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Critically evaluate the ethical trading practices of Tesco towards their UK grocery supply chain. Highlight the current issues and make recommendations for the future.

The distribution of value and power within food supply chains is an issue that is generating much attention from consumers, NGO’s and the Competition Commission. There has been much consumer interest surrounding the issues of fair trade with the success of the brand being worth over £92m in the UK alone (Cooperative Bank web page 2008). Fair Trade primarily concerns third world countries and helps the producers of UK commodities such as coffee, chocolate and bananas to build a profitable and sustainable future. This is mainly achieved through the supermarkets offering a fair price for their produce and the acceptance from the retailers to stock the lucrative trade mark which the produce carries. There are concerns however, that UK farmers who supply supermarkets are not receiving a fair price for their produce and are under extreme pressure to meet the supermarkets rigid demands. General bad practices through out the supply chain are emerging issues that are generating consumer interest of which little transparency on the supermarkets behalf is evident. Other issues on an economic platform concern the sustainability of the UK agricultural sector which focuses on tenant farms going out of business, a narrowing down of UK food suppliers and an increase in unemployment in rural areas. It is estimated that UK agriculture provides 63,000 jobs (Green healthy and fair, Sustainable Development Commission (2008). In order for supermarkets to become more ethical and consequently remain competitive, it is imperative they address the emerging issues that fair trade begins at home.

Currently it is estimated that 88% of all UK food is sold through a small handful of supermarkets with Tesco being the market leaders (Norman Baker March 2004). This equates to market sales of over £62bn per annum (Fair Trade begins at home 2008) clearly highlighting the buying power the supermarkets have over the supply chain. The main players are Tesco, Sainsbury, Asda and Morrisons who compete on price or quality. Tesco has recognized that their customers are motivated primarily on price and have positioned them self’s in the market as a value added supermarket, whilst at the same time using fair-trade and local produce lines to cater for their less price sensitive customers which they charge at a premium. It has been argued that Tesco has squeezed farm gate prices in order to pass these savings on to their customers and this has been achieved by exploiting the sheer buying power they have over their suppliers. This led to the Competition Commission investigation (2002) where it was proven that supermarkets had reduced farm gate costs in order to pass these savings on to their customers at the suppliers cost. However the problems found were not deemed anti-competitive and consequently nothing was done. The commission did however report practices that were “deemed to be against public interest” (Fair Trade Begins at Home 2007). These practices include, requesting non cost related discounts, imposing charges and making changes to contractual agreements with inadequate notice. These accusations have been reiterated in the ‘Fair Trade Begins at Home’ report (2007) (a research report into how farmers are treated through out the supermarkets supply chain) where they found that practices such as a requirement to make pre-payments, requiring financial contributions to facilitate promotions, the debating of invoices without prior agreement, payments to cover waste management, opportune de-listing of suppliers and seeking retrospective discounting. In response to this the ‘Supermarkets Code of Practice’ was introduced by the commission in an attempt to self regulate the worst abusers of unethical practice. The code sets out several areas of best practice, these include the need for terms of business to be available in writing, no undue late payments, no retrospective reduction in price without notice, making a contribution to marketing costs and discarding lump sum payments as a condition for ‘listing’ as a supplier. The code does however allow supermarkets to obtain financial contributions towards promotions from suppliers so long as they are ‘responsible’. The problem with the code is that there is no coconscious as to what is ‘responsible’ thus causing confusion. Another perceived weakness is the reliance on suppliers having to report abusive behavior, consequently been identified and damaging relationships with the retailers. A further problem with the code was highlighted in February 2004, when the Office of Fair Trading (OFT) undertook a review of the code of practice, principally to ascertain the impact of the code on relationships between supermarkets and their suppliers. As part of the review, a consultation exercise was undertaken, which revealed a “widespread belief among suppliers that the code is not working effectively” and that “most believed that the code had not brought about any change in the behaviour of the supermarkets” (OFT, 2004). The review noted that in order to identify key problems and formulate solutions, information was required from the suppliers themselves, but noted that suppliers were reluctant to provide detailed information to the OFT.

Taking the UK dairy industry as an example clearly highlights the issues surrounding ethical trade and sustainability. According to the National Farmers Union there has been a 50% decrease in the number of dairy herds since 1995 with an average of seven farms going out of business per week. This is down to a number of factors of which farm gate price squeezing has been a contributor. The issue with price is that the production costs have risen in the form of an increase in the price of red diesel, water, vet bills, animal feed and wage and rental inflation, while the profit margins in milk has dramatically fallen. Between 1995 and 2005 the farmers’ share of a litre of milk has gone from 58% down to 36% while the retail margin has increased from 3% to 31% (Ethical Trade Begins At Home 2007). The affect of this is that farmers are producing milk bellow cost. The average cost to produce a litre of milk is between 18-21 pence and the farm gate average price reaching only 18 pence per liter (A rough guide to the UK farming crisis May 2004). This has resulted in farmers over producing in order to gain margin through volume, diversifying into other areas of business or (at worst) closing down. Given the fact that milk is a consumer necessity and therefore is more prices inelastic, it would not be out of term to suggest that ethical trading is a major contributor to these alarming facts. There are many other examples of how farm-gate prices have meant that farmers are working bellow cost for example the cost of producing twelve eggs is around 45.3 pence with the farm-gate price being only 27 pence(A rough guide to the UK farming crisis May 2004). Again the domino affects of this mean more intense farming which leads to a lower welfare for live stock (due to cramming), smaller business leaving the business and a higher reliance on imports.

In response to the issues raised by the OFT’s report Tesco states “the supply chain works effectively, as it must if we are to provide new and improved products at lower cost each year. Our incentives are to work with suppliers continually to improve our offer and to ensure that the supply-base itself remains competitive and efficient. There are no signs of any competition problems. In particular, the “waterbed” and “tipping point” theories are

unsound and unsupported by any evidence – indeed the evidence is firmly against them” (Tescos main submission to the CC inquiry into the UK grocery market). Further responses to consumer concerns such as how Tesco achieve such low prices with ought squeezing farmers margins, state that “we have grown and made savings that we invest in reducing prices by maximizing sales densities in our stores, increasing our productivity, and making other savings (e.g. in energy use) Examples of greater efficiencies are the introduction of merchandisable units, hand held scanners and paperless picking.” (Tesco questions and answers web page). Clearly there is conflict between what the OFT, CC and numerous NGO reports in terms of farm gate prices and how Tesco claim they have achieved them. When asked weather the Code of Practice needs to be stronger, Tesco responded by emphasizing that the Code is legally binding, thus reiterating that they trade within the law, and that their confidential supplier survey confirmed that on the whole, their suppliers are happy with current practices. This statement asks three important questions that threaten its integrity, firstly, why is the survey not for public viewing? Secondly, how likely are the farmers to answer honestly to practices they deem as unreasonable and thirdly, ‘on the whole’ suggests that there are still suppliers who are experiencing problems, to what extent there problems impact the farmers business is not stated. On a broader scale Tesco and other supermarkets are blaming the strength of the pound in comparison to other currencies is urging them to source their food products through imports. This coupled with globalisation has very negative affects for UK suppliers as is makes it difficult for them to export their produce and large Plc businesses such as supermarkets will always source their products as cheaply as possible to increase business performance.

It is clear from my research that the current code of practice is inefficient. This is visibly illustrated by the numerous reports of continuing abuse from supermarkets quoted by the suppliers them self’s. One solution to this problem is to first of all change the wording in the code of practice. The word ‘reasonable’ gives supermarkets too much maneuverability to express what they deem fair in their favor. The code should be rigid and legally binding so as to protect both parties’ business practices. It is also clear that suppliers are unwilling to report buyer abuse in fear of damaging relationships with their supermarket partners. This begs the integrity of the current legislation in place that is designed to protect suppliers. If supermarkets had a legal obligation to be more transparent when being investigated by various commissions then a much clearer picture of the real situation can be obtained, protecting both parties in terms of avoiding bad PR on the supermarkets behalf while ensuring suppliers are being treated fairly. Another major issue highlighted through the essay is the lack of transparency there is to the consumers on how and where their UK food is sourced. Tesco and other supermarkets are rigorously promoting their ethical stance for Fair Trade and locally sourced product lines, however this is charged at a premium and only accounts for a small percentage of their over all products, arguably making such product lines niche markets which some critics would argue is a ‘green wash’ strategy. It is evident through Tescos responses to current supply chain issues that they are only acting to supply consumer needs. However if the consumer was more aware of the less attractive business practices Tesco facilitate, their needs may change. For example, if consumers were aware that when they bought a ‘2 for1’ offer at the farmers expense, they may change their buying behavior. If Tesco are serious about reacting to customer needs, a labeling system that clearly states what share of their purchase will go to the supplier and what share goes to the retailer; it will empower the consumer to make their own moral choice. The advantages to Tesco and all major retailers of adopting such transparency are evident with the success of the Fair Trade brand. If Tesco were to educate their consumers about the supply chain of every product they purchased, they will increase their ‘green’ status amongst consumers which has proven to be not only very lucrative but more sustainable. They will also gain first mover advantage over competition, quench negative feelings towards them form pressure groups and NGO report’s and consequently avoid PR disasters.

It has been suggested that food sovereignty is a solution to the problem of unsustainable farming, in particularly towards small and tenant farms who are struggling to survive (A rough guide to the UK farming crisis May 2004). Food sovereignty promotes sustainable, small scale family farm based food production with adequate prices for all farmers, supply management, abolition of export support and the regulation of imports to protect local food production. It emphasizes equitable access to land, seeds, water and other productive resources, and the development of local markets and economies rather than export economies. My opinion of this strategy is positive as I think not only will it help maintain and support local and smaller farmers but it will also be widely supported throughout consumers. This support can be seen throughout the food chin in terms a dramatic increase in market size for local and organic produce and an increase in demand of locally sourced foods seen in restaurants, supermarkets and farmers markets across the country. Another more radical strategy to increase farm gate prices and a number of other ethical issues including land degradation is to legally enforce a supply management system. This involves governmental control of imports, production and pricing and would ensure that farmers get a fair price for their produce. This scheme has been implemented in Canada and has proved successful in increasing food production efficacy while at the same time protecting farmer’s interests and livelihoods (A rough guide to the UK farming crisis May 2004). Another legislative measure that has been enforced in Ireland, Germany and France include a law that prohibits the practice of using loss leaders (selling certain products bellow cost in order for that purchase to lead to others). This aids in reducing the pressure on farmers to produce such products and getting a low farm gate price.

The notion that fair trade begins at home is an emerging issue that supermarkets need to address in order to remain competitive and avoid government intervention. Although the recommendations for change seem logical, there implementation is much more complicated. There are many conflicting arguments against the notion that supermarkets should voluntary pay UK producers more than they currently do. The largest barrier is the shareholder. It is not unreasonable to argue that due to the high competitiveness within the industry it is not in Tesco’s (or other large supermarket) interest to put them self’s at a potential competitive disadvantage in order to take a moral high ground. Tesco’s loyalties are to their share holders who want growth. If Tesco were to change they would need investors to take a financial hit with the promise that adopting a fair trade begins at home approach would bring more long term sustainable growth. On legal platform, the UK government embraces globalisatiotion and holds strong capital values. It is these capital values that will threaten any form of intervention in the current free trade market. in my opinion a realistic approach to the problem relies on educating the consumer. With a labeling laws and greater transparency on the supermarkets part the consumer will better be able to make their own moral judgment as to what they purchase. This will intern allow the su8permarkets to react better to customers needs. It is evident currently that consumers are more and more concerned about what they eat and where it has come from. These concerns are all green issues which have come across through various educational television documentaries and other green issues (for example green house gasses, food miles carbon foot prints,). As a reaction to this supermarkets are racing for the moral high ground however only a small percentage of their produce is fair and ethical trade. I am confident that if consumers were educated, they would change their consumer behavior in favor of the suppliers and the supermarkets will respond to the change accordingly. CSR is no longer a viable option for supermarkets to hide behind as consumers are more educated, less influenced and more skeptical. If supermarkets want to become more sustainable, enjoy steady growth and contribute to a better society it is imperative they make their own stance on the issue that fair trade begins at home. Those who act now will benefit in the future.

Bibligrophay

• Sue Dibb, Sara Eppel, Tim Lang and Helen Rimmer (2008) - Green Healthy and Fair. Sustainable Development Commission.
• Norman Baker March (2004).
• Office of Fair Trading (2004), The Supermarkets Code of Practice,
• Kathryn Tulip & Lucy Michaels (May 2004)A rough guide to the UK farming crisis

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