By Margaret and Jim Cuthbert
In February 2008, a written declaration was adopted by a majority of Members of the European Parliament requesting the European Commission to investigate and remedy “the abuse of power by large supermarkets operating in the European Union”. With yet more increased concentration of supermarket stores in a few retailer chains, the relationship between retailers and suppliers had been changing all over the EU, resulting in abuses of buyer power by supermarkets. What we will show here is how, seven years on, Westminster is failing to grapple adequately with these problems in the UK.
This article, therefore, deals with a different aspect of the supermarket industry from the article we wrote in Bella last September, which was mainly concerned with the very small percentage of supermarket sales which were of Scottish produce.
It is estimated that, in Scotland, the average household spends £53.20 a week on food and non-alcoholic drinks (ONS, Family Spending). Most of that money is spent in supermarkets, who, in addition, sell us tobacco, alcoholic drinks, footwear and clothing: in Scotland, as in the UK, the grocery trade is dominated by four major chains, Asda, Morrisons, Sainsbury’s and Tesco. Together they are responsible for 73.4% of the UK grocery market. In recent years discount grocers like Aldi and Lidl have been making strides: even so, Aldi and Lidl accounted for only 8.4% of the market in November 2014. In other words, the major supermarkets account for a substantial part of our weekly spend.
Small suppliers of goods where the brand is not well known have very limited access to markets except through supermarkets: and even big suppliers such as Nestles rely on supermarkets to stock their products. The stranglehold that the large supermarkets exercise becomes clear when you realise that the four large supermarkets who supply over 70% of UK groceries, are supplied in their turn by around 7,000 suppliers – and sell their products to around 25 million households. Supermarkets use their power to exact a price from suppliers for stocking their produce – and that price depends on the strength of the supplier. This practice is not confined to the UK. In 2008, a European survey by Stichele and Young found evidence of extremely large payments by suppliers to supermarkets in countries like Italy and France.
The potential abuses of power that supermarkets can use against suppliers are well documented in a House of Commons briefing paper: (August, 2012). They include:
- demanding (or taking) fees to be on a list of suppliers
- using the threat of de-listing if the supplier does not do what they have been asked
- charging slotting fees for particular shelf space
- making late payments
- returning produce that has not been sold, even when far too much was demanded in the first place
- demanding compensation if profits made are less than expected
- demanding extra payments when new stores are opening, and for promotions.
- low cost selling or deep discounting (e.g., two for the price of one) where it is the supplier who bears the cost.
- retrospective changes to agreed terms
- demanding that suppliers limit their supplies to the supermarket’s rivals.
- Altogether, the practices aim to transfer risk to the supplier and away from the supermarket.
Twice in the last fifteen years, the UK’s Office of Fair Trading has asked the Competition Commission to carry out an investigation into competition in the grocery market. The first investigation, in 2000, led to the creation of a Code of Practice as a means of regulating practices between supermarkets and their suppliers. In general, this was found to be toothless. The second, in 2008, again found problems in the relationship between supermarkets and suppliers. The report of this investigation concluded that:
“the transfer of excessive risk and unexpected costs by grocery retailers to their suppliers through various supply chain practices if unchecked will have an adverse effect on investment and innovation in the supply chain, and ultimately on consumers.”
This report highlighted the need for a revised Code, (which was subsequently introduced in 2010), and recommended that grocery retailers should themselves establish an Ombudsman’s office to monitor and enforce the Code. Failing that, it should be imposed, and the Ombudsman should be given the power to levy significant financial penalties on the retailers for non-compliance. Eventually in June 2013, the UK Government established a Groceries Code Adjudicator with a remit to “ensure that large supermarkets treat their direct suppliers lawfully and fairly, investigate complaints and arbitrates in disputes”. On 2nd February 2015, the government finally announced that, subject to parliamentary approval, it aimed to give the adjudicator powers to impose fines of up to 1% of annual turnover on any supermarket breach of the Code.
So what exactly are the terms of the Code? The Code covers all grocery retailers with groceries turnover in excess of £1 billion a year:
- Grocery retailers are prohibited from making retrospective adjustments to terms and conditions of supply.
- They are prohibited from entering into arrangements with suppliers that result in suppliers being held liable for losses due to shrinkage.
- They are required to enter into binding arbitration to resolve any dispute with a supplier arising under the Code.
- They are required to keep written records of all agreements with suppliers on terms and conditions of supply.
- They must provide to the body monitoring and enforcing the Code any information as it may reasonably require in pursuit of its functions, including complaints from primary producers.
It turns out that the Code has been broken regularly. A survey of grocery suppliers by YouGov in June 2014 for the adjudicator found that:
- 40% of those taking part said their supply agreements or terms of supply had been retrospectively varied.
- 37% complained about unjustified charges for consumer complaints.
- 35% reported a delay in payment.
So far the adjudicator has dealt with three major complaints. One was a debiting of a number of suppliers’ trading accounts by Morrisons as part of a move towards convenience stores and internet sales without those suppliers having first agreed to participate in the scheme. The money was reimbursed and it was accepted by the adjudicator that this was not Morrisons requiring a listing fee. Another was a complaint against what appeared to be a Tesco practice of asking suppliers to pay for eye-level display. Tesco said the requests had been made in error. The third was a case concerning the Co-op where the Co-op demanded compensation payments for loss of profit due to what they regarded as a service level breach. The adjudicator found there to be no evidence of any breach and the Co-op withdrew its demand.
In no case, however, has there been much “naming and shaming” and there is no real power as yet to impose fines.
Stichele and Young found, in their survey, that abusive practices by supermarkets had led to some suppliers going out of business or surviving on very low profit margins. In particular, farmers were especially vulnerable, as their products had a short shelf life, and this could be exploited by large retailers in bargaining negotiations.
Against this background, the decision by Christine Trecon, the adjudicator, announced on 5th February this year that she was going to investigate Tesco for abuse of market position: this is very much to be welcomed. It is worth noting, however, the government’s recently announced intention to give the adjudicator the power to fine will not apply retrospectively to this investigation.
In general, however, even with the power to fine, investigations like this are unlikelty to be enough. The degree of concentration in the industry is such that abuse of power, and abuse of market position, is probably inevitable. So the solution to the underlying problem would almost certainly involve some kind of anti-trust legislation, to prevent any one firm having too much of the market, and so would imply the break-up of some of the large chains.
This would increase competition, but at some potential loss of economies of scale. However, the arguments in favour of large supermarkets because of economies of scale are probably overdone – for example, once you concentrate your distribution network too much, there are large environmental costs of hauling the same produce up and down motorways.
And breaking up the large chains would, in the other direction, have distinct benefits:
a) For the labour market: it would alter the balance between employer and employee back in favour of employees.
b) For the supply chain: it would alter the balance between the supplier and the supermarket retailer.
c) For innovation: it could encourage far greater innovation in products.
Overall, however, the big question is whether Westminster would ever be willing to introduce the required legislation. Given their track record, this looks extremely unlikely. If so, here is yet another argument for more devolution – or independence. And tackling the problem at a Scotland level would have the advantage that we could try to design a solution to tackle the problem that even a medium sized store can dominate the retail market in small towns.