EGAlim III: impact on mass retail

Initially passed in 2018, the EGAlim law aims to promote "a balance in commercial relations between the agri-food sector and large retailers." On March 30, 2023, Egalim III (or the Descrozaille law) strengthened the legal framework for negotiations between brands and suppliers, and not just agricultural producers.

An overview of the challenges of this latest version and its impact on large-scale retail.

Summary of EGAlim III measures in large-scale retail

In this third version, the legislator introduces various provisions contributing to rebalancing the power dynamics between the stakeholders of commercial negotiation. These can be summarized as follows: ‍

1. If a supplier and a brand (or central buying office) fail to reach an agreement following negotiations, the supplier can decide to stop working with that brand. Additionally, a notice period can be established before terminating the partnership, with an option to request the assistance of a mediator if necessary; 

2. If a brand does not respect the deadlines set for annual negotiations with suppliers, it can be penalized and fined;

3. The obligation to conduct agreement negotiations in good faith to ensure deadlines are respected and to prevent "restrictive competition practices," which require compensation for any damage caused. In other words, brands must negotiate honestly and respect deadlines. They must avoid any practice that would distort competition. If a central buying office or brand does not respect these rules, it must compensate for the damage caused;

4. French courts have jurisdiction over disputes between suppliers and central buying offices regarding products distributed in France, in order to avoid "legal evasion" effects. This is to prevent companies from trying to use laws of other countries that are more favorable to them; 

5. If a supplier fails to meet its delivery or logistics commitments, penalties cannot exceed 2% of the value of the products concerned. Penalties are reported to the authorities, and the law provides for a logistics agreement separate from the commercial agreement; 

6. Regulation of promotions and the threshold for resale at a loss (see below).

Sources: 

• Entreprendre Service Public

• EGAlim 3: LAW n° 2023-221 of March 30, 2023

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Regulation of promotions and the threshold for resale at a loss

The measures introduced by EGAlim 1 and 2 are extended by EGAlim 3.

Fast-moving consumer goods

• Promotions are capped at 34% in value and 25% in volume, with the aim of protecting French SMEs against promotions that are harmful to their sustainability.

Food products

• Until 04/15/2026, promotions are capped at 34% of the value of products in supermarkets and at 25% in volume;

• Until 04/15/2025, distributors are required to sell products at the price they purchased them plus 10% (excluding fruits and vegetables).

‍With the aim of protecting French industries, EGAlim III also regulates promotions applied by large-scale retailers on non-food fast-moving consumer goods. The 34% cap had already been in effect on food products since 2018, but it now applies to the DPH (drugstore, perfumery, hygiene) department.

‍The government thereby intends to protect French SMEs whose existence is threatened by the price pressure imposed by distributors. Brands still have the right to run in-store discounts, but these are now regulated by law, just as they are for food products. Protecting manufacturers' margins should thus benefit the entire food sector.

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Evolution of the Egalim law

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Limits of Egalim III and circumvention by certain brands

In February 2024, Bruno Le Maire announced a massive audit of distribution contracts to verify the application of Egalim III, with the possibility of imposing substantial financial penalties in case of non-compliance. This is because anger is brewing in the agricultural sector! And for good reason, EGAlim heavily focuses on relations between suppliers and distributors. However, to align with the prices imposed by large-scale retail, manufacturers tend to sacrifice their suppliers' margins rather than their own, resulting in a total lack of results in some cases. 

But this is not the only pitfall the law faces. A financial scheme is notably in the crosshairs of authorities: some brands have set up central buying offices abroad to escape the constraints imposed by Egalim III on purchases. Store brands often benefit from this lower-cost sourcing, boosting distributors' profitability on their own products. Such a scheme undermines all the goals of fairness intended by the legislator.

It should be noted here that Egalim is a French law and that the aforementioned actions are not necessarily contrary to European law. In this case, supply chains are being set up through intra-European partnerships, notably with Spain. As is often the case, the issue of European law is at the heart of the financial and legal challenges of French companies. The President of the Republic spoke unequivocally, describing European central buying offices as a "circumvention of French law."

Inflation is another limitation that Egalim does not regulate: while supply contracts in public markets generally provide for a potential price increase (usually capped at 5%) in the event of verifiable inflation and upon submission of the appropriate supporting documents, large-scale retail contracts tend to ignore this common-sense measure. It is then the manufacturers, and consequently the farmers, who pay the price. 

Farmers are therefore largely dissatisfied with the current situation, and the new version expected in summer 2024 is planed to focus primarily on agricultural production.

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Large-scale retail strikes back

For its part, French large-scale retail is surprised to face such pressure when collective catering is still far from achieving its EGAlim objectives.

Furthermore, distributors are asking the legislator to require manufacturers to negotiate their purchases with farmers before starting annual negotiations with brands, thereby assuming responsibility for the remuneration levels imposed on farmers.

Indeed, the current Law does not oblige suppliers to disclose their raw material purchase prices to distributors. The latter would therefore prefer that transparency be established in this matter, so as not to bear the brunt of the commercials practices implemented by manufacturers.

Finally, on the subject of European central buying offices, large-scale retail argues that these mechanisms exist in other industries, and specifically serve to defend French companies against American or Chinese giants.

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