Supermarkets are, by and large, complying with the Supermarkets Code of Practice but the code is not being used to resolve disputes, the Office of Fair Trading revealed in a report published today. The OFT is inviting comments and evidence on the findings of the audit and on the wider role of supermarkets in the supply of groceries and other goods.
The compliance audit of supermarkets looked at a sample of 500 grocery supplier relationships with the big four supermarkets. The audit found relatively little evidence of breaches of the code. However there was evidence of some breaches consisting of supermarket requests that suppliers make lump sum payments in relation to loyalty and continued supply. Suppliers appear not to have complained to the supermarkets about having to make the payments and the payments in question, which mostly concerned Safeway before its acquisition by Morrisons, appear to have ceased.
Without the use of mediation to resolve disputes as envisaged by the code, it has been difficult to assess the code’s effectiveness. The code’s success depends on it being used. The OFT believes that suppliers should overcome the fear of complaining and use the code’s dispute resolution procedure when they have concerns about their dealings with supermarkets.
The OFT considers that it is legitimate for supermarkets to compete vigorously for supplies on quality and price allowing consumers to benefit from value and choice through effective competition.
The OFT considers supply relationships work best when there is a combination of competition and straight dealing. It is not fair or legitimate for supermarkets to negotiate contracts with suppliers and then change or cancel them without reasonable notice or compensation. What is reasonable depends on the facts and can, if necessary, be established through mediation under the disputes resolution procedure. However, supermarkets and suppliers should ensure that their terms of business are in writing to help avoid misunderstandings and to ensure that bargains struck are kept.
The audit found that while standard terms were available to suppliers (on such matters as title of goods, delivery terms, etc) they did not ask for details in writing of the additional particular terms to which they were often subject (such as those recording trading agreements, promotions, etc). This is surprising and the OFT urges suppliers to ensure that they obtain and understand these additional particular terms.
The purpose of the code is to address the adverse effects on the public interest arising from certain practices which were carried out by ASDA, Safeway, Sainsbury's and Tesco in their dealings with their suppliers as identified by the Competition Commission (CC) report in 2000. The code, which is statutory for Asda, Sainsbury's and Tesco, only applies to the supply of groceries to these supermarkets by their direct suppliers and to supply contracts entered into on or after 1 November 2001.
The OFT believes that varying the code would be unlikely to tackle its perceived ineffectiveness and would have legal and practical difficulties. No code can be successful in dealing with allegations of breaches unless there is evidence of those alleged breaches. In addition, the CC's 2000 report found that most relationships between supermarkets and suppliers were good. The code has to apply to a vast range of commercial dealings and making it more rigid and prescriptive may stop mutually beneficial arrangements between suppliers and supermarkets, in turn damaging competition and ultimately consumers.
The OFT is aware of proposals for a voluntary Buyers' Charter which ensures that supplier-supermarket relations are conducted on a clear and predictable basis: these are welcomed by the OFT - provided that the Charter complies with competition legislation.
The OFT is aware of wider concerns about the growth of supermarkets in particular: the consequences of the acquisition of convenience stores by supermarkets; the growth of supermarkets' sales in non-food items; and the effect of below-cost selling and price-flexing by supermarkets. At present, the available evidence does not suggest that the market for the supply of groceries is not working well for consumers, but the OFT invites any evidence that there may be aspects of the grocery market which may have an adverse affect on competition.
Sir John Vickers, OFT chairman, said: “Supply relationships work best for consumers when there is competition and straight dealing. There is extensive complaint about supermarket dealings with suppliers, and some _ but not a lot of _ evidence of past code breaches. This code, like any other, can work only if evidence comes forward. We are keen for further evidence to inform our continuing scrutiny of the supermarket sector.”
Supermarkets, suppliers and stakeholders are invited to provide evidence to the OFT regarding the issues identified by the compliance audit, and wider competition concerns. The deadline for comments is the 31 May. Comments should go to bob.macdowall@oft.gsi.gov.uk
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