Challenges for businesses from massive product labeling in the Eurasian Economic Union

December 06, 2018

Natalia Malyarchuk, Head of Kesarev Kazakhstani office, spoke on the hidden challenges for businesses caused by the introduction of massive product labeling in the Eurasian Economic Union (EAEU) and its member states during the International Forum «Anticounterfeiting 2018» on November 19, 2018. The challenges include the unclear hierarchy of product labeling systems on the national and international levels, cost increase for FMCG products and thus for consumers, remaining turnover of unsafe products despite product labeling and inevitable difficulties for pilot projects. Retail.ru published an article based on the presentation.

At present, EAEU officials discuss different approaches to product labeling in order to choose the most suitable for governments, businesses, and consumers. 

Mixed hierarchy of product labeling systems 

Currently, all five member-states of the Eurasian Economic Union, namely Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia, have their own systems for product labeling and traceability. They differ from each other in IT platforms, lists of goods required to be labeled and the specifications of the labels.

For instance, 

  • in Kazakhstan, Belarus and Russia, excisable alcohol and tobacco products are subject to mandatory labeling and traceability, 
  • in Belarus, Russia and Kyrgyzstan – animal products, and 
  • in Armenia 42 groups of goods are labeled. 

In addition to national systems, there is a single EAEU labeling for natural fur products, which also provides for variability in the use of labels.

The lack of unification of approaches to types of identification labels, procedures of product labeling, the functioning of IT systems can become a burden for producers aiming to introduce new products in one of EAEU countries, due to increased logistics cost, time for delivery and maintenance of warehouse space. 

Cost increase for FMCG products

Currently, all product traceability systems are at different stages of development and integration with the tax and customs services within the EAEU countries. This makes it difficult to carry out preliminary calculations on the costs of code generation, label purchase, installation and support of required equipment and software as well as recruitment of new personnel. 

One could argue the opposite, pointing to the pilot project of labeling of products from natural fur. Indeed, the price tag of $1 did not affect the cost of fur coats. However, the question of how it could reflect on the price of FMCG products remains open. 

Additionally, the need for traceability creates additional costs for distribution networks, especially for small businesses. These are formed from scanners, required to be used right before the sale of a product to a consumer. In case the retailer sells products with different types of labels – several such devices. 

The new requirements can lead to a significant reduction of small-scale retail and decrease of availability of many product categories in remote areas, thus the further concentration of retail under the control of large, big-name chains.

Turnover of unsafe products

Every market has products manufactured with technical violations or those that are not corresponding to declared standards. Labeling them can mask these properties from the consumer and thereby contribute to the legalization of such goods.

Mandatory labeling of FMCG goods will create an additional financial and administrative burden for producers and importers and will lead, according to various expert estimates, to the final products’ cost rise by 10-30%.

If we do not take into account these trends now, the conditions for the growth of illegal products and administrative barriers between the members of the EAEU will be formed in the near future.

Inevitable difficulties for pilot projects

Nearly every pilot project faces numerous predictable and unexpected challenges. In this case, they will include the lack of a mechanism to protect national business in violation of the rules of labeling and circulation of goods without control marks, the lack of infrastructure for the production of radio frequency tags in the country, weak systems to protect labels from illegal collection of information about manufacturers and goods.

In addition, the current version of the EAEU Agreement on the labeling of goods which declares the freedom of member states in the choice of product groups and methods of labeling may have a negative impact on the common market due to a high probability that countries with large markets would declare their rules to countries with small markets. 

Thus, based on the analysis of regulatory and institutional problems, it seems appropriate to implement labeling on a voluntary basis and in a test mode, avoiding additional costs for the end user, as well as taking into account the wide discussion with the participation of representatives of authorities, business and the expert community, before the introduction of the unified traceability infrastructure of the EAEU by 2025.

You may find the full article in Russian here