Schoosmiths' thoughts on the OFT review of the Supermarket Code of Practice - Report 20.02.04

The Food Club would like to thank Schoosmiths for permission to post these 'thoughts'.  The Food Law Unit at Schoosmiths are the club's legal advisers and they have been members since 1999.  Their web site is www.shoosmiths.co.uk and over the years they have advised and supported a number of our Members.

* The Supermarkets Code was put in place following the Competition Commission (CC) report into supermarkets in 2000.

* The OFT published its initial review of the Code on the 20th February 2004  -- for a full copy visit http://www.oft.gov.uk/News/Press+releases/2004/28-04.htm.  The process took much longer than expected because of the Safeway saga.

SUMMARY

* Suppliers (universally) say the Code is inadequate: it has not improved supermarkets' conduct.

* (A familiar theme) suppliers (large and small) genuinely fear de-listing / sanctions by supermarkets so the review gathered only anecdotal evidence - seemingly not sufficiently specific to identify key specific concerns and develop improvements.

* The OFT will, however, audit the supermarkets' compliance, across a sample of large and small suppliers, and focusing on the areas of largest concern, results will be published by year end.

OUR COMMENT

* As expected, no miracle cure.  Some good news in that the OFT will actively look into supermarkets' conduct rather than sitting back and waiting for complaints which, given the commercial realities, are unlikely to come.  It may make the supermarkets more careful.

* Less good news: while the audits will probably reveal some breaches, the (broad) scope of the "reasonableness" and "suppliers' acceptance" concepts may hide a multitude of sins, and the supermarkets may be able to use this to suggest that "all is well".

* But: fear of de-listing continues to be prevalent, and is genuinely a difficult problem to overcome.  Nonetheless, if suppliers are to complain (individually or through trade associations), now is probably the best time to consider doing so. The climate is right, and OFT has again stressed it is actively trying to do something.  It is particularly disappointed that more trade associations do not report on breaches.

KEY ISSUES IN THE REVIEW

The fear factor

* Few respondents but (through trade associations), reasonable sectoral coverage.

* Only one formal complaint had been made under the Code (by Express Dairies against Safeway) - and it involved conduct before the Code came into force.

* 73% of respondents (large & small) said they fear de-listing or sanctions. The rest made no comment.

Other areas of weakness

* 85% of respondents said the Code had not improved matters.  One said it was "worse than useless" because it gave a screen of legitimacy to questionable conduct.

The main concerns identified by suppliers are that the Code is toothless because:

* it is, they feel, too risky to complain (either to the supermarkets, or to the OFT); and

* of the concept of "reasonableness" under the Code - conduct otherwise prohibited is legitimate if "reasonable" (whatever that means).  Lack of clarity invariably benefits the supermarket, because the supplier is unlikely to challenge it.

Generally, most concerns had been raised around provisions which:

* directly impact on revenue; and

* involved the "reasonableness" issue.

* A detailed breakdown shows some issues are more problematic in some sectors than others.

* The OFT said lack of specificity / evidence meant it could not tell whether any one supermarket caused more concerns than another or whether smaller suppliers were more "picked on" than larger suppliers.

* The supermarkets are content with how the Code operates.

SCOPE FOR IMPROVEMENT?

* Suppliers asked for wording to be tightened up, to give more clarity to "reasonableness" and reduce scope for abuse.

* OFT said there was some scope for more clarity, but it: could not do so without more direct, specific evidence and they 
could not realistically define "reasonableness" across a variety of sectors and issues since they were reluctant to be too prescriptive.

Critically, the OFT said that:

* "While we recognise the fear among suppliers, there is little that can be done under the current Code, or indeed any Code of this nature, however rigorously drafted, if suppliers are not prepared to assert their rights under it."

* Some suppliers suggested creating an ombudsman.  The OFT said this would be of limited use.

* The OFT encouraged more complaints, or even informal approaches.

The OFT's record on confidentiality is good.  But given the stakes, suppliers will still have concerns over confidentiality.

NEXT STEPS

* Sufficient anecdotal concerns were expressed for the OFT to take more action.

* Over the next months the OFT will audit the big four supermarkets compliance with the Code.  It will sample their relationships with a range of large and small suppliers, and decide whether further action can be taken.  The audit will focus on payment times; retrospective price reductions; supplier "contributions" to marketing costs; lump-sum payments
as condition of supply ("pay to play / pay to stay"); payments in respect of consumer complaints (the most common issue); and tying of third party goods / services.