OFT plans further supermarket probe

Related tags Supermarket Oft

The UK’s Office of Fair Trading (OFT) last week fell short of
confirming what food producers, farmers and lobby groups have been
saying for the last year – that the Supermarket Code of Practice is
failing to curb the power of the four leading food retailers – but
confirmed that it would be carrying out a further review of the way
supermarkets deal with their suppliers.

The Supermarket Code of Practice​ was introduced in 2000 following an investigation of the food retail market by the Competition Commission, and has been widely criticised for being something of a toothless tiger.

The OFT on Friday published its long-awaited review of the Code – a process which began over a year earlier – but if hard-pressed suppliers were expecting to win support from the regulator, they were sorely disappointed.

The OFT said that its consultations with suppliers, trade associations and the four major chains covered by the Code (Asda, Sainsbury's, Safeway and Tesco) had shown a high level of dissatisfaction – 80 to 85 per cent of respondents claimed that the Code had failed to bring about any change in the supermarkets' behaviour – but said there was in fact no hard evidence to support this belief.

As a result, the regulator said that it would begin a further review of the Code “to establish how supermarkets deal with suppliers under the Code”​. There was only “anecdotal evidence”​ that the Code was not working, the OFT said, with no cases going to mediation or any allegations of breaches of the Code.

“This has made it impossible to draw any firm conclusions as to how individual supermarkets are operating under the Code, though it is clear that widespread dissatisfaction amongst suppliers continues,”​ the OFT said in a statement.

But the fact that there have been no official complaints does not, it seems, mean that everything in the garden is rosy. Most suppliers were simply to afraid to complain about the way they were treated by the supermarkets, according to the OFT’s survey – 73 per cent of respondents said that they would not risk losing a listing for their products by complaining about the alleged heavy-handedness of the retailers.

Another weakness in the Code – and one which has been repeatedly highlighted by critics such as Friends of the Earth – is its dependence on the concept of 'reasonableness' – a term which FoE claims was included at the behest of the supermarkets themselves and which allows them a great deal of leeway in their relationship with suppliers.

The OFT’s survey confirmed this claim, with many suppliers claiming that the vagueness of the term allowed the supermarkets to interpret the Code to the detriment of suppliers, leading to uncertainty about the some of Code's key provisions and increasing reluctance to complain.

Not surprisingly, the four supermarkets themselves each expressed a commitment to the Code and said – as they have always done – that their relations with suppliers were generally good. But the OFT said that it had no evidence from the supermarkets that their relationships with suppliers had changed significantly since the introduction of the Code – for better or for worse.

The new review of the Code will focus primarily on the supermarket chains themselves, with suppliers for the most part unwilling to provide specific evidence of alleged breaches of the Code.

The OFT will conduct what it calls a ‘focused compliance audit’ of each of the four supermarkets' dealings with suppliers, and is likely to focus primarily on those clauses of the Code that received the most widespread level of complaint during the initial review. The findings of these audits are expected to be published later in the year.

The audit will involve a sample examination of the supermarkets' records of dealings with their grocery suppliers, focusing particularly on the clauses of the Code where claims of breaches were more frequently identified by suppliers, the OFT said.

Why no watchdog?

Critics of the Code were quick to condemn the OFT’s decision to pursue further investigations before taking action. FoE​, the most vociferous critic of the supermarkets’ dealings with suppliers, called it “a blow to farmers and other suppliers hoping for action to give them greater protection from the bully behaviour of the big supermarkets”​, and repeated its call for an independent regulator of the supermarket sector.

“The OFT's review confirms what farmers and other suppliers already knew, that the Code of Practice is useless. The bully behaviour of the biggest supermarkets is continuing unabated to the detriment of farmers and consumers. It is time that Tony Blair finally lived up to his promise to release farmers from the supermarket arm lock by creating an independent watchdog to ensure fair trading practices,”​ said Sandra Bell, food and farming campaigner for Friends of the Earth.

Not surprisingly, FoE was also highly sceptical of the value of assessing supermarkets’ records in determining whether the Code is being breached. “This will fail to uncover the full truth about the way the retailers bully suppliers because so much business is done verbally,”​ the lobby group said.

“Nor will the audit be able to pick up on the climate of fear which clearly exists amongst suppliers dealing with the biggest supermarkets.”

It also called the OFT “naïve”​ for expecting more official complaints to be made, and once again highlighted the weakness of the Code due to its reliance on ‘reasonableness’.

“No official complaints have been brought forward, and this is not surprising when the supplier must complain to the supermarkets in the first instance. The vague wording of the Code and in particular the use of the word ‘reasonable’ throughout is another reason for the lack of complaints. As one supplier put it ‘If you are a small supplier negotiating with a retailer who has more than 15 per cent of the market you can bet its not you who defines what is reasonable’.”

The core problem with the Code as it stands, according to FoE, is that it relies on mediation – supermarkets and suppliers sorting out their own problems – rather than allowing an independent regulator to oversee the industry.

The takeover of Safeway by Morrisons is widely expected to lead to further price competition among the top four players, in turn putting more pressure on suppliers to cut prices, the organisation claimed.

“One balancing factor could have been a statutory code providing some legal and regulatory protection against the unreasonable demands on producers, which ultimately all stem from the supermarkets. The Office of Fair Trading has failed in its duty and should be renamed the Office of Feeble Timidity."

Stores disagree

But the supermarkets themselves continue to stress their credentials as supporters of British food and drink suppliers.

“We have constructive, mutually-beneficial relationships with our suppliers, who are the lifeblood of our business,”​ said Nick Agarwal, spokesman for the number two retail group Asda.

“We've always been fully committed to the Code, which simply enshrines existing good practice. We're a very open business and will discuss fully with the OFT their latest proposals.”

Asda has long been a supporter of small producers, Agarwal argued, with a succession of promotions for local products, the latest of which sees it go back to its roots with a selection of Yorkshire-made food and drink items.

The Leeds-based supermarket said it would begin stocking 50 new locally sourced products in its 24 stores across the Yorkshire region from March, taking the total number of Yorkshire products on sale to 160.

The chain said that demand for locally produced food had risen dramatically in recent years, with many local products now outselling their national brand equivalents. For example, English Lakes ice cream which is sold in Asda's Kendal store in the Lake District, north west England, now outsells the leading brand, Haagen-Dazs, by two to one, the company said.

Asda claims that it has launched nearly 800 products from small, specialist producers in stores throughout Britain, a business which the company estimates to be worth £160 million a year.

Karen Todd, Asda's head of local sourcing, said: "This isn't about window dressing. Customers tell us that they want to buy more local products and we are determined to meet that increase in demand.”

Asda has a dedicated local sourcing team whose sole aim is to identify local products and work with small suppliers to enable their products to reach its stores. The team enlists the support of regional food groups and its own customers and colleagues to discover what the essential local brands are in each area.

“Local products often come from very small suppliers. Therefore it is important for us to make it as cheap, easy and risk-free as possible for these suppliers to do business with us. That means we have had to change the way we work. No costly technology is needed – unlike other suppliers, local producers don’t need to have an electronic information system to process and receive orders and payments, all they need is a fax machine.

"We have also introduced reduced payment terms which this helps ease any potential cash flow problems they may have, and allow them to deliver direct to their local store if this is more convenient.”

The OFT certainly faces an uphill struggle in determining exactly how – if at all – supermarkets are ‘abusing’ the Code. Undoubtedly, many suppliers will have had their margins squeezed under pressure from the stores, but schemes such as Asda’s Yorkshire’s Best also give many other suppliers a chance to bring their products to a broader public – an opportunity that most seem happy to take.

At the crux of the matter is the complaints procedure. Suppliers need to have the right platform to air their complaints – without fear of repercussions and loss of listings – and it is hard to see this being achieved without some kind of independent watchdog being put in place, despite the argument, from Asda and others, that working closely with each individual supplier to both parties’ mutual benefit is possible.

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