Towards the end of March 2005 the OFT published its further findings on how supermarkets are complying with the Supermarkets Code of Practice (the Code). The OFT’s report found that generally supermarkets are complying with the Code but it found that the Code is not being used to resolve disputes and that without evidence of disputes regarding the Code it is difficult to assess the Code’s effectiveness.
The Code was introduced following the Competition Commission’s report into supermarkets in 2000, which found that there was significant dissatisfaction with the power supermarkets had over their suppliers. The Code was one of the recommendations in the Competition Commission’s report. It applies to supermarkets having a share of at least 8% of grocery purchases for resale from their stores. ASDA, Sainsbury’s and Tesco are bound to follow it. Morrisons has agreed to be bound by the Code following its acquisition of Safeway.
The OFT is committed to preparing an annual report on how the Code is working. The OFT’s first report, published in February 2004, found a widespread belief among suppliers that the Code was not working effectively but no hard evidence to support this belief. This led to the OFT commissioning a compliance audit of the Code to be undertaken by a third party in order to examine in more depth the level of compliance on the part of supermarkets. The recently published report presents the findings of this compliance audit.
Findings of the compliance audit
The audit involved the examination of a sample of 500 grocery supplier relationships with those supermarkets subject to the Code. The audit found that the supermarkets have mostly complied with the Code. Some limited breaches of the Code were detected but the nature and extent of these breaches did not suggest that non-compliance is widespread.
However, the OFT is still clearly concerned at the behaviour of the supermarkets, and in particular is concerned that the commercial importance of the supermarket relationship to many suppliers is preventing many suppliers from coming forward and making complaints under the Code. The report states “Whatever the audit’s finding on compliance, concerns may legitimately remain about the Code’s effectiveness in addressing the adverse effects identified in the CC’s 2000 report….there is a widespread feeling among suppliers that the concept of ‘reasonableness’ used in many of the Code’s terms, favours the supermarkets by virtue of the suppliers’ dependence on them, and may thus deter suppliers from complaining because they consider there is a limited prospect of it being interpreted in their favour. Together with the reluctance to jeopardise important trading relationships, this may partly explain the absence of complaints.”
Whilst the OFT encouraged suppliers to overcome their fear of complaining about the supermarkets’ conduct, the OFT has invited further comments as to whether the audit portrays an authentic picture of the dealings between suppliers and supermarkets. It has also asked for further evidence on whether the practices prohibited by the Code continue and whether there are other practices which operate and which adversely affect competition.
The OFT welcomed proposals for a voluntary Buyers’ Charter ensuring that supplier-supermarket relations are conducted on a clear and predictable basis but did not go as far as proposing to amend the Code. It stated that amending the Code “would be unlikely to tackle its perceived ineffectiveness and would have legal and practical difficulties” because “the Code has to apply to a vast range of commercial dealings and making it more rigid and prescriptive may stop mutually beneficial arrangements between suppliers and supermarkets” which could harm competition and thereby consumers. The OFT also doubted whether amending the Code would address the root causes of the fear of complaining, namely the inequality of bargaining power between suppliers and the supermarkets.
This report is clearly not the end of the story. Apart from inviting further evidence and comments on the report, the OFT has also invited comments on the wider role of supermarkets and the operation of the market for the supply of groceries. The OFT states that it is now considering whether there are sufficient grounds to make a market investigation reference to the Competition Commission: “It has been suggested that a wide range of competition issues in the grocery market – those issues identified in the CC’s 2000 report which are addressed by the Code, issues identified at the time but not addressed by the Code and any others which may have arisen since – could and should be addressed by means of a market investigation reference to the CC…”.
In addition the OFT has invited comments on the practical effects of the recent structural developments in the grocery sector on competition between grocery retailers and between suppliers, the impact of the supermarkets’ acquisition of convenience stores as well as below-cost selling and price flexing.
The OFT has requested all comments and evidence by 31 May 2005 and will publish its response later this year.
This report and the recent referral by the OFT of the acquisition by Somerfield of 114 stores from Morrisons indicates that the UK grocery sector still remains a focus for the UK competition authorities.
This article first appeared in our Food industry law bulletin May 2005. To view this publication, please click here to open a new window.