Britain's competition watchdog insisted that supermarkets should be independently regulated after finding evidence they abused their dominance by acting aggressively towards suppliers.
In a blow to the Big Four chains, the Competition Commission recommended ministers create a new ombudsman to enforce a code of conduct designed to curb their power in the £100bn-a-year UK groceries market.
The Commission said there was evidence from its two year inquiry that, if left unchecked, supermarkets would harm shoppers by squeezing suppliers so much they cut investment in new lines and products.
In emails from store buyers seized during its investigation, the Commission found evidence of foul language towards suppliers together with demands for retrospective discounts and payment for stock lost or damaged after delivery.
Business Secretary Peter Mandelson will decide whether to implement the recommendation, which came in the face of steadfast opposition by the Big Four store chains, Tesco, Asda, Sainsbury's and Morrisons.
The British Retail Consortium, which represents the chains, accused the watchdog of imposing a £5m a year scheme that was likely to lead to higher costs for shoppers.
Groups representing suppliers, including the National Farmers Union, welcomed the recommendations and called for their swift implementation.
The Competition Commission concluded in its final report into supermarkets last April, that, overall, they acted in the interests of consumers by lowering prices. But it expressed concern that unfair contracts with suppliers would force them to drop investment in innovation, while also finding some chains were becoming too dominant in certain areas – and recommended the introduction of a 'competition test' for new store opening.
Despite a challenge from Tesco, the Competition Commission announced last month that it intended to press ahead with the competition tests for new stores above 1,000 square metres.
Speaking yesterday, Commission chairman Peter Freeman, made little effort to hide his frustration that grocery chains had resisted his recommendations for an ombudsman. "Our inquiry clearly revealed problems that require action and which, if left unchecked, would damage the consumer," he said.
"We continue to believe that everyone's interests - and that includes retailers - would be served by tackling a problem that has clouded the industry for many years now."
He added: "Whilst some retailers have recognised this, regrettably the majority have not.
"We made every effort to persuade retailers of our case as it would be the quickest way to establish the Ombudsman.
"We are now left with no alternative but to set out the new Code of Practice and recommend that the Department for Business, Innovation and Skills (BIS) set up the Ombudsman to oversee its operation."
In a veiled appeal to Mr Mandelson, Mr Freeman said the ombudsman should be set up "as soon as practicable." "It is obviously for BIS to consider these matters very carefully but we are making our views as clear as we can," Mr Freeman said.
Mr Mandelson has the power to ignore the Commission's recommendations. A BIS spokesman said: "The recommendation of an Ombudsman for the grocery market raises complex issues which could impact on consumers and the wider economy. We will consider the Competition Commission's findings very carefully and issue a full response in due course."
NFU president Peter Kendall said many farmers and small businesses were the victims of "underhand practices" from the supermarkets and would be "delighted" with an ombudsman. One would not have been needed if supermarkets had treated farmers well, he added.
The code would also govern supermarket behaviour towards foreign suppliers, which has been a contentious issue for years, with charities claiming that they demand rock bottom prices of farmers in the developing world. "The Government must ensure the watchdog is given sufficient powers and is proactive in gathering evidence from suppliers, including primary producers and overseas suppliers," said Simon McRae, senior campaigns officer at War on Want.
Andrew Opie, director of food policy at the British Retail Consortium, said an ombudsman would increase costs on stores, which would be passed on to the public. "Unlike other ombudsmen, which are usually set up to protect consumers, this one seems to be set up to actually work against their interests by interfering in the market and adding costs to the supply chain. Great competition means great prices on the high street and we do not want to see that being interfered with.
"We have made our opposition clear ... and we will continue to talk to the Government."
Waitrose, Marks & Spencer and Aldi supported the creation of the ombudsman, saying that their relationships with suppliers were so good they had nothing to hide.
"Despite being found guilty of abusing their power over suppliers after a two year inquiry, all the major UK supermarkets, except for Waitrose, refused to voluntarily accept the Commission's recommendations," said ActionAid Campaigner Jenny Ricks.
"The ball is now well and truly in the Mandelson's court. The question is, is he prepared to stand up to Britain's biggest retailers to introduce a move that would benefit consumers, producers and workers?"