As the financial crisis was swirling this past fall, the British newspapers were filled with headlines saying that UK retailers were using the financial crisis and consumer desire for value pricing as cover for efforts that would crush production agriculture. Sean Poulter at The Daily Mail put it this way:
Supermarkets have been accused of demonstrating the sort of greed that triggered the banking industry crisis, by Britain’s farmers.
Tesco is particularly in the firing line with claims from the president of the National Farmers’ Union that it is using ‘outrageous bully boy tactics’ to cut prices paid to suppliers.
All the major supermarkets have been calling in suppliers in the last few weeks to demand cuts in prices following the reduction in the cost of oil and commodity crops. However, NFU president, Peter Kendall, said Tesco, in particular, has gone too far.
Tesco has been accused of putting ‘extreme’ pressure on growers and suppliers in an attempt to compete with budget retailers like Aldi, Lidl and Netto.
It is claimed growers are being asked to pay new fees to have their products stocked on shelves, give discounts on previously agreed prices, which are known as over-riders, and put up with increases in the time it takes to settle invoices.
The NFU yesterday issued the details of a hard-hitting speech to be given by Mr Kendall at a conference in Cardiff on Monday.
He will say: ‘The global economic turmoil we are currently seeing means Britain is facing its sharpest downturn for a generation, driven largely by short term greed in the financial sector. This has resulted in real damage in people’s confidence and belief in the free market system.
‘The retailers, led by Tesco as the biggest and most successful, could go a long way to restoring public confidence in that free market system by demonstrating a new, fundamentally more responsible approach to retail policy.
‘It is not inappropriate to ask, in the wake of the damage done by unfettered, greed-motivated behaviour by some in the financial sector, whether Tesco should continue to chase every last pound of dividend for shareholders at the potential expense of massive damage to the rural infrastructure in this country.’
He said it is possible to deliver both fair prices to customers and suppliers, providing the supermarkets agree to slim down their own profit margins.
‘Competitive pricing for its customers can be achieved without resorting to the crippling squeeze tactics on suppliers which are yet again rearing their ugly head.
‘We are receiving all too many complaints from suppliers, frightened of taking up their issues direct, who have had unilateral price cuts and demands for back payments and over-riders.
‘Frankly, some of these can only be described as outrageous, bully-boy tactics, and they must not continue as we head into recession.
‘While we fully recognise the plight of consumers and their need to buy good value food during the credit crunch, there is enough flexibility in the margin taken by retailers to offer competitive pricing without reducing the price paid to farmers, growers and other suppliers.
‘A continuation of this policy will see the agricultural production base in this country irreparably eroded with diabolical consequences for suppliers.’
Separately, Farmers Weekly, the industry magazine, has been contacted by supermarket suppliers who feel they are being unfairly squeezed.
One said Tesco’s response to the threat of discount rivals has been to ‘screw suppliers’.
In general, retailers in the US don’t have the market power they do in the highly concentrated UK market. Still many report themselves to be under tremendous pressure. As we mentioned here, many top producers feel they are being asked to pay to shoulder many supply-chain responsibilities — food safety, sustainability, traceability, etc. — yet are also expected to match the price of every producer out there, regardless of their commitment or lack thereof to supply chain responsibilities.
In order to learn more about the British producer community and its concerns regarding retailers, we asked Pundit Investigator and Special Projects Editor Mira Slott to find out more:
Head of Food Chain Unit
National Farmers Union
Q: NFU president Peter Kendall lambasted UK retail pricing and purchasing practices, calling them “outrageous, bully-boy tactics” that place undue burdens on suppliers. Tesco is targeted in particular. Why is that? And what constitutes the basis for these strong accusations?
A: I read with fascination your report of Fresh & Easy supplier discontent over Wild Rocket’s slow pay, clipping of bills and failure to protect category exclusivity. Tesco obviously has influence over that third party. Tesco could easily sort out problems but it places undue pressure on the middleman.
Here in the UK, Tesco has 30 percent of the retail food market by value; the next biggest is ASDA, at just over 17 percent; and Sainsbury, at just under 16 percent, with ASDA and Sainsbury fluctuating around these percentages in market share. Even below that, Morrisons is at around 11 percent.
Almost three quarters of the grocery market is concentrated between the big four supermarkets. When one does something, it affects the whole of the market. Suppliers point to retailers acting very tough on negotiations, and in hard economic times this is not surprising, but Tesco is where we’re finding allegations of unscrupulous tactics. We haven’t had explicit reports of unfair practices except related to Tesco.
Q: Rory Taylor of the Competition Commission said its investigation in no way found cause to single out Tesco specifically. Yet NFU has done just that.
A: We’ve received reports particularly on the bad behavior of Tesco. Usually complaints are distributed across the retail chain. The vast majority of any noise was against Tesco, suppliers specifically honed in on Tesco, but the issues there are issues across the whole of the market. Tesco is the market leader, which is part of the reason we’re coming out so strongly against Tesco, in the hope of convincing others not to follow their lead.
Q: Could you provide some specific examples to substantiate these claims? Do you have evidence to support such accusations? And are these widespread or limited to a few suppliers?
A: There is a problem with people wanting to go on the record for fear of retribution.
We have an obligation to protect supplier identities. We’ve received reports of Tesco simply sending an invoice representing an arbitrary portion or percentage of a supplier’s business with Tesco, and if you don’t pay it, then Tesco will de-list you. Say your turnover with Tesco is 60,000 pounds a year, the supplier is contacted in some way and told, ‘You will be receiving an invoice for, say 5 percent of that 60,000 pounds, and expect to pay it if you hope to continue trading with us.’
It could be justified as a contribution to a campaign or for a promotion Tesco is running, which may or may not help your product. It’s a fee that was not negotiated in advance. The supplier is simply contacted with little or no notice that an invoice is on the way.
Q: Are you aware of the Telegraph report on Tesco’s Discounter House, where price negotiations take place?
A: You can argue these are hard-nosed negotiations that sound unfair, but these are negotiations for future transactions. Some of the issues we’ve had are related to changing terms retroactively. These are incredibly robust negotiations at Discounter House, and while this may sound harsh, at the end of the day it looks like suppliers have options at Discounter House.
Tesco needs to judge how far to push these things; people can survive for so long before they go bankrupt or cut production so they can’t supply them. Chasing every last pound of profit puts the industry at risk of future sustainability. All sides have to make money.
Q: Don’t retailers and suppliers set up contracts and agreements in advance?
A: There are a few arrangements with specific contracts, but almost all are on a handshake basis so they can be more flexible. It is not the norm to have such a contract.
Another example of sharp practice: When you walk into a Tesco store, there are a number of price ranges and product tiers, either premium or value lines. Suppliers have complained that with very little or no notice, Tesco changes the terms of their agreement. For example, if you were supplying 75 percent of your product in the premium category, and 25 percent value category, Tesco says now we want 75 percent value product and only 25 percent premium. And the supplier is not prepared, but has to make the switch, putting higher grade product into value, low lines and taking the hit.
We’ve had reports of deliveries being rejected for various nefarious reasons — a couple damaged strawberries, and Tesco rejects whole loads. There is further trouble, but let’s be fair with Tesco; in certain areas they’ve acted in a first-class way, and try to insure a sustainable supply chain. In dairy, local suppliers’ milk went into local stores, a ring fenced group of suppliers. At times Tesco is one of the best retailers to deal with.
It’s almost a good cop/bad cop situation. We have the payment terms issue, where payments are increasingly stretched, 60 to 90 days. If your main or only customer is Tesco and it is suddenly changing credit terms that can have dramatic affect on your business. Tesco is such a big player it has strong impact on the market.
Q: Aren’t product prices to some extent dictated by competition and supply and demand in the marketplace?
A: Tesco is under pressure from discounters here. The executives would say they’re fighting similar quality at lower prices simply because the model is lower in cost. Aldi is operating from a lower cost base and can afford to go cheaper, but Tesco wants to get margin on it. These price wars impact the general market. Ultimately everyone is paying a similar price and creating distortion in the market. This kind of pressure is across most of the sectors. We are seeing particular pressure in the produce sector but it is not confined to that.
Tesco is reacting to the environment but it seems like it expects to make 3 billion pounds profit, and is seeking out every last pound from the supply chain, which is a very short-term outlook. We’re hearing reports of others driving a hard bargain, but you can’t complain about that.
Q: The British Retail Consortium representing supermarkets said there was no evidence supermarkets were abusing suppliers.
A: The Competition Commission has a different take. In its recent Groceries Market Investigation Report, it recommended an ombudsman be put in place to monitor and enforce a stronger code of ethics. We submitted evidence to the Commission from the grocery supply chain.
For The British Retail Consortium to come out and say it doesn’t see unfair practices overlooks the Competition Commission recommendation that the industry needs an ombudsman to oversee supermarkets, to investigate and insure there wasn’t such unfair practices. And we fully support that need. If supermarkets, especially Tesco, are very much against the introduction of an ombudsman, it makes them suspect.
Q: Those arguing against an ombudsman say it will just add more costs to the supply chain and result in higher retail prices, in the end hurting consumers during these tough economic times.
A: That’s the standard response. The ombudsman was to be paid by 11 to 12 biggest supermarkets. The cost is a tiny fraction of just Tesco’s turnover. So, if you took in others, it would be fractions of a percent of their turnover. We didn’t want some monolithic, huge department. We wanted a few experts to look on an independent basis. We don’t need hundreds of people to do this. The cost is negligible. I’m sure it would be less than CEO Terry Leahy’s 10 million pound salary package, or one board member’s at less than 2 million pounds.
Mira turned to the Competition Commission to learn more:
Media Relations Manage
Q: The Competition Commission recommended a more stringent and comprehensive Groceries Supply Code of Practice, to be monitored and enforced by an independent ombudsman. Why does the Commission believe tougher measures are needed, and what strategies are you employing to implement these mandates going forward?
A: How can I best enlighten your readers? Our involvement with the grocery industry goes back quite a way. We recently completed a two-year investigation; this is unusual as not many countries do this kind of style of investigation. In the UK, you can look at the structure of the market to see if change is needed to make it more competitive. In April 2008, the investigation was concluded. We were at it since May 2006.
The investigation was referred here by the Office of Fair Trading, which had a number of concerns about the grocery market, about the power of bigger retailers over here, the affects of bigger retailers on local and smaller independent shops, all part of the impetus. Another concern and main issue was relating to power of retailers over suppliers. We were looking at a very wide range of issues, some which didn’t fit well into the competition focus, such as the social affects of binge drinking and a multitude of issues subject to a lot of conjecture prior to the inquiry into market competition and strong-arm tactics by retailers toward their suppliers.
Q: Could you delineate the main conflicts? And are suppliers willing to voice their concerns in a meaningful way without fear of retribution?
A: Suppliers allege that retailers are making it very difficult for suppliers by throwing their weight around. This is something we were looking at very closely during the inquiry. We made a concerted effort during the inquiry to those having issues to come forward. We can get into a one way streak or vicious circle. If people don’t come forward with specific complaints, it is difficult to prove it is even happening. We need suppliers to confidentially come forward to let us know what’s happening. Because of the sensitivity, not all details could be published. We heard enough from enough suppliers, and while a lot of complaints are broadly posted, a couple of areas of concern needed to be addressed.
It’s rare in these inquiries you end up advocating entirely one point of view. If you listen to bigger retailers, there is no problem, and at the other end of the spectrum, there is nothing right with retailers. The truth tends to be in the middle, enough of a problem to be concerned.
Q: Could you be more pointed? Do you have specific examples?
A: Having had a flick through the report and its appendices, there isn’t much in the way of anecdotal or individual cases of complaints about retailer practices. The closest thing is Appendix 9.8, which at least categorizes some of the practices that have caused us concern and also tallies them up.
We are most concerned about retrospective changes to payments of terms and conditions. People come to an agreement and find a customer demanding significant changes with very short notice; especially where suppliers put in significant investments at the request of the retailer.
One of the problems in this industry is that written agreements don’t seem to be particularly thick on the ground. There is a Code of Practice that governs these relationships between retailers and suppliers.
A Code of Practice was introduced after our 2000 inquiry. We certainly felt it was having an affect because we couldn’t find too much evidence of transgression. It raises the question of whether the Code was as robustly monitored as people wanted it to be, and if it was comprehensive enough. We want to try to prohibit retrospective change in positions — moving the goal post. A fair dealings provision is an overriding principle.
There is some concern of shrinkage going on, where a supplier delivers something, it goes missing and the supplier gets hit for the cost. Really, it’s just particular practices that were going to be ultimately damaging to competition, which had to be the focus of our actions. If we didn’t take action on some of those areas, we could face a situation of fewer and fewer suppliers, with less competition, less choice and less innovation.
A: We did this case study to get a snapshot because things had been brought to our attention of alleged improper practices. The study lasted only about a month or so, but that meant a hell of a lot of e-mails we were going through. Appendix 9.1 summarizes the e-mail correspondence between Asda and Tesco over a five-week period.
Q: What did you conclude?
A: That there were not wholesale transgressions going on. When looking overall, people were still following the Code. It raised the question of whether the Code was sufficiently strong enough. Shortly towards the end of our inquiry, the Office of Fair Trading, which does cartel investigations, related to price-fixing, paid a few visits to retailers and suppliers regarding possible untoward communications. I want to tread very, very carefully on this one because investigations are going on, but nothing has been proven.
Already there have been two long-standing investigations stretching back to 2003; one linked to dairy and one to tobacco. In the case of dairy, fines were handed out. There is a greater awareness of those offenses in our country than five years ago.
We’re not involved with the investigations, but it appears from media reports they are not related to fresh produce. Conditions are in place for that kind of behavior, but we don’t see evidence of it. This can go on, but within a market like groceries in good shape overall. This is difficult for us to comment on because we don’t do these kinds of investigations really.
Q: What actions is the Competition Commission pursuing?
A: We’re trying to do two things, first to strengthen the Code of Practice, and also, as I alluded to earlier, not many people have come forward because they are afraid. So we want to better the existing system for monitoring and build confidence in enforcement. The idea of an ombudsman floated around early on. Along with the Code of Practice, we need someone with the power and expertise to act as arbitrator in these disputes, and establish confidence for those that feel they’ve been done a disservice.
Q: Could you respond to criticisms that bringing in an ombudsman is both unnecessary and costly?
A: We don’t envision a massive office, just a specialist expert with appropriate support. This won’t be costly, an estimated one to three million pounds a year. This outlay wouldn’t have much affect on food, considering global forces on food pricing. We generally think it would be in everyone’s interest. It’s slightly idealistic, but it’snever going to stop suppliers grumbling about retailers and to some extent retailers grumblings about suppliers, which is healthy in some regards.
Responding to criticism in general terms, if a strong Code of Practice is robustly monitored, an ombudsman won’t stop disputes, but provides a mechanism to deal with them, instead of feuding over unsubstantiated allegations. If retailers have got good, positive relationships with suppliers, they should have nothing to fear from this plan.
I can see a benefit in showing a good faith effort to resolve conflict. Promoting good relations with suppliers and treating them well reflects positively to the consumers. This is a point made by other people that instituting an ombudsman post makes a statement that we treat our suppliers properly and have nothing to hide.
The argument has been put forth that the whole country is in recession, we don’t need this right now. Actually, when things get tight, and there’s a squeeze on suppliers, this is a reason more than ever for it. Retailers don’t like the way it reflects on them when unspecified allegations are made and this would be a way to resolve this.
Q: Does the Competition Commission have the authority to enforce these codes itself?
A: As far as enforcement goes, there is an Office of Fair Trading already. There is phase one and phase two authority. When it is time for an in-depth investigation, those get referred to us. Once we finish the investigation, we don’t have a day-to-day role in monitoring and enforcement.
The ombudsman would be a new role set up to handle disputes. It could take a more proactive role; look into issues rather than individual complaints, areas where we are hearing a lot of noise. We’re not empowered to do it ourselves. The NFU is aware that we can recommend action, but the retailer has to agree to it. In terms of redrafting Code of Practice, this is within our powers, but establishing a separate office for an ombudsman is outside our powers. We have limits.
Q: So the retailers have veto power? They can stop enactment of an ombudsman?
A: The big four retailers already signed up for the Code of Practice so are bound by it. They will be signing up because it is required by order. The tricky bit is who is going to regulate it or enforce it. The Fair Trade Office is in charge of monitoring, but they have not received a great number of complaints. This tends to undermine the feelings of suppliers to come forward because they are not seeing others doing it.
Q: Tesco in particular has been getting hammered by NFU and media outlets. NFU claims it is because it receives the most ire from suppliers of unfair treatment.
A: Tesco is the largest retailer. Tesco would say everyone mentions them because they’re the biggest. Tesco has become the bête noire, the symbol for what some people don’t like about supermarkets. We’ve done enough market investigations to know the biggest retailer gets the most flack, but the problems are far from being limited to one. In the states, it’s like attacks on Wal-Mart — the biggest gets the most complaints.
This investigation is not an inquiry about Tesco. We tried to make that very clear. It is more related to local competition and the market. Of course, Tesco is the major player, but I don’t think there is anything in the investigation that is unique to Tesco. A specific Tesco question would be: Are they getting to the point they are so powerful that no one else can compete?
We didn’t think the competition was singularly down to one retailer. Small independent shops wanted us to do more in our inquiry to protect them, but actually we found good and vigorous competition beneficial for the consumer. We got quite a bit of grief for it. It can get quite emotive, whenever talking about farmers and land, and producing, this industry has been here for centuries. We concluded the market is working broadly well for consumers, but equally we didn’t conclude everything was perfect. It doesn’t mean there weren’t things needing improvement.
Q: Your comments regarding problems in the system come across quite mild, in stark contrast from NFU’s Peter Kendall accusing UK retailers of outrageous bully-boy tactics.
A: Speaking that way doesn’t contribute to us getting things accomplished. People expect us to be informed and objective. Inquiries must be conducted in a professional, unbiased manner. Cheap shots make easy headlines, but it is not appropriate to indulge openly is such criticism. We must reasonably examine issues and conduct a fair investigation.
There is a balance between not interfering in the pricing process and the way consumers get lower pricing, and fairness.
The Competition Commission sees a need to tighten the original Code of Practice to insure its intent is followed out. An ongoing debate ensues that the retailer’s position of power over the supplier supersedes boundaries and limitations on its possible abuse set forth in the original Code of Practice.
Some argue it does not go far enough to usurp the retailer’s ultimate influence in buying transactions. For example, wording in the original Code of Practice says retailers are allowed to request something of a supplier, but not allowed to require it. Suppliers insist that if a large retailer or a major customer makes the request, is there any real difference from demanding it.
In disputes you have different interpretations and still need someone to intervene if the parties can’t resolve the problem. You need an impartial party to come to a fair judgment. This is an industry where there is not a great deal of actual written agreements. If you think you’ve come to an agreement but it’s not in writing, it’s quite easy to have different interpretations. A supplier is not likely to be able to take legal actions without better record keeping and contracts.
Q: Is this problem particularly notable in the produce industry?
A: In the produce business, people are dealing with fast-changing orders, and contracts are not as widespread as they might be, paper work provides the clarity you need, yet there might be a need to change the terms of agreement down the line. In an ideal world, retailers and suppliers are discussing this at the start, if this happens, and the forecast is wrong, who is liable? Get risk elements discussed at the start of the agreement.
With farmers, most don’t supply supermarkets directly. NFU is dealing with pressure that people feel coming from up the chain, the processors, packing plants, the intermediaries. Complaints might not come from the actual supplier to the supermarkets. That is a tough one for us to address. The Code of Practice can only relate to suppliers directly supplying supermarkets.
Fairness throughout the supply chain is one thing NFU is keen on — an ombudsman would have more ability to look into issues like that relating back to the retailer through an intermediary. This is an area where we get a lot of accusations, but not always in specific terms. In the investigation, Appendix 9.6 looks at the fruit supply chain, which may be of interest.
Q: How does your investigative process work exactly? Do you involve all players in the supply chain?
A: In the market investigation, we hold lots of hearings. It’s a formal process where we sit down with parties involved, suppliers, retailers, trade organizations, etc., and it’s far from limited to those.
You never find an organization like ours using the harsh language of the NFU. There have been a few stories floating around about certain retailers, conspicuously Tesco being named for cracking down on suppliers; quite a bit of noise on that. We haven’t looked at those recent allegations. We are in the process of implementing new protective measures.
Tied together here, we’re going through this process of informal negotiations to get this up and going in a tough economic environment. So at the same time, suppliers claim that retailers are putting the squeeze on them.
Q: It seems there is still much to resolve in terms of the power the big UK retailers yield with suppliers, and the system to monitor and enforce codes of practice. What recourse do you have, for example, if retailers say no to an ombudsman?
A: If retailers absolutely refuse establishment of an ombudsman, we would go to our parent Department for Business Enterprise and Regulatory Reform and recommend they take what ever action necessary to establish one. Things are happening, but we can’t investigate a nebulous complaint. We want to create a robust environment for people to come forward.
Retailer/supplier relations are always problematic. Part of the problem is that the public complaints always run to matters of form: “They tried to change the deal after the fact.”
Yet the real problem is typically one of substance. The vendor is dependent on a limited number of customers and so is always presented the choice of going along or closing up. There also is a culture clash in which mostly family-owned businesses, very much extensions of their owners, are negotiating with large publicly held companies. This means different time horizons and different notions of what constitutes a commitment.
Yet there is no question that individuals matter. Not long ago, one of the buyers at Wal-Mart spoke with the vendors in a particular category and he raised his voice to make an important announcement: “Let me make one thing clear,” he exclaimed “I never want to hear the name Bruce Peterson ever again.”
The buyer didn’t want to be bound by moral commitments. He didn’t want to know about the time when the vendor came through… when the vendor invested on Wal-Mart’s behalf… when Wal-Mart didn’t amount to much in produce but the vendor performed anyway… he didn’t want to feel constrained by long ago promises.
“What have you done for me lately?” Perhaps this is a terribly clever way to run a business, especially if you want to run it with young executives with spreadsheets but no particular product knowledge. Yet it may be too clever by half.
Right now the push in the UK is for an Ombudsmen, someone to help ensure nothing untoward goes on. But if the market continues to consolidate, the next step would be to take some things out of the sphere of negotiation.
If we want small business to live, what if we just pass a law that large companies have to pay their bills five days after receipt of merchandise? What if we want to take discretion to fire suppliers out of the hands of retailers and require them to have metrics and only allow them to dismiss suppliers who fail to meet the metrics?
To a capitalist, such as the Pundit these possibilities sound odd. Yet, companies such as Tesco are successful in large part because of laws that restrict the ability of competitors to compete. The only reason ASDA hasn’t given Tesco a real run for its money is that UK law makes it exceedingly difficult to site 200,000-square-foot stores.
The financial crisis has made it obvious that there was a major flaw in the compensation systems of investment-banking operations. By paying bonuses based on a calendar year, the firms paid on money that had not actually been earned. The bonuses were based on hypothetical valuations as of December 31st. It is clear now that nobody should get a bonus until the whole deal has actually been sold or unwound and the profit was real.
One wonders if there isn’t a similar problem in the compensation of food industry executives. In the short term, they can benefit by beating suppliers down and thus increasing retail margins. They may get bonuses, options and salary hikes based on this short-term phenomenon.
Long term, though, they may be starving the supply base and retailers can’t thrive without suppliers so, perhaps, they are hurting long-term retail profits by demanding unsustainable prices right now.
If we want a vibrant production agriculture sector, an Ombudsmen may be useful, but more important may be compensation reform that keeps a lid on retail compensation if retail profits come at the expense of a vibrant production agriculture segment.
Many thanks to Lee Woodger of National Farmers Union and Rory Taylor of Competition Commission for helping us understand this important issue.