Examination of Witnesses (Questions 224-271)
SHANE BRENNAN, KENNETH PARSONS, AND SUSAN DOLE
28 JUNE 2011
Q224 Chair:
Good morning. Thanks very much for agreeing to speak to us this
morning. If you were not present when the previous panel opened,
I will just repeat my advice: we will try to keep our questions
brief; it does not always work. We would be very grateful if
you could keep your answers brief. There is absolutely no need
for everybody to repeat a point made by a previous witness. Obviously,
if there is something you wish to contradict or add to, your comments
are very welcome. Just to check voice transcription, could you
just introduce yourselves with your title?
Shane Brennan:
Hello, Mr Chairman. I am Shane Brennan; I am Public Affairs Director
of the Association of Convenience Stores.
Kenneth Parsons:
Morning. I am Kenneth Parsons, Chief Executive of the Rural Shops
Alliance.
Susan Dole: Good
morning. I am Susan Dole. I'm Head of Corporate Finance at Waitrose,
and I'm also the Code and Compliance Officer for GSCOP at Waitrose.
Q225 Mr Binley:
What are your impressions are of how GSCOP is working so far?
Kenneth Parsons:
It is very difficult for us to judge. Having said that, if you
look at the number of complaints that have been raised it is minimal.
I would also go a stage further and say that I would have hoped
that there would be some impact on the supermarkets if it had
been working. That would have been reflected, for example, in
their company reports, reports to shareholders and suchlike.
We see no evidence at all of that actually happening.
Q226 Mr Binley:
Is that your general view or does anybody want to add to that?
Susan Dole: Maybe
from perhaps the only retailer that is covered by GSCOP here,
Waitrose's position is that we found that it has been quite effective
and practical, in the sense that Waitrose was not covered by the
previous Code of Practice, because it was not part of the big
four. It is now covered by the existing GSCOP. Although it has
been gratifying to us, because Waitrose has always had a code
of practice about how one behaves very properly with suppliers
and treats them with fairness, what it has introduced is a discipline
in terms of training, a discipline in terms of maintaining and
being able to retrieve information in case of complaint or investigation,
which has been very useful. We have not seen any queries that
have been escalated to the Code Compliance Officer that have been
validated, so we think it has been a useful exercise in compliance.
We are in the timetable wherebybecause our year end is
the end of January 2011we will not report until May next
year, but I think there are some compliance reports coming through
from other operators that have earlier year ends. We are starting
to see them coming through between late August and early spring
next year.
Q227 Mr Binley:
Can I just ask you a supplementary to my initial question? The
evidence that we have been given is that one of the reasons for
the adjudicator is that people are frightened, fearful of losing
their business actually, and in fact their whole livelihood, because
of the actions of large supermarkets. Consequently, without the
adjudicator and just with the Code of Practice, that fear would
still exist. Is that a fair summation?
Shane Brennan:
I think that is the point. If we go back to something like the
Supermarket Code of Practice and the OFT's looking into that in
2005, predating the Competition Commission inquiry, they did a
review that was broadly positive about compliance with the Supermarket
Code of Practice at that time. The Competition Commission then
investigated the market and found hundreds of breaches of what
they felt were unfair practices. In a sense, it is about the
investigation and the ability to get involved and probe to find
whether there might be breaches. Without that, you just do not
have confidence that it is working.
Q228 Mr Binley:
From your own senior positions in big organisations, is itas
it was thought to be with the bankspressures put on middle
management that caused a lot of the problems? For instance, perhaps
a guy ordering incorrectly, realising he has made a mistake and
taking a very dodgy route out of it by refusing to accept supplies.
Is that about pressure on middle management? Do you see that?
Are you fearful of that?
Susan Dole: From
Waitrose's perspective, no.
Mr Binley: Waitrose is
all right, but what about the rest of them?
Susan Dole: I cannot
answer for our competitors.
Mr Binley: You know what
is going on in your marketplace.
Susan Dole: From
Waitrose's perspective, we have been encouraged by the rigorous
training and compliance requirements of the Code. It has given
us greater confidence that our buyers are held to even greater
account than they were previously, and that, if they commit a
fault, that will be highlighted very publicly, because the suppliers
know what the escalation practice is. On your question about
anonymous and indirect suppliers, that route of complaint is not
open until the adjudicator is established.
We believe that every supplier in the supply chain,
whether it is a direct supplier, i.e. the one who Waitrose contracts
with, where we have a contractual agreement to pay them, or whether
it is a supplier of a ready mealso it might be the prawn
in the prawn curry, but the prawn curry supplier is not the prawn
supplierequally has a right to a voice in complaining about
any inequalities or market practices in the supply chain. The
only route that is proposed at the moment to be open to them is
through the GCA, and we support that. Waitrose is totally dependent
on its suppliers for the quality of the goods it provides. The
suppliers are totally dependent on indirect suppliers to give
them that quality. There needs to be a voice for every supplier
on the supply chain.
Q229 Mr Binley: The
general impression that that gives me is that you are perfectly
happy that your middle managers are not under too great a pressure
to go into those unacceptable practices. Is that right across
the piece?
Susan Dole: Yes.
Shane Brennan:
It is a different way of looking at it. The problem is that you
do what you can get away with, when you have power in the negotiation.
We have a highly concentrated grocery market. The practice over
time we have seen is a spiralling of negotiations; they get tougher
and tougher every year. Sometimes those practices veer into things
that the Competition Commission has found to be unreasonable,
and therefore you need a rule book. The GSCOP is a rule book.
What do you need then? You need a referee. That is our view.
Kenneth Parsons:
You are right in saying that middle managers are under a lot of
pressure in these companies. They have profit targets; they have
turnover targets. By gosh, they will push the boundaries to achieve
those targets. Their career depends on it. Equally, they tend
to move jobs very quickly and have a limited amount of time to
make their mark on a particular section before they are moved
on.
Q230 Mr Binley:
You are suggesting that there could be a problem in this area.
I want to go on from this, because I just wonder how that fits
in with most large retailers taking the view that it is too early
to introduce an adjudicator. I am getting some vibes that you
might be arguing that perhaps it might be a better thing than
has been suggested by the large retailers collectively.
Kenneth Parsons:
I have to say I would take a very robust view on that. This whole
issue has been around for 20 years or something like that.
It is about time we actually got some firm action. The big retailers,
when they want to, can move very, very quickly. I used to work
for a big multiple and literally, if our managing director went
out into the stores on a Saturday, there would be changes in all
the stores by the following Friday if he asked for it. That is
the pace at which retail can move. For them to suggest that we
are moving too quickly is pretty rich.
Susan Dole: Waitrose's
perspective is that it is a very different organisation. It is
a partnership; it is owned by its employees and it has a written
constitution, way before not only GSCOP but before SCOP in 2000.
It goes back 100 years. The overarching principles are that
one behaves fairly, honestly, promptly and courteously with suppliers.
As I said previously, one of the really reassuring points about
introducing GSCOP, because Waitrose was not party to the previous
COP, was that the behavioural changes that we needed to make were
very, very few and far between. The whole ethos of the way that
we train our buyers, the ethos of the way that the partnership
works with huge respect for suppliers and the supply chainwhether
they are direct suppliers or indirect suppliersis very,
very strong.
Q231 Mr Binley:
I have been a managing director, now a nonexec chairman,
of a company, and I understand all of those good things that very
senior management always say, almost as a part of the vision statement.
At the same time, the financial director, in order to be able
to do his job, is giving a different message, which has an impact
upon middle management. Will the concept of an adjudicator help
in that respect? Forgive me, Ms Dole, but that happens in
every business I have been in: the board says one thing, but there
is another message that is being operated by middle management.
Susan Dole: I have
operated in different organisations, not just the Partnership,
and I can testify that there is a real difference between the
way that the partners (employees) operate and deal with their
suppliers, and other organisations. The principal reason for
that is that one of the ways the partnersyou are talking
about buyersoperate is they are appraised by the way that
they deal with their suppliers. It is not just about margins;
it is not just about cost prices. It is about the holistic arrangement
that we have with suppliers, the way that we nurture them, our
longstanding relationships with them that go back a decade or
more. This is as important a part of their appraisal system,
which leads into remuneration and promotion, as the bottom line
that they get on their product.
Q232 Chair:
Could I just ask the Waitrose representativeit is interesting
to hear what you say about your relationship with suppliersdoes
this not in part reflect the particular market and, if you like,
the particular emphasis on quality that you have, rather than
price, whereas the other players, shall we say, are more price
competitive? Do you think it gives you a bit more flexibility
and headroom to develop that relationship?
Susan Dole: There
is clearly a tension between cost price and retail price. The
Partnership, and Waitrose within the Partnership, operates by
trying to give both the supplier and the consumer a fair deal.
We will work with suppliers to make sure, for example in terms
of British farmers, or small, local or regional suppliers, that
the cost price that they get not only is a competitive offer,
reflected in a competitive offer to the consumer, but allows them
to sustain a sustainable business model. They can invest in their
farms; they can invest in quality; they can invest in price.
There is a tension. It is where the balance of the tension is
drawn, and Waitrose's approach is that they offer the very best
value for money where they can. For example, in its essential
range, one can buy, I think it is now 250 gramsI used
to call it half a pound, but I am too old for thatof British
butter for £1.10, which is probably equivalent to anything
else in the market, and a jar of jam made in Britain for 84p.
This is going to be quite consistent with anything else. The
"essential Waitrose" range is a very competitive entrylevel
pricing range of products, which is attractive to all consumers.
We price match on 1,000 Tescobranded products every week.
I think that speaks for itself.
Q233 Chair:
I congratulate you on using the question to promote your particular
brand.
Susan Dole: I am
the only retailer on the panel though.
Shane Brennan:
The point I would draw out is that the GCA would not exist to
stop supermarkets bearing down on the price they can secure from
their suppliers. In fact, GCA should not be about just affecting
the price negotiations that go on between the supermarket and
supplier. It is about the terms of contract. It is about, once
you have an agreement in place, not going back on the terms of
that agreement. If GCA goes beyond that scope, it is overreaching
from how it was originally identified by the Competition Commission
and by what the Department wants to see for the GCA.
Q234 Mr Binley:
First, we were toldI do not know if you were here; I think
you werethat contracts are not allembracing and the
whole world moves, in fact, too quickly for contracts to be really
effective. There is one of the concerns. Clearly Waitrose is
squeaky clean, but what about the others in respect to the question
marks about the pressure on middle management?
Shane Brennan:
I go back to my point. The problem is we have a highly concentrated
grocery market, where retailers have a lot of power, and they
can exert that power in a negotiation that is tough every single
day of the week. If they can do that and they can get away with
it, they will do it and it will get worse. That is why the Competition
Commission found hundreds of problems and unfair practices, and
why we need the GSCOP. GSCOP is the tool by which we know what
the rules now are. We need to make sure they are being complied
with.
Q235 Mr Binley:
It might be a couple of years before the Bill comes into force.
What is your view on a minireview of underlying compliance,
perhaps by the Competition Commission, between then and now?
One of the problems we are finding is that real hard evidence,
arguably because of the fear factor, is not easy to get. Do you
think we need that real hard evidence before we commit to an adjudicator
or not?
Kenneth Parsons:
I actually think one of the key reasons you need the adjudicator
is to get the hard evidence. I think it actually works that way
round.
Susan Dole: I agree
with Mr Parsons, and the sooner we get the evidencethere
is no voice at the moment for indirect suppliers or normal suppliersthe
better. A minireviewyou suggested January 2012is
too far away. Until we have an adjudicator in place, there is
no efficient monitoring or regulation of GSCOP. A lot of suppliers
do not have a voice. It is the cart before the horse.
Shane Brennan:
I would go further and say that we had two years' worth of investigation.
There were lots of breaches and abuses found in that time. The
immediate recommendation was there was an urgent need for an ombudsman,
as the Competition Commission called it. Therefore, we need it.
In a sense, there was a twoyear period in which the CC
tried to create an ombudsman on a voluntary basis. That was not
agreed to; there was no agreement on a voluntary approach. Therefore,
we have to follow through now and impose the ombudsman, because
that was ultimately the threat the Competition Commission had.
It is about the credibility of the Competition Commission going
forward, really, because otherwise you will always be in a situation
where you just do not agree on a voluntary basis to anything,
because you can just delay it and delay it.
Q236 Chair:
Is it reasonable to summarise your viewpoint by saying that the
Competition Commission could not get better quality evidence than
the adjudicator?
Kenneth Parsons:
I would go a stage further than that. I think it is probably
going to take several years for the adjudicator to become really
effective to gain the trust of the industry to start getting the
real data. A snapshot without such a position being in post is
going to give you a very peculiar and partial picture indeed.
Shane Brennan:
I just think it is an unnecessary delay. I think we need an adjudicator
in place as soon as possible, and a minireview is yet more
delay in a period that has seen incredible delay for threeodd
years.
Q237 Mr Binley:
One final question: I have already expressed concerns about the
complicated food chain of this particular market. I have also
asked whether it is right not to include the direct suppliers
in the remit of the adjudicatorwe have got the 11 biggies
in the business, but because of the power of direct suppliers
over indirect suppliers, there is a real area of pressure there
too. Would it be sensible to argue for the inclusion of that
direct supply chain in the work of the adjudicator?
Susan Dole: From
Waitrose's perspective, yes. We believe that every supplier in
the supply chain should have a voice. We would say that there
needs to be very careful guidance issued to the adjudicator on
two counts. First of all, to make sure that what the adjudicator
investigates is not vexatious or mischievous, there have to be
clear guidelines about what is a valid complaint, even if it is
an indirect or anonymous complaint. The supermarkets ought to
be consulted on what that guidance should be. Also, if there
is a filtering system in accordance with that guidance, it should
minimise the amount of cost, which is a concern among the BRC
members. If the filtering system is watertight, or as watertight
and leakfree as the filtering system can besorry,
filtering and water do not exactly go together, but forgive meit
should make sure that the adjudicator's efforts and, therefore,
its costs are as efficient as possible.
If I may, Mr Chairman, just go back for a moment
to your point about delaying a review until such time as the CC
has got time to look at evidence for a year or so, I am entirely
in agreement with my fellow panel members here. First, the regulatory
authorities, the OFT and the Competition Commission, are going
through a restructuring. We believe they are going to become
a Competition and Markets Authority. For anything to get to the
Competition Commission, it has to go to the OFT. There are structural
guidelines and timetable lines as to how long that would take.
It is going to be a year to 18 months before that can happen.
What the industry does not need is another market investigation.
What we need is a very focused, very clearcut and very
quick resolution of a problem. We have a Bill, which we believe
there is parliamentary will to introduce, and it is not being
overseen. It needs to be overseen and it needs to be enforced.
The enforcement procedures need to be consulted on very quickly
with the relevant supermarkets. To wait for a hoohah to
erupt, so that it is sent to the CMA, or the OFT and CC, if they
are still there, is in Waitrose's opinion not a good use of time.
Chair: I think we have
got the message on that.
Q238 Nadhim Zahawi:
Thank you very much, and I am conscious of the time. Mr Parsons,
you have argued that measures of the adjudicator's success will
be to reduce price discrepancies between what large retailers
and other retailers pay. Do you see that as an important objective
of the Code and can you explain to the Committee how enforcement
of the Code could achieve that?
Kenneth Parsons:
Many of the practices that have been talked about and are mentioned
in the Code ultimately translate into one thing. That one thing
is that they increase the supermarkets' profit to the detriment
of the supplier's profit. That essentially, in a nutshell, is
what all these disparate things do. If you are in that situation,
so you have the supermarkets reaping extra percentage points'
profit year after year after year, you over time get a total distortion
of the marketplace. For example, you get supermarkets with so
much cash swilling around that they can actually create banks
and fund them out of their own resources. They can buy a lot
more sites than they might otherwise be able to do.
Q239 Nadhim Zahawi:
Can I just stop you there? You have given plenty of examples.
Those are market forces. If someone is prepared to supply something
at what price
Kenneth Parsons:
What I am saying is I think that the practices we are trying to
do away with actually come down to a percentage on the margin,
which is not justified on any other grounds.
Nadhim Zahawi: It is the
abuse; it is not the setting of the price. It is then the abuse
of the contractual arrangement.
Kenneth Parsons:
Correct.
Shane Brennan:
I would certainly agree that there are problems with price discrepancy.
We are seeing a market where the biggest players are going this
way and some of the smaller players are starting to go that way.
That middle ground is becoming sparse and that is a problem.
I do not think the GCA will solve that problem. I do not think
it should be an ambition of the GCA to solve that problem. You
are right to say that it is market forces.
Q240 Nadhim Zahawi:
My next question has been covered, Chairman. My last one is just
to push you a bit further, Susan, on the Waitrose position. You
quite rightly talk about your essential range being at an equivalent
price to the other value retailers on the market. Essentially,
because of your position, your luxurious position where you have
this higherend product, you can afford to support this proposal
to the detriment to your competitors.
Susan Dole: No,
absolutely not. As I mentioned earlier, there is always a tension
between what one pays the suppliers, what customers pay and, in
the middle, there is what one takes as profit margin. In the
2000 supermarket inquiry, Waitrose was not found to be profiteering
in terms of its profit margin, in relation to other retailers.
There is no evidence that we do anything other than treat suppliers
fairly, treat consumers fairly and also do not make excessive
profits in this sector.
The evidence of that is that, recently in the last
five or six years, we have gone into Scotland, Wales, and the
north of England. We have had enormously profitable and successful
stores, which traded at budgeted turnover, which shows that, even
in areas outside our heartland, where Waitrose startedeverybody
would say it is the affluent South East because the South East
is affluentwe are doing well. I am Welsh myself and we
have gone into a sector of Wales, where we have done extremely
well in terms of turnover because customers appreciate two things.
They appreciate our provenance, our buying British policy, and
the fact that we treat suppliers fairly and do not rip them off.
It is a good balancethat is how they look at it. Customers
vote with their feet; if they did not like us, we would not be
growing our market share in areas that are not natural territories
for us.
Q241 Chair:
Can we deal with confidentiality in relationships between primary
suppliers and intermediaries? First, I suppose, this one is to
Waitrose. As a large retailer, can you give the Committee any
examples of how primary producers might be in a position to provide
useful information on the relationship between a direct supplier
and the supermarket?
Susan Dole: On
an anonymous basis, Mr Chairman?
Chair: Yes.
Susan Dole: My
answer to that would be only if they are unwilling and they do
not have the intersupply chain relationships to have the
confidence that the direct supplier would feed those to the retailer.
One would hope that in our organisation that would not happen,
because we have a lot of association; we have a lot of relationships
directly with our farmers, pig farmers, beef farmers, lamb farmers,
dairy farmers, potato growers, carrot growers, whatever. We would
hope that, within that network of relationships with direct and
indirect suppliers, any discontent would be fed through very quickly,
either through the direct supplier or to our buyers. In organisations
where those relationships are not as tightly knit, it is understandable
that they would want to go down the anonymous route.
Q242 Mr Binley:
Can I pose a supplementary to that question? You said you "would
hope".
Susan Dole: Yes,
because it is to do with human behaviour.
Q243 Mr Binley:
Bearing in mind we are talking about some of the biggest companies,
not only in the UK but in Europe, would it not be right for those
companies to be more proactive in going out and ensuring they
find out what is happening at the coal face, rather than hoping?
Susan Dole: It
is a cultural issue and different retailers behave in different
ways. Some retailers want to know right from the beginning. If
you take the economic lifecycle of a pig for example, Waitrose
would want to know from conception to the pork chop being on the
shelf exactly what happens: who the relevant parties are within
that and how they deal with each other, not necessarily getting
involved in each other's commercial relationships, but they will
want to know how it gets to pork chop. Other organisations might
take a much more lighttouch view as to how indirect suppliers
engage with their direct suppliers, and might just leave it up
to them. There are different business models and there are different
behavioural models, but certainly the Waitrose way is to want
to know everything that goes on.
Q244 Mr Binley:
This is a problem that has been going on for a very long time.
All of you say we need something done about it now and yet, it
seems to me from the answer I had there and the word "hope",
that the retailers themselves are not really making the greatest
effort to find out what really is happening with their indirect
suppliers. Should they not be doing more of that?
Shane Brennan:
That is probably a cultural change that will hopefully be achieved.
In reality, it is not the retailer's primary job, on a day-to-day
basis, to ensure the different layers of their contractual relationships.
They do need to have is some sort of outside pressure that says
you have to make sure that you act by the book at every stage
in your supply chain. The way that Waitrose described that is
the cultural ambition you want to see achieved. You have to assume
that that is not the case in every situation now, or else the
Competition Commission would not have had to go through two investigations
and we would not have had the findings we have had.
Q245 Chair:
Could I just take this a little further? Susan, you say Waitrose
effectively does this. Presumably you would not like to comment
on your other retail rivals, but would it be reasonable to say
that you believe that the appointment of an adjudicator would
effectively make other major retailers engage with different levels
of their supply chain in the same way?
Shane Brennan:
That to me is a measure of success for the GCA. If that was what
came out, that would be a measure of success.
Kenneth Parsons:
There is perhaps a danger of going right over the top and ending
up with an incredibly bureaucratic system. It could very easily
become a box-ticking exercise that gets conducted. There does
come a point when we are opening up a very big area, which I am
not sure that one individual with a very small office is going
to be able to even scratch the surface of, if we are not careful.
Q246 Chair:
Do you have concerns about the bureaucracy building up?
Kenneth Parsons:
Yes.
Q247 Mr Binley:
I am not asking the adjudicator to do that. I think it should
be sound good practice by the retailers, as part of their business
model anyway. How does that add to the bureaucracy?
Kenneth Parsons:
I think I probably misunderstood the point thereand again
I think we are in danger of veering into areas where we are not
necessarily expertsbut my understanding is that, particularly
on the ownlabel products, which obviously are very important
to a lot of retailers, they conduct far more investigations controlled
in the way you are suggesting than they might do for a proprietary
product, where perhaps reasonably they expect their big suppliers
to do that job. That is what they are being paid for.
Q248 Chair:
Could I just define this a little further? Yes, it would be the
responsibility of the retailer to make these investigations and
ensure that everything was appropriate, right throughout the supply
chain. Then, and this might point to your concern about a boxticking
exercise, the adjudicator would have to draw up a set of criteria,
and presumably benchmark retailers against it, on the process
that they employ in order to achieve this objective. Is that
reasonable?
Shane Brennan:
I would hope that, most days of the week, the job of the adjudicator
was to provide help and advice to retailer suppliers on what is
the right way to go about contractual relationships.
Q249 Chair:
Can I just move on? Do you think that there is any danger that
anonymity would give rise to a flood of spurious and potentially
vexatious claims?
Kenneth Parsons:
I personally do not think it would. The problem historically
has actually been the reverse, where it has been very difficult
indeed to get suppliers to come up with legitimate claims. I
do not see any reason to expect people to put a lot of effort
and risk their commercial businesses by coming up with spurious
claims. Given the problems that have been wellrehearsed,
in terms of actually being able to maintain anonymity anyway,
people would think very, very carefully before raising any sort
of issue, let alone a spurious one.
Susan Dole: The
Waitrose position is that, as long as the guidance is very clear
about what constitutes a complaint that is worthy of investigation,
and that is done in consultation with the GSCOP retailers, although
there will always beit is human natureone or two
spurious complaints, one would hope that the GCA and its office
will be very well experienced in weeding out any vexatious complaints,
before they cost.
Shane Brennan:
There are two answers to that question, in a way. One is the
issue of anonymity. I think actually I have sympathy with the
retailers that anonymity can only go so far in this process.
You have to have the protection of anonymity in raising an issue
but, at the point at which it becomes investigated, anonymity
becomes very hard. Therefore, that would be a check on spurious
investigations. The second thing is the issue of credible evidence,
which was referred to by the FDF earlier. To me, if the adjudicator
has set out clearly defined criteria of what it will consider
as evidence, that is the filtering system that will lead to prevention
of spurious representations.
Susan Dole: Yes,
I agree.
Q250 Chair:
Do you share the concern of some large retailers that without
the supermarket giving contextual background to an anonymous complaint,
the adjudicator will be unable to make a fair assessment?
Susan Dole: I would
have thought, if a party is brave enough to make an anonymous
complaint, they would be in a position to present the evidence
that is required for the adjudicator to put it through the filtering
mechanism to decide whether it is worthy of pursuing or not and,
if it is worthy of pursuing, to justify it. It is not an easy
thing to do. I take your point: even being anonymous in a big
industry is a scary place to be.
Shane Brennan:
The idea that you could have a complaint, an investigation, a
finding of fault and then an endpoint and at no point in that
process are the people involved in making that complaint made
known to the parties does not seem to hold water. To me, the
issue has to be that suppliers have to have the protection to
be able to raise the complaint, give the confidence that that
complaint is credible and, at that point, the adjudicator steps
in. The further point, though, is that one thing the Bill does
not do very well is protect the interest of suppliers after the
fact. I think there should be an opportunity for ongoing monitoring
for the GCA of the relationships of the suppliers that have been
subject to investigation, and the retailers, and to make sure
there has not been delisting or any other kinds of implications,
and that they can go back and actually look into it again, if
they feel as though the investigation that was conducted in good
faith has suddenly had consequences after the fact.
Chair: That is a very
interesting point.
Susan Dole: The
GSCOP does provide for that, because it has provisions around
how a supplier might be delisted or not. It cannot be delisted
simply because it has raised a complaint, and has been found out
to be the anonymous complainant.
Shane Brennan:
Yes, I agree with that.
Susan Dole: The
retailer would have to go through the GSCOP route to prove it
was commercial.
Shane Brennan:
My worry is that, in that situation, the supplier has to make
another complaint. If that supplier then goes out of business,
how it is going to make a complaint? There needs to be a proactive
role for the GCA, after the fact, to keep an eye on the aftermath
of its decision. That is just my position.
Kenneth Parsons:
I would just add to that, if I may. I agree with everything that
has been said. It is obviously a very difficult issue to try
to monitor, but there may well be several years when the GCA is
trying to get the culture of the industry to change. That is
one good measure of success: when the industry is prepared to
raise legitimate complaints fairly openly, the GCA really will
have worked.
Q251 Chair:
Do you think it is possible for the adjudicator to recommend Code
improvements without giving away supplier identities?
Shane Brennan:
It depends on the context. It depends on the type of practice
you are talking about. If it is a specific complaint about a
specific practice, on a particular day on a particular month,
then I do not think it will be. If it is about a broad trend
in the market that is backed up by credible evidenceand
there is an issue about how you define a trend on the credible
evidence testyou possibly can, but it does depend on context.
Q252 Dan Jarvis:
My first question is to Susan Dole from Waitrose. Would like
the power to be able to whistleblow on other large retailers?
Susan Dole: GSCOP
is about improving relationships between suppliers and retailers
for the benefit of consumers. It is not about retailers judging
each other's behaviour, so no.
Q253 Dan Jarvis:
Can I follow up by asking you whether you think the adjudicator
should have express jurisdiction over a whistleblowing process?
Susan Dole: To
clarify, if I may, are you asking, if one GSCOP retailer whistleblows
on another, that that be referred to the adjudicator?
Dan Jarvis: Yes.
Susan Dole: The
whole point about GSCOP and the adjudicator is to give suppliers
a voice. We would encourage the whole of the supply base to use
that voice. It is a very powerful opportunity for it to do so.
There are potentially very powerful remedies if it does do so,
so we do not see the need for whistleblowing.
Q254 Dan Jarvis:
I wanted to ask about fines. Can I ask you to summarise your
views on the desirability of a fines regime?
Kenneth Parsons:
Certainly in my case, the reality is you are talking about, by
definition, exceptionally large companies and any realistic fine
is not going to affect their financial outcomes at all. It is
going to be symbolic. What I would put forward though is that
there are certain areas of the law where both a company and the
individual can be fined. I am thinking particularly of alcohol
licensing for example. I think there is a lot of merit in extending
it to an individual buyer. If the individual buyer was in gross
breach of the Code and received a fine, it could be a fairly modest
amount but still have a considerable impact on his future behaviour
and that of his colleagues. I would actually put that on the
table as a possibility.
Q255 Chair:
There is a potential unfairness in that. An individual buyer
may be in breach of the Code, but his or her behaviour may be
as a result of pressure being applied by company policy.
Kenneth Parsons:
Yes it might, and that would equally apply to the alcohol licensing
situation in shops. There comes a point, I think, where you expect
a buyer, certainly a senior buyer, to take responsibility. If
they are told to do something that is against the Code, they should
resist.
Chair: You think it could
actually strengthen their position.
Kenneth Parsons:
Yes I do, and again one would very much hope that it is one of
those things where the symbolism of it and the culture it generated
would actually be far more important, you would hope, so that
it would not actually happen very often. I think it could do
that.
Shane Brennan:
You need to have fines for two reasons. The first one is there
should be consequences for not collaborating and coming up with
a voluntary solution. That was what the Competition Commission
said. They said we would have a voluntary solution ideally and,
if there is not one, there would be an ombudsman with fining powers,
which would be different from the voluntary approach. Secondly,
the fining powers are the way to make a regulator seem credible
to the media. Those are the two reasons.
Susan Dole: We
do not share that view. We believe that the fine, the pecuniary
recompense for a supplier, lies within a breach of terms and conditions,
whether it is a breach of terms and conditions within the concept
of GSCOP, or whether it is anything else outside the GSCOP package
of the supplier's contract, and they already have a right to bring
a case against a retailer, in that respect, for breach, which
can amount to compensation. The most important thing for any
retailer is its reputation. The nameandshame part
of the adjudicator's rule is much more powerful in terms of driving
compliance, because you do not ever want to get there, but you
want to change behaviour to make sure compliance is 100%. That
is the most powerful tool. Should that fail, suppliers have a
contractual right to go against retailers to gain financial compensation
for breaching their contract. We do not believe that fines are
appropriate.
Q256 Chair:
I do not know whether you heard somebody on the previous panel
pointing out that you could get, if you like, media compliance
fatigue; the behaviour of the retailers would not get appropriate
media coverage and, therefore, the disincentive impact would be
lessened. Have you a view on that?
Shane Brennan:
I agree. I think that fining increases the likelihood of its
continuing to be a story going forward. What I would say on balance
to that though is I hope there will not be lots and lots of investigations
and lots of findings of fault, on a weekly or monthly basis.
I hope there would be one or two investigations a year maximum.
That would be my hope. If it is worse than that, we have a much
bigger problem than we probably identified in the Competition
Commission inquiry.
Kenneth Parsons:
I also think the media might well find some of the reasons for
the fining somewhat technical and not very interesting to their
more general readership. The media may well get fatigued fairly
quickly on this one.
Q257 Chair:
I was really thinking in the event of their not being fined.
I suspect that the media would not go into the technical details
of why they were fined.
Susan Dole: I suspect
they would not go into the technical details but, if one looks
back to cases like Primark and other recent cases around retailers
behaving in the supply chain, not necessarily grocers, in a way
that the media finds inappropriate and has reported them, there
has been a huge backlash against them. Given the nature of our
media, which is very vibrant and on the ball, I would suspect
that naming and shaming would be very effective.
Q258 Dan Jarvis:
Can I now ask you whether you believe there should be a full right
of appeal against the namingandshaming remedy?
Shane Brennan:
It is a good question. Retailers need to have recourse in law
to where they believe they have been found in breach. My concern
would be that that would just be a delaying tactic, rather than
actually a means to it. Therefore, the criteria upon which you
can raise an appeal would need to be tightly defined. That would
be my reaction to that.
Kenneth Parsons:
The whole appeal process could blow out of the water any attempts
at anonymity.
Susan Dole: If
the appeal process is either the Court of Appeal or the Competition
Appeal Tribunal, whatever may come in the new regulatory framework,
it could be very expensive and very long drawn out. I have sympathy
with the BRC's position, which I think is perhaps a midpoint,
which is a meritbased system. It is the right to review
the decision before it is published, if they believe that it is
unfair, unmerited or unsubstantiated. It is not the right to
overturn it, but simply a right to have a sit down with the adjudicator
and say, "Okay, we do not see where this is coming from.
Help us understand it," and then an option to escalate it
to whatever the appropriate body might be after that. We think
that is a way to contain costs.
Q259 Dan Jarvis:
Do you think it is practical to establish the adjudicator's guidance
before setting up the adjudicator's office?
Shane Brennan:
The adjudicator has to set his own guidance. Ultimately, this
needs to be owned by that office and it needs to embed itself
in. It needs to do it quickly, but it is the right thing for
it to do to set itself its own guidance, its own terms of work
beyond what is set for it in legislation.
Kenneth Parsons:
I agree totally with that and go perhaps a stage further, insofar
as the grocery industry is a very fastmoving industry and
there needs to be the facility for those terms to evolve as the
industry evolves, and as the GCA gets more experience of it.
Susan Dole: Our
position is that effective regulation needs enforcement and there
is no enforcement at the moment. Although the GCA and its office
is not yet in place, clearly it is going to be advised by, presumably,
an existing cohort of civil servants or experts who currently
sit within the OFT, who might eventually sit within the CMA.
That cohort will have the expertise, based on all its expertise
with the Competition Commission, the OFT and even within BIS itself
to start drawing up some preliminary guidance. If one delays
until the Bill gets the Queen's assent, we are going to be two
years away. I think that is too long to leave what potentially
is a very potent way of addressing issues within the supply chain,
as between suppliers and retailers, without somebody overseeing
it. That is too long.
Q260 Dan Jarvis:
My final question is to Waitrose. You have argued for an annual
review of the budget, whereas the draft Bill currently envisages
reviews every three years. Would you like to see the Bill amended
to accommodate that?
Susan Dole: Yes,
we would. We firmly believe in two fundamental principles. If
this Bill is going to drive behavioural change, it needs to bite.
One of the ways that it can bite is by charging peopleretailers
who are acting inappropriatelythe cost of investigating
and adjudicating their cases. The way to do that is to spread
the fixed costs on a market share basis and then allocate the
incremental costs of investigation and adjudication, in proportion
to the number of complaints, investigations and the amount of
work that those retailers cause. We believe that three years
is far too long a wait to do that. We believe there should be
a review after a year and an annual review after that. The review
should cover both. The initial review should cover the first
year's budget. There is widespread concern that the first year's
budget, both the setup and runon costs, is perhaps
underestimated. It should cover the first year's budget. It
should cover the way that the costs, during the first year, are
allocated. At the end of the first year, it should cover looking
back and saying, "Was that fair? Was that proportionate?
Is that driving compliance and behaviour?"
Q261 Dan Jarvis:
In terms of the review, who should carry it out and pay for it?
Susan Dole: We
probably think it should be BIS, and we believe that paying for
it should be part of the ongoing costs, if not the setup
costs, of the GCA's office.
Q262 Chair:
Can we just go on to the funding now? Having looked at the Competition
Commission funding formula, I can well understand why the Government
did not favour it. I must confess, I did not try to work it out.
How do you think the adjudicator should be funded?
Shane Brennan:
The first thing to say is it is not an area where we have strong
views. We think it should be costeffective. We believe
fundamentally that it should be as low cost as possible. It should
be built in a way that is cutting out costs and reducing the burden
of work to ensure that is doing effective work in the most costeffective
way. The Waitrose arguments are well argued and, in putting those
points across, I would not take issue with anything they said
in that approach.
Kenneth Parsons:
I would broadly go along with that. There is a danger of this
whole area blowing out of all proportion. The costs we are talking
about are a tiny fraction of the profits of the companies involved.
For a lot of them, it is a red herring that they are raising,
rather than a real issue.
Q263 Chair:
Waitrose actually favoured the Competition Commission's formula.
Susan Dole: We
did, because it is based on the polluter pays principles. There
are two elements of cost: there is the fixed cost of funding the
ongoing costs every time. You either split it between 10, which
are the grocery retailers covered by the Code, or split it in
relation to market share. We would favour the latter. In terms
of incremental costs of ongoing investigations, appeals, adjudications
and whatever, we would favour them being allocated in relation
to the polluter pays principle; so whoever triggered it ought
to pay for it. Waitrose would expect to pick up those costs itself
and would not expect to have other retailers picking up the costs
if we have been found lacking.
Q264 Chair:
Do you feel that should still apply even if the retailer that
was being investigated was then found not to have been in breach
of the Code?
Susan Dole: That
is where the guidelines for the adjudicator comes in and that
is where consultation is needed. If the filtering procedure is
rigorous, what is a vexatious complaint? What is a mischievous
complaint? What is a potentially valid complaint? If it is a
potentially valid complaint, a retailer must have done something
for the adjudicator, if the guidelines are right, to consider
that it is worth pursuing. Yes, it is not black and white; it
is slightly grey, but we are all big boys.
Q265 Chair:
Do you not think there is the potential for a grey area, where
you get a number of vexatious complaints that, on the surface
of it, seem to have some legitimacy, which involve a retailer
on the receiving end of a whole lot of investigation found not
to be in breach of them, but the claims, if you like, were of
sufficient weight not to be spurious?
Susan Dole: Yes.
First of all, it is really important that the industry and the
adjudicator agree what the filtering terms are. Secondly, it
makes it even more important to have an annual review of the office
of the adjudicator, how it is doing its role and how it is applying
cost. If there is a pattern and that is happening, clearly something
is wrong in the guidance.
Shane Brennan:
It is suck it and see, is it not? That is why there is a need
for a regular review of the funding model.
Susan Dole: Three
years is too long, because there could be several of those within
a period of three years.
Q266 Simon Kirby:
Who pays for the cost of complying with the Code? Is it the constituents
in my constituency who are the shoppers in the supermarkets?
Is it your suppliers or is it, ultimately, paid by your ownersin
Waitrose's case your employees, presumably?
Susan Dole: We
as Waitrose will always do everything we can to minimise the cost
that we pass on to consumers. We will do that in two ways. The
first way is that we will ensure that we comply, so that we have
as few complaints as possible. That is one way, under our funding
mechanism, that we will ensure we have as low a cost as possible
from that. Also, there are always ways within one's business
case of looking for efficiencies elsewhere and whatever. It is
absolutely critical that we do all we can to minimise the passthrough
of costs to consumers.
Q267 Simon Kirby:
Does this mean the new Code has not caused prices to go up for
shoppers?
Susan Dole: There
is a lot of uncertainty about what the ongoing costs are going
to be. Until we know what those ongoing costs are going to be,
it will be very difficult for us and the whole industry to assess
what the passthrough is going to be, in terms of retail
prices. We, and I am sure everybody else, will also make sure
that we do everything possible to minimise the passthrough.
Q268 Simon Kirby:
Can I make this plea? In view of the turnover within the industry
of some £70 billion, the costs of enforcing the Code are
relatively minor. Could I plead that it is not passed on to the
consumer because, at the end of the day, we have their interests
ultimately at heart, as have you as businesses.
Susan Dole: Noted.
Q269 Chair:
Just a couple of points. This is really to Waitrose. If compliance
reached 100% across all retailers, you would have a formula based
entirely on market share. Do you not feel that this would punish
the most successful retailers?
Susan Dole: If
compliance were to be 100%, the fixed costs would be based on
market share, which I think is proportionate and there would be
no variable costs, because there would not be any complaints.
It would just be the fixed cost base, is estimated at £800,000,
I believe.
Q270 Chair:
If that is on the polluter pays principle and the other is a fixed
cost, and there is no polluter to pay then the fixed costs will
remain anyway.
Susan Dole: There
are no incremental costs.
Q271 Chair:
Do you not think it would be better to wait until the adjudicator
settles in before deciding on the weighting to apply on the polluter
pays principle?
Susan Dole: We
do not believe that because we believe that it is absolutely essential
that the supply base is protected. We have a mechanism with GSCOP.
We do not have an enforcement. Indirect and anonymous producers
at the moment, suppliers, do not have a voice, and it could be
two or three years until that happens. I think that is too long.
Kenneth Parsons:
I would agree with that totally.
Chair: That concludes
my questioning. Could I just make the point that if, on reflection,
you feel that there were questions that we should have asked but
did not, and you would like to reply to, please feel free to submit
further evidence. Equally of course, if we as members of the
Committee suddenly realise we did not explore this particular
line of questioning as fully as we might, we may well send some
further questions to you and would be grateful for your assistance
in responding. Thanks very much.
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