1 Introduction
Background
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.
Glossary
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.
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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
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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 Back
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
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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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