Time to bring on the referee? The Government's proposed Adjudicator for the Groceries Code - Business, Innovation and Skills Committee Contents


Examination of Witnesses (Questions 93-166)

PAUL KELLY, ANDREW OPIE, SEAN TOAL AND TIM FALLOWFIELD

23 JUNE 2011

Q93   Chair: Good morning, can I first of all offer you my apologies? It is the first time as Chair of a Select Committee that I have ever kept witnesses waiting and I am not very pleased about it. A number of our members were double booked and I had to round them up, so please accept my apologies. We are now able to go, and we will try to make our questions as brief and pointed as possible in order to get through them in the time available. Equally, I would be grateful if you could give your responses in the same way.

I would also like to make the point that all four witnesses do not have to respond to every question. Unless you wish to give a different opinion from other speakers or feel there is something that you need to say to supplement what the other speaker has said, do not all feel obliged to answer every question. Just before we start, could you introduce yourselves for voice transcription purposes? We will start with you, Mr Kelly.

Paul Kelly: Good morning, I am Paul Kelly. I am the External Affairs and Corporate Responsibility Director for Asda.

Sean Toal: Good morning, I am Sean Toal, Commercial Director for The Co­operative Group.

Tim Fallowfield: Good morning. I am Tim Fallowfield, Company Secretary and Corporate Services Director at Sainsbury's.

Andrew Opie: Good morning, I am Andrew Opie. I am Director of Food and Sustainability at the British Retail Consortium.

Q94   Chair: Thank you very much. Before I ask my first question I have to declare an interest. I am a member of the Co­operative party, I have a long-standing association with the movement, indeed I was an employee for 18 years, and I am a Labour and Co­operative Member of Parliament. That will in no way inhibit the rigour of my questions. I would just like to start with a general question. As large retailers you all seem confident that compliance with the GSCOP is improving. Could you briefly explain why you think this is so?

Sean Toal: I am happy to start. I think the improvement has come about from the extensive amount of training that has been put in place since the code has come into practice. Certainly in The Co-operative business we have invested just over £600,000 in buyer training and have established what we call a GSCOP team. This comprises an audit group together with legal support to ensure that the advice and guidance to our buyers on their ongoing discussions with suppliers is something that is consistent and well understood.

Q95   Chair: Is that an experience that has been repeated with the others? I have read your submissions and that seems to be fairly consistent with them. There seems to be opposition to the position of an adjudicator to varying degrees. Why do you disagree with the adjudicator?

Tim Fallowfield: Shall I answer that one? After the Competition Commission spent so much time investigating the industry and then decided that we should introduce a widened and strengthened code of practice, we think that we should actually be given the opportunity to see if the code of practice is working. On the basis that it has only had a year to operate so far, we believe it would be better to continue a review. Our own experience is that suppliers are using the code of practice, it is coming up with some good results and good resolutions, and we believe that is all that is needed in relation to dealing with this particular issue.

Q96   Chair: Do you not think that the prospect of having an adjudicator may have concentrated the mind more than if that prospect had not been there?

Tim Fallowfield: No, I do not. From what I understand, all retailers have taken this subject very seriously. Of course, it is in our best interests to have good relationships with our suppliers because we all invest a lot of time and effort in making sure that we have supplier relationships in order to meet the interests of our customers. So I think that is driving our behaviours related to GSCOP rather than the threat of any further regulation.

Q97   Chair: Does anybody wish to add to that?

Paul Kelly: Our position would be slightly nuanced in that we can see there is some merit in having an entity that monitors retailer compliance with GSCOP in relation to direct suppliers, and that that should sit within the OFT. Our concern is not dissimilar to that of Sainsbury's; there has not been a long enough period of time to evaluate the effectiveness of GSCOP as the first of the compliance reports will appear at the beginning of next year. Secondly, we think the evidence base for widening the remit of the adjudicator from what was originally envisaged in the Department's consultation is not robust enough at this stage.

Q98   Paul Blomfield: If everything is as rosy as you suggest, then what is the problem with having the adjudicator? I appreciate there is an issue about cost that has been raised in some of the submissions, but we are probably talking about a marginal cost in relation to the turnover of the large retailers. If everything is fine, presumably the adjudicator will not have much to do and will then review on the basis of that.

Andrew Opie: Our answer is that we believe it would be unnecessary to add an additional tier of regulation to the system, particularly when GSCOP is working. Remember that it does cover 10 companies now; previously it was four. Therefore our argument would be that, simply in terms of better regulation, we should not seek to add an additional tier of regulation to what is already working well, where we can see that is the case; it is demonstrated in both the compliance and also in the evidence coming out quite recently about the levels of innovation by food and drink manufacturers. We should remember that that was the original point the Competition Commission was most concerned with in terms of consumer impact.[1]

Q99   Chair: The cynic might say that you think it is working fine but, to paraphrase those immortal words, you would, wouldn't you? What happens if the suppliers do not agree, who then makes the judgment? Who would you recommend makes that judgment?

Paul Kelly: There are two points I want to make. The first is that GSCOP is much tougher and much clearer than the Supplier Code of Practice that preceded it. It sets out very clearly the responsibilities of the retailer to encourage transparency and to encourage certainty, and it gives the supplier recourse to a dispute resolution procedure that can result in binding arbitration. GSCOP is embedded in the contracts with our suppliers, so they also have recourse through normal legal channels.

Q100   Chair: Can I just stop you there? Do you not think there is a risk that, if there is no Adjudicator, the prospect of legal challenge, which would be far more time consuming and expensive, might be that much greater?

Paul Kelly: I am very happy to be open about this: at this point in time we have had no disputes that have gone to arbitration and no disputes raised with our Code Compliance Officer. We have only had four incidences where a supplier has raised a concern around GSCOP; we have discussed those with the supplier and they have not been taken any further. If you look at that in relation to the 2,500 suppliers that are covered by GSCOP, it is less than 0.2%. That does not suggest to me that there is a problem with the way in which GSCOP is working.

The second point I would make is that a lot of the issues that still hang around this issue date back to 2006 to 2008, and actually they were covered in GSCOP. A lot of the noise that we hear from some of the supplier groups relates to dated issues that have been adequately addressed by GSCOP in our view.

Tim Fallowfield: We have had exactly the same experience as Asda in relation to the scale of issues that have been raised by our suppliers. We have not had any issues that have not been determined by the supplier and our buying team. Only a very small number of issues have been raised at all. Our evidence would be that both large and small suppliers are taking advantage of the provisions of GSCOP. As a result of that, we are able to deal with those issues internally, without the need for any external review.

Q101   Chair: The figures we have are that there are about 23, all told; I appreciate that they will not all be with one retail organisation. You repeated and justified the position you have, although I see in your submissions that there is a general recognition that the adjudicator will be there and you do not particularly want to re­rehearse the arguments before then. I wanted to hear those but perhaps we need to move on.

The first round of compliance reports of the OFT are due in August. What do you think they are going to show?

Sean Toal: I think they are going to show examples of what you have heard from the witness statements already made today. There is a general shift in approach and relationship with suppliers as a result of the code coming into play. For example, in The Co­operative Group we have our own self­monitoring system that we talk about, which we call Red Flag. With this buyers have the opportunity, should there be the slightest query, to gain further advice to ensure that, before anything results in a challenge, we can resolve it with the supplier in line with the code. I think it will be a positive outcome, hence some of the comments about the need for the adjudicator that you have already heard.

Q102   Chair: I accept that this was a couple of years ago but the Competition Commission found 380 possible underlying examples of infractions of the predecessor: SCOP as opposed to GSCOP. Are you seriously telling us that it has improved so much in such a short time?

Tim Fallowfield: I think the introduction of GSCOP has had a significant impact on that. You have to remember that we have moved from a rather vague principle of reasonableness under the old SCOP to a very detailed set of provisions under the new code. I will not repeat the issues about training but that has certainly encouraged all of our buying team to have even more detailed discussions with the supply base than they would have had previously. So it has led to an improvement in relationships between retailers and suppliers.

Q103   Chair: The British Brands Group tells us otherwise; it says that it believes it is still going on. Have you any comments on that?

Sean Toal: Really it is based on evidence and, similarly to my colleagues on my left and right, the amount of instances we have had to investigate regarding difficulties with the code have been limited, if at all. We have had no claims whatsoever. Before we can make a judgment on that, we would like to understand the evidence that sits behind it. Every supplier has the right, through GSCOP, to raise any issue that they have but I think we would need more evidence.

Chair: You can rest assured that we will be probing to get it.

Q104   Paul Blomfield: Under the previous code suppliers had a right to complain to the OFT. Is it right that there is no such opportunity under GSCOP?

Tim Fallowfield: The process needs to go through binding arbitration rather than to have effectively an undefined process going through to the OFT. So there is far more detail now in relation to the escalation process that ends up in binding arbitration. The OFT has an obligation to monitor the reports that each of us is providing about our compliance. Mr Kelly said that, because of the year­end timing of Asda and some other organisations, they will not have to provide those compliance statements for some months. We are in the process of putting ours in now because we have a different year­end. The OFT can now start to look at these compliance reports and give its review of the way in which the Code is working.

Q105   Paul Blomfield: So you would be happy to see a mini review, for want of a better description, of underlying compliance perhaps by the Competition Commission between now and the Bill coming into force?

Tim Fallowfield: Certainly we think the concept of review is worthwhile. The scope and status of that review is quite important. Certainly we do not believe that should become yet another Competition Commission Inquiry; we have just gone through two of those in the last 10 years. Provided that there are very restricted terms of reference, we think a review would be very sensible. We have effectively been saying that we should let GSCOP bed down and see what practice is showing before going through all the regulation and bureaucracy of a new adjudicator.

Sean Toal: The really important information is the publication of all the annual reports of the 10 retailers. For example, The Co-operative Group's is not due until spring 2012. Being able to have that full picture of how GSCOP has bedded down is an important milestone for us to move forward.

Paul Kelly: One of our concerns is about the danger of the legislation getting the cart before the horse. Having an adjudicator in some ways seems to presuppose that GSCOP is not working, will not work, or is not fit for purpose. There has been no evaluation of how effective GSCOP has been in addressing some of the concerns the Competition Commission identified and in dealing with, as the Chair said, the 300-odd incidences it identified some five to seven years ago.

Q106   Paul Blomfield: Can I briefly return to an earlier point that you made regarding concerns about the way the adjudicator's remit was widened beyond GSCOP? What were the particular concerns on that?

Paul Kelly: Our understanding of the guidance that supports the draft Bill is that the adjudicator's role will move beyond looking at the relationship between the supermarket and its direct suppliers, to cover its indirect suppliers. Now, GSCOP is all about that relationship between the supermarket and the direct suppliers. To move it into indirect suppliers without having looked at whether there is evidence to do that is something that really concerns us because it will have fundamental implications for the way in which the industry operates. That will have ripple effects right down the supply chain.

Q107   Paul Blomfield: Thanks very much. Can I just return to the issue of a mini review of compliance for a moment? I just want to confirm that the views expressed reflect everybody's position. For example, Mr Fallowfield, is that the view of Sainsbury's as well?

Tim Fallowfield: I represent Sainsbury's.

Q108   Paul Blomfield: So that would be Sainsbury's view: that you would welcome a mini review?

Tim Fallowfield: Yes, in the right terms of reference.

Q109   Paul Blomfield: What are they in your mind?

Tim Fallowfield: Well, they are restricted to seeing if GSCOP is actually working.

Q110   Paul Blomfield: So simply on compliance and effectiveness?

Tim Fallowfield: Yes.

Q111   Paul Blomfield: Thank you.

Andrew Opie: We put in our evidence, on behalf of the companies that are not represented here but are BRC members, that they would support that position as well.

Paul Blomfield: Thank you.

Q112   Chair: The code only covers the relations between suppliers and the large retailers. To what extent do you think that practices that were envisaged as being covered by this could happen higher up the supply chain between suppliers and primary producers? Any takers?

Paul Kelly: If a primary producer is supplying into a supplier that supplies a supermarket directly, then that supplier is covered by GSCOP. Anyone who directly supplies grocery products to a Designated Retailer is covered by GSCOP.

Q113   Chair: Not between the primary producer and the actual supplier? I am obviously not getting through. I mean from a third-party producer to the main supplier.

Sean Toal: Are you referring to an indirect supplier?

Q114   Chair: Yes.

Sean Toal: We have had the discussion on the position on indirect suppliers previously. The code as it was set up was really put in place to look at the relationship between retailer and direct supplier. Certainly our position would be that we should give GSCOP a period of time to see how that is establishing with direct supply before we move on to indirect. In The Co­operative Group we deal with 1,000 direct suppliers. The sheer practicality of moving that forward to looking at indirect supply would be a huge change and, as we said earlier, there would be a cultural and ripple effect across the way in which business is run.

Paul Kelly: If you take our example, we have 2,500 direct suppliers covered by GSCOP. In the annex, we provided to the Committee an example of just one ready-meal product that has potentially 39 indirect suppliers. If you look across the range of products we sell, you could very easily increase the number of suppliers we have to deal with tenfold or possibly hundredfold. That has huge implications for us and for those suppliers in terms of the number of people to audit, the requirements that we would need to place on those suppliers and the transparency to be able to see that they are complying with GSCOP. The result of that would be enormous cost pressures thrown right the way through the supply chain that I fear would ultimately end up being paid for by the consumer at the checkout.

Q115   Chair: What I am trying to get at is whether you think that you are being blamed, if that is the right word, for problems that occur in a different part of the supply chain for which you are not directly responsible.

Andrew Opie: I think there is a lack of understanding of the influence of retailers generally on the supply chain and primary producers. That extends beyond supply relationships to things like the influence of global markets and traded commodities, for example. So the retailers are very high profile; they are large buyers in the market. Therefore a primary producer tends to think that all of his product and the price that he is getting for his product is influenced by retailers.

Chair: Okay, we will now go on to arbitration and I will bring in Margot James.

Q116   Margot James: Are you concerned that the arbitration procedure could be used by suppliers as a means of gaining some form of contractual advantage?

Tim Fallowfield: That had not occurred to me as a particular issue. In relation to the arbitration process, the concern I had was the possibility of the adjudicator being involved in conflicts of interest; so effectively he would be the investigator and the judge as well. I would have thought that could have been addressed.

Q117   Margot James: There have been criticisms that the retailers could use arbitrations tactically in the reverse by bogging down arbitrations, using delaying tactics, diluting them with too much information and that sort of thing. This might sound like a rather cynical question, but given the sorts of things that we heard from the Competition Commission Inquiry, it does not seem to be without merit.

Sean Toal: Ultimately the retailers would not want that. Certainly that would not be the case with The Co­operative Group. We are very much about trying to serve consumers, and in the tough economic climate that we are in at the moment you would not want disputes tied up in arbitration for long periods of time, because ultimately that prevents you moving forward with your range development or the price or value proposition you are providing for consumers. So it would not serve the retailer or the supplier any merit for things to be lost in the long grass, for want of a better phrase. That just prevents helping out customers in stores every day.

Tim Fallowfield: The actual GSCOP process has a timeline for trying to get things through to arbitration without unnecessary delay. It is actually a short period of time to go through each retailer's process and then, to the extent that a dispute cannot be resolved, going through to arbitration within a period of four months from the start of that process. So there is a mechanism in GSCOP to ensure there is no opportunity for either party to delay unnecessarily.

Q118   Chair: Could I just intervene on one point, Margot? This is to the Co-op: I am not sure if the position you are in is unique, but it is a particularly interesting position.

Sean Toal: We like to think it is unique.

Q119   Chair: You are a major retailer but you are also a major supplier. The views you have given are essentially from the retailer's perspective. From a supplier's perspective have you as an organisation ever experienced the difficulties that are supposed to be addressed by GSCOP?

Sean Toal: Well, for example, we are the UK's largest farmer.

Chair: Exactly.

Sean Toal: We have recently taken the decision to completely integrate our farming business into our food division. So, rather than there being within our business a supplier and retailer relationship, it is now more of a partnership approach. We are looking at the relationship fundamentally differently, on the basis of how we take cost out of the supply chain together, provide better quality and in turn provide better prices to customers. Do we still serve other retailers with our product?

Q120   Chair: That was my next question.

Sean Toal: We do not any longer.

Q121   Chair: You do not?

Sean Toal: Not any longer.[2]

Chair: That is interesting. Perhaps your experience is not quite typical of the rest of the industry.

Q122   Paul Blomfield: I wanted to explore the involvement of indirect suppliers in the process in more detail. What is the objection to them being able to submit information to the adjudicator? I understand there is a concern that there might be vexatious and spurious complaints made, but surely any adjudication process is going to ensure that those are weeded out fairly effectively.

Andrew Opie: Our primary concern would be how those would be weeded out. There is a danger, with the expectations that have been raised by certain groups around the role of the adjudicator, that indirect suppliers will swamp the adjudicator with complaints. Primarily these will not have any relation to GSCOP—it will not be a contractual issue that will be covered by GSCOP—but the adjudicator will become the answer for all the supplier complaints that are ongoing at the moment. Our concern is around better regulation in terms of the massive increase in bureaucracy the adjudicator's office would face in trying to deal with these spurious inquiries.

Q123   Paul Blomfield: If they are spurious and beyond the remit, the adjudicator will be able to bat them back pretty quickly without an increase in bureaucracy, wouldn't you have thought?

Andrew Opie: We would hope so and we would certainly expect the adjudicator to do that. It would not be our preference but, if the intention were to add indirect suppliers, it is absolutely key that the adjudicator has agreed guidance for two purposes: firstly, so that they can play some kind of transparent role in dealing with those spurious inquiries; and secondly, that retailers would know the type of information and the threshold of information that would be used by the adjudicator to possibly launch an investigation.

The first thing I say about that is that hopefully, if it is a very transparent and robust process, it would make a clear signal to indirect suppliers whose evidence would be spurious and therefore would not be useful for the adjudicator. So all suppliers would know that there is no point in writing to the adjudicator about your potential problem, because it is not an issue the adjudicator would deal with.

Paul Kelly: One of the other concerns as well is that this fundamentally changes the nature of what the GSCOP was established to do, which was to look at the relationship between the supermarkets and their direct suppliers. It would also then go into the areas of whether there is potential for duplication with the powers that other bodies have, such as the OFT. The OFT has the power to conduct investigations if it does not think the markets are working well. Therefore there is a risk of duplication, which risks swamping the adjudicator but also will create confusion as to the role of the adjudicator versus the role of the OFT.

Q124   Paul Blomfield: But aren't indirect suppliers so critical to the process that you recognise that they may help implementation if they had the opportunity to raise their own concerns? Otherwise, aren't they going to get squeezed?

Paul Kelly: The issue is that there is not a direct relationship between the supermarket and those indirect suppliers.

Q125   Paul Blomfield: Presumably your relationship with your direct suppliers will have an impact on the indirect suppliers, and therefore that is something that should be subject to consideration.

Paul Kelly: That is not what the code of practice was originally established to do. What you have seen in a number of supermarkets in relation to some indirect suppliers—this is certainly the case with Asda, where we have increased our supply base by about 50% over the last five years—is to bring in some of those indirect suppliers in produce and fresh as direct suppliers and to take out the intermediary because we have seen a number of advantages to that. There are advantages to the supplier in terms of certainty, communication, longer-term commitments, ability to invest. For us there is also the ability to take one level of cost out, which has benefited the consumer in lower prices.

So we have seen some changes in the way the supply base operates, but I think the real concern lies with going back to that example we gave in the evidence of where you have a number of indirect suppliers. These may be providing things as simple as a pinch of salt that goes into a ready meal and they are suddenly being covered. This has the capacity to hugely change the way in which the market operates, and that does not feel like good regulation.

Q126   Paul Blomfield: Is this everybody's view? Mr Fallowfield, the evidence of Sainsbury's seems to suggest that you do not have the same concerns. Is that the case?

Tim Fallowfield: No, it is not actually; we certainly do have the same concerns. All the way through the Competition Commission process we were equally forceful in saying that this should not apply to indirect suppliers. To the extent that our position is nuanced effectively, I think we felt there was an air of inevitability about some indirect groups being covered, and we therefore moved on in our thinking along the lines that Mr Opie has explained. If the Government were to determine that indirect suppliers should be covered, it is necessary to have some clear guidance as to the circumstances in which their evidence could or could not be taken into account.

Q127   Paul Blomfield: Thank you. Just to press on that point, in their evidence Waitrose were quite content with indirect suppliers being considered as a source of information. Why do you think they have a different view?

Andrew Opie: Well I think Waitrose are giving evidence to the Committee next week. Perhaps it would be better if you asked them that question directly.

Q128   Chair: I will just say that we will determine what questions we want to ask, not be told by our panellists what questions we should be asking. We are trying to tease out why Waitrose should have a different perspective from you and what your observations on it are. That is a perfectly legitimate question.

Sean Toal: It is very difficult to comment without having a conversation with Waitrose about how they determined their view. Without more information from Waitrose on how they have come to that conclusion, it is very difficult for me to pass comment or give my opinion on Waitrose's position.

Paul Blomfield: Okay, well, we will follow that up.

Chair: Yes, we will follow that up and note that you have no particular view on that.

Q129   Paul Blomfield: I would just like to help our understanding of the relationships. Could you give me an indication of how many direct suppliers you have at Asda, The Co­op and Sainsbury's? That is a big question, but I would also like to know how many you have in particular product areas, for example in soft fruit.

Paul Kelly: We have 2,500 direct suppliers who would be covered by GSCOP. You may have heard some evidence previously that, in an area like soft fruit, there are very few soft-fruit suppliers who supply directly into supermarkets; it tends to be more consolidated. To take a topical example of strawberries, we have moved some indirect suppliers, such as Vicarage Nurseries from Evesham, from being indirect to being direct over the last few years. That was done to give them certainty and to assure them that, subject to food safety and quality issues, we will take all the volume they produce, and we have been able to put in more flexible payment terms to help them through the season. So we have been able to make some changes to the way in which we have dealt with some produce and fresh suppliers to bring them into the ambit of a direct supplier.

Sean Toal: In the Co-operative Group we have 1,000 direct suppliers that are covered by GSCOP. In areas like soft fruit it is a similar picture, because it is similar right across the marketplace. There are very few suppliers overall. Just building on the comments made earlier, another example is that as a farm business we are in the process of moving our total supply on areas like potatoes and apples completely to our own farm business over the next couple of years. That is so it will become a vertically integrated supply chain with all the food security pressures that are out there at the moment.

Tim Fallowfield: In Sainsbury's we have 3,000 direct suppliers. The answer with regard to soft fruit is very similar to the gentleman on my right. We effectively have a number of development groups that we have established across fresh and produce, which effectively does many of the things that Mr Kelly was talking about. Effectively, we are putting investment into those development groups, helping the underlying farmers and growers to take cost out of their business and make sure that they have consistent standards, and providing premium in certain circumstances for their membership of those groups.

Q130   Paul Blomfield: Thank you. Could I just move on to a different area? What if the adjudicator investigated practices on the back of anonymous reports, and having corroborated them, made a general recommendation without naming and shaming individual retailers? Say, for example, that they said there should be a general improvement in practice; would that be something that would concern you? Does that amount to a breach of natural justice?

Tim Fallowfield: We have some major concerns with the whole prospect of anonymity, starting with the principles of natural justice.

Q131   Paul Blomfield: That was the basis of my question. Having appreciated that you did have those concerns, if, for example, it was investigated and the adjudicator did find that there was a problem and simply made a recommendation to Sainsbury's for an improvement in general practice, would that be a problem for you?

Tim Fallowfield: I think the difficulty with dealing with an investigation like that is that it is very difficult to respond and give your own arguments in relation to something that is not specific. That is one of the dangers of anonymity. To deal with the natural justice point, you would expect the party under investigation to be able to state its case on the basis of a reasonable amount of detail. I think there is a fundamental principle that causes concern in relation to anonymity. There are other concerns as well in relation to anonymity other than natural justice, including cost, bureaucracy, and the ways in which the adjudicator can preserve anonymity. For instance, let's say that this was in an area in which we had a small number of suppliers. Would an adjudicator have to broaden an investigation in order to ensure that anonymity was preserved? We could see all kinds of issues in relation to that.

Q132   Paul Blomfield: Is that a general concern?

Paul Kelly: Yes.

Sean Toal: Yes.

Andrew Opie: Yes.

Q133   Paul Blomfield: Would you not accept the rationale for anonymity in terms of suppliers perhaps feeling compromised by making a complaint in terms of their commercial relationship?

Tim Fallowfield: This so-called climate of fear is something that we do not recognise. As I said before, we believe that the GSCOP is working well and there are processes in GSCOP to ensure that there is a proper and independent process of review and then some safeguards to ensure that relationships are conducted on a proper basis.

Q134   Paul Blomfield: Okay, thanks. I have one last question. You are operating in a very competitive environment. Would you like the power to be able to whistleblow on other large retailers?

Sean Toal: No.

Tim Fallowfield: Well, we do not think it is necessary. Effectively the double purpose of widening the scope of the original code of practice from four retailers to 10 has meant that there are appropriate powers to deal with the relationships of all big retailers now. On the basis that we support the GSCOP, that is unnecessary.

Sean Toal: All that information, should the issue arise, will be in the public domain anyway.

Paul Kelly: I hold exactly the same position.

Q135   Chair: Would you not accept that you are perhaps not best placed to make a judgment on whether a climate of fear exists?

Tim Fallowfield: All I can say is that we have not seen the evidence of it. Clearly we are one end of the chain, and from our end of the telescope we believe that it does not exist. We have all given evidence to suggest that we are working very hard to invest in supplier relationships, and having strong supplier relationships is good for us and good for customers as well.

Sean Toal: There are also many, many examples of long-term supplier relationships across many retailers that have worked over a long period of time and are built on a solid foundation of long-term planning and long-term joint commitment. These have benefited the retailer but more importantly have benefited the customer.

Chair: I think we probably accept that. However, it is about the supplier, and equally I would say the supplier must provide evidence for it for that claim to have any substance. Ultimately it must be the supplier that will convey whether there is a climate of fear. Although for us to accept that, the supplier would have to provide hard evidence as well. Can I just move on to the issue of enforcement now?

Q136   Margot James: In your written evidence you have made various objections to the enforcement regime, in particular the fines. I wonder if you could summarise your position on the possibility of the Secretary of State moving towards a fine regime. Are you against it in principle or are you against it because of the administrative issues that it generates?

Sean Toal: The position from ourselves is that we would be against it on both the descriptions you have given: firstly on the principle but also on the fine itself. With any situation that arises with GSCOP the costs of that particular claim are borne by the retailer, but the biggest single issue for the retailer is reputational damage. That key factor alone is significant in its own right, rather than needing fines.

Tim Fallowfield: It is important to note that the Competition Commission is looking to find an enforcement mechanism here that is for the benefit of consumers rather than to penalise retailers. The prospect of introducing fines would be unnecessary and against the original concept.

Andrew Opie: That would certainly be our position. This is about B­to­B relationships, not B­to­C relationships. So it is very different to a case of collusion in the market that might harm the consumer, and for which fines might be levied. Instead, this is about a potential breach of the contractual relationship between two businesses. So for us it is a case of better regulation and proportionality in terms of the enforcement.

Paul Kelly: I agree with everything that has been said by the previous witnesses, and I would build on it. There is the recourse through normal legal powers for breach of contract under GSCOP. Secondly, under the Enterprise Act the OFT has the investigatory powers to be able to look at whether a market is not functioning effectively. GSCOP was established as a result of a Competition Commission investigation and therefore we would question why the Secretary of State would need to impose fines when those two mechanisms are already available.

Q137   Margot James: There has been criticism from other quarters that the legislation is not going far enough, and that without fines the reputational damage issue will not be sufficient. Mr Toal, you have said from The Co­op's perspective that, if the Adjudicator were able to impose fines, there would be a risk of the cost of those fines being passed on to consumers. Is that correct?

Sean Toal: We have re-looked at the whole Code through the eyes of the customer. Our business is a consumer, member­owned business; they have a profit share of the organisation. So any costs of operation of the business ultimately impact on our consumers, who are our members and owners of our organisation. So I think we need to be very aware of any risk of any impact to the consumer of the cost of regulation of the Code.

Q138   Margot James: I can see that the structure of your business places you slightly apart from the other retailers present today. Could I ask the other retailers whether you think there might be a risk of any cost of such fines, were this measure to be introduced, being passed on to the consumers?

Tim Fallowfield: Potentially I guess that indirectly that is ultimately a possibility. In relation to the key question here, the best way of bringing about behavioural change is not necessarily through fines. An investigation that comes up with a number of recommendations should actually be sufficient.

Q139   Margot James: We hope it is, which is why the Act draws back from bringing in fines immediately. What are your views on whether the adjudicator should publish an annual league table of compliance?

Andrew Opie: We do not see what it would add to the powers that are already available to the adjudicator in terms of the potential to name and shame through the publishing of information. All of the information that is made available by the companies is in the public domain anyway, so we just do not see what additional issue for the adjudicator would make them want to do that.

Q140   Rebecca Harris: I want to talk about the situation with the adjudicator's guidance, which is yet to be brought. Do you think it is practical to establish the adjudicator's guidance in advance of setting up the adjudicator's office? Do you think that would be practical or possible?

Tim Fallowfield: Yes, it would be practical and essential. If you look at the way the Bill is drafted it basically gives the opportunity for the adjudicator to make an investigation if he believes he has reasonable grounds for doing so. That is a very broad power, so therefore providing specific guidance is very important in relation to that.

Q141   Rebecca Harris: So you feel that, in establishing the guidance in advance of the establishment of the Office, there would be an opportunity for you perhaps to object to it afterwards? What kind of input would you like to have on that guidance?

Andrew Opie: We suggested that there should be full consultation with the retailers who were operating under the GSCOP mechanism so they were clear and their suppliers were clear. The point has been made previously that the whole issue about GSCOP is a good flow of information between retailers and suppliers. There were a lot of conversations with suppliers around the introduction of GSCOP. We would expect the same to happen around the introduction of the guidance, so we would expect retailers to absolutely be involved in the drafting of the guidance. Coming back to the point about potential bureaucracy and spurious inquiries, I also think it is very important that the supply chain know the type of information the adjudicator is going to act upon if he were to carry out an investigation. That includes the threshold, the importance of the information and the relevance of the information. It is important that everybody knows that, so we know exactly how the adjudicator would operate.

Tim Fallowfield: I think we have a valuable contribution to make to that as well. We have all had experience of dealing with the competition authorities over recent years. That experience is very helpful in helping to frame appropriate guidance in relation to how any adjudicator might operate.

Q142   Rebecca Harris: So you would be willing and happy to provide your input on the guidance in parallel with the Bill going forward?

Tim Fallowfield: Yes, I would.

Q143   Rebecca Harris: I am not sure how much time we have for the next set of questions. Sainsbury's, in your evidence you ask for greater scrutiny of the adjudicator. How exactly would you like to see the Bill amended to accommodate greater scrutiny?

Tim Fallowfield: Well, we are not entirely certain. One way of doing that would be to have some kind of oversight from BIS, perhaps with an annual report by the adjudicator of the way in which he has operated. There are different ways in which this could be effected, but to us that appeared to be the most obvious one.

Q144   Rebecca Harris: Is there no risk that that will be increasing the cost, which is something you are also hoping to avoid?

Tim Fallowfield: I think it is important to make certain that the way in which the adjudicator is operating is beneficial. I would recommend that there is some way of doing a regular review to ensure that is the case.

Q145   Rebecca Harris: Would the rest of you agree with that? Do you think it would be helpful for the large retailers to have a right to comment on adjudicator reports, irrespective of whether the retailer identified in that report is named?

Sean Toal: Our position is that, yes, we do think each retailer should have the right to comment. It is important that all parties involved in the overall management of the Code have the opportunity to input so that in future things can be built upon and improved. We want best practice to be shared and we want to create a behavioural change as a result of development of the code. If that is to happen, then all parties' input needs to be taken into account all the way through the process.

Paul Kelly: I would agree with that.

Rebecca Harris: Shall I move on to how the adjudicator is funded?

Q146   Chair: Could you just give me an example of that? For example, if Sainsbury's were criticised, what would you like to say about it?

Sean Toal: We would like to add a comment in relation to our overall approach to the code. It was very difficult to give an example without a specific query. Our position in the Co-operative Group is that, if the retailer is not named but it is very clear that it is the Co-operative Group that is involved, we would like the opportunity to comment on our own position, rather than the opportunity to comment on Sainsbury's necessarily.

Q147   Chair: Okay. This comes back to a point I wanted to tease out earlier. Do you think there should be some sort of right of appeal if you are named and shamed, and if so what sort of process would you want?

Tim Fallowfield: The principles of justice say that in those circumstances there should be the possibility of an appeal. Where would that go to? There is the Competition Appeal Tribunal, which appears to be the most relevant place.

Q148   Chair: Do the others agree?

Paul Kelly: Yes.

Sean Toal: Yes.

Q149   Chair: It is pretty simple. Can we move on to funding? There has been some disagreement within the Government and other bodies on this issue. How do you think the adjudicator should be funded, notwithstanding the fact that you do not think there should be an adjudicator at all? Assuming the worst-case scenario from your perspective that there is an adjudicator, how should that adjudicator be most equitably funded?

Andrew Opie: Our original position was that it should be funded by the taxpayer. If the Government believes that the policy is important for all consumers, then it should take that approach. That was our original position.

Q150   Chair: Is that a reflection of all your views?

Tim Fallowfield: We felt as though, if there were to be an adjudicator, the funding principles were reasonably equitable. We certainly have some concerns about the estimated costs; it is very difficult to estimate the kinds of costs that might be incurred by an adjudicator's office. I noticed in the GSCOP impact assessment that the costs of setting up for the implementation of GSCOP had been underestimated by tenfold, so we would certainly have some reservations about the amounts that are being put forward in the assessment.

Q151   Chair: It is interesting. I find Mr Opie's comment that taxpayers should fund it quite astonishing. The consumer, having possibly being ripped off by bad practices by a retailer, is then expected to fund a process designed to eliminate it. That is whilst the perpetrator of that particular rip-off gets away with it—financially at least, unless fines were imposed. They would only face reputational damage. I think the taxpayer might have a view that is rather different from yours on that.

The other point I wanted to make is that we have had different projections of costing, but could you each give me some idea of your total turnover? Asda?

Paul Kelly: We have just filed our accounts for last year for Asda Group and it was £19.8 billion.

Q152   Chair: £19.8 billion?

Paul Kelly: Billion, yes.

Q153   Chair: Co­op Group?

Sean Toal: £8 billion.[3]

Q154   Chair: Sainsbury's?

Tim Fallowfield: In excess of £20 billion.

Q155   Chair: That is an awful lot of money and I cannot see many taxpayers thinking that your organisations could not sustain the cost without impacting upon themselves. Have you any comment?

Tim Fallowfield: As I said, I thought that the principles contained in the BIS document were reasonably equitable.

Sean Toal: Our position is that, as it has been set up in the BIS document, at the moment a 10-way share is equitable. However, as results develop we need to take a look at that as things move forward and ensure that, dependent on the results, outcome and malpractice within the code, we look at proportionality at that point in time. As it stands right now I think the recommendations are fair and equitable.

Paul Kelly: I would agree with that. Our concern would be, if the adjudicator were undertaking a lot of investigations and incurring a lot of external legal costs, whether those should be shared by the retailers, particularly if that investigation was to conclude that there was no evidence of poor practices. It would be a concern if retailers were being asked to pay for that. However, you are right; the way in which it is laid out in the Bill—the equitability—we have no particular issue with.

Q156   Margot James: I wanted to follow up on your question, Chairman, when you cited the reasonableness of requesting that the retailers fund this body because in the past consumers have been ripped off and therefore it seems unreasonable to ask them, as taxpayers, to fund it. I wanted to approach the issue from the other way round, which is the supplier interest in all this. According to the British Brands Group, the tendency of retailers has been to pass costs back to the suppliers rather than out to the consumers. Indirectly this results in intense pressure in certain areas of supply. I am thinking predominantly of the farming sector at this point, where we have submissions from sectors like pig farming and dairy farming, which are being forced into intensive methods of production. You are claiming that consumers need to have the cheapest price on offer, so you buy in from abroad and so forth. Although this is not a price issue for consumers, they certainly have an interest in better standards of production, health issues and so forth. I wanted to know whether you would comment on those issues as being a reason why people feel the need for this additional protection offered by the adjudicator, as well as the consumer price issue.

Sean Toal: The extensive research we have done in the Co-operative Group around the specific examples you have talked about shows that the consumer at the moment has a keen interest in the farmer. They certainly have a keen interest in British-produced product, so much so that all of the protein we serve to customers is British product and a large proportion of it has higher welfare standards overall. Your point is: will the cost of this be passed directly back to the supplier overall. I do not see that being a direct link. However, we have to recognise that we are in a very, very competitive marketplace at the moment and commercial discussions have to take place between retailer and supplier in order that we do procure the best-quality products at the cheapest price for the consumer today.

I do not see the direct link that it is going to push pressure back, but I do agree with your point that there is real consumer interest in British product, the British farmer and indeed the quality of that product.

Paul Kelly: I would echo everything that Mr Toal has said. It is important to remember that every time the Competition Commission has looked at the sector it has concluded that by and large supermarkets have delivered a good deal for consumers. We are very effective in a highly dynamic market that is looked at by the rest of the world as being one of the best, if not the best grocery retail market in the world.

There is an increasing interest from consumers for British and local product. All of the retailers are investing very heavily in that, not least us. In sectors such as dairy all of us in different ways have put together unique partnerships with the farmers who supply to our processers. We pay dairy farmers a premium of 1.175p per litre. That averages around £21,000 of premium payments to our dairy farmers a year. We are doing similar things with pork at the moment and paying a premium in the market for pork. I think we are actually doing a huge amount to support those groups.

By and large the industry is not getting the credit that we should be given for supporting UK farming, investing in UK farming and wanting it to be very successful, whilst at the same time balancing our responsibility to deliver a good price for the consumer, particularly at a time when millions of families are struggling to make ends meet.

Q157   Chair: Do you think the implementation of GSCOP has caused prices to go up in the shops?

Paul Kelly: No.

Tim Fallowfield: No

Sean Toal: No.

Chair: That is interesting. Yes, do come in Margot.

Q158   Margot James: Have the costs of your implementation of GSCOP been shoved back as additional pressures on the supply chain or have they come off your bottom line?

Paul Kelly: All businesses, and ours is no exception, are constantly looking at ways to reduce costs to operate and to make savings. We absorb those sorts of cost. We definitely were not in a position where we wanted to even think about passing those back down the line to the suppliers. Those are costs for us to absorb and to find other savings. We do not think the implementation of GSCOP has put any inflationary pressure into the marketplace whatsoever.

Q159   Chair: That is very interesting, because earlier when we were talking about the cost of the adjudicator, you made a point of the costs that that would imply. Yet earlier on in the proceedings you explained at great length the efforts that your respective organisations have made to comply with GSCOP, which on the face of it would have involved considerably more expenditure than anything that would be incurred by the costs of the adjudicator. What would you say about that?

Sean Toal: The comment I would make is that there are many examples every single year of additional costs that come into the operation of a business. The art of running a business is how you manage your overall cost base in order that you provide the right model and therefore the right product to customers, so the comment that Mr Kelly made a moment ago is a good one. We have to face new costs every single year and you have to find other ways and other methods through your business, such as through new efficiencies, to absorb those costs and ultimately not to pass them back to the customer.

Tim Fallowfield: I would agree with both of the gentlemen. The question is: what are the costs going to be? We do not know the costs of what are described as being broad ranging investigations—that is a term that is used in the policy document BIS have issued.

Q160   Chair: One a year is what I think it says.

Tim Fallowfield: Really? I thought it said something like between two and four. You may be right; the costs may be minimal. We all have experience of dealing with OFT investigations where the costs escalate very rapidly.

Andrew Opie: We would be more comfortable if we knew, for example, if those issues such as the indirect suppliers were to remain in the Bill and what the guidance would be. That would give us a clearer picture to be able to assess what the likely workload of the adjudicator is going to be. Our concern is that many of the issues will not actually be levied towards an individual retailer; they will be spread across the 10 retailers because they will not be attributable to an individual retailer or an individual case, so it will be across the whole sector.[4]

Q161   Chair: The projection is that it will have an operating cost of approximately £1 million. I forget which member said that it is potentially up to 10 times that much. What sort of estimate would you make of the cost of compliance to GSCOP, leaving aside the issue of the adjudicator?

Sean Toal: For the individual retailer?

Q162   Chair: Yes. I appreciate you can only make an estimate for your own company.

Tim Fallowfield: That was what I was trying to refer to actually. The figures I was referring to I thought I had seen in the impact assessment, talking about what are estimated to be the costs of GSCOP. It said that it was anticipated it would cost £1 million and the impact assessment suggested that it had cost 10 times that amount.[5]

Q163   Chair: Yes, well, I have just said that. If you take the worst possible scenario, it is £10 million. I am asking you what you think the cost of compliance to date is within your respective organisations.

Sean Toal: The Co-operative Group in the first year spent just short of £1 million. That comprises around £600,000 on training and development and about £375,000 being spent as we speak on new systems and development to improve our communication links with suppliers through a supplier portal. The ongoing cost of the updating of the training of our buying team is going to be around £100,000 per annum.

Q164   Chair: Do you have figures for your respective companies?

Paul Kelly: No we do not, but we do not choose to distinguish it in that way. It is part of the ongoing investment we make in constantly looking to improve the skills and performance of our buyers and compliance teams. For us this is now just part of the normal cost of doing business and we do not choose to split it out.[6]

Tim Fallowfield: I do not have a figure either. We have trained 600 buyers but I do not have a figure for that.

Q165   Chair: Could I ask you to make some estimate and send it to the Committee as a written supplementary if you can? The point I am trying to get to is that you represent three of the 10 or so major retailers. If the costs of the adjudicator are spread across them then they are well within the levels that you have incurred so far in terms of compliance with GSCOP, which you say has not impacted upon prices and the consumer. Why do you think it could potentially impact upon the consumer if the adjudicator is put in post, with the worst case scenario of costs?

Paul Kelly: I think it is important to make a distinction between: the cost of the adjudicator, which, other than the reservations we have expressed, I do not think any of us have major issues about how that would be funded; the unintended costs of the decisions the adjudicator might make if he or she were to be given the full remit and scope of powers that is envisaged in the Bill around indirect suppliers; and the costs that that would put not just into retailers but right the way through the supply chain and what the impact would be. It is very difficult to estimate that because we are dealing with a hypothetical position but I think it is right of us to flag that, if the scope of the adjudicator is widened to cover indirect suppliers without very clear guidance and poor decisions are made, the costs into the supply chain could be very substantial indeed.

Tim Fallowfield: This is not just a matter of cost either. This is an issue about increased regulation and additional burdens of compliance. So that element of the implementation of an adjudicator should not be forgotten.

Q166   Chair: We come back to the guidance issue. Are you prepared to submit your views on guidance as this parliamentary process is going through?

All Witnesses: Yes.

Chair: Right, is there anybody else with any further questions? Can I thank you for your attendance? Obviously we will be interviewing representatives of other organisations; we will be probing them and will come to our conclusion in due course. If you feel there is anything that you would like to convey to us that was not brought out in the course of our questions, please feel free to do so. Equally, if we look in retrospect and think we should have asked a question but did not, we may well draft a supplementary and send it to you, and we would be grateful for a reply. Otherwise, thanks very much.



1   Ev 65 Back

2   Ev 72 Back

3   Ev 72 Back

4   Ev 65 Back

5   Ev 85 Back

6   Ev 61 Back


 
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Prepared 28 July 2011