08/03/2023
The Georgian Business Week
№1334, 20-26 February, 2023
THE MINISTRY OF ECONOMY BEGINS WORK ON A NEW BILL TO REGULATE FOOD PRICES
On the instructions of Georgian Prime Minister Irakli Garibashvili, the Ministry of Economy and Sustainable Development is starting work on a new bill to regulate food prices. The Prime Minister announced this at a government meeting on February 22.
According to him, the bill is created on the basis of the Directive of the European Union regarding fair trade.
“When we talk about inflation, last month inflation was 9.4 percent, of which 6.1 percent is accounted for by food prices. So, we can assume that as soon as these prices are corrected, inflation will also fall to the level that we have planned, and this will be reflected in the pockets of our people. In the near future, the government will send this bill to the parliament, and I hope that we will receive these regulations in the near future. Otherwise, there is simply no way out. We don't want anyone to get the impression that the government is rudely interfering in business. This is not our rule, not our handwriting and not our practice, we have found such a solution,” Mr. Garibashvili said.
According to primary market research, the surcharge for basic staples, such as rice, buckwheat, pasta, sugar, salt, vegetable oil to wholesale prices varies between 50-80%. Beyond that, allowance in the case of retail prices additionally reaches at least 25-30%.
According to the experts, excess profits end up in the pockets of retail. So, the head of the Georgian Distributors Business Association Iva Chkonia considers that the main culprit for the escalating consumer prices in the country – predatory policies of monopolists, in the face of network retailers.
“Soon there will not be small and medium players in the retail market. Taking advantage of its monopoly position, major trade networks cut off the whole small and medium business from end customers and forced them to raise retail prices. The rules of the game are set up by retail, which gained strength recently. Imagine that in total already 70 percent of the market is controlled by the retailers. In fact, all small and medium facilities switch to franchising models. If you do not follow the rules of the game, you will not be able to work. Consider that in two years there will not be retail facilities in the country. They will be finally swallowed and displaced from the market by major network retails,” Mr. Chkonia said.
He also mentioned that the consolidation process is continuing in trade networks.
“One of the clearest examples – is news from one certain retail network, which purchased two separate networks at once in 2023. Three brand supermarkets merged. Due to its monopoly position on the market of retail trade, as well as strengthening, retailers dictate strict conditions for importers, producers and distributors. For instance, the network consisted of three hundred sales facilities and then their number increased up to one thousand. With consolidation the retail network starts demanding improvement of conditions. For example, before “cashback” amounted to 20 percent, after the consolidation retail started demanding 30 percent.
It turns out that, in fact, costs for opening stores are paid by distributors, and eventually end customers. Price increase on food is caused by the predatory policy of retail chains. Year to year, they are increasing prices of so-called “entrance ticket” on the shelves of chain stores, as well as their share in the selling price of goods. Suppose that supplier agreed to pay one hundred thousand lari that his goods hit the stores. They also agreed that calculation for the sold goods will be on the fifth day of the month, and the retro bonus of the chain will amount 10 percent of its realizable value. But next year the retailer starts to revise terms. For instance, the network refers to the fact that it includes not 500 hundred but already 600 stores. So, payment will be made not on the fifth, but 25th day of a month, and a retro bonus of 10 percent increases up to 20 percent. In case of refusal goods will have to be removed from shelves, and one hundred lari, invested for “entrance ticket” will be lost. Moreover, if you change your mind and decide to returns, then you have to purchase an “entrance ticket” again, however, it will already cost 150 thousand lari.
So, in order to somehow satisfy the increasing growing appetite of retailers, distributors have no choice but to raise the price for end customers. Frequently, retailers say directly: increase price, main thing, give us retro bonus in 30 percent,” stressed Mr. Chkonia.
Note that recently three retail chains merged – «Magniti», «Gvirila» and «Daily». According to National Agency of Public Register the retail network “Daily” belongs to four physical entities: David Kukhalashvili (51.5%), Zurab Zakariadze (37%), Rusudan Maisuradze (10%) and Marina Petriashvili (1.5%). Among the owner of retail chain “Magniti” are listed five legal entities: Keystone Investment Ltd. (30%), Dolnay Consultants Ltd. (26.67%), GBC Invest Ltd. (20.04%), Good Products Ltd. (13.33%) и Retail Investment Ltd. (9.96%). The owner of 100% of the network “Gvirila” is Mialina Khutsishvili.
However, despite this merging, major market players of Georgian retail chain are such giants as “Nikora”, «Carrefour», «Spar» и «Ori Nabiji».
As the experts note, analyzing this problem, it should be known that in the world’s developed economics there is no pure market. Every State uses its toolbox, which influences the development of particular sectors of the economy.
And this is not only tax policy, but direct restrictions as well. In almost every country there are institutions for price control. They operate on the basis of anti-monopoly legislation and laws regulating prices on goods and services.
For instance, in Sweden such a law gives the state the right to freeze prices in case of war or danger of its occurrence or in case of threats of significant overall price increases.
In addition, the state can establish a maximal level of prices for individual products, introduce an order, under which price increase is possible after prior notification.
Similar mechanisms work in Austria, where around 10% of prices on goods is covered by government regulation and where the system of “social partnership operates” between business and state.
Roughly the same proportion of regulating prices on consumer goods is inherent to economics of Spain. In doing so, the government’ attention is focused on essential commodities and those produced by monopolists.
In the European Union, the issue of the relationship between manufacturers and chains gained resonance in the late noughties, when a number of EU member states initiated antitrust investigations and studies on contractual relations and the power of buyers in grocery retail.
In the EU, Directive №2019/633 of April 17, 2019 on unfair trade practices in B2B relations in the supply chain of agricultural products and food products is in force at the level, which is somehow reflected in the legislation of each EU member.
The main provisions of the directive, in particular, prohibit the postponement of payments to its suppliers for perishable agricultural and food products later than 30 days after delivery or the day of determining the value of this delivery, and for other agricultural and food products later than 60 days; cancellation by the network of the delivery of perishable food products less than 30 days before such delivery, etc.
The Directive points to the need to create in each State an appropriate State body that would resolve issues of the supply of agricultural and food products, consider complaints from networks and suppliers, resolve disputes through a certain procedure or mediation provided for by laws.
