ethics of supermarket supplier relationship

N200 Business Management Molly Anna Bennett BUS3017 11th January 2016 Word count: 2,176

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BUS3017: Corporate Social

Responsibility and Ethics

11th January 2016

Word Count: 2,176

Molly Bennett


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Analysing the prices that supermarkets pay dairy farmers for milk using business ethics

concepts

Introduction:

This paper will analyse the ongoing debate of supermarket connections to the low milk

prices that are paid to dairy farmers in the UK, using business ethics concepts. Business

ethics is largely associated with philosophy and is strongly concerned with the morality

of business practices and for the purpose of this analysis, is defined as ‘the study of

business situations, activities, and decisions where issues of right or wrong are

addressed’ (Crane and Matten, 2010a).

The controversial topic of prices that dairy farmers are paid for the production of milk

has been a frequent occurrence in the media over many years. However, in August of

this year, farming unions from across the UK developed an action plan to combat the

problem (BBC, 2015a) forcing it back into the news. To date, in 2015, the estimated

average production cost per litre of milk stands at 31p (Agriculture & Horitculture

Development Board, 2015) and the price farmers are paid is 27.3p (Department for

Environment, Food & Rural Affairs, pp, 12, 2015). This questions the use of ethical

practice and establishes the question why are farmers being paid less than production

costs for a litre of milk?


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It is important to note that not all supermarkets are carrying out these practices and that

milk is purchased from a milk processor, rather than directly from the farmers.

Morrisons, ASDA, LIDL and ALDI are those in question of paying the farmers a figure

below their production price, so this paper will focus primarily on them, while M&S,

Waitrose, Tesco, Sainsbury’s and Co-op have contracts in place to ensure this doesn’t

happen (Reuters, 2015).

This paper will analyse the topic using two main normative theories. The first of which

will be utilitarianism, focusing on the costs and benefits, and the second, theories of

justice. The analysis will briefly touch upon consumer activism and precisely the

protests from dairy farmers, compelling some supermarkets to respond.

Normative theories and moral concept:

Both based around the greatest happiness principle ‘the rightness of an action is

determined by its contribution to the happiness of everyone affected by it’ (Quinton,

1989), Bentham and Mill are the main contributors to the concept of utilitarianism.

Bentham first developed and established it in a hedonistic state, by identifying that there

must be a balance of pleasure over pain, as utility, on a quantifiable scale called the

felicific calculus. J.S Mill then built on this believing that happiness, not pleasure

(1863) should be the standard of utility taking a more qualitative and eudemonistic

perspective concentrating on the human well being. As a result, a simple and commonly

used definition of utilitarianism is ‘the greatest good for the greatest number’

(Bentham, 1789).


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Largely concentrated around human rights, fairness and equality are large

considerations of theories of justice. The term justice can be interpreted in several ways

because of variables that impact perspectives, such as outcome, procedure and social

context; all important when determining if an act is just. A good definition of justice to

use is ‘the simultaneous fair treatment of individuals in a given situation with the result

that everybody gets what they deserve’ (Crane and Matten, 2010b).

Consumer activism is an umbrella term for a range of activities that can be carried out

by consumers to exercise and reinforce their rights when purchasing goods or services

(Financial Times, 2015). It is a moral concept, and for the purpose of this paper, will

focus specifically on boycotting and buycotting, two popular methods of consumer

activism.

Utilitarianism:

The concept of unhappiness in this context primarily occurs to the dairy farmers as the

farmers, on average, are paid less than the production cost of a litre of milk.

Economically, this is unsustainable as they are operating at a loss and knock on effects

have already been encountered. Two in three dairy farms in the UK have closed over

the past decade and some locations have seen a 31% drop in dairy farms (The Guardian,

2015a). Unfortunately, the majority of farmers do not have another option, as a

significant amount of custom comes from the supermarkets, preventing them to seek

business elsewhere.


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Although the supermarkets do not trade directly with the dairy farmers, they are

involved in the procurement process. They seem to benefit from the low cost,

potentially increasing profit margins, which in turn, is passed onto the customer by

offering low retail prices; arguably devaluing the product completely. (The

Independent, 2015). The ongoing price war between the supermarkets puts unnecessary

pressure onto the farmers to produce at a lower cost, so the supermarkets can charge a

lower retail price in order to compete. Unfortunately for the farmers, due to the

significant power that they possess, they don’t seem to have another option and have to

comply. However, farmers have now begun to take action in the form of purchasing all

milk in the supermarkets, so consumers can’t. This will be discussed in more detail

throughout the paper.

While utilitarianism is an efficient theory to determine whether a decision is ethical,

according to some theorists, it is flawed regarding subjectivity and the distribution of

utility. The decision of whether something is ethical relies on the party, a view that

Bernard Williams acknowledges somewhat when he refers to ‘personal morality’

(1973). Applying this to the context, the decision may be deemed unethical by the

farmers as they experience unhappiness, and ethical by the customers as they experience

happiness. With respect to the distribution of utility, the question posed is whether the

aim is to possess average happiness, where everyone has some happiness, or maximize

total happiness where there will always be a group possessing unhappiness (Flew, 1954)

which in this case is currently the dairy farmers.


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The number of customers purchasing milk, plus the supermarkets involved with the

questionable practices far outweighs the number of dairy farmers and fulfills the

theory’s principle of ‘the greatest good for the greatest number’ (Bentham, 1789)

deeming it an ethical practice.

Theories of justice:

Focusing on particular articles from the Universal Human Rights Declaration, the

analysis will use John Rawls liberty principle with Beauchamp and Bowie’s procedural

justice and part of Rawls equality principle combined with Beauchamp and Bowie’s

distributive justice to analyse the practice.

Procedural justice and liberty principle

Bowie and Beauchamp’s (1997) procedural justice concept is ‘whether everyone has

been free to acquire his or her rewards for their efforts’ meaning that when this is

followed, generally, there is a fair procedure in place so that minimum standards can be

established across an industry to receive fair rewards. However, only some

supermarkets (M&S, Tesco, Sainsbury’s, Waitrose and Co-op) have voluntarily

implemented commercial contracts to ensure that a minimum price is paid to the dairy

farmers (National Farmers Union Online, 2015). As a result, farmers who are part of the

supply chain for supermarkets such as ASDA, LIDL, ALDI and Morrisons experience

unfair pay due to the lack of regulation and standardisation. The lack of regulation

across the market allows large companies to find loopholes and exploit these for


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potential economic benefit; linking directly to procedural justice. There are differing

minimum standards therefore resulting in differing procedures across the industry.

Rawls’ (1971) liberty principle is defined as ‘each person is to have an equal right to

the most extensive total system of basic liberties’. Assuming that the total system of

basic liberties is the Universal Declaration of Human Rights, this concept is not being

fulfilled. Article 23 of the UDHR states that ‘Everyone, without any discrimination, has

the right to equal pay for equal work’ (UN General Assembly, 1948). As dairy farmers

are doing the same amount of work as others in the industry, yet not being paid at least a

similar minimum price, it can be argued that this human right is being exploited. This

results in the liberty principle not being fulfilled as not everyone has an equal right to

system of basic liberties.

Distributive justice and equality principle:

Bowie and Beauchamp’s (1997) second theory is that of distributive justice, the notion

that consequences, positive or negative, are distributed in a fair manner. The positive

consequence in this case is the economic benefit in the form of low retail prices for

customers, supermarket profits and supermarket CEO salaries. David Potts of Morrisons

is paid £850,000 (The Guardian, 2015b) and Ronny Gottschlich of LIDL was given a

56% pay rise this year, now receiving £970,000 (ThisIsMoney 2015). These figures

demonstrate that particular supermarkets within the UK are earning substantial amounts

of profit in order to remunerate their employees to this degree. However, the average

production of one entire dairy farm within the UK in 2015/2015 according to the

Deparartment for Environment, Food and Rural Affairs ( pp. 16, 2015) is just £78,000,


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where a substantial amount is received from supermarkets. It is clear that in these

instances, the positive consequences are not being distributed in a fair manner; the

grounding principle of distributive justice.

The buying power that supermarkets possess has a significant contribution to Rawls’

(1971) equality principle of ‘The argument is just if the one that profits the least is

better off without’. If applied to a business context, it could be argued that Article 13 of

the UDHR is violated when the practice is being used; it states ‘Everyone has the right

to freedom of movement and residence within the borders of each state’ (UN General

Assembly, 1948). Focusing specially on the freedom of movement, the dairy farmers

are not free to move within the market, restricted because the supermarkets they supply

are such a significant source of income. 1 in 5 suppliers to the 10 biggest retailers didn’t

want to raise issues with the regulator as they feared negative consequences from this

source of income (The Guardian, 2015c). It could be interpreted that the dairy farmers

are coping with the conditions that have due to fear. This relates to the equality

principle as it demonstrates that the farmers are firstly, the ones that profit the least, and

secondly, would definitely not be better off without due to the sheer volume of trade

with supermarkets.

Consumer Activism:

Boycotts are a non violent direct action where one or more parties achieve objectives by

urging individual customers to refrain for buying a particular product (Friedman, 1999)

and a buycott is the opposite where products or services are bought deliberately in


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support of policies or to counter a boycott. A combination of the two is used to protest

against the practices undertaken by supermarkets. In August 2015, dairy farmers called

for a boycott against LIDL, ALDI, ASDA and Morrisons as none of them ‘had a

formula in place that’s paying a sustainable for all their milk products’ (The Guardian,

2015d). To assist with this, farmers decided to go into the supermarkets practicing the

problem and buy all the milk off the shelves; they then gave the milk to charities across

the country (The Guardian, 2015d). By doing this, it could be argued that buying all the

milk on the shelves, even though it is not an act of support for the supermarkets is a

buycott. Buying all the milk prevents consumers benefitting from the low retail prices

so they have to boycott and buy elsewhere, it also sends a message to the supermarket

that they are unhappy.

Due to the protests and media coverage, some of the supermarkets responded. As an

example, Morrisons now sell a brand of milk called ‘Milk for farmers’ where 10p per

litre extra will be paid to them. (BBC, 2015b). However, some may argue that this is not

enough; Morrisons have simply added a brand of milk that supports farmers while also

selling the milk that doesn’t. In effect they have shifted the responsibility to the

consumers, rather than taking a stance and ensuring that all milk sold in their stores

pays a fair price.

Conclusion:

To conclude, taking into account that the underlying foundation of the utilitarianism

concept is ‘the greatest good for the greatest number’ the practice carried out by

supermarkets can be deemed ethical; the number of consumers benefitting from the low


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retail price far outweighs the number of dairy farmers that are being paid below cost

price.

However, the paper also analyses the topic using theories of justice. The liberty

principle and idea of procedural justice is not fulfilled to which the supermarkets break

Article 23 of the Universal Human Rights Declaration, the right to equal pay for equal

work. The equality principle and concept of distributive justice is also not satisfied and

some would argue that in a business context, Article 13 is broken, the right to

movement, as they cannot exit the relationship due to the volume of business received.

Despite utilitarianism concluding the practice ethical, it is outright unethical. The fact

that supermarkets aren’t even allowing for the dairy farmers to break even is insulting,

disrespectful and shows a lack of integrity in the trading relationship.

In order to resolve the issue, regulation in the form of commercial contracts ensuring a

payment of cost price plus margin for dairy farmers across the entire industry, put in

place by all supermarkets and milk processors is essential. This will result in a fair

procedure meaning all dairy farmers will be paid at least the cost of production,

complying with Article 23 of the UDHR. In addition, the farmers will be able to move

freely within the industry knowing they will receive a minimum payment for their

goods, adhering to Article 13 of the UDHR, in a business situation.

Consumers may experience a higher retail price or supermarkets noticing a decrease in

profit margin, but everyone benefits in some way, the average happiness has increased

across the industry leaving nobody unhappy; and that’s what is most important.


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Reference list

- Agriculture & Horitculture Development Board, 2015. Estimated typical milk production costs for Great Britain. [online] Available at: <http://dairy.ahdb.org.uk/market-information/farming-data/estimated-gb-milk-production-costs/#.VmMm7N_hBPN> [Access 5 December 2015]

- Ashford, E., 2000. Utilitarianism, Integrity and Partiality. Journal of Philosophy,

97: 421 – 439.

- BBC, 2015a. Farmers announce ‘action plan’ over milk prices. [online] Available at: <http://www.bbc.co.uk/news/uk-33842001> [Accessed 5 December 2015]

- BBC, 2015b. Morrisons to create new milk brand for farmers. [online] Available

at: <http://www.bbc.co.uk/news/uk-33857629> [Accessed 6 January 2016] - Beauchamp, T.L. and Bowie, N.E., 1997. Ethical theory and business. 5th edition.

Upper Saddle River, NJ: Prentice Hall. - Bentham, J., 1789. An Introduction to the Principles of Morals and Legislation.

Oxford: Clarendon Press. - Crane, A. and Matten, D., 2010a. Business ethics. 3rd edition. New York: Oxford,

pp.3-45. - Crane, A. and Matten, D., 2010b. Business ethics. 3rd edition. New York: Oxford,

pp. 91-139.

- Department for Environment, Food & Rural Affairs, 2015. United Kingdom Price, Volume and Composition of Milk. London: Department for Environment, Food & Rural Affairs.

- Financial Times, 2015. The definition of consumer activism. [online] Available at:

< http://lexicon.ft.com/term?term=consumer-activism> [Accessed on 06 January 2016]

- Flew, A.G.N., 1954. The Justification of Punishment. Philosophy, 29(111), p.291-

307. - Friedman, M., 1999. Consumer boycotts. New York Times Magazine, 13

September. - Mill, J.S., 1863. Utilitarianism. London: Parker, Son and Bourn.


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- National Farmers Union Online, 2015. Ask the experts: Where should I buy my milk? [online] Available at: < http://www.nfuonline.com/sectors/dairy/ask-the-experts-where-should-i-buy-my-milk/> [Accessed 18 December 2015]

- Quinton, A., 1989. Utilitarian ethics. 2nd edition. London: Gerald Duckwork & Co

Ltd. - Rawls, J., 1971. A theory of justice. Cambridge: Harvard University Press.

- Reuters, 2015. UK farmers protest over fear of financial ruin from low milk prices.

[online] Available at: < http://uk.reuters.com/article/uk-britain-farming-milk-idUKKCN0QF1KY20150810> [Accessed 5 December 2015]

- Smart, J.J.C. and Williams, B., 1973. Utilitarianism for and against. London:

Cambridge University Press. - The Guardian, 2015a. Farmers call milk price row a ‘morality issue’ and vow to

continue protests. [online] Accessed at: < http://www.theguardian.com/business/2015/aug/11/milk-price-row-morrisons-pay-farmers-10p-premium> [Accessed 6 December 2015]

- The Guardian, 2015b. Morrisons names ex-Tesco man David Potts as Chief

Executive. [online] Accessed at: <http://www.theguardian.com/business/2015/feb/25/morrisons-tesco-man-david-potts-chief-executive> [Accessed at 02 January 2016]

- The Guardian, 2015c. Supermarket price war takes toll on UK food suppliers.

[online] Available at: <http://www.theguardian.com/business/2015/jul/20/supermarket-price-war-takes-toll-uk-food-suppliers> [Accessed 2 January 2016]

- The Guardian, 2015d. Dairy farmers call for supermarket boycott as milk prices

fall. [online] Available at: <http://www.theguardian.com/business/2015/aug/06/dairy-farmers-call-for-supermarkets-boycott-as-milk-price-falls> [Accessed 6 January 2016]

- The Independent, 2015. Market price war leads to 50% cut in dairy farmers.

[online] Accessed at: < http://www.independent.co.uk/news/uk/home-news/supermarket-price-war-leads-to-50-cut-in-dairy-farmers-9971293.html?> [Accessed 6 December 2015]

- This Is Money, 2015. Lidl boss Ronny Gottschlich given 56 percent pay rise after

bumper year in which annual sales hit record 4bn. [online] Available at: <http://www.thisismoney.co.uk/money/markets/article-3297211/Lidl-boss-Ronny-Gottschlich-given-56-cent-pay-rise-bumper-year-annual-sales-hit-record-4bn.html> [Accessed 2 January 2016]


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- UN General Assembly, 1948. Universal Declaration of Human Rights. [online] Accessed at: < http://www.un.org/en/universal-declaration-human-rights/> [Accessed 18 December 2015]


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Appendix

Appendix A

Appendix A is an article that provides contextual information regarding the chosen

topic for my assignment.

- Ruddick, G. 2015. Milk price row: the key questions. The Guardian, [online] 11

August. Available at: <http://www.theguardian.com/business/2015/aug/11/milk-price-

row-key-questions>

[Accessed on 02 December 2015]

ethics of supermarket supplier relationship

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