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

1  Introduction


1. In 2000, the Competition Commission found that certain practices of the large supermarkets in relation to their suppliers were operating against the public interest. This led to the establishment of the Supermarkets Code of Practice (SCOP), covering the four largest retailers: Asda, Safeway, Sainsbury's and Tesco. Safeway was later acquired by Morrisons, and Morrisons agreed to be bound by SCOP as if it was a signatory.

2. SCOP covered issues such as standard terms of business, prices and payments, promotions, compensation, consumer complaints, third party dealings and staff training. With time, it was criticised for being imprecise, in particular in relying on a test of reasonableness test for certain practices.

3. The Office of Fair Trading reviewed the performance of SCOP in 2004/05 and found relatively little evidence of Code breaches, although there were also indications of reluctance to complain on the part of suppliers. In 2006, after the OFT's decision not to refer the reviews' findings to the Competition Commission was challenged, a two-year Competition Commission investigation began.

4. The Competition Commission investigation covered not just matters relating to SCOP but other matters such as supermarkets' land holdings and the use of the planning system, which are not relevant for the purposes of this Report. The Competition Commission found that the large retailers' exercise of buyer power was not necessarily harmful to consumers, and indeed that many aspects of the market operated to the benefit of consumers. However, the Competition Commission received some 380 complaints from suppliers and supplier associations, one third of which related to certain practices such as requirements for suppliers to make payment adjustments retrospectively or the passing on to suppliers of costs incurred in product loss (shrinkage), and nearly half of which related to excessive transfer of risk or cost to suppliers in some other way. The Competition Commission concluded that, left unchecked, such behaviours would reduce suppliers' ability and incentive to invest and innovate, which in turn could act to consumers' detriment.

5. The resulting Competition Commission report of April 2008[1] decided on the setting up of a statutory new code, the Groceries Supply Code of Practice (GSCOP), covering all large retailers with a turnover of more than £1bn. The reasonableness tests in SCOP were removed, and an overarching requirement of fair dealing inserted. In addition, the large retailers were required to include the Code automatically into their contracts with suppliers. The Code also introduced protection against de-listing (that is, terminating contractual relations with a supplier) without reason.

6. Alongside the new Code, which came into effect in 2009, the Competition Commission decided to seek undertakings from the large retailers to establish what was then termed an Ombudsman, to monitor and enforce compliance with the Code. The Commission indicated that if satisfactory undertakings from the large retailers were not received within a reasonable time, it would ask the Government to legislate to introduce a statutory regulator. The Commission was unable to obtain undertakings from the large retailers to establish an Ombudsman, and therefore in August 2009 it formally requested intervention from the Government.

7. The previous Government accepted the Commission's recommendations and consulted on the establishment of a Groceries Code Adjudicator between February and April 2010. The consultation produced a range of views on the need for, and the appropriate powers of, an Adjudicator. However, opposition to the need for an Adjudicator was confined essentially to certain (though not all) of the 10 large retailers and their representative bodies; other responses were largely supportive while a handful or so contained comments of a technical nature.

8. Each of the Conservative, Labour and Liberal Democrat manifestos contained a commitment to introduce a Groceries Code Adjudicator.[2] The Coalition Agreement said:

We will introduce, as a first step, an Ombudsman in the Office of Fair Trading who can proactively enforce the Grocery Supply Code of Practice and curb abuses of power, which undermine our farmers and act against the long-term interest of consumers.[3]

9. In August, the Coalition Government produced its Response to Consultation[4] with proposals for a Groceries Code Adjudicator and for the draft Bill to be published later in 2010, with an actual Bill to be introduced "in the second Session".[5] The term 'Adjudicator' was chosen over the initially selected 'ombudsman' because the latter term generally refers to an arbiter acting on behalf of members of the public rather than in business-to-business matters. The Government subsequently published the draft Groceries Code Adjudicator Bill on 24 May 2011 and invited comments on the draft Bill by 19 July 2011, the last day before the summer parliamentary recess.[6] The Government requested that Parliament undertake pre-legislative scrutiny of the Bill, and this Committee agreed to undertake that scrutiny. We make some observations about the process of scrutiny and next steps in the concluding section of this Report.

10. The Committee on Environment. Food and Rural Affairs held a one-off evidence session on the draft Bill on 14 June 2011, following which the Chair of that Committee wrote to us in a letter of 22 June 2011[7] with a number of conclusions and recommendations of its own. We are grateful to the EFRA Committee for its work, and we refer to its views in the appropriate parts of this Report. We do not believe that our views diverge greatly.

This inquiry

11. The inquiry's terms of reference were:

  • The need for the Groceries Code Adjudicator
  • Compliance with the Groceries Code to date
  • The specific provisions of the Bill
  • The functions and powers appropriate for any Code Adjudicator
  • The appropriate location for the Adjudicator
  • Enforcement powers, penalties, appeals, and funding
  • Coverage of indirect suppliers
  • Powers to investigate anonymous reports

12. We held four evidence sessions: with the Departmental Bill Team, with a cross-section of representatives of the large retailers, with suppliers' organisations and representatives of smaller retailers (along with Waitrose, whose position on the draft legislation differed somewhat from that of other large retailers), and with the Minister for Competition. We thank all those who took the time to provide evidence to assist the inquiry.

GCA      Groceries Code Adjudicator

GSCOP  Groceries Supply Code of Practice (2009). Set out in Schedule 1 to the Groceries (Supply Chain Practices) Market Investigation Order 2009

SCOP      Supermarkets Code of Practice (superseded by GSCOP)

The Bill uses the term "Groceries Code" for GSCOP.[8] The remainder of this Report refers simply to 'the Code' or 'the GSCOP'.

The Code defines "groceries" as food (other than that sold for consumption in the store), pet food, drinks (alcoholic and non-alcoholic), other than that sold for consumption in the store, cleaning products, toiletries and household goods, but excludes petrol, clothing, DIY products, financial services, pharmaceuticals, newspapers, magazines, greetings cards, CDs, DVDs, videos and audio tapes, toys, plants, flowers, perfumes, cosmetics, electrical appliances, kitchen hardware, gardening equipment, books, tobacco and tobacco products.

1   'The supply of groceries in the UK market: investigation'. The Report is accessible at: www.competition-commission.org.uk/rep_pub/reports/2008/fulltext/538.pdf


2   http://media.conservatives.s3.amazonaws.com/manifesto/cpmanifesto2010_lowres.pdf; page 97; http://www.labour.org.uk/uploads/TheLabourPartyManifesto-2010.pdf; page 8:5;
http://network.libdems.org.uk/manifesto2010/libdem_manifesto_2010.pdf; page 83 

3   http://www.cabinetoffice.gov.uk/sites/default/files/resources/coalition_programme_for_government.pdf; page 13 Back

4   http://www.bis.gov.uk/assets/biscore/business-law/docs/competition-matters/10-1011-groceries-supply-code-practice-government-response.pdf  Back

5   See Chapter 5, page 35 of the Response to Consultation; http://www.bis.gov.uk/assets/biscore/business-law/docs/competition-matters/10-1011-groceries-supply-code-practice-government-response.pdf Back

6   www.bis.gov.uk/policies/business-law/competition-matters/market-studies/cc-market-investigation-on-the-uk-supply-of-groceries Back

7   See Appendix Back

8   The definition is in Clause 23 Back

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Prepared 28 July 2011