Asda’s decision to drop own-label ready meals supplier Ferndale Foods has potential significance for the Supermarkets Code of Practice. Amid recriminations of alleged breach of the code by Asda, every aspect will be pored over in great detail in the coming weeks - not least by the Office of Fair Trading, which has to decide whether the complaint is the first to deserve official investigation under the code.
But while the industry awaits the OFT’s response with bated breath, there is a more fundamental issue at stake. Ferndale’s loss could lead to the closure of its plant at Thamesmead, with the scrapping of 600 jobs.
So is there ever a pleasant way for a supermarket to terminate a contract with a supplier, particularly if it’s a major deal? In this case, Asda is adamant it has behaved impeccably. It claims the fact it notified Ferndale Foods about a tender process for its own-label ready meals business 18 months ago meant the supplier was aware that the contract was not a given. The supermarket also claims to have consulted the company at every stage.
Ferndale disputes this. It claims that, after it was invited to tender for contract, Asda gave no concrete feedback on whether it had been successful or not. In fact, it says it was business as usual until June 22, when it was issued with an ultimatum.
Clearly, this highlights the key issue of communication. Other suppliers who have faced such crises tell a similar story. For example, Terry Smith, MD of the Romney Marsh Potato Company, which faced ruin and mass redundancies after being dropped by Tesco in March, says his company “didn’t have a proper discussion” with the retailer about the impending axe at any stage.
Smith also claims Tesco gave no concrete
reasons or “sound financial argument” as to why it had failed to retain the contract.
Obviously, clearer, more official discussions regarding continuation of contract would have undercut some of the frustrations felt by both Ferndale and Romney.
Duncan Swift, head of receiver Grant Thornton’s food and agribusiness recovery group, says retailers should clearly outline to suppliers the reasons for delisting them.
Another issue is the period of notice given before the official ending of a contract. The law may stipulate at least three months for redundancy consultation, often an inevitable consequence of ending large contracts. But many suppliers argue that timescales should differ according to the size of the deal.
“There’s no reason why a supermarket should not be able to delist a supplier,” says Swift. “The issue is: what is reasonable notice?”
Ferndale claims the usual period for it to pitch for autumn business ends in May. Notice of termination was delivered in June.
The supermarkets cannot deny that the code of practice specifically requires “reasonable notice” of contract changes. But again, views may differ on appropriate timescales.
“A more gentlemanly approach might be for a retailer dealing with more than 20% of a supplier’s business to give it more than three months notice,” says Swift.
So the biggest grievances appear to be communication and the notice period. Both issues could arguably be eased by more concrete terms; some bold suppliers are now insisting on two-year rolling contracts.
Swift suggests a compromise. “Key trading terms could be e-mailed in bullet point, providing an audit trail if possible.”
Clearly, as long as things remain as they are, the end of a supplier/retailer relationship will continue to be damaging and messy.