Does code give suppliers optimism over relations with retailers like Coles?

Does code give suppliers optimism over relations with retailers like Coles?

Four years ago, Australia was declared an "inhospitable" market by Heinz, the multinational voicing concern about the pressure placed on suppliers by the country's highly concentrated grocery sector, dominated by two players, Woolworths Ltd and Coles.

The open expression of such a forthright view attracted media attention, though concern regarding the relationship - and more specifically the power relationship - between retail and suppliers, whether in the agricultural or food manufacturing sectors, was longstanding. At about the same time, the Australian Food and Grocery Council (AFGC), together with Coles and Woolworths, set about creating the Food and Grocery Industry Code of Conduct which officially came into existence late in 2013.

Underlining just how slowly regulatory wheels grind, the latest - and far from final - stage in this process played out last week when the Code became prescribed and legally enforceable under the Competition and Consumer Act 2010.

AFGC chief executive Gary Dawson welcomed this development which he said gave the Code "real teeth". Having the voluntary Code legally enshrined in this manner had been part of the plan envisaged by its authors.

When announcing the tabling of the Code's prescription under law last week, the Minister for Small Business, Bruce Billson, said the prescribed Code represented a "very substantial step forward" which would improve the process of dispute resolution between suppliers and retailers. 

He also said the two big supermarkets had recognised some "bumper rails" are needed on their conduct and "special care" is required given their "immense market power and presence".

So, is Australia in 2015 a more hospitable place for grocery suppliers than in 2014, and does this further strengthening of the Code give suppliers cause for optimism that the market will be a fairer place in which to do business?

At this stage, it is - even four years on - still probably a little early to judge, not least as neither Coles nor Woolworths has officially signed up. However, it is widely expected they will. Indeed, given they have been so involved in the Code's creation, it would be highly surprising if they were not too. Aldi has said it will sign, as has wholesale group Metcash, though with the important caveat it would wait 12 months before doing so to see how it works in practice.

Heinz did not venture an opinion, declining when contacted by just-food to comment on last week's news.

Suppliers will understandably reserve judgement until retailers have signed on but the development last week elicited a cautious welcome.

In addition to the AFGC's upbeat response, Simon Talbot, chief executive of the National Farmers' Federation, said the institution of a prescribed Code was a "a constructive step towards addressing the issues of concern to the farm sector". To be effective, however, he said the voluntary Code would have to have support from "across the retail sector", and "we hope that support will be forthcoming".

Australian Dairy Farmers said the Prescribed Code of Conduct was "not perfect" but does address "several key imbalances with regard to major retailer power over suppliers".

The NFF had wanted the code to be mandatory and withdrew from the negotiations when it became clear that only a voluntary code would be forthcoming. However, its qualified welcome underlines the significance of last week's development.

As a voluntary code, the retailers are not obliged to sign up to it - though they would likely face public pressure and criticism if they did not - but once signed up its measures are now enforceable by the Australian Competition and Consumer Commission. It now becomes a clear co-regulatory measure. The stipulations have been framed by industry partners but the Code itself is being policed by a statutory body.

Under Section 51AD of the Competition and Consumer Act 2010, a corporation "must not, in trade or commerce, contravene an applicable industry code". 

Key elements of the Code include tough restrictions on retrospective and unilateral variations to grocery supply agreements; greater transparency on the basis of shelf allocation for branded and private label products; recognition of the importance of intellectual property rights and confidentiality in driving innovation and investment in new products; and a low-cost and fast-track dispute resolution mechanism.

A court would have authority to address a breach by, for instance, voiding or varying contracts. The ACCC will have extra audit powers, and the Code will require documentation of supplier agreements to be kept so that the ACCC can review them if required. Also, the ACCC does not require a formal complaint to trigger an investigation.

Given the concerns over the power retailers wield over suppliers, this could be a significant factor. Joanna Bills, director of Australian food industry consultancy Freshagenda, believes some suppliers may be wary about making a public complaint. "Whether their ability to raise concerns with the ACCC directly or to 'tip off' the regulator will alleviate [those concerns] and allow them to have concerns dealt with I'm not sure. It will be interesting to see," Bills says.

Billson said last week that consumers will "unquestionably" benefit from the Code, though of course consumers benefit from tough competition which keeps prices low. This has certainly been the case in Australia. When they are benefiting from keen prices, consumers may not be overly worried about how suppliers are feeling.

The "fierce competition" between Coles and Woolworths has kept prices flat, says Bills. "Our analysis has shown that retail prices have risen a lot more slowly than other living costs between 2009 and 2014, despite a general rise in food commodity prices. This suggests to us that the current situation is benefiting consumers at the expense of manufacturers/processors. It will be interesting to see what happens if the retailers become a bit less profitable but retail prices rise more quickly in future."

Instigators of the Code would say a dysfunctional market where food manufacturers are squeezed dry clearly does not serve consumers well, as Dawson contended. He said the Code would "drive behavioural change to encourage fair and effective competition in the long-term interests of consumers".

The benefit for consumers, it is hoped, will therefore be broader and sustained. As for the benefit for Australia's weary food suppliers - and the question of the market's "hospitability" - last week's development is far from being a truly decisive moment. Not only are we waiting to see that all retailers sign up, but after that suppliers, retailers and the ACCC and will have to monitor how it works in practice.

Arguably, 2018 - so that's seven years and counting since the AFGC first began discussing this with Coles and Woolworths - is now perhaps the critical date to look to. 

Poignantly, the NFF said it "looked forward to the review of the Code" in three years' time, adding if it believed the Code was not working as envisaged, it would push for mandatory regulation to take its place. However, given the length of time it has taken to reach this stage, it remains to be seen whether three years will be long enough to judge the Code's true effectiveness.