Written evidence submitted by ActionAid
SUMMARY
ActionAid strongly supports the introduction of a
Groceries Code Adjudicator. We encourage the Select Committee
to make the case for:
Introducing
the Bill and passing the legislation in the current session of
Parliament.
Strengthening
protection for suppliers against retaliatory action by retailers,
and improving the body's effectiveness, by allowing it to carry
out proactive surveys and spot checks, and by allowing third parties
to submit complaints.
Including
a system of financial penalties from the point of establishment.
Retaining
the provision for indirect suppliers to make complaints.
Ensuring the
body is adequately funded and appropriately staffed.
Extending
the scope of the body to encompass the whole groceries supply
chain within the UK.
INTRODUCTION
1. ActionAid welcomes this opportunity to submit
to the Business, Innovation and Skills Select Committee inquiry
into the draft Groceries Code Adjudicator Bill.
2. ActionAid is an
international development charity that combats poverty worldwide.
We work in over 40 countries to help
the most vulnerable people gain their rights to food, shelter,
work, education, healthcare and a voice in the decisions that
affect their lives.
3. ActionAid has contributed to the policy process
that led to the draft Bill since the Competition Commission began
its groceries market inquiry in 2006. Grocery retailers import
an estimated £3 billion worth of goods from developing countries
each year. This trade brings vital jobs and investment to poor
countries.
4. However, irresponsible purchasing practices
also result in an unfair transfer of wealth from producers in
developing countries to retailers in the UK, and are a major barrier
to improving the poverty wages and poor conditions endured by
employees of supplier businesses in developing countries.[3]
5. As such, we warmly welcome the Government's
decision to introduce a Groceries Code Adjudicator (GCA) to monitor
and enforce the Groceries Supply Code of Practice (GSCOP). It
is particularly encouraging that the draft Bill provides for suppliers
to submit complaints anonymously, and gives indirect suppliers
standing to make complaints.
6. The GCA has overwhelming public support. Over
90% of respondents to a GfK NOP poll from January 2011 believe
retailers treat farmers and suppliers unacceptably, and 84% of
respondents want the Government to introduce an independent regulator
to monitor retailers as soon as possible.[4]
7. The GCA also enjoys cross-party support, has
been debated in Parliament, and has been subject to several detailed
inquiry and consultation processes. The GSCOP has been in existence
for over one year, however it remains unenforced. There is a pressing
need to move forward as quickly as possible, and we urge policymakers
to introduce the Bill and complete the legislation within the
current Parliamentary session.
8. If the GCA is to monitor and enforce the GSCOP
effectively, we believe the draft Bill needs improving in certain
areas. The following sections provide suggestions for making these
improvements.
INVESTIGATIONS AND
ANONYMITY
9. ActionAid submits that the GCA should be able
to use credible evidence, irrespective of its source, when deciding
whether to begin an investigation.
10. Currently, the Bill restricts the GCA to
considering complaints made by only by suppliers when deciding
whether to investigate alleged breaches of the GSCOP. Retailers
will therefore know that a complaint could only have come from
a supplier. This raises serious concerns, as it greatly increases
the risk of retailers taking retaliatory action against suppliers
they suspect of making a complaint.
11. To help protect suppliers' identities, the
Government proposes that the GCA will investigate patterns of
behaviour among retailers on the basis of complaints submitted
by more than one supplier. This is an important feature of the
GCA and it should be retained.
12. However, knowing that complaints must have
originated from suppliers, a retailer could still take punitive
action against some or all of the suppliers it had subjected to
the particular behaviour investigated by the GCA.
13. This is evident from the fact that retailers
with buyer power often unilaterally change (and from the supplier
point of view worsen) contract terms across whole supply categories
as part of their day-to-day trading operations.[5]
This shows that even if a retailer did not suspect a particular
supplier of making a complaint, it could take punitive action
against a group of suppliers that it had subjected to the behaviour
investigated by the GCA.
14. If the GCA is able to initiate an investigation
on the basis of credible evidence gathered from a wider set of
sources—for example, through its own surveys or spot checks,
or through submissions from third parties—retailers would
not know who was responsible for gathering or providing the information.
This would:
Encourage
suppliers to provide information to the GCA, thereby improving
its effectiveness.
Reduce the
incentive for retailers to take action to indentify suppliers.
Reduce the
grounds for retailers to take punitive action against suppliers
they suspect are the subject of an investigation.
Reduce the
grounds for punitive action against suppliers that retailers know
for certain are the subject of an investigation.
15. As the Bill proposes, the GCA should also
be able to consider information in the public domain when deciding
whether to begin an investigation. However, media stories that
relate specifically to purchasing practices that may be in breach
of the GSCOP are infrequent, and we believe the onus for carrying
out key functions of a public body should not fall on journalists
or other third parties.
16. Furthermore, in the vast majority of instances,
the information published would need to conceal suppliers' identities,
and much of the useful case detail would need to be omitted. The
concern therefore is that this cannot be relied on as mechanism
for triggering an investigation.
17. It is vitally important that the Government
strengthens the anonymity protections for suppliers. If only one
or two are subject to retaliatory action, confidence in the GCA
would collapse, potentially to the point of it becoming almost
wholly ineffective.
18. Allowing the GCA to initiate investigations
on the basis of credible intelligence gathered, including by the
GCA itself or submitted by third parties, would strengthen protection
for suppliers significantly, improve the quality and quantity
of information flowing to the GCA and enhance its effectiveness.
19. We therefore encourage BIS to act on the
Competition Commission's recommendation that the GCA develops
a threshold that must be met before an investigation is commenced,
similar to that in Section 25 of the Competition Act 1998, which
allows the Office of Fair Trading to conduct an investigation
if there are reasonable grounds for suspecting an infringement.[6]
20. We suggest Section 5 of the Draft Ombudsman
Undertakings, arrived at by the Competition Commission after extensive
consultation and deliberation, could also be used as a credible
basis to strengthen protection for suppliers and improve the GCA's
effectiveness:
5.2(c) [the Ombudsman may consider] complaints from
any other person, to the extent that it relates to a breach of
the Code and/or the Undertakings
21. Concerns have been raised that by allowing
the GCA to consider information from a wider set of sources, it
may become overwhelmed by a large volume of complaints. If this
happened, we expect they would be prioritised according to their
importance and resources available, as is standard practice with
any number of existing regulatory schemes.
22. Of greater concern is that by restricting
the sources of information that could trigger an investigation,
suppliers will be discouraged from coming forward and the GCA
would be rendered far less effective.
FINANCIAL PENALTIES
23. ActionAid submits that the GCA should be
given the power to levy financial penalties on retailers from
the point of its establishment.
24. We are concerned that non-binding recommendations
to retailers found to be in breach of the GSCOP, and publicly
naming companies in more serious cases, will not act as a sufficient
deterrent. As a consequence, more suppliers will be pushed into
financial distress through breaches of the GSCOP than would be
the case if a penalties system was in place from the outset. If
the GCA is to be effective, it is vital that retailers recognise
GSCOP breaches are considered a serious matter and that the consequences
will be significant.
25. It has been suggested that introducing financial
penalties from the GCA's inception would be a disproportionate
measure. However, penalties are a vital part of enforcement in
virtually every other industry regulated through public statute,
and after a major inquiry and extensive deliberation, the Competition
Commission recommended that the Ombudsman (precursor to the GCA)
should be able to levy "significant financial penalties on
retailers for non-compliance."[7]
26. The GCA would seek to use penalties only
in severe cases that are supported by convincing evidence, and
where suppliers are named. While such cases would be few and far
between—perhaps one per year—they would send a clear
message to retailers and act as a strong deterrent. Furthermore,
retailers that comply with the GSCOP would not be affected in
any way. This seems hardly disproportionate.
27. The Competition Commission first concluded
that abuses of buyer power are endemic in the groceries supply
chain over a decade ago. Lobbying by retailers helped weaken the
resulting code of practice, which proved ineffective. Retailers
are now strongly opposed to penalties, and it is reasonable to
consider that one of the main reasons for this is because the
absence of penalties will weaken the GCA's effectiveness. Suppliers
have waited too long for effective enforcement, and we believe
they should not have to wait any longer.
28. Further reasons for empowering the GCA to
levy financial penalties from its inception include:
Negative publicity alone will not be sufficient
29. The GCA should be able to publish
the names of retailers found to be in breach of the GSCOP, however
this will not be a sufficient deterrent in and of itself. Negative
and often shocking reports about conditions for producers and
workers in retail supply chains have been given regular coverage
by national media outlets for well over a decade. However, the
Competition Commission's findings show clearly that retailers
have continued to engage in harmful supply chain practices despite
this negative coverage.
30. The effectiveness of negative publicity
rests to a large extent on the assumption that consumers will
boycott a retailer in protest at unfair treatment of suppliers.
However, consumers may not act as the GCA would wish them to.
Market research consistently shows that considerations such as
price, quality and convenience drive consumer choice of retailer
to a far more significant extent than supplier relations, or even
ethical performance more broadly.[8]
Reliance on negative publicity as a deterrent also assumes consumers
will be aware that a specific retailer had been "named and
shamed". However, it is not certain that the GCA's reports
will always be covered by major news outlets, or if they were
covered, how much prominence will be given to them. Conversely,
a financial penalty given to a retailer would sharply increase
media coverage and public awareness of a retailer's behaviour.
Financial penalties will improve compliance with
the GSCOP
31. A study by the Office of Fair Trading found
that most companies and lawyers believe financial penalties are
important, or very important, to prevent infringements of competition
law.[9]
BIS has stated this study supports the case that retailers' compliance
with the GSCOP will be lower in the absence of financial penalties.[10]
32. Improved compliance would have the further
advantage of reducing the costs associated with the GCA's complaint
and investigation functions.
The risks for consumers and suppliers are minimal
33. Concerns have been raised that retailers
would pass on the cost of a penalty to consumers or suppliers.
As such cases such would be few and far between, this is unlikely
to have significant repercussions for consumers and suppliers.
34. Retailers compete intensely for customers,
which should help deter them from passing on the cost of a penalty.
Even if a retailer did so, the impact on individual consumers
would be negligible as the cost would be spread across sales of
between £1 billion and £60 billion, depending on which
retailer received the penalty.
35. Furthermore, supplier trade associations
such as the British Brands Group and National Farmers Union recognise
that if any additional costs from the GCA are passed on by retailers,
they are more likely to be transmitted to suppliers than to consumers.
Despite this risk, these groups support the GCA as the benefits
brought to consumers and suppliers through improved compliance
with the GSCOP will outweigh these potential costs.
Risks relating to appeals can be kept to a minimum
36. Cases that result in a financial penalty
would be few and far between. Furthermore, the GCA would only
impose a penalty when there is very strong and convincing evidence
that a retailer had breached the GSCOP. The GSCOP requires retailers
to write down contract terms with their suppliers, which will
enhance the GCA's ability to gather firm evidence and present
a robust case. For these reasons, the risk that financial penalties
will result in burdensome appeal cases can be kept to a minimum.
INDIRECT SUPPLIERS
37. ActionAid is extremely pleased that the Bill
makes indirect suppliers eligible to submit complaints to the
GCA. Almost all suppliers in developing countries trade with UK
retailers through intermediaries. If the GCA's remit excludes
indirect suppliers, the Government would lose an important opportunity
to strengthen its commitment to ethical trade, and the CGA would
not be able to monitor or enforce the GSCOP effectively. As such,
the Select Committee's intention to re-visit this issue raises
concern.
38. The Competition Commission reported that
"unexpected costs and excessive risks" are passed on
from retailers' direct suppliers to indirect suppliers further
up the chain, including primary producers. To remedy this, the
Commission recommended that indirect suppliers should be able
to submit complaints to the Ombudsman.
39. This is measure is crucial to the GCA's success,
as when retailers breach the GSCOP, direct suppliers are likely
to have a much greater incentive to pass on unexpected costs and
excessive risks to indirect suppliers, rather than to notify the
GCA. A look at the options available to direct suppliers shows
why.
40. A breach of the GSCOP would result in financial
losses for direct suppliers, who broadly speaking would have four
options available under the GCA scheme:
(a) file a formal dispute case and attempt to
win compensation;
(b) submit a complaint anonymously;
(c) absorb the losses incurred by the breach
of GSCOP; and/or
(d) recoup losses by passing on the costs and
risks to indirect suppliers.
41. These options are looked at in turn:
(a) The Government recognises that in a majority
of instances, the "climate of fear" amongst suppliers
will prevent them from filing formal dispute cases. As such, disputes
alone will not remedy the Adverse Effect on Competition.
(b) The ability to submit complaints anonymously
will encourage direct suppliers to provide information to the
GCA. However, anonymous complaints would not result in suppliers
receiving compensation for financial losses incurred through an
infringement of the GSCOP. Therefore direct suppliers would still
have an incentive to pass on costs and risks to indirect suppliers.
(c) Direct suppliers could absorb losses incurred
through a breach of the GSCOP. However, this would damage their
business operation, and the Adverse Effect on Competition would
remain in place.
(d) The greatest incentive for direct suppliers
is therefore likely to be to recoup any losses incurred by passing
on excessive costs and risks to indirect suppliers.
42. Furthermore, direct suppliers tend to hold
market power over indirect suppliers such as primary producers,
meaning the incentive to pass on excessive costs and risks will
be even greater.
43. This indicates that in cases where the GSCOP
had been breached, excessive costs and risks may be transmitted
to indirect suppliers in a majority of instances and a large number
of breaches could go undetected. As such, if indirect suppliers
are not permitted to submit complaints, the GCA will be deprived
of the information it needs to enforce the GSCOP effectively.
RESOURCING
Funding
44. ActionAid is concerned that the GCA's proposed
budget of £800,000 per year will severely limit the number
of investigations it will be able to carry out, and that in turn
this will prevent it from remedying the Adverse Effect on Competition
effectively.
45. The Competition Commission recommended that
the total annual costs of this remedy should be in the region
of £3.9 to £5.4 million (comprising £3 million
retailer costs and £0.9-£2.4 million costs of the Office
of Fair Trading).[11]
46. £800,000 is a very small sum compared
to the size of the industry that the GCA is tasked with regulating
(in the order of £130 billion per year), and when compared
to the ten largest grocery retailers' operating profits, which
together exceed £5 billion per year. For illustration, the
following table draws a comparison with the Advertising Standards
Authority.
| Groceries Code Adjudicator[12]
| Advertising Standards Authority[13]
|
| Industry turnover | £128.18 billion
| £3.94 billion |
| Core running cost | £0.8 million
| £3.45 million |
| Levy as percentage of industry turnover |
0.0006% | 0.1-0.2% |
Staff
47. The choice of person appointed to the role of GCA will
be critical to its success. The appointee should be someone who
has the respect of suppliers as well as retailers if the body
is to be established and run successfully. Accordingly, the GCA
should be appointed on the basis of an open recruitment process
and their suitability for the role, rather than selected from
a limited pool of candidates (for instance from within the Office
of Fair Trading only).
EXTENDING THE
SCOPE OF
THE GCA
48. ActionAid submits that the scope of the GSCOP and GCA
should be extended to cover the whole of the groceries supply
chain within the UK.
49. The Competition Commission made the following informal
recommendation in its Final Report: "we suggest that, if
it subsequently appears that, despite the operation of the GSCOP
(and the Ombudsman) intermediaries continue to transfer excessive
risk and unexpected cost further up the supply chain, Defra and
BERR should consider the introduction of appropriate measures,
including the extension of the GSCOP and the role of the Ombudsman
or the introduction of a similar, complementary code and arrangements
to cover the intermediaries and primary producers."[14]
50. A recent merger between the large-scale suppliers Northern
Foods and 2 Sisters highlights the need for this measure. According
to media reports, the companies' new parent group is aiming to
reduce the number of its approximately 4,500 (second tier) suppliers
by around 50%. Firms that continue to supply the group will be
asked to offer better deals and "loyalty overriders"
where they agree not to pass on price increases even if their
costs increase.[15]
51. If UK-based suppliers were covered by the GSCOP, there
is a possibility that this company could be in breach of its provisions
(eg that aim to prevent unexpected cost transfers; to ensure fair
dealing; or that relate to de-listing).
52. However without an extension of the code, the GCA has
no means of addressing the Adverse Effect on Competition when
suppliers transfer unexpected costs and excessive risks to other
suppliers, including to primary producers.
Thank you for considering the points raised above. If you would
like clarification on these or any other issues relating to the
GCA Bill, please do not hesitate to be in contact.
17 June 2011
3
For example see "Concentration in food supply and retail
chains", DFID Working Paper, August 2004; Insight Investment
(2004) "Buying your way into trouble? The challenge of responsible
supply chain management", London: Insight Investment. Back
4
"ActionAid poll shows vast majority of the public think supermarkets
behave unacceptably," ActionAid, 25 May 2011. Back
5
See for example, "Northern's supply chain faces axe from
Bopara", The Grocer, 31 May 2011; "Tesco tightens
the screw on suppliers despite Defra's call", The Grocer,
25 October 2008; "M&S cuts supplier payments by 5.5%",
just-style, 3 March 2006. Back
6
Undertakings to establish a Groceries Supply Code of Practice
Ombudsman Scheme, Response to Consultation (12). Back
7
Final Report (49). Back
8
"Getting fresh down the aisles", Marketing Week,
24 January 2008. Back
9
Office of Fair Trading, "The deterrent effect of competition
enforcement by the OFT", November 2007. Back
10
Department for Business, Innovation and Skills, "Taking forward
the establishment of a body to monitor and enforce the groceries
supply code of practice: Government response to the consultation",
August 2010. Back
11
Final Report (11.421). Back
12
Grocery Code Adjudicator Impact Assessment, BIS, May 2011. Back
13
Source: http://www.asbof.co.uk/resources/reports/35th_Asbof_Annual_Report.pdf Back
14
Final Report (11.449). Back
15
"Boparan starts to look at cutting the costs at Fox's",
Uttoxeter Advertiser, 8 June 2011; "Northern's supply
chain faces axe from Bopara", The Grocer, 31 May 2011. Back
| 
