Supermarket Code of Practice

HC Deb 16 March 2004 vol 419 cc23-31WH

11 am

Andrew George (St. Ives)(LD)

I am pleased to have secured this debate, and delighted to see the Minister. I have seen him in this position before, when he was goalkeeping behind me for the House of Commons football team, so I know that he has a safe pair of hands to assist him in responding on this important matter.

Today is an important day for me not only because of this debate: in the Lower Waiting Hall, there is an exhibition of Cornish cuisine, and one point that I want to make relates to the importance of farmers co-operating and coming together to promote a brand, and of achieving vertical integration through the supply chain.

Let me give the background to this short debate on the supermarket code of practice. The Select Committee on Environment, Food and Rural Affairs, both in the cross-party report on gangmasters that it published last September and last December, has identified that supermarkets can dictate market conditions. On 10 October 2000, the Competition Commission produced a report identifying the fact that supermarkets represented a complex monopoly practice, and proposed that a code of practice be established. After what I believe were a number of drafts, a code was finally published on 31 October 2001. However, according to those involved in the process, particularly from the supplier side, it was a rather watered-down version of the code that was originally proposed by the commission.

The Office of Fair Trading announced in February 2003 that it would review the success of the code's progress, and it published its report only a few weeks ago, on 20 February. What it found was no surprise to people on all sides who had been watching what was happening with the code, including suppliers, who had caused the code to be established, largely through the complaints that they made about their treatment.

The main results of the OFT review were as follows. The code was not working effectively: 80 to 85 per cent. of suppliers who responded to the survey claimed that the code had failed to effect any change in supermarket behaviour, despite the recommendations of the Competition Commission's 2000 report. However, there was no hard evidence that that was the case. Some 73 per cent. of suppliers reported a fear of complaining, which was the main reason for the code's lack of effectiveness. No cases had been brought under the code's mediation process by suppliers claiming a breach of the code. One case was brought, but it related to a contract established before November 2001, which I understood was the start date before which past contracts could not be included, so the code was not used. A number of aspects of the code were criticised, including the rather vague term "reasonableness" and other subjective terminology that was open to wide interpretation.

Rather worryingly, the OFT analysis also included the following statement: We do not believe that there is anything in the changes in the fortunes of UK farmers, especially the amounts they are paid for their produce, which can be linked to the code or the general behaviour of the supermarkets. The review pointed to BSE, foot and mouth disease and the strength of the pound against the euro, rather than farmers' treatment by supermarkets, as largely responsible for farmers' misfortunes. However, farmers' organisations rightly question the assumptions behind the suggested source of their misfortunes. Two of the problems—BSE and foot and mouth disease—affect only red meat consumption and have very little impact on other sectors. Furthermore, fluctuations in the exchange rate have not resulted in fluctuations in price. If the problems had anything to do with the strength of the pound, there would be the same fluctuations in price as there have been in the exchange rate, which has not happened. Supplier organisations strongly believe that consolidation of agriculture downstream has affected the proper operation of the market.

I have read the OFT report and spoken to many farmers and farmers' organisations, and to others working in the supply chain. Many people have provided me with case material, but I could not use it even today for fear that they could be identified and delisted, or lose contracts with buyers in the future. However, one does not have to be Sherlock Holmes to identify serious problems in the way in which the market operates. Farmers face particular challenges. They produce perishable goods, even in the case of livestock that are ready for slaughter. Growers produce goods that are ready for harvest at very particular times. They depend on their buyers playing ball and sticking to their contracts and the nature of those contracts.

Mr. Elfyn Llwyd (Meirionnydd Nant Conwy)(PC)

I congratulate the hon. Gentleman on raising this issue.

The hon. Gentleman describes the worst effects of an unbridled monopoly. Is he aware of the report published recently by the New Economics Foundation, which states: 270 jobs are lost each time a supermarket opens"? Worse still, it states that 50 farmers and small traders are forced out of business every week by the operation of the big four.

Andrew George:

I am grateful for that intervention. I was not aware of that finding, although I am not surprised to hear it. The main purpose of the debate is to examine the effect on the supplier side, however, and not simply the impact that supermarket chains undoubtedly have on other traders in the environs of sites where they establish new supermarkets. I do not doubt that some studies have identified a net job loss rather than a net job gain in the wider economy, and that supermarkets would want to debate that issue.

My point is that supermarket practices place farmers in a particularly difficult situation. For example, farmers and growers have to buy the packaging materials that supermarkets use, and often they cannot do so at cost price. Many farmers know full well that they are being charged for packaging that may simply be a plastic bag in which to put broccoli or a cauliflower, and that the supermarkets are charging them more than the cost price of those materials as a way of recouping money. Payments are also often delayed. On 17 January 2003, theFinancial Times published a study into supermarket power. On page 17, the study said that in 2001, Tesco, Asda and Sainsbury's alone extracted an additional £623 million from suppliers through longer credit terms. Supermarkets are obviously in a strong position to negotiate better credit terms.

Retrospective conditions are often added to contracts. Suppliers often do not even see their contracts. Suppliers who want to keep their contract may have to make unexpected contributions to promotions of the sort that I am sure we have all seen, such as "Buy one, get one free" or "Buy one, get one at half price." Farmers often make the major contribution enabling supermarkets to make such offers. Farmers might also have to deal with consumer complaints and with recompensing the consumer. It is sometimes unclear, particularly in the case of perishable goods, whether the cause of the problem lies with the handling and storage arrangements at supermarkets rather than with the farmer who supplied the goods.

There is often a problem with contracts being changed at short notice. Contracts are sometimes ended after the plants are already in the ground or ready for harvest. That happened recently to a supplier not many miles from my constituency. There has also been threatening behaviour.

Mr. Roger Williams (Brecon and Radnorshire)(LD)

Does my hon. Friend agree that not all farmers deal directly with supermarkets? They may deal, for instance, with slaughterhouses that have direct contracts with the supermarkets. Such farmers could be in a weak position because of the monopoly of the supermarket even though they do not deal directly with it.

Andrew George:

My hon. Friend makes a good point. Particularly in the red meat sector, it is noticeable that, with consolidation, some of the sector is growing to such a level that it can negotiate better deals and better contracts with the supermarkets and use its market muscle, but it is true that many farmers supplying to slaughterhouses have to be extremely careful.

In one case, a grower decided to switch his supply to another co-operative that was supplying another supermarket. He received a threatening letter from the original supermarket saying that it would make sure that he never supplied any source that was a source for the other supermarket. It ultimately apologised for the letter and withdrew it, but the fact is that we know that such practices go on. There is a severe fear of de-listing. That happens throughout the food chain; it does not apply only to the suppliers. Other food supply organisations and representatives, some of which are very substantial names and businesses, have raised similar concerns and fears in briefings to me prior to this debate.

The consumer has an important role to play. There is a general impression—indeed, the OFT gives us the same impression—that the consumer is a two-dimensional person who is interested only in price and nothing else. My own impression is that consumers are much more sophisticated. Price is clearly a key determinant, or at least the impression of low price is. Supermarkets often give the impression of low price while in fact people end up spending more than they originally intended. However, price is not the only determinant. It is quite clear from consumer surveys and from the views of consumer-based organisations such as the National Federation of Women's Institutes, which is supporting the need for further intervention in the field, that consumers are interested in other values as well as price, including concerns such as local sourcing, food miles, environmental impact and support for British producers. We have just come out of fair trade fortnight, which identified a great deal of interest across the nation in producers and conditions not only in this country, but in other countries.

I want the Minister to look carefully at the OFT report. The OFT is suggesting that it will undertake further research. Although that is welcome, there is a great deal of frustration: following the original report from the Competition Commission in 2000, the suggestion that we will undertake further research is not good enough. He might consider establishing a post with what could be called a particular function, as a Minister and ministerial discretion can direct action that is more important than research, rather than requiring primary or secondary legislation. Whether we called the holder of such a post a food trade inspector, a watchdog, and ombudsman or whatever, it would be useful to have a clear sense of purpose within the OFT to achieve a number of critical improvements to the way in which the food supply chain operates.

First, the outcome of the OFT report shows the importance of the need for anonymity to overcome the problem of fear. The OFT needs to be proactive, not to react to complaints. It should proactively undertake investigations, possibly on the basis of confidential tip-offs, although often simply by looking at areas of the supply chain where it perceives difficulties. Subjective language such as "reasonableness" should be replaced with more objective language clearly outlining the length at which payments will be received. There needs to be greater transparency in the food chain. Emphasis needs to be placed on the fact that procedures are in conformity with the code, and perhaps the annual accounts of the larger retailers could contain a statement to that effect.

Where a complaint is made, the appointment of a mediator should not be the responsibility of the supermarket; it could perhaps be the responsibility of the OFT, the complainant and the supermarket acting jointly. The bad publicity that would result from the publication of a report's findings would make a big difference to the way in which supermarkets operate. I am suggesting not that the OFT should ensure that reparations and compensation are paid where a problem is found, but simply that it should monitor the payment of reparations and compensation where the report identifies a need.

Therefore, I am not convinced that there is a need for further legislation of any kind, but we must have clear ministerial direction and clear ministerial bottle if we are to take the issue on.

11.16 am

The Parliamentary Under-Secretary of State for Trade and Industry (Mr. Gerry Sutcliffe)

I congratulate the hon. Member for St. Ives (Andrew George) on securing a debate on a subject that is important not only to suppliers, but to supermarkets and consumers. He outlined the case excellently, and I shall try to respond to many of the points that he made. I am also grateful to the hon. Members for Meirionnydd Nant Conwy (Mr. Llwyd) and for Brecon and Radnorshire (Mr. Williams) for their comments. The issues clearly affect all those hon. Members' constituencies, and I acknowledge their work in bringing them to the Government's attention. I say that not least of the hon. Member for St. Ives, with whom I have enjoyed time on the football pitch, as he rightly said. On occasion, we have worked well together and we can perhaps do so now to resolve this issue.

It is important that I explain the background to the current supermarket code of practice before attempting to consider the way forward. In 1999–2000, the supermarket sector was the subject of an extensive investigation by the Competition Commission. The investigation was undertaken in response to a reference made by the OFT under the Fair Trading Act 1973 to consider the existence, or possible existence, of a monopoly over the supply in Great Britain of certain groceries by certain supermarkets. That reference reflected complaints that supermarkets had been placing unreasonable demands on their suppliers. The investigation therefore focused on the supply of groceries, particularly to the UK's four largest supermarkets, which at the time were Tesco, Sainsbury, Safeway and Asda.

It is important to note that the report, which was published in October 2000, concluded that the industry was broadly competitive and that, overall, excessive prices were not being charged and those supermarkets were not earning excessive profits. However, it identified three situations in which competition was distorted and which operated against the public interest. The first concerned the relationships between the largest supermarkets and their suppliers. The commission identified several practices that, when engaged in by the larger supermarkets—those with significant buying power—adversely affected the competitiveness of some of their suppliers. As a result, those suppliers were likely to invest less in new product development, which, in turn, could lead to lower-quality products and less consumer choice.

The commission therefore recommended that a code of practice be drawn up to cover the practices that it had identified and that the code be binding on supermarkets with at least an 8 per cent. share of the market. The four supermarkets that were the subject of the commission's adverse findings were required to give legally binding undertakings under section 88(2) of the Fair Trading Act 1973. The supermarket code of practice, which forms a part of those undertakings, was designed specifically to address the unsatisfactory aspects identified by the commission in the dealings between supermarkets and their suppliers of groceries. In short, it provides for those dealings to take place on a clearer and more predictable basis, and the OFT is empowered to review how the code is working in practice. The October 2000 Competition Commission report identified two other practices whereby competition was distorted and operated against the public interest—selling some frequently purchased products below cost and varying prices in different areas in the light of local competition. The commission concluded that such practices, when carried out by the large supermarkets, contributed to a situation in which the majority of products were not fully exposed to competitive pressure. It considered several remedies, including a ban on below-cost selling, but concluded that such remedies would be disproportionate to the adverse effects found. It therefore decided not to make recommendations in respect of those two practices.

It is important to note that, in looking at below-cost selling, the commission was not concerned about whether the selling price was below the cost of production. Rather, it was concerned about whether products sold by supermarkets were below the price at which the supermarket had purchased them. Even if the commission had decided to recommend a ban on below-cost selling, it would not have prevented supermarkets from paying suppliers less than the cost of production. I hope that I have given hon. Members a better understanding of the background to the code of practice.

I now turn to the legal details. As I explained, the supermarkets' code of practice was drawn up in accordance with a recommendation in the Competition Commission's October 2000 report on supermarkets. It came into force, as the hon. Member for St. Ives said, on 17 March 2002. It was designed to regulate a limited number of practices engaged in by the larger supermarkets that the commission felt distorted competition and operated against the public interest.

The code is legally binding on the supermarkets that were the subject of the commission's adverse finding—those with a market share of 8 per cent. or more at that time. Because Morrisons was not the subject of the Commission's adverse finding, it cannot be bound by the code even after it completes its acquisition of Safeway. However, we understand that Morrisons has indicated to the OFT that it would be prepared to abide by the code on a voluntary basis.

I think that the hon. Gentleman will agree that the code was never intended as a panacea to remedy all the ills that have been found and deal with all the issues that he raised. It is a formal remedy to an adverse finding by the Competition Commission. As such, its scope and application cannot be extended to cover issues or parties that were not the subject of the commission's adverse finding. It does not regulate the base price paid to suppliers for their products, which is a matter for commercial negotiation. Neither could it do so, as that was not an issue on which the commission made an adverse finding.

The OFT is required to review the operation of the code on an annual basis. It published its first review of the operation of the code on 20 February this year. The review found a widespread belief among suppliers that the code was not working properly, as the hon. Gentleman has outlined. However, it found no hard evidence to support allegations that the code had been breached. I recognise his point that it is difficult for suppliers to come forward if they feel that they are going to be in breach of the code. That is where it becomes difficult to obtain the hard evidence that we need to act. Although he must have a heavy case load, if he would like to talk in confidence, I am prepared to meet him following today's debate and consider in detail how we can best pass that concern on to the OFT. I recognise that there is a difficulty.

Andrew George:

I thank the Minister for his offer to meet and I am keen to take it up. Does he accept that, given the nature of the OFT report's findings, which identified a sense of fear among suppliers to the supermarkets, the code cannot carry on as it presently stands? A degree of anonymity is required by anyone attempting to interface with it.

Mr. Sutcliffe:

I recognise the point. I will try to come on to what the OFT is doing and what we need to consider. Outside the official response to its work, I take the issue seriously and will be working on it and looking closely at what the OFT says. That is why I wanted to speak to the hon. Gentleman and other hon. Members who have hard evidence, because we need such evidence to obtain a result.

As part of its review, the OFT sought information from more than 60 trade associations representing the suppliers, as well as other interested suppliers and the supermarkets. I understand that 35 organisations replied, including a few individual grocery suppliers for the regions that we both know well. Although responses came from a small number of organisations, the OFT is confident that the views expressed are broadly representative of grocery suppliers overall. We think that trade associations with which the grocery suppliers have been involved have put the case across.

As the hon. Gentleman said, much of the information that was received was anecdotal and came without hard facts. We want to obtain those facts. The OFT has found it difficult to come to any firm conclusions about how individual supermarkets are operating under the code, and particularly about whether there has been any breach.

It is fair to say, however, that the OFT's consultation exercise has revealed several points. There is a widespread belief among suppliers that the code is not working effectively, and the main reason identified for the perceived lack of effectiveness appears to be a fear of complaining among suppliers, as we have recognised. The OFT has referred to a climate of apprehension among suppliers. That seems to relate to suppliers' fear that they would be de-listed by supermarkets, which the hon. Gentleman mentioned. I ask the suppliers, trade associations and others to work with the OFT to ensure that we have hard facts on which to operate. The OFT noted that no cases had gone to mediation under the code and that the only written complaint concerning an alleged breach related to events that took place before the code came into force.

When supermarkets originally made their undertakings, the OFT encouraged traders to build up dossiers of alleged breaches of the code. We must ensure that we devise a process that will enable complaints to be made. The OFT takes the matter seriously and is examining it in greater detail. It intends to carry out a further audit of the situation, because it recognises that the code of practice is not working effectively. That will be its starting point.

I accept what was said about the speed at which we need to operate because, as the Minister for Employment Relations, Competition and Consumers, I am concerned about the treatment of consumers in relation to some of the issues that have been raised.

The hon. Gentleman raised the question of why there is not an ombudsman, a regulator or someone at the OFT with specific responsibility for this area. I know that a number of people have called for such a post. However, I am not clear what an ombudsman or individual regulator would do that the OFT is not already doing. The OFT has said that it recognises that there is a problem, and the basis for an annual review is in place, although we need to find a better procedure through which individuals can complain and retain their anonymity. The hon. Gentleman is right that there is no need for further legislation or more bureaucrats to look into the matter. As has already been said, the OFT has the power to investigate complaints against supermarkets.

Andrew George:

When the Minister and I meet, perhaps we could explore the matter further. It is clear to me that there are a number of areas in which it would be helpful for the OFT to provide a clear focus for action. It should be proactive in producing and publishing reports, and it should address the issue of anonymity. Such an approach by the OFT would ultimately be in the interests of supermarkets, because it would be good for them to be able to demonstrate greater transparency and to reassure consumers that they are not damaging British producers.

Mr. Sutcliffe:

There is no disagreement between us on the need for the OFT to act or on the need for its action to be based on factual rather than anecdotal evidence. The view that the code is not working effectively should be challenged on the basis of facts. That would make the whole situation transparent, and people would feel that their grievances had been properly examined. I want the OFT to continue to examine the position in the terms raised by the hon. Gentleman, and I also want consumer protection issues to be taken into account.

The hon. Gentleman said that supermarkets play an important role in the UK, and I do not think that the measures that he is asking us to adopt are anti-supermarket. The code was the result of an initial reference by the OFT to the Competition Commission. We need to ensure that the OFT gets things right. If it produces hard evidence, we will act upon it, because it will be in the public interest to do so.

The hon. Gentleman has raised an important issue. I undertake to meet him to discuss how to ensure that factual evidence from suppliers or their trade associations is put before us. I shall continue to work with the OFT to ensure that there is a speedy response to any concerns that are raised, and shall try to get everyone's agreement on how to establish an effective code of practice. I am pleased that Morrisons is prepared to operate the code voluntarily, but we need to re-examine that issue. The hon. Gentleman raised these matters in a spirit of co-operation, and in that spirit, I am sure that we can reach a solution that will allow suppliers and consumers to be protected, while clarifying the supermarkets' position. I congratulate him on raising the issue.

11.29 am

Sitting suspended until Two o'clock.