EGAlim III: the impact on supermarkets | Sidely

EGAlim III: impact on the retail sector

Corentin Malissin
April 17, 2024 - 4 min reading

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

Here's an overview of what's at stake with this latest version and its impact on the retail sector.

Summary of EGAlim III measures in the retail sector

In this third version, the legislator has introduced a number of provisions designed to rebalance the balance of power between the parties involved in commercial negotiations. These can be summarized as follows: 

  1. If a supplier and a retailer (or buying group) fail to reach an agreement following negotiations, the supplier may decide to stop working with that retailer. In addition, it is possible to set a notice period before terminating the partnership, with an option to request the assistance of a mediator if necessary ; 
  2. If a retailer does not respect the deadlines set for annual negotiations with suppliers, it can be sanctioned and fined;
  3. The obligation to negotiate agreements in good faith , so as to ensure that deadlines are met and to prevent "practices restrictive of competition", which require compensation for damage caused. In other words, chains must negotiate honestly and respect deadlines. They must avoid any practice that would distort competition. If a central or chain store does not comply with these rules, it must compensate the damage caused;
  4. French courts have jurisdiction over disputes between suppliers and central purchasing bodies concerning products distributed in France, to avoid the effects of "legal evasion". This is to prevent companies from seeking to use the laws of other countries that are more favorable to them ;
  5. If a supplier fails to meet its delivery or logistics commitments, penalties may not 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. Restrictions on promotions and below-cost selling (see below).

Sources : 

Controlling promotional offers and the resale-at-loss threshold

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

Consumer goods

  • Promotions are capped at 34% of value and 25% by volume, in order to protect French SMEs from promotions that are detrimental to their survival.

Food products

  • Until 15/04/2026, promotions are capped at 34% of product value in supermarkets and 25% in volume;
  • Until 04/15/2025, distributors are obliged to sell products at the price at which they were purchased, plus 10% (excluding fruit and vegetables).

With the aim of protecting French industries, EGAlim III also regulates the promotions applied by supermarkets on non-food FMCG products. The 34% cap had already been in force on food products since 2018, but it now applies to the DPH (drugstore, perfumery, hygiene) department.

The government's aim is to protect French SMEs whose existence is threatened by the price pressure imposed by retailers. Retailers still have the right to offer in-store discounts, but these are now governed by law, just as they are for food products. Protecting manufacturers' margins should therefore benefit the entire food industry.

Evolution of the Egalim law

Store features
Law Egalim I Egalim II Egalim III Egalim IV
Date 2018 2021 2023 Summer 2024 (planned)
Objective "balanced trade relations in the agricultural and food sector and healthy, sustainable food accessible to all". Protecting the remuneration of agricultural producers Strengthening the balance in commercial relations between suppliers and distributors Still unknown, but should concern "farmers' production costs".

The limits of Egalim III and how certain chains get around it

In February 2024, Bruno Le Maire announced the massive control of distribution contracts to verify the application of Egalim III, with the possibility of imposing substantial financial penalties in the event of non-compliance. Because anger is growing in the farming world! And for good reason: EGAlim focuses heavily on relations between suppliers and distributors. In order to match the prices imposed by supermarkets, 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 stumbling block facing the law. In particular, the authorities have set their sights on a financial arrangement: some retailers have set up central purchasing units abroad to avoid the purchasing constraints imposed by Egalim III. Private labels often benefit from this lower-cost sourcing, which boosts the profitability of retailers' own products. Such a scheme undermines all the fairness objectives set 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 channels are being set up through intra-European partnerships, notably with Spain. As is often the case, the question of European law is therefore at the heart of the financial and legal stakes for French companies. French President Nicolas Sarkozy was unequivocal when he described European purchasing groups as "circumventing French law".

Inflation is another limitation that Egalim does not address: while public procurement contracts generally provide for a possible price increase (often limited to 5%) in the event of verifiable inflation and the provision of appropriate supporting documents, supermarket contracts tend to ignore this common-sense measure. In such cases, it is the manufacturers, and consequently the farmers, who pay the price. 

Farmers are therefore largely dissatisfied with the current situation, and the new version due in the summer of 2024 should focus primarily on agricultural production.

Retailers strike back

For its part, French supermarkets are surprised to be under such pressure, while the catering industry is still a long way from achieving its EGAlim targets.

In addition, distributors are asking the legislator to require manufacturers to negotiate their purchases with farmers before entering into annual negotiations with retailers, thereby assuming responsibility for the remuneration levels imposed on farmers.

In fact, current legislation does not oblige suppliers to make their raw materials purchase prices known to distributors. The latter would prefer to see transparency in this area, so as not to have to pay the price for commercial practices implemented by manufacturers.

Finally, on the subject of European purchasing groups, supermarkets point out that such mechanisms exist in other industries, and are precisely the way to defend French companies against American or Chinese giants.

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