The Competition Authority of Kenya(CAK) has sanctioned consumer giant Unilever Kenya for revising payment terms with tens of its suppliers following an investigation that revealed the company exploited smaller traders.
According to three people familiar with the ruling, the competition regulatory ruled that the consumer giant abused its buyer power in findings that will be made public this week.
Buyer power refers to a dominant firm’s ability to obtain favourable trade terms from its suppliers. It can be abused when the buyer has significantly more bargaining power than the seller.
Unilever, which manufactures Omo detergent, Vaseline, and Knorr spices, increased payment terms for its 75 suppliers, the majority of whom are local traders, from 60 days to three months.
It gave the traders one week to accept the new terms or be removed from Unilever’s sought-after supplier list, highlighting Unilever’s purchasing power. The consumer goods behemoth, on the other hand, exempted 23 of its large and foreign suppliers from the payment delay order.
The delayed payment was intended to boost Unilever’s cash flow while harming its suppliers as the consumer giant fights to maintain its dominance, which has come under severe attack from domestic rivals such as Bidco Oil Refineries and foreign firms such as L’Oreal and Procter & Gamble.
The Competition Authority believes the revised payment terms amounted to buyer power abuse, which carries a KES 10 million fine and a five-year prison sentence for executives of firms in violation.
The CAK has ordered Unilever to reduce a supplier’s repayment period to between 30 and 45 days and to increase spending on local supplies by more than KES 400 million over the next three years beginning next month.
According to a brief on the talks prepared by a top law firm involved in the discussions, Unilever sought to settle the breach with the CAK to avoid financial penalties and jail time for its executives, in a rare rebuke of a multinational corporation by the regulatory body.
“The settlement follows investigations into alleged breach of Abuse of Buyer Power provisions of the Competition Act. The Authority’s finding was that Unilever possessed buyer power over its suppliers, a majority of whom are SMEs.” said the brief
Unilever defended its decision to change the payment terms by claiming that the suppliers agreed to the change.
According to one person familiar with the CAK investigation, the company added that the change was made to align local contracts with those of subsidiaries owned by its parent company.
The investigation revealed that Unilever Plc’s trade terms called for an average payment period of 30 days rather than the 90 days mentioned by the Kenyan subsidiary.
“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. According to the CAK, 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.”
Abuse of buyer power came to light in early 2018 after supermarket suppliers complained that retailers were using their dominance to delay payments, resulting in the collapse and auction of firms supplying the stores.
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 SME 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.”
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