What should FMCG companies and retailers pay attention to when negotiating?

Dr. Judit Firniksz
senior lawyer
Réti, Várszegi & Partners Law Firm PwC Legal

It has a great impact on the negotiations between various actors in grocery retail that as of 1 May 2020 the Government Decree 109/2020. (IV. 14.) introduced a retail tax for financing the so-called Pandemic Defence Fund. According to the government’s plans, multinational retail chains must contribute with HUF 36 billion to the fund named above every year. The new retail tax must be paid both by retailers operating physical stores and e-commerce enterprises, and it doesn’t matter whether they are in Hungarian or foreign ownership. As for the basis of calculation, it is the annual net sales revenue of the retailer in the one-year preceding the tax’s introduction. Only those retailers must pay the tax which had net sales revenue above HUF 500 million, and there are progressive tax categories above this sum. In this situation, retailers might come to the conclusion that they should offset this decrease in their revenues by lowering the prices at which they purchase from suppliers.

Dr. Barbara Dávid
trainee lawyer
Réti, Várszegi & Partners Law Firm PwC Lega

In order to protect suppliers from the damages, they would suffer if such steps were taken by retailers, the Government Decree 180/2020. (V.4.) caters for protecting the interests of agri-food product suppliers during the emergency situation. In line with this, as of 5 May 2020 new rules apply to retailers in their negotiations with suppliers. There are two important changes in regulation. Firstly that from now on it qualifies as unfair trade practice if a retailer decreases the price they pay to the supplier for the goods sourced, against the will of the supplier. This creates a somewhat difficult situation, as in most cases the positions of the negotiating parties are opposing, and in debated cases, it must be proven that the supplier did protest against the price decrease, but the price was still reduced – unilaterally by the retailer.

Secondly that as of 5 May a retailer mustn’t threaten the suppliers with ending the contractual relationship between them, stopping to order form them or ordering less from them, cancelling promotions with them or in any other way, in order to achieve the reduction of the prices at which the supplier sells its products to the retailer. Once again, it is very difficult to prove in practice that such behaviour has occurred on the retailer’s side. Still, the significance of cases like this is indicated by the fact that the authorities aren’t allowed to end the examination of cases like this with the verdict that the retailers must perform their contractual obligations: it must also be stated by the National Food Chain Safety Office (NÉBIH) that the given retailer has broken the law. For the time being these two changes are only in force during the emergency period, but there is a chance that they might remain valid afterwards.

Competitors must practice special care when revealing or exchanging any strategic information. However, horizontal information exchange can’t only be direct, as data can also be shared in indirect fashion via a third party such as a trade organisation or a market research company. Information exchange can also be realised by suppliers or retailers of enterprises, and this leads to the formation of a so-called ‘hub-and-spoke’ cartel structure, examples of which have already occurred in Hungary too. There are risks in passing on information vertically too: those situations where the negotiating parties share information in a pro-competitive fashion must be separated from those where the suppliers use the retailer (or vice versa) as an anti-competitive information exchange medium – basically a source of information. Special attention must be paid to situations where one receives sensitive information without asking for it or against their will, which information isn’t even used afterwards, because, in accordance with the so-called Anic Presumption, the use of received information is always assumed until the company in question proves the opposite.

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European Court of Justice discussed the sectoral tax

This isn’t the first time in Hungary that a special tax is imposed on certain actors in the retail market. The European Court of Justice (ECJ) examined whether the special tax introduced between 2010 and 2012 was in harmony with European Union legislation. In March 2020 the ECJ ruled: the sectoral tax was compatible with the regulations of the European Union. //

Special proving rules related to purchasing price-reducing behaviour

The legislator has defined special proving rules for the new behavioural limitations. In the case when the supplier reports to the National Food Chain Safety Office (NÉBIH) that the purchase price of goods was defined in an unlawful way by the retailer, the latter must prove the opposite in writing to avoid fine payment. However, retailers must only do so if there is a great difference between the relative market strengths of the two parties – expressed in sales revenue, e.g. the annual sales revenue of the supplier is below HUF 500 million, while the retailer’s sales revenue is more than HUF 1 billion. //