New Code Won’t Break British Chains’ Armlock on Farmers

Date: 2 Mar 2002 | posted in: Retail | 0 Facebooktwitterredditmail

British farmers and environmentalists are irate over the government’s new regulations governing the way major supermarket chains deal with their suppliers. The binding Code of Practice was issued in November after an extensive study found that the major supermarket chains routinely use their market power to squeeze farmers, undermine competition, and harm the public interest.

Farmers attacked the new rules as “purely cosmetic,” while Friends of the Earth warned that the code is “so weak that it simply legitimizes the worst practices of the supermarkets.”

Just five companies—Tesco, Sainsbury, Safeway, Wal-Mart-owned Asda, and Somerfield—account for 80 percent of all grocery sales in Britain. Tesco has fully one-quarter of the market. In the U.S., the top five firms control 40 percent of sales nationally and about 75 percent of sales in the largest 100 cities.

The Competition Commission, an independent agency established by Parliament, began investigating supermarkets two years ago. The inquiry was prompted by Welsh farmers’ angry demonstrations in front of supermarkets, asking why they only got ? 2 for a lamb when the meat was sold for ? 2 per pound in the store.

The Commission also sought to determine why groceries cost 12-16 percent more in Britain than in France and Germany. Farm incomes meanwhile have reached their lowest levels in more than a decade. Last year, total farm income was ? 1.8 billion. Tesco alone generated ? 1 billion in profits.

The Commission’s report cleared the chains of collusion and price fixing, but documented 52 ways in which supermarkets are exploiting their dominant power over farmers and suppliers. Several of the chains, for instance, required that suppliers pay a substantial fee to obtain shelf space. These payments are also widespread in the U.S., where they are known as “slotting fees.”

“We find that this practice, when carried out by any of those multiples [i.e., chains] with buying power,” concluded the report, “adversely affects the competitiveness of some of their suppliers and distorts competition. . . because the multiple engaging in the practice does not necessarily select the best, or most efficiently produced, product, or that preferred by consumers, but to some extent is influenced by whoever is best able to make the payment requested.” Often the fees required are beyond the means of small farms and food companies.

Other anti-competitive practices documented by the report include requiring suppliers to shoulder most of the costs of in-store promotions, provide compensation and retrospective discounts when sales of a product do not meet expectations, contribute to the costs of building new stores, and provide volume discounts even when lower volumes are ordered. Some of the chains regularly delayed payments for more than 30 days after delivery. Some purchased products at a negotiated promotional price and then sold them to consumers at full price.

Gathering information for the report was not easy. The Commission noted that the chains had created a “climate of apprehension” among suppliers, many of whom were reluctant to share information for fear of reprisals.

The report found that the supermarkets’ anti-competitive practices have also harmed independent grocers. Small stores are “doubly disadvantaged,” the Commission concluded. Not only do they lack the muscle to obtain the same favorable terms their big competitors get, but they are in fact often paying higher prices as suppliers seek to make-up for losses incurred dealing with the major chains. Between 1961 and 1997, the number of independent grocers fell from 116,000 to 21,000.

The Commission’s report recommended that the government issue a binding code of practice to govern how major chains deal with their suppliers. One year later, the Department of Trade and Industry released its Code of Practice.

The final version, which was written in consultation with the major chains, is substantially weaker than the recommendations made by the Competition Commission. For example, practices which the Commission had said supermarkets should not in any circumstances undertake, the final Code says they shall not undertake “unreasonably” or without prior written consent from the supplier. Most suppliers are not in a position to refuse such requests, noted critics.

British farmers are facing both low prices and declining marketshare. As British chains have grown larger and more globally minded, especially after Wal-Mart purchased the Asda chain in 1998, they have increasingly dropped domestic food in favor of imports. As part of its Real Food Campaign, Friends of the Earth surveyed supermarkets and found that, during the peak of the British harvest, only 25-43 percent of the apples and pears sold at the top four chains were homegrown.

The Council for the Protection of Rural England (CPRE) has been studying the important symbiotic relationship between farmers and locally owned food shops. In a study of the East Suffolk region, CPRE found that 81 local shops relied on 295 local produces for both raw foods (produce, eggs, meat) and secondary products (jams, bread, sauces). Many of the farms were too small to supply the large chains.

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Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance and directs its Independent Business Initiative, which produces research and designs policy to counter concentrated corporate power and strengthen local economies.