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 GSCOPit will not be a contractual
issue that will be covered by GSCOPbut 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 suppliersthis is certainly the case with
Asda, where we have increased our supply base by about 50% over
the last five yearsis 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 itfinancially
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 Billthe equitabilitywe
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 investigationsthat 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.
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