The “evil” that Rimi does

07. jūlijs, 2008


Vjačeslavs Dombrovskis

Everybody must have heard stories about how large retail 'monsters' (eg Rimi and Maxima) exploit small producers by squeezing huge discounts, not paying them on time, and generally not treating them very well. When a story is put this way, it's hard not to be sympathetic with those who are "small" and many, and not to feel anger towards those who are big and few (and very rich). Moreover, when the "big" and "rich" are foreigners (from Norway and Lithuania), and the "small and many" are local producers, this quickly becomes personal. It's "us" versus "them". The mob demands blood and politicians are only too happy to spill some. It's not a big secret that recent amendments to the competition law are designed to protect the interests of small producers in their dealings with large retailers. Isn't it a good thing, you may ask? Not necessarily. Actually, the amendments are a curious way of shooting yourself in the foot.

Anyone who would care to read the actual text of the amendments can’t help but wonder as to what their authors really meant. Perhaps oversimplifying a bit, the amendments forbid firms that wield considerable market power (eg Rimi and Maxima) from using it in an “evil” way. Presumably, “evil” is whatever harms small producers. Yet this raises a number of interesting questions. For example, is it “evil” when, say, Maxima demands a discount from a producer? More generally, is it “evil” to ask for a lower price? Last week I was asked to contribute to a seminar organized by SSE-Riga and Jurista Vards, where a bunch of lawyers were having a very hard time trying to figure out what’s “evil” and what’s not. It might seem counter-intuitive at first, but “evil” to small producers can be a good thing for a much larger and more important group – the consumers.

First, lets take the most obvious case – the discounts that large retailers relentlessly squeeze from the small suppliers. I am sure producers perceive it as the most wicked and evil act on earth. Yet retailers pass these discounts on to their customers, who certainly perceive it as a good thing! Are producers’ interests more important than consumers’ interests? That would be a very slippery road to step on.

Second, lets look at a somewhat more complicated issue as to who should bear the risk for unsold goods. Typically, neither producer nor retailers can accurately predict whether, say, the buyers will buy exactly 10,000 packs of milk within a week. Yet a retailer must decide on how much milk to put on the shelves. Usually, the arrangement is that the unsold milk is returned to the producer. That is, the producer assumes full risk for any unsold milk. The amendments seem to suggest this is “evil” and that the retailers should not return unsold goods to the producers. Well, think of what happens as a result of this “amendment”. The retailers still have to decide how much milk to buy from producers in the first place. Since there is some uncertainty about the demand, the retailers really have two choices. They can buy milk in relatively large quantities to make sure that demand is satisfied at any time. Or, they can purchase a relatively small quantity of milk but then run the risk that some buyers will face empty shelves. Naturally, if the amendment says that retailers should bear all risk for unsold milk, the retailers would choose to keep smaller inventories of milk. So don’t be too surprised when you run into an empty shelf after amendments come into effect.

The above is just one example (of many) where a seemingly “evil” act is justified because it benefits the consumers. Unfortunately, it seems that the authors of the amendments narrowly focused on what’s good for the local producers, totally ignoring the consumers. Sorting out what’s “evil” and what not can be quite complicated. Here is how something that might have been conceived with best intentions, (i.e. the amendments), is actually quite evil. According to the law, the penalties for “evil” actions are quite high – reaching 0.2 percent of the perpetrator’s turnover in case of repeat offense. In case of, say, Rimi, that’s about 0.5 million Ls. The amendments, however, are quite vague, filled with words like “unfair” and “unjustified”. Needless to say, it’s hard to interpret what is “fair” and what’s not. From retailers’ point of view, the amendments open the door to costly litigation and the risk of large penalties. Naturally, the effect of the amendments is to increase the risk of running large retail chains and the (expected) cost of doing business there. And higher costs mean higher prices to the consumers.

To sum up, the amendments to Competition Law will probably achieve their aim of protecting interests of producers. Yet they will do so at the expense of the consumers. As a result of the amendments, consumers will face higher prices and lower quality of shopping experience. The truth is that Rimi and Maxima (and other retailers) make our lives better, partly by being able to squeeze lower prices from the producers (and disciplining them in many other ways). Hundreds of thousands vote with their feet every day by shopping at numerous supermarkets and hypermarkets. Perhaps politicians should take clue from that!

PS I nearly forgot that there will be another group that will win handsomely. The language of the amendments and their sheer arbitrariness will make the resulting legal battles lengthy and costly – to the great delight of the lawyers.

In Latvian here

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