Retail chains in Kenya are fueled by local suppliers who keep them operational through stocking their shelves with their inventory, so as to attract their target customers. While the two parties enjoy a symbiotic relationship, it has not always been a smooth ride. Many local suppliers have been forced to close shops because of cash flow inadequacy as a result of delayed or defaults in payments from the giant retail chains they supply to. Even with the cash flow challenges, local suppliers dutifully keep supplying the retail chains with inventories & services with the hope of staying afloat.
Large debts to suppliers
The collapse of Nakumatt, Uchumi and Tuskys paint a grim picture of the cashflow risks that the suppliers have had to deal with in the past without any legal recourse. The downfall of the trio ripped off suppliers of nearly KES 30 billion. This situation can be best explained in terms of buyer power abuse. Typically, retail chains have the ability to obtain advantageous terms of trade from their suppliers, but this buyer power is often abused when the retail chain significantly gains more bargaining power than the supplier forcing them to put up with their terms which are often unfavorable.
Over the last 6 years, the retail industry has witnessed drastic changes from new market entrants that has seen an upsurge in supplies businesses, product diversification, the COVID-19 pandemic which transformed the shopping experience for consumers among others. In light of these new developments, the Competition Authority of Kenya (CAK), formulated new rules and regulation to ensure an equal, fair and leveled playfield for the parties involved.
The 2021 Retail Code
To address the issue of buyer power abuse which has been an inherent problem in the ecosystem, the CAK in consultation with relevant stakeholders and relevant government agencies formulated the 2021 Retail Code. The code addresses buyer power abuse issues specific to the retail industry and borrows heavily from the UK’s Groceries Supply Code of Practice (the “Groceries Code”) which also provides protection to customers.
The Code is founded on the fair dealing principles which applies to all suppliers and retailers including self-selection stores, supermarkets, and hypermarkets. Their relationships must be built on good faith with clarity in terms of production, delivery and payments when dealing with suppliers and product movement, stocking levels and cash flows when dealing with the retailers.
Empowered by the Competition Act, 2010 (the “Act”) as a watchdog in the industry, CAK can now investigate and punish buyer power abuse. Conviction attracts an up to 5-year prison sentence or up to KES 10,000,000 fine. CAK can also impose administrative remedies such as a penalty of up to 10% of the preceding year’s gross annual turnover of the defendant.
The Case of Carrefour vs Orchards Limited
The case is a stellar example of the Retail Code in effect. In 2021, Carrefour was found guilty of abuse of power after Orchards Limited; a local supplier of probiotic yogurt petitioned its case to the CAK on the accounts of; unilateral contract termination without notice to the supplier citing failure to meet the demanding supply chain terms, requirement to pay KES 50,000 as listing fees for each of their products, requirement to pay a further rebate of 10 percent on their second delivery of supplies and 1.25% on their annual sales and transferment of labor cost to Orchards.
CAK ordered the retailer to refund Orchards KES 289,482 in form of rebates within 30 days and pay damages of KES 130,856 for loss arising from the terminated contract. Carrefour was also slapped with a financial penalty of KES 124,768 amounting to 10% of Carrefour’s gross annual turnover from the sale of Orchards product. The company was required to seek CAK’s approval before refusing to accept any goods or returning them for that matter.
The Retail Code fixes the loose ends that the suppliers have always had to worry about when engaging large retail chains. The suppliers have also come up with their own self-protection mechanisms by creating platforms where they can share payment history of different supermarkets to help them understand their creditworthiness.
Retail chains should endeavor to have good working relationships with their suppliers, as it will impact how their businesses grow. They should start by giving them favorable terms, and paying them on time, to ensure that their suppliers remain operational to keep providing them with stock. This will not only save them reputational risk and court cases, but will cultivate a long lasting relationship with the suppliers which will trickle down to a satisfied customer base that will grow their profits.
Author: Inzillia Sasi