I am director of Food and Drink Industry Ireland, which is a business sector within IBEC representing manufacturers and suppliers of food and drink. My colleague, Mr. Shane Dempsey, is head of consumer food within IBEC. I thank the committee for the opportunity to make a detailed submission late last year and for inviting us to attend today's hearing.
The food and drink industry in Ireland is of vital economic importance to the economy, both in terms of production and consumption. The industry has an output approaching €20 billion. More that half of that is consumed at home as part of the biggest expenditure item in household budgets.
Some key facts are worth bearing in mind. Approximately 50,000 people are directly employed in the food and drink sector with a further 60,000 employed indirectly in all regions of the country. The industry also uses 90% of the output of Ireland's 110,000 farmers. The extent to which it is embedded in the Irish economy is demonstrated by the fact that it accounts for €8.3 billion or almost half of the goods and services sourced in Ireland by the manufacturing sector.
The home market is the most important for the food and drink industry constituting the sole market for many smaller companies. The industry supplies a customer base that is highly concentrated leading to an imbalance of power between supplier and retailer. The trading relationships in the grocery sector are almost completely unregulated, a situation almost unique in Europe. The imbalance in size between suppliers and their customers gives the latter huge buying power. That has led to unsustainable pressure on suppliers by retailers. If it continues, it threatens the indigenous supply base and will have serious knock-on effects in terms of price, choice and competition. It will lead to an inability to service more remote parts of the country. It will harm the viable but delicate fabric of smaller retailers and will result in job losses in manufacturing, sales and marketing across the country and the destruction of Irish brands and loss of export potential.
The narrow focus of competition law is insufficient against these broad socio-economic concerns. Legislation is required to provide a framework for a balanced relationship between the suppliers and grocery retailer and wholesalers. Protecting the domestic supply chain as an integral part of the overall food and drink industry and of the social fabric of society must be an immediate priority of Government policy and the ongoing work of the committee.
The top three retailers control 70% of the Irish grocery market. Thus a single multiple retailer deciding not to stock a product can lead to a supplier and-or brand losing over 20% of its sales volume. Not being listed with any one of the top three retailers undermines the feasibility of suppliers' overall business. Even global businesses operating here achieve a lower value of turnover in Ireland than any of the three major retailers in the Irish market. Other than Scandinavia, Ireland has the highest level of retail concentration in the European Union. Retail concentration among the top three is 64% in Great Britain and it is at an even lower level in Northern Ireland.
Power in the market and, in particular, buying power increasingly rests with retailers and in the increasingly concentrated food service sector. That is bolstered by the ability to de-list and source products from overseas. Suppliers are not able to recover cost increases through price increases. Being forced to fund what used to be retailer activities such as distribution and promotion as well as funding price discounting compounds suppliers' difficulties. A number of route-to-market costs are now largely controlled by the retailer but still funded and-or paid for by suppliers directly or indirectly. Those were traditionally a function of the supplier's role, for example, distribution and merchandising.
Food suppliers are struggling to meet the increasingly difficult demands of retailers above and beyond normal contractual negotiations on price. Those include high levels of inflation in funding retailers' marketing initiatives, promotions, merchandising and distribution. That comes on top of general business input costs which are among the highest in Europe. Those unsustainable additional costs may force many companies out of business and, ultimately, reduce consumer choice and competition in the market. Suppliers are compelled to meet retailers' demands due to massive buying power in the market.
There is increasing sourcing of products and brands from outside the State bypassing Irish suppliers and manufacturers. That practice, if left unchecked, could effectively cripple this important indigenous industry that supports over 230,000 jobs in the economy as part of the agrifood sector.
Let us consider what is being done in other countries. Trading relationships in the grocery sector are regulated in a number of other EU member states, including France, Belgium, Germany, Greece, Italy and Spain, with various forms of legislation in force to ensure that a degree of balance between supplier and customer exists. In September 2008, the UK Competition Commission published a consultation on a new grocery trade code of practice. UK retailers must sign an undertaking for fair trade with suppliers following adverse finding in its recent investigation of the UK groceries market. The proposed new code is a widening of an existing code of practice, which was introduced in the UK market in 2000.
There are many moves in this regard at the level of the European Parliament and the European Commission. In February 2008, a written declaration signed by 439 MEPs, including the majority of Irish MEPs, called on the Commission to investigate the effect on small businesses, suppliers and workers. The written declaration signed by MEPs stated that EU retailing is increasingly dominated by a small number of supermarket chains, that supermarkets are fast becoming "gatekeepers", controlling farmers' and other suppliers' only real access to EU consumers, and there is evidence from across the EU that big supermarkets are abusing their buying power to force down prices paid to suppliers. Such buying power impacts negatively on working conditions and the environment. The declaration also sets out what MEPs want: that the Commission's competition watchdog investigates the effects of concentration on small businesses, suppliers, workers and shoppers, and an assessment of potential abuse of buying power. They also want measures to protect consumers, workers and producers, including the possibility of legislation.
Separately and not as a response to that, the European Commission published a communication on food prices in December. Two items in the communication are pertinent to today's proceedings:
Practices which distort the relationship between suppliers and retailers should be discouraged. This is for example the case for late payments, unjustified or excessive fees paid by suppliers for services provided by retailers or tempting consumers with misleading offers. In this context, the introduction of codes of conduct would be welcome as an expression of retailers' social responsibility and national codes of conduct should be reviewed.
Moreover, it called for "Better regulation and ensuring a vigorous and coherent enforcement of competition and consumer protection rules as this could help rebalance the bargaining power in the food supply chain". FDII asks that the Government take the necessary steps to ensure responsible trading in the food sector. Across Europe, national legislation ensures that food industry suppliers are not dominated and overwhelmed by massive retailers.
The comments of the Tánaiste, Deputy Mary Coughlan, late last week that retailers must address price differentials but not at the expense of suppliers are to be welcomed. The Government must act quickly and decisively to put in place an effective legal framework to ensure the existence of responsible trading practices between grocery retailers and their suppliers; the establishment of an ombudsman to investigate complaints of irregular activity or the abuse of power; that suppliers are not forced to pay for advertising and the display of goods or pay "hello money" unless there is a clear benefit to both parties. Without these remedies, the structure, employment capacity and profitability of Ireland's €20 billion food and drink sector will be in grave danger.
