Price controls on essential food items: consultation paper

Chapter 4: Businesses to whom the measures should apply

We benefit from a competitive grocery retail market in Scotland, across multiple formats which include large supermarket chains, town centre convenience stores, franchises operating in multiple locations, independent high street stores, farmers’ markets, speciality stockists, mobile and online retail platforms. The variety of retail formats reflects different market catchment areas and demographics, geographic variance and demand profiles for different products.

The supply chain requires complex and varied distribution models, reflected in a mixture of aggregated purchasing and vertical supply chain integration, with differences for each product line in each range in each store. It engages a range of commercial models across production, storage and distribution. We know that consumer access to different retail formats and products is influenced by geographic location, transport connectivity and digital connectivity. Additionally, some people will have accessibility requirements which further affect access to retailers.

This Chapter addresses the question of which retailers should be covered by price cap obligations. The relevant part of the illustrative draft provisions in Annex A is Part 1, section 5. There are different ways of defining what is meant by a “large supermarket” business, and we approach with care the question of the businesses to which the price cap obligations should apply.

We are inviting responses on whether the principle of only applying the duty to large supermarket chains achieves the best outcomes for the consumer, the retail sector and the food supply chain and, if so, whether the definition within the draft legislative provisions correctly captures that group of retailers. We would, in particular, welcome views from retailer operators on any operational implications which might have unintended consequences, or be prejudicial to our objective.

What is the proposal?

We are proposing that large supermarket chains supplying food to consumers in Scotland would be required to comply with a price cap duty. These businesses are referred to in the draft legislative provisions as a “qualifying business”.

It is proposed that a retailer could be a qualifying business if it meets the following conditions for the business as a whole:

• more than 50% of its annual turnover is from the sale of grocery items (a suggested definition of “groceries” is set out in section 5(3) of Annex A), and
• it has more than 250 employees, and
• it has a total annual turnover of more than £250 million per annum.

We also propose that a business would be exempt if it wholly or mainly offers food for sale as part of a takeaway service, or for both takeaway and immediate consumption on the premises. This is to make clear that out of home establishments, such as cafes or takeaways, are not intended to be covered.

We are not currently proposing that the physical size of the retail unit determines whether a business or store is in scope. This would mean, for example, that small stores in a city centre location which are operated by a large business would be in scope, whereas an independent retailer operating in the same location would not even if the premises had a larger retail unit floor space.

The definition of a qualifying business has been based upon employee numbers and annual turnover. The employee criterion aligns with the established Companies House definition of a ‘large’ business.^[7] The additional turnover and grocery sales criteria have been selected based upon analysis of the turnover and business models of major supermarket chains. We welcome feedback on whether these criteria are appropriate to capture large supermarket chains.

Discussion points relating to whom the measures should apply

Business purpose

The obligation would apply only to food sold in a retail format. It is not intended that any price cap scheme would apply to food sold in other contexts such as catering, out of home establishments like restaurants or cafes, hospitality or trade. While some of those businesses may sell some items that are specified in regulations (as discussed in Chapter 3) they are not proposed to be within scope. We nevertheless are seeking views on how such businesses may be affected even if not subject to price caps.

It is expected that exemptions would need to be set out in any legislation, to ensure that any businesses that are not intended to be captured are clearly exempt. The illustrative draft suggests a proposed exemption for takeaways at section 5(2). We are also seeking views on whether any other specific exemptions would be required for businesses who might be captured by the definition given above but not typically considered a “large supermarket” chain.

Retail catchment, location and accessibility

Evidence indicates that around 90% of food consumed in the UK is from take-home groceries^[8]. According to analysis of Kantar data by NESTA, most food in GB purchased from retailers is for in-home consumption (groceries) and over 90% of this is purchased from just 11 retailers, which includes the major supermarkets.^[9],[10] While differences exist between income groups, most people purchase groceries either from large supermarket chain brands or from discounters.

Not all locations in Scotland fall within large format retail catchment areas, including some remote, rural, island or inner-city areas. People without physical access to large retail outlets, or outwith online retail delivery areas, may rely on local or convenience stores, or specialist retailers for most of their grocery shopping. As the volume of retail sales in large stores is one contributory factor in retailer pricing strategies, it is often the case that lower priced products are more consistently available in larger retail stores.

There is a tension between our desire to ensure that the benefits of a price cap are made available to the maximum number of people in Scotland, and our suggested approach to applying the obligation to larger retailers only. However, maximising the impact of price caps must be balanced against wider considerations, such as protecting smaller businesses who may struggle to implement such a scheme.

Store size and business structure

We do not consider the floor space of any retail unit, or the proportion of floor space made available to food products with a retail unit, to be the most important factor in deciding on the application of any requirements. Instead, the focus is on the overall size of the business. This would mean for example that large supermarket chains would be subject to price cap regulation, including where they are operating small format convenience stores.

We welcome views on the extent to which there is a correlation between retail unit floor space and the operational flexibility to effectively implement price caps. For example, the ability to provide substitute price capped products in response to generated demand, which may have unintended consequences for retailers, producers or consumers.

Retailer Capacity to Implement Price Caps

Small and medium-size enterprises may find price cap regulations more challenging to implement than larger businesses. We anticipate that smaller retailers holding limited product ranges may have less opportunity than large supermarket chains to redistribute the cost of price controlled items across its broader inventory, without the unintended consequence of depriving the consumer of the benefit of the more affordably priced item. We welcome feedback on these assumptions.

We recognise however that stakeholders have raised concerns around competitive disadvantage for smaller retailers even if those businesses are not subject to the price cap requirement. We understand that this could arise where a convenience store retailer already competes with a branch of a large supermarket chain, and price capping might increase the difference in price between the convenience store’s products and items at the supermarket.

Franchises and symbol groups

In addition to the independent convenience stores and supermarkets, many businesses operate as part of a franchise or as part of the so-called “symbol group” model where an individual retailer retains ownership of the business, employs staff and makes day-to-day decisions but operates under a larger brand. We recognise this sector is complex with several differences between individual franchise and symbol group operators in terms of supply chain, promotions, wholesale supply and a number of other operational factors.

The inclusion of such retailers in a price cap scheme would widen the access of consumers to price capped food items but would carry with it some of the risks associated with small business’ ability to manage implementation and compliance. We are keen to understand the potential impacts on these retailers of being included in any price cap and the consequences of including or excluding these retailers.

Smaller retailers with agreements to sell supermarket brand products

We are aware that some retailers who would not fall within the scope of the proposed definition may have agreements in place with large supermarket chains to sell their branded products within their stores. This may occur in locations where the larger supermarket chain does not itself have a physical presence. We do not currently have enough information about the operation of those agreements to be able to determine the impact of including these retailers within a price cap scheme, and welcome input on the potential consequences of including or excluding them.

Geographical Coverage

The proposal to exclude smaller retailers would not affect all consumers equally. As outlined previously we are aware that many low-income households and those with disabilities rely on smaller stores, including independent convenience stores. We wish to explore how significant capturing online sales by retailers in scope could be in mitigating this issue, and would welcome contributions from consultees on this question.

Making a choice not to include any retailer in a price cap scheme necessarily reduces the geographical and population coverage of the scheme. We would aim to achieve the widest possible benefit to as many consumers as possible while balancing this with applying price cap requirements on only those businesses that are capable of operating such a scheme without unintended consequences for consumers.

Application of Price Caps Across Retailers

The current policy proposal is that the same price cap would apply to a product regardless of the qualifying retailer selling it. All qualifying retailers selling a product that is subject to a price cap would therefore be required to comply with the same maximum price. We recognise, however, that the impact of a price cap may differ between retailers.

Businesses operate with different cost structures and pricing models, and retailers in remote and island communities may face higher supply and distribution costs than retailers elsewhere in Scotland. At this stage, we do not propose applying different price caps based on factors such as business type, business size or geographical location. However, we would welcome views on whether there are circumstances in which such distinctions should be made and the reasons for doing so.

Consultation questions

20. Do you agree or disagree with the proposal that any price cap scheme would apply to large supermarket chains only? [Agree. Disagree. Unsure]

• Please explain your answer.

21. Do you agree or disagree with the proposed definition of qualifying retailers that would be in scope, as outlined in the consultation? [Agree. Disagree. Unsure]

• Please explain your answer, particularly with reference to any alternative definitions you may wish to provide .

22. Should the price cap policy be applied to any of the following :

• Independent convenience stores.
• franchise convenience stores.
• symbol group convenience stores.
• specialist retailers (e.g. bakeries, butchers, greengrocers, fishmongers).
• locations that do not sell groceries as their primary purpose (e.g. coffee shops, petrol stations).
• Smaller retailers selling supermarket brand goods.
• other (please state).

[Yes. No. Unsure] for all of the above.

• Please explain your answers.

23. What exemptions, if any, should apply?

• Please explain your answer.