Crying over spilt milk

An Article from Business Respect, Issue Number 116, dated 9 Dec 2007
By Mallen Baker

There is no greater myth in corporate social responsibility than the idea that there is always an obvious right thing to do, which will bring reputational and business benefits. And there is no better illustration of this fact than the way that UK supermarkets have been comprehensively stuffed over the recent milk price-fixing row.

The headline news has been that supermarket giants, including Asda-Walmart and Sainsbury's, have admitted taking part in fixing the prices for milk and cheese in 2002 and 2003 that, in the words of the Sunday Mirror newspaper and many others "milked an extra £270 million from shoppers".

Consumer groups, such as the National Consumer Council, went for the jugular. "Today’s admission of guilt by Sainsbury’s and Asda confirms that these supermarkets have been creaming off money from their customers in breach of competition laws – helping neither customers nor their farm suppliers.

"Without the OFT’s investigation this shameful episode would not have come to light. It will do enormous damage to the reputation of supermarkets. Consumers have always trusted supermarkets to provide value for money, but they will be more sceptical about their claims in the future."

There is an interesting dynamic here. We all know and agree that healthy competition helps to keep prices low. Here, we seem to have entered the perspective that says that anything other than the lowest achievable price is somehow theft from shoppers. There was a different perspective at work in 2003.

At that stage, the big concern and political pressure was around the desperate state of the milk industry. Farm gate milk prices were hitting rock bottom, and there was great outrage that the supermarkets were paying insufficient prices to the farmers to ensure sustainable livelihoods. Nobody then was talking about the imperative to keep prices rock bottom.

The National Farmers Union reflects this situation in its own response to the fines: "This was a period of time that was extremely difficult for dairy farmers when prices were very low for a sustained period and there was great pressure on dairy companies and retailers for a farm gate price increase."

In response to the political pressure on them at the time from the farmers and the government, the supermarkets raised prices for milk between October 2002 and October 2003. The fact that they did this in response to the concerns over milk prices was known, and supported at the time.

For instance, the UK government, in its formal response to the Thirteenth Special Report of the Select Committee on Environment, Food and Rural Affairs, said "We conclude that the July and September 2003 retail price increases were transmitted to farmers ... We welcome the decisions of the supermarkets to increase the retail prices of liquid milk and cheese last year while specifying that the price increases must be passed along to farmers."

The government went on to say: "We urge the supermarkets to place more weight upon their social responsibility to ensure, at the least, a sustainable farmgate price for British dairy farmers."

They didn't mention the part about the OFT fining them if they did.

All the supermarkets affected are furious, but most have come to the conclusion that it was better to minimise the consequential costs through compliance. Justin King, CEO of Sainsbury said: "We are disappointed that we have been penalised for actions that were intended to help British farmers".

Tesco has said, however, that it will fight the Office of Fair Trading's ruling arguing that it did not take part in any collusion. Tesco was the first company to raise its prices at the time, although its defiance is thought legally risky given the larger penalties it may be hit with should it lose.

What has been the cost to the companies? Well, so far a 116m uk pounds fine. But there may be more to come. One leading law firm said that the big supermarkets faced potential lawsuits by consumers. Cohen, Milstein, Housfeld & Toll said that it was "analysing the options for legal action on behalf of all consumers and small businesses".

This is not to argue that the supermarkets have been flawless paragons of virtue. The dairy supply chain in particular has a complicated history of claim and counterclaim of bad practice, with bad will and blame being the order of the day. Undoubtedly the supermarkets will bear some responsibility for this.

But the issue underlines just how difficult it is to square some of the difficult supply chain issues with the consumer expectations of lowest possible prices. When prices paid to producers are too low, everyone agrees that for the sustainability of food production, they should be increased. But if an individual supermarket acts alone, it hits only some producers and makes that supermarket uncompetitive. If they all act together, the action - however politically approved at the time - is criminalised, prosecuted and presented as theft from shoppers.

This has not been a good outcome for those who argue for greater accountability of corporations to stakeholders. There will often be cases, of course, when different stakeholders energetically disagree, and the company has to balance competing demands in its decisions over the right thing to do.

Sadly, stakeholders can also be capricious. We have now the best illustration to date that they can penalise you today for doing what they demanded you do yesterday.

Does that mean that companies should now disregard stakeholder concerns and simply focus on the bottom line? Of course not. But in the same way that many companies have found disappointment in producing new products to meet the demands of representative customers in focus groups - like the ones who said they preferred the taste of "New Coke", for instance - likewise they need to consider and interpret stakeholder demands and accept that the decision is always theirs, as are the consequences.

We will see more of this. Environmental sustainability implies higher prices. Consumer organisations want low prices. Pressure on food supplies will go up. Solutions will be difficult to achieve by individual companies acting alone. Running retail just became a whole lot more political.

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