After an April 2008 Competition Commission report on the UK grocery supply market, a new Groceries Supply Code has just come into force and a new grocery supply “Ombudsman” post is in the offing. Zoe Hare brings home the bacon.
Who: Competition Commission
When: 4 February 2010
Law stated as at: 25 February 2010
On 4 August 2009, the Competition Commission ("CC") established a new Groceries Supply Code of Practice ("GSCP"), as published in its final Order to its investigations into the groceries market. On 4 February 2010, this new Code came into force.
In addition, the CC is now consulting on the appointment of a new Ombudsman specific to the groceries market to whom suppliers can turn if they believe a retailer is failing to observe the GCSP.
The GCSP extends the application of the existing Code of Practice. Not only is the administrative burden on retailers more onerous but the new GCSP applies to more supermarkets than the previous Code.
Previously, the only supermarkets caught by the Code were Tesco, Asda, Sainsbury's and Morrison. The new GCSP applies to any grocery retailer with an annual UK turnover exceeding £1 billion. Therefore the initial list of retailers ("Designated Retailers") also includes Co-operative, M&S, Waitrose, Aldi, Iceland and Lidl; however, this list is subject to change by the OFT if a retailer reaches the £1 billion threshold.
The key provisions for suppliers which have been introduced by the new GSCP are set out below.
Duty to incorporate the GCSP in supply agreements
Under the old Code, a retailer's written terms of business need only be made available to the supplier on request. However, under the new GCSP, Designated Retailers are prohibited from entering into or performing any supply agreement unless the GCSP is incorporated and that all terms are consistent with the new GCSP.
Therefore, suppliers will now have time to review and negotiate the terms of business before entering into the contract for supply. The terms must be provided in advance as the CC has expressly stated that setting out the terms on the supermarket's website is insufficient to discharge its responsibility under the GCSP.
Duty to provide information to suppliers
In addition to providing the suppliers with a written copy of the terms and conditions and the supply agreement, Designated Retailers must also provide the supplier with a separate notice before entering into the supply agreement which sets out:
(a) the Designated Retailer's key obligations under the GCSP;
(b) identity of the senior buyer for that supplier;
(c) identity of the compliance officer;
(d) details of a feedback mechanism for the supplier;
(e) details of the Ombudsman;
(f) summary of the dispute resolution procedure; and
(g) confirmation of the de-listing procedure.
Principle of fair dealing
The GCSP has introduced an overarching obligation for Designated Retailers to deal with suppliers "fairly and lawfully". In particular, the GSCP sets out that a Designated Retailer must:
"conduct its trading relationships with Suppliers in good faith, without distinction between formal or informal arrangements, without duress and in recognition of the Suppliers’ need for certainty as regards the risks and costs of trading, particularly in relation to production, delivery and payment issues."
This new provision may give suppliers more leverage to resist terms which are offered by supermarkets, especially if the retailer is seen as abusing its greater bargaining power to a supplier's detriment.
Variation of supply agreements and terms
A Designated Retailer must not vary any supply agreement retrospectively, or request or require that a supplier consents to retrospective variations, unless the agreement clearly and unambiguously:
(a) provides for specific changes of circumstances allowing for adjustments to be made; and
(b) sets out the method of calculating the adjustment,
and, in any event, reasonable notice is given to the supplier.
Suppliers not predominantly to fund promotions
Under the new GSCP, a Designated Retailer must not, directly or indirectly, require a supplier predominantly to fund costs of a promotion. This is a change from the previous Code which stated that a retailer "may not unreasonably" require a supplier predominantly to fund costs of a promotion.
This revised provision in the new GSCP ensures that suppliers do not have to pay extra costs in order to have their goods promoted. The cost of promotions must not be passed on to the supplier, either directly or indirectly. If this provision was not expressly stated in the GSCP it would leave open the possibility of suppliers having to pay for their goods to be promoted by the retailer. The provisions in the new Code give suppliers extra leverage to resist such requests from the retailers.
Why this matters:
As explained above, the new GSCP extends the provisions of the previous Code and gives greater protection to suppliers against unfair terms which a retailer is trying to enforce.
The overarching principle of fair and lawful dealing helps to ensure that supermarkets do not abuse their bargaining power when contracting with suppliers. It offers more opportunities for a supplier to resist terms which it considers to be overly detrimental or unfair on the basis of this principle, particularly if it considers the retailer to have used its powerful position to request the inclusion of particularly onerous terms.
Moreover, the creation of a new Ombudsman specific to the groceries market will give suppliers a new route for raising complaints and disputes against retailers.
However, the key provision from an advertising and marketing perspective is that the retailers must not require a supplier predominantly to fund the costs of a promotion. This means that suppliers cannot be forced to pay unreasonable costs in order to promote their item in the supermarkets. This will even the playing field and help reduce the countervailing power which supermarkets, as purchasers, have against suppliers.
For a comparison between the old and new Codes of Practice, please click here.