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


Examination of Witnesses (Questions 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 whereby—because our year end is the end of January 2011—we 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 it—as it was thought to be with the banks—pressures 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 meal—so it might be the prawn in the prawn curry, but the prawn curry supplier is not the prawn supplier—equally 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 chain—whether they are direct suppliers or indirect suppliers—is 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 partners—you are talking about buyers—operate 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 representative—it is interesting to hear what you say about your relationship with suppliers—does 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 grams—I used to call it half a pound, but I am too old for that—of 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 told—I do not know if you were here; I think you were—that 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 evidence—there is no voice at the moment for indirect suppliers or normal suppliers—the better. A mini­review—you suggested January 2012—is 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 adjudicator—we 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 be—sorry, filtering and water do not exactly go together, but forgive me—it 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 started—everybody would say it is the affluent South East because the South East is affluent—we 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 balance—that 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 there—and again I think we are in danger of veering into areas where we are not necessarily experts—but 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 be—it is human nature—one 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 evidence—and there is an issue about how you define a trend on the credible evidence test—you 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 people—retailers who are acting inappropriately—the 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 owners—in 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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