Overview of the application of the Egalim 2 law
The Egalim 2 law (“Equalim 2“), entered into force on October 18, 2021is the latest measure to rebalance supplier/distributor relations in food distribution.
At the end of the trade negotiations for 2022 and taking into account the inflationary effects of the war in Ukraine (II), it is appropriate to draw up an initial assessment of the application of Egalim 2 (I) and to consider the future of the system. (III).
Imperfect implementation, due to a complex system
A material and geographical field of application with ill-defined contours
The list of food products covered by Egalim 2 is based on a complex European customs nomenclature, made even more difficult to understand due to the exclusion of certain common food products, such as fruit, drinks (alcoholic or not), cereals , etc. .
Also, some products, such as flour, can be both included or excluded from the scheme, depending on the nature of the buyer. These inconsistencies make understanding the law very difficult for professionals, and in particular farmers, who have to juggle several sets of rules.
The law does not only apply to relations with merchants: certain provisions concern suppliers and their “buyers”. However, the notion of “buyer” covers hotels and restaurants in addition to distributors. It should be noted that the legislator has excluded wholesalers from the system even though they represent the main pivot of the distribution chain.
The origin of the food products is irrelevant. According to the Ministry of Agriculture, Egalim 2 must be interpreted as a police law applicable to food products manufactured abroad if there is a link with French territory (such as the place of delivery of the consumer, the establishment of the buyer, etc.). This concerns both agricultural products delivered in France and products processed abroad and imported into France.
The foreign supplier must therefore comply with the provisions of Egalim 2 for its activities in France, just like the French supplier importing foreign food products.
The transparency mechanisms imposed by Egalim 2 have not yet had the desired effect
In order to allow the return of value to the farmer, Egalim 2 provides for various mechanisms to limit the pressure of negotiations on the agricultural raw material.
I. Between the agricultural producer and the first buyer of the agricultural raw material.
To reinforce the transparency of “upstream” relations, Egalim 2 provides:
- The obligation to conclude annual written framework contracts for all sectors, with a minimum duration of three years (which can be extended to five years);
- The obligation to provide for an automatic price revision clause based on indicators chosen by the parties.
Even if the intention of the law is commendable, these new obligations weigh heavily on the farmer, who is now forced to offer a standard contract to his buyer.
ii. Between the food supplier and the distributor
Several mechanisms are designed to exclude the cost of the agricultural raw material from the negotiable part of the supplier’s tariff:
In the T&Cs, the supplier must either:
- Be transparent by disclosing the share of agricultural raw materials in the food product sold (both in price and composition), for each of the agricultural raw materials in the product (option 1) or in aggregate, i.e. all agricultural raw materials combined (option 2);
- Have an independent third party certify that the negotiated agreement relating to year n-1 correctly reflects the increase in the cost of agricultural raw materials (option 3).
At the end of the first months of application of Egalim 2, it appears that the two “transparency” options have been abandoned in favor of recourse to an independent third party (option 3, preferred by 70% of suppliers), for two reasons:
- First, options 1 and 2 oblige the supplier to disclose, at least partially, the construction of its tariff to the distributor, which may limit its ability to negotiate later. Moreover, the exercise of these options obliges the supplier to list, for each of its references, their exact share of agricultural raw materials in the composition and the price, which can be particularly complex (case of foreign manufacture for example).
- Although it guarantees a certain “opacity” of the tariff, option 3 is nevertheless difficult to implement. Indeed, Egalim 2 does not specify which elements (and in particular whether the cost of commercial cooperation services is taken into account or not) the third-party certifier must take into account in order to exercise its control. Let’s hope that the first certifications issued by third-party certifiers (who are essentially auditors) will set a trend for the future.
The annual contract between the supplier and the distributor must specify:
- The “non-negotiable” share of agricultural raw materials in the tariff;
- The consideration for each price reduction granted by the supplier to the distributor;
- An automatic price revision clause based on changes in the cost of agricultural raw materials; and
- A renegotiation clause in the event of an increase or decrease in the cost of agricultural products, but also the cost of energy, transport and packaging.
The main innovation of the system is the automatic price review clause, which aims to prevent the parties from having to return to the negotiating table during the year in the event of a significant change in the cost of agricultural raw materials. Its implementation raises several difficulties:
- The evolution of the indicators on which the revision formula is based is not necessarily correlated to the supplier’s purchasing cycle. This can have the effect of “decoupling” the value of the stock of agricultural commodities from its real value;
- The adjustment formula must take into account both increases and decreases in the cost of agricultural raw materials. This implies that a supplier will be forced to mechanically lower his prices in the event of a fall in the price of the agricultural raw material he uses, even if he is exposed to the increase in the cost of his other expenses (energy, transport, packaging , etc.);
- Certain indicators do not exist, particularly in the so-called “organic” sectors, which has forced the contracting parties to postpone the integration of this clause to a later date.
Egalim 2 put to the test by the inflationary effects of the war in Ukraine
At the beginning of March 2022, trade negotiations on national brand products ended for the first time with inflation accentuated by the crisis in Ukraine. However, by excluding part of the supplier price from commercial negotiations, Egalim 2 also contributes to rising food prices.
In this context, the government has set up a trade negotiations follow-up committeecomposed of representatives of the various links in the food distribution chain, to deal with the consequences of this crisis.
Signature of a charter of commitment – not legally binding
On March 31, 2022, this committee resulted in the signing of a charter of commitment by representatives of large retailers and their suppliers, providing for a whole series of commitments.
Large-scale retailers have committed to:
- Activate renegotiation clauses (and “be flexible in the analysis of these clauses“) in order to allow the increase in the price of energy and transport packaging to be taken into account, even if the criteria for opening the renegotiation are not met; and
- Do not apply logistics penalties whether the suppliers can justify sufficiently in advance the existence of a link between the delay and the war in Ukraine.
Suppliers commit to transparency and good faith when requesting price increases. In the event of a shortage, they must warn the distributors as far upstream as possible in order to “operate a fair distribution keyof the resulting cost increase.
Egalim in the future
The purchasing power of consumers seems to be at the heart of the concerns of the presidential campaign and the legislative elections.
However, by its very objective, Egalim 2 risks contributing to the rise in food prices in stores.
This phenomenon, coupled with the complexity of the system and the consequences of the war in Ukraine, can make it difficult to set up the system. Let’s hope that the implementing decrees and the future “guide to good practices” in terms of logistics sanctions – the “Commercial Practices Review Commission” (CEPC) – will provide more details in the months to come.