Some Ideas for a Sustainable and Efficient Reform of Commercial Negotiations [Opinion piece]

“This reform must fully account for the new economic cycle we are experiencing, which is characterised by high volatility in prices and the costs of supply, production, storage, transport and distribution”.

Preparing a reform of commercial relations law is a significant undertaking that is already engaging the energy of the French Government, the two French co-rapporteurs, Anne-Laure Babault and Alexis Izard, and the concerned stakeholders. Discussions have begun. They will conclude at the end of next April, with a view to the possible drafting of a bill to be introduced by the Government.

At this stage, may we be able to put forward a few simple ideas that could contribute to the collective reflection.

1 - What objective for a sustainable and efficient reform?

In 1996, the Galland Law, combined with the Raffarin Ordinance on commercial urban planning, aimed to protect “small businesses”. In 2007-2008, the Chatel and LME measures addressed issues related to purchasing power. In 2018-2019, the Egalim Law aimed fora better distribution of value within the agri-food sector.

Today, it seems to us that the next reform, which we hope will be sustainable and efficient, should meet two essential objectives: the simplification and adaptation of the legal framework to the volatility of prices and costs, especially in agriculture.

Firstly, the reform must propose a simplification of the applicable rules. As it stands, the system is abnormally complex. Form takes precedence over substance. Companies, especially SMEs and mid-sized businesses, are at a disadvantage. Large groups and distributors bear the cost of consultants hired to manage equations and indicators. The value analysis is provided to each other, on a platter, as part of mandatory and targeted transparency.

The cost/efficiency ratio of the current system is questionable.

Above all, this theoretically subtle system appears in practice to be cumbersome and ineffective, severely diverting the content of discussions between each sector player, to the point where, except for rare exceptions, the focus shifts from seeking commercial performance to drafting clauses that are rarely implemented.

Therefore, the reform should focus on simplication measures to relieve companies and make room for commercial discussions, which are more necessary than ever in these period of affected consumption.

This reform could also be an opportunity to return to the fundamentals of the law on restrictive competition practices, namely a set of rules based on freedom and the sanctioning of abusive practices. As its stands, the texts applicable to commercial negotiations are more about regulation, and impose on the parties a complex framework designed for purposes other than sales development and combating abusive practices.
It is probably time to refocus the system around the founding principles of competition law and to stop assigning variable and contradictory political objectives to trade negotiation law (purchasing power vs. farm income vs. the competitiveness of French agri-food industry).

Concerning these three major concerns, the solutions are likely elsewhere. As for commercial relations, let us place at the heart of the system freedom and the sanctioning of abuses, , and foster a new dynamic of cooperation between the parties.

Concerning these three major concerns, the solutions are likely elsewhere. As for commercial relations, let us place at the heart of the system freedom and the sanctioning of abuses, , and foster a new dynamic of cooperation between the parties.

Then, this reform must take full account of the new economic cycle we are experiencing in France, characterised by highly volatile prices and the costs of supply, production, storage, transport and distribution.

The current legal framework is based on the outdated assumption of price and cost stability. It stipulates fixed tariffs and prices for at least a year. The Egalim framework maintained this principle of fixed prices with complex theoretical corrective mechanisms (revision and renegotiation clauses), which are often impractical due to a lack of indicators, and ultimately ineffective.

Today, it seems time to acknowledge the incompatibility of this principle of fixed pricing , given the recent return of high volatility in raw materials and other cost factors (notably energy). The current system is outdated and now unsuitable. The corrective mechanisms, appealing in theory, are in fact not unused.

The reform under discussion could thus propose abandoning the principle of fixed prices for an annual duration. Some alternative solutions are being discussed, and one them might emerge from the ongoing consultations.

Beyond the legitimate objectives of purchasing power and protecting agricultural income, this reform could also contribute to protecting France’s industrial fabric.

2 - How to effectively consider downstream agricultural issues upstream?

The consideration of the legitimate interests of agricultural producers at the downstream stage of relations between manufacturers and distributors already exists within the Egalim framework, albeit ineffectively. This consideration currently takes various forms, applying the principles of “sanctuarization ” (of agricultural raw material) and transparency, the latter serving the former. The French principle of the “sanctuarization” deserves to be preserved, but its implementation must certainly be simplified.

Moreover, under the current options 1 and 2, which ensure transparency (in detail or aggregated) on the value of the share of agricultural raw material (“MPA”) in the price, sanctuarisation appears quite theoretical. Prohibiting a sale price below the cost of MPA does not, in practice, protect farmers’ interests, as no processed product is sold at the cost price of MPA…

Paradoxically, it is option 3, criticised for its lesser transparency (at a point open to debate), that results in a real consideration of the evolution of MPA at the downstream stage of price negotiations between manufacturers and distributors, as this option leads to a minimum 3xnet price and thus to a minimum 3xnet in relation to the evolution of MPA prices. However, option 3 hardly reaches consensus, with distributors demanding a “true” transparency and manufacturers lamenting the administrative burden of upstream and downstream attestations…

The reform must ensure a certain level of transparency regarding the costs of MPA and the associated indicators. In our view, this represent a significant achivevement of the Egalim framework, inviting discussions on the value of MPA and the remuneration of agricultural producers downstream. However, these provisions will need to be simplified.

Furthermore, we believed that the rules governing negotiations between manufacturers and distributors cannot resolve the known upstream issues through formal constraints. Conversely, these downstream rules should enable and promote prices evolution in light of upstream needs, particularly in agriculture. In theory, revision and renegotiation clauses could fulfil this function. In practice, it is evident that they are not the expected solution. Let us acknowledge this.

Simplification and adaptation of the legal framework to the context of price and cost volatility, a return to the principles of freedom and effective sanctions for abusive practices, and consideration of upstream issues without clumsily regulating commercial relations – these could be the driving forces behind the ongoing reflection for a reform the French law of commercial negotiations. We believe this reform is necessary.