Dr Craig Emerson has delivered his interim report on his review of the Food and Grocery Code of Conduct. Making the code mandatory is widely accepted as the large supermarkets call for broadening its reach to other large retailers like Bunnings, Costco and Amazon. Emerson delivered eight recommendations and three for further consultation.
The independent reviewer, Dr Craig Emerson said making the code mandatory was essential to deal with the heavy market power imbalance between the supermarkets – Coles, Woolworths, ALDI, Metcash – and smaller suppliers.
“The voluntary Code of Conduct has no penalties, leaving the competition watchdog chained up on the back porch,” Emerson said.
Emerson stipulates that the mandatory code be enforced by the Australian Competition and Consumer Commission (ACCC). For serious breaches, the ACCC would be empowered to seek penalties of up to $10 million, 10 per cent of a supermarket’s annual turnover, or three times the benefit it gained from the breach – whichever was greatest.
Penalties for less serious breaches would be up to 600 penalty units, which is currently $187,800.
The review received 56 submissions and held more than 40 meetings with stakeholders this year, as well as a producer roundtable with agriculture minister Murray Watt, involving 17 producer groups, and a processor roundtable involving 15 processor groups.
Emerson put forward eight firm recommendations and is seeking stakeholder views on three others. (See below.)
Support for the mandatory code has come from the ACCC, former ACCC Chairs Rod Sims and Allan Fels, the National Farmers’ Federation, AUSVEG, Australian Dairy Farmers, the Australia Chicken Growers’ Council, Fresh Markets Australia, and 16 other stakeholders including the major supermarkets.
An ALDI spokesperson said, “We set high standards when it comes to collaborating with our supply partners, and we have a reputation of being a fair and respectful partner to them. We have been a voluntary signatory to the Australian Food and Grocery Code of Conduct since 2015 and we support the Code becoming mandatory, as these changes reflect our ongoing commitment to our supply partners. We are reviewing Dr Emerson’s recommendations for the food and grocery sector in the Interim Report in detail.”
Wooworths, Coles: Extend code to all major retailers
Coles said it was proud to be a founding signatory to the code.
“We remain committed to the objectives of the code in delivering value to our customers while maintaining strong, collaborative relationships with our valued suppliers. We support a mandatory code and would welcome the extension to other large companies that supply grocery products. We will continue to work constructively as part of this review process,” it said.
Woolworths said the code should extend to all major retailers in Australia including multinationals Amazon and Costco, and other large local operations like Bunnings and Chemist Warehouse that also compete in grocery categories.
It said a “one size fits all approach” may have unintended consequences of “disadvantageous outcomes for consumers”.
It also said the code protections would be best directed at supporting smaller suppliers. In its submission, the company said large Australian and foreign owned multinational suppliers supply more than 70 per cent of the company’s packaged goods by sales and 60 per cent of sales across all products.
“In more than 20 packaged grocery categories there are two or three multinational companies that have significant scale, brand differentiation and greater than 50 per cent share of category sales,” it said.
In pet products, two suppliers have more than 50 per cent category sales in Pet Needs and the top three suppliers of snacks share 62 per cent of sales in the category, it added.
“Wholesale price increases by our largest 100 suppliers (ranked by sales) accounted for approximately 80 per cent of all cost price increases in 2022/23,” its submission said.
For Woolworths, these large suppliers are “robust cost price negotiators” and may even without the supply of products as part of the negotiation.
“It is important to note that suppliers are not obliged to provide cost information to justify their increased wholesale prices to retailers, under the Code. This limits our ability to test and verify the basis for a cost increase request. In many cases, we are obliged to accept these cost price increases or face an inability to supply our customers with well-known brands,” it said.
“Commercially robust – but always good faith – negotiations with large suppliers are important to support better pricing outcomes for Australian consumers. Many such suppliers already enjoy superior bargaining power to us. Further insulating such suppliers from inquiry and testing in negotiations with us risks muting competitive dynamics that are essential to well-functioning retail markets which work well for consumers,” it said.
Meanwhile, the retailer said it recognised smaller suppliers can “find large retailers and wholesalers complex to deal with due to a lack of resources, knowledge and experience in the retail industry”.
It said it had established a team to actively support small suppliers in their first few months partnering with them and invested in a range of small supplier initiatives including
- developing of a Small Supplier Commercial Report, providing our smaller suppliers with data on the commercial performance of their products (drawing on feedback from the Independent Reviewer);
- shorter payment terms (14 days or less), including actively working to resolve cash flow issues due to growth with us; and
- investing over $5.2 million in Seedlab, an independent national small business incubator and accelerator program.
It said the projects had been met with positive feedback as recognised in a significant uplift in our 2024 small supplier internal Voice of Supplier survey results, which have shown improved perceptions of working with the business.
Firm recommendations
- The Food and Grocery Code of Conduct should be mandatory.
- all supermarkets that meet an annual revenue threshold of $5 billion (indexed for inflation) should be subject to the mandatory code. Revenue should be in respect of carrying on business as a ‘retailer’ or ‘wholesaler’ (as defined in the voluntary code). All suppliers should be automatically covered;
- the code should place greater emphasis on addressing the fear of retribution. This can be achieved by including protection against retribution in the purpose of the code and by prohibiting any conduct that constitutes retribution against a supplier;
- as part of their obligation to act in good faith, supermarkets covered by the mandatory code should ensure that any incentive schemes and payments that apply to their buying teams and category managers are consistent with the purpose of the code;
- to guard against any possible retribution, supermarkets covered by the mandatory code should have systems in place for 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;
- a complaints mechanism should be established to enable suppliers and any other market participants to raise issues directly and confidentially with the ACCC;
- a code supervisor (previously the code reviewer) should produce annual reports on disputes and on the results of confidential supplier surveys; and
- penalties for non-compliance should apply, with penalties for more harmful breaches of the code being the greatest of $10 million, 10 per cent of turnover, or three times the benefit gained from the contravening conduct. Penalties for more minor breaches would be 600 penalty units ($187,800 at present).
Draft recommendations
- The mandatory code should include informal, confidential and low-cost processes for resolving disputes, and provide parties with options for independent mediation and arbitration. This could be achieved by:
- adopting the dispute-resolution provisions of other industry codes, which provide for independent mediation and arbitration;
- allowing for supermarket-appointed code mediators to mediate disputes, where agreed by the supplier, and recommend remedies that include compensation for breaches and changes to grower supply contracts; and
- allowing suppliers to go to the code supervisor (previously the code reviewer) to make a complaint; to seek a review of a code mediator’s processes; or to arrange independent, professional mediation or arbitration.
- supermarkets are encouraged to commit to pay compensation of up to $5 million to resolve disputes, as recommended by the code mediator and agreed by the supplier, or as an outcome of independent arbitration;
- specific obligations under the code should set minimum standards that cannot be contracted out of in grocery supply agreements or otherwise avoided; and
- the government should consider increasing infringement notice amounts for the code.
The report also recommends strengthening protections for suppliers against possible retribution from supermarkets, through a mechanism for making confidential complaints to the ACCC.
“An effective Code of Conduct would benefit consumers through greater choice and better prices by enabling suppliers to innovate and invest in modern equipment to provide higher‑quality products at lower cost,” Emmerson said.
Concerns raised about the code being mandatory could be alleviated, by replicating options used in other industry codes like independent mediation and arbitration.
Existing code arbiters would be redesignated code mediators and able to hear confidential complaints, but independent mediators would also be available, as would an independent arbiter for dispute resolution.
Emerson said that constitutional limitations mean legislation cannot force the use of arbitration to resolve disputes. Instead he’s asking supermarkets and Metcash to agree to independent arbitration by accredited, professional arbiters with compensation to a supplier capped at $5 million.
The existing independent reviewer would be renamed the code supervisor. Suppliers could raise issues confidentially with the code supervisor, who could be requested to review the processes of a code mediator.
The code supervisor would produce annual reports on disputes and on the results of a confidential supplier survey.
The Interim Report welcomes stakeholder feedback on the recommended dispute‑resolution processes.
Emerson said he also wanted to hear from stakeholders about whether provisions of the existing Code that allow supermarkets to contract out of the Code’s obligations should be tightened.
For example, if provided for in a grocery supply agreement, the Code allows supermarkets to vary a contract unilaterally, require a supplier to fund promotions, and pay for wastage at the supermarket premises.
Emerson said, “If suppliers have no ability to influence the terms of a grocery supply agreement, the practice of supermarkets in contracting out of their obligations makes the Code farcical.”
Stakeholder views are also sought on whether additional protections are needed for suppliers of fresh produce.
Stakeholders are invited to make submissions to the Interim Report by 30 April 2024. The Final Report will be provided to the Government by 30 June 2024.
