The way we buy groceries has changed dramatically in recent years given the growing importance of online shopping and delivery services, a trend exacerbated by the global pandemic. As society’s shopping habits continue to evolve, food retailers are also becoming more innovative and delivering services in different ways, increasingly using digital platforms to reach customers.
On February 9, 2022, the UK Competition and Markets Authority (CMA) officially added Amazon has its list of grocery retailers required to comply with the Grocery Sourcing Code of Practice (GSCOP). Amazon entered the UK grocery business with its Amazon Fresh offering in 2016 and the company’s food retail business has since grown with the launch of physical stores in the UK in March. 2021. However, it has only now been added to the CMA list.
The GSCOP was published in 2009 and provides details on how designated retailers should manage their relationships with suppliers. For example, GSCOP:
- prevents designated retailers from making changes to short-term supply contracts;
- requires designated retailers to give appropriate notice if they no longer wish to use a supplier;
- requires designated retailers to give reasons for terminating a contract with a supplier.
- Compliance with the GSCOP is monitored by the Groceries Code Adjudicator (GCA) who has the power to impose penalties for violations.
There are now 15 designated grocers that must comply with GSCOP, with an online grocer being the most recent addition before Amazon.
Why was Amazon nominated?
In making a designation, the CMA focuses on a retailer’s relative size and buying power relative to its suppliers. A turnover threshold is applied and to be added to the designated list to comply with GCSOP, grocers must have annual grocery sales of over £1 billion in the UK. In arriving at its decision to designate Amazon as the grocery retailer, the CMA considered the relevant grocery product revenue of Amazon’s two wholly-owned subsidiaries and the applicability of the GSCOP to Amazon.com Inc. and concluded that “…there is a risk that Amazon and companies that are part of the Amazon group of companies may seek to use their size and status to negotiate more favorable terms with grocery suppliers…”.
What does this mean for suppliers?
The designation of the CMA means that Amazon must now comply with the terms of the GSCOP and suppliers who believe the code has been violated will have the right to refer Amazon to the GCA. If any of the Designated Grocers are found to have violated the GSCOP, the GCA has a number of enforcement powers, including the ability to impose fines of up to 1% of the turnover grocer’s total annual turnover in the UK. For example, in 2019 one of the UK’s largest grocery retailers was fined £1.3m for breaching GSCOP on two counts – it didn’t. failed to provide the necessary reasonable notice to its suppliers of decisions to delist products and it changed supply agreements without giving reasonable notice of the changes. The GCA also demanded that the grocer issue a formal apology.
Suppliers are likely to welcome this development as it gives them more tools to protect their business relationships and supply contracts with Amazon. Suppliers will also be able to rank Amazon for GSCOP compliance in the GCA’s annual survey – which is used as a clear metric by the GCA to assess progress. Suppliers will be able to access the confidential platform set up by the GCA in February 2021 to report any merchant behavior that they deem to be in violation.
What does this mean for Amazon?
Amazon will have to consider the provisions of the GSCOP and report to the CMA annually. Additionally, in order to remain compliant, Amazon will need to train its staff and ensure they are aware of their obligations to suppliers. More generally, the designation of the CMA comes at a time when competition authorities around the world are grappling with the challenge of whether (and how) to regulate large digital platforms.
In the UK in particular, as part of its new ‘pro competition regime for digital markets’, the government is consulting on the introduction of a number of new measures which will apply to digital businesses. Under this package of measures, companies with a designated “Strategic Market Status” (SMS) will be assigned bespoke enforceable codes of conduct setting out how they are expected to behave, which will be overseen by a specially created unit at the within the CMA, the Digital Markets Unit (DMU). The SMS designation of a company will be made by the DMU.
The government has indicated that the objective of the Digital Markets Unit should be to promote competition and competitive outcomes by addressing both the sources of market power and the economic harms resulting from the exercise of market power. market. With its focus on limiting market power and its code-based system, there are clear parallels with GSCOP. Indeed, the CMA turned to the Grocery Code Adjudicator (along with other UK industry regulators like Ofgem) to inform its decision to recommend a code-based system (as opposed to, for example, the legislative approach big technologies adopted in the European Union in the form of laws on digital markets and digital services).
Once the UK scheme is up and running, Amazon may well be designated as having SMS, in which case it could find itself subject to codes of conduct governing several aspects of its UK retail business.