Inflation: what would an “agreement on the moderation of margins” between distributors and manufacturers consist of?

An “agreement” in the face of inflation. Guest of the TF1 and France 2 news this Sunday evening, Emmanuel Macron unveiled a new approach to fight against soaring prices on store shelves. While labels continued to increase by 11.2% over one year in August, according to INSEE, the Head of State wants to “put distributors and manufacturers back around the table, so that they agree to compress their margins, thereby lowering the bill for the consumer.

“When we see the prices, it is clearly above the increase in raw materials,” explained Emmanuel Macron. In addition to the anticipated reopening of commercial negotiations between these players and distributors, which will be ratified by the bill expected this Wednesday in the Council of Ministers, the government intends to reach “an agreement on the moderation of margins throughout the agri-food sector”. “It’s unbearable to see so many of our compatriots who are in this situation, having to choose essential goods for themselves, for their children, for their family. No one should take advantage of this crisis,” said the President of the Republic.

Concretely, the Head of State hopes to prevent undue increases in the margins of the main manufacturers from weighing on household budgets. The different actors could come to an agreement among themselves. “Controllers” would be responsible for supervising this procedure.

The principle of an agreement aimed at moderating margins has already existed, specifies Bercy, which refers to a precedent dating from 2011. At the time, the Minister of the Economy, Bruno Le Maire, was in charge of Agriculture, in a context marked by the increase in distributor margins on fruit and vegetables, even as the prices of raw materials fell following “agricultural crises”. Then MP, Christian Estrosi called for capping the margins of these players, on a list of basic products.

In May, the government issued a decree in application of the 2010 agriculture and fisheries modernization law. This text introduced the possibility for distributors to conclude “margin moderation agreements” with the State. “As part of a margin moderation agreement, the distributor undertakes, when a product has entered into a economic crisis, to reduce its gross margin applied on this product so that the gross margin rate on this product is lower or equal to the three-year average of the gross margin rates of the fruit and vegetable department,” specified the text.

These agreements were concluded for one year, with the State. They operated on a voluntary basis, but with an incentive component, exempting “distributors from paying the additional tax to the tax on commercial premises (TATaSCom)” if they committed. “In no case can the consumer price on this product during the period of economic crisis be higher than the price which would have been observed on the first day of crisis if the company had applied the average gross margin of the last three years on the Ray. The brand undertakes to implement this system without delay as soon as the economic crisis is proven and at the latest within 48 hours following the start of the crisis period. This commitment ends when the period of economic crisis for the product has ended,” added the decree.

If the principle of an agreement on “moderation of margins” has therefore already existed, many questions remain. Whether it is the list of products concerned, the players - industrial? Distributors? State ? - who will sign the agreement, its duration, or the way in which the margins will be capped, a long discussion process is underway to define the contours of this project. The Minister of the Economy also met with agri-food manufacturers - Ania and Ilec - this Monday morning, in the company of his colleague in charge of Trade, Olivia Grégoire.

In principle, these representatives seem open to discussion. Calling for an end to "the period of suspicion around the so-called excess margins made in France by manufacturers of consumer products", Ilec is awaiting details on the agreement and stresses that its margins "are already very low by compared to those carried out in other European countries. Ilec is also waiting to hear the opinion of “the Competition Authority” on this project, before submitting it to its members, including Candia, Danone, Ferrero and Bonduelle.

It also remains to define the acceptable level of margin, and which actors should make the effort, while, in recent months, numerous reports have reached contradictory conclusions. In a sort of lying poker game, each company accuses the other of being responsible for the price rise. In July 2022, a first document, from the Senate, rather criticized distributors, emphasizing that “inflation on shelves is largely justified by the surge in raw materials”. A few days later, MPs reached a similar conclusion, seeing no evidence of “systemic abusive behavior on the part of manufacturers or distributors”. In November, again, by the General Inspectorate of Finance: “the agri-food industry has compressed its margins” and “large distribution has not contributed to increasing consumer prices of food products”, noted the experts.

More recently, in April, a McKinsey report concluded that distributors had reduced their margins more than manufacturers in 2022, a dynamic which could continue this year, in particular via the introduction of the “anti-inflation quarter” in supermarkets. In June, the chief economist of the Banque de France highlighted an increase in margins in the agri-food sector. “In France, the agri-food industries and other manufacturing industries seem to have driven unit margins upwards in recent quarters,” she noted. But this is also explained by a “catch-up”, following years of dieting, in 2020 and 2021. So, who will put their hand in their pocket? And at what level?