A code is toothless if suppliers won’t speak out says Elaine Watson
Tesco, Asda, Sainsbury and Safeway have all welcomed the review. They have said they will co-operate with the audits and they have stressed their commitment to building strong relationships with suppliers - particularly smaller firms.

No-one was expecting miracles. Yet even the most gracious observers have wryly noted that it has taken the OFT the best part of 12 months to work out what was painfully obvious to everyone else within a matter of weeks.

The supermarkets code of practice isn’t working; it hasn’t made the slightest difference to trading relationships and suppliers are in any case too frightened to complain.

The intractable nature of the problem is neatly encapsulated in the opening summary of the OFT’s new report reviewing the code. “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.”

The OFT has been powerless to investigate alleged breaches of the code, it adds, because it has nothing to go on beyond anecdotal evidence. “To identify any key problems and formulate solutions, we would need detailed information from the primary source, namely the suppliers,” says the report. “But we have not received this.”

Despite encouragement to trade associations to build up dossiers of alleged breaches, “none have done so,” it adds.

In other words, if suppliers don’t come forward with detailed information, the OFT can’t help them; if they do, they risk commercial suicide. The OFT devotes the following 54 pages to exploring this paradox before concluding that nothing
can be concluded without further investigations.

Meanwhile, those hoping the OFT would propose a radical shake-up of the current regime, or suggest further legislation, will be sorely disappointed.

Banning below-cost selling or forcing manufacturers to publish price lists, for example, is not the answer, insists the report. “There is a danger that imposing rigidity on the transactions between suppliers and the supermarkets could unduly fetter the ability of supermarkets in particular to react to competitive pressures in the market.”

Other suggestions, such as regulations covering the conduct of internet auctions or moves to define precisely what constitutes ‘reasonable’ behaviour in a negotiation, could “realistically, never be put into effect” claims the report.

Likewise, there is no provision in the Enterprise Act for fining retailers for non-compliance. If that’s not an option, what else can be done?

The path chosen - to send in auditors into the big four supermarkets to conduct further investigations - is probably the only one the OFT could have taken in the circumstances, says Safeway’s communications director Kevin Hawkins.

“If they had put up a white flag and said we can’t do anything they would have got a load of stick. So they had to do something. The trouble is, a lot of business is done verbally, so there is only so much a paper trail will reveal. My personal view is that while a huge part of the supply chain - and that includes processors and foodservice companies - is excluded, the whole thing was going nowhere anyway.

“The only way to make this work is to bring people together on a voluntary basis. It would take longer, but you would get the buy-in.”

As the OFT has recognised, says Hawkins, quibbling over whether the OFT itself, an ombudsman or a separate body or individual is best placed to act as an intermediary between suppliers and retailers is missing the point. If any third party is to deal with a complaint or approach a supermarket, the same issues arise, he says. “Thinking you can ever deal with a complaint properly and fairly and ensure anonymity is crushingly naïve.”

The OFT has not decided precisely how or when the audits will be conducted, and has first to put the contract to
conduct the audits up for tender, says a spokeswoman. “We don’t have a strict timetable yet, but we would like a report back before the end of the year.”

There is also some confusion over whether auditors will be paying Morrisons a visit. Although it is not currently covered by the code, Morrisons should qualify when it takes over Safeway on March 8 and, as a result, controls more than 8% of the grocery market.

But as Morrisons hasn’t signed any statutory undertakings, it will not automatically become subject to the code on March 8, says the OFT spokeswoman.

“We still need to clarify whether auditors will go into Morrisons, Safeway or both.”

Auditors will focus on clauses in the code where alleged breaches are the most frequent, she adds. These include requesting unjustified payments for consumer complaints; requesting contributions to retailers’ marketing costs; requesting lump sum payments as a condition of supply; issuing retrospective reductions in price without reasonable notice; tying third party goods and services for payment; and dealing with undue delays in payments.

But, as our news story on page 6 shows, while all suppliers welcome the latest OFT inquiry, most think that sifting through the paperwork at the big four supermarket chains will not achieve anything.

One major supplier points out that a huge amount of business, including the ‘requests’ being investigated by the OFT, is done over the phone and formal documents are unlikely to reveal blatant breaches of the code.

Moreover, while the power imbalance between trading partners remains, any sort of code could prove an irrelevance in the face of commercial pressures. He explains: “The market is getting tougher, and there will be more and more abuse of suppliers, because of the competition between the leading retailers.”

Most of those suppliers we contacted thought smaller manufacturers were the most vulnerable, and that the code was pretty irrelevant to larger branded suppliers who, in many cases, were big enough to look after themselves.

That’s a sensitive point but it is made privately by supermarket executives. And one retailer told us this week: “There have been scenarios where global suppliers can have you over a barrel, call you up and say our prices are going up and you’ve got to pay or we won’t supply you.”

News of the OFT’s latest probe was also welcomed across the food industry.

The National Farmers’ Union says an audit could well prompt some buyers to moderate their behaviour as they know their actions could be scrutinised.

Meanwhile, the Association of Convenience Stores continues to insist that new measures - specifically a ban on below-cost selling and transparent price lists - are the only way to prevent the multiples from abusing their dominant position.

Others are just pleased the OFT has recognised that the dearth of formal complaints under the existing code is not a sign that the code is working.

Farming and Food Policy Commission chairman Sir Don Curry, who has been taking informal soundings from suppliers since the code was first instituted, has requested a meeting with the OFT to talk through the next steps.

Speed is of the essence, says Sir Don. “I want to talk through the timescale. This is a matter of urgency. I’m not sure whether an auditor will uncover the facts. In the meantime, however, nothing can be done unless there is a willingness on all sides to come to constructive solutions.”

Forcing through more legislation or banning certain practices will only forces issues underground, Sir Don says.

And he adds: “Honesty and trust are what is lacking.

“The real question is: how can we build positive relationships in the industry?”