The Ministry for Economic Development has provided negative feedback on the proposed amendments to the Retail Law. According to RBC Daily, the statement could trigger a series of meetings between the ministries within the government, resulting in the draft law being significantly revised or even recalled from the State Duma before the second reading (which could take place in October). Increases in shelf price and small producers seeing access to retail channels restricted were among the key concerns arising from the potential revisions to the retail law.
In May 2015, the harsh amendments to the Retail Law passed their first reading at the State Duma. The initiatives included a decline in retro bonuses from the current 10% to 3%, a ban for marketing services in supply contracts and decreases in days in accounts payable from 10-45 to 5-35 for various product categories. The autumn session was set to see the second reading and further discussions on the complete elimination of retro bonuses, the length of the transition period for retailers, and a revision in the cap for the share of penetration on municipal markets (from 25% at present to 15%).
In Russian food retail, the back margin is a significant part of gross profitability and the proposed amendments could have a material impact on the consolidated results of chains. Given the strong purchasing power of large players, we see those names avoiding a material slide in procurement terms, with the current funds allocated to marketing activities and bonuses being largely redistributed to the blended SKU price of producers. However, smaller players and unorganised trade might experience more notable headwinds to profitability.
We reiterate our generally cautious stance on the cross-sector impact of the amendments to the Retail Law on retail chains, while the polar views of the industry participants and state officials meant that the outlook on its implementation is vague at the moment.