UPDATE 1-French supermarket warns president about inflation

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By Marie Maitre

PARIS Oct 23 (Reuters) - E.Leclerc on Tuesday joined the ranks of French supermarkets denouncing both demands by food producers for sharp price rises in 2008, and a legal framework preventing retailers from negotiating with suppliers.

E.Leclerc warned President Nicolas Sarkozy in a newspaper advertisment that price increases imposed by food producers threatened French households' spending power.

"Mr President, promising a rise in spending power means allowing prices to fall. Visibly, we got off to a bad start," the E.Leclerc ad's caption read.

The full-page ad, published in right-wing daily Le Figaro, featured seven products -- including mineral water, eggs, pasta, yoghurt and Camembert cheese -- with tags showing double-digit price increases due to come into effect at the end of the year.

"Enough with half-measures, small reforms and hackneyed phrases: Inflation is back," said E.Leclerc, a family-owned group, which has made a name for itself with catchy advertising slogans promoting the rights of consumers and cheap prices.

Under French law, supermarkets cannot negotiate with suppliers directly on retail prices, and instead negotiate "soft" services such as shelf space and promotional campaigns for specific products.

The revenue they receive for these services allows them to make a profit even if they sell products at less than what they pay for them. However, price rises have put their margins under pressure.

Several supermarket groups, including retail giant Carrefour (CARR.PA), want the rules scrapped so they can freely negotiate prices with suppliers. Big suppliers want them maintained as it protects their pricing power.

Economy Minister Christine Lagarde, who held a news conference on spending power on Tuesday, told France Inter radio that there was a balance to be struck.

"We are trying to establish a balance between suppliers and retailers and, in particular, we want to allow retailers to pass along all the discounts they get from suppliers, which is not the case today," she said.

"Today I don't pity retailers. They keep a number of back-margins, discounts that they get from suppliers. Today we want these discounts to be passed forward to the consumer."

The Secretary of State for Consumer Affairs, Luc Chatel, last week proposed a partial reform of the law by year's end and said the government would consider further reforms next spring. But in its ad, E.Leclerc said that would be too late.

"Prices have gone up and households' consumer spending will be affected from the first quarter of 2008," it said.

France's fifth-largest supermarket group, Casino Guichard (CASP.PA), also dismissed the planned reform, with Chief Financial Officer Michel Favre calling it "a big noise for nothing."

Favre told a conference call with analysts on the company's third-quarter sales that the government's ideas were "stupid" because they could leave supermarkets selling at no margin on some products.

"Normally, nothing will change with respect to the first quarter ... It's a big noise for nothing," Favre said.

Big food suppliers such as Danone (DANO.PA) and Lactalis have announced steep price increases for November and December, citing the rising cost of raw materials such as milk.

Retailer Auchan recently said jam makers such as Materne were seeking increases of 14 percent to 16 percent and brewers were demanding 4 percent to 8 percent more for their beer.

Economists fear that as a result French inflation -- which has remained moderate so far -- may spike higher this winter.

(Additional reporting by Nick Antonovics)