How to halt a supermarket sweep

A voluntary code of conduct may help defuse tensions between the supermarket chains and their suppliers, as well as blunt the attacks on their dominance that will spring up during Abbott's competition review.

The voluntary code of conduct agreed by the two big supermarket chains and suppliers represents an evolution in their relationships rather than a revolution. However, criticism of it by farmers as ‘’spin’’ is premature and hopefully misconceived.

The code is designed to regulate and give structure to the dealings between the chains and their suppliers. It is an attempt by the chains to make a statement to the suppliers and the community that they will deal fairly and equitably, and that when there are the inevitable disputes or breaches of the code, there will be mechanisms for dealing with them.

The code is a response to the mounting criticism of the chains’ dominance and the way that has been reflected in their relationships with suppliers. It is also an attempt by the chains to head off the threat of having a mandatory code imposed on them.

It’s not a remedy for existing breaches of contract or the law. The Australian Competition and Consumer Commission has been inquiring into allegations of misuse of market power and unconscionable conduct by the chains for some time. Those inquiries will inevitably continue.

Nor will it prevent instances of the kind of behaviour the code seeks to address in future, but it will provide an agreed and defined pathway towards addressing them.

It might  help the supermarkets blunt the inevitable attack on their dominance that will occur when the Abbott government’s review of competition law gets underway.

The charge that the chains have been abusing their market power and damaging suppliers in the process is at the centre of the political discussion around their scale and the imbalances in negotiating clout. This has led to calls for a draconian response by legislators, including market share caps and forced divestitures.

To the extent that the chains can do anything that dispels the perception that the chains are evil and arrogant duopolists, the code, the recent generous supply deals struck with the struggling Coca-Cola Amatil-owned SPC Ardmona fruit business and the milk supply deal Coles has struck with Murray Goulburn enable the chains to point to evidence that challenges those beliefs.

It should be said that at its core, the code simply, well, codifies what the chains should be doing anyway under existing contract and competition law.

It does address some specific behaviours, like payments for premium shelf spaces and compensation for shrinkage. But perhaps the most significant aspect of the agreement is that it puts in place layered mechanisms for resolving disputes, with provisions for mediation and arbitration if they can’t be resolved directly.

There is still the ability for a disgruntled supplier to go directly to the ACCC, which will also have a role in monitoring the code. The suppliers have not given up any rights by agreeing to the code.

For the chains, the voluntary code is preferable to what might have been imposed had they not been able to reach an agreement, given the charged political environment.

At the very least, they would have faced (and could still face) and mandatory code, as do their peers in the UK.

At a practical level, that might not have been much different to their agreement, but it would have superimposed another regulatory structure and wouldn’t have created something with the potential to defuse the tensions in the relationships they have with some of their suppliers.

One would expect the chains will be given the opportunity to demonstrate that a voluntary code can be effective in producing better and fairer resolutions and avoiding the kinds of escalation that occur when there is no agreed informal (albeit binding) process for dealing with them.

It should be noted that not all suppliers, certainly not the farmers and not all grocery retailers have signed up to the code.

Metcash, Aldi and Costco aren’t parties to the code. Aldi, which has plans to more than double its already extensive existing store network, is an increasingly potent competitive force, while Costco is starting to accelerate the roll-out of its network.

Over time they – and inevitably online competitors – will provide more significant constraints to the market power of the chains, which might help quieten some of the chains’ more threatening critics.

In the meantime, the code may not be a debate-ending development. But it may help the chains respond to their critics – and make their suppliers feel less threatened and powerless in the process.