Economists and the Government

There has also been the case were supplier intermediaries have taken advantage of the supermarkets practice of outsourcing specific category sales (such as diary or fruit/vegetables). This has meant that these intermediaries have been able to equal the levels of market power retailer have and gain from it during the initial production stage. This can be seen clearly in two main case examples, the banana price wars of 2002 and the collusion of supermarkets to fix the price of milk which is still be investigated by the OFT. The banana wars case study was at its pinnacle between the years 2002 – 2003.

It was at this stage that major price cuts were made by supermarkets for the known value item. The war began when ASDA reduced the price of bananas to 94p after successfully negotiating a new deal with their supplier. Such is the competition and market structure of supermarkets that ASDA’s rivals quickly followed with all other supermarkets cutting prices further. To do so, the retailers had forced their suppliers into deep price cuts that had detrimental effects of suppliers who were now not receiving the legal minimum for a box of bananas and subsequently were unable to pay their labourers the minimum wage.

This is an example of the buyer power retailers possess and the way in which it forces suppliers to comply with their demands. Another key concern is the value chain between the trades of agricultural produce to gain power and profits. This relationship is described by Cox et al. (2002) as the ‘nature of competition for the revenues at each stage of the chain’. It is this nature of competition that is currently being seen by suppliers and supermarkets. The large retailers have been able to close the market to competitors which has led to power being gained over suppliers and culminating at the consumer.

As a result of this, the suppliers’ dependence on these large retailers means that the supermarkets are able to drive down prices and enforce new terms constantly. This power of retailers in which they can engage in dictating to suppliers has meant that the possibility of barriers to entry forming in the supply chain has increased. This concern of distorting competition by restricting entry can be seen by the significant number of landbanks owned by the largest supermarket in the UK, Tesco and the other ‘big four’ supermarkets.

3 This concern is added to by the way in which trade terms can have an adverse effect on competition within and between the supply of groceries and the suppliers. Changing consumer trends has meant that strain on suppliers has grown further as they attempt to meet the demands of consumers and supermarkets. Regulation within the industry is limited to the Supermarket ‘Code of Practice’ and the rules and guidelines for subsidies and payments set in the Common Agricultural Policy (CAP).

The code of practice must been revised to tighten the way in which supermarkets trade with suppliers inclusive of farmers. Introduced in 2002, the code has been severely criticised for being weak and ineffective. There has been clear evidence that the code has failed to ensure that supermarkets behaviour has improved with 80-85% of respondents, to an OFT review of the code in 2004, claiming this. This could be resolved by the introduction of an independent regulatory body, which has already been suggested, to control the trade between suppliers and supermarkets through stricter regulation.

Alternatively, regulation could be introduced to govern the whole supermarket industry, with changes likely to be made to competition policy within the UK, which would help reduce the power of supermarkets freeing up negotiation terms for suppliers. This would help to counter the issues regarding distortion of competition within the market and the burden of supply chain costs placed upon the suppliers highlighted by the Competition Commission’s ‘notice of remedies’ paper (2008) which stated:

‘We have provisionally found that the exercise of buyer power by certain grocery retailers and symbol groups with respect to their suppliers of groceries, through the adoption of supply chain practices that transfer excessive risks and unexpected costs to those suppliers, is a feature of the markets for the supply of groceries by all grocery stores, which prevents, restricts or distorts competition in connection with the acquisition of groceries by those grocery retailers and symbol groups.

‘ Reforms to the CAP could also help guarantee new levels of minimum prices paid to producers through a new scheme strengthening the single payments scheme adopted in the UK. To conclude, the UK supply chain is heavily burdened by the growing power of the large retailers, who have been accused of using this power to dictate trade terms to suppliers and restrict entry to the market.

There are sufficient levels of evidence that suggests these claims are true, with examples including the way in which supermarkets hold onto the power within their relationships with suppliers to the extent that suppliers fear to mention there concerns about their agreement with supermarkets in fear of losing their contract with the retailers. This was noted by the Competition Commission (2000). This is also seen through case studies such as the banana wars of 2002.

There is also the concern that by holding onto landbanks, arranging cartels and collusions and engaging in price wars, that the supermarket firms are distorting competition within the industry which has a adverse effect on both suppliers and consumers. It is possible that a new reform of the CAP will be required to ensure fair trade between suppliers and retailers. There will also need to be further tightening of the supermarkets ‘code of conduct’ guidelines and new regulations introduced to protect the suppliers and consumers and prevent further growth of supermarkets, a concern of policymakers, economists and the Government.

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