Posted 7:02 PM by Luigi
The perils of value-adding

The following article from The Jakarta Post shows that although adding value to local products through processing can be a good idea, e.g. to promote local crops and varieties, it is not necessarily all that easy.

Giant French retailer Carrefour chokes on fried banana

Zakki P. Hakim and Fabiola Desy Unidjaja, The Jakarta Post, Jakarta

Who would have thought that a Rp 5,000 (54 U.S. cents) fried banana could make the French retailing giant Carrefour come up against the government, legislators, a fair competition commission and the press?

Carrefour -- the second largest retailer in the world with operations in 29 countries and global sales of 70.5 billion euro (US$91.65 billion) in 2003 -- is now under the spotlight as the authorities found it necessary to closely monitor a dispute between the hypermarket and a small supplier of fried banana and cassava chips over what is called a "listing fee".

Susanto, chairman of the Association of Modern Market Suppliers (AP3MI), said the listing fee -- a significant sum suppliers have to pay to get their products on store shelves -- and other promotion-supporting fees had deterred small businesses to sell in the Carrefour chain.

"That is why we have put a fight against Carrefour about the Rp 5,000 fried banana (firm) as the giant market is killing off smaller snack suppliers," he told The Jakarta Post over the weekend.

The legal dispute began last October when Carrefour decided not to put two products supplied by PT Sariboga Snacks on displays, although the latter had paid a total listing fee of Rp 47.3 million to the hypermarket.

Carrefour explanation was that the products, packaged fried banana and cassava chips, failed to meet the standard for display at the hypermarket chain.

The supplier eventually went bankrupt and Sariboga demanded Carrefour pay the listing fee back, but the latter refused.

The AP3MI, on behalf of Sariboga, then filed a complaint against the hypermarket to the Business Competition Supervisory Committee (KPPU) over allegations of unfair competition.

However, Carrefour Indonesia president director Herv‚ Clec'h said separately that his chain had acted properly in the matter.

Clec'h said: "The snack supplier (Sariboga) was not a manufacturer, but only packaging the products it obtained from smaller firms".

Packaging firms depended on a small margin due to the small value they added to the products, thus Sariboga could not afford the listing fee, he said on Friday.

Clec'h said the listing fee was a common practice in retailer-supplier business relationships globally and it was a subject to negotiations.

The "listing fee" depended on the market position of the supplier. The less-known the brand or the less indispensable the product is, the higher the listing fee is.

Since retailers like Carrefour naturally have a stronger position against suppliers, most of them had to pay big listing fees.

"We have hundreds of other small-scale suppliers, but only one is having a problem (with the listing fee)," he said.

However, in the case of big manufacturers such as Unilever and Nestl‚, as Clec'h admitted, Carrefour was in the weaker position. He said big consumer good companies usually did not pay listing fees as Carrefour need their products.

Carrefour started the first hypermarket here in 1998, opening its first outlet in Kuningan, South Jakarta, and offering a range of about 50,000 products -- from electronics, screwdrivers, clothes, meat, fruits, vegetables, to fresh-from-the-oven pastries.

Today, there are 15 Carrefour hypermarkets in the country, with total sales at Rp 3 trillion last year.

Its success prompted other retailers such as Hero and Matahari to expand into the hypermarket business. Since then, five hypermarket operators opened 54 outlets in the Greater Jakarta alone.

However, following this case, the House of Representatives and the government are promising to issue a presidential decree to better regulate the expansion of modern markets in the country.

The issue has been widened into protection of the country's traditional markets from rapidly-growth modern markets, which have been blamed decreasing jobs in the retail sector.

"The government has other urgent things to regulate, such as infrastructure and education. Distribution activities had been doing well. It should not become an urgent matter," Clec'h said.

A case of snack dispute has now been escalating into a possible restriction for hypermarkets to expand their existing stores in the country.

As Susanto put it: "This fried banana case made Carrefour to have an annoying toothache".