UK: Government Announces Plans To Address Failures In Groceries Market, Declines To Extend Scope Of Groceries Code

The Groceries Code has been back in the news recently, with the Groceries Code Adjudicator launching only it’s second ever investigation of a retailer. We issued briefings for retailers and for suppliers following the first GCA investigation.

Making fewer headlines, but perhaps just as important for the future of the sector, the UK Government recently consulted on whether the scope of the Groceries Code should be extended. The Code currently covers the 10 largest UK supermarkets and their direct suppliers. The consultation focused on whether that scope should be extended to cover relationships between producers (such as farmers) and intermediaries who process or supply their goods for use by supermarkets.

The Government was not convinced that there was a sufficiently strong need to extend the Code itself, but did conclude that some of the issues highlighted in the consultation needed more targeted intervention.

The most notable of these were the following:

1. Unfair or unclear contracts imposed by processors (such as slaughterhouses and manufacturers) on the producers who supply them, particularly in the dairy sector

The Government proposes compulsory written dairy contracts in 2018, to be enforced by the Rural Payments Agency, specifying (among other things) the price payable, the timing of deliveries, the duration of the contract, and payment terms. Similar standard term written contracts are already in use in regulated sectors such as gas, electricity and water.

2. Strengthening the negotiating hand of producers by encouraging collaboration

The Government is looking to encourage farmers to collaborate on things like production planning, processing and sales so that they can enjoy the benefits that come with greater scale, amongst other things enabling them to have a stronger hand when negotiating with the manufacturers and distributors who purchase their produce. Such collaboration will usually raise significant competition law risks, for which government involvement in the process will not be a defence unless the parties are following specific legislative requirements. There are nevertheless some circumstances where collaboration can be viewed as potentially "good" for a market, and EU competition law certainly allows for greater-than-usual cooperation between agricultural producers. The UK Government has said it intends to keep those rules in place after Brexit.

3. Strengthening the negotiating hand of producers by increasing price transparency

The Government also intends to explore options for bolstering the negotiating hand of producers by increasing the transparency of information in the sector. It noted that farm gate prices are freely available but prices negotiated between intermediaries and retailers are (understandably) kept confidential. This makes it difficult for producers to know how much retailers are willing to pay, and to estimate the "fair share" they should be looking for from distributors. There are again potential competition law issues with such price transparency – while it can make it easier for buyers to compare products on price, and so drive prices down, it can in some circumstances make it easier for sellers to compare margins and so drive prices up.

Other proposals made in the Government's response include the creation of a mandated carcase classification system in England and the consideration of statutory codes of conduct for contractual good practice between processors and producers.

Scottish producers should take note that the proposals, including those set out above, will not apply in Scotland as agriculture is a devolved responsibility. However, the Scottish Government may well decide to follow suit. The current arguments over responsibility for agriculture post-Brexit suggest a recognition that pan-UK consistency is desirable in respect of at least some agricultural issues, even if the Scottish Government has strong views on how that consistency should be achieved.

Respondents to the consultation also noted continuing problems with late payments to small producers. The UK Government hopes these will be addressed by the new Small Business Commissioner, appointed in October 2017 with powers across the UK, including Scotland.

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