Watchdog to usher in an era of transparency in grocery sector

Supermarkets and their suppliers often lock horns on contracts, but mainly behind closed doors. Now their dealings are set to be thrust under the spotlight.

The Government recently announced it is to create a watchdog to police the big grocers and protect suppliers.

The new ombudsman will enforce a new groceries supply code of practice (GSCOP), which comes into force next month.

Supermarkets are up in arms – they argue their hardball stance with suppliers is fair game, and helps keep prices low for customers, as well as driving up standards.

But suppliers hope the threat of public scrutiny will force supermarkets to think twice about being late with payments, or trying to tie them in to unprofitable contracts.

"The revised GSCOP is a great improvement on the current regime," said consumer minister Kevin Brennan. "However, the power that large grocery retailers remain able to wield over their suppliers can still create pressures on small producers, especially in these difficult economic times, which ultimately may impact on consumers.

"Free and fair competition is the key to a healthy market and it is right that there should be an enforcement body to make sure that consumers are getting the best value for money."

The code of practice was drawn up by the Competition Commission after an investigation of the grocery industry from 2006 to 2008 concluded large grocery retailers were passing on excessive risks and unexpected costs to their suppliers.

The competition watchdog asked the government in August to create an ombudsman to enforce the new code after a majority of retailers failed to agree on a voluntary system.

While details such as the scope and powers of the new ombudsman are yet to be ironed out, it is expected to cost 5m a year, with retailers paying for it.

As well as affecting the big four supermarkets – Asda, Tesco, Sainsbury's and Morrisons – the ombudsman will regulate other grocers with turnover of more than 1bn, including the Co-operative, Iceland and Waitrose. Most retailers were opposed to it, with only Marks & Spencer, Waitrose and Aldi backing the idea.

Among suppliers, the ombudsman is seen as long overdue. One Yorkshire supplier, who declined to be named, said the ombudsman is "very necessary" to create a more transparent system.

"The retailers can put a supplier out of business without blinking," said the firm. "A big retailer can say 'You give me these prices or we will close this down'.

"The real benefit of the ombudsman is that suppliers and retailers can put their side of the argument out in a public dimension and then the shopper can decide whether the retailer is acting fairly with their supply base."

The new GSCOP includes rules such as forbidding a supermarket from forcing a supplier to predominantly fund a promotion on its shelves.

Retailers will also be prevented from barring suppliers from their buying lists without "genuine commercial reasons". If a supermarket amends a deal during its term but fails to give the supplier adequate notice, it will be obliged to pay compensation.

The National Farmers' Union (NFU), which lobbied hard for the ombudsman, said it would strengthen the position of farmers and growers in the supply chain. NFU president Peter Kendall said: "2010 must be the year we begin to eradicate unfair dealing and protect investment and innovation in British agriculture for the benefit of both farmers and growers and consumers."

But retailers say the ombudsman is an unnecessary layer of bureaucracy that will force up costs for shoppers.

British Retail Consortium director general Stephen Robertson said: "This would tip the balance of negotiating power in favour of multi-national food manufacturers allowing them to drive up the prices customers pay.

"The UK grocery market is worth 130bn a year. If threats of involving an ombudsman allow big food companies to squeeze even 0.1 per cent more out of supermarkets, that's 130m extra on customers bills."

A spokesman at Leeds-based Asda said the new code is a step forward and needs time to bed in.

"We don't support anything that's going to put prices up for customers," said the spokesman. "Our fear is that if this covers all of the big major multinational suppliers, who are big enough to look after themselves, there's a danger they will use the mechanism to force up prices which will feed through to people's bills.

"A process that might have been battled out in hard-fought negotiation over a couple of weeks could drag on for six months.

"We are far more sympathetic when it comes to talking about small and local suppliers and have not been lobbying hard against that."

The Government denies the ombudsman will have a significant impact on consumer bills or workers.

Commission's decision

The Competition Commission investigated the grocery industry between 2006 to 2008.

It concluded large grocery retailers were passing on excessive risks and unexpected costs to their suppliers, leading it to draw up a new supply code of conduct and call for the creation of an ombuds-man.

Evidence presented to the grocery investigation included:

n A medium-sized farm forced to supply major supermarkets at a "hefty" loss. "I get threatened that I will get a black mark if I don't supply even if it is at a loss.

"We get score cards sent by e-mail every week telling us how we are getting on against other suppliers," said the farmer.

"If you fall below a certain percentage you get marked down."

n A small, independent supplier told to pay 8,500 to have its product considered by a supermarket buying team for inclusion in its range.

n A supplier told by a retailer that it would be dropping the price paid for its product immediately as the margins were not sufficient.

The supplier was threatened with de-listing if it did not comply.

It accepted the new price because it already had the product in its system but was forced to make redundancies.