Food suppliers to UK supermarkets are increasingly finding themselves under major financial distress caused by the market power wielded by the major multiples.

These are demanding ever cheaper products with longer payment periods and other supplier contributions as part of the unwritten agreements they readily pull out of when it suits them, said Duncan Swift.

“Urgent action is needed through radical reform of the ineffective Supermarket Code of Practice and the introduction of a Supermarket Ombudsman if we are to ensure the long-term future of the UK’s food industry,” he added.

The Supermarket Code of Practice was introduced in March 2002 to resolve some of these issues by setting out how business should be conducted between supermarkets and their suppliers but has had no impact whatsoever, said Swift. However, an audit of the effectiveness of the code is under way. The government, through the Office of Fair Trading, is expected to give its view on its effectiveness later this month but Swift expects the audit will not yield substantive results.

“The failure of the code is no particular criticism of any one supermarket but simply reflects the market power that consumers have delegated to them en masse. If any one supermarket fails to use that power to full advantage it will simply lose out to a supermarket competitor which does. Whilst this goes on, the other end of the food-chain is eroding as more and more suppliers struggle to make ends meet,” said Swift.

“Where the current code falls down is that it does not stipulate the minimum required contract terms that should govern every supply from a food supplier to a major supermarket. Too much remains unwritten, even though suppliers can ask for some of it in writing most don’t as they are too afraid of being seen as potential trouble makers. What the government’s audit is unlikely to capture is the extent of this problem. Determining its extent is likely to be lost in the haze of debating just what is ‘reasonable’.

‘We are constantly seeing examples of disproportionate power damaging suppliers. A meat producer we are aware of for example can achieve sales of £2 million a week but only has an indicative order book which does not stretch beyond the Friday of that same week. It clearly suits the supermarkets this producer supplies, to order the quantities required at the very last minute but makes it incredibly hard for the producer to run the business properly,” he said.

The main problem with the code is that it is weak, vague and loosely worded, Swift added. “The principle of a code remains valid but to really make a difference it needs to include:

• The stipulation that there must be an agreed written contract between supplier and supermarket for each SKU (stock keeping unit), irrespective of point of delivery. (It is not intended that the requirement for a short-form contract will create a lawyers’ charter but to serve the primary function of evidencing the balance in transactions between suppliers and retailers. This would make any subsequent audit of the effectiveness of the code far more meaningful).

• Each contract to contain the minimum terms of:

(1) 30 day notice of contract termination, sole exceptions being contamination/public health matters where such incidences have been reported by either party to The Food Standards Agency.

(2) Supermarket notifying supplier one week forward of total SKU order requirement of which 70 per cent is guaranteed for payment by the supermarket if over 70 per cent of that order requirement has been made available by the supplier to the supermarket at the relevant time.

(3) All retrospective financial discounts or contributions related to volume or otherwise to be recorded in the contract prior to relevant supply being made. Failure to record rendering such discount or contribution requirements invalid.

(4) Payment for SKU’s supplied and accepted, or amount equivalent to guaranteed order requirement, to be made to supplier within 30 days without deduction. Any other payment terms to be valid only if agreed and specified in writing in the contract prior to supply having been made.

“Suppliers are crying out for a code that is fair, enforceable and robust. It should be made compulsory for any supermarket with a market share above five per cent (not the current eight per cent).

“The government should also consider going a step further and creating a supermarket ombudsman in the same way that there is a banking ombudsman, to oversee and supervise fair dealing in this key industry sector. Failure to act will result in more failures within the sector and an impoverishment of the choice the market offers,” he said.