The Agency for Protection and Development of Competition of the Republic of Kazakhstan (APDCRK) published an analysis of the services provided by retail chains and large retail outlets during the summer. It was revealed that retail chains earn nearly 70% of their profits from additional services imposed on producers, while just over 30% comes from trade markups.
The additional services, referred to by producers as non-existent, are only present in retail chains and are absent in any other trading formats: neither in small neighborhood shops, nor in numerous bazaars, nor at gas stations, cafes, or hotels.
Why are these services considered non-existent? Because they are not provided by retail chains, even though fees are charged for them. The burden of these so-called "services," which include retro bonuses, product placement services, advertising placement, promotional activities, "entry bonuses," and others, falls on the shoulders of producers. The antimonopoly agency also found that retail chains charge fees for certain informational services three times a year - quarterly, semi-annually, and annually.
Industry associations in the food sector have long sounded the alarm about the onerous conditions imposed by monopolistic retail chains on domestic producers.
The publication of the APDCRK analysis confirmed the facts that retail chains, taking advantage of their dominant position in the country, impose burdensome sales conditions on producers. According to the APDCRK report, Kazakhstani food retail has free rein for any abuses and violations, and the interests of retail chains are prioritized over the rights of Kazakh producers and consumers, as well as over the interests of the national economy.
The report covered the operations of food retail from 2021 to 2022 across more than 125 major entities in internal trade throughout the country. It indicated that there have been longstanding issues in the relationship between retail chains and product suppliers due to the imposition of conditions that restrict the rights and interests of producers and suppliers.
When it became clear that retail chains earn nearly 70% of their profits from these non-existent services and just over 30% from trade markups, market participants acknowledged that this is no longer about economics but rather about disguised racketeering, where chains simply "squeeze" money from producers. The outcome has been a reduction in the production of Kazakhstani products, as producers can no longer sell their goods at fair prices.
This approach by retail chains towards working with and cooperating with producers and suppliers also results in all the aforementioned "services" being incorporated into the product pricing, making it more expensive for consumers and less competitive compared to imports. The reasons why imported food products perform better under these conditions than local products have been voiced multiple times. First and foremost, this is due to the high level of government subsidies and support for food producers in neighboring countries.
We have a significant amount of products from Russian and Belarusian producers. However, it must be noted that Russia invests five times more in the development and support of farmers than Kazakhstan. According to industry associations, Belarus invests even eight to nine times more. Additionally, in Belarus, it is enshrined at the state level that domestic food should occupy 70-80% of retail shelf space. In Russia, retail chains earn, as expected, from trade markups rather than from retro bonuses or other non-existent "services."
Kazakhstani industry associations believe that retail chains are essentially undermining the fundamental economic principles of the trade business. Retail should earn its percentage from the sale of goods through trade markups, as is done worldwide. According to APDCRK data, the largest retail chain in the country, Magnum, provides the highest number of "services" nationwide - 34 services, followed by Metro with 16 services and SMALL with 11 services. Consequently, the share of income from food products from January to September 2022 for the same major chain from additional services was 62%, while from retail sales of goods, it was 38%, and for their closest competitors, it was 65% and 35%, respectively.
“ As a result, suppliers are forced to include a percentage of compensation for the promotional services in the product price, which subsequently affects the final cost of food products. There is also an excess of the legally established 15% trade markup on socially significant food products (SSFP) by retail chains, which also impacts the final price of the goods. ”, – notes the APDCRK.
Interestingly, even under such "draconian" conditions for domestic producers, chains not only violate the requirements regarding the size of the trade markup on SSFP but also manage to delay payments for already sold products. Meanwhile, the norms of responsibility for delayed payments for goods are absent in our country, although in global practice, administrative liability is provided for such delays. As Vladimir Kozhevnikov, director of the "Dairy Union of Kazakhstan," reported, payment delays for delivered and sold products often exceed one or two months. There was even a completely outrageous case where a retail chain did not pay a supplier for nearly a year for sold goods, accumulating a debt of almost one billion tenge.
“We have long been raising alarms about the unacceptable conditions imposed on us by the chains. We welcome the publication of this APDCRK report, which clearly states that contrary to normal economic models, chains earn not from trade markups, as is the case in retail across the world, but by imposing unnecessary services on Kazakh producers. This situation must be urgently changed, as it concerns the fate of domestic food production and whether it will survive overall or completely yield to imports,” - asserts Vladimir Kozhevnikov, director of the "Dairy Union of Kazakhstan."
His colleague, president of the "Kazakhstan Poultry Farmers Union," Ruslan Sharipov, notes that this is also a matter of food security. In this light, the relationships between sellers and producers should not be regulated by a "wild" market and the rules imposed by retail chains from a position of power.
“We are simply shocked by the figures presented in the analytical report of the APDCRK. We have long said that retail chains oppress us, but when we saw these numbers, we realized how deep the problem is. In the recommendations of the APDCRK, it is clearly stated that this market needs strict regulation and that retail chains have no right to demand that domestic producers comply with all the conditions and pay for "services" that they not only require but also extort like professional racketeers. Kazakhstani food production is completely suffocated by retail chains. It is now crucial to adopt responsible legislative decisions that will put a stop to the abuses of retail chains and create priority conditions for domestic producers in their own country,” - believes Ruslan Sharipov, president of the "Kazakhstan Poultry Farmers Union."
Producers primarily rely on the draft law "On Amendments and Additions to Certain Legislative Acts on Consumer Rights Protection," which aims to regulate the market and legally address the relationships between retail chains and producers.
“Representatives of industry unions have long told us that such a situation exists, so the APDCRK report, in which all their complaints are supported by concrete facts and figures, has come at a very timely moment. The report presents truly outrageous figures. Our country needs to have a normal market economy that operates honestly, where all parties, all participants in trade activities are equal and adhere to the law. If the current laws do not fully regulate these processes, then it is time to improve them. Therefore, the work we are doing to amend the legislation is more relevant now than ever. With our draft law, we are ready to put a stop to such completely unmarket practices in our country,” - noted Majilis deputy Nurzhan Ashimbetov.
In its report, the APDCRK also states that within its competencies, the agency issued 4 notifications regarding major retail chains for violations of legislation in the field of competition protection. Relevant information regarding 27 cases of non-compliance by retail chains with the established trade markup on socially significant food products in the amount of 15% and the inclusion of trade compensation for social products at rates of 5% or more, which is prohibited by law, has been sent to the authorized body of the Ministry of Trade and Industry.