The introduction of an ombudsman will make the grocery sector a fairer place for all involved, says Tim Lloyd

This week's Private Member's Bill calling for an ombudsman underscores how much industry support there is for the new role particularly from suppliers.

The grocery sector has undergone close investigation in recent times. Two statutory inquiries by the Competition Commission the most recent in 2008 and numerous investigations by the Office of Fair Trading have considered a wealth of evidence on the conduct of supermarkets towards their suppliers. On every occasion these inquiries have found the supplier-supermarket relationship to be, in one way or another, anti-competitive.

The picture is complex, not least because supermarkets deal with all sorts of suppliers, some of which are multinationals themselves. But in fresh foods, there is plenty of evidence that supermarkets' bargaining position has got out of hand.

A widespread view is that the supermarkets are, to use a rather hackneyed expression, institutionally anti-competitive in their dealings with fresh food suppliers, most of which are small or medium-sized businesses that have little choice but to deal with the supermarkets. In short, it's all about economic dependency a feature that may also account for suppliers' reluctance to speak out when demands are made that threaten long-term viability.

This is not to say consumers don't benefit in the short term from supermarket behaviour. Indeed, competition between supermarkets is part of the problem. The point at which a hard bargain becomes anti-competitive is difficult to spot, but all the more so without an ombudsman to referee the process.

The Competition Commission takes care to ensure its processes are fair, evidence-based and inclusive. Our own work at the Nottingham School of Economics, undertaken with colleagues at the University of Exeter, corroborates its findings.

Lacking access to confidential documents, emails and contracts between supermarkets and their suppliers, our research adopts an econometric approach to the issue of market power, analysing the prices of fresh foods as they pass along the marketing chain. Broadly speaking, we found that fresh food prices were not behaving as might be expected if the chain were operating competitively.

So is there substantive evidence pointing to the misuse of market power? Quite simply, yes. And the consensus within the food industry with the notable exception of the supermarkets themselves is that an ombudsman is a necessary safeguard in a market where a handful of private companies stand between 7,000 or so suppliers and the lion's share (about 70%) of the food purchased by 60 million consumers.

As the government wrestled with the realities of creating the ombudsman, the Conservatives took the opportunity to vow to draft the legislation if elected. The move is a vote-winner, as Labour, making its own commitment, acknowledged.

Bearing in mind the reluctance of the supermarkets to agree to an effective voluntary code of conduct, having an ombudsman to arbitrate in disputes and penalise foul play is probably the "least worst" option. The Competition Commission's research also suggests it will cost the taxpayer relatively little. However, the role will be pointless if it does not boast sharp teeth crucially, the ability to levy fines.

Tim Lloyd is an associate professor at the Nottingham School of Economics.

Read more
NFU wants early debut for grocery ombudsman (3 March 2010)