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Interviews
30/07/2013

'The distribution channel is engaging in unfair competition with manufacturers'

Wiki Spanish Food interviews Ignacio Larracoechea, President of Promarca, which comprises the main manufacturers of leading food, drink and drugstore brands in Spain.

Verónica Martos. Journalist @martosveronica

Wiki Spanish Food- Promarca has been defending the interests of name brands for over two decades. What activities have you organized over the course of the year?

Ignacio Larracoechea.- That's right. Promarca was created in 1989, so we have been active for more than 20 years in raising awareness about name brands' values in the mass consumption sector and in highlighting the hard work of leading food, drink and drugstore brands in Spain. To this end, the association organizes a range of activities in various areas, which include drafting analyses and reports, organizing conferences and events with industry experts, and performing other analyses which help us understand the viewpoint, needs and concerns of today's consumer, while also working to improve their well-being.

These activities enable us to raise awareness about and to highlight the contribution by name brands to the Spanish economy and society in terms of job and wealth creation, investment in R&D and innovation, new product launches and, in short, improvements to the standard of living.

W.S.F.- Many products are recognized by their brand name. What do those products offer consumers?

I.L.- Products from leading mass-market name brands are clear exponents of quality, trust and innovation. Those brands represent years of research, investment in innovation, quality raw materials and punctilious production processes.

Moreover, they are brands that consumers use throughout their lives; some Spanish brands have been around for more than a century. This leads to a unique relationship between the consumer and the brand. Every single person can name several brands that they have been using their whole lives, brands that they can't imagine doing without.

W.S.F.- Store brands have been gaining market share. How do you view this situation and how does it affect the companies in Promarca?

I.L.- First we have to ask why store brands are expanding their market share. Name brands have always competed with less expensive products, and that was never a problem. The real issue is that, in recent years, the distribution channel is engaging in unfair competition with manufacturers, employing abusive sales practices to grow their own brands. These practices have been favored by the increase in distributors' bargaining power, due to their high degree of concentration: five players account for almost 50% of the market share. These abusive commercial polities were highlighted by Spain's National Competition Commission in 2011 in its "Report on relations between manufactures and distributors in the food sector".

This situation has jeopardized leading mass-market name brands, but third- and fourth-tier brands have really been hit the hardest. One of the consequences of this situation is the disappearance of brands. According to data from consulting company IRI, 21.7% of brands ceased to exist between 2001 and 2009, with the consequent limitations on variety for consumer.

W.S.F.- The current economic situation is one of the reasons that store brands have gained market share. How have name brands adapted to the new situation?

I.L.- According to the most recent Grayling barometer, price is the main reason that nine out of ten consumers choose a store brand product. Leading brands are working hard to adapt to consumers' situation through promotions, lower prices, coupons, etc. In fact, according to data last year from the OCU (Spanish Organization of Consumers and Users), while store brands are increasing their prices, name brands are lowering theirs.

However, according to a study by The Brattle Group consulting company, the main reason for the difference in price between store and name brands are the margins that the distribution channel applies to the latter to favor the purchase of their own products. According to the study, if the same margins were applied to both types of brands, name brand prices would decline by up to 20%. It's also important to note that brands don't set the final prices for sale the public; distributors set prices and decide whether or not to allow promotions at their stores.  

W.S.F.- How do you view supermarkets that don't sell brand names? Do you believe they will be jeopardized in the medium term?

I.L.- The limited variety policies that some stores employ adversely affect the entire chain, from the primary sector through to the consumer. Moreover, the negative effects of the shift from name brands to store brands are already visible in the economy and in employment. According to the most recent data from ESADE Business School, the decline in name brands since 2008 has led to the net destruction of economic added value of over 800 million euros for Spain as a whole, the loss of 86,000 jobs and 1.6 billion euros in taxes, and a 20% decline in R&D and innovation spending.

For consumers, these policies increasingly limit their right to free choice and to innovative, better quality and fairly priced products.  

W.S.F.- The Food Chain Improvement Act recognizes abusive practices in relations between distributors and manufacturers. How does Promarca view this regulation's impact?

I.L.- It is a pioneering act in Spain, since it recognizes for the first time the existence of abusive practices by distributors and seeks to implement mechanisms to eliminate them, such as prohibiting unjustified sales charges and packaging copies, as well as the use of confidential product information. As for the industry, the only area that we believe the regulation could have addressed in more depth is distributors' discriminatory management of brands, as it harms free competition and consumer interests.  

Promarca believes that the new regulation represents progress and is on the right track to try to end existing imbalances in the food chain, to improve functioning in the industry, and to guarantee free competition.

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