Price controls on essential foods: partial business and regulatory impact assessment

Section 3: Assessment of Impact on Business, Investment and the Economy

3. Costs to businesses

The policy proposal is expected to have direct costs for qualifying retailers within scope of the proposed scheme and may also give rise to indirect costs on other food retailers, wholesalers, distributors, food manufacturers and other businesses in the food system operating within Scotland and elsewhere (see section 3.1). However, the nature and scale of these costs are dependent on the design of a future food price control intervention and its implementation, which are the subject of the consultation. The overall extent of impacts is therefore dependent on a range of policy factors including the food items selected, the level at which any price cap is set and the availability of measures or mitigations to support implementation.

For the purposes of this Partial BRIA, it is not possible to set out quantified estimates of the potential costs to the qualifying retailers, quantify indirect costs for other businesses or quantify benefits to consumers. It is anticipated that the design and implementation of the food price control will be developed through engagement with stakeholders through the consultation process and through further business engagement following the consultation.

This iteration of the BRIA does however set out an initial assessment of the possible sources of and avenues for costs (direct and indirect) and benefits that may arise for different stakeholders of a general food price control.

Costs to qualifying food retailers

There will be a range of potential new direct and indirect costs for specified supermarkets required to comply with a food price cap scheme. Potential costs may include:

• Direct compliance costs, including one-off and ongoing costs associated with changes to pricing systems and processes, staff training, familiarisation with new requirements, adapting pricing signage and/or labelling and any reporting, monitoring or record-keeping obligations.
• Direct commercial costs which may arise where price caps result in lower margins on specified food products compared with the status quo, potentially reducing revenues associated with those product lines
• Indirect commercial costs including costs associated with reviewing product ranges, changes to procurement practices, and engaging in negotiations with suppliers and other supply-chain partners.
• Regulatory and enforcement-related costs, including the costs of responding to compliance activity, compliance notices, investigations or enhanced information requirements where applicable.

It is recognised thorough the development of proposals set out in the consultation that smaller retailers may have less purchasing power and lower operating margins than larger supermarkets. As a result, the costs identified above were more likely to be disproportionate to smaller businesses. This is set out in section 3.3 in more detail.

It is further recognised that a price cap could have differing impacts on different qualifying retailers depending on the price at which the retailer had sold specific goods before a cap is put in place and the design of the price cap.

The Scottish Government will seek to develop its understanding of the quantifiable impacts of the food price cap for further iterations of the BRIA, although it should be noted that providing these may prove overly complex. Following the consultation further development of the policy would be undertaken alongside detailed economic analysis to assess the proportionality of intervention, quantify costs and benefits, and identify implementation arrangements that maximise consumer benefits while minimising adverse impacts on businesses and market functioning.

Costs to other food retailers

While the proposed scheme is intended to apply only to qualifying retailers, other food retailers may experience indirect impacts.

These businesses may compete directly with qualifying retailers for grocery sales. Depending on the design of any scheme, a widening of the price differential between price-capped products and similar products sold by retailers outside the scheme could potentially influence consumer purchasing behaviour and affect sales patterns.

The scale of any impact is uncertain and may vary significantly between locations, business models and product categories. Impacts may be more pronounced where smaller retailers rely on sales of staple food products or operate in direct competition with qualifying retailers.

3.1 Other potential impacts on business or the wider economy

Potential wider economic impacts of a price control intervention

In economic terms, a binding price cap on essential food products can be understood as the transferring a portion of the economic surplus (the ‘benefit’) associated with those products from producers and suppliers to consumers purchasing the capped goods. An illustrative diagram is shown in Annex B, showing the prevailing market price (P*) and the price set under a binding price cap (Pc) using formal economic theory.

Where price caps (Pc) are set below the prevailing market price (P*) or create a price differential between the market rate and the capped price, the expected effect is to lower the prices paid by consumers for targeted goods. Depending on the design of the intervention, this may reduce revenues or margins associated with those products for qualifying retailers and potentially other businesses within the supply chain.

The extent to which any costs are absorbed by retailers, passed through supply chains, or offset through other commercial decisions will depend on the design of any scheme and wider market conditions. The consultation therefore seeks evidence on how retailers and other businesses may respond in practice.

Potential responses could include:

• Changes to supplier arrangements, including renegotiations with suppliers and intermediaries within the supply chain for capped products. This could reduce costs for retailers but may also have implications for suppliers, sourcing decisions, product quality, supply-chain resilience and the use of local produce.
• Changes to wider pricing strategies, where qualifying retailers adjust prices of products that are not subject to the price cap in an effort to offset reduced margins on capped items. This could include changes to the pricing of non-capped products, promotional activity, product ranges or other commercial strategies. The extent to which this may occur would depend on commercial considerations and competitive pressures.
• Changes to product availability or range, where retailers reduce the range of products offered or, in more extreme circumstances, withdraw products where a price cap is set significantly below prevailing market prices and cannot be accommodated within normal commercial operations.

Furthermore, if a price cap has constrained prices below prevailing market levels for a sustained period, there is a risk that consumers could face a relatively sharp increase in prices once the intervention ends as retailers, suppliers and markets adjust to underlying costs and market conditions.

Potential indirect impacts on the food supply chain, including primary producers

The food supply chain comprises a number of interconnected stages, including primary production, processing, manufacturing, distribution, wholesaling and retail. Each stage adds value, incurs costs and contributes to the final price paid by consumers.^[18]

Any food price cap would apply at the retail stage of the supply chain. However, the extent to which the costs associated with a price cap are absorbed by retailers, passed through to other businesses, or offset through wider commercial decisions will depend on the design of any intervention and market conditions at the time. As a result, impacts may extend beyond qualifying retailers and affect other businesses operating throughout the food system.

Potential impacts could be experienced by farmers, food manufacturers, processors, wholesalers, distributors and others. These impacts could affect operating costs, investment decisions, product availability or business viability. The scale and nature of any effects is also likely to vary considerably between products.

According to figures provided by the Food and Drink Federation to the Competition and Markets Authority (CMA), the cost of suppling goods directly from the supply chain in supermarket retail accounts for around 70% of revenues generated by retailers on average across the sector. Of the remaining 30%, 27% relates to other costs incurred by the retailers, such as labour, energy, warehousing, distribution, marketing and administration costs, with the remaining 3% equates to the retailer’s profit.^[19] This highlights that the majority of retail food prices are associated with costs incurred throughout the wider supply chain rather than retailer profits alone.

Our food supply chain is highly complex. Primary producers typically operate within interconnected supply networks and often sell their products through processors, packers, manufacturers or other intermediaries before goods reach retailers and consumers.

Primary producers may be particularly sensitive to changes in commercial terms where they have fewer opportunities than larger downstream businesses to negotiate prices or contractual arrangements. Where commercial pressures are transmitted through supply chains, stakeholders may have concerns that a disproportionate share of any commercial adjustments linked to the operation of a price cap policy could occur at the production stage. However, the extent to which this could occur in practice remains uncertain and likely to vary highly depending on the specific product and specific market context. This is a key area on which the consultation seeks evidence.

Designing measures that mitigate any potential negative commercial impacts on primary producers requires careful consideration of the complexity of modern food supply chains.

Farm-gate prices are shaped by a range of interconnected factors, including domestic and international market conditions, input and production costs, contractual arrangements and wider supply chain dynamics. This makes it challenging to isolate the potential impact of a food price cap from other factors affecting prices and profitability across the food system.

While data are available on farm-gate prices and retail prices, it becomes decidedly more complex to track how individual ingredients, costs and profits within composite food products move through supply chains. Even for more “simple” products made up of a single ingredient the number of intermediaries means it is unlikely that one actor in the food supply chain would have visibility of costs and prices paid.

The draft legislation includes a proposed duty for Scottish Ministers to consider the impacts on food retailers, food producers and other relevant businesses when setting a price cap and specifying the foods subject to price caps,

There is a number of identified design and implementation choices which we are seeking to more fully assess through the consultation. In particular further evidence from those operating across the supply chain will help us better understand the scale and nature of any impacts in practice.

Potential indirect impacts on other outcomes

There are potential indirect consequences for production, including impacts on supply chain resilience, climate change, biodiversity and animal welfare. This will be considered more fully following the consultation in a final BRIA.

3.2 Benefits to business

At this stage, no direct or material benefits to businesses have been identified. The primary purpose of the proposed intervention is to improve food affordability for consumers. While some businesses may experience indirect effects, for example through changes in consumer demand or purchasing behaviour, the direction and scale of any such impacts are uncertain and may vary significantly between sectors and businesses. The consultation therefore seeks evidence on whether any business benefits may arise in practice.

3.3 Specific Small business impacts

As policy development remains at an early stage, it is not currently possible to quantify the impacts of any future food price control scheme on small businesses. The consultation seeks evidence on these impacts and further assessment will be undertaken in future iterations of the BRIA.

Direct impacts

Under the qualifying business criteria proposed in the consultation, direct regulatory obligations would apply only to larger grocery retailers meeting specified thresholds relating to employment, turnover and grocery sales. As a result, most small and micro businesses are not expected to be directly subject to any obligations arising from a food price cap scheme. As set out in section 1.4, the majority of small Non-Specialised Food & Drink Retail stores will not be included under the criteria set out in the consultation.

The proposed approach has been developed with the aim of reducing the risk of disproportionate compliance, implementation and administrative burdens falling on smaller businesses, which may have less capacity to absorb additional costs or implement new regulatory requirements.

However, the consultation also seeks views on alternative approaches to defining businesses within scope. Depending on the final design of any policy, different approaches to defining qualifying businesses could result in different impacts on smaller businesses. In particular, the treatment of franchise and symbol-group arrangements remains an area where further evidence is being sought through consultation. The extent to which individual operators within such arrangements could be affected will depend on the final policy approach adopted.

Indirect impacts

Although the proposed qualifying business criteria are intended to limit direct regulatory obligations to larger supermarket chains, there may nevertheless be indirect effects on smaller retailers. In particular, a price cap could increase the price differential between products sold by qualifying retailers and comparable products sold by convenience stores, independent retailers and other businesses outside the scope of the scheme.

The extent to which this affects consumer behaviour is uncertain. Consumers may continue to choose smaller convenience stores not captured under the price cap scheme for reasons such as proximity, opening hours, product range and convenience, even where prices are higher than those offered by larger supermarkets. However, if the price differential for capped products became sufficiently large, it is possible that some consumers may choose to shift a greater proportion of their grocery spending towards retailers subject to the scheme.

Depending on the design of any intervention, this could affect sales volumes, revenues and profitability for some smaller retailers, particularly those that rely on sales of staple grocery products. The scale and distribution of any impacts are likely to vary significantly depending on a range of factors.

Although proposal to capture large qualifying businesses is to mitigate the risk to smaller enterprises, there are possible indirect impacts it may have, such as smaller enterprises now having to compete with lower prices for the selected products with larger retailer who are charging (significantly) less. This widening of the price differential between smaller enterprises, such as convenience stores, and larger supermarkets may create increased demand for these products at the selected businesses in scope and reduce demand in the smaller enterprises.

There is also the possibility of indirect affects to consumer facing businesses that are not grocery retailers, such as bakeries, pubs, restaurants, cafes and other forms of hospitality that rely on the local food supply chain and may make available essential food items or meals made out of essential items, for example sandwiches. However, the scale and nature of any such impacts remain uncertain and require further consideration. The Scottish Government will continue to engage with SMEs and their representative bodies to better understand and consider any potential indirect impacts as policy development progresses.

3.4 Impact on Scottish firms’ competitiveness

The introduction of a food price cap on selected essential food items may affect competitive dynamics within the grocery sector and wider food supply chain. The nature and extent of any impacts will depend on the final design of the scheme, the products selected, the level at which any price cap is set and how businesses respond in practice. At this stage, the Scottish Government has not reached any conclusions regarding the overall impact on competition and is seeking further evidence through the consultation process.

Scotland produces food that is recognised around the world for its quality, underpinned by high standards of environmental stewardship and animal health and welfare. The costs associated with labour, energy, feed, fertiliser and other inputs are significant factors in food production. There are concerns that the introduction of price controls on certain products could influence sourcing decisions within the supply chain. Depending on how any price cap is designed and implemented, there may be circumstances in which retailers or suppliers seek to source lower-cost alternatives to maintain margins or manage costs. This could affect demand for some domestically produced goods and potentially increase reliance on imported products.

This may have implications for Scottish producers and Scottish food and drink manufacturers and could raise wider questions around economic impacts, environmental outcomes, production standards and food security. Alongside the consultation, we are exploring available evidence on the effects of price capping on primary production in countries where similar policies were advanced.

3.5 Impact on Scottish firms’ ability to trade internationally

The proposal may have implications for businesses involved in the import, export, production and supply of food products. The scale and nature of any impacts will depend on the final design of any intervention and the products selected for inclusion.

Price controls on selected products could influence sourcing decisions within supply chains, including the balance between domestically produced and imported products. Depending on how any scheme is designed, businesses may alter procurement arrangements, product ranges or purchasing strategies in response.

The Scottish Government is also mindful of its obligations to consider the impact of domestic policies on international trade. As the draft consultation and BRIA acknowledge, the international trade impacts of this policy are an important consideration, and the final policy design must be compatible with the Scottish Government’s obligations arising from the UK’s membership of the World Trade Organisation (WTO). Legal analysis will therefore be required in due course to ensure the policy’s compliance with WTO rules, and formal notification at the relevant WTO committees may be required, depending on the specific measures and requirements adopted.

The consultation therefore seeks evidence on any potential impacts on trade, supply chains and business activity both within Scotland and more widely. Further assessment will be undertaken through development of the Final BRIA.

3.6 Impact on investment opportunities for Scotland and Scottish’ Firms

The introduction of a food price control scheme could influence investment decisions by retailers and businesses operating within the wider food supply chain.

If a food price cap reduced expected returns or increased perceived regulatory risk, businesses may choose to delay, reduce or redirect investment in retail operations, food manufacturing, processing, logistics or production. Potential impacts may be more significant for businesses whose activities are closely linked to the Scottish retail market than for businesses primarily supplying export or wider UK markets.

The extent of any such impact would depend on the design and duration of any scheme and the products affected.

3.7 Impact on Employees

At this stage, no direct impacts on employees or Fair Work outcomes have been identified. However, the potential effects of any future food price control on employment remain uncertain and are likely to depend on the final design of the scheme and how businesses respond in practice.

Potential impacts may arise indirectly through changes in retail, production and supply-chain activity. For example, if a price control scheme were to influence sourcing decisions within the food system, there may be implications for demand for domestically produced food products. Depending on the scale of any such changes, this could affect investment and employment within parts of the Scottish food and drink supply chain. Conversely, different effects may arise in other sectors depending on how businesses respond to any intervention.

The Scottish Government will continue to engage with businesses, producers, trade representatives and other stakeholders throughout the consultation process and as policy development continues. This engagement will help inform a fuller assessment of any potential employment, workforce and Fair Work implications in future iterations of the BRIA.

The Scottish Retail Consortium has indicated concern that the proposed price cap could exacerbate negative consumer behaviours in store or create negative working conditions for retail staff. This responds to recent trends in increases in unacceptable customer behaviour towards retail employees. Further work is required to understand whether there would be any correlation between pricing strategies and customer behaviour/ employee experience.

3.8 Impact on Consumers – The Consumer Duty

The potential impacts to consumers are dependent on the design and implementation of the food price control, of which views are being sought through the consultation. As such, no quantifiable costs or benefits have been identified at this stage. We outline in this iteration of the BRIA the possible avenues for consumers to benefit.

As set out in the consultation, the primary objective of the food price cap is to improve the affordability of food for a selection of essential food items, particularly for those on lower incomes. Whilst any reduction in the price of essential food items would be available to all consumers purchasing those goods, lower-income households may benefit disproportionately as they typically spend a larger share of their household budgets on food.

At this stage the potential impacts on consumers have been identified as:

• A potential reduction in the cost of purchasing essential food items in supermarkets which are subject to the obligation, depending on the level at which any cap(s) is set relative to prevailing market prices. This will in effect deliver an in-direct and in-kind benefit to consumers. The value of any benefit will depend on a number of factors (discussed below).
• Potentially greater benefits for lower-income households, who spend a larger proportion of their disposable income on food.
• Increased predictability and transparency around price levels of essential food items – even during periods of high food price inflation

The selection of food items that would be subject to a price cap in Scotland is central to how the policy’s implementation could support consumers to afford healthy food. The balance of items subject to the cap are therefore critical to support the affordability of nutritious affordable food that is needed to maintain a healthy diet. While the intention of the proposed price cap scheme is to deal with the issue of affordability of food in the face of increasing inflationary pressures it is important to balance this against other factors such as encouraging a healthy diet.

It would be necessary to balance consumer preferences and purchasing behaviour against a number of other considerations. Other considerations should include how the choice of items might have broader impacts for climate change and biodiversity loss, as well as potential implications for animal welfare and the Scottish food and drink industry. For example, capping certain products could encourage imports and there could be an incentive for suppliers to minimise costs by selecting food with lower animal welfare standards.

In considering the impacts of any price control measures, it is also important to understand how they may influence consumer perceptions of the value of food. While the overall policy objective is to improve affordability of essential foods, any changes in retail pricing could also affect how consumers perceive intrinsic value of those products.

The potential impacts of the proposal on consumers, including differential impacts on people with protected characteristics are a consideration for other impact assessments including the Equality Impact Assessment (EQIA). An EQIA can identify both potential benefits and risks arising from differences in dietary requirements, purchasing behaviour, access to retailers and access to online delivery services. The evidence gathered during consultation can inform all relevant assessments that may be required to support the design of a final scheme.

The extent to which consumers benefit from any food price cap scheme may also vary depending on their access to qualifying retailers. Households in some rural, remote and island communities may have more limited access to large supermarket chains and may rely to a greater extent on local convenience or community retailers for some food purchases. Research on the cost of remoteness has found that food purchased from some remote community stores can be significantly more expensive than equivalent food purchased from supermarkets.^[20]

Research undertaken in the Western Isles (Na h-Eileanan Siar) suggests that consumers access food through a combination of large retailers, local stores and online grocery provision, with food access increasingly reliant on a small number of national retail chains.^[21] While access to larger retailers and online delivery services has improved food access for many households, the availability of these options is likely to vary considerably by location. As a result, the benefits of any price cap scheme may not be experienced equally across all communities and locations. This will be considered further in future policy development, including through any future Island Communities Impact Assessment.

As set out in section 3.1, one potential response by retailers to a price cap would be to adjust wider pricing strategies, including increasing the prices of products that are not subject to the price cap, in an effort to offset reduced margins on capped items. This could result in some consumers facing higher prices for non-capped goods and may reduce the net affordability benefits of the policy for some households. However, the extent to which this may occur in practice remains uncertain and would depend on retailer behaviour, market conditions, the final design of the scheme and the competitive pressures faced by retailers.

3.9 Impact on Regulators

At this stage it is not possible to quantify regulator costs or resource requirements. The consultation therefore seeks evidence from regulators, local authorities and other stakeholders to inform future assessment in the Final BRIA. More detail is set out in section 4.

The introduction of a food price cap scheme would have implications for public bodies responsible for monitoring, oversight and enforcement of any future intervention. The consultation proposes that local authorities would have a central role in the administration and enforcement of the scheme, including the investigation of potential non-compliance and issuing of compliance notices. As a result, local authorities, may experience additional resource requirements associated with monitoring activity, business engagement, compliance assessment, record-keeping and enforcement functions.

Alternative approaches to the price cap scheme explored in the consultation, for instance introducing a requirement for a whole basket of goods to be sold at a maximum price or capping the profit that retailers could make on a specified product, are likely to place additional demands on enforcement bodies and increase the cost and complexity associated with monitoring and compliance activity compared with the model directly tested in the consultation.

There may also be a requirement for additional Scottish Government resource to support the operation of the scheme. This could include, but is not limited to, on-going policy development, stakeholder engagement, monitoring of scheme performance, collection and analysis of evidence, periodic reviews of impacts and development of price-setting decisions.