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September 20, 2007

Milking the consumer? Price-fixing row hits UK dairy

Claims that UK retailers and dairy processors have colluded to raise the price of milk, butter and cheese will have caused a wry smile among the country's food suppliers, who often complain of the undue pressure placed on them by the country's powerful grocers. just-food analyses the claims that price-fixing has cost UK shoppers some GBP270m (US$542m).

Claims that UK retailers and dairy processors have colluded to raise the price of milk, butter and cheese will have caused a wry smile among the country’s food suppliers, who often complain of the undue pressure placed on them by the country’s powerful grocers. just-food analyses the claims that price-fixing has cost UK shoppers some GBP270m (US$542m).

The irony that the UK’s competition watchdog has claimed leading supermarkets have colluded with certain dairy processors to raise the price of milk, butter and cheese will not have been lost on agricultural suppliers to the grocery multiples.

As the supermarket sector braces itself for the preliminary report of the Competition Commission’s investigation into the power of the supermarkets, the Office of Fair Trading has claimed that retailers and dairy processors fixed retail prices of milk, butter and cheese in 2002 and 2003. The OFT has named retailers including Tesco, Morrisons and Sainsbury’s, and dairy groups including Dairy Crest, Arla Foods and Robert Wiseman. The OFT alleges that the price-fixing cost consumers some GBP270m (US$541.7m) over a two-year period.

Given that in the midst of the Competition Commission’s current inquiry, supermarket suppliers have even called for the creation of a supermarket ombudsman to prevent supermarkets from abusing the power they wield over suppliers, any suggestion of continuing collusion can presumably be dispelled. 

Both retailers and suppliers have stridently denied the suggestion that they contravened UK competition law.

Kevin Hawkins, director of the British Retail Consortium, which represents the major grocery chains, said it was “nonsense” to claim that retailers had acted together to raise dairy prices. “Supermarkets are extremely competitive businesses – the idea that they got together in a smoke-filled room to fix prices is sheer nonsense,” Hawkins told the UK news channel Sky News today (20 September).

Hawkins was a former Safeway employee during the period under review and said the retailer – now owned by Morrisons – had unilaterally decided to increase its prices to consumers in a bid to help UK farmers.

“In spring 2002, there was a glut of milk on the market and dairy companies cut the price that they were paying to farmers,” Hawkins said. “So, in order to secure and stabilise the supply chain, Safeway, as a business, put up prices to consumers on the basis that the extra revenue would go to farmers – through the dairy companies – as higher farm gate prices. The intention was to secure the supply chain in the interest of consumers.” Hawkins, however, told Sky News that “the money never reached the farmers”.

Morrisons, which bought Safeway in 2004, said it “firmly believes” it is not directly involved in the OFT’s inquiry as the period under review fell before its acquisition of the retailer.

“At no point during its inquiry has the OFT requested any documents or information from Morrisons,” the retailer said. “The company is currently of the view that the OFT cannot have reasonable grounds for believing Morrisons might have been involved.”

Asda claimed that “price-fixing is absolutely against everything we stand for”, while Tesco said it would “vigorously defend” itself against “any allegations that we have not acted in the best interests of consumers”.

When asked by just-food if Tesco would confirm it had not colluded to raise the price of milk, butter and cheese for UK consumers, a spokesman said: “We’re not making any further comments at the moment. We need to go through the report before making any other comment.”

However, Dairy Crest issued a statement to say the company had “co-operated fully” with the OFT to date. “The next steps for Dairy Crest will be to review the OFT’s provisional findings in detail, and respond accordingly,” the company said.  Wiseman, meanwhile, said it was looking forward to reviewing the detail of the OFT’s allegations and to “to defending our position”.

As yet, no party has been found guilty but if illegality is proven the companies concerned could face fines of millions of pounds. They have until 11 October to respond to the OFT allegations, and a final ruling is not expected to be determined before next year.

“We think consumers paid over and above what they should have; the price-fixing among processors and retailers cost consumers some GBP270m,” the spokesperson said. “That works out as 3p on the price of milk, 15p on half a pound of cheese and 15p on a quarter of butter.” She added: “We’re confident of our findings but the relevant parties now have every right to come forward, make representations and give evidence to us.”

A further irony of today’s announcement is that it concerns dairy products at a time when a shortage of supply is driving up retail prices in the UK, and farmers are reaping the benefits. Or, as the farmers would see it, earning a rightful return after years of tight margins and the exodus of a number of farmers from the dairy sector.

What’s more, with the comments from the BRC’s Hawkins, it seems at least one supermarket was trying to deliver a higher farm-gate price for dairy farmers. Supermarkets are widely criticised for allegedly putting undue pressure on suppliers but, in this instance, we have an example of retailers trying to respond to a serious issue – some would have said a crisis – among its suppliers.

Nevertheless, despite the apparent rich irony caused by the OFT’s announcement this morning, the situation will do little to quell the belief among consumers that their concerns matter little to UK supermarkets. For some, just the allegation that retailers looked to raise the price of staple products like milk and butter, will be enough to confirm the view that the UK grocery sector is dominated by a few, all too powerful retailers.

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