Business reforms: regulations favoring local producers in Armenia
Reforms for local business in Armenia
Representatives of Armenia‘s small and medium-sized businesses have long complained about the numerous barriers they face to be featured in trade networks. They claim that the local products of small enterprises are subjected to “discrimination.” The business owners are also dissatisfied with the lengthy periods they have to wait for payments from retail networks that have agreed to sell their products.
To address this issue, several government bodies first studied the problem and then came forward with a joint proposal to amend the legislation. At the beginning of the year, Parliament approved the amendments.
Here, we discuss the issues that these reforms aim to resolve, how businessmen perceive the government’s efforts to address their problems, and what additional changes they are anticipating.
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Business and retail network relationship Issues
37-year-old Armen A. is in the canning business. He came up with the idea to start a small business in 2019. He established contacts with local farmers for purchasing the necessary produce and set up production. It was only after this that he began to think about how to present his products to consumers.
“The initial hurdle I faced in getting my products onto retail shelves was their preference for VAT-registered businesses. To even get a foot in the door, I had to sign up for VAT, shouldering extra tax burdens in the process. This was particularly challenging as we were just a fledgling small business.
Having navigated that challenge, I then encountered the problem of delayed payments. It became a routine struggle, having to invest additional effort, money, and time, constantly nudging them to remember the pending payments and delays,” recalls Armen.
The businessman emphasizes that payment delays by retail networks can seriously harm a small business, even leading to bankruptcy:
“There are two choices: either wait endlessly or file a lawsuit. However, the legal process can drag on to the point where it becomes meaningless. Additionally, this can damage relations with the retail networks, closing the door on any future collaboration.”
The businessman assures that many in his circle have encountered these problems. As a result, they had to stop selling their products in large commercial networks and look for other markets.
Government agencies have acknowledged existing issues
Over 53% of Armenia’s retail turnover is attributed to its retail networks. The Competition Protection Commission investigated this sector and confirmed several issues:
- Large retail chains often purchase goods from suppliers at much lower prices than smaller outlets do.
- Suppliers are asked to pay additional fees to ensure their products are prominently displayed.
The Commission found that suppliers faced a tough choice: pay for favorable placement and larger display areas in shopping centers or lose the opportunity to present their products on equal competitive terms.
The study revealed that the fees suppliers pay to retail centers are distributed as follows:
- 33% for advertising displays,
- 22% for prime product placement,
- 22% for organizing product tastings,
- 16% for placement in showcases or refrigerators,
- 7% for the chance to be featured in the retail network.
3. Large outlets prefer to work with VAT-registered suppliers.
“The current situation largely prevents retail networks from working with non-VAT-registered companies. Consequently, these companies may lose the opportunity to introduce their products to a wide consumer base and face unfair competitive conditions compared to VAT-registered companies,” the commission concluded.
Retail networks delay payments for delivered goods for up to a year, leading to financial difficulties and cash shortages for supplier companies.
“Through retail networks, small and medium-sized businesses have the chance to enter the market, grow, and promote themselves. Retail centers may pay some earlier and others later, yet cash flow is crucial for any business,” said Tigran Markosyan, a member of the Competition Protection Commission, to journalists.
Legislative сhanges Implemented
Following the Commission’s study findings, in January 2024, the Parliament approved amendments to the “Economic Competition Protection” and “Trade and Services” laws. These will come into effect on May 2.
Here are the most significant changes:
- Buyers, including retail networks and factories purchasing agricultural products, must pay for the goods within 30 days of delivery.
- Retail networks must publish on their websites the minimum requirements and principles for selecting a potential supplier’s products, a list of the products they sell, the conditions for product display, and the reasons for contract termination.
- They are required to sign a written contract with suppliers, containing mandatory information specified by the law.
- Payments to suppliers must be made within 30 days for food products and within 60 days for non-food items.
- Delayed payments will be considered an abuse of strong negotiating positions and will lead to legal consequences.
- If a retail network fails to pay an amount of three million drams [about $7,500] or more within a period of 90 or more calendar days, it will be considered an abuse of a strong negotiating position and will result in legal liability.
“New rules will act as a stimulus for farmers since most of them develop their operations through loans. Delays in payments for products often lead to additional interest and penalty charges on those loans. As for small and medium-sized businesses, they will be better protected against potential abuses,” believes Tigran Markosyan, a member of the Competition Protection Commission.
Business and competition protection commission dialogue
Armen A., a small business owner producing canned goods, believes the 30-day payment period is acceptable and realistic. He suggests, especially for small businesses, that the threshold for late payment penalties should be less than three million drams.
In response to the businessman’s remark, the Competition Protection Commission told JAMnews: “The penalty amount was determined based on international experience and discussions with stakeholders, including suppliers and representatives of small and medium businesses. However, the commission is open to revising the regulations based on their real-world application.”
Small business representatives requested the article’s author to convey to the commission their ongoing concerns about two unresolved issues.
First, they’re troubled by retail networks’ preference to work with VAT-registered businesses. Additionally, they’re concerned that while the amendments apply to shopping centers, they don’t extend to individual stores, which could continue to interact with small and medium businesses at their discretion.
The commission responded to these queries, citing two sections of the “Trade and Services” law: “According to section 15.8, retail networks are prohibited from setting discriminatory conditions in their dealings with suppliers. Section 15.9 requires a retail network to have an official website and publish minimum requirements for potential suppliers, a list of the products they sell, and the conditions for displaying those products.“
However, entrepreneurs believe these changes lack a clear requirement for retail outlets to collaborate with businesses regardless of their tax status, leaving the decision at the discretion of the retail networks.
Regarding the legislative changes not applying to individual stores, the commission stated, “This consideration was based on the strong negotiating position of retail networks.”
Business and government expectations
Business leaders believe these legislative changes are critically important but have come too late.
“The government system is slow. The government typically responds to problems only after they’ve already arisen or are well underway, and even then, it’s often too late. We should be able to anticipate and prevent potential risks in advance,” says Armen.
He emphasizes that the slow response from the government system negatively impacts the business environment and the economy:
“For example, we’ve had retail networks that delayed payments for years. To this day, we have unpaid goods. If the law had been enacted earlier, businesses would have suffered less financial loss.”
However, the entrepreneur hopes that after the law is passed, delays by commercial networks will be minimized.
“Up until now, small and medium-sized businesses were not in a position to compel retail networks to sign contracts and set payment deadlines. Decisions about when and how debts were paid were often based on personal relationships, which is not right from the state’s perspective,” says Tigran Markosyan, a member of the Competition Protection Commission.
He is confident that the legislative changes will be effective from both an economic and social standpoint.
When asked what the government expects as a result of the reforms, the Ministry of Economy replied:
“We aim to create necessary, predictable, and clear legal foundations for the relationships between retail networks and suppliers, as well as for the agricultural product market. This will promote fair trading, improve the competitive environment, and enhance consumer protection.“
