Like all brands that sell their products to supermarkets, you have to anticipate and manage the demands of retailers during annual negotiations. One of the sticking points for most manufacturers is back margins: a practice which, despite having been regulated by law for the past twenty years, continues to be the subject of much debate in the world of supermarkets.
What can you do to prepare for these discussions? That's what we're going to look at in this article: we'll start with the definitions you need to master, then review the regulatory framework, and list a series of best practices to help you stay on track with your sales objectives despite the inclusion of back margins in your distribution agreements.
Back margin generally corresponds to a rebate applied by a supplier to its distributor at the end of an accounting period, in return for achieving a sales target.
In practice, back margins are often used by supermarket chains to increase their profits by reducing the share of their product sales paid to manufacturers. This practice is made possible by a deferred payment system, and must be included in the distribution contract.
Rarer, or even non-existent in supermarkets, is the case where the manufacturer takes the initiative in setting up a back margin, which he uses to encourage his partner sales outlets to boost sales, in return for a financial reward in the form of a bonus. In this case, the balance of power is more in the supplier's favor. This is often the case with an industry giant who has the power to influence its resale network.
Legislation has governed back margins since 2006, in order to limit their harmful effects on the economy of brands, which are often forced to accept sometimes abusive financial practices to avoid having their products delisted from supermarkets.
Technically, the commercial objectives that give rise to the application of back margins are varied and depend on the brand concerned: sales volume, producer participation in logistics, increase in category sales, etc.
Finally, as we shall see below, the term "back margin" has no legal resonance. The law prefers the term " other financial advantages".
To understand what's at stake with back margins for producers and retailers alike, we need to master the related terms that describe the retail business model.
Front margin is the traditional margin generated by the sale of a product or service. It is obtained by subtracting the pre-tax selling price invoiced by the supplier from the pre-tax selling price to the consumer. On this subject, we recently explained how to get your distributors to lower their mark-up on the sale of your products.
The loss leader (SRP) refers to the minimum price below which resale of a product is prohibited or restricted by law. In other words, it is the minimum amount at which a good may be sold, in order to protect fair competition and avoid damaging commercial practices.
Finally, the effective purchase price refers to the actual cost incurred by a company when acquiring a product or service. It includes not only the declared or displayed purchase price, but also all expenses directly associated with the purchase. These additional expenses may include costs such as delivery charges, import taxes, transportation or storage costs, etc.
The expression "triple net" is sometimes used to designate the price paid by the distributor, after integration of invoice discounts, deferred rebates and other commercial and logistical cooperation services.
Historically accounting for up to 40% of the price invoiced by the supplier to the distributor, back margins came under the scrutiny of the legislator in 2006. This was followed by a series of measures to contain and regulate the phenomenon.
Voted into law on July 1, 1996, the Galland law had already laid down an initial framework for the notion of back margin, stipulating that "the effective purchase price is the unit price shown on the invoice plus sales tax, specific taxes relating to this resale and the price of transport". In other words, for a product, the true purchase price corresponds to the amount indicated on the invoice, plus the taxes and transport costs incurred by the resale of this product.
Excluding non-integrated or post-invoice financial agreements, this formulation modified the resale-at-loss threshold formula and provided a new tool for analyzing the distributor's sources of profitability, in particular with the concepts of front and back margins.
It should be remembered, however, that selling at a loss has been forbidden in France since 1963. Hence the subtlety of using back margins, which do not appear on purchase invoices and are therefore de facto excluded from cost price calculations.
In 2006, the Dutreil amendment modified the French Commercial Code by introducing a new definition of the effective purchase price, from which it will now be necessary to deduct "all other financial advantages granted by the seller expressed as a percentage of the net unit price of the product, and exceeding a threshold of 20% [...]".
In 2008, the Chatel law once again modified the notion of the resale-at-loss threshold, allowing distributors to include the famous "other financial advantages" in the price. This means they can sell at a lower price than that indicated on the purchase invoice, as long as they can prove that the sums "advanced" to customers have been paid to them after the fact, failing which the term "sale at a loss" would apply.
In the same year, the law on the modernization of the economy reduced legal payment terms, with the aim of limiting the impact of deferred payments.
In the retail sector, commercial negotiations are an annual event. And, for your brand, the success of this exercise will largely contribute to the achievement of your sales objectives (market share gains, increased sales...).
That's why it's vital to prepare carefully, and not to sign anything unless you've fully understood what's at stake.
If it's sometimes vital for the buyer to set a back margin in the agreement, here are a few tips to help you limit its impact on your profitability, and even, in the event of successful sales, reap the benefits.
By following these recommendations, we hope to help you better prepare for the upcoming annual negotiations. Defining your sales objectives is the first step to successful negotiations. Understanding your distributors' financial mechanisms is also a prerequisite for successful discussions.
Ultimately, your aim is to ensure that every commercial gesture you make generates a proportional return. In line with your trade marketing strategy, the logic of give-and-take applies perfectly to the back margin, which should enable you to improve your sales, and if possible your profits.
