Handing down his final report from his review of the Food and Grocery Code of Conduct, Dr Craig Emerson says that if the imbalance in market power between supermarkets and suppliers is to be corrected, a mandatory code is needed with heavy penalties for breaches.
Emerson said an improved dispute resolution process, strengthened protections against retribution, and new protections for fresh produce suppliers were also key.
In all, Emerson made 11 recommendations which Treasurer Dr Jim Chalmers said the federal government would adopt in full.
“We’re cracking down on anti‑competitive behaviour in the supermarkets sector, so people get fairer prices at the checkout.
“The Review found that the current voluntary Code is failing to address the imbalance of bargaining power between supermarkets and their suppliers, including farmers.
“Suppliers fear retribution from supermarkets if they raise concerns or exercise their rights under the Code,” Chalmers said.
Emerson recommended the code apply to grocery retailers and wholesalers with annual revenue of more than $5 billion.
“At this stage, that will bring Woolworths, Coles, ALDI and Metcash into the Code. It is likely that Costco will exceed the $5 billion threshold in the foreseeable future,” Emerson said.
He said there should be multi-million-dollar penalties for serious breaches of the code and maximum penalties of more than $1 million for all other breaches.
“I am recommending for breaches of the Food and Grocery Code are the heaviest of any industry code of conduct.
“I am recommending that the ACCC be able to issue infringement notices with penalty amounts of $187,800. These provide a timely enforcement tool for the ACCC where it has reasonable grounds to believe a contravention of a clause of the code that attracts a penalty has occurred,” Emerson said.
These new penalties will require an Act of Parliament.
A mandatory code would obligate the supermarkets to act in good faith – acting honestly and fairly in all dealings with suppliers. Breaches of the good-faith obligation would be subject to the highest penalties.
Emerson said the review received “strong evidence” from smaller suppliers fearing retribution from supermarkets if they made a complaint.
A mandatory code would go some way to alleviating this, as well as a new mechanism enabling suppliers fearful of retribution to make confidential complaints to the ACCC.
“The review heard evidence that suppliers of fresh produce are especially vulnerable owing to the perishability of their products.
“To protect these suppliers, I am recommending new measures to improve suppliers’ understanding of how prices are determined and to require supermarkets to take due care in their forecasting practices,” Emerson said.
He said an exception to a code provision would be allowed but the supermarket must demonstrate it is reasonable and benefits both parties. For example, “a reasonable, mutually beneficial exception might be a supplier willingly agreeing to co-fund an instore promotion of its product,” he said.
Supermarkets would have to clearly identify any exceptions to suppliers when negotiating grocery supply agreements.
Regarding resolving disputes, Emerson said constitutional limitations prevent a mandatory Code imposing the use of binding arbitration on businesses to resolve disputes.
“I am pleased to announce that Woolworths, Coles, ALDI and Metcash have voluntarily given their in‑principal agreement to pay small suppliers up to $5 million in compensation as an outcome of arbitration – which for those suppliers is a large sum,” Emerson said.
Existing code arbiters employed by the supermarkets would be redesignated code mediators and would hear complaints and assist parties to reach a settlement, if requested by a supplier. If a supplier wanted an independent mediator or arbitrator, that service would be made available.
The existing independent reviewer would be renamed the code supervisor, who would provide advice on options for dispute resolution, review processes of a code mediator where requested, and produce annual reports on disputes and the results of confidential supplier surveys.
For the full report click here.
The recommendations
Recommendation 1
The Food and Grocery Code of Conduct should be made mandatory.
Recommendation 2
All supermarkets, including online supermarkets, that meet an annual Australian revenue threshold of $5 billion should be subject to the mandatory code. Revenue should be in respect of carrying on a supermarket business as a ‘retailer’ or ‘wholesaler’ (as defined in the existing code). All suppliers should be protected by the code.
Recommendation 3
The code should place greater emphasis on addressing the fear of retribution by:
- including protection against retribution in the purpose of the code;
- ensuring that retribution captured under the obligation to act in good faith includes action taken against suppliers for exercising their rights under the code;
- requiring that any incentive schemes and payments that apply to a supermarket’s buying teams and category managers are consistent with the purpose of the code; and
- requiring supermarkets to have systems in place for their senior managers to monitor the commercial decisions made by their buying teams and category managers in respect of a supplier who has pursued a complaint through mediation or arbitration.
Recommendation 4
An anonymous complaints mechanism should be established to enable suppliers and any other market participants to raise issues directly with the ACCC.
Recommendation 5
The Code should provide parties with avenues for mediation and arbitration to resolve disputes.
- Supermarkets must appoint a suitably qualified code mediator who is engaged by supermarkets (replacing their code arbiters), and who would be available to assist with resolving disputes, where requested by a supplier.
- avenues for independent mediation and arbitration should also be available.
- parties can agree on an independent mediator or arbitrator. A list of suitably qualified mediators and arbitrators should be compiled by the Treasury or the Australian Small Business and Family Enterprise Ombudsman (ASBFEO);
- supermarkets must attend independent mediation if requested by a supplier; and
- where mediation has not settled a dispute, independent arbitration can be used to settle disputes as agreed between the supermarket and supplier.
In addition, Woolworths, Coles, ALDI and Metcash have agreed in principle to be bound by a decision of their code mediator to award compensation of up to $5 million, where agreed by a supplier. They have also agreed to be bound by a decision of an independent arbitrator for compensation of up to $5 million, where requested by a small supplier. Small suppliers would be those with annual revenue below $10 million or fewer than 100 staff.
Recommendation 6
A code supervisor (previously the independent reviewer) should produce annual reports on disputes and on the results of the confidential supplier surveys, be able to identify systemic issues with the code and be available to suppliers to provide information on options to resolve disputes and review the processes of code mediators.
Recommendation 7
To ensure exceptions allowed for in grocery supply agreements are reasonable and transparent:
- all exceptions should be subject to a reasonableness requirement that considers the benefits, costs and risks to the supplier and the supermarket, and protects against exceptions that are not in a supplier’s interest, with the supermarket bearing the onus of proof that any exception is reasonable; and
- for all new grocery supply agreements, supermarkets should be required to provide suppliers a simple guide to any exceptions that are included in the agreement.
Recommendation 8
To address issues relating to fresh produce, the code should require that:
- grocery supply agreements must include the basis for determining prices;
- all forecasts of required volumes are conducted with due care; and
- fresh produce standards and specifications must be reasonable.
Recommendation 9
Maximum penalties for more harmful breaches of the code should be the greatest of $10 million, three times the benefit gained from the contravening conduct or, where the benefit cannot be determined, 10 per cent of turnover in the preceding 12 months. Maximum penalties for other breaches should be 3200 penalty units (currently $1,001,600).
Recommendation 10
The penalty amount for infringement notices for contraventions of the code should be 600 penalty units (currently $187,800), an increase from 50 penalty units (currently $15,650) that otherwise applies for industry codes.
Recommendation 11
The ACCC, code mediators and the code supervisor should engage in education and outreach activities to ensure that suppliers are empowered to take advantage of their rights under the code.
For the full report click here.
