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Distributors prepared for scrapping of agency laws

The UAE government’s decision to allow direct imports of 14 different foodstuffs has reignited debate about the country's agency laws.

The UAE appears to be calling time on its infamous agency laws, following the government’s decision to allow direct imports of 14 different food products.

For distributors of branded goods in the UAE, the agency laws have been an important means of protecting their livelihood, while many retailers view the laws as a green light for certain distributors to inflate prices.

But some six years after signing an agreement to join the World Trade Organisation, the UAE is expected to soon scrap the laws, which give certain local companies sole rights to distribute foreign goods in the regional market.

“The UAE signed the agreement [with the WTO] in 1999,” Hubert Lobo, retail services manager, ACNielsen, told RNME. “Based on that, by the end of this year, there will be full implementation of the WTO in the UAE.”

Despite this, UAE authorities have yet to put a timeframe on scrapping the agency laws, which Lobo estimates will be during the first quarter of 2006. But while he is unable to pinpoint the exact time of the agencies’ abolition, Lobo is convinced that retailers and manufacturers will “welcome the WTO with both arms.”

However, other parties affected by the change are less likely to be impressed. “The only ones unhappy with the WTO will be distributors who will lose their monopoly over those agencies and brands,” Lobo said. “Once the market is opened, because of competition, prices are going to drop,” he added.

But he added that any changes following a repeal of the agency laws are unlikely to be immediate. “It will take some time, there won’t be a big impact. The only thing is that the distributor will have to work harder to prove he is the right partner for his manufacturer or principle.”

Khalid Salamat, director of marketing at distributor HBG Holdings, is more cautious, largely because he is unsure how and when the laws will change. “Ultimately, it will probably happen, but most likely in stages rather than in one bold swoop,” he said. Salamat is also concerned that a change in the laws could have an adverse affect on distributors that are not agents of any particular brands.

“There is a difference between a distributor and an agent or representative,” he said. “They are not necessarily the same thing. It could be disadvantageous to existing distributors as additional imports would partially or wholly jeopardise their business in the trade channels they’ve established after years of hard work.”

Despite this, Salamat thinks a change in the law would allow new distributors to take a slice of the market currently reserved for agency operators. “For us, it is very exciting to see a major shake-up that will allow innovative new entrants like HBG to win new customers that have previously been off-limits.”

Many industry insiders have predicted that supermarkets will start importing goods directly following any change to the law. Salamat agrees this could happen, but still sees an important role for distributors. “Supermarkets will still need distributors to deliver to their warehouse or stores. This activity could in future be done by the brand owner directly, but is unlikely,” he said.

But not all distributors with agency agreements are worried by anticipated changes to the laws. Naser Ali Odeh, general manager of GulfCo, which distributes brands such as Tang, Maxwell House and Wrigley’s in the UAE, thinks the changes will make little difference, not least because it has not been enforced strictly during the past few years.

“The agency law has been here for some time. In the last few years, however, it has not been applied so rigorously,” he told RNME. “In reality, the supplier will not allow an open market for his product.”

Even without the agency laws, retailers or rival distributors attempting to trade goods at lower prices than the agencies are unlikely to succeed, owing to various entry blocks to the market, Odeh argues.

For example, different countries have different rules on labeling and shelf life, which can make importing even branded goods a complicated game. “Food is a sensitive item — there are food colourings allowed in Europe that are not allowed here. Regulations here are very strict and enforced.”

Supermarkets and distributors looking to compete with agencies are also likely to struggle against the long-standing deals agencies often have with their suppliers. Odeh said a supermarket looking to import Contrex water from France would probably be priced out of the market.

“It would not be profitable for them. When we order from France, we get 25% off their pricing. If they go and buy from a wholesaler at an additional 25% with additional forwarding costs, it wouldn’t work.”

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