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UK Grocery Market

Volume 497: debated on Wednesday 14 October 2009

I hope you will agree that this is also an excellent debate, Mr. Streeter: it is certainly important to many hon. Members. Many organisations. too, will be following the debate, particularly as we are at a crucial stage in the negotiations of the plans, which I shall explain in a moment, originally proposed by the Competition Commission following a lengthy inquiry into the grocery market sector.

Many people may question whether it is appropriate to have any kind of debate about the role of the grocery market sector within the UK in the context of development policy, but today I would like to explore with the Minister the importance of association with such a crucial, leading sector in the UK and development policy itself. I shall also discuss the widespread and growing concern about how the market operates in the UK and the impact of that on developing countries. I welcome the Minister here today and I am pleased to have secured the debate.

I begin by declaring an interest in that, among my many other sins, I am the chairman of the Grocery Market Action Group, which was set up in July 2006 at the commencement of the Competition Commission’s inquiry into the grocery sector. Some of the members of that alliance of organisations are ActionAid UK, Traidcraft and Banana Link. The clear impact on suppliers of the supply chain to supermarkets means that organisations such as the Association Of Convenience Stores, the Rural Shops Alliance, the British Independent Fruit Growers Association, the British Brands Group, and the National Farmers Unions of England and Wales and of Scotland are also members of the Grocery Market Action Group. They have been involved in jointly supplying a case to the Competition Commission during its inquiry.

It is important to understand the context in which I am asking the Minister to respond. The issue is the role of supermarkets at the end of the grocery market supply chain, about which there have been concerns for some time. Indeed, in 1999, my hon. Friend the Member for South-East Cornwall (Mr. Breed) undertook an inquiry into the role of the supermarket from the perspective of both UK planning and the impact of the power of the supermarkets within the supply chain itself. The inquiry considered the manner in which the supermarkets were able to dictate market conditions for all other operators in the supply chain, particularly producers.

The report produced as a result of that inquiry was entitled “Checking out the Supermarkets,” and was sent to the competition authorities. As a result of that and other concerns expressed at the time, in April 1999, the then director general of the Office of Fair Trading referred the matter to the Competition Commission, which undertook an inquiry and, in October 2000, produced a report on the supply of groceries from multiple stores in the United Kingdom. That report recommended the establishment of a supermarket code of practice.

In September 2003, the Competition Commission produced a report on the Safeway merger, which raised further issues about the impact of the effective concentration of power in the supermarket sector. In February 2004, the OFT produced a report on its inquiry into the workings of the supermarket code of practice, which was implemented as a result of the Competition Commission’s report that I mentioned. In March 2005, the OFT produced a second report on the code of practice and, by May 2006, it referred the grocery sector to the Competition Commission. The issue therefore has a long pedigree.

By that stage, many organisations had become frustrated. They felt that action was required to curtail or control the excessive power in the supply chain of supermarkets, which were able to dictate market conditions and force suppliers to accept conditions and terms that were clearly to their detriment; and that it was time one of the competition authorities did something about the issue. It has taken two years for the Competition Commission to complete its inquiry. The organisation—the alliance—that I have chaired and convened during that time has submitted a number of proposals to the Competition Commission during its inquiry. The proposal for an adjudicator—or, to use the Competition Commission’s term, an ombudsman—to oversee the sector and ensure that a code of practice is properly imposed is particularly relevant to today’s debate.

On 13 March last year, I attended an evidence session with the Competition Commission, of which there is a record, and on 30 April 2008, it produced its final report on the UK grocery market. The Government produced their response on 29 July last year. Crucially, the Competition Commission concluded that there was a

“transfer of excessive risk and unexpected costs to suppliers”


“if unchecked will have an adverse effect on investment and innovation in the supply chain, and ultimately on consumers”.

It recommended the establishment of an ombudsman to oversee a code of practice. The critical point is that the supermarket code of practice was found to have failed in the sense that suppliers living in a climate of fear feared the consequences of making any kind of complaint. The supermarket code of practice had become relatively useless. The Competition Commission therefore proposed having an ombudsman to oversee what was happening and to provide a point to which future complaints could be directed.

The impact of the problem on the developing world is significant. The point that a number of development organisations—ActionAid UK, Banana Link, the Fairtrade Foundation, Traidcraft, Oxfam and others—have been making for a number of years is that what is relevant to UK suppliers is just as relevant to suppliers from developing countries. There is currently a price war between supermarkets on bananas, for example, and that is clearly having a detrimental effect, not so much on the supermarkets, but on the primary producers in developing countries. Indeed, the Fairtrade Foundation’s director of communications and policy said in a press release last week:

“Price cuts serve only to devalue bananas yet further, creating a false illusion amongst shoppers that they can be sustainably produced for such give-away prices…This is highly irresponsible at a time when farmers and workers across the developing world are facing their own economic crisis, as well as battling the growing effects of climate change.”

The impact on developing countries comes in several forms. The concern relates not only to the supermarkets’ ability to force down prices, as they do here in Britain, but to the impact that that has on terms and conditions. Often, the supermarkets do not enter into written contracts and retrospective changes are made to agreements, and when the buyers come back to their original suppliers they often charge for shelf space. Promotions are often conducted at the expense of the suppliers: buy one, get one free offers are not, in fact, the gift of the supermarket, but something the supplier is required to provide for the supermarket. Several practices set out in the Competition Commission’s report show that what the supermarkets are doing is extracting wealth from suppliers. It is appropriate to note that, in these recessionary times, supermarkets are posting record profits. Someone is hurting, but it is clearly not the supermarkets.

A further argument being made by development charities and others relates to the impact on labour standards in developing countries. As the Under-Secretary of State will be aware, on 4 August this year, the Competition Commission recommended that the Government establish the post of ombudsman. That area is the responsibility of the Department for Business, Innovation and Skills, and the post held by his colleague the Minister of State at the Department for International Development straddles both Departments. There will, no doubt, be discussions between both Departments, but the commission has clearly recommended in its report that the role of the ombudsman must be established because the supermarkets have failed to adopt the scheme voluntarily. From 4 August the Government had 90 days to respond and make a decision—three weeks away now.

As the Minister may be aware, I also raised the issue at Prime Minister’s questions on 4 February, asking:

“Does the Prime Minister agree that the commission’s proposed remedies to tackle this problem should now be implemented without further delay?”

The Prime Minister replied:

“The hon. Gentleman is absolutely right to highlight this problem—first, because of the failure to introduce early payment to many of the suppliers, we are asking the supermarkets to do that. Secondly, in relation to developing countries, we have been in talks with supermarkets such as Asda about how they can source their produce from those countries at a fair price. We will continue to push that as quickly as possible.”—[Official Report, 4 February 2009; Vol. 487, c. 844.]

This is an important matter. We are entering a crucial stage in the negotiations. Clearly, many organisations that are suppliers of supermarkets are looking out to see what the Government will do. It is very rare that a Government reject the clear recommendations of a competition authority, which has a responsibility to fulfil its statutory duty by assessing a particular case independent of the Government. The Competition Commission has acted in a responsible manner in this case.

I have several questions for the Under-Secretary. What discussions has he or his colleague, the Minister of State, had with BIS, with regard to the Competition Commission’s request that the Government implement its recommendation? Has the Minister or his Department discussed the matter with other Departments, such as the Department for Environment, Food and Rural Affairs, or with their contacts in developing countries, which clearly have an interest in the matter? What assessment has his Department made of the benefits that an ombudsman would bring to suppliers in developing countries? In what circumstances would the Government ever reject the recommendations of a competition authority, such as the Competition Commission, when it has engaged in such lengthy inquiries into such an important matter? Will his Department make a statement, in parallel with BIS, in the first week of November to indicate how that Department’s decision will impact on suppliers from developing countries?

I begin by congratulating the hon. Member for St. Ives (Andrew George) not only on securing this important debate at such short notice, but on his long-standing interest in development—an interest you share, Mr. Streeter. I welcome the opportunity to make a few observations on his comments.

Around the world, 2 billion people depend on agriculture for their livelihoods. The fragility of the world food system was highlighted during last year’s food price crisis. When those price increases came through, they trapped an estimated 150 million additional people in poverty and pushed the number of hungry people to more than 1 billion worldwide. We urgently need to support poor farmers and consumers to deal with fluctuating markets and survive the current global economic downturn.

The UK supermarket sector, as the hon. Gentleman has so clearly demonstrated, has a critical role to play in that. It is worth more than £100 billion a year, and its purchasing decisions make a huge difference to the livelihoods of producers in developing countries. So far, the UK has led the way in developing African horticulture to supply our markets. Altogether, British consumers spend more than £1 million a day on fruit and vegetables from Africa, and there is an important debate, because of that flow of goods, about the interaction between development and environmental sustainability.

I will take this opportunity to speak about the argument relating to food miles, because the hon. Gentleman has an interest in that area as well. As a Department, we make it clear that, with about 1 million farmers in Africa and their families relying on the fruit and vegetable trade in the UK and depending upon their earnings to get their children through school and to care for them when they are sick, it is important that UK customers do not make their purchasing decisions on the basis of food miles alone.

The distance that food has travelled is an incomplete argument about how sustainable the food that we eat is, and it is important for customers to recognise that when they make ethical consumer choices. In Kenya, for example, small-scale farmers bring their beans to the Kaviani sheds in Machakos district. Each week they sow, weed and pick green beans, and each week they earn an income of around £20, which they can invest in their children’s education.

One of the problems in Africa is not so much the availability of food but its affordability. People literally do not have enough money to purchase the food that they need. Exporting commodities, typically food such as the Kenyan beans, is an essential part of any economic growth strategy to increase incomes and reduce poverty. It is the same for small-scale farmers who produce coffee and sell it on international markets. They do so to be able to buy food locally for themselves. The hon. Gentleman made an important point.

The hon. Gentleman referred to the groceries supply code of practice. When it comes into force in February 2010, it will help to ensure better outcomes for both producers and consumers in the international grocery market. It will achieve that by ensuring that supply agreements are in writing and incorporate the code. The number of designated retailers will increase from four to 11, and they must have trained compliance officers. Certain practices will be prohibited, and the new code will ensure that disputes are resolved through fair and legally binding independent arbitration.

We are still assessing the Competition Commission’s proposal to establish an ombudsman to monitor and enforce the code of practice. The proposal raises several complex issues, and we need to consider its potential impact on consumers and the wider economy. We intend to make a decision on that later this year.

The Competition Commission believes that the benefits of effective enforcement and monitoring by an ombudsman would accrue from future investment and innovation due to increased confidence on the part of suppliers. However, we think that the evidence relating to the argument about those benefits is insufficient at present, which is why we want to do a more careful analysis to inform a future decision. An ombudsman would, of course, generate additional costs that would be borne by the retailers, but our view is that, although such costs are likely to be passed on to consumers, they would not constitute a material increase in consumer prices.

Little is known about the potential impact of either the code of practice or an ombudsman on developing countries. Frankly, analysis has not been undertaken on the issue. It is reasonable to consider that, in theory, the code will provide benefits such as increased investment for developing countries, as it would in the UK supply chain. However, in practice, the number of suppliers in developing countries who would engage with and make use of the code of practice or an ombudsman would be relatively low, so that the benefits would likely be insignificant. We think that the Government can operate in a more effective way to improve the livelihoods of poor farmers in developing countries.

I certainly appreciate the Minister’s point that an ombudsman could have a low impact, but even if very few complaints were pursued through the supermarket code of practice, the existence of an ombudsman and the code, if they have real teeth, would have a widespread impact. As he says, the cost could easily be borne, particularly by a sector that is posting the largest profits in its corporate history.

I understand the hon. Gentleman’s point, and I assure him that, over the coming weeks, the Government will keep in contact with him on this issue, which he has pursued with vigour for some time, so that we can deal with his concerns.

I should like to put on the record the commitment that my Department has to ensuring that agriculture and food security are given the highest attention not just in the UK but internationally. In the White Paper that we launched in July, we set out our commitment to provide more than £1 billion to fight hunger and to increase food production in the poorest countries. We will provide at least £1 billion a year to support growth and trade over the next three years.

In the White Paper, we laid out a commitment to increase our support for fair and ethical trade fourfold over the next four years. At the weekend, we announced a commitment of £12 million over the same period for Fairtrade. We therefore hope that, by 2013, we will have doubled the number of individual producers accessing the benefits of fair trade. At present, 2.2 million people will directly benefit. We hope that that benefit will extend to their families and affect some 7.5 million people all told.

I very much appreciate what the Minister is saying about fair trade and extending the work of the Fairtrade Foundation, which is extremely welcome, but I wish to get back to the point of this debate: the implementation of the supermarket code of practice, which will happen anyway, because the Competition Commission has the power to introduce it. The question remains, and we have only days to consider it, as to whether his Department will exert pressure to ensure that BIS looks seriously at the commission’s recommendation to establish an ombudsman. There is an indication in what he has said that it may not, but it would surely be a first if there were a failure to implement the recommendation of an important commission.

The hon. Gentleman may have misinterpreted what I said. Of course we will have discussions with BIS. My point was that we do not have sufficient evidence to show the direct impact of an ombudsman on developing countries. Although there is a logical argument to be made, and we will make it, we do not have the depth of evidence required to prove the impact of an ombudsman on developing countries. That was the point I was making.

Our work on fair trade will produce other benefits in boosting the impact on the developing world. We expect that the global sales value of fair trade certified products will treble over the next four years. We think that that is a fair way of doing business.

The hon. Gentleman mentioned bananas. There was a major piece in one of the Sunday papers on banana prices. I have discussed the matter with the Fairtrade Foundation and wish to put on the record for interested consumers who may be following this debate or reading Hansard that those supermarkets that have gone 100 per cent. fair trade on their bananas have committed to not joining what I consider to be an unhelpful price war. Something that I did not realise some 30 years ago when I used to stack bananas on shelves was that they were often used by supermarkets as loss leaders to get customers into their shops.

We will continue to support ethical trading initiatives, as we have since 1999, and to work with the food retail industry to develop responsible supply chains that will provide equitable opportunities for small and poor producers and enable them to connect with the market.

The food retail industry challenge fund will help retailers design new business models that will bring millions of farmers into fairer and more profitable trading relationships with UK consumers. We made available a fund of some £2 million to make partnerships work for the benefit of farmers, particularly in Africa. Helping poor farmers to increase their crop yields, giving them the support that they need to trade their goods internationally and ensuring that they can earn a fair price are all fundamental to helping lift millions of people out of poverty. I reassure hon. Members that DFID will continue to work with Governments and businesses around the world to support poor farmers and their communities.

Sitting suspended.