Large retailers will need to tread carefully

Christine Tacon’s appointment earlier this year as the UK’s first Groceries Code Adjudicator was greeted with a weary sigh of relief by many in the food and drink sector. It is hoped that she will finally bring an end to the acrimonious dispute that has raged between the UK’s leading supermarket chains and their suppliers for decades.

The row centres on the claim by suppliers that the supermarkets have used their dominant position in the groceries market to squeeze their margins and insist on one-sided contracts. This prompted a market investigation in 2008 by the Competition Commission, which led to the introduction two years later of the Groceries Supply Code of Practice. The code is intended to remove the distrust that exists between suppliers and the supermarkets by ensuring that the retailers treat their suppliers fairly and lawfully.

The adjudicator sees her job as the promotion of a stronger and more efficient groceries market, delivering better value to consumers. She wants to do this by changing retailers’ behaviour through compliance with the Groceries Code. Will she succeed in her aim and can we expect to see a flood of complaints to the new groceries ombudsman?

The groceries market is worth approximately £150 billion a year in the UK with nearly 100,000 grocery stores nationwide. Together, the five biggest retailers have a market share of about 75 per cent. The code only applies to retailers with turnover above £1bn. Ten supermarkets qualify – Aldi, Asda, Co-operative Group, Iceland, Lidl, Marks & Spencer, Morrisons, Sainsbury, Tesco and Waitrose – and together they will pay an initial levy of £800,000 a year in total to finance the adjudicator.

The code allows suppliers to complain when retailers unilaterally vary supply agreements or force them to make compensation payments for wastage or forecasting mistakes regarding the volume of sales. It outlaws for the most part listing fees and dictating to suppliers which third party service providers to use, such as for haulage and packaging. De-listing of suppliers may only be for genuine commercial reasons. Reasonable notice must be given of de-listing so that there is sufficient time for the suppliers to enter into discussion with the large retailers’ Code Compliance Officer.

Any supplier or retailer may make a complaint to the adjudicator. However, she will only act where the evidence is corroborated. Sanctions available to her for a breach of the code range from issuing advice and making recommendations for change of practice to the imposition of financial penalties.

A consultation on the final guidance for investigations and enforcement – including proposed financial penalties – closed last month and final guidance is due to be published by Christmas Day. No investigations may be launched by the adjudicator until the statutory guidance is in place. The proposed maximum penalty is 1 per cent of UK turnover. This means that retailers run the risk of a maximum financial penalty ranging from £10 million to £500m on the basis of the 2012 UK turnover of the relevant retailer concerned. The financial penalties limit must be approved by the UK parliament before fines can be imposed.

The key test of the success of the Groceries Code and its adjudicator will be their deterrent effect. Will the business relationship between the ten large retailers and their suppliers improve?

It is anticipated that the adjudicator may attract more complaints than the Office of Fair Trading has received in the past under previous schemes because the identity of the complainant will be kept confidential throughout, unless the supplier chooses otherwise. This is designed to remove the risk of retaliation by retailers.

There is an indication in the recent consultation documentation published by the UK government that there have been a number of issues raised by third parties about behaviour outside the spirit of the code, since the adjudicator was appointed in June. Business groups, such as the National Farmers Union, the British Brands Group and the Food and Drink Federation, which supported the establishment of the adjudicator, can be expected to be active, as can their related Scottish bodies.

Once the guidance on investigations and enforcement is finalised before the end of the year, large retailers will need to tread with caution in their dealings with suppliers in Scotland or face the financial consequences when the new groceries watchdog bares her teeth.

• Mark Clough QC is a consultant at Brodies LLP. Christine Tacon CBE is keynote speaker at Brodies’ free food and drink conference in Perth on Friday www.brodies.com/rich-pickings

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