Food and Grocery Code of Conduct: Update on Report Recommendations

9 July 2024

Background

In late June, Treasury released its final report from the Food and Grocery Code of Conduct (the Code) review led by The Hon Dr Craig Emerson.

The eleven recommendations detailed within the report have been accepted by the Government. As outlined in the June members brief most of the recommendations focus on the administration and governance of the Code. This means the Code will become mandatory and contain strong penalties of up to 10% of retail turnover for breaches. It’s an expected move given the highly politicised environment in which the review has been conducted.

The AFGC is disappointed to report no improvements have been considered for the specific and targeted provisions used by industry with their trading partners e.g., range reviews, delisting or price increases. More work needs to be done to ensure real improvements to these clauses that could strengthen their use and make a tangible difference to supplier protections.

While we support the changes at a high level, the detailed drafting process will be critical to ensure the Code remains fit for purpose. The AFGC will actively participate in this process and seek input from member company Legal Counsels.

Recommendations

The following provides a deeper explanation of each of the eleven recommendations.

Recommendation 1:

The FGCC should be made mandatory.

Key Notes:

No adjustments to scope
- Retain the principal focus on supermarkets
- Not extending to other retail businesses e.g. Big W, Chemist Warehouse etc.
- Not extending up the supply chain e.g. processors

Recommendation 2:

All supermarkets, including online supermarkets, that meet an annual Australian revenue threshold of $5 billion should be subject to the mandatory Code. Revenue should be in respect of carrying on a supermarket business as a ‘retailer’ or ‘wholesaler’ (as defined in the existing Code). All suppliers should be protected by the Code.

Key Notes:

This will capture Aldi, Coles, Metcash and Woolworths.
Costco are likely to be captured soon, given their 2023 turnover estimated at $4.3B
Amazon unlikely to be captured until it:
- Starts selling fresh goods
- Passes $5b in FMCG turnover
Definition for products covered to be updated
Rejected extending good faith obligations onto suppliers

Recommendation 3:

The Code should place greater emphasis on addressing the fear of retribution by:

Including protection against retribution in the purpose of the Code;
Ensuring that retribution captured under the obligation to act in good faith includes action taken against suppliers for exercising their rights under the Code;
Requiring that any incentive schemes and payments that apply to a supermarket’s buying teams and category managers are consistent with the purpose of the Code; and
Requiring supermarkets to have systems in place for their senior managers to monitor the commercial decisions made by their buying teams and category managers in respect of a supplier who has pursued a complaint through mediation or arbitration.

Key Notes:

Fear of retribution will be reflected in the purpose of the Code, and existing protections against retribution in the good faith provision will be broadened. This will include retribution against a supplier for exercising its rights under the Code, regardless of whether it involves a complaint or dispute.
Obligation to ensure that any retail buyer incentive schemes or payments are consistent with the purpose of the Code. Virtually no detail has been provided regarding how this new obligation will be operationalised.
Retailers will be required to adopt systems whereby senior managers monitor the commercial decisions made by their buying teams and category managers regarding a supplier who has pursued a complaint through mediation or arbitration.

Recommendation 4:

An anonymous complaints mechanism should be established to enable suppliers and any other market participants to raise issues directly with the ACCC.

Key Notes:

Unclear what ACCC will do with this information.
One element of the ACCC’s expanded role under the mandatory Code
Concerns with the ACCC managing this process given suppliers’ traditional hesitation to raise issues with the ACCC.

Recommendation 5:

The Code should provide parties with avenues for mediation and arbitration to resolve disputes:

Supermarkets must appoint a suitably qualified Code Mediator who is engaged by supermarkets (replacing their Code Arbiters), and who would be available to assist with resolving disputes, where requested by a supplier.
Avenues for independent mediation and arbitration should also be available.
Parties can agree on an independent mediator or arbitrator. A list of suitably qualified mediators and arbitrators should be compiled by the Treasury or the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).
Supermarkets must attend independent mediation if requested by a supplier.
Where mediation has not settled a dispute, independent arbitration can be used to settle disputes as agreed between the supermarket and supplier.
In addition, Woolworths, Coles, ALDI and Metcash have agreed in principle to be bound by a decision of their Code Mediator to award compensation of up to $5 million, where agreed by a supplier. They have also agreed to be bound by a decision of an independent arbitrator for compensation of up to $5 million, where requested by a small supplier. Small suppliers would be those with annual revenue below $10 million or fewer than 100 staff.

Key Notes:

Mediation, arbitration, legal avenues and ACCC were all available under the current Code. This recommendation retains elements of the existing dispute resolution model, while formalising independent mediation and arbitration.
Code Arbiters (to be renamed as Mediators) appear to retain their existing functions
- In-principle’ agreement from the current four signatories to be bound by a decision made by a Code Mediator awarding compensation of up to $5 million, where agreed by the supplier
Independent Reviewer (to be renamed to Code Supervisor), refer to the next recommendation for more detail.
In addition, independent mediation has been formalised as an option to resolve disputes
- List of approved Mediators held by Treasury and Australian Small Business and Family Enterprise Ombudsman (ASBFEO)
- Obligatory for supermarket to participate if requested by a supplier
- Parties would share the costs of mediation equally, unless otherwise agreed
Independent arbitration would be another avenue for suppliers to resolve disputes:
- List of approved Arbiters held by Treasury and ASBFEO
- Existing Code signatories have given ‘in-principle’ commitment to:
  - Participate in independent arbitration, if requested by a small supplier. Small suppliers are defined as having <$10m turnover or <100 employees
  - Independent Arbiters can compensate small suppliers up to $5m
- Independent arbitration is only an option if:
  - Mediation did not settle the dispute (unspecified, but implied, that this is independent mediation)
  - For Metcash, the supplier must have first mediated through its Code Mediator

Recommendation 6:

A Code Supervisor (previously the Independent Reviewer) should produce annual reports on disputes and on the results of the confidential supplier surveys, be able to identify systemic issues with the Code and be available to suppliers to provide information on options to resolve disputes and review the processes of Code Mediators.

Key Notes:

The existing Independent Reviewer role appears somewhat diminished.
- Loses the ability to resolve systemic industry issues.
- Retains most other existing functions, e.g.:
  - Reviewing a Code Mediator’s processes
  - Annual survey
  - Annual report on disputes

Recommendation 7:

To ensure exceptions allowed for in grocery supply agreements are reasonable and transparent:

All exceptions should be subject to a reasonableness requirement that considers the benefits, costs and risks to the supplier and the supermarket, and protects against exceptions that are not in a supplier’s interest, with the supermarket bearing the onus of proof that any exception is reasonable; and
For all new grocery supply agreements, supermarkets should be required to provide suppliers a simple guide to any exceptions that are included in the agreement.

Key Notes:

Introduces a new ‘reasonableness test’ that will apply to exercising ‘opt out’ options in a grocery supply agreement
- The onus will be on supermarkets to demonstrate ‘reasonableness’ – regarding the benefits, costs and risks to both parties of ‘opting out’ of Code protections within a grocery supply agreement
- Unclear what this will look like in practice
This recommendation will be reviewed after two years of operation, to assess whether it is meeting its intent.

Recommendation 8:

To address issues relating to fresh produce, the Code should require that:

Grocery supply agreements must include the basis for determining prices;
All forecasts of required volumes are conducted with due care; and
Fresh produce standards and specifications must be reasonable.

Key Notes:

Strengthens provisions for fresh produce suppliers.
Not as relevant to AFGC members

Recommendation 9:

Maximum penalties for more harmful breaches of the Code should be the greatest of $10 million, 3 times the benefit gained from the contravening conduct or, where the benefit cannot be determined, 10 per cent of turnover in the preceding 12 months. Maximum penalties for other breaches should be 3,200 penalty units (currently $1,001,600).

Key Notes:

Penalties will be tiered
Maximum penalties will apply to breaches of the following provisions
- Good faith
- GSA in writing and retained
- Freedom of association
- Duty to train staff
- Keeping records
- NEW protections against retribution
  - KPI changes
  - Monitoring systems
Mid-tier penalties will apply to breaches of other Code obligations
Penalties appear to be the ‘hook’ to increase the future role of the ACCC with respect to the Code

Recommendation 10: The penalty amount for infringement notices for contraventions of the Code should be 600 penalty units (currently $187,800), an increase from 50 penalty units (currently $15,650) that otherwise applies for industry codes.

Key Notes:

Significant increases for infringement notices from 50 to 600 penalty units
ACCC will be empowered to issue infringement notices for less egregious breaches of the Code
- Infringements carry a lower evidentiary threshold than penalties
- It is implied that the ACCC will conduct compliance checks

Recommendation 11: The ACCC, Code Mediators and the Code Supervisor should engage in education and outreach activities to ensure that suppliers are empowered to take advantage of their rights under the Code

Key Notes:

ACCC to produce guidance material on:
- Dispute resolution options
- Breaches of the Code, including clear examples of retributive conduct
Supermarket obligations to train their workforce on Code will become enforceable
Code Mediators and the Code Supervisor to have a role in educating suppliers about the Code including dispute resolution.
- Unclear the form this will take
- Implication this will be a supportive role and ACCC will do the heavy lifting
Next full review recommended to take place five years after implementation

Contact

For more information contact
Samantha Blake, Deputy CEO, samantha.blake@afgc.org.au or
Rick Umback, Manager, Industry Affairs, rick.umback@afgc.org.au

TANYA BARDEN OAM
CHIEF EXECUTIVE OFFICER