UK supermarkets face new code of conduct designed to protect suppliers

Posted by Daniel Palmer on 27th February 2009

The UK’s competition watchdog, the Competition Commission (CC), has overnight published a new draft code of conduct for supermarkets and suppliers to help address concerns about abuse of buyer power.

The Order follows the CC’s inquiry into UK groceries retailing last year, which concluded that measures were needed to address its worries about relationships between retailers and their suppliers. The Commission will also shortly publish a draft Order outlining measures to prevent exclusivity arrangements and restrictive covenants being used by grocery retailers to restrict entry by competitors in order to improve competition in local areas.

“The new Code of Practice will be included in all retailers’ contracts with their suppliers and provide a much clearer framework for these agreements. We want to ensure that suppliers do not have costs imposed on them unexpectedly or unfairly by retailers,” Peter Freeman, Competition Commission Chairman and Chairman of the Groceries Inquiry, said. “The Code will prohibit retrospective changes to terms and conditions, and limit the extent to which suppliers are required to pay for listings, promotions, inaccurate forecasts or customer complaints. It will also set out a clear procedure for resolving disputes and the requirement for retailers to provide reasonable notice and commercial justification before a supplier is de-listed.”

“We are not seeking to impose overly restrictive rules on commercial negotiations and it is not possible to set rules for every set of circumstances in supply agreements, given the variety of products, suppliers and situations,” he explained. “What we are introducing are clear standards so that, for example, those elements in a supply agreement that could be subject to uncertainty and change are discussed up front, so that both parties are agreed on how costs and payments will be allocated in those situations.”

“Without it, the uncertainty and hardship caused by certain practices could significantly damage investment and innovation by suppliers and in turn, therefore, also harm consumers.”

The new code of practice will require that:
• provisions of the new code are included in every contract between grocery retailers and their suppliers;
• all retailers with groceries turnover in excess of £1 billion per year are included within its scope;
• an overarching fair dealing provision is included;
• retailers are prohibited from making retrospective adjustments to terms and conditions of supply;
• retailers are prohibited from entering into arrangements with suppliers that result in suppliers being held liable for losses due to shrinkage;
• retailers are required to enter into binding arbitration to resolve any dispute with a supplier; and
• retailers are required to keep written records of all agreements with suppliers on terms and conditions of supply.

The Commission is still planning to introduce an Ombudsman to enforce the code but will only do so with permission from retailers.

The British Retail Consortium has, however, disputed the need for an ombudsman.

“This should be about customers. An ombudsman is unjustifiable pandering to supplier pressure groups. It would simply be an expensive bureaucracy – unnecessarily piling on costs with only one result; increased shop prices,” Stephen Robertson, British Retail Consortium Director General, said. “If the economy were in good shape this would be a mistake but during a recession it is even more wrong.”