Supermarket Sweep

One of the odder parts of yesterday’s Queen’s Speech was the announcement of the Groceries Code Adjudicator Bill. This was odd because it is the sort of Bill that normally loses out in the annual Cabinet bunfight over which department’s Bills will get introduced in that session of Parliament. It is as far from being a populist crowd-pleaser as you can get in legislative terms.

What is the Groceries Code Adjudicator?

The big supermarkets are a constant target for anti-capitalist and consumer ire. If it isn’t complaints about Tesco using “slave labour” by signing up for the government’s work experience programme for the long term unemployed, it is anger over how big out of town stores kill off small shops on High Streets. The latter was the motivation behind the campaign and successful judicial review proceedings by the Association of Convenience Stores to get the Office of Fair Trading (OFT) and Competition Commission (CC) to investigate the Groceries market in 2006 after the OFT declined to conduct a new investigation following the CC’s 2000 investigation.

Another of the items on the charge-sheet is how the big supermarkets can use their strength to oppress their suppliers. Common practices include(d) retrospectively unilaterally changing agreed supply terms (typically by reducing the agreed prices to cover increases in the supermarkets’ transport costs) and by charging for promotional activity. It is this which the Bill is intended to address.

One of the remedies recommended by the CC in the 2006-09 Groceries Market Investigation was the establishment of the Groceries Supply Code of Practice (GSCOP) to regulate disputes between the large supermarkets (with turnovers in the UK of over £1bn) and their suppliers. It was hoped by the CC that the supermarkets would voluntarily accept the establishment of an adjudicator for such disputes but some did not. So the government consulted on whether to bring in the legislation which would be needed to give effect to the CC’s recommendation. This process started under the last government but did not complete until August 2010, with a recommendation to bring in suitable legislation.

Why is it odd?

The oddest thing is that it is unusual for governments actually to bring in primary legislation after it is recommended by the CC. Where the CC proposes a remedy requiring primary legislation the expectation is usually that it will be very unlikely to happen if for no other reason than that the legislative timetable is always busy with the government’s own priorities. This is likely in part to be behind the supermarkets’ recalcitrance over voluntarily accepting the creation of a non-statutory adjudicator of the GSCOP. The relatively low likelihood of the government in 2008-9 bringing in legislation to add costs to the groceries supply chain at a time of economic crisis, rising unemployment and general tightening of consumer demand and spending made it easier for the supermarkets to resist an enforcement mechanism for the GSCOP. It is also odd because, despite being not a partisan piece of legislation and having its origins in the implementation of Labour’s competition law regime it wasn’t one of the measures which Ed Miliband agreed to support in the Queen’s Speech debate.

So why now?

It is difficult to find non-cynical reasons for the timing of the Bill. It might be that Ed Miliband is right that the government simply has run out of ideas for the sorts of legislation which are needed now (even though, for example, his criticisms about inaction on utilities pricing could get addressed in the Enterprise and Regulatory Reform Bill being brought by the Department of Business Skills and Innovation (BIS) and other measures to promote growth would not necessarily require primary legislation, legislation having been somewhat fetishised as a panacea by Labour in government). Scheduling the Bill takes up time which might otherwise have been taken up with more politically embarrassing Bills like one regulating lobbying.

Giving Vince Cable an additional, relatively uncontroversial Bill to see through Parliament also helps the Coalition to show that LibDem ministers are doing a fair share of the legislative work of government while diverting him from thinking or speaking too much about broader strategy in inconvenient ways.

There may also be some political advantage away from the Westminster Village in the substance of the Bill. The Association of Convenience Stores has traditionally leaned towards supporting the Conservatives – its members are by definition small businessmen (one can imagine Margaret Thatcher’s father, the grocer Alderman Roberts, being a stalwart). From my brief stint in BIS’s predecessor during the Major government, I remember that both Michael Heseltine and his junior competition minister put a great deal of weight on the opinions of people like the ACS. The suppliers who are intended to gain the most by the operation of the Adjudicator are likely to include farmers and again, this plays to a natural Conservative constituency in their many rural seats.

On a more principled level, it has looked like the GSCOP has been very lightly used, at least in part, possibly, because of the fear of commercial reprisals. The terror for any supplier to the supermarkets is delisting and switching to alternative suppliers. The CC is nothing if not thorough and bases its recommendations on robust econometric research and analysis. My personal experience of advising retailers and food suppliers is that the CC’s findings are far from fanciful. When even large suppliers are wary of the power of their supermarket customers there’s clearly a problem. Protecting suppliers was also unlikely to happen through ordinary market activities – the supermarkets and their suppliers got burnt by large cartel fines for attempting to maintain supplier pricing in the milk and cheese markets.

By taking the unusual step of bringing quick primary legislation in to implement a CC recommendation, the Bill also strengthens the market investigation regime and puts businesses which are being investigated under it on notice that they have to plan for the realistic possibility of legislative remedies as well as the more usual behavioural ones. The major institutional reform in the Enterprise and Regulatory Reform Bill is the merging of the OFT and CC into a new Competition and Markets Authority (CMA). Showing that the CMA will have teeth may have wide-reaching consequences for the promotion of competition.

Ironically, if the Adjudicator is used regularly and protects suppliers from abuses of supermarkets’ market power, the Bill may end up being redistributive in effect. Consumers are, as a result of the broader economic problems they and the country face, increasingly demanding better value from the supermarkets. This has meant that the supermarkets have had to focus even harder than ever on keeping prices as low as they can and competing aggressively with one another (even I have switched from Sainsburys to Morrisons for the main weekly shop and Sainsburys have been better at coping with the recession than Tesco, the market leader). So, the fear that the active use and enforcement of the GSCOP may result in higher supermarket prices may be misplaced. Instead, the supermarkets today may be forced to swallow the costs of treating suppliers better rather than passing them on to consumers. Improving the profitability of food suppliers may provide an economic boost to rural areas. However, this might ultimately lead to the convenience stores losing out as supplier prices rise (they aren’t going to get better prices than the supermarkets) while retail prices remain low, squeezing their margins. That would be an interesting unintended consequence of the ACS’s battle to get the OFT and CC to look at the sector six years ago!


2 thoughts on “Supermarket Sweep

  1. Pingback: Milk, Milk, Lemonade… | botzarelli

  2. Pingback: What’s the Big Idea? | botzarelli

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s