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


Written evidence submitted by the Competition Commission

Please find attached a submission from the Competition Commission to the Business, Innovation and Skills Select Committee concerning the draft Groceries Code Adjudicator Bill. We hope the committee will find this helpful; it sets out the background to our recommendation to BIS that the Groceries Code Adjudicator should be established and our views on whether the draft Bill is consistent with our recommendation.

In summary the submission states that:

—  The Competition Commission (CC) investigated competition in the UK groceries market in an inquiry that took place between May 2006 and April 2008;

—  The CC found that, in many important respects, competition in the UK groceries industry was effective, delivering good outcomes for consumers;

—  However the CC also found that certain grocery retailers' adoption of certain supply chain practices, and in particular the transfer of excessive risk and unexpected costs to suppliers, was a feature of the market that would, if un-checked, have an adverse effect on suppliers' willingness to invest in new capacity, products and production processes, and would therefore ultimately have a detrimental impact on consumers;

—  In order to remedy this feature, the CC decided to expand the scope and application of the existing Supplier Code of Practice (SCOP) and increase its coverage, establishing a new Grocery Suppliers Code of Practice (GSCOP);

—  It also decided that a Groceries Code Ombudsman (now Adjudicator) (GCA) should be established to monitor and enforce the GSCOP and to resolve disputes between retailers and suppliers under it;

—  The draft GCA Bill presented to Parliament in May 2011 is consistent with the recommendations in the CC's Groceries Report;

—  In two respects (the powers to impose financial penalties and to adjust the formula according to which grocery retailers contribute to the costs of the adjudicator) the draft Bill grants powers to the GCA only subject to the making of orders by the Secretary of State.

The CC welcomes the draft Bill.

We would be happy to provide any further clarification you require either on the points made in the submission or on our report on the Groceries Market Investigation.

SUBMISSION

This submission provides an overview of the key findings and actions taken by the Competition Commission to remedy the adverse effect on competition found in the groceries supply chain. The findings of the investigation have been discussed in detail in our final report.[1] Further information can be provided if the Committee would find it helpful.

BACKGROUND

The Competition Commission (CC) investigated competition in the UK groceries market in a detailed inquiry that took place between May 2006 and April 2008.[2],[3] The investigation examined in detail the status of competition in the market. It received over 700 submissions from grocery retailers and others, held 80 hearings, conducted numerous site visits, and held round-table discussions with food and drink manufacturers, primary producers (such as farmers) and academics to discuss the issues. We also commissioned surveys, issued questionnaires and examined relevant industry publications and databases.

The investigation, as with all CC investigations, was conducted in a transparent manner. Many of the submissions were posted in non confidential versions on our website[4] (respecting commercial confidentiality and the wishes of some suppliers, farmers and grocers who were concerned about the reaction of retailers if their identities became known). A large amount of evidence was published in the form of working papers and interim reports, to give interested parties the opportunity to respond to our interim findings, before our final report was published in April 2008.

FINDINGS OF THE INVESTIGATION

In a market investigation the CC is required under the Enterprise Act 2002[5] to identify whether there are features of a market under investigation that prevent, restrict or distort competition in connection with the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom ("an adverse effect on competition" (AEC)).

In the groceries investigation we found that, in many important respects, competition in the UK groceries industry was effective, delivering good outcomes for consumers.[6] Many concerns that were raised with us, after thorough investigation, were found not to have an adverse effect on competition. However we concluded that there were some features of the market that caused adverse effects on competition. One of these features concerned the groceries supply chain.

We considered a range of evidence concerning the groceries supply chain, including a survey of suppliers, evidence gathered directly from suppliers and their associations, a review of emails between two grocery retailers and their suppliers over a six week period and the analysis of profitability along the entire supply chain for certain products. Details of the CC's assessment and findings are given in section 9 of our report.

The investigation found that the exercise of buyer power by certain grocery retailers in relation to their suppliers of groceries through the adoption of certain supply chain practices, and in particular the transfer of excessive risk and unexpected costs by grocery retailers to their suppliers, was a feature of the market that would, if unchecked, have an adverse effect on suppliers' willingness to invest in new capacity, products and production process. We considered that this would ultimately have a detrimental impact on consumers.

REMEDIES

If the CC finds an AEC we must decide whether action should be taken by the CC, and/or whether we should recommend that others take action, to remedy, mitigate or prevent the AEC or any detrimental effect on customers. In choosing appropriate remedial action, the CC has a statutory obligation to achieve as comprehensive a solution as is reasonable and practicable, while also having regard to the principle of proportionality and the desirability of minimising implementation costs. Remedies for the AEC found in the grocery supply chain are discussed in section 11 of our report.[7] We proposed two remedies, the GSCOP and the Groceries Code Adjudicator (Ombudsman). The remedies are discussed below.

THE GSCOP

The first remedy was to expand the scope and application of the existing Supplier Code of Practice (SCOP),that had been implemented following the 2000 investigation. The CC found that while the SCOP was effective at regulating some retailer-supplier practices it had not prevented the transfer of excessive risks and unexpected costs to suppliers (paragraph 11.280) because the SCOP contained a number of uncertain terms, in particular a "reasonableness" standard, that made some aspects of it unclear. However the CC also found evidence that the SCOP was having an effect, and that retailers not covered by the SCOP had sometimes imposed trading conditions that were worse than those of retailers covered by the SCOP. The CC decided to tighten the provisions of the SCOP, (via a new Code of Practice (the GSCOP)), to prohibit the harmful practices identified, particularly retrospective changes in terms of supply. The CC also decided to increase the coverage of the GSCOP to apply to more grocery retailers. The coverage of the GSCOP was extended to apply to all retailers with grocery sales of over £1 billion (ten retailers in total). After an extensive process of consultation the Groceries (Supply Chain Practices) Market Investigation Order, which incorporates the GSCOP, came into force in February 2010.[8]

The GSCOP covers dealings between grocery retailers and their direct suppliers. In most cases primary producers supply intermediaries and processors and do not have a direct trading relationship with the grocery retailer. Instead the intermediaries and processors have the direct trading relationship. During the investigation we received a number of complaints from indirect suppliers to the grocery retailers. The CC did not have the power to extend the GSCOP to cover primary producers because primary producers (such as farmers) were not part of the market referred to the CC for investigation.[9] The CC noted however that pressure from retailers may be driving the behaviour of intermediaries towards their suppliers and the GSCOP may help to alleviate problems experienced by primary producers.[10] In addition the Groceries Code Adjudicator (see below) would be able to take account of complaints from primary producers and, if appropriate, launch an investigation. However the CC suggested that if it subsequently appeared that, despite the operation of the GSCOP (and the GCA), there continued to be a problem to address, Defra and BIS should consider the introduction of appropriate measures, including the extension of the GSCOP and the role of the Adjudicator or the introduction of a similar, complementary code to cover intermediaries and primary producers.

The OFT is responsible for monitoring and enforcing compliance with the Order. The main requirements of the Order are:

—  to ensure retailers incorporate the GSCOP into supply agreements;

—  to require retailers to train staff on the requirements of the Order and GSCOP;

—  to appoint an in-house compliance officer; and

—  to deliver an annual compliance report to the OFT, approved by the chair of the retailer's audit committee and to publish a summary in the retailer's annual report.

The process for resolving disputes is also set out in the Order. Disputes under the GSCOP would be arbitrated by the GCA or, if the GCA was not established, by an external body with expertise in dispute resolution.

THE GROCERIES CODE ADJUDICATOR (OMBUDSMAN)

Many suppliers had complained that the arrangements in place for monitoring and enforcing the existing SCOP were inadequate. They were concerned (smaller suppliers especially) that if they complained their identity would become known to the retailer and they would suffer commercial consequences. Suppliers were also concerned about the independence of the dispute resolution process in the SCOP and about the risk of being delisted by the retailer.[11] The CC decided by a majority of five to one[12] that a Groceries Code Adjudicator (GCA) should be established to monitor and enforce the GSCOP and to resolve disputes between retailers and suppliers under the GSCOP.[13] The GCA was identified as a necessary part of ensuring the GSCOP's effectiveness.[14] It would be a dedicated body with industry experience, which would build working relationships with suppliers, trade associations and retailers.[15]

The GCA would monitor retailer supply chain practices. There is currently no government or consumer organization that has the resources and responsibility to review the practices to be regulated by the GSCOP in an active manner. A dedicated GCA would develop knowledge and understanding of complex retailer/supplier relationships. It would provide guidance on the GSCOP and, where necessary, impose sanctions where breaches of the GSCOP had a negative effect on suppliers that may harm consumers.

Several retailers suggested that the GCA was not necessary as this role could be undertaken by the OFT. However the CC, the OFT and a large number of supplier groups did not think that this was desirable. The OFT would remain responsible for ensuring the retailers complied with the Order, but there was a clear need for a more focused and specific body to monitor and enforce the GSCOP. The CC envisages that the GCA would have significant groceries industry experience which would enable it to address specific problems more effectively.

The CC recognised that relying on disputes alone as the basis for the monitoring and enforcement of the GSCOP would undermine its effectiveness as a remedy because, in order to resolve a dispute, the grocery retailer would need to be told the identity of the supplier bringing the dispute. The CC believed that the active investigation of practices by the GCA would be critical to the success of the GSCOP. Such investigations would provide a basis for breaches of the GSCOP to be identified without revealing the identity of particular suppliers, and without the implication that any particular supplier had complained. Complaints could be received by the GCA on a confidential basis, as a form of information-gathering. A single complaint may not result in any action other than its being collected and verified. Once the GCA had sufficient information—for example, to spot a pattern of behaviour among retailers or areas of concern within a particular retailer's buying practices—it could decide to open an investigation with the purpose of understanding the pattern of behaviour (rather than investigating the individual complaints).

In order to increase transparency with respect to supply chain practices,[16] the CC decided that primary producers and other suppliers to intermediaries and processors should also be permitted to make complaints to the GCA about alleged breaches of the GSCOP.

Although the CC was able to implement the GSCOP it did not have the statutory power to create the GCA by means of an Order. Therefore the CC sought to agree undertakings with the ten largest grocery retailers to establish the GCA. Unfortunately informal and formal consultations made it clear that it would not be possible to obtain suitable undertakings from the ten retailers. This possibility was envisaged in our report, which recommended that if the CC was unable to agree undertakings BIS should take the necessary steps to create the GCA.[17] The CC recognized that it did not have the power to require financial penalties to be levied through undertakings but it considered financial penalties would be beneficial to enforce the GSCOP. The report stated that if BIS were required to create the GCA the GCA should be given the powers to impose monetary penalties on retailers in respect of breaches of the GSCOP where there was strong and convincing evidence that the retailer had breached the GSCOP.[18] A formal recommendation was made to BIS on 4 August 2009 to take the steps necessary to create an effective GCA as soon as possible.[19]

THE DRAFT GCA BILL

The draft GCA Bill presented to Parliament in May 2011 is consistent with the CC's recommendation in the Groceries Report. In particular we make the following comments:

INVESTIGATIONS

We note that the GCA is able to receive complaints from direct and indirect suppliers, as envisaged by the report.

FINANCIAL PENALTIES

The CC recommended that if BIS introduced legislation to provide for the GCA then the GCA should have the power to impose financial penalties. The draft bill envisages the possibility of financial penalties being imposed. However, an Order made by the Secretary of State authorising the GCA to do so would have to be in force, and the making of such an order would be conditional upon the Secretary of State reaching the view that the Adjudicator's other powers to make recommendations or require information to be published were inadequate. It would be helpful to know the circumstances in which an order enabling financial penalties to be levied would be made. We note the explanatory notes state that the authorisation to impose financial penalties would be given generally, not on a case by case basis, which seems the right approach.

RECOVERY OF INVESTIGATION COSTS

The CC stated in paragraph 11.415 of the report that it expected the costs incurred by the GCA to be met by the grocery retailers subject to the GSCOP. In the draft undertakings that the CC sought to agree with the ten largest grocery retailers it was envisaged that a formula would be used to recover costs from the grocery retailers. The formula related the amount to be paid by each grocery retailer to its groceries turnover, and various indices related to the number of complaints and investigations concerning the grocery retailer.

We note the draft Bill envisages the GCA may require large retailers to pay a levy towards the GCA's expenses. The draft Bill states the levy would be a flat levy applied to each retailer unless an order from the Secretary of State was in force conferring power on the GCA to require large retailers to pay different amounts based on the time and expense the GCA expects to incur in dealing with matters relating to each retailer. We also note that the draft Bill states that the GCA may require a large retailer to pay some or all of the costs of an investigation, and that if the GCA has a surplus it may repay some or all of the surplus to the large retailers. If it is envisaged that the amounts recovered from a retailer in relation to a specific investigation would count towards the surplus, that would be provide a means of making the amounts charged to each retailer even more reflective of the time and expense the GCA incurs in dealing with matters relating to that retailer.

SUMMARY

The CC welcomes the draft Bill which seeks to give effect to its 2009 recommendation.

10 June 2011


1   http://www.competition-commission.org.uk/rep_pub/reports/2008/538grocery.htm Back

2   "Groceries" meant food, pet food, drinks (alcoholic and non-alcoholic), cleaning products, toiletries and household goods but excluded other products such as petrol, clothing, white and brown goods and tobacco. Back

3   The CC had also investigated the market for the supply of groceries from Supermarkets in 2000. One of the remedies from this investigation was the Supplier Code of Practice (SCOP) which applied to the dealings of the four largest grocery retailers with their suppliers and aimed to ensure that buyer power was not being exploited. Back

4   The groceries investigation homepage can be accessed at http://www.competition-commission.org.uk/inquiries/ref2006/grocery/index.htm Back

5   s134 Back

6   See section 10 of the groceries report for details of the findings and features found in the investigation. Back

7   Paragraphs 11.269 to 11.376 Back

8   The Groceries (supply chain practices) market investigation order 2009 came into force on 4 February 2010
see http://www.competition-commission.org.uk/inquiries/ref2006/grocery/pdf/revised_gscop_order.pdf 
Back

9   See final report paragraph 11.294. Supply chain practices adopted by intermediaries in their dealings with primary producers could not be described as "features" of the reference market because they do not relate to the structure or conduct of grocery retailers or their customers (see paragraph 9.14). It was therefore not legitimate for the CC to take remedial action (including a formal recommendation) as part of the current market investigation to address these practices. Back

10   Paragraphs 11.294-11.297 and 11.363. Back

11   It is notable that during the life of the SCOP only 17 complaints were made. This compares with some 380 complaints from suppliers or supplier groups that the CC received during the market investigation. Back

12   One member of the Group (Professor Lyons), while supporting the AEC finding and the strengthening of the GSCOP, dissented from the strong preference of other five members to appoint an Ombudsman independent of the OFT. This is explained in paragraph 11.347 of the report.  Back

13   The CC used the term Ombudsman for what is now the Groceries Code Adjudicator. Back

14   Paragraphs 11.337-11.347. Back

15   Paragraph 11.337. Back

16   The evidence we found suggested that it is not uncommon for processors and other intermediaries, in discussions with their suppliers (including primary producers), to attribute particular supply chain practices to direct intervention or pressure placed on the processor or intermediary by grocery retailers. We have also been told by grocery retailers that, in many cases, this attribution is incorrect, and that the supply chain practices are in fact instigated unilaterally by the processor or intermediary, with no input from the retailer (see paragraph 11.363). Back

17   Paragraph 11.343. Back

18   Paragraphs 11.371-11.372. Back

19   http://www.competition-commission.org.uk/inquiries/ref2006/grocery/pdf/gscop_2_bis_letter.pdf Back


 
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Prepared 28 July 2011