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 ( ) 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 : 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 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

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