Supplementary memorandum submitted by Sustain (A8(a))
When the Competition Commission recommended that a code of practice should be drawn up to address the adverse effects of supermarkets' practices in relation to the suppliers, it identified 27 practices, which it felt to be "against the public interest". The Competition Commission found evidence that the identified practices gave the five major supermarkets (Asda, Safeway, Sainsbury, Somerfield and Tesco) substantial advantages over their, smaller retailers whose competitiveness was likely to suffer as a result.
The loss of smaller independent suppliers, or the creation of barriers to new retail entrants, is against the public interest as it erodes choice and innovation. The Commission's report also provided evidence that supermarket practices are detrimental to small farmersthe very same farmers who find it most difficult to recover from recurrent crises in farming. The loss of small farmers has profound implications for the countryside and the environment. These concerns were made in a submission by six key organisations on 31 August to Rt Hon Patricia Hewitt MP. 
Despite these concerns, the public has never been consulted on the code which was finally launched at the end of 2001. A consultation with suppliers on a draft code in 2001 was criticised as suppliers felt their comments were ignored. As a result there are significant weaknesses in the final version of the code launched by the DTI at the end of 2001. 
CONCERNS ABOUT THE PROCESS OF DRAFTING THE CODE
No consumer or environmental organisations have been consulted on the draft code and nor have they received any information regarding its current status. Other Government departments are now operating very open and partnership-based approaches as standard, involving all stakeholders under the new "Open Government". It does not make sense that a new Government initiative does not follow such practice especially as it was clearly intended to protect "the public interest".
Drawing up of an effective code of practice is in the interests of the consumers, and society more generally, and that organisations representing these interests should be involved in the process.
Supplier organisations, including farming organisations, were only consulted on what was clearly a near final draft of the Code in early 2001.
The NFU has been extremely concerned about this process. Ben Gill, the NFU President said "The handling of the Code's publication could not have been worse . . . During the seven months in which your department had the Code you consulted with the major supermarkets but virtually excluded ourselves and other suppliers' organisations. . . . Despite this delay, we had hoped in vain that you would prescribe a code that would protect farmers' and growers' trading relationships with the supermarkets".
The Code was finally launched in November without any prior warning to farmers or consumers. 
WEAKNESSES IN THE FINAL CODE
It is generally felt that the final code is not strong enough to actually improve the relationship between suppliers and retailers and that it may actually legitimise some of the bad practices the Competition Commission hoped to eliminate. The NFU's particular concerns are the provisions covering promotional time-scales, changes to prices and payments, and consumer complaints management. Plants and flowers have also not been included, despite demands from the NFU for inclusion of this vulnerable group. They said in a Press Release: "As it stands at the moment, the Code will do little if nothing to reassure our members that it will give them any protection within their sector".
The following are brief examples of where the Code of Practice has watered down the Commission's recommendations (our emphasis shown as underlining):
1. The Competition Commission Report: "Retailers should not request suppliers to contribute to retailers' costs of buyers visits, or any supplier contribution to the retailers' costs of artwork or packaging design, consumer or market research, or to the costs of store refurbishment or opening; or to provide hospitality".
The final Code of Practice:
"A Supermarket shall not, directly or indirectly, unreasonably require a Supplier to make any Payment towards that Supermarket's cost of: buyers visits to new or prospective Suppliers; artwork or packaging design; consumer or market research; the opening or refurbishing of a store; or hospitality for that Supermarket's staff".
2. Competition Commission Report: "Retailers . . . should not over-order goods at a promotional price; and they should not require suppliers predominantly to fund promotions'.
Code of Practice:
"A Supermarket shall take due care when ordering from a Supplier at a promotional wholesale price not to over-order and that if that supermarket fails to take such care, it shall compensate the supplier for any product over-ordered and which it subsequently sells at a higher non-promotional retail price". "A Supermarket shall not, directly or indirectly, unreasonably require a Supplier predominantly to fund the costs of a Promotion".
3. Competition Commission Report:
"Retailers should not seek any form of compensation for profits being less than expected, whether on a promotion or otherwise, or for product wastage".
"Retailers should compensate suppliers for costs caused through the retailers' forecasting errors".
Code of Practice:
"A supermarket shall not directly or indirectly require a Supplier to make any Payment to compensate that Supermarket when profits from the sale of that Suppliers' products are lower than expected by that Supermarket unless the basis of any such Payment is agreed in writing between that Supermarket and that Supplier before the relevant supplies of that product are made".
". . . a Supermarket shall fully compensate a Supplier for any cost incurred by that Supplier as a result of any forecasting error attributable to that Supermarket unless; that Supermarket has prepared these forecasts in good faith and with due care; or there is an agreement in writing between that Supermarket and that Supplier before the relevant supplies of the product are made that such compensation is not appropriate".
The Code of Practice does not define what is considered to be unreasonable, or what constitutes due care, or good faith leaving the interpretation in the hands of the supermarkets. Moreover, proposed written agreements in these areas are likely to institutionalise, rather than remove, the informal unfair practices highlighted by the Commission. According to this Code arbitration in the case of any dispute between supermarkets and suppliers would be left to a Mediator appointed by the Supermarkets. It is widely agreed that this Code offers little if any benefit to farmers and growers supplying supermarkets.
We would argue that the competition policy rules which govern the process of drawing up such codes be amended so that all stakeholders who have an interest in the code should be involved in its development.
The operation of the Code of Practice should be reviewed in detail after a year, by an independent analyst, to ascertain what impact, if any, it has made on the way in which suppliers are treated by the major retailers. To facilitate this, an immediate review of current practices should be carried out in order to have a baseline which with to compare current and changing practices.
The appointment of an independent watchdog, to monitor the impact of the code and to arbitrate in cases of dispute between supermarkets and suppliers. There should also be consideration of a permanent regulator on the multiples to address the many issues highlighted by both Competition Commission and those public interest groups concerned with consumer and environmental protection and local economies.
11 January 2002
7 Competition Commission "Supermarkets: A report on the supply of groceries from multiple stores in the United Kingdom", CM 4842, October 2000, HMSO. Back
8 Letter to Patricia Hewett MP, 31 August 2001 signed by : Centre for Food Policy Friends of the Earth, National Consumers Council, National Federation of Women's Institutes, Royal Society for the Protection of Birds, Small and Family Farms Alliance. Back
9 See NFU press releases. Also Supermarket code "worse than useless" Financial Times; August 25, 2001, by Kevin Brown and Lisa Clifford Back
10 DTI Press releases: 31 October 2000 Hewitt backs good behaviour code for supermarkets & suppliers, and DTI press release; 18 December 2001 Hewitt accepts supermarket undertakings on good behaviour code. Back
11 For instance the Competition Commission pointed out that the practices led to "lower quality and less choice for consumers" Back
12 Handling of Supermarket Code Publication Disastrous-NFU 6 November 2001. Back
13 Undertakings given by [Asda, Safeway, Sainsbury and Tesco] to the Secretary of State for Trade and Industry under section 88(2) of the Fair Trading Act 1973. Back
14 Supermarket Code of Practice fails dismally to deliver, NFU PR 31 October 2001. Back
15 Competition Commission "Supermarkets: A report on the supply of groceries from multiple stores in the United Kingdom", October 2000, HMSO. Back