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Australia’s Proposed Supermarket Code: UK Lessons Missed

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Australia’s retail grocery sector is among the, if not the, most highly concentrated in the world. The two vertically integrated chains, Coles and Woolworths, enjoy 70% of sales in dry grocery goods and 50% of sales in fresh grocery goods. Self-evidently, this has implications for competition in the sector and in turn for the prices, range and quality of grocery goods available to consumers. The power of the chains affects the business strategies, if not survival, of other grocery retailers and businesses participating in the supply chain directly and indirectly, including primary producers. More generally, supermarket power affects many facets of Australian society, including the social fabric and sustainability of communities, employment opportunities, the environment, public health and animal welfare.

Not surprisingly then, the retail grocery sector and the strategies of Coles and Woolworths, in particular, attract a high degree of public interest, regulatory scrutiny and political attention. Consistent with a global trend, the sector has been the subject of a large number of public inquiries and investigations in recent years. A wide ranging Australian Competition and Consumer Commission (ACCC) investigation into allegations of unfair trading and anti-competitive conduct by the supermarket chains is under way. Concerns relate to various supermarket strategies including with respect to acquisitions, supply chain management, private labels, pricing, advertising and packaging and diversification into other sectors such as petrol, liquor and financial services.

Several cases concerning alleged breaches of Australia’s competition and consumer law, the Competition and Consumer Act 2010, have been litigated over the last decade, with mixed results, and a range of law reform proposals have been debated and some introduced including in the areas of merger review, misuse of market power, collective bargaining by small businesses, price discrimination, codes of conduct and unit pricing. A forthcoming independent review of competition policy and law has the retail grocery sector squarely in its sights.  In response to the public controversy, and in anticipation of the forthcoming review, in late 2013 the supermarket chains and supplier representatives released a draft of a new voluntary code of conduct intended to self-regulate supermarket-supplier relations.

The proposed code of conduct is intended to govern key aspects of the commercial relationship between supermarkets and their suppliers and, on its face, addresses many of the concerns ventilated by suppliers in recent years concerning their terms of trade with Coles and Woolworths.  Terms must be documented clearly in a grocery supply agreement and must specify certain matters such as quantity and quality requirements, duration of the agreement and the circumstances in which the agreement may be terminated. Agreements may not be varied retrospectively. Certain terms are not allowed such as terms requiring supplier payments for shrinkage, wastage, stocking or shelf positioning. There are limits on the circumstances in which products may be delisted and suppliers are not to be required to predominantly fund promotion costs.

The code should also offer some comfort to suppliers in relation to the protection of their confidential information and intellectual property in competing with supermarket own brands.  Suppliers have been concerned about retailers copying the branding and packaging of their products, giving rise to a more general concern that in the longer term suppliers will be disincentivised from investing in product innovation by such practices. Under the code retailers are not to infringe supplier intellectual property rights in developing own brands and will not use confidential information provided by suppliers relating to product development, pricing and promotion for purposes other than those for which it is disclosed.

Some have expressed cynicism about the supermarkets’ motivations in agreeing to the code, describing it as aimed at diluting political concerns and heading off any attempt to introduce more draconian remedial measures such as market capping and divestiture. Others have made the obvious point that the code will not alter the underlying economics of supermarket-supplier relations; nor will it weaken the market power of the majors or strengthen the bargaining position of primary producers, many of whom do not deal directly with the supermarkets.  It will also not address concerns associated with the major supermarkets’ leveraging their power in the grocery retail market into other sectors such as liquor, fuel and financial services.

The code is not intended as and will not be a substitute for the laws that deal with anti-competitive acquisitions, misuse of substantial market power and unconscionable conduct. The ACCC will continue to monitor supermarket acquisitions and its investigation into potential breaches of the prohibitions on misuse of market power and unconscionable conduct by the supermarkets is ongoing. The Chairman has promised an outcome to that investigation in 2014. The government’s forthcoming review of competition law will also examine the effectiveness of the existing legal prohibitions and remedies in addressing the issues besetting the sector. No doubt the outcome of the ACCC’s investigation will be highly influential in the attitude taken by the review committee to these issues and to calls for legal reform.

Others have expressed cautious optimism about this latest development in the ongoing debate about supermarket-supplier relations in Australia, pointing out that the code will act as a useful adjunct to the existing statutory framework. It will provide suppliers with greater transparency and certainty and access to a range of dispute resolution processes, supported by the threat of ACCC intervention and formal enforcement proceedings where disputes prove intractable. Such provisions and processes may shift at least some bargaining power in favour of suppliers, even if they do nothing to alter the basic structure of the grocery retail market and its high degree of concentration in particular.

That said, there are significant limitations on the code’s likely effectiveness. These limitations are highlighted by comparison with the model that has been adopted in the United Kingdom in response to similar concerns that have arisen in Australia in relation to the grocery retail sector.

First, the consequences for breach of the Australian code can include declarations, injunctions, damages and a range of remedial orders that could require contractual terms to be changed and payments to be refunded. However, the law does not provide for penalties to be imposed for breach of the code. This is a serious weakness. The potency of any form of regulation is significantly enhanced by, if not ultimately depends on, the credible prospect of escalation to severe sanctions in the face of non-compliance.

Contrast the position in the UK.  A groceries supply code was introduced in that country in 2013 (see Grocery Code Adjudicator Act 2013), administered by an independent statutory officer – the Groceries Code Adjudicator. Consequences for breach of the code include a maximum penalty of 1% of UK turnover from the retailer. This would equate to a maximum financial penalty ranging from £10m to £500m (based on 2012 annual accounts) depending on the UK turnover of the retailer concerned. What is more, where the code is found to have been breached the costs of investigation can be recovered from the retailer.

Second, in Australia, again unlike in the UK, there is to be no dedicated independent agency or officer charged with educating the sector about the code, providing guidance on its interpretation (such as the meaning of dealing in “good faith”), monitoring and reporting on compliance and mediating or arbitrating disputes. While some of these roles will be played by the ACCC, the code appears to envisage that educative and monitoring functions will be performed primarily by a committee of an industry roundtable. All of the dispute resolution processes prescribed by the code are to be conducted privately or with a mediator/arbitrator appointed by the parties. The ACCC becomes involved only where those processes are unsuccessful and/or there is a unilateral complaint to the Commission about breach of the code.

By contrast in the UK, funded by a levy paid by the largest supermarkets, the Groceries Code Adjudicator (Christine Tacon) is tasked with all of the functions that the Australian code proposes be performed by an industry committee. In addition, the UK Adjudicator has substantial investigatory and enforcement powers, backed by the threat of imposing substantial sanctions subject to Parliamentary approval. Other tools at the Adjudicator’s disposal include the power to make recommendations about what a retailer should do in order to comply with the code and the power to require that a retailer publish information about an investigation. These are significant ‘naming and shaming’ tools that, in practice, may be sufficient to achieve suitable outcomes without having to impose financial penalties. The Adjudicator has said she regards penalties as ‘the last resort’.

Importantly too, Tacon – a person of long-standing experience in the food production and retail sectors – sees it as a key aspect of her mission to build trust between her office and the industry and amongst industry participants themselves. This will be critical in enabling her to perform her role under the code and ultimately in potentially changing the behaviour that has prompted its introduction. While it is easy to harbour some scepticism about the prospects of such trust-building initiatives, early reports appear to be positive on this front. Tacon has met with the retailers’ code compliance officers and supplier representatives who apparently have responded positively. She reports that already there is a change in behaviour by the retailers with suppliers indicating that they are enjoying greater flexibility over where they source packaging and reasons for delisting are being set out more clearly with reasonable notice being given.

Whether or not the Australian code succeeds in repairing the broken trust between suppliers and the major supermarkets in Australia remains very much to be seen. However failure to emulate some of the strengths of the UK system makes it hard to shrug off the cynicism that justifiably accompanies most attempts at self-regulation. It may also explain in part why groups such as the National Farmers’ Federation withdrew from the code negotiating table and why their Victorian counterpart have dismissed the code as ‘pure spin’; whereas in the UK the new adjudicative scheme enjoys widespread (even if qualified) support, including from the National Farmers Union.

If penalties are to be available for breach of the Australian code it will require an amendment to the provisions of the Competition and Consumer Act 2010 that govern codes of conduct. Similarly, legislative action would be required to establish an independent adjudicator, either as part of or separate from the ACCC.  Bruce Billson MP, the Minister for Small Business, who is overseeing the government’s forthcoming review of competition law has said that if the code, as currently proposed, proves ineffective then steps will be taken to give it more ‘teeth’.

However, waiting for the (arguably) inevitable failure of the code before introducing more stringent measures does not commend itself as sensible policy. Nor is it likely to engender confidence amongst those in the Australian supplier community who have been crying out for government to take robust action in relation to supermarket power and behaviour for years. If anything, the ‘wait and see’ strategy will only reinforce the perception that the supermarkets wield as much political power as they do market power.

 

Caron Beaton-Wells was the co-convenor of a major public symposium on supermarket power, held by the University of Melbourne and Monash University, in August 2013. The UK Groceries Code Adjudicator participated in the symposium by video. For information about the symposium, including Christine Tacon’s video, see http://www.law.unimelb.edu.au/clen/news-and-events/supermarket-power-symposium/flushcache/1/showdraft/1.

AUTHOR
Caron Beaton Wells
Caron Beaton-Wells is a Professor specializing in competition law at the Melbourne Law School and Director of the University’s Competition Law & Economics Network. Her research and teaching focuses on anti-cartel law and enforcement and her publications include Australian Cartel Regulation: Law, Policy and Practice in an International Context (CUP, 2011), with Brent Fisse and Criminalising Cartels: Critical Studies of an International Regulatory Movement (Hart, 2011), with Ariel Ezrachi. She is a member of several national and international editorial and advisory boards, has consulted to the OECD, ASEAN, SSNED and the New Zealand Government, is a non-governmental advisor to the ICN and the Law School's representative on UNCTAD's Research Partnership Platform. Caron is also a member of the Law Council of Australia's competition and consumer committee and a member of the Victorian Bar. Caron Beaton-Wells is a specialist in competition law. She has published widely in the area, including Proof of Antitrust Markets (Federation Press, 2003) and Australian Cartel Regulation: Law, Policy and Practice in an International Context (Cambridge University Press, 2011), with Professor Brent Fisse. Her research on market definition, merger review and more recently the criminalisation of cartel conduct has led to articles published in national and international competition law journals. She has won major competitive funding for and led cutting edge research on cartel criminalisation, together with researchers from the Law School, the University's School of Politics, Sociology and Criminology and the University of South Australia's Centre for Regulation and Market Analysis.
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