Decision

Executive summary

Published 25 March 2019

This summary sets out in brief my findings and decisions.

Findings on De-listing without reasonable notice

Paragraph 16 of the Groceries Supply Code of Practice (the Code) states: “Prior to De-listing a Supplier, a Retailer must… provide Reasonable Notice to the Supplier of the Retailer’s decision to De-list.” The De-listing Guidance and Supplementary De-listing Guidance that I published to help Retailers to interpret paragraph 16 of the Code set out a number of factors for a Retailer to consider when deciding “significance” of a reduction in the volume of purchases being made from a Supplier and what amounts to “reasonable notice”, confirming that both would vary from case to case.

I find that Co-op applied the Code wrongly in relation to the reasonable notice requirement of paragraph 16. I find that Co-op De-listed Suppliers with no, or short, fixed notice periods that were not reasonable in the circumstances. These were applied unilaterally without due consideration of the De-listing Guidance. These De-listing decisions included but were not limited to decisions issued between summer 2016 and summer 2017 as part of the Co-op Right Range Right Store programme. Further, when making volume changes, I found that Co-op did not always correctly consider significance to determine whether the De-listing requirements of the Code were engaged. This conduct was not compliant with the Code. I find that Co-op broke paragraph 16 of the Code.

Co-op applied standard notice periods on numerous occasions without any consideration as to the particular circumstances of the product or Supplier in question. This was contrary to the Code, my De-listing Guidance and my Supplementary De-listing Guidance, all of which specify that notice of De-listing should be considered on a case-by-case basis.

Co-op failed to identify what decisions might result in significant reductions in the volume of groceries bought from Suppliers and at times to deal with them in a Code-compliant way by giving reasonable notice in accordance with paragraph 16.

Scale and impact on Suppliers of De-listing without reasonable notice

The evidence I have received indicates that a significant number of Suppliers have been affected by De-listing without reasonable notice. This includes Suppliers of various sizes and across different categories of the Co-op groceries business.

For a large number of the Suppliers that I received evidence from, there was no or very little financial impact from the short notice given to them of De-listing. However for a number of Suppliers the lack of notice of a significant reduction in orders or removal of a product resulted in them incurring significant costs which might have been avoided had they received reasonable notice. In addition, for several Suppliers, the short notice given of distribution reductions or product removals resulted in wastage of packaging and products. Other consequences of De-listing without reasonable notice included adverse effects on the efficiency of Suppliers’ businesses, the resources used by Suppliers trying to obtain information from Co-op and uncertainty about the stock Suppliers would be required to provide to Co-op at any given time.

Root causes of De-listing without reasonable notice

Compliance risk management, proactively undertaken at all levels in the business

There was inadequate governance to oversee and manage compliance with the De-listing requirements of the Code. Co-op did not take adequate steps to reassure itself that it was acting in compliance with paragraph 16 of the Code. This meant that Co-op did not recognise when there were problems with Code compliance, such as buyers failing to give reasonable notice of De-listing. It also failed properly to identify and oversee De-listing decisions that were effectively being taken outside the commercial team. There was not enough focus within the organisation on compliance with the Code and it mistakenly relied on a wrongly held belief that because of its brand values, Suppliers would highlight to Co-op any concerns that they had. Where problems were identified Co-op did not appreciate the level of change required to rectify the problem or lacked the systems to implement the changes that were necessary.

Legal, compliance and audit functions working to support Code compliance

There was insufficient legal, compliance and audit support to deliver compliance with paragraph 16 of the Code and prevent De-listing without reasonable notice. This meant that the failure to give reasonable notice of De-listing and the root causes of these failures continued over a sustained period of time without effective internal challenge.

Internal systems and processes working to support Code compliance

Co-op IT systems contributed to its failure to comply with paragraph 16 of the Code. One of the main issues was the absence of a central IT system that could be accessed by all relevant Co-op employees who were dealing with Suppliers. Another particular problem was that the IT systems restricted the notice that could be given to Suppliers of distribution changes arising from the range review process. These systems did not allow consideration of what might be reasonable notice of any De-listing for a Supplier and effectively prevented Co-op from delivering on the notice periods set out in its own internal policy.

Training on paragraph 16 of the Code

The training which Co-op provided was inadequate to equip buyers to identify decisions that might result in a significant reduction in the volume of a product or products ordered from a Supplier or properly to consider on a case-by-case basis what might amount to reasonable notice of De-listing for any particular Supplier.

Individuals from both within and outside the Co-op buying team were inadequately trained to recognise and raise concerns about Code compliance. The failures in training were compounded by the weaknesses in the Co-op policies and process documents, which did not adequately equip buyers properly to perform their roles and to assess significance and reasonable notice in compliance with the Code.

Communication between the Retailer and Suppliers facilitating Code compliance

At times there was a lack of communication by Co-op with Suppliers about decisions that might amount to De-listing. Many Suppliers were not given the opportunity to explain or discuss the impact of De-listing decisions before they were made and notice periods fixed. This meant that Co-op did not always have the information it needed to determine significance and reasonable notice on a case-by-case basis. Moreover, because at Co-op other parts of the business outside the commercial team could make decisions that affected ranging, it was not possible for Co-op to be assured that all information relevant to the assessment of significance was properly taken into account.

Findings on variation of Supply Agreements without reasonable notice

Paragraph 3 of the Code states: “If a Retailer has the right to vary a Supply Agreement unilaterally, it must give Reasonable Notice of any such variation to the Supplier.” I have published three case studies on paragraph 3 of the Code which make quite clear the point of interpretation about reasonable notice. I find that Co-op unilaterally and without reasonable notice varied its Supply Agreements with Suppliers by its application of depot quality control charges and benchmarking charges. This conduct was not compliant with the Code. I find that Co-op broke paragraph 3 of the Code. This caused particular difficulties for Suppliers with fixed cost contracts, which would not have been able to amend their cost prices accordingly.

In some cases Co-op did not provide sufficiently clear or detailed information to Suppliers about depot quality control charges and benchmarking charges to enable them to form reasonable estimates of the amount and frequency of the charges. Co-op buyers were not aware of the likely amount and frequency of these charges and were accordingly unable to give notice of them. Co-op did not appear to consider what constituted reasonable notice of the application of either of the charges for Suppliers on fixed cost contracts because of a failure to understand the Code.

Scale and impact on Suppliers of variation of Supply Agreements without reasonable notice

The failure to give reasonable notice of depot quality control charges affected Suppliers of fresh produce and Suppliers of meat. The failure to give reasonable notice of benchmarking charges affected only Suppliers of own-label products.

Following my raising of the issue with Co-op and an intense period of escalation, some Suppliers received large sums as refunds for depot quality control charges and benchmarking charges which Co-op determined had been applied without reasonable notice. Suppliers from which I received evidence gave mixed views as to the significance of the amounts they had been charged by Co-op without reasonable notice; many considered the charges to be a cost of doing business or that they were not significant enough to warrant being challenged. There were other consequences of variation of Supply Agreements without reasonable notice for some Suppliers including the administrative burden of checking what they had been charged and trying to challenge charges and operating in an uncertain environment in which they would be expected to absorb unforeseen costs.

Root causes of variation of Supply Agreements without reasonable notice

Compliance risk management, proactively undertaken at all levels in the business

Co-op failed to identify the risk to Code compliance associated with depot quality control and benchmarking charges being applied not by buyers but by other parts of the Co-op business or in the case of depot quality control charges, the independent co-operative societies. Co-op failed to demonstrate to me its oversight of the proposed charges, when they would be applied and with what notice. There was a lack of recognition across the Co-op business that it had proactively and consistently to manage its Code compliance risk in relation to paragraph 3 of the Code.

Legal, compliance and audit functions working to support Code compliance

Co-op legal, compliance and audit functions did not appear adequately to have worked together to develop or to oversee any policy or rationale governing the circumstances in which charges would be applied.

There was not sufficient co-ordinated oversight of Co-op systems by Co-op legal, compliance and audit functions to ensure Code compliance. The co-ordinated engagement of these functions with the systems and policies relating to charges happened too late to ensure or to compensate for lack of Code compliance.

Internal systems and processes working to support Code compliance

One of the root causes of the failure to give Suppliers reasonable notice of the application of depot quality control and benchmarking charges was that Co-op unreasonably relied on its portal as the principal or only way of communicating with Suppliers about variation to Supply Agreements. Co-op informed me that the primary method it used to communicate with Suppliers about changes to its terms and conditions was updating documents contained on the portal. Co-op was not however entitled to assume that Suppliers who continued to use its portal were on notice of any change to charges.

Co-op systems also failed to support Code compliance in relation to Suppliers’ challenges to charges.

Training on paragraph 3 of the Code

Co-op failed to recognise the importance of ensuring that all employees who have the ability to apply charges or otherwise to affect a Supplier’s commercial arrangements with Co-op are trained on the Code. Co-op training material did not adequately deal with the issue of variation of Supply Agreements or explore on a case-by-case basis what constitutes reasonable notice under paragraph 3 of the Code.

Communication between the Retailer and Suppliers facilitating Code compliance

Buyers’ lack of awareness of the charges and consequential inability to discuss them with Suppliers caused particular problems in circumstances where the portal, which Co-op used as the primary means of communicating with Suppliers, was not ft for purpose.

I note nonetheless that I did not identify any concerns with the nature and tone of communication by Co-op, either internally or with its Suppliers. Correspondence was broadly courteous and reflected the commercial nature of Supplier relationships.

Enforcement measures

The enforcement measures available to me as a result of finding that Co-op broke the Code were to make recommendations, to require information to be published and to impose financial penalties.

I consider Co-op’s breach of the Code to be serious because I have found that both paragraphs 16 and 3 of the Code were broken and a significant number of Suppliers were affected by its conduct. I have decided that recommendations are a proportionate and effective measure to reduce the likelihood of repetition of non-compliance with paragraphs 16 and 3 by Co-op. I also believe that the implementation of those recommendations will provide greater certainty to Suppliers that in future, any De-listing or variation of Supply Agreements will be carried out in accordance with the Code.

Recommendations

My recommendations are as follows:

• Recommendation 1: Co-op must have adequate governance to oversee and manage its compliance with the Code.
• Recommendation 2: Co-op legal, compliance and audit functions must have sufficient co-ordinated oversight of Co-op systems to ensure Code compliance.
• Recommendation 3: Co-op IT systems must support Code compliance.
• Recommendation 4: Co-op must adequately train on the Code all employees who make decisions which affect a Supplier’s commercial arrangements with Co-op.
• Recommendation 5: Co-op must in any potential De-listing situation communicate with affected Suppliers to enable Co-op to decide what is a significant reduction in volume and reasonable notice.

I will engage with Co-op to ensure that the recommendations are implemented efficiently and effectively. I require Co-op to provide a detailed implementation plan within four weeks of the publication of this report setting out how it will comply with my recommendations. Co-op will then be required to respond to the recommendations on a quarterly basis and I will set reporting metrics for this purpose.

I do not consider the nature and seriousness of the breaches by Co-op to merit a financial penalty.