Modern retailing is here to stay in Sri Lanka and has now captured a wide section of products and services. The traditional trade outlets (kade's) have also upgraded, in order to compete with the modern retailing formats. Under this set up Sri Lanka’s supermarkets should not resort to anti competitive practices discouraging small manufacturers by charging as high as 25% margin on the trade price (or the manufacturer’s price) for keeping these items on their shelves, a senior official of the Consumer Affairs Authority told the Business Times.
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Anti competitive practices are not permitted under the Consumer Affairs Act, and manufacturers have the right to make a complaint to the Director General of the Authority to conduct investigations and to direct it to the Consumer Affairs Council to make its determination.
Supermarkets rejected these claims and said margins are based on operational costs and not exorbitant as asserted by manufacturers.
The Consumer Affairs official noted that the authority has received several complaints from some manufacturers on the practice of supermarkets charging high margins and they have also made a request to control it. There is no room for complacency and sound marketing practice is a must, he warned. In a move that might help reduce the pricing power of the major supermarkets, the official said it would refer any issue to the Consumer Affairs Council for more detailed examination, if the manufacturers insisted on this.
A Fast-Moving-Consumer-Goods (FMCG) manufacturer said that supermarkets (Food City/Keells/Arpico/Lak Sathosa) charge as high as 25% margin on the trade price (or the manufacturer’s price) for keeping these items on their shelves. He claimed that payment to manufacturers, by these supermarkets range from 45 days to 60 days, but often extend even beyond, although they get their monies from consumers promptly upon a sale.
Every year the management of these supermarkets keep demanding another 1% or more squeezing the manufacturers further on the excuse that NBT or electricity rates have gone higher, which costs the manufacturers have also to bear, with the threat that if the manufacturer does not pay the demanded increase, they will take the products off their shelves. By squeezing manufacturers in this fashion, these supermarkets have sent many small time operators out of business, he alleged.
There are many new suppliers wanting to get into the supermarkets and the supermarkets knowing this, take advantage of existing suppliers. In addition, the stores themselves have now become manufacturers, under their brand name mostly sub-contracting to wayside parties and compete with established brands, making it even more difficult for struggling manufacturers. Further, some supermarkets try to even determine the prices at which a manufacturer sells their products displayed in their supermarkets, to be more competitive than in other competing supermarkets, he said.
He pointed out that in the case of products, sold under their brand, such products are given display at “eye level” as against poorer display levels for others. As for profit margins they subsidise their products to attract more consumers since they make profits both from their manufacture and from the margins kept for sale from their supermarkets, he said.
Responding to the claim that Lak Sathosa charges a high 30% margin on some items, a senior official of Lak Sathosa told the Business Times, that as a state-owned institution they have to sell consumer goods at reasonable prices while meeting the operational costs. To balance it Lak Sathosa has to charge high margins from certain manufacturers, if they are not willing to accept it they can go to any ‘kade’ and sell it to them, he said.
Another manufacturer however argued that Lak Sathosa is supposed to sell at lower prices to the public and not make huge profits at public expense.
A senior official of Cargills Food City told the Business Times that their margins on FMCGs are in the region of 1% to 15% and they are not charging as high as 25%. He added that their chain handles over 10,000 consumer items and the company hunts for volumes and price to drive its growth in a tight margin business, as the largest of Sri Lanka’s supermarket chains opens its shelves to competitors. “We are trying our best to get competitor brands on our shelves and we are against anti competitive practices,” he said.
Consumer Foods & Retail Sector Head of “Keells Super” chain of supermarkets, Roshani Moraes said that the margins are fixed by manufacturers and the company is not charging any margins from them. All the products sold at their supermarkets are priced marked and they have no control to determine those prices. On the other hand Sri Lankan supermarkets have the lowest margin for consumer items compared to supermarkets in foreign countries. Suppliers must also negotiate with the retailer on the retail sales price. As a general rule, retail price margins range from 15-20 % for dry products and 25-35 % for frozen products. However the price margin will not be passed on to consumers, she said.
A spokesman for the Arpico Super market chain said that margins vary from product to product and the fast moving products have a low margin. Modern retailing is far from easy. There are numerous challenges to be faced in the market. For example, the operational costs including electricity bills are continuing to rise. Hence, margins are slipping, since price increases cannot be made to commensurate the cost increases, he added.
Manufacturers urged the Consumer Affairs Authority to look at “transfer pricing” and whether it is fair competition for items manufactured by the supermarkets themselves, which situation if not controlled will put many manufacturers out of business. It is high time that the authority checks on what these supermarkets are up to and to ensure a level playing field for both manufacturers who supply them as well as for consumers who ultimately have to bear high prices, a manufacturer said.
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