Written evidence submitted by Dairy UK
SUMMARY
Dairy UK supports
the creation of a Groceries Code Adjudicator as it will help to
create a common understanding on acceptable contractual practices
and minimise unexpected transfers of risk.
The Adjudicator
should operate under a clearly defined remit.
The Adjudicator
should take the utmost care to ensure commercial confidentiality.
The Adjudicator
should seek to expedite its investigations as rapidly and efficiently
as possible.
The scope
of the Adjudicator should not be extended to include indirect
suppliers until an investigation by the competition authorities
(OFT or Competition Commission) concludes that it is necessary.
DAIRY UK
1. Dairy UK represents the interests of dairy
farmers, producer co-operatives, manufacturers of dairy products,
and processors and distributors of liquid milk throughout the
United Kingdom. Between them Dairy UK's members collect and process
about 85% of UK milk production.
BIS QUESTIONS
The need for the Groceries Code Adjudicator
2. Dairy UK broadly welcomes the Government's
proposals to set up an Adjudicator to oversee the Groceries Supply
Code of Practice. The creation of an Adjudicator will help to
ensure the enforcement of the Code and create a common understanding
on acceptable commercial practices between retailers and their
direct suppliers. This should help to create a more predictable
market place with suppliers being less exposed to unexpected transfers
of risk.
3. There is widespread misunderstanding over
the potential impact of an Adjudicator. The same market challenges
will remain, and it is in addressing those challenges that food
processors become more competitive and profitable. Complaining
to an Adjudicator will not be viewed as a sustainable route to
success.
4. It could be presumed that the Adjudicator
will help to ensure greater adherence to the Code because it will
create a formal route to arbitration and lift the onus from suppliers
to initiate complaints. The more substantive change brought about
by the advent of an Adjudicator may be the powers conferred on
it to undertake investigations. This means that suppliers will
not themselves have to take action under the Code to seek redress.
Compliance with the Groceries Code to date
5. The code has helped to create a closer consensus
on acceptable contractual practices which has helped to generate
a more predictable commercial environment. Consequently the lack
of complaints under the Code does not demonstrate that it is of
limited value.
The specific provisions of the Bill
6. Dairy UK's comments on the specific provisions
of the bill are covered in the answers to succeeding questions.
The functions and powers appropriate for any Code
Adjudicator
7. It is important the Adjudicator operates within
a clear remit and that its operating principles are closely aligned
with other bodies enforcing competition law such as the OFT and
the Competition Commission. The new body will inevitably come
under pressure from a range of interest groups seeking to change
retailer behaviour. The new organisation may try to meet these
expectations or make efforts to change its remit. Overall this
would introduce an element of unpredictability in the application
and evolution of the competition policy framework governing the
food industry.
8. Further, whilst the Adjudicator should be
able to initiate any type of investigation that it considers appropriate,
it should not do so without substantive evidence from a variety
of sources that an issue needed addressing. Dairy UK does not
want to see a situation where competing companies can seek to
embarrass each other by asking for an investigation because they
lost out on certain contracts, or suppliers of one company likewise
seeking to make life awkward for a company they do not supply.
This would threaten to politicize commercial relationships in
the supply chain. It would also expose companies to tremendous
cost and mis-direction of managerial resources if they were constantly
being drawn into inquiries.
9. However, we would caution that the Adjudicator
should use its powers judiciously. Suppliers should also not be
subject to indiscriminate requests for data. Data requests should
be justified by some sort of cost/benefit analysis to ensure that
they are properly targeted and justified.
10. The Adjudicator should set itself a clear
timetable for the completion of investigations to ensure they
are expedited as quickly and as efficiently as possible.
11. Commercial confidentiality must be protected
at all times. The greater the information collected the greater
the chance that commercial confidentiality will be violated. The
Adjudicator must have in place robust procedures to ensure that
the confidentiality of any data obtained is rigorously protected.
12. In publishing the results of those investigations,
there should be a general presumption against the disclosure of
information by the Adjudicator unless it is absolutely necessary
for the Adjudicator to carry out its function of communicating
judgements and decisions. The Adjudicator should not do anything
that would prejudice the commercial interests of companies that
did not wish to support the complaint being made against any particular
retailer. As such suppliers should not be under an obligation
to provide information if they did not wish to do so, but if they
are to be compelled, then that information should not be divulged
without the consent of the supplier.
13. It is therefore important that the Adjudicator
should operate:
(a) under a tightly defined remit and institutional
safeguards to prevent mission creep;
(b) with clearly defined obligations of confidentiality
and a duty to protect the interests of companies not wishing to
disclose their participation in any investigation; and
(c) with operational procedures designed to produce
rapid and timely outcomes to investigations.
The appropriate location for the Adjudicator
14. The Adjudicator could usefully be located
in the OFT. The OFT is the appropriate government body for regulating
markets, implementing competition law and scrutinising commercial
relationships between large retailers and suppliers in the UK.
15. Utilising the existing expertise of the OFT
would ensure that the relationships between retailers and their
suppliers are assessed using the same criteria and intellectual
rigor used for all other industries.
Enforcement powers, penalties, appeals, and funding
16. There is a case for arguing that reputational
damage will act as a sufficient penalty to ensure enforcement.
If this is considered insufficient and a penalties regime adopted
then it should be borne in mind that there is a risk that any
penalties will simply be transferred down the supply chain. Arrangements
need to be put in place to ensure that this is not the case.
Coverage of indirect suppliers
17. There is some debate as to whether the functions
of the Adjudicator should be widened beyond those proposed in
the Bill to include relations between food processors and their
supplying farmers. We would argue that this is not warranted by
the conclusions of the Competition Commission inquiry which undertook
a protracted and exhaustive investigation of supply chain relationships.
18. The Commission concluded that only specific
action was required in respect of restricting certain practices
by retailers that transferred risk to direct suppliers and this
would be achieved through strengthening the implementation of
the GSCOP. The investigation did not conclude that further action
was required in respect of other segments of the supply chain,
ie; food processors and their primary product suppliers.
19. The Competition Commission investigation
included a detailed look at the milk sector,[19]
and concluded that regulation further down the supply chain was
not necessary.
20. Extension of the scope of the Code to include
indirect suppliers could only reasonably be justified if the OFT
or Competition Commission undertook a further investigation which
concluded it was desirable. Whilst clearly there is some concern
amongst certain parties over the operation of the dairy market,
Dairy UK would argue strongly that the market is operating correctly
and that further regulation is not required.
21. The types of practices excluded by the Code
are not used by milk buyers in their relations with dairy farmers.
The only practice that is similar to those banned by the Code
is retrospective price adjustments. Dairy UK is strongly opposed
to the use of retrospective price changes. Fortunately their use
by milk buyers is exceptionally rare because of the inevitable
reputational damage they cause to the buyer. In fact, in the last
major instance when a retrospective price change was made, it
hastened the collapse of the milk buyer due to the resulting resignation
of farmers. This demonstrates that the market provides a strong
safeguard against the use of retrospective price changes.
Powers to investigate anonymous reports
22. The Adjudicator should not be under an obligation
to accept complaints that remain anonymous to it. To prevent spurious
or unmeritorious complaints any complainant should make itself
known to the Adjudicator.
23. In respect of complaints from third parties
(entities not directly involved in the commercial relations in
question) if the Adjudicator feels an investigation following
a single third party complaint is warranted then it should only
be with the express consent of the supplier mentioned by the complainant.
It should not be possible to compel a supplier to provide information
or to be involved in an investigation where a complaint has been
submitted by a third party. Anything less could enable a third
party potentially hostile to the interests of the supplier to
interfere in its commercial relationships with its customers.
24. If the Adjudicator decides to investigate
on the basis of a single complaint then in many situations it
would be difficult to ensure the anonymity of the supplier referred
to by the complainant. This could damage the commercial relationship
between the supplier and the retailer.
25. On this basis the Adjudicator should only
investigate third party complaints if a retailer has demonstrated
a pattern of behaviour affecting a sufficient number of suppliers
to ensure the protection of anonymity for the suppliers concerned.
26. In making these observations Dairy UK is
seeking to ensure that the Adjudicator can operate effectively
to enforce the Groceries Code to reduce unexpected transfers of
risk, whilst at the same time meeting the concerns of suppliers
over commercial confidentiality.
17 June 2011
19 www.competitioncommission.org.uk/inquiries/ref2006/grocery/pdf/emerging_thinking_supply_chain_practices.pdf Back
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