Supermarkets must treat suppliers more carefully, rules Competition Commission

The Commission found that the dominance of the groceries market by the four biggest supermarkets is not harming consumers, but they might be harming their suppliers. It also found that there was not enough competition in some markets.

The Competition Commission (CC) has conducted a full investigation into the grocery market after complaints that the four biggest chains – Tesco, Asda, Sainsbury and Morrisons – controlled too much of the food market.

The report found that there was enough competition to create benefit for consumers. "In many important respects, consumers are receiving the benefits of competition, such as value, choice, innovation and convenience," said Peter Freeman, chairman of the Inquiry Group and of the CC. "But we need to take appropriate action to address those areas where they could be served better and where their interests could be damaged in future."

Though consumers have benefited from low prices this has sometimes come at the expense of suppliers to the supermarkets who suffer because of the huge buying power of very big retailers, said the report.

"Some aspects of the way retailers deal with their suppliers could, if left unchecked, also harm consumers," said Freeman.

The Commission has invented a code of practice, the Groceries Supply Code of Practice (GSCOP) for retailers whose revenues are over £1 billion a year. They must comply with an over-arching requirement that they deal fairly with suppliers, and must hire in-house compliance officers with the new Code who must report either to the audit committee or a non-executive director of the company.

Other requirements under the GSCOP will be that retailers will have to enter binding arbitration to resolve supplier disputes and keep written supplier records which must be supplied to the ombudsman who will be appointed to monitor GSCOP under the new proposals.

The CC has called on retailers themselves to organise and appoint an ombudsman but has told the Department for Business, Enterprise and Regulatory Reform (BERR) that it should create an ombudsman if the companies themselves do not do so quickly enough.

The report is largely positive for the big retailers, said Giles Warrington, a competition law expert with Pinsent Masons, the law firm behind OUT-LAW.COM, because it rejects the fiercest criticisms labeled at the four biggest chains.

"The CC has largely given the sector  a clean bill of health," said Warrington. "The CC has rejected many of the arguments raised by third parties, in particular the Association of Convenience Stores (ACS). In particular, the ACS and others argued that the 'big four' multiples are able to exercise their bargaining power with suppliers to obtain significantly lower prices than other retailers and wholesalers."

"[The ACS said that] Tesco's market position was so strong as to be anti-competitive. Given that the reference to the CC by the OFT in the first place came about largely as a result of an appeal by the ACS against the OFT, it will be interesting to see whether the ACS seeks to appeal the CC's decision," he said

As well as creating new rules governing the supermarkets' relationships with suppliers, the CC identified some market problems which gave large retailers too much power. It ordered retailers to release property developers from 30 identified covenants, essentially guarantees that it will be the only grocery retailer in a certain commercial development. It also ordered another 30 to last no more than five more years.

The CC also recommended to local planning authorities that they do not allow the granting of exclusivity for more than five years in developments. It also recommended that there be a 'competition test' for applications for planning permission for new development which would involve the Office of Fair Trading in planning decisions.

The CC said that the picture for smaller retailers was not as gloomy as some had made out. "Whilst we have been sympathetic to those finding themselves under pressure in this market, particularly independent retailers, this does not mean that competition is not working well – it is often the effects of rivalry between retailers which benefit the consumer," said Freeman..

"Competing with large retailers is difficult but our evidence does not show that independent retailers or the wholesalers that supply them are in terminal decline. It is not impossible for them to compete and in the current economic climate the benefits of vigorous competition are as relevant as ever," he said.