Decision

Conclusions on Co-op conduct and enforcement measures

Published 25 March 2019

Conclusions on Co-op conduct

49. The Code has been in force since February 2010. The GCA was established in June 2013. During my engagement with Co-op and during the period under investigation, I found that at a senior level within Co-op there was a failure sufficiently to recognise the need for Co-op to take steps to ensure that it was compliant with the Code. There does not appear to have been adequate engagement within Co-op to manage the risk in relation to its compliance with the Code. Had Co-op understood, it would have put in place effective governance; legal, compliance and audit functions; internal policies, systems and processes all working together across the business to deliver compliance with paragraphs 16 and 3 of the Code.

50. Co-op has accepted that the focus of the business was elsewhere and it is clear that the Code was not embedded into the culture of Co-op as it should have been. Co-op mistakenly assumed that its brand values and desire to work in a certain way meant that it was likely to be acting in compliance with the Code and that if there were any issues with compliance it would be made aware of these by Suppliers.

51. Because of those factors, the business was not effectively Code-proofed in relation to the requirements of paragraphs 16 and 3. Co-op misunderstood the Code in relation to the reasonable notice requirement of paragraph 16 and so misapplied it; and had no effective safeguards, in particular in relation to insufficient audit, process and governance to prevent unilateral variation of Supply Agreements without reasonable notice, as happened in breach of paragraph 3. Guidelines which Co-op asked buyers to follow did not correctly interpret and apply paragraph 16 of the Code. There was an absence of guidance as to the application of paragraph 3 of the Code. This was carried across into parallel failings in Co-op training. In any event and on Co-op evidence from its own internal investigation, internal policies on De-listing were not followed, and it seemed to me that buyers were left individually to attempt to resolve the conflict between maximising income and doing the right thing, in terms of Code compliance.

52. Systems, processes, business practices and the ability of different parts of the Retailer to affect Suppliers’ risks and costs of trading with Co-op, all contributed to Co-op breaking the Code. Buyers were not equipped to make decisions about reasonable notice that were Code compliant in the context of either paragraph 16 or paragraph 3. All of the factors I have summarised above contributed to this. Moreover, on the evidence I received from Suppliers, some buyers were simply too busy and were as a result difficult to get hold of. Communication problems, both internally between buyers and other parts of Co-op business and externally between buyers and Suppliers, meant that when buyers applied incorrect notice periods, these were not picked up or acted upon sufficiently quickly or adequately.

53. And when I raised issues, Co-op failed to fix the bigger problems that needed to be addressed. Suppliers on the whole, however, seemed to accept that Co-op was disorganised and often didn’t have the detailed information they needed to trade efficiently or with certainty. In relation to charges under paragraph 3, these were in many cases regarded simply as a cost of doing business and it was on the whole better to preserve the supply relationship than to challenge them. Had Co-op been a bigger share of some of these Suppliers’ businesses, they considered this position would not have been sustainable. I also wish to note that I did not identify any concerns with the nature and tone of communication by Co-op, either internally or with its Suppliers. Correspondence was broadly courteous and reflected the commercial nature of Supplier relationships.

54. Ultimately I launched this investigation to help Co-op to get things right for the future. My enforcement measures are entirely focused on that and by monitoring their implementation, I will be able effectively to oversee the improvements that need to be made.

Enforcement measures

55. My decision on enforcement

55.1 The forms of enforcement available to me as a result of finding a breach of the Code are set out in paragraph 2.2 above. In deciding whether to use any enforcement measures, and if so which ones, I have taken into account the Guidance. In view of my findings and my conclusion that Co-op has broken paragraph 16 and paragraph 3 of the Code I consider that it would be inappropriate to take no enforcement action against Co-op. As stated above I have already engaged with the Retailers about practices associated with paragraph 16 and paragraph 3 and have published guidance on De-listing and case studies about variation of Supply Agreements. Therefore I did not consider that issuing further advice or guidance would serve any purpose.

55.2 In view of my findings I have decided to make recommendations to Co-op. I have set out below the reasons that I consider recommendations to be an appropriate measure.

56. Recommendations

56.1 I consider Co-op’s breach of the Code to be serious because I have found that both paragraphs 16 and 3 of the Code were broken and a significant number of Suppliers were affected by its conduct. I have decided that recommendations are a proportionate and effective measure to reduce the likelihood of repetition of non-compliance with paragraphs 16 and 3 by Co-op. I also believe that the implementation of those recommendations will provide greater certainty to Suppliers that in future, any De-listing or variation of Supply Agreements will be carried out in accordance with the Code. My recommendations have been written to address what I have identified in my report to be the root causes of the breaches by Co-op of paragraphs 16 and 3 of the Code.

56.2 My recommendations are as follows:

• 56.2.1 Recommendation 1: Co-op must have adequate governance to oversee and manage its compliance with the Code.
• 56.2.2 Recommendation 2: Co-op legal, compliance and audit functions must have sufficient co-ordinated oversight of Co-op systems to ensure Code compliance.
• 56.2.3 Recommendation 3: Co-op IT systems must support Code compliance.
• 56.2.4 Recommendation 4: Co-op must adequately train on the Code all employees who make decisions which affect a Supplier’s commercial arrangements with Co-op.
• 56.2.5 Recommendation 5: Co-op must in any potential De-listing situation communicate with affected Suppliers to enable Co-op to decide what is a significant reduction in volume and reasonable notice.

57. Requirement to publish information

57.1 This report contains the information that I consider is relevant to Co-op compliance with the Code and makes this information publicly available. There is no other information that I consider to be relevant for publication. In light of this, I will not be using my enforcement power to require information to be published. I do not think it would serve any additional purpose in the context of this investigation.

58. Financial penalties

58.1 As set out above, one of the enforcement powers given to me by the Act and the Financial Penalties Order is to impose a financial penalty up to a maximum of 1% of a Retailer’s annual UK turnover where I find a breach of the Code has occurred.

58.2 The Guidance states that I will use the power to impose financial penalties to reflect the seriousness of the breach and that financial penalties may also be used where I consider that they would constitute a serious and effective deterrent to the Retailer concerned and more generally to other Retailers who may be considering activities contrary to the Code. The Guidance also states that in deciding whether to impose a financial penalty and the amount, I may take into account any evidence relating to whether infringement was committed intentionally or negligently. I have considered each of these factors. I do not consider the nature and seriousness of the breaches by Co-op to merit a financial penalty. I believe that recommendations are the most effective and proportionate use of my enforcement powers in this investigation.

59. Requirements of Co-op to enable me to monitor compliance with my recommendations

59.1 I require Co-op to provide a detailed implementation plan within four weeks of the publication of this report setting out how it will comply with my recommendations. I will engage with Co-op to ensure that the recommendations are implemented efficiently and effectively.

59.2 I require a response from Co-op to the recommendations on a quarterly basis and will set reporting metrics for this purpose once I have seen its proposed implementation plan and considered it against my findings.