Toughen up: what Australia's supermarket code could learn from the UK

The new draft voluntary code of conduct between supermarket giants Coles and Woolworths and their suppliers has so far elicited responses ranging from cynicism to cautious optimism.

Supporters point out the code will act as a useful adjunct to the existing statutory framework and provides transparency and certainty.

But critics describe it as intended to dilute political concerns around the misuse of market power and unconscionable conduct by supermarkets, heading off any attempt to introduce more draconian remedial measures such as market capping and divestiture - while not altering the underlying economics of lop-sided supermarket-supplier relations.

Others point out that the code fails to address concerns around major supermarkets’ leveraging their power into other sectors such as liquor, fuel and financial services. It is also unlikely to strengthen the bargaining position of primary producers, many of whom do not deal directly with the supermarkets.

And as a comparison with the UK experience shows, there are significant limitations on the Australian code’s likely effectiveness, not least of which is the absence of penalties for its breach.

The UK approach

Non-compliance with the Australian code could lead ultimately to declarations, injunctions, damages and a range of remedial orders requiring contractual terms to be changed and payments to be refunded. But a serious weakness of the statutory scheme underpinning the Australian code is its failure to provide financial sanctions for breaches.

The UK introduced a much tougher groceries supply code earlier this year, administered by independent Groceries Code Adjudicator, Christine Tacon, whose position is funded by a levy on the largest supermarkets.

Tacon, who participated in a major public symposium on supermarket power held by the University of Melbourne and Monash University in August, has wide-ranging investigatory and enforcement powers, backed by the threat of substantial sanctions.

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 £10 million to £500 million (based on 2012 annual accounts) depending on the UK turnover of the retailer concerned. What’s more, where the code is found to have been breached, the costs of investigation can be recovered from the retailer.

Tacon also has the power to “name and shame” by requiring a retailer publish information about an investigation. This tool alone may be sufficient to achieve suitable outcomes without having to impose financial penalties. Tacon has said she regards penalties as “the last resort”.

Importantly too, Tacon - well-known in the food production and retail sectors - aims to build trust between her office and the industry and amongst industry participants themselves. This will be critical in ultimately in changing unconscionable behaviour.

Early reports have been positive. Tacon says that there has already been a change in behaviour by the retailers with suppliers indicating that they are enjoying greater flexibility over where they source packaging, while reasons for delisting products are being set out more clearly, with reasonable notice being given.

Pale by comparison

All this makes Australia’s efforts seem rather pale. Australia’s proposed code has no dedicated independent agency tasked with educating the sector or providing guidance on the code’s 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 Australian Competition and Consumer Commission (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 are to be conducted privately or with a mediator/arbitrator appointed by the parties. The ACCC becomes involved only where those processes are unsuccessful or there is a unilateral complaint to the Commission about breach of the code.

The voluntary code is not intended as a substitute for the laws dealing with anti-competitive acquisitions, misuse of substantial market power and unconscionable conduct, which will continue to be monitored by the ACCC.

The ACCC continues to investigate potential market power misuse and unconscionable conduct by the supermarkets, with an outcome expected next year.

No doubt the verdict of the ACCC’s investigation will influence the government’s forthcoming review of competition law, which will examine the effectiveness of the existing legal prohibitions and remedies.

But whether or not the Australian code succeeds in repairing the broken trust between suppliers and the major supermarkets in this country remains very much to be seen. Failure to emulate some of the strengths of the UK system makes it hard to shrug off the scepticism that justifiably accompanies most attempts at self-regulation.

More teeth needed?

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 has dismissed the code as “pure spin”; whereas in the UK the new adjudicative scheme enjoys widespread support including from the National Farmers Union.

Applying penalties will require an amendment to the provisions of the Competition and Consumer Act 2010 that governs codes of conduct. Similarly, legislation would be required to establish an independent adjudicator, either as part of or separate from the ACCC.

Minister for Small Business Bruce Billson, who is overseeing the government’s competition law review, has said that if the current code 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 seem sensible policy. Nor is it likely to engender confidence amongst suppliers 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.