Brussels, 5 July 2010
Retail Market Monitoring Report: Frequently Asked Questions
1) What are retail services?
Retail services encompass a wide variety of forms (shops, electronic commerce, open markets, etc.), formats (from small shops to hypermarkets), products (food, non-food, prescription and over-the-counter drugs, etc.), legal structures (independent stores, franchises, integrated groups, etc.), and locations (urban/rural, city centre/suburbs, etc.).
2) Why has this report been done?
The retail sector was selected for in-depth work because of its impact on growth, job creation and consumption; and because it showed signs of market malfunctioning. It represents 4.2% of GDP, 17.4 million employees and 20% of European small businesses. It also has many interconnections with other markets both upstream (for example suppliers, employees, transport companies etc.) and downstream (for example consumers).
A well functioning retail market contributes to growth and jobs, and plays an important role in reaching the goals set out in Europe 2020. Retail markets are part of the internal market and as such, specific measures to improve their functioning will be part of the "Single Market Act" due in the autumn.
3) How was the report prepared?
What is new in the approach taken to prepare this report is that the analysis did not only evaluate the economic performance of the retail sector. It considered all economic, social, environmental and consumer impacts by accounting for the linkages that the retail sector has with its upstream and downstream markets. This so-called systemic approach made it possible to identify the main issues affecting the economic, social and environmental performances of the retail sector (in terms of innovation, competitiveness, social and territorial cohesion, climate change, etc.).
It represents a change from traditional policy making which would typically consider one sole policy objective. This approach should lead to more sustainable outcomes that are termed as a “fair” Internal Market approach.
4) What problems with the functioning of retail markets were identified?
The analysis carried out identified the following problems:
Malfunctioning of commercial property markets (for example varying commercial planning rules), limited take-off of e-commerce (it represents more than 2% of total retail service sales in just 4 Member States), insufficient development of commercial communications (for example sales promotions) and independent services providing information on prices and quality (for example internet price comparison sites, or comparative tests of products and services), which give rise to a lack of accessibility by the consumers to a sufficient choice of shops. Proximity of shops is of key importance to some groups of consumers, for example the elderly (17% of the EU population is now 64 or older), the disabled (15% of the EU population) or those who cannot afford a car (9% of EU citizens). But the report highlights that the number of small local grocery shops fell by 3.7% between 2004 and 2009.
Lack of rules or their insufficient enforcement addressing unfair commercial practices between various actors in the supply chain and lack of transparency in quality schemes (for example, labels) and difficulties in their cross-border use because of varying rules (for example language requirements) which may undermine the capacity to invest in innovation.
Negative impact of the informal economy on working conditions, lack of information to consumers as regards social performance of businesses in the retail sector and mismatch between the needs of businesses and the skills of employees in the retail sector that can all impact negatively on working conditions.
High energy consumption, high production of waste, significant contribution to the volume of traffic and congestion due to transport of goods, insufficient account taken of environmental costs in the supply chain (logistics, energy efficiency shops, marketing and communication) and lack of incentives to address these issues, lack of a common method to evaluate environmental impact of products and services sold which give rise to sustainability, efficiency and fairness issues.
5) What is causing the lack of accessibility to retail outlets by consumers?
Consumers lack accessibility to a sufficient choice of grocery shops and thus to a wide selection of affordable and quality products. This problem also impacts negatively on environmental performance (by forcing consumers to travel more) and adversely affects the most socially European vulnerable citizens (for example, it can be very difficult for some elderly people to go shopping because of a lack of shops close by).
There are several reasons that could explain this. First of all, the lack of co-ordination and inefficiency of commercial urban planning rules and malfunctioning of commercial property markets affect the establishment of retailers and consumer accessibility to retail outlets. Second, insufficient take-off of e-commerce in the Internal Market due to a number of obstacles (cross-border delivery costs, inefficient logistics systems, untrustworthy or costly payment systems, bad functioning of redress, etc.) contributes to the problem. Third, insufficient development of commercial communications and independent services providing information to consumers (e.g. websites providing price comparisons or comparative tests of products) make it difficult for consumers to compare retail offers and therefore further deepen the problem.
6) Are big retail chains abusing their buying power by imposing unfair contractual terms on their suppliers?
There are complaints from suppliers about alleged abusive contractual practices. Even large suppliers have reported that they have had to accept what they deem unfair terms from major retailers because they are so dependent on them to sell the volumes for their branded products.
The situation is a complex one. Although it is true that retail markets are highly concentrated, in particular in some Member States, this does not systematically lead to problems and certain very large retailers have long-standing and fair contractual relations with their suppliers. In such instances, both consumers and businesses benefit from these direct contracts between retailers and suppliers. Indeed, by cutting out the intermediary, these contracts can give rise to higher returns for the supplier but also lower final prices to the consumer.
However, it is also clear that some malfunctioning in the contracting process throughout supply chains exists. Small retailers have complained about the selling power of certain wholesalers or suppliers. The impact on affected suppliers is to undermine their innovative capacity and prevent them from developing their businesses. The impact on retailers is to prevent them from sourcing products from the most cost efficient centres, including those located across national borders, which also undermines the smooth functioning of the Internal Market. How to deal with these issues will be looked at as part of the measures to be included in the Single Market Act.
7) Is the development of private labels a problem?
The perceptions of the effects of private label products vary. Some suppliers, especially SMEs, consider this as an opportunity, often the only one, to be able to enter the market. By demonstrating that they have a label, it's a signal of quality. Others have reported being under pressure to supply private label products under unfavourable conditions. Branded manufacturers in particular complain of how their major clients (the retailers) become their competitors with own label products which places them at a competitive disadvantage and prevents them from being able to launch innovative products without them being immediately imitated. The impact of private labels on product competition and innovation under differing contractual requirements will therefore also need to be analysed.
8) What are the reasons for large price divergences between Member States?
Although the increasing market power of retailers has allowed them to control general inflationary tendencies, large price differentials for certain products are found within regional retail markets and across national ones. For example, the price of food and no-alcoholic beverages is, on average, 28.4% higher in Belgium than in the Netherlands. Many factors can explain price differences. For example, transport and logistics costs, differences in average household income or VAT rates may explain some of them. However, reasons linked to local market competitiveness, lack of cross-market communication and information, different legal frameworks or commercial practices such as the territorial restrictions noted above seem to be accentuating these differences. Better information to consumers about the retail offer beyond their usual shopping zones including across borders (35% of European citizens live in border areas) could encourage more competitive pricing strategies and therefore help to reduce these price differences.
9) Why does the labour market not function more smoothly?
The report also points to some labour market malfunctioning in the retail services market. First, there are enforcement issues related to labour law rules as reflected in part by informal economy working in the sector. Second, there are very diverse rules and collective agreements both within and across Member States for many reasons. Third, there appears to be a growing mismatch between the basic skills needed by the sector (notably in the use of ICT applications as the retail sector relies heavily on ICT use) and those of school-leavers and others entering the employment market.
10) How could the retail sector contribute to facing the challenge of climate change?
The lack of incentives and policy co-ordination was identified as an issue making it harder for the retail sector to face the challenges of climate change.
Some progress has been made – for example, the Retail Environmental Sustainability Code signed by many of the large European retail groups recently. However, the report highlights that environmental impacts of the retail sector are linked to many factors throughout the retail supply chain. Lack of accessible shops and waste management are some of the issues raised. Moreover, as these issues fall under the competence of different levels of public administration (from local municipalities to the European level), retailers are often confronted with differing policies. A more global approach and greater level of co-ordination would be helpful to create the right incentives for retailers, of all sizes, to move to ways of operating that minimise environmental impacts.
11) Given the nature of the issues identified with the retail sector, at what level do answers lie?
No decision has been taken at this stage and that is why the Commission welcomes views from all stakeholders on this report. Any proposals which the Commission makes as part of the Single Market Act will include consideration of at which level it is most appropriate to act, if at all, in line with the principle of subsidiarity. Exchange of good practice, or more binding rules are all possible options.
What are the next steps?
The Commission welcomes views on today's report and invites all interested parties to submit their reactions to it by 10 September 2010 to the following address:
DG Internal Market and Services
200, rue de la Loi
or by e-mail: MARKT-RETAIL@ec.europa.eu
The possible measures to address the identified problems will be presented in the Autumn as part of the Single Market Act aimed at relaunching the Single Market.