The UK grocery market is well known for its fierce competition, both between the big four retailers and between the major multiples and the rest of the high street, including independent and convenience retailers, foodservice, markets in all their forms and, more recently, the discounters.
But at what point does this rivalry cross over from healthy business practice to creating an over-powering and unfair environment?
This was just one of the issues faced by the Competition Commission when it undertook a two-year inquiry into the grocery market back in 2006, with input from the supermarkets and evidence collected from across the supply chain.
The aim of the investigation was to examine the grocery market in its entirety, from the state of the market to the balance of power among the big four and the fairness of the playing field on a wider scale.
The recommendations, much talked about in industry circles, included the appointment of an independent ombudsman to oversee and implement a new Groceries Supply Code of Practice, as well as the creation of a competition test to prevent any one retailer from gaining more than 60 per cent market share in any given area.
But these have had a mixed reception from the trade, with some supporting the findings, many sceptical about the proposals and others - notably the major multiples - voicing concerns about what they could mean for the industry and for consumers in the long term.
Rory Taylor from the Competition Commission confirms that the body is pressing ahead with various measures resulting from the inquiry, having launched a public consultation on draft undertakings to establish an ombudsman last month. “The overall aim was to see if competition in the grocery market was working well and benefiting consumers,” he tells FPJ. “Broadly speaking, we found that it was, but we had concerns relating to some aspects of retailer-supplier relationships and the level of competition between retailers in some local areas. We felt that either of these issues could adversely affect consumers’ interests if left unchecked.”
The debate reached the highest level in February when Andrew George, MP for West Cornwall and the Isles of Scilly Constituency of St Ives, challenged Gordon Brown to confront the issue on Prime Minister’s Questions. The Liberal Democrat MP called on the PM to act swiftly to implement the recommendations resulting from the grocery market inquiry for the benefit of suppliers.
He said: “The Competition Commission reported last year that the large supermarkets and I quote, ‘transfer an excessive risk and unexpected cost… to their suppliers, damaging consumer interest and to the detriment of both farmers and growers both here and in the developing world’.
“Does the Prime Minister agree that the Competition Commission’s proposed remedies to tackle this particular problem should be implemented now without any further delay?”
Brown said that George was “absolutely right” to highlight the problem. He replied: “First of all, we are asking supermarkets to change their practice and introduce early payments to suppliers. Secondly, in relation to developing countries, we have been in talks with supermarkets like Asda about how they can source produce from these countries at a fair price. We will continue to push for this as quickly as possible.”
But the Competition Commission does not have the power to establish an ombudsman itself, so this will require the agreement of the retailers. If they do not sign up to the undertakings, the commission will recommend to the Department for Business, Enterprise and Regulatory Reform (BERR) that it takes steps to establish the ombudsman instead. Once in place, the ombudsman will use the revised code of practice as a basis for its work.
“The existing code was drawn up following a previous inquiry into grocery retailing in 2000,” Taylor explains. “It has now been revised in light of evidence received during this latest inquiry from retailers, suppliers, trade bodies and other representative groups. This evidence made it clear that there was a need to strengthen the code to provide greater clarity and prevent certain practices - particularly those that shift unexpected costs and risks onto suppliers - which ultimately could damage consumer interests.
“We have published a draft of the revised Groceries Supply Code of Practice and in the near future, we will publish a legal order putting it into effect with strengthened provisions and covering a wider group of retailers than the previous code…
“Ideally, we would like the retailers to agree to undertakings to establish the ombudsman as it will take longer to establish if BERR has to legislate,” he admits. “We very much think it would be in everyone’s interest - including the retailers - that the ombudsman is appointed as soon as possible. This is a real opportunity for the industry to tackle a long-running problem by bringing greater confidence in the existing system from all sides. The costs of the ombudsman would be modest, so talk of it leading to higher prices for consumers is exaggerated.”
There are still plans for a revised competition test and, following the Competition Appeal Tribunal, in which UK number-one retailer Tesco had the initial proposal quashed on the grounds that the financial aspects had not been considered fully, the commission has restarted work on the test for the next six months, in order to provide greater analysis of the costs, the benefits of the test and how it would operate.
So with plenty going on behind the scenes, how has the industry responded to the inquiry and its findings?
A freshinfo poll in February showed that the trade believes that the Competition Commission’s announcement to appoint an independent supermarket-supplier ombudsman was “welcome news”, with 40 per cent of the vote. However, the rest were sceptical, with those claiming that the measure was “insufficient for the industry” and those dismissing it as “a waste of time” notching up 29 per cent of the vote each. Only one per cent believed the move would be “unreasonable for retailers”.
One respondent wrote: “The ombudsman role could work if he or she is allowed to be proactive and investigate, rather than wait for a supplier to complain. Suppliers need to be able to say to their customer, ‘it wasn’t me, guv - they [the ombudsman] came in and looked at the books - and did they whistle through their teeth when they saw the figures’.
“We need this approach to make it workable, otherwise the only customers for this ombudsman will be suppliers who have lost their business with a particular workshop.”
Another added: “The major disputes between buyer and supplier that might go to the ombudsman will always have two sides to the story. It will be extremely difficult to deal fairly with such things. A thankless task.”
Nigel Jenney, chief executive of the Fresh Produce Consortium, is seeking views from the industry about the proposal to introduce an independent ombudsman. “The fresh produce industry welcomes the opportunity for sharing best practice and transparency throughout the supply chain provided through the provision of the Competition Commission’s order,” he says. “We recognise the Competition Commission’s aim to balance the need for minimum standards in supply agreements with the need to maintain scope for commercial negotiations, particularly where these negotiations are mutually beneficial to suppliers and retailers.”
But there are signs that the sector is ripe for change. An industry-led buy-supply forum to be held in London this summer is just one of the ways that players are making a stand to try to change things. The meeting, facilitated by the Commonwealth Secretariat, will see industry members from across the supply chain come together at the Commonwealth headquarters to tackle the balance of power in the market.
Stuart Symington, chief executive of the Fresh Produce Exporters’ Forum (FPEF) in South Africa, is working to establish an impartial platform to safeguard trading relationships for the future. He has teamed up with Sujeevan Perera, trade adviser to the Commonwealth Secretariat, to make this happen.
Symington claims that the findings of the Competition Commission inquiries starting in 2000 and 2006 have been “benign” and have had little effect. He questions whether the latest findings will go the same way. “Apart from the appointment of an ombudsman, which may reveal actual cases in which suppliers are being compromised by the market power of the big four, there appears to be no meaningful change in the market,” he says. “We hope that such an appointment will send a signal to all value chain role-players - at the UK end in particular - that they are being watched. And if the ombudsman is given teeth, then that should be a deterrent for anyone wanting to test the commercial limits of what has essentially become an unstable system.”
But he warns that the ombudsman must position itself to make a difference by observing and taking on board how the industry works and getting to the crux of the issues.
“The ombudsman should firstly understand how the business works because without understanding the real mechanics of this business, he or she won’t uncover the real issues,” says Symington. “Second, the ombudsman should visit supplying countries to hear firsthand what is actually going on in their relationships with supermarkets.
“Thirdly, the ombudsman needs to appreciate that it is no single individual or company’s fault that these practices have developed. The current model of capitalism allows a distorted playing field like this to develop - the ombudsman needs to recommend the refinement of such a system, so that all parties can benefit.”
A strategy for moving forward, Symington says, could be to replace the proposed competition test with limits on selling prices. “I would prefer that all the supermarkets were disallowed from selling our products at below cost price - with immediate effect,” he says. “That would be a fair policy introduction that would apply to all supermarkets that would then have to compete fairly among one another, without forcing their suppliers to subsidise their price wars with one another on the high street.”
It is clear that the industry must strike while the iron is hot and while there is still a chance to have a say in what will happen next, because another inquiry into the UK grocery market any time soon is unlikely and it will take months - if not years - to see if the latest recommendations will make any impact on the retail scene.
“We do not expect another grocery inquiry in the near future, although we cannot rule out the possibility of further inquiries - especially given its size and importance and, of course, a major merger in the sector would result in at least an Office of Fair Trading inquiry,” Taylor explains. “We have an expectation that if our measures and recommendations are introduced, it will remove the need for a further investigation for a good while - and this is especially so if retailers agree quickly to an ombudsman.”
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