Milked! Supermarkets admit secret price-fixing

Milked! Supermarkets admit secret price-fixing
By Martin Hickman, Consumer Affairs Correspondent
Published: 08 December 2007

Some of Britain's biggest supermarket chains admitted yesterday that they had secretly swapped information with each other to make shoppers pay more for milk and cheese in a £270m scandal that represents one of the worst examples of price-fixing in British corporate history.

Asda, Sainsbury's and Safeway agreed in principle with the anti-cartel watchdog, the Office of Fair Trading (OFT) , that they acted covertly against the interests of consumers while publicly claiming that they were supporting 5,000 farmers recovering from the foot-and-mouth crisis.

The multiple confessions - which will limit the stores' exposure to fines of £116m – are the latest twist in a three-year investigation that has deeply embarrassed a sector that purpots to be fiercely competitive. Campaigners said it would damage the reputation of the £90bn-a-year grocery giants at a time when they are under investigation by the Competition Commission for threatening suppliers and stifling rivals.

All the major store chains with the exception of Waitrose and Marks & Spencer are embroiled in the OFT inquiry into milk prices in 2002 and 2003 which has been ongoing since the beginning of 2004. Britain's biggest store chain Tesco, and Morrison, are accused of collusion too, but vigorously deny they took part in the swindle. The allegations against Tesco involve cheese as well as milk and butter.

If the OFT proves its case, the retailers could theoretically face fines of up to 10 per cent of their worldwide turnover, which in Tesco's case would amount to £4.3bn, though in practice, any fine would be much smaller.

As a result of the price rises, several pence was put on a pint of milk and 15p on a quarter-pound pack of butter, costing consumers an estimated extra £270m.

Carl Belgrove, the National Consumer Council's competition expert, said: "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."

The OFT's charges vary for each supermarket. In general it is alleged – and accepted by Asda, Sainsbury and Safeway – that, during 2002 and 2003, stores increased the price of milk as a result of collusion. The large dairy processors allegedly acted as middle men, passing on sensitive information about prices to their supposed rivals.

In their defence, the supermarkets said they had been under political pressure to help farmers hit by foot-and-mouth which closed down the countryside for months in 2001.

While acknowledging the laudable aim, the OFT said that it could find "no evidence" that the money from increases had been passed on to farmers.

Sainsbury, Asda, Safeway, two major dairies – Dairy Crest and Wiseman – and a cheesemaker The Cheese Company confessed their guilt, which was announced yesterday. The Office of Fair Trading told them they faced maximum fines of £116m, though the final figure may be as low as £80m as a result of their co-operation.

Sainsbury's told the London Stock Exchange that its fine was £26m. The fine for Safeway is thought to be between £8m and £10m; £9m for Dairy Crest and £6m for Robert Wiseman.

It is unclear who blew the whistle on the price-fixing but Arla, the dairy processor, will escape a fine after fully co-operating with authorities.

Sainsbury's chief executive, Justin King, said: "We are disappointed we have been penalised for actions that were intended to help British farmers, but recognise the benefit of a speedy settlement with the OFT."

Asda, which has built its reputation on low prices, expressed its "regret" about the episode and said it was working with the OFT to ensure better practices so that it could not happen again.

The OFT will not disclose the precise dates on which the prices rose. But figures from the Milk Development Council show that the price farmers received for milk in January 2002 was 18.7p per litre and that, in December 2003, at the end of the period under investigation, it was up by less than half a penny to 19.1p.

Andrew Groves, team leader of the OFT investigation, said: "I think it is reasonable to say we don't doubt the purpose initially was to pass money back to farmers but, in general, there is no evidence that farm-gate prices increased as a result of the initiative. We don't know what happened to the money."

Joanna Blythman, author of Shopped: The Shocking Power of British Supermarkets, claimed the scandal underlined a mismatch between the impression of good value in the chains and the reality. "What some have been doing behind the scenes is to fix the prices so that they make fat profits and the farmer gets ripped off at the same time ..."

The British Retail Consortium, which represents the stores, insisted there was clear evidence that the increases in milk prices introduced by supermarkets had benefited farmers.

A Friends of the Earth spokeswoman, Sandra Bell, said: "This is just another reason why we need an independent regulator to oversee the grocery market. That could come out of the Competition Commission. Tweaking the new code of practice won't work."

Which? complained that, despite overpaying, consumers would not receive refunds.