Indicator 2.3
Issue: Fair trading relationships
Indicator: Integrity of the trading relationship with UK farmers and suppliers
Rationale - why is this an important issue?
What influence do supermarkets have in practical terms to address this issue, and what is the desired supermarket action on this?
Despite the indirect nature of most trading relationships between farmer/growers and supermarkets, it is clear that some supermarkets have higher reputations than others among primary producers for their fairness and integrity in trading. A good reputation is not always a price issue. Cultivating personal relationships with growers, and having buyers in place for many years, and a commitment to using (and sticking to) long-term contracts are viewed very positively by farmers who need this stability in order to plan and build their businesses. As the Competition Commission report implied, a good reputation is also built on supermarkets not exploiting their access to consumers, by demanding shelf fees, demanding that suppliers use packaging and transportation from supermarket-nominated companies, setting unreasonable conditions and giving little notice of changes in specifications. This is especially important in these days when all bagging and labelling costs are borne by the grower.
How the indicator is measured and scored
At first glance, terms of trade between primary producers and supermarkets could be compared by measuring the share of retail price passed back to farmers for selected commodities. But this is clearly impossible, due to the confidential nature of business transactions, variations in quality criteria, and the number of intermediaries between farm and supermarket. Another approach is to rate supermarkets more highly when they use the same method as the Fair Trade movement in setting prices, based on ‘cost plus.’ This ensures a living wage by calculating production costs and building on a margin which covers a reasonable return on labour and investment. Asda claim to be “working to create ways of paying farmers that are based more on what a crop costs to grow rather than the dropping market price.”[46] But some farmers complain that ‘cost plus’ is just another exercise in market power, a way of ratcheting down farmgate prices by forcing growers to open their books and “share efficiencies” with their buyers, and this certainly seems to have been the experience of suppliers to Wal-Mart.[47] One east Anglian farmer reported that he had the recent experience of having to submit minimum costings in order to remain a supplier and was then forced down to the costings supplied.[48] Since then costs have risen but “no account has been taken of that” by the customer.
Because of the key roles of intermediaries, balance of supply and demand, and quality in setting price, price alone is a very difficult indicator to get robust, defendable comparisons of supermarkets.
So we have decided to use a quantitative surveys of suppliers, asking first tier suppliers to evaluate their UK supermarket customers on the aspects of integrity of their trading relationship with suppliers and ultimately farmers/growers. The survey has been designed by the Centre for Food Chain Studies at Imperial College (Wye), based on extensive qualitative research with the apple and pear, milk, potato, red meat, poultry and pork chains—see report Fearne A, Duffy R and Hornibrook S (2002) “Methodologies for quantitative comparison of UK multiple retailers’ terms of trade with primary producers”. Great care is taken to ensure complete confidentiality to respondents. The method is grounded both in organisational theory (concepts of distributive and procedural justice) and the Competition Commission’s findings. The survey rightly starts from the premise that price is not the only driver of supplier satisfaction or dissatisfaction, compared to process issues such as the sharing of information, adequate notice of changes, and rapid turnover and poor knowledge of supermarket buyers.
Pilot testing of the survey instrument in 2002 proved its viability and revealed clear differences between the top 10 UK supermarkets (Figure 2).
Figure 2. Weighted scores of UK supermarkets in pilot of ‘Race to the Top’ supplier survey, 2002
Why is this a good indicator?
The real strength of this indicator is its legitimacy based on the Competition Commission’s findings. Comparative measurement of supermarkets’ trading integrity can thus constitute a unique form of oversight of the DTI Code of Conduct.
Limitations of this indicator
It could be argued that this indicator does not get to heart of the pricing issue. First tier suppliers are the part of the supply chain which supermarket buyers deal directly with, and measurement of the integrity of this relationship is a far more accurate comparative measure of supermarket performance than opinion surveys at farmer level. But opinion surveys of ‘suppliers’ views’ may be seen as not a robust benchmarking methodology, and it gathers the opinions only of those producers who are included in the supermarket supply chain, excluding those who do not supply supermarkets, perhaps as a result of many of the issues that we are trying to measure. At the other extreme, suppliers with exclusive and/or ‘category management’ relationships with supermarkets may be so tightly integrated into the retailer’s operations that they are no longer objective respondents to a supplier survey. In the future we may seek to supplement supplier surveys with measures of farmer satisfaction, where there is transparency in the supply chain and the supermarket end-customer can be accurately identified.
Supplier surveys also bias the assessment to UK-originating chains; supermarkets with high dependence on imports may escape the careful scrutiny which the survey can apply within the UK.
[46] Daily Express 23 November 2000
[47] “Wal-Mart suppliers have learned quickly that it isn’t business as usual. Wal-Mart requires that some suppliers work off a system called ‘cost plus’ which means producers must open their books. That’s a kind of business relationship that exceeds the comfort level of many.” Doing Business by Wal-Mart’s Rules. Top Producer magazine, November 2001.
[48] See also “Asda asks suppliers to reveal all” Sunday Times 11 August 2002.