Unfair commercial practices and retailer buyer power: the UK and EU experience

Rona Bar-Isaac, Melbourne, 1 August 2013

Why the focus on (grocery) retail?

Economically important sector Direct importance to consumers £110.4 billion sales – almost 8% of GDP

High proportion of market in hands of relatively few players Big 4 account for 65% of sales Big 10 account for 85% sales

Relative imbalance between retailers and (most) suppliers

BUT food prices falling

NB: 2008 figures. Today’s figures show higher sales and greater concentration.

Key Strands (UK)

First CC investigation into supermarkets 2000 Led to 2001 Code of Practice

Outcomes of 2008 CC Grocery market investigation GSCOP and Ombudsman Other remedies outside scope of today

Players – OFT, CC, BIS

Why a GSCOP?

A little history Concern about practices employed by retailers with buyer power Identified series of practices that adversely affected competition “a climate of fear” Addressed by way of 2001 Code, applied to big 4

Why revisit? Code flawed in a number of ways

too few retailers covered hard to interpret lacking in binding mechanism to resolve disputes

Widely regarded a failure very few complaints dispute resolution procedure not used no successful enforcement

Why a GSCOP?

CC findings in 2008 Large grocery retailers have buyer power in relation to at least some

suppliers Exercise of buyer power can benefit consumers through lower prices

but can also cause harm where: excessive risks or unexpected costs are transferred by retailers onto

suppliers leading to reduced incentives for investment by suppliers unchecked, consumers would ultimately be harmed by reduced

investment in quality and innovation

Why a GSCOP?

The 2008 answer New GSCOP to remedy flaws of old Code Binding dispute resolution procedure Supported by a dedicated Ombudsman to oversee enforcement

The old Code

Application Four supermarkets Direct supplies to the four

Terms covered: Written terms Retrospective reductions in price Supplier contributions to promotional costs Lump sum payments as condition of supply Tying of third party goods/services

Requirement of “reasonableness” – uncertainty; risk of supermarket-imposed definitions of what reasonable

Dispute resolution – through supermarket offered mediator

The key changes

Increase scope More retailers covered

Improve transparency and certainty Written agreements Prohibit retrospective changes to those agreements

Shift evidential burden Fair dealing provision Revised definition of “require”

Improving dispute resolution procedure

Measures to increase retailer accountability

Early verdict on GSCOP

Introduction of new trading terms

Untangling “agreements” from other contacts between retailers and suppliers

Increased clarity probably achieved with improved opportunities to spot non-compliance

But at expense of more bureaucracy and rigidity?

What does an Adjudicator add?

Permanent body with responsibility for enforcement of GSCOP

Funded by a levy paid by the designated retailers

The Adjudicator can: Arbitrate disputes between retailers and suppliers Investigate confidential complaints from direct and indirect suppliers, whether

in the UK or overseas, and from third parties Issue recommendations to resolve differences in interpretation Hold to account retailers who break the rules by-

‘naming and shaming’ imposing a fine (how to be determined and maximum fine still to be established)

Appeals to the High Court

Adjudicator appointment

Christine Tacon appointed Adjudicator- Designate Jan 2013 Confirmed in position with passing of Grocery Code Adjudicator Act, April 2013 Four year appointment Industry roles in food and farming (including fast moving consumer goods and farm

supply businesses) and regulated sector experience £800k budget, levy funded Staff of four

Grocery Code Adjudicator Act 2013 in force from June

Guidance on the exercise of adjudicator powers to be published (by end of year) To cover investigations process and use of sanctions No investigations prior to publication

Key strands (EU)

Information gathering Food prices monitoring

Principles of Good Practice

Green Paper on unfair commercial practices

Players DGs (Internal Market and Services, Health and Consumer Policy, Agricultural

and Rural Development, Competition) HLG (2008-2010) followed by HLF (Commissioners, Ministers, industry

stakeholders and citizens’ groups) European Parliament

Information gathering

2007 Single Market Review

Permanent food prices monitoring tool established following Commission Communication on Food Prices 2008

DG Competition information gathering on supply chain practices 2009

HLG Report on competitiveness issues in agro-food sector 2009

Commission Communication 2009 on A Better Functioning Food Supply Chain in Europe (with Staff Working Paper)

Information gathering – ECN report 2012

Response to 2009 Commission Communication and pressure from EU Parliament

Comprehensive overview of EU food sector and activities of Commission and NCAs

2004-2011: 180 antitrust cases; 1,300 mergers, 100 market/monitoring exercises across EU relating to food sector

e.g. in the UK CC 2008 report identified the degree of interaction among suppliers as a cause for

concern (CC report 8.18) and that the “conditions necessary for tacit coordination to arise and be sustainable…may be present in UK grocery retailing” (CC report, 8.40)

OFT enforcement actions against alleged information exchange, RPM and price-fixing – dairy, tobacco, branded goods

Information gathering – ECN report 2012

Shortcomings in the sector the result of many factors: Structural/cyclical price developments; Structural shortcomings (small-scale agriculture); High concentration in retail; Imbalances in bargaining power

Bargaining power imbalances more appropriately addressed through action on unfair trading laws and codes of conduct/best practices

Information gathering - DG Competition

DG Competition study on choice and innovation in the food sector

Launched 2013; report at end of the year Examining the effects of concentration in retail food markets and use

of own brand products To inform the Commission’s work on unfair trading practices

Unfair trading practices

UTPs ongoing issue for discussion at EU and national level

Divergent approaches to UTPs across EU; no specific EU-level framework for regulating B2B practices

Green Paper consultation published January 2013 on supply chain practices

One of 11 actions in 2013 European Retail Action Plan Key principles of Plan include consumer empowerment, improved

market access, fairer treading relationships

Follows work on food sector but cross-sectoral in scope

Unfair trading practices – Green Paper

UTPs: Practices that grossly deviate from good commercial practice and are

contrary to good faith and fair dealing Main types:

ambiguous contract terms lack of written contract retroactive contract changes unfair transfer of commercial risk unfair use of information unfair termination territorial supply constraints

Unfair trading practices – Green Paper

Seeks views on:Types of UTPs, their extent and impactHow to address them – prohibition/case-by-case

analysis?EnforcementWhether further action required at EU level

Consultation closed April 2013 – awaiting Commission response

What have we learnt?

Consistent findings of the existence and exercise of buyer power by large retailers in dealings with (small) suppliers

The evidence seems to point to that power leading to reduced quality, choice and innovation in the medium term

In terms of remedy, the enforcement framework to back a Code is as important as the content of the Code

The next 2-3 years are key