On 8 March 2022, the Commerce Commission published its final report on its Grocery Market Study. One of the key recommendations was for a mandatory Code of Conduct for supermarkets. Here is what it said:
GROCERY CODE OF CONDUCT
Recommendation 6: Introduce a mandatory grocery code of conduct to govern relationships between the major grocery retailers and their suppliers
Recommend that a mandatory code of conduct be introduced for grocery retailers and their suppliers contained in either primary or secondary legislation of some form.
Major grocery retailers have the ability to use their strong negotiating position to:
- transfer costs and risks to suppliers, despite retailers being better placed to manage them
- reduce transparency and certainty over terms of supply
- limit suppliers’ ability or incentive to provide favourable supply terms to other grocery retailers.
In turn this lessens suppliers’ incentive and ability to innovate and invest in ways that ultimately harm consumers and leads to reduced production, reduced capacity, reduced product quality and fewer new product offerings.
A code of conduct will provide suppliers with greater certainty that they will not be subject to these behaviours. Other benefits of a code – more transparency and predictability, and better allocation of risk (with potential benefits of suppliers to innovate and deliver high-quality goods), outweigh any risk of price increases or other poor outcomes for consumers.
Development of a code involves further consultation with Māori suppliers to understand whether they face different issues or have different aspirations to be reflected in a code.
A grocery code of conduct should be based on the provisions in the Australian Food and Grocery Code
Where there is a choice of approach, the Australian approach should be preferred unless there is a good reason not to.
Recommendation 6A: Supply relationships should be subject to an overarching principle of good faith
- Code should include an overarching principles-based behavioural obligation to act in good faith, in line with the Australian Food and Grocery Code.
- Good faith is not defined in the Australian Code. However, a number of factors that may be taken into account when deciding whether or not a retailer or wholesaler has acted in good faith when dealing with a supplier are listed.
- Distinction between an obligation to act in good faith, and a principle of fair dealing, as explained in the UK Groceries Supply Code of Practice may not be necessary
- good faith is central to the UK Code’s concept of fair dealing, and the Australian Code has expanded its concept of good faith to an extent where they substantially overlap
- if there is an additional obligation beyond the concept of good faith contained in the Australian code, then this should be by further clarifying or specifying the expectations of parties acting in good faith to provide additional certainty, and assist in speedy resolution of disputes, when compared with a more broadly drafted obligation.
Recommendation 6B: A grocery code of conduct should include provisions to improve the transparency of supply agreements
A code should set requirements aimed at improving the up-front transparency of the terms of supply.
To ensure parties are clear about their rights and obligations, a code should include a requirement that all agreements between major grocery retailers and suppliers, including any variations, must be:
- recorded in writing;
- written in clear and concise language;
- kept by the retailer for the duration of the agreement, and a period afterwards; and
- provided to the supplier.
To ensure that areas of common dispute, or areas that may significantly affect the rights and obligations of the parties, are subject to agreement in advance, some specified matters should be required to be covered in all supply agreements:
- any quantity standards (such as minimum supply volumes);
- any quality standards;
- any delivery requirements set by the retailer;
- when groceries may be rejected;
- the maximum period for payment; and
- circumstances when payment may be withheld, or deductions made.
Recommendation 6C: A grocery code of conduct should prohibit or limit a range of conduct
A code of conduct should identify any specific behaviours that should not occur or should occur only in defined circumstances. This could include limits on matters including, but not necessarily limited to:
- Unilateral variations of the terms of supply, including the imposition of additional costs or discounts – if permitted at all, they should only occur where the ability to do so is provided for in the agreement, should require reasonable notice, and should be reasonable in the circumstances having regard to the benefits, costs and risks to the supplier and retailer.
- Retrospective variations of the terms of supply, including requests for additional payments outside of the original terms – unlikely to be justifiable, and consideration should be given to their prohibition.
- Payments for the major grocery retailers’ business activities or costs, such as promotional funding or merchandising – such payments should only be permitted when they are reasonable in the circumstances, having regard to the benefits and costs to suppliers and retailers. Guidance will be required as to when such payments are reasonable.
- Payments for shrinkage or wastage – payments by a supplier to a retailer for shrinkage should be prohibited. Payments for wastage should only be permitted in circumstances where the supplier bears responsibility for the loss.
- Discrimination on ranging and shelf allocation. Retailers should apply the same product ranging and shelf-space allocation principles to suppliers’ products and their own private label products.
- The circumstances in which a major grocery retailer can delist a supplier’s products. A code of conduct should address both the circumstances in which this may occur, and the process that should be followed. A code should incorporate protections for the confidential information and intellectual property of suppliers, to address supplier concerns about their information and intellectual property being shared with the major grocery retailers’ private label divisions.
Separate provisions relating to fresh produce could be included in a code
The perishable nature of fresh produce creates some specific problems for fresh produce suppliers. In particular:
- different terms may be required, or different industry practices may need to be accommodated
- suppliers of fresh produce are particularly vulnerable to last-minute renegotiation
- rapid dispute resolution will be essential.
A code of conduct could include provisions specific to fresh produce, in areas where this would be desirable. Consideration should be given to the terms of the Australian Horticulture Code to see whether matters relevant to fresh produce should be included in any New Zealand grocery code of conduct – some of its principles may be relevant.
Read FGC’s response and the Commerce Commission’s full report and executive summary here