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A revised code of conduct for supermarkets would include fines of up to $10 million and independent mediation – a resolution suppliers are too afraid of ‘retribution’ to access, the architect of the changes tells The Saturday Paper. By Mike Seccombe.
Craig Emerson on the supermarket code of conduct review
Verbal contracts are proverbially not worth the paper they’re written on. Voluntary codes of conduct governing the behaviour of big businesses are not much better, as David Littleproud colourfully attested on television this week.
Asked if the Food and Grocery Code of Conduct – which is supposed to prevent Australia’s big supermarkets from dealing unfairly with their suppliers – had had any effect, the National Party leader replied: “It’s had three-fifths of bugger all.”
He criticised the lack of punitive measures: “There needs to be big fines.”
He is right. The current code does not provide for penalties. As Littleproud also complained, the supermarkets employ their own in-house arbiters to rule on potential breaches of the code, which hardly seems independent. The supermarkets, he said, had farmers “over the barrel”.
Such complaints have been made for many years. Yet, when Australia’s big supermarkets committed to the voluntary code in November 2013, that was good enough for Littleproud’s side of politics, which was then in government. When the current dispute-resolution provisions began in January 2021, Littleproud was minister for agriculture.
Why all the tough talk now? Littleproud has even voiced support for proposed legislation introduced last month by the Greens, providing for forced divestiture to break up the big players.
Several things have changed. There is a cost-of-living crisis, fuelled by inflation and high interest rates, and the public perception has grown that supermarkets have taken the opportunity to pad their profits by paying suppliers less and charging customers more.
Consequently, the behaviour of the big supermarket chains – Woolworths, Coles and Aldi, along with the wholesaler Metcash, which have a collective market share of 80 per cent – has come under a great deal of scrutiny.
In January, the Albanese government announced it would give $1.1 million to consumer group Choice to monitor food and grocery prices and provide “price transparency and comparison reports” on a quarterly basis for three years.
The government also directed the Australian Competition and Consumer Commission (ACCC) to investigate pricing and competition in the supermarket sector and deliver a final report by early next year.
There is also an ongoing Senate inquiry, chaired by the Greens’ economic justice spokesperson, Nick McKim. The chief executives of Woolworths and Coles, Brad Banducci and Leah Weckert, are scheduled to appear before it on Tuesday, which will no doubt provide compelling political theatre.
In addition to all this, the government appointed Dr Craig Emerson, former economic adviser to Bob Hawke and a senior minister in the Gillard government, responsible at various times for competition, deregulation, trade and consumer affairs, to review the Food and Grocery Code of Conduct.
He delivered an interim report this week and a final report is due by the end of June. It was the interim report to which Littleproud was responding on Tuesday. The funny thing is, the report provided most of what the Nationals’ leader was demanding, but didn’t do while in government.
“I firmly recommend the Code be made mandatory and apply to all supermarkets with annual revenues exceeding $5 billion, which at present are Coles, Woolworths and ALDI, and wholesaler, Metcash,” Emerson said in the report.
Speaking to The Saturday Paper, he anticipated the number of supermarkets covered would soon grow to five.
“Costco will come in before too long, because they’ll come over the top of that $5 billion annual revenue threshold. That will just happen as a matter of course,” he said.
Emerson advocated a regime of penalties, including the “big fines” Littleproud flagged. In cases of “major or systemic breaches”, the ACCC could seek penalties of “up to $10 million, 10 per cent of a supermarket’s annual turnover, or 3 times the benefit from the breach, whichever is the greatest”.
“This would better reflect the size and annual turnover of the supermarkets that would be covered by the Code,” his report said.
Emerson also proposed changes to the current regime whereby supermarkets effectively sit in judgement of themselves, via their in-house arbitrators.
He recommended that when requested by a supplier, independent mediation would be mandatory for the supermarket. If that failed, independent arbitrators with “relevant dispute-resolution expertise and grocery experience” could be appointed. As to where those arbitrators would come from, Emerson will need to answer that in the final report.
Another question is whether the supermarkets would agree to that – as he wrote in the report: “Owing to constitutional limitations, arbitration must be entered into voluntarily to resolve disputes.”
The idea is to expedite the process. The alternative for an “aggrieved supplier would be to persuade the ACCC to run a case through the courts. This could take several years, by which time the supplier, as a key witness, would have gone bankrupt,” he wrote.
The current regime does not seem to be working.
“Since the commencement of the dispute-resolution provisions of the voluntary Code in January 2021, only 6 disputes have been lodged with Code Arbiters,” the report noted.
“Critics of the voluntary Code point to the small number of disputes as evidence … of its failure. They nominate the fear of retribution by supermarkets as the dominant reason for so few disputes being raised by suppliers. Retribution could take many forms, including the unfavourable renegotiation of terms and conditions of supply, relocation of shelf space to less popular locations within stores, and total delisting of a supplier’s products.”
Speaking to The Saturday Paper, Emerson elaborated. “They’re so fearful of retribution that they are fearful of talking about the fear of retribution. We have had confidential discussions, including with representative organisations that don’t want to be identified, let alone their members.
“That’s why I’ve created a channel for suppliers who do fear retribution, to be able to complain anonymously, with details to the ACCC.”
It’s true his report did not advocate applying the code as widely as some would have liked.
Alcohol has been excluded, for example, even though market concentration in the liquor retail industry is high, with the four largest retailers – Endeavour Group, Coles, Metcash and Aldi – holding a combined market share of almost 70 per cent. Emerson argues alcohol does not fit easily into the definition of groceries and wine producers in particular have options to sell elsewhere. Sixty per cent of Australian wine is exported.
Bunnings is not covered, for the obvious reason that it doesn’t sell food and groceries, though it is, according to some retail analysts, not only vastly more profitable than the supermarkets but even more ruthless in the treatment of its suppliers. The horticulture council of the National Farmers’ Federation continues to push for Bunnings horticulture products to be covered. Emerson has left the prospect open.
At the heart of the current concern about supermarkets is the matter of profit. Why should consumers care if they are screwing suppliers down to the point where they are barely profitable?
The first point, says Emerson, is that not all suppliers are in a weak bargaining position. Some – think Nestlé or Coca-Cola or Unilever or Kellogg’s – are in a powerful position to negotiate.
“So we’re not creating this mandatory code because poor Nestlé or Coca-Cola is struggling.
“The evidence that we’re getting is that quite a few of the small suppliers have enough money to exist, to kind of justify them hanging on in the hope that something will come up, but they don’t have the capital to be able to make those investments. That is not good for society as a whole.
“So what I’m saying is let them, in economic terms, earn a normal profit.”
As to how much profit the supermarkets should make, he offers no opinion. Nor does the assistant minister for competition, charities and treasury, Andrew Leigh.
“Profit margins aren’t our principal concern in this,” says Leigh. “We certainly want businesses to do well … but competition is about trying to make sure that the whole economy is as dynamic and productive as it can be.”
Popular opinion would have it that the supermarkets are gouging consumers. But are they, really? As Leah Weckert pointed out in The Australian Financial Review this week, Coles’s profit margin, of about 2.6 per cent, is as it has been for the past five years.
The same business-friendly newspaper also recently noted evidence to the Senate committee showing supermarket prices were up 18.8 per cent since 2020, rather less than in several other comparable countries. Returns on investment for the big supermarket companies are certainly very healthy, says one industry analyst, “but certainly don’t amount to superprofits”.
In which case, while there would appear to be good reason for the government to engage Choice and the ACCC to investigate, the case for breaking them up might be less clear. “The Review does not support a forced divestiture power to address market power issues in the supermarket industry,” said Emerson in his report.
Andrew Leigh highlights the massive disruption such a course of action would entail.
“Woolies is Australia’s biggest private-sector employer so you’ll immediately have a whole lot of people losing their jobs through no fault of their own. I think the one thing everyone can agree on in this is that the behaviour of Coles and Woolworths is not being driven by people working in the checkouts, and yet it’s those people who would be affected by divestment.
“That’s why the ACTU has been reluctant to back the divestiture powers.”
According to multiple reports, Opposition Leader Peter Dutton slapped down Littleproud’s idea of supporting the Greens’ divestiture bill in the party room last week – simply because it came from the Greens. He and Littleproud continue to throw the word around, however, as they promise the shadow treasurer, Angus Taylor, will come up with an alternative.
They will have to come up with something, because at the moment only the government has a proposal to protect the Nationals’ core constituency, the farmers.
As Leigh says: “The fact is, they signed on to the voluntary code of conduct in 2015. When the review was done in 2018, they signed on to continuing to make it voluntary. And now they seem to have jumped on to the idea of divestment powers.
“The National Party are tigers in opposition but kittens in government.”
It’s a tough assessment but historically accurate.
This article was first published in the print edition of The Saturday Paper on April 13, 2024 as "Price check on all aisles".
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