EuroCommerce a.i.s.b.l.

Avenue des Nerviens 85, B-1040 Brussels

www.eurocommerce.eu

Retail and agriculture

CONTRIBUTION TO THE AGRI-MARKETS TASK FORCE

Date: 15 July 2016

Interest Representative Register ID number : 84973761187-60

Christel Delberghe Director of Policy, Competitiveness and Food

T: +32 2 737 05 91 delberghe@eurocommerce.eu

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KEY MESSAGES

1. Retailers fully recognise the present difficult circumstances of farming. The economic sustainability of the agriculture sector is an essential part of the food supply chain, along with retailers and all other actors which make it possible for food to reach consumers.

2. The current crisis results from overproduction. It is structural, with deeper roots in the present global situation in milk production, the Russian boycott and sluggish Chinese demand. Retailers understand the difficulties encountered and have taken numerous steps to show solidarity through the crisis. However, the crisis is the result of factors that retailers cannot influence and require structural and culture change in the agriculture sector.

3. The food supply chain is increasingly sophisticated. The vast majority of products undergo many stages of processing, each adding value. Retailers have few direct relationships with farmers and make a small net profit margin (1-3%). Other distribution channels, for instance exports, further processing, catering and hospitality, account for a significant share of the milk produced, so retailers’ influence over milk prices is negligible. We encourage policy makers to take a holistic view on the functioning of the entire food supply chain and avoid too much focus on one sector.

4. No small retailer deals directly with a large supplier; they source from a joint purchasing alliance or a wholesaler. In the same spirit, we support stronger organisation of farmers as key to a better-performing supply chain which can better deliver for farmers. We also call for a reduction of unnecessary administrative and financial burdens which add to farmers’ production costs and hold them back from a more entrepreneurial approach to agriculture.

5. Proposed solutions such as full price transparency, and other forms of intervention in the distribution of value-added will do nothing to help strengthen the position of farmers in the supply chain. Price transparency at product category level helps generate a better understanding of the process of value creation in the chain, but has to respect competition rules. Furthermore, information about the final price of a processed product will do little to help farmers negotiate better prices with their direct buyer, as prices depend on conditions in the market in which they operate and the degree to which intermediaries add value or costs.

6. Similarly, regulating contractual practices at EU level will not deliver the protection that farmers seek. Freedom of contract and of negotiation should remain a key principle in business-to-business relations. In practice, retailers have very few direct contracts with farmers. Most countries have regulation and enforcement mechanisms; they are different but all seek to achieve the same outcome. The Supply Chain Initiative and other related initiatives are a useful mechanism to make fair practice become the norm and encourage operators to resolve their disputes in a way that facilitates continued business relationships.

7. Retailers needs a diverse agriculture sector that understands consumer demand better. Large scale production caters for the large volumes of standard commodities. Smaller producers help meet individual consumer demand for specific products (local, organic, healthy, etc.); they also help retailers differentiate. Consumers are prepared to pay more for products which offer added-value. Retailers can help smaller producers respond to consumer demand and in practice have developed numerous initiatives to support smaller farmers.

8. Finally, we believe that structured supply chain dialogue, either through inter-branch organisations or similar structures can benefit everyone in the supply chain. These make it possible for sectors to share information about market trends and allow farmers respond to market signals, to the benefits of all parties.

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A. Introduction

Farmers and economically sustainable farming are as essential to the food supply chain as retailers, who act as the last link in the chain before consumers. Retailers play a critical role in passing up in the supply chain, information on consumer demand trends and on issues like origin or production methods. They also provide for marketing the right product at the right location and at the best price, and create different quality ranges to meet different consumer requirements. Retailers and wholesalers need sustainable and efficient supply chains to remain competitive in a highly competitive market, and serve the millions of consumers that shop with them every day. Retailers support a market-oriented common agricultural policy, which contributes to a fully functioning single market. Within this framework, the key challenge today is how to help farmers become more competitive, efficient, less dependent on direct payments, better organised and more consumer-driven.

The current agriculture crisis is mainly the result of surplus production globally, exacerbated by external factors such as the Russian embargo and low Chinese demand, the removal of milk quotas, stagnating consumption and changing dietary habits in Europe. Retailers and wholesalers fully understand the challenges these pose for farmers. At the same time, we are concerned that by continuing to increase production to maintain income levels, they contribute to bringing prices further down. With expanded herds of heifers ready for lactation next year, the potential for the problem to increase is strong. We also share concerns of a possible knock-on effect on the beef market, resulting from more cows being slaughtered to limit milk production.

Retailers’ relationships in the supply chain have little connection to the milk or meat crisis. In practice, there are very few direct relationships between farmers and retailers, and the vast majority of products on retailers’ shelves have undergone at least some degree of processing by an intermediary company. In general, prices of agriculture products are set by supply and demand in world markets. Movements in farm gate prices are reflected in retail prices, but only to a limited degree: raw materials make up only a small proportion of the total cost of the final product. This limited share of primary agriculture input in final products also reflects a strong diversification of distribution formats, differentiation of dairy products, different overall business strategies of dairies and substitution effects of competing products. This largely explains why agriculture price volatility is absorbed across the supply chain.

Retail and wholesale is a diversified sector that provides jobs to 29 million Europeans. It contributes to the life and attractiveness of city centres, small towns and villages. SMEs make up 99% of the sector, provide about 2/3rd of its jobs and contribute 55% of its value-added. About 90% of retailers are micro-businesses. Micro and small enterprises in retail tend to source products from common purchasing alliances or wholesalers as a means of increasing their bargaining power, and reduce transaction costs for all parties. The development of retailer brands is particularly important for small retailers whose net margin on branded goods are very narrow.

Throughout the agriculture crisis, retailers have sought, within the limits of EU and national competition rules, to show solidarity with farmers, participated in supply chain dialogues nationally and helped farmers through concrete actions, including support and intensive promotional activities.

This document aims to provide a positive contribution by the retail and wholesale sector to the work of the agriculture markets task force. It aims to clarify the role of retail and wholesale in the food supply chain, and their relationship with the agriculture sector. This document also comments on a number of suggestions made in the Agri-markets task force on how to strengthen

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the position of farmers in the food supply chain, such as price transparency and contractualisation, and suggests a number of policy issues to be considered.

B. Retail and wholesale in the food supply chain

The European Commission has already recognised that, overall, the food supply chain performs well1. It has grown more and more sophisticated as a result of increased safety and quality requirements, as well as the development of new products and services to respond to changing consumer demand.

The food supply chain is made up of many operators, each adding value. In reality, retailers have only limited direct relationships with farmers and only a limited percentage of agricultural/primary products end up on retailer shelves2. The rest goes to exports, processing, catering and hospitality and other distribution channels. Therefore, the ability of the retail sector to address a major structural problem beyond their control is extremely limited.

Examples Germany The data below shows that only 37% of the milk produced in Germany finds its way to retailers’ shelves. The majority is exported (48%) or sold as an ingredient (15%). Drinking milk only represents 17% of the volumes sold by dairies to retailers. The majority of production goes into cheese (47%) followed by butter and milk powder used as ingredients (22%).

1 European Commission communication: A better functioning food supply chain in Europe (2009) 2 See Annex 1

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Finland In Finland, an internal survey among members of the Finnish Grocery Trade Association shows that, out of the total number of purchasing contracts entered by Finnish retail and wholesale companies, only 5% are directly with producers, representing 1% of the total value of retailer/wholesaler purchases. Source: Finnish Grocery Trade Association Belgium The data below from Belgium shows that nearly 75% of domestic pigmeat production is exported and only around a quarter is used domestically. Less than 7% of total domestic production ends up on large retailers’ shelves as fresh meat. Retailers therefore do have the ability to set the price of pigmeat on the market as a whole.

Source: Comeos (2015) La concertation de la chaîne pour la viande porcine dans l’impasse

Retailers and wholesalers operate in a highly competitive and dynamic environment. A study conducted by DG Competition3 shows that no retailer has a dominant position in the EU market, and with the exception of a few smaller markets, retail markets are generally only moderately concentrated. It also confirms that consumers have benefited from modern retail developments through greater choice and innovation.

Consumers are at the heart of the supply chain. They have a considerable choice of retailers4 and, in exercising that choice, they trigger competition and force retailers to constantly innovate (in their products, services, formats and operations), look for cost efficiencies and deliver the best prices. Investing in reliable, efficient and competitive supply chains that meet consumer needs is therefore key to the competitiveness of individual retailers. Engaging in unfair practices would undermine their ability to source and offer a wide range of products, damaging their competitive position.

3 European Commission (2014) “The economic impact of modern retail on choice and innovation in the EU food sector.” 4 Nielsen (2015) “The future of grocery: e-commerce, digital technology and changing shopping preferences around the world.”

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At the same time, many of the major brands with whom retailers and sometimes farmers directly deal with, hold dominant market positions. “Must-stock” brands have a strong position in any negotiations up and down the supply chain. We understand there may be limitations to comparing net margins of retailers and producers, but we would nevertheless wish to highlight that manufacturing companies often operate with double digit net margins. DG Competition and other ECB studies5 confirm that more competition at supplier level would improve consumer choice and innovation.

Water Soft Drinks Beers

Nestlé 32.70% Coca Cola 51.40% Heineken 37.10%

Danone 26.20% Suntory Or-Schw 20.30% Carlsberg 30.10%

Alma 22.60% Retailer Brand 9.80% Anheuse 14.60%

Retailer Brands 13% Pepsico 6.90% Retailer Brands 4.90%

Tea Herbal tea Chocolate powder

Unilever Lipton 41.20% Unilever 33.10% Nestlé 41.80%

ABF Twinings 25.60% ABF 16.40% Mondelez 25.90%

Retailer Brands 8.70% Retailer Brands 15.60% Retailer Brands 13%

Roasted coffee Coffee pads Soluble coffee

Mondelez 45.90% Douwe Egberts 35.90% Nestlé 59.10%

Douwe Egberts 12.90% Mondelez 29.70% Mondelez 18.10%

Retailer Brands 19.70% Nestlé 15.50% Retailer Brands 18.10%

Retailer Brands 11.60% Source: Fédération des entreprises du Commerce et de la Distribution, IRI, 2014

To improve their negotiation position with national and international brands, retailers have established buying platforms nationally and internationally. The ECB has recognised the positive role played by purchasing alliances as long as benefits are passed on to consumers. These alliances do not affect the relations with farmers.

In the agriculture sector, some cooperatives have also reached a dominant position (see graph below). In certain countries such as the Netherlands, Denmark or Finland, dairies hold a very dominant position in the market (above 80% market share). The countries least affected by the agriculture crisis are also countries where farming is better organised – e.g. through cooperatives or producer organisations.

5European Central Bank (2014) "Retail market structure and consumer prices in the Euro Area"; "Within- and cross-country price dispersion in the Euro Area”.

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Source : European Commission, DG Competition

Encouraging a better organisation of farmers is key to a better-performing food supply chain that also delivers for farmers. The vast majority of companies in retail are micro-businesses, but in practice none of them has a direct relationship with large suppliers. To remain competitive and handle efficient relations, they join buying alliances or other forms of cooperation or source from wholesalers.

The best performing cooperatives or producer organisations are usually business driven and flexible to enable trading partners to adapt to changing consumer expectations; they provide essential marketing skills and added value services to their members6. We are concerned that a large majority of cooperatives or producer organisations are not sufficiently enough business-oriented and still retain complex decision making processes.

C. Price transmission in the food supply chain: is price transparency a solution to strengthening

the position of farmers?7

EuroCommerce8 sees value in facilitating a better understanding of the process of value transmission in the food supply chain as a means of generating more trust and greater understanding among stakeholder groups as well as addressing some of the misperceptions about individual sectors. Discussions should take place on the basis of sufficiently aggregated data supplied by recognised statistical or market research bodies and in full respect of competition rules.

However, we are concerned that a requirement for full price and market transparency risks influencing the conduct of individual market players, leading to sub-optimal outcomes in price negotiations and encouraging collusive and coordinated behaviour in the market. Retailers are also concerned at the additional regulatory burden which further data collection could entail, while providing little benefit to farmers.

6 Conseil Général de l’alimentation, de l’agriculture et des espaces ruraux (2012) "Rapport sur l’organisation économique de la production agricole". 7 For more details, see our contribution on price transparency tools (www.eurocommerce.eu or here) 8 See EuroCommerce contribution to the Task Force on market transparency tools.

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As foods becomes more highly processed, the original commodity price makes less of an impact on the final retail price. Each stage of the food supply chain adds value and has an impact on the final price. Only where agricultural products are sold without any major alteration or processing, can the original commodity price have a higher impact on the final retail price. This increasingly complex set of players largely explains the dampening of price volatility through the supply chain. Retail prices also depend on competition at retail level. We therefore do not believe that full price transparency will help strengthen farmers’ position in the chain. On this basis, we ask policy makers to be cautious about imposing price transparency in order to avoid undermining competition and the principles that the EU stands for. If full information is available on each operator’s price structure, competition would be compromised at all stages of the supply chain.

In this context, it is important to recognise the difference between gross and net margins. The retailer gross margin only reflects the difference between the cost of goods purchased by the retailer and the consumer price. It includes all operating costs incurred by the retailer (real estate, personnel costs, equipment, energy, taxes, logistics, etc.) and a very small net margin (the average 1-3% already mentioned).

The table below shows that for specific agriculture products, retailer margins remain very low or even negative9:

Source: FranceAgrimer (2016) “Observatoire de la formation des prix et des marges des produits alimentaires”.

9 In this case, given that resale below cost is prohibited in France, retailers compensate for the losses incurred.

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D. Contractualisation and contractual practices as a means to help farmers manage risk D1. Contractualisation

In its background note to the task force, the European Commission suggests that contracts, in particular long-terms contracts, could offer increased certainty for farmers and processors and therefore be part of an effective risk management strategy for farmers and their customers.

A number of sectors have developed voluntary standard forms of contracts tailored to their specific circumstances, in some cases, including dispute resolution mechanisms, and which companies can adapt to their individual trade agreements. These have gained wide acceptance and are appreciated and considered useful by market participants.

The key challenge for agriculture today is how it can face increasing global competition by becoming more competitive, efficient, less dependent on directs payments, better organised, and more consumer-driven.

We do not see compulsory written contracts with mandatory clauses as an effective means of supporting farmers’ positions in the food supply chain. Only half of the Member States have introduced compulsory written contracts. Experience, from France or Spain for example, shows that these have neither preserved farmers from the crisis nor increased confidence among market participants.

In fact, at retail level, written contracts are the norm and this trend has improved after the implementation of Supply Chain Initiative10. With the exception of small operators or purchases, the vast majority of contracts are written.

We are concerned that mandatory clauses and other interventions in the freedom to design contracts, purchase obligations and price regulations, restrict business partners’ ability to negotiate. They restrict competition, lead to efficiency losses and price increases which are detrimental to consumers. Mandatory clauses push companies to develop standard terms and conditions worked out by legal staff in order to prevent legal proceedings. This results in sub-optimal outcomes for smaller suppliers. It tends to serve instead the interests of multinational suppliers, who have extensive legal staff but does not necessarily benefit SMEs or farmers, who do not necessarily have the same legal expertise.

We also do not see publication of certain types of contract information as a useful mechanism. Making contract information public is inconceivable; would inhibit competition and run counter to EU and national competition rules.

Individual retailers have voluntarily taken steps on contractualisation and developed specific partnerships together with producers and processors: such examples may include tripartite contracts (signed by retailers, processors and producers) and bipartite contracts (producer – processor linked to processor – retailer).

10 Principle #1: “WRITTEN AGREEMENTS: Agreements should be in writing, unless impracticable or where oral agreements are mutually acceptable and convenient. They should be clear and transparent, and cover as many relevant and foreseeable elements as possible, including rights and procedures of termination.” Vertical relationships in the Food Supply Chain: Principles of Good Practice

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Examples Auchan has developed a three-year tripartite contract with a producer association in Northern France (Le Porcilin), with several meat processors and the French manufacturer Bigard11. The aim of this partnership is to enable proper remuneration for all actors in the food supply chain, while guaranteeing quality on the shelves. Another tripartite partnership was launched in January 2016 between Auchan, Laiterie de Saint-Denis-de-l’Hotel (dairy working with 370 French farmers) and L’Association de Producteurs de Lait du Bassin Centre, as part of its “filière responsable Auchan” initiative launched in 2015. 12 Independent merchants, who are often organised in cooperatives, deal on a daily basis with farmers and local food manufacturers. Such merchants, like Herbert Esslinger of EDEKA Group, sell locally produced eggs, fruits, juices, liquors, sausages, dried fruits, honey, firewood, fresh salads and vegetables and label the product with the names of the farmers. To enlarge the assortment, this particular merchant also created its own label exclusively for local farming products. 13

We also do not see regulating contractual relations as a useful means of improve the distribution of added value in the food supply chain. As indicated above, establishing a direct relationship between the farm gate price and the retail price is difficult without considering all the steps and costs incurred by each operator in the chain (see chapter C on price transmission). As a basic principle of a market economy, public authorities should refrain from interfering or deciding about the distribution of value in the chain. Such interference will reduce incentives to invest and to seek efficiency gains.

We suggest that instead, farmers be encouraged and supported to act as entrepreneurs equipped to react quickly to changing markets. Contracts involving SMEs and farmers should aim to be fit for purpose, and as clear and simple as possible. Training and support programmes for SMEs should ensure that SMEs and entrepreneurs are better equipped to deal with the complexity of contractual negotiations.

Retailers have built relationships with dedicated agricultural entrepreneurs, through which they develop tailored promotions and marketing activities, including special product placements on supermarket shelves (e.g. entry area). In the vast majority of cases, because of their position in the chain, retailers have actively engaged with farmers and showed them ways of promoting and selling their products. Retailers often finance the costs of implementing quality assurance schemes that farmers have to comply with and guarantee a fixed purchase volume for a certain period of time (see examples of good practice, part E).

11 http://pressroom.auchan.fr/corporate/article/69-lancement-d-une-contractualisation-tripartite-avec-des-eleveurs-porcins-pour-la-marque-le-porcilin 12 http://www.web-agri.fr/actualite-agricole/economie-social/article/auchan-s-engage-aupres-des-producteurs-de-lait-du-centre-lsdh-1142-116345.html 13http://www.edeka-esslinger.de/regionale-partner.php

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D2. Contractual practices14

The Commission has found that “practices between market participants in the food supply chain are in most cases fair and sustainable for both parties”15. Out of the millions of transactions taking place every year across Europe, only a few raise problems. The reason for this, is that engaging in unfair trading practices undermines operators’ ability to source and offer a wide range of products efficiently, and thus damages their competitive position.

Unfair Trading Practices may occur in any sector of the economy and, therefore at any stage of any supply chain. Therefore the Common Agricultural Policy, whose remit is the farmers’ direct relations in the supply chain, is not an appropriate mechanism to address unfair trading practices. Regulating retailer contractual practices would in practice have very limited impact on the welfare of farmers, because retailers have very few direct commercial relationships with farmers.

Freedom of contract is a key principle in business-to-business transactions and a contract is the result of a negotiation process in which both parties seek a reasonable balance of advantage and some compensation for those areas where the other party may be given an advantage. In a properly functioning market economy, bargaining generates efficiencies and consumer benefits. This should not be confused with alleged unfair trading practices.

Bargaining power is intrinsic to a well-functioning open market economy and in practice both large and small players exert bargaining power in all supply chains. The division of bargaining power between manufacturers and retailers varies from product to product and is a dynamic phenomenon which changes over time. Manufacturer concentration in certain consumer goods markets is still very high. The size of the supplier and the buyer may not always be the most important issue in evaluating buyer power. In fact, no retailer, even the largest, truly negotiates with manufacturers of “must have” products, and even a relatively small supplier of a desirable product can have significant bargaining power depending on its power on local markets16. Retailers simply cannot afford to lose these sought-after brands from their shelves by imposing unfair conditions on suppliers.

On average, 70 to 80% of the food sold through supermarkets is sourced nationally, rather than cross-border. Business-to-business contractual relations are essentially determined by the national legal and business environment. On this basis, we consider that national level conditions are the most appropriate. Furthermore, contract terms are applied in the same way irrespective of the origin of the supplier (domestic or foreign). Therefore, unfair or fair trading practices have no adverse impact on cross-border trade.

In its report of January 2016, the European Commission showed that, most EU Member States have regulatory or self-regulatory systems to address unfair trading practices and a majority have public means of enforcing these. It concluded that these schemes may vary in how unfair trading practices are defined, regulated and enforced, but they all seek to achieve the same outcome. There is therefore no strong case for harmonisation, and since national legal systems and contract cultures vary, there can never be a one-size-fits-all solution which can work across

14 For more details, please see the EuroCommerce contribution to the Green Paper on Unfair Trading Practices from 2013 15 European Commission communication: Tackling unfair trading practices in the business-to-business food supply chain. (COM/2014/0472 final) 16Heimeshoff, U. & Klein, G.J. (2013), Discussion Paper – Bargaining power and local heroes, Düsseldorf, Germany, Düsseldorf Institute for Competition Economics (DICE), n° 87. This study considers in particular the case after two regional beer breweries stopped delivering a specific full-assortment retailer within a short notice due to failed negotiations for further supply of beer. These strategies of local suppliers clearly have significant negative effects on retailers’ revenues.

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all Member States. International conventions can be referred to in order to resolve cross border issues when they arise (choice of the law applicable to the contract and enforcement). Example: In Italy, over 80% of food products is sourced nationally (share of national sourcing, food products, 2012):

Source: Federdistribuzione

The current agriculture crisis is the outcome of surplus production, arising from disruption in global demand and structural issues in certain countries and sectors. Addressing unfair trading practices will not solve these issues and eve heavy regulation, where it exists, has not shielded farmers from the crisis or acted as a useful tool to mitigate the impact of the agriculture crisis. Countries such as France, Spain or Slovakia in which trading practices are particularly regulated have suffered equally.

We also support the Commission’s recommendations to Member States to ensure that their national UTPs regulations are proportionate, especially with regard to the range and nature of the practices covered, but also that sanctions are proportionate to the gravity of the conduct and its potential harm to the victim. There are cases where retailers, especially foreign-based ones, are subject to discriminatory and disproportionate measures. These protectionist measures not only harm consumers through higher prices, but they also do not generate substantial benefit to farmers and suppliers.

Increasingly, companies have put in place mechanisms to deal with unfair trading practices when they arise. They have shown their commitment to fair dealing with suppliers in defining - with all other players in the food supply chain, including farmers, common principles of good practice for trading relations and in setting up procedures to integrate them in their daily activities through the Supply Chain Initiative17. These principles of good practice are usually reflected in the contracts companies sign with their trading partners, and enforced by encouraging parties to resolve their disputes in a way that supports business continuity (through dialogue and mediation) as opposed to courts. This is supported by the establishment of national dialogues in a number of countries.

Today, nearly 390 groups have registered, representing over 1,230 national operating companies; this level of commitment has already achieved a critical mass of retailer transactions covered by the SCI principles. It has inspired initiatives in no less than 15 countries (e.g. voluntary “sustainable

17 www.supplychaininitiative.eu

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supplier relationships” scheme in France hosted by the B2B relations ombudsman) and led to the development of national dialogues in 5 EU countries (BE, CZ, DE, FIN, NLs)18.

Farmers and their representatives participate in a number of these activities; but we regret their lack of participation at European level. It is not appropriate to conclude that the SCI has failed without having at least tested it. The SCI does not replace legislation but acts as a complement. It aims to encourage businesses to resolve their disputes in a way that facilitates continuation of business relationsships. Court cases and ex-officio investigations tend to disrupt or break relationships. In countries where relations are heavily regulated such as France, operators tend increasingly to resort to mediation and other alternative dispute resolution mechanisms.

As a member of the SCI, EuroCommerce has taken note of the Commission recommendations on the SCI19 and through the SCI, we are conducting through 2016 a gap analysis to identify where and how progress can be achieved in the framework of a voluntary scheme. The SCI will report on progress and potential adaptation by end 2016 in the framework of the High Level Forum on a better functioning food supply chain.

E. Retailers need large scale production but also to work with networks of smaller producers that

help them offer differentiated products

Consumers benefit most when retailers have strong, innovative, mutually beneficial and long-lasting relationships with their suppliers, and when both retailers and suppliers share plans and agree on common objectives and targets, using innovation and differentiation to drive profitable growth. Suppliers who can deliver unique products or another competitive advantage add most value to retailers.

To serve the needs of the millions of consumers that visit their shops every day, retailers need suppliers that can deliver large volumes of products at a given quality standard. Often, farmers lack the scale required (see annex 3), so retailers are keen to see agriculture becoming better organised in ways which increase competition and competitiveness. Producer organisations have the potential to contribute to strengthening farmers’ bargaining power, reduce fragmentation and improve relationships with operators upstream in the supply chain. To avoid market distortion by very large groups, they should be subject to competition law. Large cooperatives are able to negotiate (or even dictate) contract terms and conditions with their business partners.

Retailers and wholesalers try to balance their competitive needs while encouraging as much local sourcing as possible. They seek to complement their assortment with higher added value products such as local products, organic or regional specialties. As part of this, they promote the unique nature and benefits of locally produced food their specific characteristics to consumers. This collaboration between retailers and farmers takes many forms but with the aim of developing a differentiated offer and creating sustained demand for high quality agricultural produce. Farmers that grow for specific retailers with volume forecasts tend to do better financially from these relationships.

Short food supply chains and direct farm sales are often put forward as a possible alternative. They are growing, contribute to diversity in supply and meet consumer demand for local products.

18 For more information, see the SCI Year Two Annual Report 19 Report from the Commission to the European Parliament and the Council on unfair business-to-business trading practices in the food supply chain

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Sales of agricultural products to consumers directly by farmers are also already quite common in rural areas. Foods sold directly or locally should however subject to the same general requirements as other foodstuffs.

Retailers are at the forefront of promoting agricultural products, including through retailer brands. Their investments and promotional activities help increase sales and find new markets for agricultural products. Retailers provide farmers with tools to better communicate about their products and their specific characteristics to consumers. The establishment and the functioning of many certification schemes for agricultural products and foodstuffs demonstrates cooperation in the food chain. Retailers apply quality standards through third party certification schemes such as IFS, BRC, ISO22000, IMQ, ICS BIO, Ecolabel, non-GMO, MCS, ACS etc. and play an instrumental role in supporting and promoting the growth of sustainable agricultural and fishing practices (e.g. development of MSC standards for sustainable fisheries).20

Examples of good practice

In Germany, leading retailers have established, in collaboration with the meat processing industry and the agricultural sector, the so called “Initiative Tierwohl”21 (animal welfare initiative). It is financed by retailers and aims to raise production standards to improve the welfare of animals. Participating farmers receive an additional 4 cents per kilogram of pigmeat and poultry sold.

SPAR Austria has developed long-term partnerships with over 7,000 organic farmers in Austria, who form the backbone of SPAR‘s private label „SPAR Natur*pur“. 63 Interspar-Hypermarkets have over 6.400 articles from over 600 local farmers & SMEs in addition to the standard assortment. Besides the quality production, the company runs special programs together with its supplying farmers. Those programs are developed jointly with the farmers and have excellent selling numbers. They fix individual requirements and add-on-prices for the farmers.

In Spain, Mercadona’s Sustainable Agri Food Chain scheme (CASPOPDONA) brings together 7500 crop producers, 4300 livestock producers and 12000 fishermen. The scheme is a joint effort by Mercadona and its integrated and specialist suppliers to contribute to innovation, modernisation, productivity and prosperity in every link of the agri-food chain.

In the UK, recognising the impact that retailers can make on the local farming sector, retailers have focused on building and maintaining close partnerships with farmers, taking responsibility for quality to consumers and farmers alike and more broadly, to all actors of the supply chain. This is done either in the choice of sourcing or by working with farmers through dedicated supply chains. Examples of such partnerships include Tesco’s Sustainable Dairy Group and Sainsbury’s Dairy Development Group.

In Belgium, Delhaize supports local Belgian producers: 70% of the company’s fresh assortment originates from local producers, based on stringent quality standards. 750 local products are directly delivered to stores by 150 local producers. Delhaize Belgium, for instance has coordinated with 47 farmers, 10 feed suppliers and 5 slaughterhouses, in order to bring to its shelves pork that has been fed with higher quality (and more expensive) animal feed. In order

20 For more details on the contribution of retailer brands to support farmers, see our publication "Retailer Brands - Serving consumers, SMEs and innovation" 21 http://initiative-tierwohl.de/

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to make this possible, Delhaize volunteered to pay for the price differential, aiming to offer it in all the Delhaize stores in Belgium and Luxembourg. 22

In Belgium, Colruyt has also committed to support farmers in transition to organic farming, in their attempt to fulfil customer’s increased demand for local, organic products. Starting April 2016, Colruyt has put onto its shelves ‘transition vegetables’ which will only be eligible for the organic label in two years’ time. This initiative is to help organic farmers bridge a financially difficult transition period and encourage farmers to invest in more sustainable farming methods. The figures below reflect the company’s efforts but similar results would be achieved by other retailers in Belgium, meaning that this is part of a wider retail sector effort.23

Kesko (Finland): in 2015, Finnish retailer Kesko launched the “Thank the Producer” campaign in collaboration with the main farmers’ organisation, the Central Union of Agricultural Producers and Forest Owners (MTK). The campaign is based on the recognition that 82% of consumers find it important to eat domestically-produced food. About 80% of the products sold at K-food stores are of Finnish origin. This generates work and welfare across the country. Through the campaign, K-food stores offer their customers a chance to provide support direct to pork producers. Consumers can pay one euro extra for a ham, in which case Kesko will pay an additional euro to the producer. This year the scheme has been expanded to other products such as beef, pork, and processed meat products.

Sonae (Portugal): Continente Producers’ Club: launched in 1998, Continente Producers’ Club (“Clube de Produtores Continente”) is a support structure whose goal is to bring the agricultural sector closer to the direct sale of products to the consumer, supporting the Portuguese economy in a sustained manner. With more than 200 members in mainland Portugal, in Madeira and the Azores, Continente Producers’ club creates jobs, fosters agricultural development and leverages ambitious and innovative projects. Its work is focused on local production planning, based on consumption forecasts, guaranteed sale of produce and the development of competitive products with clear benefits throughout the value chain from producer to consumer.

Delhaize (Romania): Mega Image, the Romanian branch of Delhaize was the first retailer to work closely with small farms and support them with seeds and technical advice to grow vegetables in an efficient way, with minimum environmental impact. The products are then sold in the stores under the “Gusturi Romanesti” own label, which promotes sustainable Romanian

22 https://sustainabilityreport.delhaizegroup.com/2014/case-studies/sustainable-private-brands/delhaize-belgium-luxembourg/ 23 https://www.colruytgroup.be/en/news/colruyt-group-supports-de-lochting-transition-organic-farming

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agriculture24. Furthermore, Metro is running the ‘De-ale noastre’, a program which promotes nurturing partnerships with local producers and where the wholesaler participates with advice and capacity building25.

Albert Heijn supermarkets (in the Netherlands and Belgium) and Albert (Czech Republic), part of Ahold Group, cooperate intensively with farmers to boost the quality and sustainability of their products and to cater for the trend towards healthier eating and living. Fresh fruit and vegetables are exclusively sourced on the basis of long-term cooperation agreements with farmers and the company seeks to develop a distinctive assortment. Consumer insights and knowledge generated by agricultural universities are discussed with farmers. Room is made for investment in products and process renewal, while striving for top quality fresh products at affordable prices. The supermarkets also cooperate on an exclusive basis with the Vion meat group. Through this cooperation, over a hundred pig farmers produce certified pork applying high animal welfare standards.

F. Adjusting production patterns to the needs of consumers

Retailers need a farming sector more responsive to consumer demand. Today, the demand for certain products is stagnating or decreasing as a result of changing dietary habits and purchasing power, whilst on the other hand, demand for higher value-added products is on the increase. As stated above, prices paid to farmers are the result of global demand and supply dynamics and over which retailers have no direct control. We are concerned that, in order to maintain income levels, farmers have kept on increasing production, contributing to pushing prices down further. Retailers’ practices have no connections with these global and market dynamics. The chart below shows decreasing consumption of meat, fishery and dairy products in volumes over the past years in France.

24http://www.delhaizegroup.com/Portals/0/Documents/Annual%20Reports/2014/150403_DLZ_RA14_UK_WEB.pdf 25 https://www.metro.ro/gama-de-produse/marcile-noastre/de-ale-noastre

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The table below, shows that the years to come will be characterised with higher demand for customisation, convenience, and wellness-oriented products. To succeed in the market, retailers need to understand the long-term needs of their market, grasp the changing patterns in consumption and technological developments and nurture partnerships that enable a sustainable, innovative and better managed supply chain.

Source: McKinsey – the consumer sector in 2030, trends and questions to consider

Quality affects demand considerably. Customers have become a lot more selective about what they buy and produce of lower quality than expected will not get bought again. Even if price remains consumers’ top priority, a number of consumers are prepared to pay a premium for higher-quality produce.

Examples In France, a recent study by the French Observatory “Observatoire Société et Consommation” showed that while 50% of French people perceive that their purchasing power has decreased over the past 5 years, nearly 60% favour quality products, even at a higher price. This is particularly true for fresh produce: 72% of respondents were ready to pay a higher price for quality fruit and vegetables, 76% for fishery products, 63% for dairy products, and 71% for meat products. In France, consumption of quality certified processed meat (label rouge) has increased (+7% in volume in 2014, following a 3.6% increase in 2013) in a context of overall declining consumption in the category.

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1 Tonnages commercialisés en LR seul et en IGP+LR / 2 Enquête PRODCOM 2012 / 3 Chiffre d’affaires sortie entreprise

de transformation /

4 Tonnages commercialisés en IGP seul et en IGP+LR Source : INAO

In France, added-value products are among those achieving greatest growth prospects:

In the EU, certain countries face a huge gap between supply and demand. For instance, in Belgium, the demand for organic products has been growing on a continuous basis (+4% in 2014) and the fastest growing category has been organic dairy, with a market share of 11%26. Belgian retailers face difficulties sourcing organic products to meet this increasing demand, as there are structural shortages in organic pork, turkey, milk and to a lesser extent in some fruits and vegetables. A similar situation exists in France, where about two -of organic pigmeat is imported because of insufficient domestic production.

26 https://www.colruytgroup.be/sites/default/files/financial/annualreports/pdf/volledig-verslag_en-2015.pdf

Evolution tonnage

2014

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Retailers encourage structured supply chain dialogue – e.g. through interbranch organisations or any other settings. Whilst respecting competition law requirements, these encourage sharing of information about market trends and facilitate adjusting production to consumer needs and requirements.

Examples France: French Retail Federation (FCD) joint initiative with Coop de France In 2015, FCD, representing large retailers in France signed a joint initiative with Coop de France, representing agriculture cooperatives. Based on a recognition that many food prices and consumers’ food budgets have decreased, the two organisations developed a joint initiative to give new impetus to business relationships (by identifying and drafting good practice as a basis for commercial agreements), improve competitiveness, enable sustainable development and mobilise local and regional networks. Portugal - PARCA Since 2011, Portugal has put in place a national platform (PARCA) that brings together government bodies, farmers, manufacturers and retailer associations27. The aim of this initiative is to promote Portuguese products and highlight the importance of the agri food sector for the economy. In addition, PARCA is expected to improve transparency and bring equity in the value distribution along the food supply chain. Furthermore, the platform has initiated debates on trading practices and conflict management and it has brought an observatory to assess the price formation from farm to fork. Belgian Supply Chain Dialogue In 2014, through their supply chain dialogue, retailers and farmers agreed on common terms of reference covering 80% of their needs in the procurement of fresh products. This reduces the time and resources invested by farmers in handling different audit schemes. In response to the dairy crisis, the Belgian supply chain dialogue set up a private temporary fund to support farmers in 2015. Linked to this, they agreed on the development of a risk management toolbox comprising 11 measures to address difficult situations arising in the agricultural sector and covering issues such as sourcing, insurance schemes, contractualisation, production thresholds, the futures market, diversification, marketing, dedicated logistic chains, export facilitation, below cost selling prohibition and CAP strengthening.

27 http://www.gpp.pt/parca/

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Conclusions and policy recommendations:

There is only a very limited connection between retailers’ relationships with their supply chain and the agriculture crisis. In order to meet changing consumer demand for quality products, retailers need a farming sector, which is: ­ better organised: the countries least affected by the crisis are countries where farming is

better organised; ­ more responsive to consumer demand: in certain countries affected by the crisis, demand for

organic milk or pigmeat is not being met by farmers domestically and a large proportion of organic products have to be imported;

­ more responsive to market signals: by maintaining high levels of production, producers are only serving to drive the market price down further; this has to stop. Retailers are keen to share market information with farmers to help them plan, and to encourage them to add value on the farm to meet increased demand for locally-sourced or artisanal products.

­ Less fearful about engaging with other food business operators: farmers must become agricultural entrepreneurs and look to run their farms like any other business using market information to grow what the market wants to buy.

A return to quotas and prices set by committee in Brussels is not the way forward, not least as it cannot create a demand-driven or sustainable agricultural sector. Retailers support strongly the efforts of Commissioner Hogan in this respect. We also support the Commission decision to encourage a temporary voluntary reduction of milk production and ask the Commission to play an active role in facilitating discussions among cooperatives, producers organisations and other forms of association to ensure a level playing field across Europe. It is important to prevent efforts in certain countries to limit production being jeopardised by lack of action in others. It is also worth pointing out that reintroducing high intervention prices will do little to help the small farmers who are suffering most, but rather increase the income of already profitable large farms.

Whilst not wishing to downplay the crisis, the task force should not forget that 45% of farm income still comes from the guarantee of CAP payments unrelated to production. This is a safety net no other industry, including retail and wholesale enjoys.

We therefore agree with the ideas put forward for looking at two sorts of agriculture in the future: ­ large-scale production of commodity products that are undifferentiated, export-oriented and

whose price is set by the dynamics of global supply and demand; ­ medium-sized and small farmers, that also serve a general interest and play a key role in

maintaining the land and jobs in rural areas. They need help to retain value on the farm through tapping more directly into the growing demand for local and speciality foods which are traceable to traditional methods and production. They also need support in developing entrepreneurial skills, how to use market information to their advantage and how to work with operators such as larger retailers.

We also ask policy makers to: ­ maintain a market-oriented CAP that respects the single market and open competition and

supports producers responding to market signals. As an overall principle, any business that is insulated from market demand or competitive pressure has less incentive to change, modernise and compete but in doing so it ultimately condemned to fail;

­ help facilitate price differentiation in the chain, where this is currently not possible; for example in the milk sector, unless a specific scheme is established, a retailer cannot identify individual farmers who produced the milk and therefore have no basis to establish any form of price differentiation;

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­ to reduce the unnecessary administrative and financial burdens which add to farmers’ production costs, but also proper enforcement of existing EU regulation to ensure that farmers and retailers across Europe benefit from a level playing field;

­ refrain from taking action that would limit the development of retailer brands; featuring the name of the producer on labels should be decided voluntarily between retailers and producers;

­ to encourage entrepreneurial skills development in the agriculture sector; ­ to encourage a structured supply chain dialogue among sectors, including manufacturing, e.g.

through interbranch organisations, to help farmers better anticipate consumer needs; ­ not to forget that markets are also about the needs of consumers, many of whom are still

struggling to make ends meet since the economic crisis. Farmers’ hard work and commitment should not be wasted by producing food for which there is no market.

Retailers are an easy target, but the wrong one in seeking a scapegoat for a crisis which is internal to the agricultural market; reducing the level of competition or adding further regulatory burdens at any stage of the supply chain will only come to the expense of consumers through higher prices, less choice and less innovation.

EuroCommerce EuroCommerce is the principal European organisation representing the retail and wholesale sector. It embraces national associations in 31 countries and 5.4 million companies, both leading multinational retailers such as Carrefour, Ikea, Metro and Tesco and many small family operations. Retail and wholesale provide a link between producers and 500 million European consumers over a billion times a day. It generates 1 in 7 jobs, providing a varied career for 29 million Europeans, many of them young people. It also supports millions of further jobs throughout the supply chain, from small local suppliers to international businesses. EuroCommerce is the recognised European social partner for the retail and wholesale sector. http://www.eurocommerce.eu

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Annex 1: Analysis of the milk and dairy supply chain, France

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Annex 2: Retail concentration in the EU

Source: European Commission, DG Competition

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Annex 3: Fragmentation in the agriculture sector

Source: European Commission, DG Competition