Australia’s two major supermarket chains have both agreed to sign a voluntary code of conduct to guide their relationships with suppliers.
The code, hammered out over the weekend with the Australian Food and Grocery Council, is the result of over a year of negotiations, and follows stern warnings from the new government over the issue.
Over the past few years, Coles and Woolworths have come under fire for using their market power to extract favourable conditions from their suppliers. One sore point of contention has been the rise of private labels, which offer lower returns for suppliers.
The code does not address or diminish the growth of private label brands. But it does cement some important rights for suppliers.
It prevents the supermarkets from changing contracts retrospectively without consultation with their suppliers, and from using the intellectual property of their suppliers to develop private-label products.
Coles and Woolworths will also no longer charge suppliers for goods stolen from their stores,
Another of the clauses is to cover how disputes to the code are handled. Both supermarkets will appoint an internal compliance officer, to report every six months on compliance to the code.
The code also introduces a formal disputes resolution mechanism, and requires both supermarkets to deal in writing with their suppliers.
Competition lawyer Alexandra Merrett, formerly with the ACCC and now with the University of Melbourne, says this strikes her as the most significant development.
“It’s creating a framework for complaints to be handled. For small suppliers, that’s the biggest problem. A lot are reluctant to spend thousands taking their biggest customer to court.”
Apart from being cheaper than a court appearance, a complaints process also creates a valuable paper-trial. “A lot of small suppliers are concerned about retaliation if they complain,” Merrett says.
“But if you have a concern and lodge a complaint through the process, you’re in a relatively protected position. It would look terrible for major retailers to cut your line.
“It also creates a norm of how to deal with concerns. It’s a much more transparent process. At the moment, it’s very ad-hoc.”
The supermarkets have been under pressure to agree to a voluntary code, with a mandatory code hanging over them if they do not.
The code will be submitted to the Australian Competition and Consumer Commission, and if it passes muster there, will be incorporated into Competition and Consumer Act. This will give the ACCC the power to investigate breaches of the code.
Merrett says in this sense, the code is compulsory for the two major supermarkets. However, suppliers are under no obligation to abide by it.
She says this government buy-in at the very end of the process means it’s likely to be more workable than a compulsory code.
She points to the mandatory 2006 horticulture industry code as showing government does not always produce the most workable industry legislation. Victorian Farmers Federation spokesman Peter Hunt called the horticulture code “a complete failure” in August.
But independent senator Nick Xenophon fears the supermarket code “doesn’t have any teeth”.
“It needs some effective sanctions in there,” he tells SmartCompany. “Let’s wait and see how effective it is.
“Obviously I welcome it, but it needs to be closely monitored. I hope this isn’t window-dressing, but a sign of a changing culture.”
Ultimately, Xenophon says, the market power of the supermarket duopoly makes it impossible for small businesses to compete whether or not they deal fairly with suppliers.
“Unless you get rid of things like your fuel shop-a-dockets, playing fair on food won’t make any difference to small businesses that are just haemorrhaging because of unfair practices,” he says, calling fuel discounts vouchers “predatory discounting”.
Australia is not the only country to grapple with the market power of its supermarkets – it’s had a voluntary code of conduct for more than 10 years. Under its current iteration, suppliers lodge complaints with an ombudsman, who has the power to investigate and levy fines on supermarkets acting unfairly.
In the UK, the ‘big four’ of Tesco, Sainsbury’s, Asda and Morrisons together account for 65% of grocery sales. Coles and Woolworths account for 80% of Australian grocery sales.