Dr. Muiris Ó Céidigh:

I am going to deal with the first issue we were asked to address, namely, the code of conduct for the groceries goods sector. There has been a long delay in the publication of the consumer and competition Bill, which will include the code of practice for the sector. Retailers are now the main distribution channel for fresh milk, distributing 79% of all fresh milk. The catering and door-to-door delivery channels distribute 11% and 10%, respectively. Buying power in the retail and grocery trade is concentrated in a small group of retail multiples. The three largest multiples control 80% of the retail grocery market. The future of the domestic liquid milk market and its supply source is being shaped by the actions of the multiple retailers. To attract customers, retail multiples keep the prices of basic food products, such as fresh milk, at low levels and thus reduce the margins of processors, producers and distributors further down the supply chain. As a result, there is less value added in the chain for all participants with the exception of the multiple retailers. The primary producer who supplies the milk is at the bottom of the supply chain but is at the critical starting point and is continually under pressure and never more so than at present. The processor is also under pressure, as a result of low returns, to exit the home market for liquid milk and will do so if other more profitable export opportunities become available.

The code of conduct must be designed in such a way which will ensure that all stakeholders in the fresh milk supply chain will have adequate margins. In the absence of such margins, product quality will suffer and supply will be endangered. Accordingly, consumers producers, processors and distributors have a direct interest in the proposed code of conduct and how it will impact on the supply chain for fresh milk. The agency has considered the draft code - which will initially be voluntary in nature - and recommends that, if it is to work, it should be on a statutory basis and that a regulator with robust enforcement powers, of both a civil and criminal nature, should be appointed.

The initial drafts of the code have dealt with the issues of payment and promotion including prompt payments; marketing costs; shrinkage payments; wastage payments; limited conditions for payment as a condition of being a supplier; compensation for forecasting errors; no payment for better positioning of goods unless in respect of promotions; and promotions. Many of these have much to do with the relationship between the multiples and primary suppliers but they also have knock-on effects for secondary suppliers. In initial drafts of the code the important provisions to which I refer were implied into the contractual agreement between processors and multiples and, therefore, the only remedy available would be through a contractual action in the courts. The agency is of the view that a civil contractual remedy would be of questionable benefit where there is an imbalance in the relationship. If the code of practice is placed on a statutory basis, however, criminal offences could be prosecuted by the regulator, if one were appointed. That is one of the major arguments in favour of a statutory code.

The agency is also of the view that in the context of any contractual termination provision in a contract relating to the supply of milk to a multiple, sufficient notice should be provided in order that account might be taken of the production cycle of the producer panel supplying that milk. It is not just a question of turning off the supply because there is a cycle involved. There should also be a redundancy-type compensation payment similar to that relating to discontinuance for which provision is made under the paid commercial agents directive in order to reflect the cost incurred by producers in developing all-year-round supply capacity.

In the context of how the product is treated in multiple outlets, the use of fresh milk as a loss leader or its sale below cost should be prohibited under the proposed code of practice. The use of milk as a key value indicator to increase both footfall and sales of other products in multiple outlets undermines the confidence of specialist producers in their product by seeing it debased and used as a commodity product and sold at ridiculous prices. They can see their animals on their farms and are then obliged to watch advertisements on television which highlight the low price of milk, which is sometimes sold at prices equal to or just above those of bottled water.

These are the issues which the agency believes should be addressed in the context of the code. Mr. McEnteggart will now comment on pricing.