Whether it is the current debates about specifications and pricing in the beef sector, the future of liquid milk supply or the new tender process being proposed for supplying Aldi, the issue of the role of supermarkets in the value chain and how they exercise power is seldom out of the headlines.
As the European Commission noted in a recent communication, many of the commercial relationships between businesses in the food supply chain are imbalanced in that one trading partner has significantly greater bargaining power than its counterparty. While noting such differences in bargaining power are common and legitimate in commercial relationships, the Commission also concluded that they may sometimes lead to unfair trading practices (UTPs). Examples they give of these practices include:
Avoiding or refusing to put essential commercial terms in writing.Retroactive unilateral changes in the cost or price of products or services.Transfer of unjustified or disproportionate risk to a contracting party.Deliberately disrupting a delivery or reception schedule to obtain unjustified advantages orUnilaterally terminating a commercial relationship without notice, or subject to an unreasonably short notice period and without an objectively justified reason.Large players
The implications of having a few large players dominating an industry have preoccupied us economists for a considerable period of time. It is fair to summarise that the definitive outcome of all this work is that such market structures may or may not be competitive and therefore may or may not impose costs on society! The issue of competition is of course not only an academic exercise and the competition authorities (for example in the UK) have also expended considerable effort and resources investigating supermarkets. Again, the outcomes of these investigations have generally been inconclusive. A common argument is that the fear factor (particularly from the perceived threat of being delisted as a supplier) prevents those on the receiving end of such practices complaining.
This means it is often difficult for competition authorities to find hard evidence of practices that may be deemed unfair or anti-competitive. Also the irony cannot be missed that one of the few times the retailers and processors of milk in the UK have been found guilty of collusion was in reaction to farmer-led milk price protests in 2009 when they came together to agree to pay farmers an extra 2p/litre!
If we accept that UTPs exist and are detrimental to suppliers, the next bone of contention is what should be done about it. A concern for the EC has been that very different approaches have been taken across EU countries to dealing with the issue (interestingly Ireland is seen as one of the countries that has taken a less regulatory approach). The EC has recently come out against legislation at EU level, but instead support extension of the voluntary supply chain initiative whereby companies effectively sign up to a code of good practice (which itself may be seen by some as simply an attempt by big business to stave off regulation), together with more uniform legislation across EU member states.
In Ireland, the Oireachtas Joint Committee on Agriculture, Food and the Marine published a report at the end of last year calling for a statutory code of conduct in the grocery sector, underpinned by an independent supermarket Ombudsman. When this issue was last discussed a few years ago, the ESRI produced a strongly argued paper that such an approach was likely to do little to support domestic suppliers while incurring costs on consumers. Unsurprisingly, those representing the larger retailers in Ireland also favour an EU-wide voluntary approach rather than a statutory code.
Personally, while fully understanding the sentiment and the difficulties with unbalanced trading arrangements, I am not sure I support the establishment of an Ombudsman. This is due to the fact that despite assurances of anonymity, I do not think many cases will come forward and therefore what you are left with is an expensive figurehead.
Even if a system such as that in the UK (where the top 10 retailers each face an £80,000 levy per year to pay for the Ombudsman) is adopted, the final cost will ultimately fall on consumers.
An interesting alternative I saw suggested in the UK was to force retailers to have their supply arrangements audited annually by an independent body.
Rather than concentrating on regulating the buyers in these markets, others advocate strengthening the position of the more vulnerable suppliers, for example enabling them to establish structures (such as acting as a single co-operative, producer organisations etc) that give them enhanced bargaining power. While in theory this may sound attractive, the usual problems with establishing such co-operative actions apply.
In addition this may not always be to the benefit of the consumer. A recent case in point is the €70m fine received by the dairy co-operative Valio in Finland as a result of being found guilty of predatory pricing (pricing below actual cost of production) in order to keep out a potential new entrant, Arla.
Complex issue
The one thing that is clear is that the issue is complex and my main concern is that while stronger regulation may seem by many to be a logical way to address the issue, the law of unintended consequences will inevitably come into play.
That is regulation that aims to protect the potentially more vulnerable partner may well have the opposite effect. Taking an example from another area, in Scotland, legislation aimed at strengthening the position of tenants has led to fewer tenancies being available as landlords become wary of letting out their property.
Whether it is the current debates about specifications and pricing in the beef sector, the future of liquid milk supply or the new tender process being proposed for supplying Aldi, the issue of the role of supermarkets in the value chain and how they exercise power is seldom out of the headlines.
As the European Commission noted in a recent communication, many of the commercial relationships between businesses in the food supply chain are imbalanced in that one trading partner has significantly greater bargaining power than its counterparty. While noting such differences in bargaining power are common and legitimate in commercial relationships, the Commission also concluded that they may sometimes lead to unfair trading practices (UTPs). Examples they give of these practices include:
Avoiding or refusing to put essential commercial terms in writing.Retroactive unilateral changes in the cost or price of products or services.Transfer of unjustified or disproportionate risk to a contracting party.Deliberately disrupting a delivery or reception schedule to obtain unjustified advantages orUnilaterally terminating a commercial relationship without notice, or subject to an unreasonably short notice period and without an objectively justified reason.Large players
The implications of having a few large players dominating an industry have preoccupied us economists for a considerable period of time. It is fair to summarise that the definitive outcome of all this work is that such market structures may or may not be competitive and therefore may or may not impose costs on society! The issue of competition is of course not only an academic exercise and the competition authorities (for example in the UK) have also expended considerable effort and resources investigating supermarkets. Again, the outcomes of these investigations have generally been inconclusive. A common argument is that the fear factor (particularly from the perceived threat of being delisted as a supplier) prevents those on the receiving end of such practices complaining.
This means it is often difficult for competition authorities to find hard evidence of practices that may be deemed unfair or anti-competitive. Also the irony cannot be missed that one of the few times the retailers and processors of milk in the UK have been found guilty of collusion was in reaction to farmer-led milk price protests in 2009 when they came together to agree to pay farmers an extra 2p/litre!
If we accept that UTPs exist and are detrimental to suppliers, the next bone of contention is what should be done about it. A concern for the EC has been that very different approaches have been taken across EU countries to dealing with the issue (interestingly Ireland is seen as one of the countries that has taken a less regulatory approach). The EC has recently come out against legislation at EU level, but instead support extension of the voluntary supply chain initiative whereby companies effectively sign up to a code of good practice (which itself may be seen by some as simply an attempt by big business to stave off regulation), together with more uniform legislation across EU member states.
In Ireland, the Oireachtas Joint Committee on Agriculture, Food and the Marine published a report at the end of last year calling for a statutory code of conduct in the grocery sector, underpinned by an independent supermarket Ombudsman. When this issue was last discussed a few years ago, the ESRI produced a strongly argued paper that such an approach was likely to do little to support domestic suppliers while incurring costs on consumers. Unsurprisingly, those representing the larger retailers in Ireland also favour an EU-wide voluntary approach rather than a statutory code.
Personally, while fully understanding the sentiment and the difficulties with unbalanced trading arrangements, I am not sure I support the establishment of an Ombudsman. This is due to the fact that despite assurances of anonymity, I do not think many cases will come forward and therefore what you are left with is an expensive figurehead.
Even if a system such as that in the UK (where the top 10 retailers each face an £80,000 levy per year to pay for the Ombudsman) is adopted, the final cost will ultimately fall on consumers.
An interesting alternative I saw suggested in the UK was to force retailers to have their supply arrangements audited annually by an independent body.
Rather than concentrating on regulating the buyers in these markets, others advocate strengthening the position of the more vulnerable suppliers, for example enabling them to establish structures (such as acting as a single co-operative, producer organisations etc) that give them enhanced bargaining power. While in theory this may sound attractive, the usual problems with establishing such co-operative actions apply.
In addition this may not always be to the benefit of the consumer. A recent case in point is the €70m fine received by the dairy co-operative Valio in Finland as a result of being found guilty of predatory pricing (pricing below actual cost of production) in order to keep out a potential new entrant, Arla.
Complex issue
The one thing that is clear is that the issue is complex and my main concern is that while stronger regulation may seem by many to be a logical way to address the issue, the law of unintended consequences will inevitably come into play.
That is regulation that aims to protect the potentially more vulnerable partner may well have the opposite effect. Taking an example from another area, in Scotland, legislation aimed at strengthening the position of tenants has led to fewer tenancies being available as landlords become wary of letting out their property.
This is a subscriber-only article
SHARING OPTIONS: