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Private labels muzzle retail sector growth

This is the second installment of the four-part series by Fred Aminga on what is hailing Kenya’s supply chain

Running on supplier’s cash to fuel businesses was only a tip of the iceberg in the dwindling fortunes in a retail value chain wrought by unfair practices and manipulation. Suppliers and manufacturers say the misuse of private labels by retailers to gain undue advantage over suppliers is a key cog in undermining growth of the retail sector.

The move, where retailers package and sell own brands in their own stores, make them direct competitors of suppliers and is squeezing national brands out of the market as a result of shrinking shelf space.

Under this strategy, though two products are supplied to retailers, the cost of the product packaged with a private label is cheaper than the supplier’s brand. However, Retail Traders Association of Kenya (Retrak) says the fast growing market intervention is designed to provide specific consumer values including price and quality.

“Such values arise from lower provision costs due to logistical and reduced brand management costs,” it says, adding that at all times private labels are accorded equal treatment on the shelves and beyond.

“Naturally customers in any retail environment vote with their wallets and are unlikely to pick a product that doesn’t meet their value needs,” says the lobby group. But suppliers who include manufacturers say in the course of business dealing, they feel manipulated and treated unfavourably by some retailers who demand lower purchases compared to others once they enter into an agreement.

By virtue of owning shelve space and supply networks, suppliers feel retailers hold them hostage, sometimes using threats of removing them from suppliers list to arm twist them.

Such threats give retailers undue advantage to suppress suppliers who find it difficult to even address genuine complaints. This usually makes them play ball or else they lose prime positions on the supermarket shelves even as retailers take up to 240 days to make payments.

That is why retailers can afford to order goods in bulk and they can return goods to suppliers as they wish. A report on trade in Kenya retail sector says corporate impunity meted in the value chain sometimes comes alongside unilateral change of contracts from a purchase contract to a consignment sales contract or replacing the goods with other goods.

It is not uncommon for retailers to also come up with unpredictable transfer of costs or risks to suppliers by imposing requirements such as funding the cost of promotions despite shops being points of marketing.

Suppliers are sometimes forced to lower prices for particular goods at levels that are extremely lower than ordinary delivery prices of equivalent goods and irrespective of business dictated margins. According to suppliers, they are sometimes forced to exceed the limits using forced discounts while others are asked to re-sale products at a loss.

Retailers are also on the spot for using intelligence from suppliers to exploit advance product information and compete with the national brands. The study also reveals that suppliers also fear retailers could be sharing the information with third parties, despite the sensitive information being provided confidentially by them.

Retrak, however, says that in an information economy, either party remains free to exploit and harness information within their reach responsibly, adding that no instances of exploitation had been recorded.

Some retailers demand that suppliers limit deliveries to other retailers in a move that affects availability of the products in the market, hiking costs of products even in retail stores seeking higher margin.

“Painfully the suppliers abide in order to remain in business. The practice is quite recent, traced to the last 18 months when the retailer’s margin increased from 18 per cent to 30 per cent,” says the study conducted late last year.

Suppliers also have issue with the possibility that retailers are exploiting advance information on products and plans that they have access to in their capacity as buyers to develop own private labels.

Refusal by some retailers to put essential terms in writing have made it more difficult to establish the intent of parties and to identify their rights and obligations under the contract.

The fact that retailers sometimes withhold essential information relevant to the other party in contractual negotiations is increasingly becoming an issue of concern. “Some retailers refuse or avoid putting essential terms in writing.

This makes it more difficult to establish the intent of the parties and to identify their rights and obligations under the contract,” the report says. To revive the dwindling fortunes of the retail sector, suppliers and manufacturers and retailers have now agreed on the need for a Code of Practice to ensure fair trade practice and prompt payment. They have recommended an industry-driven regulation geared towards stimulating development of the retail sector.

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