Written evidence submitted by The Competition and Markets Authority (COV0138)
The Competition and Markets Authority (CMA) welcomes the opportunity to submit written evidence to the Food Supply Inquiry.
The CMA is an independent non-ministerial government department that works to promote competition for the benefit of consumers, both within and outside the UK. The CMA works to ensure that consumers get a good deal when buying goods and services, and businesses operate within the law.
The CMA does this in a number of ways:
Competition is key to healthy markets and good consumer outcomes. To retain customers, businesses that face effective competition must keep their prices down and maintain high quality and standards. Conversely, if competition is weakened or restricted then consumers lose out by paying higher prices or suffering from lower quality products or services. Enforcement of consumer law is equally important, ensuring that consumers can engage in markets with confidence.
The coronavirus (COVID-19) pandemic demands urgent and critical decisions by government to address exceptional issues of public health and wider public policy. Within its remit, the CMA has been advising government on the measures it decides to take, aiming to ensure the protection of competition and consumers, both in the short and longer term.
The submission summarises the CMA’s overall response to coronavirus to date, including the work of its COVID-19 Taskforce, and it addresses the third question in the Committee’s call for evidence, about what further impacts the current pandemic could have on the food supply chain, or individual elements of it, in the short to medium-term and on the steps that could be taken to mitigate these impacts.
No one can predict precisely how demand and supply will develop in the period ahead, but experience tells us to keep in mind:
As the effects of the crisis change, and the exigencies subside, co-operation for laudable short-term reasons can easily become harmful – to competition and consumers – if it persists over the longer term. A key challenge for government will be to unwind the measures put in place to protect the economy and ensure security of supply – including exclusion orders and financial assistance – at the right moment. For its part, the CMA will continue to promote well-functioning, competitive markets as a critical ingredient in helping consumers, businesses and the wider economy to recover.
The CMA’s COVID-19 response
The outbreak of coronavirus is an unprecedented and rapidly evolving challenge that has prompted concerns that businesses might exploit the situation to take advantage of people, for example by unfairly increasing prices or making misleading claims about their products. The CMA has received over 38,000 complaints as of 3 May, and our teams will continue to monitor the situation closely, and take action where appropriate.
To respond to the challenges of the outbreak, the CMA has established a taskforce which:
The CMA published a report on 24 April providing an update on the work of the Taskforce.
Food supply
Competition law prohibits certain types of co-operation and information-sharing between businesses in order to safeguard competition and protect consumers. Where normally the CMA views such cooperation with concern, in exceptional circumstances like those presented by the pandemic, cooperation between firms may be essential to ensure the continuity of supply of essential goods and services.
This is why the CMA has made clear that it does not want its own approach to enforcing competition law to stand in the way of necessary co-operation to deal with the current crisis. To that end, the CMA published guidance on 25 March 2020 that makes clear that no action will be taken by the CMA against business co-ordination undertaken solely to address concerns arising from the current crisis. The guidance, which applies across sectors (including the food sector), sets out the conditions under which cooperation between companies will be exempted from competition law enforcement during the Covid-19 outbreak. Equally, the guidance emphasises that the CMA will not tolerate conduct which goes beyond what is necessary to respond to the pandemic and opportunistically seeks to exploit the crisis.
In the context of food supply, government has gone further and legislated (via statutory instrument) to exclude certain agreements between firms in the grocery and dairy sectors from competition law. The CMA has provided advice and assistance to government on these so-called “exclusion orders”, ensuring the risks of anti-competitive behaviour and consumer harm are kept to a minimum.
In times of severe economic disruption, anti-competitive and exploitative behaviour by firms becomes more likely. The detriment arising from such conduct in the food sector may be particularly acute, given the essential nature of the product and its importance in household budgets. Over the last two months, the CMA has received an unprecedented number of complaints about profiteering, many of them concerning foodstuffs. It is writing to traders that have been the subject of complaints, and it is gathering further information about potential breaches of competition or consumer law.
The pandemic will continue to have major impacts on many important sectors of the UK economy, including the food supply chain. Some of these effects will be short-lived while others could mean longer-term changes to the way markets operate.
a. Collusion between firms (‘crisis cartels’)
Significant economic disruption like that caused by the pandemic gives rise to the possibility of so-called ‘crisis cartels’ being formed, where competitors agree amongst themselves how to limit the impact on their businesses to survive a crisis. For example, in 2003 the European Commission applied the EU cartel prohibition to an arrangement between French meat federations (supported by French state authorities) that set minimum prices and limited imports in the context of serious problems in the beef industry as a result of the outbreak of "mad cow" disease. The background crisis was taken into account only as a mitigating factor, not as a justification for the cartel.
Competition authorities, including the CMA, do not typically treat crisis cartels any differently than other types of cartels. Cartels harm competition and lead to consumers being overcharged regardless of the form they take. This is why they are treated as such serious infringements of competition law, and can carry criminal sanctions for individuals held responsible for them.
b. Mergers prompted by the crisis
The financial impact and the uncertainty for businesses caused by the pandemic inevitably influences M&A activity. These may lead to transactions involving a party potentially exiting the market due to financial distress (failing firms), and/or foreign investors looking to acquire important businesses in key economic sectors such as the food supply chain. They may also lead to mergers between close competitors facing similar (industry-wide) financial and business difficulties.
It remains critical to preserve competition in markets through rigorous merger investigations in order to protect the interests of consumers in the medium and longer term. Even significant short-term industry-wide economic shocks may not be sufficient, in themselves, to override competition concerns that a permanent structural change in the market brought about by a merger could raise.
The pandemic has not brought any relaxation of the standards by which mergers are assessed by the CMA, but the CMA will consider the available evidence in relation to the possible impacts of the pandemic on competition in each case. The CMA has issued a general 'refresher' on how it is likely to approach ‘failing firms’ claims. In a recent case the panel of independent group members who decide phase 2 merger cases provisionally cleared Amazon’s investment in Deliveroo in light of a deterioration in Deliveroo’s financial position as a result of coronavirus (COVID-19). (See paragraph 5.2 in page 63 of the Provisional findings report).
c. Profiteering (‘price-gouging’)
The CMA has received a range of complaints concerning ‘price-gouging’ in relation to a range of essential goods. This includes certain food products from certain outlets, in particular halal meat, chicken, bread, flour, rice, vegetables, and spices, but generally covering a full range of foodstuffs. The CMA has written to over 120 firms, accounting for around 2900 complaints, in relation to these queries, to warn traders of our concerns, and to gather further information about potential breaches of competition or consumer law. There may be issues behind retail price rises, such as price increases further up the supply chain, and the CMA is asking businesses to provide explanations for price increases in the first instance. The CMA is also conscious of reports that smaller retailers are finding it difficult to obtain stock as suppliers prioritise major outlets. The CMA will use its existing powers to the maximum possible extent. But competition and consumer protection law were not designed for emergencies of this sort, and specifically for tackling price-gouging. Accordingly, the CMA has advised government on options for emergency time-limited legislation which might tackle more directly the issue of price-gouging.
d. Restoring competition after the crisis
The circumstances that have given rise to the current exclusion orders put in place by government could arise in other parts of the food sector. Government will need to consider carefully, as it has for the exclusion orders it has already made, whether a sufficiently strong public policy case exists for further exclusion orders. The bar for disapplying competition law should be high, as competition law exists to protect consumers and markets. Where government considers that further orders may be required, the CMA stands ready to advise government on its approach.
Where exceptional circumstances justify the temporary disapplication of competition law, it is important that the scope of this disapplication is limited to only what is necessary. This is relevant in the drafting of exclusion orders, but also in how promptly and effectively they are brought to an end to avoid lasting damage to markets and detriment to consumers. Unscrupulous firms might seek to use arguments around legitimate and necessary cooperation to respond to the pandemic as a ‘cloak’ behind which they can collude to increase prices or otherwise undermine competition. Although the activities permitted under the exclusion orders are carefully and specifically defined within the orders themselves so as to guard against this risk, it remains possible that collusion between firms which goes beyond the scope of what is allowed under the exclusion orders could flow from the enhanced cooperation the orders permit.
The exclusion orders themselves stipulate that the Secretary of State must publish a notice once there is no longer a significant disruption or threat to disruption to the supply of the relevant goods or services and the exclusion is therefore no longer justified. The notice will specify the end date for the exclusion, which must be no sooner than 28 days after publication of the notice, in order to allow for the arrangements to be wound down.
A difficulty for government will be deciding when the supply disruption the exclusion orders are meant to address is over. The COVID-19 pandemic is likely to continue to affect the lives of UK consumers and businesses for many months to come. The decisions government takes about when and how to remove or change its interventions will have a critical impact on how markets evolve and recover.
Government may also encounter resistance from the beneficiaries of the exclusion orders against their termination. Firms covered by the exclusion orders may be concerned that ending the arrangements could lead to them suffering economic harm, or would otherwise be premature. Firms could also argue that the arrangements provided for under the orders are in fact of benefit to consumers, and should therefore continue to be maintained in the longer term.
It will be for government to balance the different legitimate public policy considerations in bringing exclusion orders to a close, including the concerns of industry and the welfare of consumers. From a competition perspective, the longer such arrangements are in place, the greater the risk of consumer detriment occurring. As the UK emerges from the current crisis and the focus shifts towards restoring growth and prosperity, fair and open competition will be essential to reinvigorating the UK economy. Vigorous competition leads to innovation and improved choice and quality, which will help ensure that UK food suppliers will remain among the best in the developed world.
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