Wed Apr 10

Supermarkets need to change the way they operate in Australia. But how do we get them to do this?

Written by: Carol Richards, Professor, Queensland University of Technology

Australia’s big supermarkets have been put on notice.

A Treasury-commissioned review ^[1] recommends making the existing voluntary food and grocery code of conduct ^[2] mandatory.

The voluntary code sets standards for wholesalers, retailers and suppliers to try and ensure fair negotiations over prices for products. While prescribed under federal legislation, signing up is optional and there are no penalties for breaches.

The review recommends a complaints mechanism, action to deal with retribution against suppliers, obligations for supermarkets to act in good faith and penalties of up to A$10 million for non-compliance.

But will this be enough to change the way supermarkets operate in Australia?

Why we need more action

Government intervention is long overdue. It is well documented that dominance by major players Coles and Woolworths has resulted in unfavourable terms for suppliers ^[3], commercial retribution ^[4], high levels of food waste ^[5] and price gouging ^[6].

There have been other inquiries into Australia’s big supermarkets. But these have not led to effective change, because previous governments have stuck with voluntary forms of regulation.

We should not be surprised voluntary self-regulation has failed. There is little evidence ^[7] this approach is effective, especially without a credible threat of enforcement ^[8].

Do the recommendations go far enough?

This latest review was commissioned by the federal government and led by former Labor trade minister Craig Emerson. This week, the interim report was released, with a final report due at the end of June.

The recommendations are a step in the right direction but will not deal with the central issue of market dominance.

The review has not recommended forced divestiture ^[9] laws, despite the Greens calling for them.

Divestiture is the partial or full disposal of part of a business, not considered central to a company’s core operations, through sale, exchange, closure, or bankruptcy.

However, the interim report’s call for a mandatory code is a positive step, although we need to be careful about how it is implemented.

Making the code mandatory would mean the Australian Competition and Consumer Commission (ACCC) can fine supermarkets for breaches. Giving the commission powers to issue substantial penalties goes some way to responding to criticisms it is toothless ^[11].

But fines might not be enough when supermarkets may be “too big to care ^[12]”. A $10 million ^[13] fine for Coles in 2014 did not appear to result in corporate behaviour change.

The interim report also proposes allowing suppliers to request independent mediation if, for example, they believe they are not receiving fair payment for their goods, and, if agreed by both parties, arbitration.

On paper this recommendation ^[14] seeks to ensure “quick, low-cost dispute-resolution pathways for suppliers”. However, greater clarity is needed on how mediators would be independent.

Fruit picker emptying a bag of oranges into a truck

The mediation process would need to be truly independent to protect suppliers against retribution. Lukas Koch/AAP ^[15]

While the report notes a “list of independent mediators and arbitrators would be maintained by the code supervisor”, elsewhere it is noted mediators “would be engaged by the supermarkets” and an “advantage of these code mediators is they would be very familiar with the supermarkets that engaged them”.

Without having a truly independent process, the fear of retribution will remain a significant weakness of the code.

How do we punish those who don’t comply?

If Australia is going to have a mandatory code, we need think about how less obvious retribution will be handled. This could involve instances where a complaint results in supermarkets avoiding certain suppliers but not stating why.

The code allows for confidential complaints, but how investigations will be able to maintain anonymity is unclear.

Added to this, the notion of “good faith”, which underpins the recommendations in the interim report, is highly subjective, and assumes supermarkets can stop their buying teams from acting against suppliers.

It will also be important to ensure the code is unambiguous, to stop supermarkets from using loopholes to exercise market power in other ways. For example, by buying only part of a previously agreed upon order.

What next?

Government regulation of supermarket power is long overdue, following years assuming markets will self-regulate. These recommendations should be seen as a win in theory, however the ACCC will need proper resourcing to effectively regulate a sector used to a free rein.

It is yet to be seen whether these reforms will mean consumers could ultimately be paying less for their food groceries without driving down prices for growers.

The recommendations at this interim stage focus mainly on supply chains and fairer trading. Market share and the dominance of the two major supermarkets is not being addressed which may ultimately mean business as usual for pricing, for now.

With market concentration and anti-competitive behaviour now being scrutinised, it is likely other sectors will seek similar reforms.