Supermarkets face life-changing decision on code of conduct

Monday will be crunch time in the politically charged negotiations between the supermarket giants and the Australian Food and Grocery Council to agree to a supermarket code of conduct that is voluntary rather than mandatory.

Monday will be crunch time in the politically charged negotiations between the supermarket giants and the Australian Food and Grocery Council to agree to a supermarket code of conduct that is voluntary rather than mandatory.

After months of discussions, Woolworths is scheduled to hold its final meeting with the AFGC on Monday to once and for all try to reach an agreement on a code designed to improve relationships between supermarkets and suppliers by curbing the power of the supermarket giants.

An agreement was expected by Easter and with less than five weeks of sitting left in Parliament, the speculation is that an agreement must be reached in the next two or three weeks - or a mandatory code could be imposed on them.

If neither is done, the fate of the retail giants will be left to the government elected in September.

It is a high-wire act as the Coalition has committed to a root-and-branch review of the competition legislation with particular reference to grocery retail and banks in its first 100 days. In addition, Barnaby Joyce is still pursuing his divestiture powers bill.

Coles met AFGC two weeks ago and it is understood that all parties agree to 90 per cent of the code, including a dispute resolution mechanism, but the sticking points are so important that it might cause Woolworths, Coles or the AFGC to pull the plug.

It is understood that the AFGC is pushing for a resolution one way or the other before its annual CEO forum on May 30.

It won't be easy as the two supermarket chains are unable to agree on appropriate mechanisms to address their growing vertical integration in a market where they control an unparalleled 70 per cent-plus of the nation's grocery shelf space.

Vertical integration issues go to the heart of competition issues that arise from the supermarket giants having access to information from their suppliers that is not publicly available about the supplier's pricing strategies, costs, margins and advanced innovation plans and how the chains then use that information to develop their private-label brands in competition.

According to the AFGC, private labels were 25 per cent of supermarket sales in 2010. If Australia follows trends in Europe, this could grow to as much as 50 per cent.

Options being canvassed include structural separation of the supermarkets' private label development, marketing teams from its branded buying arm so that the buyers don't share information. Under such a model, retailers would be required to bid for shelf space for private labels in the same way as branded suppliers and would help control the retailers' getting a preview of branded packaging and IP.

Another issue that needs to get over the line is a mechanism that forces the chains to stick to pre-agreed contracts with their suppliers. Options are believed to include a legislated supermarket ombudsman with hard powers to enforce a code of conduct (following the UK Groceries Code model) and various behavioural obligations to ensure fair dealing by industry participants.

A spokesman for Coles said: "It would be inappropriate for a voluntary Australian code to impose prescriptive requirements that would prevent genuine commercial negotiations." He said Coles and the AFGC discussed a range of unintended consequences of some proposed provisions that may adversely affect suppliers and add costs to consumers.

The discussions come as the Australian Competition and Consumer Commission investigates the chains over allegations of misuse of market power when dealing with suppliers.

Last year the Gillard government ruled out any legislative changes to curb the power of the supermarket chains, calling instead for a voluntary and co-operative industry approach. To this end it set up a forum for industry participants to develop a framework to work the problems out themselves.

The ACCC and federal government have indicated that they expect the code to be "prescribed" under the Competition and Consumer Act. If the Code is "prescribed", the ACCC would have powers to enforce the code, including the power to seek injunctions, corrective advertising, section 155 investigation notices, public warning notices, orders varying contract terms and random audit powers.

The incorporation of the code into supply agreements would also give suppliers private rights of action for breach of contract. Whatever happens, life for the supermarket chains will never be the same.

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