The Groceries Supply Code – a true “win-win” for drinks suppliers?

The Groceries Supply Code of Practice 2010 (GSCOP) is legislation designed to force the largest UK supermarkets to behave more fairly and lawfully towards their suppliers. Solicitor Andrew Park argues that it gives drinks suppliers a real opportunity to improve their margins on sales to the supermarket sector, and could begin to reduce the UK consumer’s addiction to promotions.

Over 80% of all wine sold in the UK is sold in the off-trade; over 80% of that is sold by the multiple grocers; and over 50% of that is sold on promotion. The majority of the British wine-consuming public has become addicted to promotional offers. Of course it’s not limited to wine; the same can be said for spirits, lager, beer, cider etc – all drinks are sold on promotion on a huge scale.

As this addiction has grown, many suppliers have seen their margins on sales to the multiples driven down so much that they no longer find the sector viable. This is not just bad news for suppliers – it is bad for the consumer and, ultimately, for the supermarkets as well.

Being able to buy drinkable wine at rock bottom prices may at first sight be a benefit to the consumer. But is it really, if they end up with a shrunken and rather peculiar sub-set of products to choose from (yes, it’s wine, Jim, but not as we know it) which serve only to feed their addiction to low prices? And will creating and sustaining demand for this type of product really benefit the supermarkets in the long run?

How can drinks suppliers try to make the supermarkets change their ways, given that it’s their market power that has brought this situation about in the first place?  The GSCOP was introduced in February 2010 in order to constrain that power and force them to act more fairly towards their suppliers. The Code requires every “Designated Retailer” (DR) – currently Asda, Co-op, M&S, Morrisons, Sainsburys, Tesco, Waitrose, Aldi, Iceland, and Lidl – to deal with its suppliers fairly and lawfully at all times. It also limits the DRs’ freedom to pursue practices considered unacceptable in several key areas.

An important part of the regulatory mix was to be the appointment of an Ombudsman to enforce the GSCOP. That hasn’t happened yet, and some have suggested that the Code lacks teeth and is unlikely to change the behaviour of the DRs until it does. But some parts of the legislation are fully enforceable already, even without an Ombudsman, and savvy drinks suppliers can and should be using it to their advantage. Key actions suppliers can take include:

1. Appoint a Code Compliance Officer – as well as having someone internal to monitor the application of the Code, it sends a clear message to DRs that you are aware of the Code and serious about compliance.

2. Train your sales personnel to ensure they understand the Code and how best to make that known to the DRs.
The Code places restrictions on Listing Fees. If a DR requests one, ask to see the risk assessment/estimate upon which the fee has been based.

3. The Code requires DRs to ensure that all the terms of each supply agreement are set out in writing.  Ask for Code-compliant Written Supply Agreements.

4. The Code requires DRs to prepare forecasts in good faith, with due care, and following consultation with the supplier. Ask to see relevant forecasts before confirming your final agreement.

5. The Code distinguishes between Promotions being ‘predominantly funded’ by the supplier and ‘supported’ by the supplier. The former is prohibited, the latter permitted only on certain conditions. This is an important protection which suppliers can make use of in several ways.

6. De-listing – The Code provides that a DR may only de-list a supplier for genuine commercial reasons. Standing up to a DR who is in breach of the Code cannot be a justification. If a DR does propose to de-list, it must go through certain hoops, and the supplier has a right of review.

(The above list is not exhaustive.  A more detailed Guide is available from www.appwinelaw.com)

The power of the multiples is not the only problem drinks suppliers are faced with right now.

Currency fluctuations, duty increases, and the protracted economic crisis all continue to make conditions extremely difficult. But even if all those other factors remain equal, consistent reliance on the GSCOP should, over time, result in fairer supply agreements with the DRs, fairer and more consistent performance on their part and, ultimately, better margins for their suppliers.

If the supplier’s price to the retailer is fair, and includes a fair margin, and the retailer’s price to the consumer is fair, and includes a fair margin, prices to the consumer will find their right level and the process of weaning consumers off promotions could well have begun.

This should not be seen as protectionism for suppliers. Producers’ associations whose rules aim to keep vineyard, grape and wine prices high will – and should – still fear suppliers who use innovative techniques to produce wine of equivalent, or better, quality at lower prices.

Fairer and better margins for suppliers should encourage increased innovation and competition in the supermarket drinks sector, to the ultimate advantage of the consumer in terms of quality, choice, health and quality of life.

Andrew Park heads APP Wine Law, a UK-based law firm specialising in wine trade-related legal work, including UK/EU wine agency, distribution, brand development and joint venture matters. APP Wine Law produces a free Guide explaining how suppliers can use the GSCOP to their advantage. It can also help suppliers with training on the Code. For further information visit www.appwinelaw.com