Govt Orders Supermarket To Pay Ksh1.1B Penalty Over Abuse Of Buyer Power

The Competition Authority of Kenya (CAK) on Tuesday, December 19 ordered a popular supermarket chain in Kenya to pay a fine amounting to a total of Ksh1,108,327,873.60.

In a statement, CAK accused the supermarket of separately abusing its bargaining position with Pwani Oil Products Limited and Woodlands Company Limited.

CAK is established under section 7 of the Competition Act No.12 of 2010 ('the Competition Act'). The Authority enforces the Competition Act to enhance the welfare of Kenyans by, among other roles, sanctioning Abuse of Buyer Power (ABP), as was the case here.

Buyer power refers to the ability of a powerful buyer to obtain terms of supply outside the scope of normal business practices or that are disproportionate, unfair and detrimental to a supplier, or unrelated to the objective of a supply contract.

Shoppers queue in a supermarket in Kenya. /CITIZEN DIGITAL

It is also the ability of a buyer to reduce profitability below a supplier's normal selling price, or more generally, obtain terms of supply more favourable than a supplier's ordinary contractual terms.

The Act provides a non-exhaustive list of the manner through which ABP manifests in the marketplace including reducing supply prices by significant amounts or below competitive levels, threats of termination or unilateral termination of contract without a reasonable justification, delaying payments, refusal to receive or return goods without justifiable reasons, and transfer of costs or risks to suppliers.

CAK revealed that according to investigations, the supermarket chain's parent company was fined Ksh1.1 billion for separately abusing its superior bargaining position over the two suppliers.

Woodlands processes and supplies retail stores across the country with refined natural bee honey from Kitui County while Pwani Oil processes and supplies Fast-Moving Consumer Goods, specifically edible oil/fats, skin-care products and washing soap products.

Further, the supermarket chain was required to amend all its supplier contracts and expunge clauses that facilitate abuse of buyer power, including but not limited to the application of listing fees, collection of rebates, and unilateral delisting of suppliers.

The Authority also ordered the retailer to refund the suppliers a total of Ksh16.8 million in rebates deducted from their invoices as well as Ksh500,000 that was billed as marketing support (store opening/listing fees).

Rebates are a refund of a percentage of sales offered by a supplier to its customer, for example, a retailer, in exchange for a benefit such as early payment by the retailer, or as a reward for surpassing designated purchasing targets or an incentive for an increase of volumes ordered by the retailer.

CAK revealed that the supermarket charges its suppliers at least three types of non-negotiable rebates that are as high as 12%. The rebates are deductible annually and monthly and have been increasing on an annual basis, thereby significantly reducing the final payout to suppliers.

Investigations also determined that the supermarket's suppliers are required to provide free products and pay listing fees for every new branch opened as well as post employees to the supermarket's branches. These practices amount to the transfer of the retailer's costs to suppliers, which is prohibited by the Competition Act.

"Specifically, Woodlands was required to provide one carton per stock-keeping unit (SKU) and pay Ksh50,000 as a condition to commence supplies at new branches. Pwani Oil was required to provide two free cartons per SKU and pay Ksh200,000 for similar purposes.

"Given that one product has several SKUs based on variants produced, this requirement has significant financial implications on the profitability and competitiveness of suppliers," added the statement.

The Authority's Acting Director-General, Dr Adano Wario, noted that ABP is typically meted out on Small and Medium-Sized Enterprises (SMEs) who accept adverse conditions from their powerful buyers who control critical infrastructure and access to consumers, such as a country-wide network of branches.

SMEs account for 98% of all businesses in Kenya, contribute up to 40% of GDP and are the source of livelihood for millions of Kenyans, directly and indirectly. However, despite their centrality to economic progress, SMEs in the country contend with various challenges leading to the closure of many businesses in infancy.

"At the core of the Authority's mandate execution is the promotion of inclusive economic development. Abuse of buyer power defeats this aspiration by crippling suppliers, who are mostly SMEs, and whose contribution to our economy cannot be overstated," said Dr Wario.

"While appearing to enable an offender to offer lower prices to consumers, this apparent benefit is short-term and unjustifiable when placed against the long-term damage caused to the upstream supplier market, including forced exits, especially by SMEs in the manufacturing sector."

Goods being sold in a supermarket. /FILE