Fighting the high cost of living in French overseas territories

COMPARED TO MAINLAND FRANCE, SIGNIFICANT PRICE DIFFERENCES RANGING FROM 19% TO 38% FOR FOOD PRODUCTS

The general level of consumer prices is 7% to 12.5% higher in French overseas departments than in mainland France¹.

These price differences are largely attributable to food products, which represent one of the main items of household consumption, and for which price differences are much larger and average between 19% and 38% depending on territories.

MARGIN RATES SOMETIMES HIGH BUT WHICH DO NOT BY THEMSELVES EXPLAIN THE COST DIFFERENCES

The Autorité has analysed the margin rates of the various stakeholders in retail distribution: distributors, shipping companies, ports, handlers, freight forwarders and wholesalers. It found that the margins of some stakeholders are higher than those in mainland France, indicating limited, but real room for manoeuvre.

However, the Autorité has not identified any margin variances that alone would explain a significant share of the price differences with mainland France. On the other hand, it is the accumulation of margins of the stakeholders in the entire consumer chain that can explain some of the price differences with mainland France.

HAVING RECOURSE TO WHOLESALE IMPORTERS AND DOCK DUES REPRESENT A SIGNIFICANT SHARE OF THE PRICE OF THE PRODUCTS

If the margins made by distributors alone do not account for most of the price differences between French overseas departments and regions and mainland France, two main factors, however, largely explain these differences for imported products:

- forwarding costs for imported products, related to geographical distance (16% of the cost of a product for a distributor). They include maritime transport, dock dues, various taxes and costs related to the use of different service providers for imports. On average dock dues are the most expensive cost item in forwarding costs;
- recourse to wholesale importers (16% of the cost of a product for a distributor).

These forwarding costs and the use of wholesale importers, passed on by distributors in the final price to the consumer, therefore partly explain the price differences with mainland France.

While the use of wholesale importers is often necessary for distributors given the services provided on their behalf (storage, stocking and advertising), the forwarding costs, mainly consisting of dock dues, are unavoidable. This tax, set by the French overseas territories, is levied on goods imported and produced in French overseas departments. Goods produced in each collectivity may be exempt from this tax, the objective being to encourage the consumption of local products over that of imported products. Initially designed to protect local production through rate differentials, dock dues are now a significant resource for local authorities and have sometimes deviated from the initial objective, for example when they apply to products that are not locally produced.

The complexity of the rates applied and the mechanisms implemented were identified for their adverse effects on consumers, distributors and local businesses.

In addition, the average sea-faring rates can be very disparate depending on the territories. According to available data, the average rate in French Guiana, for example, is three times higher than the average rate in La Reunion (average rate of 15% in French Guiana, 7% in Guadeloupe and Martinique, and 4% in La Réunion).

A HIGHLY CONCENTRATED RETAIL SECTOR

The retail sector in the French overseas departments and regions appears to be more concentrated overall than in mainland France, although there are differences by area. Some representatives of local authorities and associations have indicated that the small size of the overseas territories would encourage the convergence of offers and that the distributors in the French overseas departments and regions would not be engaged in a "price war" similar to what can be seen in mainland France.

Merger control allows the Autorité to examine takeovers of supermarkets or hypermarkets  and to ensure that competitive intensity is maintained. This has been done, particularly in Martinique  recently, with the adoption of innovative measures to maintain competition between different retailers.

However, merger control cannot be used to intervene in highly concentrated areas. If the structural injunction , to force a retailer to sell stores – this mechanism is however accompanied by very restrictive conditions, which has led the Autorité to propose a relaxation of this mechanism in order to facilitate its implementation and to better respond to the situation of high concentration in French overseas territories.

QUALITY AND PRICE PROTECTION HELPS TO FIGHT THE HIGH COST OF LIVING

Quality and price protection is based on a location-sensitive list of everyday consumer products (examples: ham, beans, rice, rice, laundry, dish washing liquid, toothpaste, etc.) which must be sold at a reasonable price. It is the result of an annual negotiation between the various economic stakeholders, under the supervision of a government representative.
All stakeholders welcome the principle of the system, which is aligned with the fight against the high cost of living. Quality and price protection thus made it possible to observe significant price reductions in 2019 in all regions.
 

While quality and price protection is a tool that has found its place, it nevertheless faces several difficulties in its implementation: insufficient visibility among consumers, too many objectives and unequal participation by stakeholders.

IMPORT AGREEMENTS

The 2012 Lurel Law prohibited exclusive import agreements in order to intensify price competition between retailers. The Autorité has already had to fine suppliers and distributors who had not put an end to these exclusive distribution agreements on five previous occasions  and has seen local stakeholders become more familiar with the new rules. The law has also forced suppliers to implement competitive tendering procedures much more frequently in choosing their wholesale importers.

The Autorité also notes that a significant share of overseas distribution companies is also present as wholesale importers on the wholesale market. This vertical integration (presence of a stakeholder at different levels of the chain) is likely to raise competition risks, in particular as regards the allocation of commercial cooperation budgets (price advantages granted by the supplier to the distributor for the promotion of his products on shelves or in catalogues). An integrated stakeholder could indeed be encouraged to favour its retailers to the detriment of competitors.

TRANSPORT COSTS THAT CAN WEIGH ON PRODUCTS WITH LOW ADDED VALUE

In general, maritime transport costs represent a limited share of the purchase cost of imported products (less than 5% on average excluding fuel and handling). In recent years, these costs have tended to increase, in part due to higher handling and fuel costs.

As freight services do not depend on the value of the goods, products with low added value, such as a bottle of water, are more affected than products with high added value (a bottle of champagne for example). Thus, the cost price of mineral water more than doubles when the cost of freight is considered. An explanation for this is that containers are billed at fixed cost independent of the value of the product. It therefore applies in the same way to a bottle of water and a bottle of champagne. In the end, including all forwarding costs (freight + dock dues + local transport), the price of the bottle of mineral water is multiplied by 4, compared to 1.3 for the bottle of champagne.

MINIMALLY COMPETITIVE LOCAL PRODUCTION

Local production accounts for a quarter of consumer goods but remains generally uncompetitive compared to imported products. Despite the forwarding costs and taxation specific to French overseas departments and regions (government assistance and dock dues), these schemes do not generate any obvious downward effect on prices. While some sectors, such as bananas, sugar and rum, do export, they are not enough to offset the trade imbalance.
This lack of competitiveness is largely due to the narrow markets in French overseas territories and the high number of farms, which prevent local producers from achieving economies of scale.

E-COMMERCE: A FACTOR IN OPENING UP AND FIGHTING AGAINST THE HIGH COST OF LIVING BUT WHICH IS DEVELOPING SLOWLY

The e-commerce is potentially a factor in opening up the populations of French overseas departments and regions and combating the high cost of living. It is also an indirect vehicle for developing local employment with the creation of logistics activities. The market of the French overseas departments and regions also has considerable business interest, with individual markets having several hundred thousand inhabitants.

However, despite the opportunities it presents, the e-commerce sector in French overseas territories is lagging behind in its development, with a significant number of retailers operating in mainland France absent from the overseas territories. Of the dozens of major online retailers consulted by the Autorité during the investigation, only one third offer delivery in the French overseas departments and regions. This situation is mainly due to the existence of strong barriers and constraints, both logistical (delivery costs and times, return of products, after-sales service) and customs (dock dues in particular).

Thus, shipping costs increase the price paid by the consumer and discourage overseas consumers from ordering online. For example, the following costs were observed on some online sales sites:

Delivery times are also longer than in mainland France: from 3 to 27 days compared to an average of 5.3 days in mainland France.

The exercise of the right of withdrawal, which allows a consumer to return a product without giving any justification within 14 days of delivery, is also more difficult to implement, as some sellers leave the costs of reshipment to the buyers, which may discourage buyers from ordering online. Some retailers prefer not to sell overseas rather than having consumers pay for the return and delivery costs.

The implementation of the guarantee of conformity, which in the event notably of a defect gives the consumer a right to the repair, replacement or reimbursement of the product can be complicated. While this right, unlike the right of withdrawal, must not entail any costs for the consumer, it appears that some retailers do not respect the law to the letter, making the buyer contribute to the costs of return or reshipment.

In addition, consumers are not or poorly informed about the payment of dock dues when ordering online. They complain about the lack of transparency and advance knowledge of the amount of dock dues to be paid. In addition, it is questionable whether it is appropriate to apply this tax to products that do not compete with a local option (for example, for certain electronic devices), even though one of the reasons for the existence of this tax is to protect local production.

Finally, European regulation 2018/302 prohibits geoblocking based in particular on the customer's place of residence. Thus, consumers in French overseas territories must be able to freely access e-commerce sites and benefit from non-discriminatory conditions compared to mainland consumers.

¹INSEE 2015 figure.

²Since the lowering of the notification thresholds, introduced by the Lurel Law, the Autorité's supervision of the sector has tightened.  In this respect, it has also issued several decisions making these acquisitions conditional in order to guarantee price competition in the catchment areas concerned.

³See Decision 18-DCC-142 of 23 August 2018 regarding the acquisition of sole control of SDRO and Robert II by Groupe Bernard Hayot.

⁴The structural injunction makes it possible to order transfers of assets (stores) in the retail trade if three cumulative conditions are met: the retailer is in a dominant position, it has committed an abuse and it practices high prices or margins.

⁵See decisions 19-D-11, 18-D-21, 18-D-03, 17-D-14, 16-D-15