Brian Wu summarises the final proposed changes to the Food and Grocery Code of Conduct designed to strengthen effectiveness and compliance.
In June 2024, the Food and Grocery Code of Conduct Review 2023-24 Final Report (Report) was released.
Our previous blog post explored:
- how the Food and Grocery Code of Conduct (Code) currently operates in regulating the conduct of retailers and wholesalers (supermarkets) towards suppliers in the food and grocery sector, and
- the recommendations made in the Interim Report released in April.
This blog post summarises the recommendations in the Report and how they differ from those in the Interim Report.
What are the key recommendations of the Report?
“My central recommendation from the Review of the voluntary Food and Grocery Code of Conduct (the Code), is that the Code be made mandatory with heavy penalties for breaches. Making the Code mandatory is essential to ensuring it is effective in addressing the heavy imbalance in market power between supermarkets and their suppliers, especially their smaller suppliers.” – Dr Craig Emerson, Foreword to the Report
The Report retains or expands on many of the recommendations made in the Interim Report:
- making the Code mandatory for supermarkets with annual revenue exceeding $5 billion
- addressing suppliers’ fear of retribution through new protections
- providing independent mediation and arbitration as dispute resolution avenues under the Code
- requiring all exceptions to be subject to a reasonableness requirement, and
- introducing penalties for breaches of the Code.
The Report also makes two new recommendations based on concerns raised by stakeholders:
- new protections for suppliers of fresh produce, and
- education for suppliers about their rights under the Code, to be provided by the ACCC, Code Mediators and Code Supervisor.
Recommendations carried across from the Interim Report
The Report adopts or builds on many of the recommendations made in the Interim Report.
A Mandatory Code
The current Code is voluntary and only applies where a supermarket signs up to the Code. The Report states that for the Code to be effective, it needs to protect against adverse conduct, be subject to the credible threat of effective enforcement and penalties, and not be undermined by the threat of signatories walking away. Thus, the Report recommends that the Code should be made mandatory.
The Report recommends that this mandatory Code should apply to all supermarkets (including online supermarkets) with annual Australian revenue exceeding $5 billion. Applying this threshold, the mandatory Code would cover all signatories to the existing voluntary Code. A number of other large retailers are also expected to surpass the $5 billion threshold in the future or expand their offering of grocery products and thus be captured by the proposed mandatory Code.
Addressing Suppliers’ Fear of Retribution
The Interim Report raised various proposals to address suppliers’ fear of retribution from supermarkets (e.g. offering poorer shelf locations or reducing the volume of stock ordered) if they make a complaint or reject a request.
The Report recommends that the Code place greater emphasis on addressing the fear of retribution by:
- including protection against retribution in the Code’s purpose
- ensuring that the obligation to act in good faith includes action taken against suppliers for exercising rights under the Code
- requiring supermarkets’ incentive schemes and payments for buying teams and category managers to be consistent with the Code’s purpose, and
- requiring supermarkets to implement systems to monitor commercial decisions made by buying teams and category managers in relation to suppliers who have pursued a complaint through mediation or arbitration.
The Report also recommends establishing a new anonymous complaints mechanism to enable anyone, including suppliers and supermarket staff, to report suspected breaches of the Code to the ACCC.
Dispute Resolution
In our previous blog post, we summarised the existing dispute resolution mechanisms under the Code.
Consistent with the Interim Report proposal, the Report recommends that the following avenues for mediation and arbitration should be provided under the mandatory Code:
- supermarkets must appoint a suitably qualified Code Mediator to assist with resolving disputes, where requested by a supplier, and
- the following avenues for independent mediation and arbitration should also be available:
- parties can agree on an independent mediator or arbitrator
- supermarkets must attend independent mediation if requested by a supplier, and
- where a dispute is not settled following mediation, independent arbitration can be used, as agreed between the supermarket and supplier.
Additionally, all signatories to the current voluntary Code have agreed in principle to be bound by:
- a decision of their Code Mediator to award compensation up to $5 million, where agreed by a supplier, and
- a decision of an independent arbitrator for compensation up to $5 million to a small supplier (a supplier with annual revenue below $10 million or fewer than 100 staff).
The Code Supervisor would review Code Mediators’ complaints-handling processes, identify emerging and systemic issues in relation to the Code’s operation, conduct annual surveys of stakeholders in relation to the operation of the Code, and produce annual reports on disputes and confidential supplier surveys relating to the Code.
Removal of Broad Exceptions
The current Code prohibits certain types of conduct between a supermarket and its suppliers. However, supermarkets can ‘contract out’ of these obligations, usually where there is an exception in a grocery supply agreement and it is reasonable in the circumstances.
In balancing the protection of suppliers who may have little bargaining power while retaining freedom in contracting, the Report recommends the following measures to ensure exceptions 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 supermarket, and protects against exceptions 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 with a simple guide to any exceptions included in the agreement.
Penalties
The Report recommends introducing penalties for breaches of the Code. For ‘more harmful breaches’ of the Code, the Report recommends a maximum penalty of the greatest of $10 million, three times the benefit gained from the contravening conduct or 10% of annual turnover. This would apply to key provisions of the Code, including:
- the obligation to deal with suppliers lawfully and in good faith
- provisions relating to grocery supply agreements
- freedom of suppliers to form associations
- the duty of supermarkets to train staff with respect to the Code
- record-keeping requirements, and
- the new protections against retribution (see above).
The maximum penalty for other breaches would be 3,200 penalty units (currently $1,001,600) – a significant increase on the 600 penalty units ($187,800) proposed in the Interim Report.
The ACCC would also be able to issue infringement notices where it has reasonable grounds to believe a penalty provision has been breached. The Report recommends an infringement notice penalty amount of 600 penalty units (currently $187,800).
New Recommendations
The Report also makes new recommendations that were not in the Interim Report.
Fresh Produce
Numerous stakeholders raised concerns about issues in relation to suppliers of fresh produce, including:
- lack of transparency in how supermarkets determine the price suppliers receive for fresh produce, which creates high levels of uncertainty for suppliers
- supermarkets purchasing lower volumes of fresh produce than they had previously indicated, and
- the need for stronger protections in relation to fresh produce standards set by supermarkets (which allow for rejection of fresh produce that does not meet those standards).
To address these concerns, the Report recommends that 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.
Education and Outreach by the ACCC, Code Mediators and Code Supervisor
The Report also raises the importance of better education and guidance to supermarkets and suppliers to ensure the Code is effective. The Report recommends that the ACCC, Code Mediators and Code Supervisor should engage in education and outreach activities to empower suppliers to take advantage of their rights under the Code.
Next Steps
The Australian Treasurer, Dr Jim Chalmers, has said that the Government will adopt all 11 recommendations in the Report. Most of the recommendations can be implemented by the Government making changes to regulations. However, the introduction of penalties for breaches of the Code requires legislation to be passed by Parliament. The Treasurer has said that the Government will ‘prioritise’ these changes but there is no set timeline.
Image Credit: Ripe Fresh Fruits on Beige Surface by Any Lane / Pexels / Licence / Remixed to B&W and resized
