The Competition Authority of Kenya (CAK) has punished consumer giant Unilever Kenya for revising payment terms with tens of its suppliers after a probe revealed the firm exploited smaller traders.
The competition watchdog in findings, which will be made public this week, has ruled that the consumer giant abused its buyer power, according to three people familiar with the ruling.
Buyer power is the ability of dominant firms to obtain advantageous terms of trade from their suppliers and can be abused where the buyer has significantly more bargaining power than the seller.
Unilever, which makes products like the Omo detergent, Vaseline and Knorr spices, revised the payment periods for its 75 suppliers, mostly local traders, from 60 days to three months.
It gave the traders one week to accept the varied terms or drop from its sought-after list of suppliers, highlighting Unilever’s buyer power.
The consumer giant, however, exempted 23 of its large and foreign suppliers from the delayed payment order.
The delayed payment was meant to boost the cash flow of Unilever while hurting those of its suppliers as the consumer giant fights to retain its dominance that has come under a severe attack from homegrown rivals such as Bidco Oil Refineries and foreign firms like L’Oreal and Procter & Gamble.
The competition watchdog reckons the revised payment terms amounted to abuse of buyer power, which attracts a penalty of Sh10 million and jail terms of five years for executives of firms in breach.
The CAK has ordered Unilever to cut the repayment period for a supplier to between 30 and 45 days and to increase spend on local supplies by over Sh400 million over the next three years from next month
Unilever sought to settle the breach with the CAK to avoid financial penalties and jail for its executives in a rare rebuke of a multinational by the watchdog, according to a brief on the talks prepared by a top law firm involved in the discussions.
“The settlement follows investigations into alleged breach of Abuse of Buyer Power provisions of the Competition Act,” said the brief seen by the Business Daily.
“The Authority’s finding was that Unilever possessed buyer power over its suppliers, a majority of whom are SMEs.”
Unilever defended its decision to vary the payment terms, arguing that the suppliers had agreed to the variation.
The company added that the variation was aimed at harmonising the local contracts with those of subsidiaries owned by its parent company, one person familiar with the CAK probe said.
The probe revealed that Unilever Plc’s trade terms provided for an average of 30 days payment period, and not the 90 days mentioned by the Kenyan subsidiary.
On its claim that suppliers agreed to the variation of the terms, the CAK said that its investigations revealed that “Unilever presented a superficial choice to its suppliers, based on the limited time (about a week) given to respond to the varied offer.”
“And the language of the communication made it clear that the matter was not open to discussion,” said the brief.
The CAK declined to comment on the Unilever case before placing the settlement in the Kenya Gazette.
Abuse of buyer power came into sharp focus in early 2018 following complaints by supermarket suppliers that retailers were using their dominance to delay payments, which triggered collapse and auction of firms feeding the stores with goods.
The CAK may also impose administrative remedies, including a penalty of up to 10 percent of a firm’s annual sales and reversal of the violation.
The buyer power law, which took effect in 2018, aims to protect firms with weaker bargaining power from unscrupulous dominant companies.
In April last year, supermarket chain Carrefour was ordered to revise all its agreements with some 700 suppliers within a month after the Competition Tribunal found it had been exploiting traders.
Carrefour, Kenya’s second largest retail chain, was asked to expunge up to six items from its supplier contracts that gave the retail store the power to offer ultra-competitive pricing to boost sales and increase market share.
The clauses included some forcing suppliers to pay a non-refundable fee to do business with it and compelling merchants offering the retail chain goods to provide extra rebates or discounts.
Carrefour was found to be in breach of the law for forcing suppliers to post their own staff at its outlets at the expense of the traders. It was also accused of rejecting goods already delivered.
The tribunal’s ruling was later upheld by the High Court.
Rather than face off with the competition watchdog in a tribunal or court, Unilever opted for settlement.
The multinational has agreed to incrementally increase its local procurement spend by Sh400 million over three years beginning January 2023.
Unilever has also made a commitment to reduce its payment period for supplies to between 30 and 45 days and invite at least two local SMEs suppliers to all its tenders.
“With a further commitment to lower it to 45 days effective 1st January,” said the brief. “Reduce payment terms for all new SMEs on-boarded after 1st January, 2023 to 30 days.”
It will also set aside an annual budget of Sh75 million for development training for its SME suppliers for three years.
Unilever uses Kenya as one of the three strategic hubs in Africa, alongside Nigeria and South Africa
It runs a manufacturing plant in Nairobi’s Industrial Area for its consumer goods and operates tea factories in Rift Valley.
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