Price controls on essential food items: consultation paper

Chapter 2: Price caps on essential food items – the model

There is a number of potential models for introducing price caps on essential food items. Design options for each element of a price cap could combine to produce different impacts, risks and benefits. Other jurisdictions have applied various models in recent years which are explored in further detail below and in Annex B, but these are not the only possibilities.

In this chapter, we seek your views on the nature of the proposed price cap. It considers the core principle of price capping and seeks your views on how a scheme could be structured. Other important considerations, such as the choice of items to be capped or the retailers to which any duty applies, are dealt with in subsequent chapters.

Annex A contains the Scottish Government’s illustrative draft legislative proposals. As we are seeking views and evidence for how price caps could be implemented, some of the legislative detail can only be addressed after consultation. Any legislation ultimately introduced would have to be adapted to reflect final proposals. The draft provisions are provided at this early stage to support a discussion on the detail, alongside consultation on the general principles.

The relevant parts of the illustrative draft provisions for this chapter are sections 1, 2, and 3 in Part 1.

What is the proposal?

We are proposing the following model, with section 1 of the draft provisions at Annex A demonstrating how that could be brought into effect in legislation.

We are proposing to set price caps for essential food items sold by qualifying retailers (see Chapter 4). The food items that are price capped would be set out in Regulations (see Chapter 3).

Where a retailer offers for sale one of those products in a store or online, they would be under a duty to sell at least one type of that product at or below a maximum price (the price cap).

The retailer could choose which particular product to use to meet the duty, as long as it meets the description of the product as set out in Regulations.

If the product type selected by the retailer were to run out, the retailer would have to substitute it with another type of that product at or under the price cap (if an alternative is available and on sale to customers), otherwise they could be in breach of the duty.

The retailer could also sell price capped products for a price which is lower than the cap.

It would not be possible for a retailer to meet their duty by requiring a consumer to buy multiple or associated promotional items before the price applies. For example, a retailer could not say that the price is only available under a “3 for the price of 2” offer.

Notably, while a food item can be price capped this does not oblige the retailer to stock that product. The duty would only apply to price capped products where they are actually offered for sale.

This approach is intended to balance consumer access to lower priced essential food items with operational flexibility for the retailer in determining how they meet the obligation. We recognise that different approaches may place additional operational burdens on retailers and may result in different outcomes for consumers.

Regulations would set out and describe the food products subject to a price cap – these are sometimes referred to as “specified food products” in this consultation (see Chapter 3) and the maximum price (see Chapter 5) for those products.

Further detail about the operation of the duty, including exemptions and compliance arrangements could be set out in regulations. These issues are addressed in subsequent Chapters.

The proposed approach has been selected as the illustrative model for consultation because it is relatively straightforward for consumers to understand and for retailers and regulators to monitor. However, we recognise that other models may offer greater flexibility in responding to changing supply chain conditions and market pressures. While we are seeking views on the benefits and drawbacks of the illustrative model, we also welcome views on alternative models.

Alternative approaches could include:

• Putting in place a temporary price freeze on food items.
• Capping the profit that retailers could make on a specified product.
• Introducing mandatory discounting on specified products.
• Introducing a requirement for a whole basket of goods to be sold at a maximum price (with the price of individual products at the retailer’s discretion, provided within the total basket allowance).

Discussion Points relating to the price-capping duty

Core principle

Price capping is a form of market intervention that has over time been used in the UK and in other countries in different contexts. For example, Ofgem's energy price cap currently limits the maximum prices that suppliers can charge many domestic consumers on default energy tariffs, including standard variable tariffs. The cap is reviewed periodically and adjusted to reflect market conditions. The Scottish Parliament implemented a freeze on private residential tenancy rents in October 2022 in response to the cost of living crisis, followed by a temporary cap on increases of 3 %. The Scottish Parliament has now passed legislation that introduces a long-term system of rent controls, which gives Scottish Ministers powers to cap rents at CPI +1% in areas where rents are rising particularly steeply. Countries in the EU and elsewhere have introduced price caps on essential food items (See Annex B for examples). The UK previously applied place price caps on grocery items in the 1970s.

Each form of price cap intervention has different characteristics. But a common factor is that there will be a difference between the market rate and the capped price which is often redistributed. In the case of price capping of essential food items in supermarkets, the potential effects include cost being borne elsewhere in the food supply chain or being redistributed to other products sold by the retailer.

Price cap model

As outlined above, the proposed approach is an item-level price cap – i.e. each individual product subject to the cap would have a price cap set for it. However, alternative approaches could allow greater flexibility in how retailers meet the policy objective. For example, instead of setting a maximum price for individual products, a price limit could apply to a basket of goods, allowing retailers to offset higher prices for some items with lower prices for others. Alternatively, a requirement could apply at product category level, so that where a category includes several similar products, such as fruits like apples, pears and bananas, a retailer would be required to offer at least one item within that category at or below a capped price.

Greater flexibility may allow retailers to respond more easily to changing market conditions, seasonal availability and supply chain pressures. It may also support competition within categories of capped goods. However, these approaches may reduce transparency for consumers, who might find it more difficult to identify the intended benefit of the scheme. They may also increase complexity for retailers, regulators and enforcement authorities, as compliance would require ongoing assessment of a range of products rather than straightforward checks against specified capped items.

We welcome views on the relative benefits and risks of alternative approaches.

Replacement Products

The proposed duty would effectively require that retailers that run out of an item sold at a capped price must then sell another item of the same type (for example an alternative variety of apples) at the capped price – if they have any available and on sale. This is proposed to enhance compliance and to avoid a retailer not having price capped goods for sale because one brand of the good sells out in-store. A form of product replacement requirement operates in other price cap schemes, including for example in Croatia. This would require a level of real-time adaptability to pricing in-store if a price capped good sells out.

If Regulations describe the products by reference to features such as weight, size or nutritional content, then the substituted product would also need to have those features. However, if the store has no alternatives available for sale that are in line with that description, then the duty would not apply.

We anticipate that price capped items would be described by weight, volume, quantity etc. However, we recognise that situations may arise where a retailer has run out of stock of their usual price capped item and would prefer to substitute it, at that price, with a larger size than those specified (for example to avoid having to substitute in a premium product of the usual prescribed size). We are interested in views on whether this type of flexibility would be beneficial and how it could operate in practice.

Stocking

We are not proposing a duty to stock specific price capped items, only that if a retailer does offer a specified food product for sale at a particular store or website, then at least one type or variety of that product must be offered at or below the cap at that store or website.

Whilst a requirement to stock price capped items could help increase availability of price capped goods, this is not proposed as there may be circumstances beyond the control of retailers such as supply chain disruption which would mean goods may not be available. It also represents a more significant intervention in business operations.

There is recognition that the proposed approach may simply mean that retailers affected choose not to stock a specific item that is subject to a price cap.

We can mitigate this risk by ensuring that the products to which the cap applies are those for which there is sufficient consumer demand, thereby retaining some competition incentive in the system, and by ensuring that the list of specific products is sufficiently broad to support seasonal flexibility.

Online and in-person sales

It is proposed that any price cap on essential food items should include online sales, where a qualifying retailer (in any registered location) is offering the products for sale on a website or app to a customer in Scotland.

It is proposed that this should include all forms of online sale including online purchased deliveries, collection of items from retailers, and when third party online platforms act as an intermediary for retailers. It is recognised that regulating online sales can give rise to complexity regarding online marketplaces and cross-border sales. It is proposed that Scottish Ministers should be able to provide for further detail on how the duty applies to online sales in Regulations to ensure the duty operates effectively and in a way that responds to emerging practice over time.

The draft provisions would not prevent an online retailer levying other charges to the consumer such as delivery charges, service fees and small order fees.

Applying the price cap to both in-store and online sales would help maximise access to price-capped products, reflect changing consumer shopping habits and ensure that the benefits of the scheme are available consistently across different retail channels. Including online sales could also support some consumers in remote, rural, island and inner urban communities who may not have a qualifying retailer nearby, helping to ensure that the benefits of the policy are accessible across Scotland.

Packaging and Signage

Consumers already benefit from legal protections which ensure that they are clearly made aware of the price of any item before purchase. However, we are interested in views on whether retailers should take any particular steps to make clear which foods are price capped - potentially by law or as a matter of guidance.

We do not propose any additional obligations in relation to packaging, promotion or signage. We do not propose that retailers be required to indicate prices have been set as a result of the statutory price cap and would propose leaving promotional branding as a matter of retailer discretion.

Price cap schemes elsewhere, for example in Croatia, require specific signage outlining that a good is available at a specific price due to the price cap scheme in place. In larger stores there is a requirement that price capped items are displayed in their own designated section of the store for visibility. These approaches could also be considered for Scotland. Potential benefits include greater clarity for consumers about which products are subject to a price-cap and easier identification of lower priced items. However, there could also be drawbacks.

Low-priced goods that are labelled as such can lead to a form of stigma for people who may rely upon them. While this effect is not universal, we believe that people should be able to purchase food in a dignified way.

Additional display or signage costs may impose costs and operational burdens on retailers, particularly where product ranges change seasonally and when displays need to be regularly updated. On balance, our proposed approach is to retain retailer discretion on signage and promotion, with reliance upon existing consumer protections on pricing displays. Views are welcomed.

Consultation questions

7. Which model of price cap do you consider likely to be the most effective - An item level price cap, a category-based price cap, a basket-based approach, or an alternative? Please explain your answer, describing any proposed alternatives and considering the costs and benefits of a preferred approach.

8. Do you agree or disagree with the proposal that if a price capped item sells out, then the retailer should be required to sell an alternative at the capped price (if available and on sale to customers)? [Agree. Disagree. Unsure].

9. The proposal is that retailers would not be required to stock price capped food items. Do you agree or disagree with this approach? [Agree. Disagree. Unsure].

10. Please explain your answers to Questions 8 and 9.

11. Do you agree or disagree that price caps should apply to relevant products sold online? [Agree. Disagree. Unsure].

• Please explain your answer.

12. Do you agree or disagree that a retailer should be able to meet their obligation to offer a food item at a capped price by offering a variety that exceeds the minimum requirements specified in Regulation? (for example, if the requirement related to 1 pint of milk, could the obligation be met by selling a 2 pint carton at the capped price?) [Agree. Disagree. Unsure].

• Please explain your answer.

13. Should price capped foods:

a. have specific branding [Yes. No. Unsure].

b. have specific signage, labelling [Yes. No. Unsure].

c. be located or grouped together in-store (and online) [Yes. No. Unsure].

• Please explain your answer to a, b and c, including any views on how this could be implemented.