The Groceries supply code of practice may be extended… but not by much
Tuesday 8th November 2016
The Grocer revealed last month that the Government is to consider extending the role of the Groceries Code Adjudicator, Christine Tacon (the ‘GCA’), to cover a host of food and drink retailers, wholesalers and hospitalities companies.
Apparently, the Department for Business, Energy and Industrial Strategy is set to launch consultation into the role and remit of the GCA, in what The Grocer reports is expected to herald a tidal wave of calls for the GCA’s remit to be extended. It has been suggested that the businesses which may be covered by any extended remit could include Boots, B&M Stores, Holland & Barrett, Ocado, Poundland, wholesaler Booker, food service business Compass, Dunnes and Musgrave.
Pressure has been building for the GCA’s scope to be extended for some time. You can look back at parliamentary discussions in January 2015 and the time of the ‘milk crisis’ to see calls for the GCA’s remit to be increased. At that time it was pointed out that the GCA has no role in influencing prices offered to farmers for milk or other dairy products and the GCA said that her role was not to get involved in the price paid for milk. In any case, many of the complaints related to indirect suppliers not the direct supplier to the retailers.
Parliament made it clear when debating such issues that the GCA’s role would be reviewed in 2016 and it seems that we are edging closer to that point. The NFU has been among those calling for milk and beef to be specifically covered by the GCA and for her role to extend to indirect suppliers.
There is, and has been for some time, mounting pressure to extend the GCA’s remit to cover other businesses who do not traditionally supply groceries. There was a call in January 2016 when Holland & Barrett was accused of squeezing its suppliers for the GCA to cover that business and businesses like it. However, whilst there is scope to extend the remit of the GCA it isn’t likely the GCA’s remit could be extended to cover businesses such as Boots, B&M, Holland & Barrett or Poundland as has been suggested.
To understand why, we must go back to 2006. The Groceries Code Adjudicator was appointed after, in 2006, the Office of Fair Trading referred to the Competition Commission, for an investigation report into the supply of groceries by retailers in the UK. The Competition Commission published a report on the investigation in 2008 and its conclusion was that there was a danger that large grocery retailers were exercising excessive bargaining power and that was likely to have adverse effects on competition and lead to reduced innovation in the supply chain. Ultimately, consumers would get a worse deal in the long run.
That report, which is 266 pages long, was titled ‘The Supply of Groceries in the UK Market Investigation’. It did not look at other sectors, but what it did do was examine a number of different categories of grocery retailers.
There are seven major categories of grocery retailers in the UK;
- Large grocery retailers who have chains throughout Great Britain, such as those covered by the Groceries Supply Code of Practice (GSCOP)
- Regional grocery retailers such as Booths, Dunnes, Proudfoot and regional groups of the Co-Operative
- Symbol retailers such as Premier, Londis, Costcutter and Spar
- Convenience store operators
- Limited discounters who were perceived as Aldi, Lidl and Netto
- Frozen food retailers such as Iceland and Farmfoods
- And, finally, speciality grocery retailers which primarily sell an individual grocery product, such as bakeries, butchers, fishmongers, greengrocers, health food shops and off-licenses
In 2007 large grocery retailers accounted for around 85% of the grocery sales with the largest four retailers, at the time, having around 65% of the total grocery sales. The ‘Big Four’, despite the charge of Aldi and Lidl, currently have 70.2% of the grocery market, according to Kantar.
The Competition Commission analysed each of these categories of grocery retail. It did not extend that investigation beyond those seven grocery retail categories. In other words, it did not look at general merchandise retailers/discount or variety retail and how or whether there is a lessening in competition as a consequence of their market share and/or activities.
What it did find was that while wholesalers do exercise a certain level of buying power and such buying power could have a detrimental effect on suppliers, by diminishing their profitability, they would not necessarily be able to intervene. They said ‘while wholesalers and buying groups may, in certain circumstances, have buying power, the CC does not have the power to make findings in this investigation, or to take remedial action, including formal recommendations in relation to the buying power of wholesalers or buying groups, unless the wholesaler, or the corporate group to which it belongs owns grocery stores’.
The Competition Commission said they cannot look at wholesalers unless they are part of a corporate group which operates grocery stores. In considering whether or not to extend GSCOP to wholesalers who operate grocery stores, the Competition Commission took the view that wholesalers only account for a small proportion of the overall grocery sales through symbol groups and, as a consequence, if GSCOP was applied to wholesalers then they may distort the wholesale market.
Having said all that, 2008 was a very long time ago. Everybody will remember that in May 2015 Booker, the largest British wholesaler, bought Musgrave, the owner of Londis and Budgens. Booker of course already owned Premier and Family Shopper and, as a consequence, there is a good chance its symbol business, together with Budgens, is now generating retail grocery sales of £1bn or more, which is the current threshold to be covered by GSCOP. That technically means the GCA could decide Booker should be covered by GSCOP if, when you look at the numbers, its corporate group is generating £1bn of grocery sales.
But it is not just Booker that could (or may soon) meet that £1bn threshold. Ocado has a turnover in excess of £1bn, although the business probably does not have £1bn worth of grocery retail business because some of its revenue is generated from its deals with Waitrose and Morrisons. Ocado apparently has a buying agreement with Waitrose, which is covered by GSCOP, so it might be that Waitrose exercises most of Ocado’s buying power.
So, aside from Booker and Ocado, I cannot see that the GCA’s remit can be extended to cover anyone else. At the moment, there is a good chance it cannot cover Booker, because of the Competition Commission’s fears applying GSCOP to one wholesaler, and not the others, might distort the market.
The Competition & Markets Authority, which took over from the Competition Commission, has pointed out that extending GSCOP is likely to require a new investigation and, possibly, new law. If that is right, people should bear in mind that GSCOP really started in 1999 when the OFT persuaded the Big Four to sign up to the voluntary, and seemingly insufficient, Supermarkets Code of Practice.
That being the case, it took ten years for GSCOP to be made law and 14 years for the GCA to be established. On that basis, I think Boots, B&M and other can be confident nothing is likely to change quickly. Booker and Ocado on the other hand should be mindful that there is a lot of pressure building for the GCA to have a greater remit and including those businesses might just be feasible.