bill.  The SMPU felt attempts to oppose the adoption of the bill at an early stage, when after food producers’ actions aimed at the legislative establishment of the rules for interaction of retail chains and suppliers, the bills began to be registered one after another.  And this flow was barely stopped when there were already five versions, which added difficulties to the work on the issue by the Verkhovna Rada Committee on Economic Development.  Meanwhile, the delay has not only sharpened the crisis in the food industry due to the huge debts of the retailers.  There began bankruptcies caused by the unresolved problem.  SMPU considers today’s calls for more roundtables and leisurely discussions on how to maintain the monopoly of the retail chains to be a continuation of the same strategy to delay the decision.

Why regulation of “retail chains – suppliers” relationship is urgent

Meanwhile, the situation is deteriorating.  Networks that have been using suppliers ‘money for years, delaying payments, accumulating debt, and even buying imported goods from their suppliers’ competitors with money of the suppliers, are no longer in the best financial position.  This is evidenced by the fact that even after the Cabinet of Ministers Resolution №410 of April 5, 2020, when the government supported retail chains, giving them the opportunity to replenish working capital to attract soft loans up to UAH 1 billion for one year with interest compensation of up to 5%  annual, banks still have not dare to lend to any of the key retail chains.  Suppliers continue to get their payments for current deliveries with delays, and say that debt repayment is out of the question.

The logic of the resistance of retail chains to the adoption of the bill that would limit their ability to use the funds of suppliers at its discretion is clear.  But now is the time to think about the consequences we can already see as a result of the long-standing practice of retailers dictating the rules, and to imagine the prospect of its continuation, which will lead to the collapse of the entire food supply chain and affect all its participants.  Then it becomes clear that urgent transition to civilized rails is necessary for everyone, including the retail chains themselves.

The goal of the SMPU is to avert the threat of disruption of food supplies. For this purpose introduce  legislative regulation of the trade practices that harm the economy of raw material producers, processors, retail chains and end consumers.  SMPU – for European approaches in business, applying of the best practices and creation of conditions for civilized food production and trade.

The work plan of the Verkhovna Rada Committee on Economic Development for the period of the seventh session of the Verkhovna Rada of the ninth convocation (February – July 2022) provides for consideration of the bills in June with a vote in July this year.  We therefore call on Dmytro Natalukha, Chairman of the Committee, to complete consideration of Bills №6068, №6068-1, №6068-2, №6068-3 as soon as possible and submit them to the Session Hall.  We hope that the people’s deputies understand the importance of providing our citizens with food and supporting the enterprises that produce them.  After all, we all depend on their economic well-being.

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