A mandatory Food and Grocery Code of Conduct that provides for heavy penalties for deliberate or careless breaches while encouraging the resolution of disputes through mediation and arbitration incorporates the best of both worlds. Such are my recommendations in the final report on the review of the Code.
The federal government has announced it accepts all 11 of my recommendations.
While making the Code mandatory, those recommendations also import and strengthen the dispute-resolution provisions of the existing voluntary Code.
Constitutional constraints prevent a government or a parliament imposing arbitrated outcomes on private parties; only the courts can do this.
However, I have obtained the in-principle agreement of Woolworths, Coles, ALDI and Metcash to pay small suppliers up to $5 million in compensation as an outcome of arbitration – which for those suppliers is a large sum. I thank these companies for their cooperation in this groundbreaking outcome.
The first port of call when resolving disputes will be the supermarkets’ own mediators, who have deep knowledge of the business, including of the buyers and senior management. But if a small supplier wanted an independent mediator or arbitrator, an expert would be made available from a panel formed in advance by the small business ombudsman.
Critics of making the Code mandatory argued that this would forfeit the dispute-resolution features of the voluntary Code.
But my recommendations and the in-principle commitment of Woolworths, Coles, ALDI and Metcash enable both enforceability and strengthened dispute resolution – the best of both worlds.
Penalties for non-compliance with the Code are essential. The Code will be enforceable by the Australian Competition and Consumer Commission (ACCC). In my interim report, I recommended maximum penalties for the most serious breaches – such as systemic breaches and a supermarket failing to act in good faith – of the highest of $10 million, three times the benefit gained from the breach or 10 per cent of turnover in the 12 months preceding the breach.
In the Final Report I am also recommending maximum penalties of more than $1 million for all other breaches.
Together, these are the heaviest penalties of any industry code of conduct.
The mandatory Code will apply to grocery retailers and wholesalers with annual revenue of more than $5 billion, which are Woolworths, Coles, ALDI and Metcash. It is likely that Costco will exceed the $5 billion threshold in the foreseeable future. If Amazon began selling fresh food in its own right it too could be subject to the Code at some stage.
I have carefully considered arguments for other retailers to come into the Code, including the sale of nursery plants by Bunnings, the sale of wine, beer and spirits by supermarket affiliates, and of non-prescription items by Chemist Warehouse.
However, I have recommended that the Code continue to apply to supermarkets as conventionally understood as places for regular grocery shopping, as well as Metcash as the largest grocery wholesaler.
My concern about extending the Code to other retailers and other products was that casting the Code’s net far and wide could constitute regulatory overreach with unforeseen and unintended consequences.
The review received strong evidence from smaller suppliers that they feared retribution from supermarkets if they made a complaint or exercised their rights under the voluntary Code.
I have recommended strengthening the Code to ensure that supermarkets and their buying teams do not engage in retribution against suppliers, including where suppliers seek to make complaints against them under the Code.
I have also recommended a new mechanism to enable 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. I have recommended new protections for these suppliers.
More generally, the purpose of an industry code of conduct is to help rebalance the highly uneven bargaining power of a member of an oligopoly and its smaller suppliers.
Oligopolies are common in Australian industry. In principle, the first-best policy response is to use competition policy to introduce greater competition into the relevant industry.
The resurrection of national competition policy by the federal, state and territory might be capable of achieving this, including through a reconsideration of state and local government restrictive planning and zoning laws that favour incumbents over prospective market entrants.
Well-designed, market-specific codes of conduct can play an important part in this rebalancing of bargaining power. But they need to be designed carefully, so that they are both effective and well targeted and unambiguously do more good than harm. Those were the principles guiding the review of the grocery code of conduct.
Craig Emerson was the independent reviewer of the Food and Grocery Code of Conduct. He is managing director of Emerson Economics, director of the APEC Study Centre at RMIT University and adjunct professor at the Centre of Policy Studies in Victoria University’s College of Business.