Economics

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.