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

1. Unfair commercial practices and retailer buyer power: the UK and EU experience Rona Bar-Isaac, Melbourne, 1 August 2013

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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?

10. 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

11. 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

12. 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

13. 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)

14. 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

15. 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

16. 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

17. 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

18. 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

19. Unfair trading practices – Green Paper • Seeks views on: • Types of UTPs, their extent and impact • How to address them – prohibition/case-by-case analysis? • Enforcement • Whether further action required at EU level • Consultation closed April 2013 – awaiting Commission response

20. 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