Controversial code

22 February, 2008
Last week's largely predictable Competition Commission report into the power of the supermarkets has done little to please bakery suppliers or retailers, finds Patrick McGuigan
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T he Competition Commission's (CC's) two-year-long investigation into the grocery market inched towards a final conclusion last week, with the publication of its long-awaited final remedies statement. On the surface, bakery suppliers should be happier with the recommendations than high street bakers, who face the daunting prospect of even more supermarkets springing up around them.
The document outlined some of the changes that are now up for consultation and are likely to be recommended in the CC's final report, due in May. Chief among these was the idea of an ombudsman who would supervise the relationship between supermarkets and their suppliers, and would have powers to fine retailers for practices such as aggressive price cutting and 'pay to stay' fees for keeping products on shelves.In addition, the current planning 'needs test', which limits the number of supermarkets built in a particular area based on population numbers, would be scrapped, as would planning guidance designed to limit the building of edge- and out-of-town supermarkets. Instead, a 'competition test' could be brought in, based on how many outlets a retailer already has in a particular area. This would potentially stop the domination of areas by one retailer, but would give the green light to rivals to build more supermarkets.In theory, a grocery ombudsman could offer some form of redress to those bakery suppliers that feel they are being unfairly treated by the supermarkets. The new code would prohibit retrospective changes to agreed terms of supply and also "require retailers to make further improvements to their dealings with suppliers through the appointment of an in-house code compliance officer, keeping better records of contracts with suppliers and automatic notification to suppliers of contractual terms and their right to complain and seek arbitration of disputes," states the report.But Dave Brooks, CEO of cake company Finsbury Food, has little faith in the proposal. "It's a complete irrelevance and waste of time," he said. "First of all, who is going to pay for an ombudsman? If funds are raised from the retailers, they are likely to pass the costs on to us anyway and then there's the question of how independent the ombudsman would actually be."Brooks, who has participated in several consultation meetings with the CC in recent months, also believed the proposal would not improve on the current Supermarkets Code of Practice. "If a supplier is too afraid to use the code or speak directly with its customers, I don't see what difference an ombudsman would make. There is no way a supplier will be able to keep its anonymity if it makes a complaint," he said. "Suppliers need to take responsibility for themselves."== unfair power ==However, another bakery manufacturer told British Baker that he felt retailer power was out of hand. "Some of the demands they make over things such as payment terms and back payments are simply not fair. They regularly refuse to accept price increases despite rocketing ingredients costs," he said. "An ombudsman is a good idea, but he has to be able to take decisions quickly. If he takes six to eight months, the problem will have gone away or the company will have gone bust."An even better way of monitoring the relationship between suppliers and retailers would be to audit a random selection of companies each year, he adds. "Just like with PAYE or VAT, an audit team could go through a sup- pliers' correspondence and contact reports to see whether a business is being put over a barrel. In that way, the manufacturer couldn't be accused of being a whistleblower by the retailer."Andrew Simms, policy director at the New Economic Foundation, an economic think-tank that has long criticised the power of the supermarkets, is equally sceptical about appointing an ombudsman. "Changing the monitoring of the Supermarkets Code of Practice by introducing an independent ombudsman is a good idea, but only if he has the tools to do the job. Coupled with the Commission's other proposals, expecting an ombudsman to control the market- distorting power of the supermarkets is like sending someone to build sea defences with a feather duster. It would be messy, ineffective and potentially dangerous."Meanwhile, Tesco executive director for corporate and legal affairs, Lucy Neville-Rolfe said that introducing a new ombudsman could be bureaucratic and an unnecessary cog in a supply chain. "More red tape is likely to stifle innovation and investment and reduce the ability of retailers and suppliers to work together flexibly to deliver the best deals for customers," she said.== bleak outlook ==The CC's report will do nothing to alleviate the bleak view of the British high street painted by Verdict Research's retail analyst Nick Gladding, who said that, in 2007, high street bakers such as Greggs and independent chains, accoun-ted for just 1.3% of the estimated £118bn grocery market, with supermarkets generally estimated to account for over 75% of sales. For the baker on the high street, the news that supermarkets may be allowed to build even more sites is worrying. As Peter Williams, director of Hatfield, Herts-based high street chain Simmons says: "We offer something the supermarkets don't - fresh food and coffee, made to order. But we certainly don't want to see new supermarkets being encouraged. Shops like Tesco Extra have had an impact and many of the supermarkets now have cafés, which is a concern."However, one ray of hope for high street bakers is that the CC recommendations on planning are not guaranteed to be implemented by government. "The CC is looking at this from a free market position, but the government is aware there are concerns about the future of the high street. For that reason, the government may reject the planning proposals," added Gladding.At the British Shops and Stores Association, director Bob Jarrett called for issues such as small business rate relief to be addressed to really help high street retailers, but these were outside the CC remit.While the supermarkets - bar Tesco on the planning issue - broadly welcomed the bulk of the proposals, Simon Briault at the Federation of Small Businesses hopes the government chooses to ignore the CC proposals on planning. "The idea that improving competition means building more supermarkets is fundamentally wrong. The CC needs to look at the whole market, not just competition between supermarkets. For independent retailers such as bakers, the market is fundamentally unfair. Supermarkets can force down prices with their suppliers, who then look to regain their losses with smaller customers - it's the waterbed effect." n----=== The CC's key recommendations ===? A 'competition test' in planning decisions on large grocery stores and measures to prevent exclusivity arrangements and restrictive covenants being used by retailers to restrict entry by competitors; new stores of 1,000 sq m or more must not command more than 60% local market coverage? The creation of a new strengthened and extended Groceries Supply Code of Practice, extended to include all grocery retailers with a UK turnover greater than £1 billion (covering Waitrose and M&S, previously exempt)? A recommendation to establish an independent ombudsman to oversee and enforce the Code



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