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 informationfor
example, to spot a pattern of behaviour among retailers or areas
of concern within a particular retailer's buying practicesit
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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