Written evidence submitted by the British
Brands Group
SUMMARY
The British Brands Group welcomes the Draft Groceries
Code Adjudicator Bill, while noting that a number of its provisions
are weaker than those recommended by the Competition Commission.
The Group calls on Government to establish an effective
adjudicator as soon as possible to monitor and enforce the Groceries
Supply Code of Practice and to do so as the Competition Commission
intended and recommended.
1. The British Brands Group welcomes the opportunity
to submit views to the Business, Innovation and Skills Committee
on the Draft Groceries Code Adjudicator Bill.
2. The British Brands Group is a trade organisation
that provides the voice for brand manufacturers in the UK. Its
goal is to help create in the UK the optimum climate for brands
to deliver their benefits to consumers. Such benefits include
broader choice, ever-better products through innovation, strong
value and confidence for consumers. A list of members is available
on request.
3. Branded products represent well over 50% of
packaged goods sales in supermarkets. The majority of our members
supply branded products to the grocery market and therefore has
a strong interest in ensuring fair, vigorous competition, a market
that works well for consumers and an environment that promotes
innovation and growth. The Draft Bill is directly relevant to
these themes.
BACKGROUND
4. The Competition Commission (CC) found competition
problems in its 2008 investigation of the groceries market, concerning
practices that transferred excessive risks and unexpected costs
from retailers to their suppliers to the detriment of consumers.
Its remedy is a Groceries Code of Practice (GSCOP) monitored and
enforced by a Groceries Code Adjudicator (GCA).
5. The CC reached a similar finding in its 2000
investigation of supermarkets, declaring 27 retail practices in
relation to suppliers uncompetitive. It can be deduced that such
practices have been (and we believe remain) endemic and persistent
in sections of the groceries market.
6. The CC's remedy in 2000 was a Supermarket
Code of Practice (SCOP) overseen by the OFT. In implementing the
SCOP, the OFT diluted the CC's recommendations. As a result, the
SCOP did not command the confidence of suppliers and did not work
well.
7.The GSCOP + GCA is a remedy for consumers, to assure
them a choice of high quality and new products. It relies on suppliers
to bring disputes or inform the GCA of on-going retail practices.
It is however well known that suppliers will not speak out. It
is commercial suicide to do so, for large and small suppliers
alike. An adjudicator, if implemented as the CC recommends, has
potential to overcome this reticence.
8. This is the first major test of the CC's remedy
powers under the Enterprise Act regime, which de-politicised competition
enforcement. It would cast the new regime into considerable doubt
if the government failed to implement in full the recommendation
of the CC. The CC clearly states that the enforcement mechanism
is an integral component of the remedy.
THE NEED
FOR THE
GROCERIES CODE
ADJUDICATOR
9. The GCA is essential, for four strong reasons:
— The GCA is an integral and essential
part of the CC's consumer remedy that will bring tangible benefits
to the supply chain and to consumers. It is being implemented
by legislation as the CC does not have the necessary powers itself
to introduce it, in contrast to the GSCOP which came into force
on 4 February 2010.
— The adjudicator has two distinct roles
in relation to breaches of the GSCOP—arbitrating disputes
between a specific supplier and a specific retailer and carrying
out investigations into more widespread practices undertaken
by one or more retailers against one or more suppliers. Investigations
are by far the most important to the effective working of the
remedy than bilateral disputes.
Six years' experience of the SCOP shows that
suppliers are extremely unlikely to bring disputes, invoke their
contract rights or complain, yet without their participation practices
that act to the detriment of consumers are nigh impossible to
detect, let alone prevent. An independent adjudicator to whom
suppliers or their representatives can speak anonymously is essential
to overcome this obstacle.
— Practices that transfer excessive risks
and unexpected costs from retailers to suppliers persist.
— The current regime (the GSCOP with no
independent monitoring and enforcement) is weaker than the regime
under the old SCOP, a situation that runs counter to the CC's
intention. Under the SCOP suppliers and trade organisations could
contact the OFT. This is no longer possible, with arbitration
under the GSCOP and legal action under contract law being the
only available (but wholly unrealistic) options.
COMPLIANCE WITH
THE GSCOP
TO DATE
10. A confidential survey of suppliers was undertaken
in 2010 concerning practices experienced by suppliers in the previous
trading year, prior to the introduction of the GSCOP. This demonstrated
that practices that transferred costs and risks from retailers
to suppliers were pervasive in the UK, that such practices affected
costs, revenue and innovation, and that suppliers did not take
action. The primary reasons for inaction were the lack of an effective
regulatory remedy and fear of commercial sanction were a complaint
to be made.
11. We have no reason to believe the situation
has changed. Since the introduction of the GSCOP, the feedback
from members has been "business as usual". We are also
aware of potential specific ongoing breaches of the GSCOP, for
instance in demands for additional payments after an agreement
has been reached.
12. Such information is wholly consistent with
the findings of the Competition Commission's market investigation
summarised in its Memorandum: the need for a Groceries Ombudsman
(Paras 2.1-2.3, 4 August 2009).
DILUTING THE
RECOMMENDATIONS OF
THE COMPETITION
COMMISSION
13. The Draft Bill dilutes the recommendations
of the CC in three important respects:
(1) the threshold to be reached before the adjudicator
may launch an investigation;
(2) the provision of penalties for non-compliance;
and
(3) staffing.
Launching an investigation
14. We envisage the adjudicator launching an
investigation only where a potential breach of the GSCOP affects
a number of suppliers or a number of large retailers (an investigation
into a single supplier's complaint could never remain anonymous,
were an adverse finding made). Such investigations are therefore
crucial to the integrity of the GSCOP, addressing pervasive or
significant breaches.
15. The CC, in its draft undertakings, stated
that the adjudicator should use its discretion when deciding to
launch an investigation, but in doing so should consider complaints
from suppliers and retailers, complaints from any other person,
to the extent that it relates to a breach of the Code [our
emphasis] and any other information (Para 5.2, Schedule to Final
Undertakings, 28 April 2009). In its response to the consequent
consultation, the CC considered this evidence threshold to be
potentially too narrow, suggesting BIS develop a threshold similar
to Section 25 of the Competition Act 1998:
The Director may conduct an investigation if
there are reasonable grounds for suspecting—
(a) that the Chapter I prohibition has been infringed;
or
(b) that the Chapter II prohibition has been
infringed.
16. The Draft Bill ignores this recommendation
and makes the evidence threshold for an investigation extremely
high, being information from a supplier or in the public domain
only. This is perverse, in light of the years of knowledge gained
from the SCOP that suppliers tend not to come forward with information,
that practices are not discussed in the public domain (hence the
dearth of published evidence) and that investigations should prevent
the most significant breaches of the GSCOP.
17. It is clear from the Draft Bill that the
anonymity of any complainant cannot be guaranteed, with the adjudicator
obliged to disclose the identity of a supplier if required under
an EU obligation, rules of court or a court order (Clause 19(3)).
This increases the risk to suppliers in complaining and highlights
the extremely high proposed threshold for evidence before an investigation
may be launched.
18. Clause 4.2 of the Draft Bill therefore requires
amendment to allow the adjudicator to launch an investigation
if it has reasonable grounds to suspect a breach of the GSCOP,
along the lines of Section 5 of the Competition Act 1998.
Penalties
19. The CC made it clear that, were retailers
to fail to establish an adjudicator in a reasonable time via voluntary
undertakings, BIS should establish one with "the power to
levy significant financial penalties on the retailers for non-compliance"
(Para 49, Final Report).
20. The provision for financial penalties also
formed an integral part of the CC's formal recommendation to the
Secretary of State:
The CC recommends that BIS take the steps necessary
to establish an effective Ombudsman as soon as practicable. It
is further recommended that the Ombudsman be given the power to
levy significant monetary penalties on retailers for non-compliance
with the GSCOP. (Para 5.1, Memorandum, 4 August 2009).
21. This recommendation should be followed, not
because of the punitive effect of fines but in order for the "naming
and shaming" penalty to work. If retailers are able to breach
the GSCOP and act against the interests of consumers without sanction,
it will be perceived that such breaches are unimportant and trivial
(and, from the media's perspective, not worth reporting).
22. In the interests of a robust remedy to breaches
of the GSCOP, the passing of the Bill needs to be accompanied
by an order by the Secretary of State authorising the adjudicator
to levy penalties from day one.
Staffing
23. In the Schedule to the Draft Undertakings
to establish an ombudsman, the CC states:
The Ombudsman may appoint staff, subject to any restrictions
contained in the Budget or provided by the OFT. Any staff of the
Ombudsman shall be appointed on terms and conditions as determined
by the Ombudsman. (Para 10.1).
The Draft Bill however is significantly more narrow,
not permitting the adjudicator to engage staff but allowing for
secondments by the Secretary of State or the OFT (Schedule 1,
Para 9 and Explanatory note 72).
24. In light of the fact that, certainly in the
case of investigations, there may be significant evidence to review,
such restrictions on staffing imposes great inflexibility on the
adjudicator, compounded by the fact that presumably (and hopefully)
BIS and the OFT are not awash with suitably qualified personnel
available for secondment at short notice.
25. Schedule 1, paragraph 9 of the Draft Bill
requires amending to permit the adjudicator to appoint staff subject
to budgetary restrictions or provided by the OFT, as recommended
by the CC.
THE PERFORMANCE
OF THE
GSCOP + GCA
26. It is in the public interest that the CC's
recommended remedy works in the interests of consumers. It is
therefore necessary for this objective to be fully integrated
into the heart of any monitoring and review of the GSCOP and the
role and performance of the adjudicator. As currently drafted,
the Bill focuses on arbitrations and remedies with no requirement
to assess the performance of the remedy overall.
27. Clause 15(2) of the Draft Bill therefore
requires amendment to require the adjudicator, in its annual report,
to give an assessment of the remedy's overall performance in preventing
large retailers transferring excessive risks and unexpected costs
to suppliers.
28. Clause 16 of the Draft Bill provides for
the Secretary of State to review the performance of the adjudicator.
As the adjudicator is one integral part of a two-part remedy (with
the GSCOP), the adjudicator needs to be reviewed in the context
of the total remedy, not in isolation. Clause 16(4) of the Draft
Bill therefore requires amendment to ensure the review considers
the performance of the remedy overall, not just in terms of arbitrations
and investigations but also in preventing the practices it was
designed to address.
COSTS OF
THE ADJUDICATOR
29. The CC affirmed that the costs of an adjudicator
can be mitigated by retailers' compliance with the GSCOP and that
the costs are proportionate to the adverse effect on competition
that it found (Para 11.415, Final Report). It is most unlikely
that any costs will result in increased prices to consumers for
a number of reasons:
the costs
are likely to be very small in the event of retailer compliance.
Grant Thornton has estimated that, in the unlikely event of all
costs being transferred to consumers, the impact would be 1¼p
on the weekly shop;
were a retailer
to incur higher costs due to non-compliance, competition in the
market would prevent these costs being passed through to consumers;
and
retailers
have a long and strong tradition of passing costs upstream to
suppliers, not downstream to consumers. The ombudsman's costs
will be treated no differently.
We (and we suspect the CC) are optimistic that quantifiable
benefits to consumers will far exceed the costs.
THE RELEVANCE
OF THE
GCA TO LARGE
AND SMALL
DIRECT SUPPLIERS
30. During Parliamentary debate on Albert Owen
MPs Private Members' Bill (Grocery Market Ombudsman Bill) to appoint
an ombudsman to oversee the GSCOP, it was questioned whether large
suppliers should be covered by the function. The CC considered
this and envisaged that:
"the GSCOP Ombudsman would prioritize the resources
of its office to focus on those disputes and complaints concerning
suppliers without market power over and above those concerning
suppliers of major branded products that have market power".
Para 48, Final Report.
31. We agree with this analysis while strongly
recommending that ALL direct suppliers, of whatever size, are
included within the adjudicator's remit, for the following reasons:
the CC considered
that it would be difficult to draw a line between large and small
suppliers. It concluded that such an approach would be impractical;
the GSCOP
applies to suppliers of all sizes so its monitoring and enforcement
should too;
the adjudicator
is the gateway to the dispute resolution procedure. With no access
to the ombudsman, large suppliers only have the courts for redress;
the adjudicator's
role will be significantly more difficult if evidence from large
suppliers on retailers' compliance cannot be taken into account;
larger suppliers
may be better able to bring widespread potential breaches of the
GSCOP to the adjudicator's attention than small suppliers; and
to exclude
large suppliers would run counter to the interests of consumers.
Large suppliers impact far more consumers than small suppliers.
15 June 2011
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