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Grocery Sector

Volume 485: debated on Monday 15 December 2008

Motion made, and Question proposed, That this House do now adjourn.—(Ian Lucas.)

I am pleased to have secured this debate on the regulation of the grocery sector, and that the Minister is here to respond to it, as he knows my well-established interest in the subject as a result of a parliamentary question that I asked him on 23 October—column 443—and of a Westminster Hall debate on 13 May this year, in which we had the opportunity to debate the role of supermarkets in the grocery supply sector.

I shall first paint a picture of the subject’s background. My hon. Friend the Member for South-East Cornwall (Mr. Breed) deserves an honourable mention at this stage, because he was the author of a report, “Checking out the supermarkets”, which was published in 1998, and which was a precursor to a request in April 1999 by the then director general of fair trading to refer concerns about the practices of supermarkets to the Competition Commission. The commission produced a report in October 2000, entitled “Supermarkets: A report on the supply of groceries from multiple stores in the United Kingdom”. In September 2003, the Competition Commission produced a report on the Safeway merger. Following the commission’s original report in 2000, which set up the supermarket code of practice, the 2004 report from the Office of Fair Trading was the first attempt to review whether the code of practice was effective. Because of the inconclusiveness of the first report, a second was produced in March 2005. As a result, in 2006, the OFT referred supermarkets to the Competition Commission again.

In July 2006, I was privileged to be able to call together a wide range of non-governmental organisations and interest groups including Friends of the Earth, the Association of Convenience Stores, the British Brands Group, the British Independent Fruit Growers Association, ActionAid, Traidcraft, the National Farmers Union of England and Wales, the National Farmers Union of Scotland, Banana Link and Breaking the Armlock in what we called a cross-cutting group, because it was covering a number of subjects that were relevant to the Competition Commission inquiry. We submitted a proposal, which I had supported for a number of years, for not so much an independent food trade regulator as an adjudicator.

On 13 March this year, following the provisional findings of the Competition Commission’s inquiry, I went to give further evidence to the commission along with Michael Hutchings, a lawyer supporting the cross-cutting group, and Robin Tapper, representing the NFU. I was pleased that on 30 April 2008, the commission’s final report on the United Kingdom grocery market included proposals for the strengthening of what was then known as the supermarket code of practice to become a reinforceable grocery sector code of practice and for the establishment of a supermarket ombudsman, for a number of reasons which I shall explain in a moment. The Government responded on 29 July; the Minister may well comment on that.

We need to be clear about the Competition Commission’s powers under the Enterprise Act 2002, as proposed by Government and agreed by Parliament. Section 134(1) states that the Competition Commission shall decide whether any feature of the market restricts or distorts competition, which is described as

“an adverse effect on competition”.

Section 134(4) states that if the Competition Commission decides that there is an adverse effect on competition., it must also decide whether action should be taken by it to remedy the adverse effect or whether action should be taken by others, and, in either event, must decide what action should be taken. Section 134(6) states that the commission must try to

“achieve as comprehensive a solution as is reasonable and practicable”.

Section 134(8) states that when deciding on these remedies the commission may have regard to likely customer benefits in the form of

“lower prices, higher quality or greater choice of goods or services”.

According to paragraph 3 of the Competition Commission’s final report, published on 30 April—this is a crucial quotation—

“the transfer of excessive risk and unexpected costs by grocery retailers to their suppliers through various supply chain practices if unchecked will have an adverse effect on investment and innovation in the supply chain, and ultimately on consumers”.

It proposes the two remedies that I mentioned earlier—a change in the supermarket code of practice and the establishment of an ombudsman. Paragraph 5 states:

“If we cannot secure suitable undertakings from these grocery retailers, we recommend that Government takes the necessary steps to facilitate the establishment of the Ombudsman.”

The report devoted 90 of its 270 pages to the description of the remedies. It therefore cannot be said either that the remedies were not a substantial element of the report or that the commission treated the issue lightly.

Obviously, we were keen to hear what the Government had to say. On 29 July, they said in a press release:

“If it cannot get agreement the Government will consider establishing the ombudsman itself. The Government would make an assessment based primarily on what would be in consumers’ best interests”.

I congratulate the hon. Gentleman on yet again raising this topic, in which we share an interest. The simple fact is that, according to even the Sainsbury’s briefing for this debate, the supermarkets have no intention of voluntarily agreeing to an ombudsman. The Government must, therefore, now make up their mind. If the supermarkets will not accept a voluntary agreement on an ombudsman, the Government must legislate.

I am grateful to the hon. Gentleman for that—or perhaps I should call him my hon. Friend, as on this issue and many others he has been an assiduous and strong campaigner. It would be helpful if the Government were to give a strong steer on this issue, either this evening or soon. Otherwise, there will be a long and painful process of attrition. It will be most painful for the suppliers and the primary producers in this country and worldwide if we do not achieve the desired result as soon as possible.

On behalf of the cross-cutting group, we commissioned Professor Roger Clarke of the Cardiff business school to look at the potential impact of an ombudsman on the consumer’s best interests. His paper will be published in the new year, but I can quote from some of the findings that I know it will contain when it is made public. Professor Clarke says that an ombudsman

“will reduce the problem in supplier/retailer relations whereby the abuse of buyer power in the short run has negative effects in the longer run tending to raise prices to consumers.”

Secondly, it

“will reduce risks to suppliers enabling them to invest for the longer term and provide benefits from new innovation such as better quality products and more product variety.”

Thirdly:

“The costs of this policy as envisaged by the CC”—

the Competition Commission—

“are likely to be very small while failure to introduce an Ombudsman is likely to lead to a significant weakening of the policy.”

On such a failure, he adds:

“In turn, this is likely to mean further investigations will be needed in the future. The introduction of an Ombudsman is likely to provide significant consumer benefits and be, arguably, in the interests of the supermarkets themselves.”

I shall come to that point later.

The evidence provided by the Sainsbury group is not necessarily fair from the point of view of the supermarkets either. Although the cross-cutting group has some quibbles about the CC’s draft proposals, the code should apply to all transformative stages through the supply chain, not to the last supplier to the supermarkets. There are various issues and reasons to do with that, but I will not go into them now. There is also a weakening of the supply code as drafted, a number of elements of which involve what we describe as the “unless” clauses—the conditional reasons why the code would not apply. We think that that results in a weakening of the supply code. There is also a need for a greater emphasis on proactivity within the role of the ombudsman, because it was clearly shown by the previous inquiries that suppliers do not complain because they fear the consequences of complaining about their primary customer. The most significant consequence is that they lose that customer. There is great concern about that climate of fear, as it was described.

There are areas of dispute relating to matters of cost and arguments about red tape. The Tesco director of corporate and legal affairs, Lucy Neville-Rolfe, said in April 2008:

“Tesco considers that introducing a new ombudsman could be bureaucratic and an unnecessary cog in a supply chain which has worked well for consumers. More red tape is likely to stifle innovation and investment and reduce the ability of retailers and suppliers to work together flexibly to deliver the best deals for customers”.

That is not what we would hear if we spoke to suppliers—certainly if we spoke to them quietly and without the climate of fear. If the supermarkets are so concerned, they must explain why they have created red tape for primary producers through the creation both of unofficial rules and regulations for their assured produce and of other mechanisms that constrain the ability of suppliers to innovate. Asda’s chief executive, Andy Bond, said in April 2008:

“The Competition Commission’s proposals on the new code and an ombudsman could cost the industry hundreds of millions”.

The worst estimate of the cost of a code is £5 million to £6 million, even if all the costs to the industry—and it would be a cost on industry, not the taxpayer—were automatically transferred to customers, which would work out at about 1.25p per customer. The proposal fails to recognise the benefits for the supermarkets.

I commend my hon. Friend on the work that he has done on the subject. He has clearly set out the resistance from supermarkets to the setting up of the ombudsman, but he will recognise, too, that there is huge support for the measure from suppliers, and from the National Farmers Union, the Farmers Union of Wales and the Country Land and Business Association. That is in great contrast to the lack of support from Her Majesty’s official Opposition, who appear to be determined to connive with the Government in preventing the setting up of the ombudsman.

I will side-step the party political arguments, and simply concentrate on the issue emphasised by my hon. Friend. There is strong support for the measure, not just among suppliers, and it is important that the Government recognise that in these straitened times—the recession and the credit crunch—if we are to create the stability in the economy that the Government sincerely want to achieve, one of the best ways of doing so is to respond to the large number of small and medium-sized enterprises in the grocery supply chain that need reassurance. One of the best ways of giving them that reassurance, and providing the stability that the British economy needs, is not to side with the supermarkets but to ensure that there is fair play for people throughout the supply chain.

The Government should recognise—and I am sure that they will do so in time—that there is growing interest among consumers, consumer-based organisations and other non-governmental organisations in matters relating to sourcing and traceability in the supply chain for food and other products in the retail and catering sectors. I was brought up on a three-acre farm, where food never travelled more than 10 miles to reach its final destination. The pittosporum went up the road to Covent Garden at Christmas time, but the market has changed. I accept that it is a new and very different world from the one in which I was brought up, but now that people are less aware of the source of their food, it is important that transparency and reassurance are available in the market.

If the supermarkets have nothing to hide, they have nothing to fear from this rather simple and straightforward regulation. In fact, they have a great opportunity as a result of the existence of an independent arbiter on the nature of the relationships between themselves and their suppliers. If that independent arbiter can give them a badge of approval, that will be a good thing. The measure has the support of the NFU and the CLA. Given that the Government passed the Enterprise Act 2002 in the first place, all that the Competition Commission is doing on this occasion is following the letter of the law that the Government clearly support.

I congratulate the hon. Member for St. Ives (Andrew George) on securing parliamentary time for this important debate. I welcome the opportunity to debate the issues with him once again. As he rightly says, we have exchanged ideas and positions on this issue a number of times, and I suspect that, given the passions in this debate, there will doubtless be a number of further exchanges. I note, too, the considerable interest with which my hon. Friend the Member for Stroud (Mr. Drew) has pursued these issues, as the hon. Member for St. Ives mentioned. I recognise the agricultural passions—if I may put it that way—that the hon. Member for Brecon and Radnorshire (Mr. Williams) brings to this debate and the interest of the hon. Member for Ceredigion (Mark Williams) in this subject.

I recognise that in initiating this Adjournment debate the hon. Member for St. Ives is bringing to the Floor of the House many of the concerns of the so-called cross-cutting group—a UK-wide group with cross-party parliamentary membership that has made series of strong representations on this issue, including giving evidence to the Competition Commission’s inquiry into the power of supermarkets in the grocery sector.

I recognise that the group has commissioned its own analysis of the consumer welfare benefits of an independent ombudsman. The hon. Gentleman may well be aware that my officials met the report’s author, and Traidcraft, the National Farmers Union and the British Brands Group as recently as last week. We are studying the report that the group commissioned with considerable interest.

Perhaps the hon. Gentleman will allow me to set out some of the context for the debate and the inquiry. Supermarkets are crucial to the economy. Some £110.4 billion-worth of grocery sales are made through nearly 100,000 grocery stores in the UK. The eight largest grocery retailers account for about 85 per cent. of total grocery sales, with the largest four accounting for about 65 per cent. of grocery sales. One thing is for sure: a supermarket will not remain in business in the grocery sector if it has no customers, and those customers are, for the most part, although not exclusively, local customers. The question for the Government, at least in the regulation of supermarkets, is surely whether we have got the balance right. If we have not, we must work out what we should do about it. Such questions are part of the reason we established the independent competition authorities in the first place and part of the motivation for the Office of Fair Trading and the Competition Commission mounting the various investigations that the hon. Gentleman described.

It is also worth noting that in the past two or three years British supermarkets have made enormous strides in improving their ethical sourcing, improving their environmental performance, reducing their wastage, encouraging recycling, stocking the greener goods that customers now demand, stocking ranges of healthier food and more locally produced products, and making contributions in a wide variety of ways. Indeed, British supermarkets, led by the Co-op, have also led the way in promoting and championing Fairtrade goods, and I hope that they will do more in this area. In particular, I hope that they will continue to work with the Department for International Development to see how they can source more of their products from developing countries.

I fully understand—this is one of the points I was making—that there are good public relations reasons why the supermarkets should get in front of this debate, rather than be dragged along behind it, but in what circumstances would the Government not accept the considered recommendations and findings of a competition body that they have set up to consider these issues deeply and make recommendations that it clearly wants to implement?

If the hon. Gentleman will forgive me, I shall come to exactly that question in due course. Perhaps I may end my comments on the context in which we are having the debate by saying that as long as what the supermarkets are asking is fair, there should be nothing wrong with that. If it is not fair, that is perhaps what the strengthened supermarkets code should be for. I will come to that in more detail.

As the hon. Gentleman said, the Competition Commission began its work in May 2006, delivering its final report and recommendations on 30 April this year. As he knows, the Government responded on 29 July. The Competition Commission produced an extremely thorough report that raised a series of complex and important issues for the grocery market. We recognise in particular the importance of the grocery sector to consumers, as well as to the wider economy. That is why we put considerable time and effort into looking at the report in some detail, giving full consideration to the findings and the recommendations, especially those for the Government.

The hon. Gentleman will know that the Competition Commission received hundreds of submissions from third parties and held some 80 hearings as a result of the inquiry. I hope he will acknowledge that, in general, the Competition Commission found that the groceries market delivers a good deal for consumers.

I acknowledge that the Competition Commission identified two principal areas of concern. The first is that some grocery retailers have strong positions in several local markets, which could lead to a poorer retail offer for consumers in those areas. The second, which he touched on, is concerns over the transfer of excessive risk and unexpected costs being passed on to grocery retailers’ suppliers through various practices that the Competition Commission believes will have an adverse effect on investment and innovation unless they are addressed.

Grocery buyer power is of benefit to consumers, as part of the lower supplier prices arising from that buyer power will be passed on to consumers. While the Competition Commission did not find the financial viability of food and drink manufacturers to be under threat, the transfer of excessive risks and unexpected costs could, in its view, lessen the incentive to invest and innovate.

With that in mind, is my hon. Friend somewhat surprised by paragraph 3.1 of Sainsbury’s submission to the debate? It states categorically:

“Sainsbury’s was not provided with any specific evidence to support the conclusion of an adverse effect in relation to suppliers with whom we trade.”

Given the nature of what the Competition Commission argued, is it not somewhat strange that a supermarket could make that point?

It is for my hon. Friend, and indeed others who have received the document that he describes, to make their own judgments. I will come on to the fact that a dialogue is under way between the Competition Commission and those who have submitted evidence. We need to allow that dialogue to continue.

Let me come to the remedies suggested by the Competition Commission. On the supply chain issues that it specifically identified, it recommended the creation of the grocery supply chain code of practice, building on the existing supermarkets code of practice. That new code will extend the number of supermarkets from four to 11, covering grocery retailers with groceries turnover in excess of £1 billion.

An overarching fair-dealing provision is included and certain practices such as making retrospective adjustments to terms and conditions of supply will be prohibited. Record keeping will be improved and in-house code compliance officers will be introduced. In addition, retailers will also be obliged automatically to provide their standard terms and conditions to suppliers. As the hon. Member for St. Ives might know, the Competition Commission already has powers to implement that remedy.

The hon. Gentleman directed the bulk of his comments to the fact that the Competition Commission is also seeking undertakings from grocery retailers to establish an ombudsman to monitor and enforce compliance with the new grocery code. The Competition Commission hopes to achieve that through grocery retailers’ agreeing voluntary undertakings.

The hon. Gentleman asked about current progress and my hon. Friend the Member for Stroud effectively repeated that question and the concern underlying it. I should make it clear that the creation of an ombudsman remains with the Competition Commission for the foreseeable future. Under section 159 of the Enterprise Act 2002, it is seeking undertakings from the grocery retailers covered by the new groceries supply code of practice to establish that ombudsman to monitor and enforce compliance with the code. No formal recommendation has been made to Government.

Implementing the remedies is progressing, albeit at a slightly slower pace than that currently posted on the Competition Commission’s website owing to the sheer number of parties that want to make their views known and that want to make representations.

The Minister is characteristically helpful and open in his response, but was one of the recommendations in the report that the Department for Business, Enterprise and Regulatory Reform consult the Department for Environment, Food and Rural Affairs on the effect that the recommendations would have on primary producers? If so, has DBERR made contact with DEFRA on those issues?

When the Government published their response to the initial Competition Commission report on 29 July, that response came from the whole of Government. All the interested Departments, not just my Department and DEFRA, were consulted in the preparation of the report. I shall come on to the question of future consultation across Government.

I am aware that time is against us, but before the Minister moves on will he reassure the House that the Government will in no way be influenced by the appointment of Sir Terry Leahy, the chief executive of Tesco, to the Prime Minister’s Business Council for Britain? I understand that the council has been appointed to advise the Government on business matters in relation to the future of the economy of Britain.

We have a high opinion of Sir Terry Leahy, which is why he was appointed, but we also have a high opinion of organisations such as Traidcraft and the National Farmers Union, who have slightly different opinions from Tesco on the issues that we are involved in. We are interested in everybody’s opinions, but it is still the Competition Commission’s responsibility to take forward the discussions with a large number of stakeholders, including non-governmental organisations and major multiple and minor grocery retailers. The commission hopes to conclude the informal consultation before Christmas. I understand that the hon. Member for St. Ives is among those who have met the Competition Commission to give their—

House adjourned without Question put (Standing Order No. 9(7)).