Concerns around “pay to stay” fees

Written on 5 Dec 2014

Premier Foods (whose brands include Mr Kipling’s, Ambrosia, Bisto and Oxo) hit the headlines today as suppliers challenge the food producer’s commercial terms. These require lump sum payments to remain on Premier Foods’ approved supplier list – so called “pay to stay” fees. A number of Premier Foods’ 1,000 suppliers question the legality of the fees under competition law.

Pay to stay fees are common in the retail sector and so the debate around Premier Foods’ terms will be of keen interest to a significant number of suppliers, producers and retailers within the sector.

In 2013, the OFT commissioned an extensive study into the effect of pay to stay fees (along with other similar terms, known collectively as “reverse-fixed payments” such as lump sum payments to retailers for shelf space) and concluded that these terms are not necessarily anti-competitive. Whilst pay to stay fees might give rise to anti-competitive effects (where a producer leverages market power to demand unreasonable payments, for example), in some circumstances pay to stay fees can actually give rise to pro-competitive outcomes (such as where the producer shares the risk of trialling a new product with a retailer).

The Labour party has campaigned for the outlaw of pay to stay fees, but these calls have been consistently resisted by the Government. Despite this, BIS has recently stated that the fees are “a hugely important issue” that ministers are “taking very seriously”. The publicity surrounding Premier Foods’ terms may prompt the Government and the Competition and Markets Authority (which has taken over from the OFT as the UK competition regulator) to push the issue up their priority lists.

Alongside the general principles touched on above, Designated Retailers for the purposes of the Groceries Supply Code of Practice (which includes the ten largest supermarkets) are prohibited from imposing listing fees, except in the case of promotion of new products.

So what does this mean for businesses?

  • It is clear, for the time-being at least, that pay to stay (and other reverse-fixed payments) are not presently prohibited by competition law per se.
  • The legality of any specific fee will depend on the circumstances specific to the products, parties and markets affected by it.
  • The risk of complaint, investigation and illegality (and the associated negative publicity and sanctions) is clearly higher for producers and retailers with strong market positions, who might be suspected of leveraging market power to elicit unfair payments. Businesses in this position should think carefully about the imposition of pay to stay fees and should consider constructing a ready-made defence to fend off any complaint and deal quickly with any negative media coverage that might follow.
  • The Government is presently consulting on the imposition of mandatory pay to stay reporting requirements for large companies – larger businesses should be mindful of this potential development.
  • Designated Retailers under the Groceries Supply Code of Practice (and those businesses transacting with Designated Retailers) should be alive to the additional restrictions imposed by the code.