Striking a balance in the food industry
With the promise of a statutory grocery code of practice looking likely to be fulfilled, Fionnuala Carolan examines the differing industry views on this impending code
Print7 September 2011
For as long as there have been supermarkets there have been complaints of abuses of power in the grocery industry. There is currently thought to be a chronic imbalance of power in the sector due to too few retailers and too many small suppliers.
In early July, Minister for Enterprise, Richard Bruton, invited all parties to communicate their views on the proposed statutory code by 1 September. All sectors of the industry should by now have submitted their objections to or concerns about the code which will be considered by Minister Bruton over the coming months. With these submissions in mind, the government hopes to create a statutory code before the new year.
Minister Bruton has said he intends to introduce the Consumer and Competition Bill to the Dáil to give the code the force of law before the end of the year.
By considering views from all angles of the industry, Minister Bruton said he hopes to create a code that will create a framework of fair trading relationships in accordance with the Programme for Government.
Finding a balance will be difficult. Suppliers and retailers have a very fraught relationship and managing to satisfy both sides will take careful consideration.
While the initial thoughts of the government were to create a voluntary code, it has been accepted that this is now not a viable option after the release of a report by John Travers in July.
Minister Bruton said he was disappointed that there has not been agreement on a voluntary code, as he believed that regulation by government should always be a last resort. He said that when the government has to intervene it should be designed to avoid unnecessary costs to both industry and the public.
Retailers have been reluctant to accept that the industry needs a code because they deny that there is an issue and say that a code and ombudsman will simply add more costs.
After years of tension over alleged unethical practices in the sector the code will hopefully go some way towards addressing the imbalance of power in the sector, where the large retailer holds all the power and the primary producer is literally at the bottom of the food chain.
Problems ahead?
If the Competition Authority rules in favour of a Musgrave takeover of Superquinn in October, there will be only three multiples in the country meaning that the retailers will wield even more power than ever. While the supermarkets are always made out to be the perpetrator, it must be said that the supermarkets are under increasing pressure to provide low prices on everyday goods for consumers. However while supermarkets are giving in to consumers’ requests for cheaper goods, suppliers and primary producers say that they are footing the cost of these cuts. When the supermarkets put pressure on the suppliers for discounted prices, the suppliers in turn have to squeeze the farmers for lower prices making it a vicious circle and one that is difficult to break.
The UK code
In the UK new rules to encourage fair dealing between supermarkets and suppliers came into force in February 2010.
Members of the industry are now urging the UK government to adopt amendments to the draft Groceries Code Adjudicator Bill to ensure retailers must comply with the Groceries Supply Code of Practice (GSCOP).
The plea comes after publication of the House of Commons Business and Enterprise Committee’s ‘Time to bring on the referee?’ report on 28 July, whose recommendations included allowing the Groceries Supply Code of Practice ombudsman to impose fines on retailers, rather than merely naming and shaming.
However retailers in the UK also say that an adjudicator will simply push up costs for retailers and ultimately passed on to consumers.
Differing views on the code
Government
Minister for Enterprise, Richard Bruton
Minister Bruton said that regulating the grocery goods sector is a highly contentious area.
“There is an inevitable strain in the relationships between suppliers and retailers. These relationships, I believe, must be built on solid principles of mutual opportunity and fair competition. This does not always happen.”
He said that prices are already too high in the sector and that consumers deserve the chance to buy high quality products at keen prices. “My job in large part is to protect consumers and enhance employment across the entire economy. I will ensure that job-creation and the consumer interest – strongly complimentary goals – are at the forefront of this debate.”
He acknowledged his disappointment on the failure of a voluntary code and said that creating a statutory code was a ‘last resort’ tactic.
“Where regulation is imposed it should be forensically designed to avoid unnecessary costs on consumers and businesses, and I am determined to ensure a fair balance,” said Bruton.
Farmers
IFA president, John Bryan
IFA President John Bryan has long been lamenting the lack of equality in the food chain. He believes that the primary producer is receiving too small a percentage of what consumers are paying for food and the constant discounting of food is forcing the farmers to sell for below cost price. Bryan spoke to ShelfLife and made the point that if the country wants a sustainable supply of indigenous produce, we are going to have to pay a fair price for it.
The IFA wants the Code of Practice to address the credit terms that retailers impose on suppliers and to reduce the current levels to 21 days.
He said: “The code must address the imbalance of power in the supermarket/supplier/producer relationship and ensure retailers’ actions do not impact unfairly on primary producers through their pricing and purchasing decisions. The code must also prevent below cost selling and predatory pricing practices.”
The IFA president said the retail sector had become concentrated further following the sale of Superquinn. “Assuming the Musgrave offer is approved, the three main players will control nearly 80% of the market. This level of ownership among a small number of retailers could exacerbate the difficulties for the primary producer. Effective legislation, which is properly enforced, could help to allay the concerns of everybody else in the food chain.”
Mr Bryan also wanted to see provisions put in the code whereby suppliers from outside the state are also bound by the regulations in the code.
Supermarkets
The supermarkets claim that food prices are already under considerable pressure from rising global commodity costs and climbing fuel and utility prices.
They also say that the extra costs of dealing with a new administrative body will make it even harder to keep price rises away from shop shelves.
The supermarkets would have been in favour of a voluntary code of practice as opposed to a statutory one and said they would support the process of establishing a voluntary code. Musgrave put out the following statement:
“Musgrave has consistently supported the establishment of a voluntary code which eliminates out of contract unfair and unsustainable business practices targeted at SMEs, be they retailers or suppliers, and has actively and constructively participated in the process led by John Travers. Retailers and suppliers have a shared responsibility in creating and sustaining jobs in this sector and in bringing the most competitive prices to shoppers.”
Suppliers
Food and Drink Industry Ireland (FDII), the IBEC group that represents the food sector suppliers, welcomed the publication of the draft statutory Code of Practice by John Travers.
FDII head of consumer foods, Shane Dempsey said: “The food industry has long sought the introduction of a code of practice in the grocery sector to ensure that Irish consumers can access the range of high quality products, produced by Irish food companies, in convenient locations and at affordable prices. We will engage in the consultation process to ensure that a new code allows producers, suppliers and retailers to get a fair reward for delivering quality products to consumers.”
Shane Dempsey, Head of Consumer Foods, Food and Drink Industry Ireland spoke to ShelfLife about the consultation process
What are your expectations for the impending code of practice? Do you believe it will work?
It’s important to note that the consultation process on the code has been ongoing for nearly three years. This latest stage is to consult on a draft code created by John Travers specifically. He created this code on the basis of discussions he held with industry stakeholders. It represents his attempt to draft a code of practice. We would have our own views on the effectiveness of this code, our own view of what and who any code should cover which we’ll be making known to the minister as part of our submission.
The farmers are still worried about the primary producer getting a fair price for their goods. In your opinion is there sufficient clauses in the code to insure this happens?
Travers code focuses on business practices and behaviour. I presume that the impact of such a code and its clause would have to be carefully analysed to ascertain if it would achieve such a
goal.
Some of the multiples weren’t too enamoured at the prospect of a code. Do you think they will adopt it with ease or can you see teething problems arising?
Retailers don’t acknowledge that any code is necessary. It’s interesting to note that retailers at a European level are engaging with EU commission consultations under the B2B stakeholder forum and have acknowledged there are unfair business practices arising from buying power that need to be addressed.
Considering a voluntary code didn’t work, do you believe that the statutory nature of it will really make a difference to the big supermarkets?
Retailers and suppliers couldn’t agree on a voluntary code in the past. FDII members were prepared to engage in the voluntary process. It’s worth noting that the UK’s statutory code has resulted in retailers putting in place compliance regimes. Irish retailers will no doubt obey any statutory obligations.
Will food suppliers from outside of Ireland also have to operate according to the code?
As envisaged they would.
Who do you think will the code benefit most – consumers or suppliers?
If retailers’ unfair commercial practices ceased the consumer would benefit. Firstly, suppliers could invest in new products to meet consumer demand. Large retailers would have to compete on meeting consumer demand better than their competitors, without the distortion of buyer income.
Main aims of the statutory Code of Practice
:: Outlawing of below cost selling
:: Suppliers not forced to fund retailer promotions
:: Equity in the supply chain so that the primary producer gets a fair price for goods
:: Retailers obliged to release details of profits and turnover in this country
:: A limit on the use of own brand products
:: Confidentiality and anonymity to those who make complaints to initiate investigations
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