Exploring what GSCOP means for Amazon Vendors
Amazon’s designation to the Groceries Supply Code of Practice (GSCOP) is ‘probably the biggest news in years’, fundamentally affecting Vendors’ relationships with Amazon. The detail will emerge over time, though big questions are already in play, such as how will Amazon maintain its profitability if upfront fees, price matching with margin support and chargebacks are constrained? Key for Vendors is to prepare and make sure they know GSCOP in detail.
This was the verdict of an online meeting in March 2022 hosted by the British Brands Group and Tambo, exploring Potential Implications of GSCOP for Vendors.
Fair negotiations and agreements regulated by GSCOP could result in Amazon’s designation proving mutually beneficial to all involved, as has been the case when other grocery retailers have been designated.
The background to GSCOP
Introduced by the UK’s Competition Commission in 2010 to prevent the misuse of buyer power by large supermarkets, GSCOP primarily protects consumers by ensuring they have a choice of innovative, high quality products to shop. Providing a fairer, more certain trading climate for suppliers is a means to that goal, encouraging product investment. The Code doesn’t differentiate between online and offline and is supported by an independent regulator, the Groceries Code Adjudicator (GCA), who monitors compliance and has enforcement powers including the ability to require information, publish guidance, investigate designated retailers and impose fines.
When GSCOP was introduced more than a decade ago, Amazon was small in grocery but now has a grocery turnover exceeding £1 billion, hence its designation on 1st March 2022. This means that Amazon must comply with the Code in its relationships with all its grocery Vendors, no matter their size or where in the world they are based.
In addition to complying with the Code, Amazon, like all designated retailers, must have written supply agreements, appoint Code Compliance Officers, have dispute resolution procedures, train their staff and formally report on compliance.
The practical effects are to change fundamentally the dynamic of the relationship between buyer and seller, such that both parties are motivated, admittedly by different forces, to resolve differences and reach agreements at point of trading. However, for this to work, Vendors must know the Code, understand its subtleties, recognise the different options available to resolve issues and be familiar with the best language to use to keep the trading relationship positive.
Amazon in GSCOP
Amazon’s business model differs from that of other designated retailers so Vendors are taking a keen interest in how the Code will be applied and interpreted, a level of interest borne out by the high numbers joining the meeting.
Amazon’s move to share contact details with all Vendors of its Code Compliance Officer, senior category buyers and supplier helplines is a very positive first step although potentially only a short-term stop gap. It opens the floodgate for thousands of suppliers to contact Amazon, when historically human contact has been difficult, with most business conducted online and automated via Vendor Central. There is also now a clear escalation process. The impact of this has yet to become clear and, long term, Amazon may need to evolve its approach to provide the necessary points of contact required by the Code in a way that is efficient, effective and compliant.
Amazon has issued a Groceries Supply Code of Practice Notice to Vendors, bringing its supply agreements into compliance. These agreements need to be clear, as Vendors must know what they are signing up for, for example in relation to payments, charges and rebates. Once an agreement has been reached, there is limited potential for retrospective changes, the basis for them having to be set out up front and agreed.
Damage allowances are a case in point. These tend to be mandatory, with currently limited detail presented to Vendors on what they cover. GSCOP has specific provisions for wastage and shrinkage, with charges being appropriate only where fault lies with the Vendor. So now any charges levied must be in line with GSCOP.
Marketing spend is a further area where Vendors may reasonably expect greater clarity and transparency. What will they receive for what they are being asked to pay? If that is unclear, and if marketing spend remains a mandatory requirement for trading on Amazon, might that be interpreted as a listing fee, an area regulated under the Code?
Pricing
The Code does not regulate pricing, though there are potential restrictions on what Amazon may now do. This is a potentially significant area where Vendors need to be prepared. Key is what Vendor’s sign up to in their Supply Agreements. In the past Amazon approached Vendors for margin support during the year as it price matched against its retail competitors. This approach will now need to be agreed with the Vendor upfront.
Closely related is the ability for Amazon to reduce the visibility and competitiveness of a Vendor’s products when the Vendor does not provide the margin support required, a practice known as CRAPing (Can’t Realise a Profit). This applies pressure – or in GSCOP language ‘duress’ – on the Vendor to pay the required margin support which may, in certain circumstances, be deemed requiring a listing or ‘pay-to-stay’ fee, something that the Code regulates.
An interesting variation on this is when Amazon price matches against a promotional price in a competing retailer and requires margin support from the Vendor to fund it. Might the new Amazon price be also deemed a promotional price? If so, it cannot request or require a Vendor predominantly to fund the price match.
Greater certainty for Vendors
From what we have covered so far in this Brands Blog, it can be seen how GSCOP can be expected to improve certainty for Vendors, notably in relation to the costs and risks of trading. There are further provisions though that come into play.
GSCOP does not allow Amazon to request or require payments for better positioning. Key to trading on Amazon is the Buy Box and the ABB programme (Anything on the Buy Box) allows additional items to be included in the Buy Box area. Would payment for this add-on amount to a payment for better positioning?
On the operational side, the Code can open a liability on Amazon if a Vendor incurs costs because of forecasting errors by Amazon. Amazon’s forecasting tends to be automated, with it challenging to involve Amazon staff in the process. This contrasts with the Code’s call for forecasts to be prepared in good faith and with due care, with the basis for any forecast shared with the Vendor.
Delivery discrepancies into fulfilment centres is a further area potentially affected. Current practice seems to be to make deductions for alleged short deliveries first and then rely on Vendors to challenge them later. Under GSCOP, if the deduction was erroneous and a delay in payment results, the Code would have been breached.
Deductions from trading accounts were investigated by the GCA in the Tesco investigation of 2015. As a result, recommendations were made which all designated retailers must reflect in their approach. If a supplier challenges a deduction within 30 days, the deduction cannot be made until it has been agreed by both parties. That ability to challenge relates to deductions for alleged short deliveries and to other deductions including chargebacks, which must be outlined and agreed in advance in supply agreements.
How will Amazon maintain its profitability?
How will Amazon maintain its profitability if upfront fees, price matching with margin support and chargebacks are constrained?
Already we are seeing agreements which set fixed margin performance upfront, known as CSA Agreements, and it may be that more ASINs are rejected if there is limited scope of them ever being profitable. Other margin-improving initiatives may be greater use of MOQs (Minimum Order Quantities) and a greater demand from Amazon for bigger pack sizes.
Whatever form they take, new margin protection arrangements can be anticipated as Amazon seeks to sustain its profit while taking on more costs, for example in providing Vendors with contacts and helplines to ensure GSCOP issues are resolved.
In conclusion, there is a strong belief that GSCOP designation will change grocery supplier relationships within Amazon, with a much greater emphasis on fairness. The Code’s ‘grey areas’ could be used to Vendors’ advantage and Vendors now have the ability, via Amazon’s Code Compliance Officer or the GCA, to clarify how the letter and spirit of GSCOP is to apply to the Amazon model. At this early stage there remains uncertainty over how Amazon will adjust to the new rules and where the GCA may need to intervene. Suffice it to say, from past experience, there should be confidence that designation will lead to better relationships for all, being good for Amazon as more brands enjoy working with them and good for Vendors as they enjoy more profitable, predictable relationships.
A Vendor action plan
So what steps should Vendors now take? The following were proposed:
- Assess the business significance of the designation. Yes, trading with Amazon can be expected to change for the better but also new dynamics of competition will come into play, between those Vendors that are GSCOP-savvy and those that are not;
- Upskill through training. It is essential to understand GSCOP and its nuances, to be able to identify potential breaches when they occur. It is also necessary to know the different channels available for raising Code concerns and how to use them constructively to preserve the trading relationship;
- Identify and place value on those Amazon practices which may breach the Code. This will bring insights to the commercial significance of designation for individual Vendors and help prioritise areas for focus and remedial action;
- Plan how to address areas of focus in a way that is positive for the business overall. This may mean direct approaches to Amazon but, more likely, indirect approaches via third parties and/or the GCA such that Vendor anonymity is preserved;
- Identify the grey areas where more guidance is needed on how the Code applies. Grey areas can be the Vendors friend, as the duty to comply rests with Amazon, but there are likely to be areas where guidance will be helpful;
- Develop an approach for engaging the GCA. An effective GCA is one that is alert to practices as they occur. Again, engagement may be direct, or may be via third party where the Vendor remains anonymous.
The British Brands Group is a not-for-profit membership organisation of branded companies of all sizes, many of which have Vendor relationships with Amazon. Tambo is the the UK’s first Amazon services platform.
The Group was closely involved in the policy discussions that led to the creation of the Code and lobbied strongly for an Adjudicator to monitor and enforce it. It now works with the Code day-to-day on behalf of its members, providing a free helpline on Code-related practices and ensuring the GCA remains abreast of market developments and practices relevant to compliance.
The Group was the first to introduce supplier training on GSCOP, in 2013, and runs both open and in-house courses, with content kept right up to date with latest developments. More details of the training, which is open to all suppliers of grocery products, of all sizes and nationalities, can be found here.
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