Major supermarkets will be banned from taking retribution against their small business suppliers and could find themselves subject to massive fines, after the federal government agreed to make the Food and Grocery Code of Conduct mandatory for the industry’s biggest players.
Treasurer Jim Chalmers has confirmed the government has accepted all eleven recommendations of a major Code review, undertaken by economist and former minister for small business Craig Emerson.
The changes, when enacted, will overhaul a voluntary system that small business advocates have long argued is not fit for purpose.
They will also open the door to multi-billion dollar fines against supermarkets found to have severely broken the rules.
The report — and its government response — comes as part of a broadscale effort to ensure Australia’s market leaders are competing fairly.
Here’s what small businesses need to know about the final report, and the government’s response.
The voluntary Code covers supermarket giants Woolworths, Coles, ALDI, and Metcash, the wholesaler behind the IGA franchise banner.
Signatories of the Code agree to a set of minimum standards, and pledge to negotiate with their smaller suppliers — those with annual revenue under $10 million, or fewer than 100 staff — in good faith.
The Emerson review, established to determine if the voluntary Code is fit for purpose, heard the nine-year-old system is not capable of stemming the worst behaviour.
“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 from their commitments,” Emerson said.
“This can be achieved only by making the Code mandatory.”
The federal government has agreed to the recommendation, confirming supermarket businesses with over $5 billion in annual revenue will be bound by a compulsory Code.
The Code will be mandatory for bricks-and-mortar, online, and hybrid businesses that meet the $5 billion threshold.
While noting concerns about the relationship between nursery plant and wine businesses and their smaller suppliers, the government says the Code will apply specifically to supermarket retailers.
The review recommends the Code be strengthened to address retribution against small business suppliers for challenging their big business partners under the Code.
Beyond real backlash, the review heard that fear of retribution itself could discourage small businesses that seek mediation or arbitration through the Code, further weakening its protective powers.
“Smaller suppliers have told the review that they fear retribution from the big supermarkets if they make a complaint,” Emerson said.
To counter those fears, Emerson recommended the following expansions:
Emerson carefully noted a renewed focus on retribution should not restrict supermarkets from taking commercially savvy decisions.
A “decision to delist a supplier’s product or relocate it to a less-favourable location elsewhere within a store would not necessarily, of itself, constitute retribution,” he said.
The government agreed to the changes, saying it will crack down on retribution by requiring the new Code Supervisor to survey small suppliers at regular intervals.
It also levelled the expectation that supermarkets ensure their internal reward schemes do not encourage unfair relationships with small businesses.
To further shield small businesses from retribution, the government has agreed to establish an anonymous tip-off line within the Australian Competition and Consumer Commission.
This complaints pathway will allow suppliers to flag potential breaches of the Competition and Consumer Act 2010, including elements of the Code.
The new system will work alongside the new designated complaints function, which is designed to fast-track small business complaints to the consumer watchdog.
Even if small suppliers have valid cases against their big business customers, filing those complaints can be time-consuming and costly.
To ensure a fair balance between parties, Emerson recommended supermarkets appoint a qualified Code Mediator to directly handle disputes raised by suppliers.
Separately, independent arbitration and mediation pathways should exist; attendance at those sessions should be mandatory for supermarkets for suppliers who choose that option.
Supermarkets already subject to the Code have already pledged to provide compensation of up to $5 million when recommended by a Code Mediator or independent umpire, Emerson noted.
The government agreed to protect the low-cost Code Mediator pathway while preserving the right for small suppliers to request independent arbitration or mediation.
A list of appropriate arbitrators and mediators will be managed by the Australian Small Business and Family Enterprise Ombudsman.
To ensure the continual performance of the mandatory Code, Emerson recommended the establishment of a Code Supervisor to pen regular reports on compliance and the results of confidential supplier surveys.
The government agreed, saying the Code Supervisor would also note reports of supplier retribution.
The major supermarkets and their smaller suppliers should be free to negotiate “reasonable and transparent” exceptions to the Code where it is mutually beneficial, Emerson said.
Even so, some exceptions would remain off-limits, including deals that:
The government agreed to that framework, saying it will introduce a strengthened reasonable test for Code exceptions.
The Emerson review heard that fresh produce suppliers are especially fearful, given the seasonality and short shelf-life of their goods.
He recommended the Code ensure fresh produce supply agreements are clear on price, forecasted with due care, and include reasonable standards — that is, supermarkets should be barred from needlessly refusing produce on quality grounds when it meets the agreed requirements.
The government “acknowledges the unique challenges faced by suppliers of fresh produce,” its response said.
It will amend the Code to “require that grocery supply agreements include the basis for determining prices, requiring supermarkets forecasting of volumes is conducted with due care and fresh produce standards and specifications must be reasonable”.
Emerson was clear that penalties should not just be enforced, but have enough bite to meaningfully discourage poor conduct.
Maximum penalties for severe Code breaches should hit the greatest of $10 million, three times the financial benefit gained from the dodgy conduct, or, in circumstances where the precise value gained is unclear, 10% of turnover in the preceding 12 months.
With some Code signatories making in excess of $40 billion in revenue each year, fines could technically reach into the billions of dollars.
Infringement notices for Code contraventions should also increase, jumping from 50 penalty units (currently $15,650) to 600 penalty units (currently $187,800).
The government will “introduce penalties that act as a meaningful deterrent to poor behaviour,” it said.
The ACCC, Code Mediators appointed by supermarkets, and the Code Supervisor, should all engage in education and outreach to ensure participants understand their rights and obligations.
Given the significant scope of the new and mandatory code, the government gave its support to Emerson’s final recommendation.
The mandatory shake-up will require time, and amendments to the Competition and Consumer Act 2010, to take effect.
There is no ironclad timeline, but the government said it “will prioritise” those changes.
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Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
