Friday, February 18, 2011

Filipino SMEs similar to martyred wives for sticking it out with vertical price agreements with MNCs

If it is has been established (here and here) that vertical price agreements in the Philippines are obviously huge burdens on Filipino distributors and retailers, then why do these guys stick it out with the multinational corporations (MNCs) to begin with?

Well, in the case of Nestle, its distributorship agreements usually promise market support to its local distributors/retailers. Armed with these promises, the SMEs pour in hundreds and thousands of pesos in setting up their operations, and in fulfilling their end of the distributorship agreement. Having infused so much capital to get their operations underway, it is often difficult for these Filipino SMEs to stop midway, call foul, and just back out of the whole thing. Not only would there be breach of contract involved, but these SMEs, naturally, hang on in the hope of turning a profit, and to avoid any further loss of investment. In short, their hands are tied. Plus, there is always the threat of having the multinational pre-terminating or refusing to renew the distributorship before the SME recovers from its investment.

Such vertical agreements also have an impact on consumers. From the point of view of the SMEs, once Nestle, for instance, sets a minimum price, the Filipino retailer/distributor generally has to market the goods more vigorously and creatively since lower prices are usually associated with lower quality. This is especially problematic when marketing and promotional support from the manufacture wanes throughout the existence of the distributorship agreement. So the Filipino SME, like a martyred spouse, sticks it out with the abusive other half.

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