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Presentation

Food and Grocery Conference Australia 2018
Professor Graeme Samuel AC
Melbourne – Grand Hyatt – Savoy Ballroom
23 May 2018. 4:30pm

Thank you Belinda for the very warm welcome to the conference.

It’s an exciting time in the sector. We’ve already heard this morning some great discussions about some of the changes taking place in the food and grocery sector. There are new entrants – and the old ones are also competing hard. It’s clear that it’s going to be exciting few years ahead.

The two largest players – Coles and Woolworths have continued to grow. We’ve seen new entrants emerge in the sector – ALDI now has over 500 stores nationwide. Costco is continuing to expand. And we’re now seeing the possibility of disruption emerging with AmazonFresh set to burst onto the scene. This continues to improve the competitive landscape for the grocery sector as it strives to find new ways to meet the needs of consumers.

More players entering the market can open new doors for Australian suppliers to get their ideas and products to consumers. But these opportunities also come with perils, as the major retailers will inevitably call on their suppliers to do more to keep prices down.

In the near future we’re likely to see retailers place greater pressure on suppliers – which can cause tension and conflict between important partners in the industry.

Hard bargaining between retailers and suppliers can deliver the best outcomes for consumers. However, when retailers cross the line and start bullying to unfairly extract profits or lump suppliers with all of the risks but none of the rewards – it can lead to a toxic environment.

This slowly spreads across our grocery sector ecosystem and can eventually poison consumers by way of less choice, innovation, quality and value on the shelves.

In 2015 the industry listened to community concerns and recognised it needed to change in order to be sustainable. Coles, Woolworths and the AFGC came together to develop the Food and Grocery Code of Conduct. The Australian Government later prescribed the Code into law.

The Code sets out the framework for strengthening the retailer-supplier relationship – it aims to increase transparency in commercial dealings, set minimum standards of business practice and provide fair dispute resolution procedures.

The Government welcomed this industry-led approach and agreed to give it a chance to work. The Code is signed by Coles, Woolworths, ALDI and About Life and has been in force for the past three years.

In March I was appointed to undertake an independent review of the Code. This is a legislated review into the Code’s effectiveness after its introduction in 2015. Today I’m here to discuss my early findings from my Review of the Food and Grocery Code of Conduct.

The Review has an ambitious timeline – with just six months from 2 March to provide a report and my recommendations to the Government.

The Team has already completed our initial issues phase of consultation, having spoken to or received written submissions from over 30 industry stakeholders including: retailers; suppliers; representative bodies and industry experts. We’ve been struck by the willingness of people to give us their time out of their busy day to connect with the team and tell us about their experiences. If I didn’t express it enough at the time – thank you again for your generosity.

From here, we’re going to release the draft report in the next few weeks and then we’ll begin another set of discussions on the draft recommendations. We will then look to finalise the report by early September.

I consider the Code an important document – at face value it sets out the way retailers should treat their suppliers in their dealings. But it’s more than that – one of the key elements from the Review is its positive impact on cultural change within the two largest retailers – Coles and Woolworths. While I am not going to pretend that everything is now perfect – I’ve been encouraged by the attitude towards the Code and the improvement in relationships between retailers and suppliers. Things are better than they were three years ago. To that end – is the Code working – should it exist? I would have to answer yes at this stage.

But we’ve also found that more needs to be done. The Code should exist, given the nature of the industry. I recognise that with the two largest retailers still holding a significant portion of market share, many suppliers have limited alternatives. This naturally results in an imbalance of power in favour of the retailer and we are well aware of past examples when the major players have overstepped the line.

The Review has raised a number of issues that demonstrate there are still improvements to be made. And it’s important that industry sets the boundaries of the relationship between retailers and suppliers when faced with such competitive forces.

The signatories to the Code should be commended for promoting stronger retailer-supplier relations, which is being driven from the very top levels. They have backed up their commitment by implementing important procedural changes to improve training, monitoring and compliance with the Code.

These retailers have recognised that doing the right thing by their suppliers is doing the right thing by their customers, and this shows in their bottom line.

But like in all large organisations, it seems that not all of buyers have received the memo.

During our consultations, the team and I have heard some moving stories about inappropriate behaviour at the buying level. In particular, some smaller suppliers and family-owned businesses were so fearful of losing their contracts that they felt compelled to agree to terms that make no business sense.

With the fierce wave of competition incoming, it is important that we ensure our regulatory foundations are solid to avoid any slide back to the bad habits of the past.

The Code has helped address a range of tough issues that the sector has previously grappled with. But we need to move forward to build on this momentum and goodwill in the sector. This starts with my first proposed change to the Code.

An enhanced good faith provision

I will be recommending that the Code be amended to enhance the provision on good faith.

The principles of good faith and fair dealings lie at the very heart of the retailer-supplier relationship and this should be the primary provision that underpins the Code.

The intention is to move the sector beyond solely focusing on the narrow prescriptive requirements of the Code and instead to refocus the industry’s efforts towards achieving the spirit of the Code.

This provision may take its design from the unconscionable conduct provision in the Competition and Consumer Act – to provide a list of factors to help guide whether dealings with suppliers meet proper commercial standards.

The question of fairness can’t be considered in isolation, it needs to consider all the relevant circumstances of the suppliers – including for example the supplier’s size, nature of their business and production pipeline.

For example, a retailer can give a supplier a month’s notice they are cancelling an order and tick all of the boxes in the Code.

But the backstory may be that the supplier has scrambled to pay for an overseas shipment to meet the retailer’s order and a change at the last minute will spell disaster for them. Clearly, that’s not fair for the supplier.

The new good faith provision will allow the question of fairness to be considered in the context of the full story.

Suppliers shouldn’t have to operate on the whim of the retailer. What chance do our small business suppliers have of competing on the global stage if they don’t have the confidence at home to invest back in their business and continue to innovate?

The advantage of making good faith a primary provision of the Code is that it will also become a lens through which all of the Code’s other provisions are to be interpreted.

A provision like this fosters a collaborative approach and goes towards supporting a change in business culture.

Dispute resolution / Adjudicator model

For this industry mindset to take hold we need the retailers to give their suppliers assurances that their voices will be heard.

Although, the Code provides a dispute resolution framework, including avenues to engage in mediation or arbitration, it seems there is little (or no) take up. The threat of retribution for dissenting suppliers is a real and pressing fear in this industry.

We have identified the need for an approachable adjudicator with the power to make binding decisions to resolve complaints. I note that this will also require governance and oversight arrangements that instil confidence in suppliers to come forward with issues – but I’ll get to that point in a bit.

I’ve been impressed with the way some disputes are handled within the industry. Coles have done a great job appointing Jeff Kennett to deal with disputes between them and suppliers.

It’s a difficult space for retailers and suppliers to be in. Inevitably there will be some conflict, particularly in regards to perceptions of independence. But it needs to be handled in a professional manner with no repercussions. The Kennett model goes some way to address this imbalance. I’ve heard first hand of how some disputes are managed and I’m encouraged to hear that Jeff is able to follow up with those aggrieved suppliers, to ensure there are no repercussions from making a complaint.

At this stage I am inclined to see this model be put in place by all Code signatories – that is to be clear – elevating the Code Compliance Manager to be a Kennett in each retailer. There should be an arm’s length dispute resolution mechanism for suppliers that ensures grievances are heard and most importantly, compensation is paid to those who deserve it.

I feel that building upon the current Code Compliance Manager position to become an independent adjudicator will have a better, more relevant role for suppliers. A real fair dinkum adjudicator would:

  • Be independent and objective;
  • Employed for a fixed term of office;
  • Empowered to obtain information needed to investigate complaints;
  • Be able to award compensation and changes to contracts – with these decisions binding on the retailer or wholesaler;
  • Have buy-in from executive-level management and this be communicated to suppliers;
  • Be able to monitor and deal with any retribution; and
  • Be open and transparent – require them to produce a public annual report on a summary of cases and undertake an independent survey of supplier attitudes

I might note that although there may some confusion with the titles and nomenclature, this is the model that has been adopted in the United Kingdom. In fact the ‘Adjudicator’ there carried out functions more akin to those the responsibility of our ACCC here, although I will be suggesting some changes to the ACCC’s functions to become more aligned with the current practical operation of the UK Adjudicator. And the Code Compliance Officers under the UK Code are akin to what I am contemplating recommending for adoption here as Adjudicators. But my recommendations will impose stringent operational principles on Adjudicators, with a failure to adhere to these principles constituting a breach of the Code.

I know that this won’t be the silver bullet – but it’s better than a mandatory code or a Government bureaucracy that would have uncertain results. Further, this is building upon a lot of practices already adopted by the major retailers. We’d enshrine these principles of the adjudicator in the Code – to ensure that it happens and it is taken seriously.

While the Adjudicator would be employed by the retail or wholesale company their activity would, through annual reports to the ACCC, be would be made available to the public and monitored by the ACCC. Annual public reporting would provide an industry scorecard of the type of behaviour that persists in the industry. Further, the ACCC could then call for submissions on the adjudicators’ reports to test whether their audits are hitting the mark and they could get a better sense of what is happening on the ground.

If the adjudicator doesn’t perform as they should under the Code, this would be a breach of the Code and the ACCC could step in and order the removal of the adjudicator in extreme examples.

As I’ve mentioned , this would also see a change in role and oversight by the ACCC. Their enforcement role would remain – but their role would also be to educate, inform and help change the culture of these organisations.

They could have a great role in bringing all the adjudicators together for best practice discussions. We’d like to see a better relationship between suppliers, retailers and the regulator.

I reiterate that this recommendation is designed to build on the cultural changes that are already taking place in retailers and wholesalers. By codifying an adjudicator model and building in the right governance arrangements and incentives, we can develop a trusted avenue for suppliers to achieve effective dispute resolution going forward – regardless of who is at the top.

I have received a few calls for penalties to be included in the Code. One of the most annoying facets of fines is that they do not remedy the party affected by bad behaviour. I don’t want to increase the government coffers – I want to ensure that suppliers who have a genuine case can get compensation from retailers that do the wrong thing.

The review is going to look seriously at how this can be implemented and at least cost to those within the Code.

I want to consult on some options and work closely with retailers, wholesalers and suppliers when the draft report is released in June.

This is a good opportunity for the industry to show best practice. Because otherwise it will be left in the purview of the Government to establish an independent adjudicator office and to be frank, we don’t think that an additional bureaucratic Government body is the best outcome. If the ACCC can step up to a more active role in ensuring that retailer/supplier disputes are being handled appropriately by Adjudicators, I – am fully confident that the industry can solve this issue itself.

Coverage

In terms of industry participants, coverage needs to include all the main players in the industry.

Metcash is the obvious current player which is not in the Code, as the largest and most prominent Australia-wide wholesaler in the market. In many respects they operate akin to the major retailers when dealing with suppliers, as a key access point to market.

Although they have indicated their willingness to join, I think it is important that they do sign up to the Code – to the extent their operations work with suppliers.

I might note that other major industry participants, including new entrants should also consider it appropriate that they sign up to the Code – in fairness and to avoid the necessity of a mandatory Code, which may not need to be all embracing of the whole industry, but be targeted to the recalcitrants who do not see the wisdom of voluntary adoption

I have also noted that in the case of wholesalers, such as Metcash, they have a dual role. They are powerful customers of suppliers – that is where the Code is relevant to their operations, albeit with some modification to remove the application of some provisions which apply specifically to retailers.

But they are also powerful suppliers to generally small retailers who have little alternatives to obtain supply – indeed in many cases Metcash is the sole source of supply. While Metcash can offer many benefits to their retailer customers, there is inevitability that a monopolist might exert its market power, in much the same way as was alleged against Woolworths and Coles leading to the Code’s implementation three years ago.

So do we need a special Code to deal with the relationship between a wholesaler and its retailer customers?

My inclination is to resist calls for such a Code. There is the Small Business Ombudsman with significant influence. But I also note that the Competition and Consumer Act already has several mechanisms to assist small and medium businesses in dealing with powerful larger businesses, including unconscionable conduct legislation, unfair contract terms regulation, the so called misuse of market power provision and most importantly the collective bargaining processes available to small business. I would encourage retailers concerned with their dealings with monopoly suppliers to explore these provisions, particularly those facilitating collective bargaining.

The independent retail sector has recently been doing some of its own soul-searching as it re-examines its traditional business model. One of the areas in its sights is better collaboration within the supply chain, potentially opening new avenues of supply. Competition can be a wonderful discipline to bring about behaviour between business and its customers on a more acceptable basis.

I believe that Metcash signing up to this Code will help in efforts to rebuild trust, cooperation and transparency across the independent grocery retail sector. We have seen that the Code changes the culture of businesses that adopt it.

As I have indicated, the alternative is to proceed down the mandatory code route – indeed it might involve a targeted mandatory Code directed solely at recalcitrant industry operators. I don’t think more Government regulation in this sector is in anyone’s interest.

A mandatory code could also involve greater compliance costs – it’s just not something that will be positive for the industry – signatories already spend considerable resources on compliance with the current code – we don’t want to increase this burden with a mandatory one.

To that end Metcash has told me they are a willing participant and we’re going to work with them to ensure that they do sign up. I think it will be a positive for Metcash and their suppliers. They have a terrific company and I think they’ll be a part of the Code sooner rather than later.

Loopholes

Overall the Code is working well, but there are some instances where the provisions aren’t achieving the spirit of the Code. It’s inevitable that in a Code that can’t capture everything some things fall through the cracks. I am somewhat reluctant to specify every instance and be more prescriptive in how businesses should operate.

I feel that maybe the best approach is to look to use the expanded ‘good faith’ provisions in the Code I have referred to earlier – with a view to encouraging good faith and common sense to become the lens through which all parties should use to interpret the code. We need to define what ‘good faith’ is beyond the legal definition and show suppliers that if ‘good faith’ doesn’t occur – you will have an avenue of complaint and redress to your retailer, particularly through the independent Adjudicator concept I have discussed earlier.

That said, there is a need to change some provisions of the Code. In particular, I’ll be looking closely at the delisting requirements to ensure that suppliers are being delisted for genuine commercial reasons and not as punishment for making a complaint or driving a hard bargain.

Some of these are a no brainer – contract variations that have retrospective effect have been an endangered species in this business – but it’s time to get rid of it completely. We’ll work through these with all parties to ensure that we get a fair deal that sets some clear expectations.

Price rises

I wanted to also discuss the current nature of price rises within the industry. It has been a common theme across almost all consultation meetings and it sounds like absolute nonsense. This current process whereby as a supplier to a major retailer – you need to justify your price rise – in some instances partaking in a laborious exercise of providing all of your information before a price rise could be considered.

I don’t know why suppliers would participate in this process. Suppliers should only need to justify their price to consumers, not the retailers.

I was shocked to hear that this exercise can go so far as requiring a supplier to list the increase in costs of all the ingredients that go into their product!

It is one thing to act in the best interests of the consumers by understanding the reasons behind a price rise, but it is quite another to mandate that suppliers must share trade secrets just to start a conversation about price!

This is not to mention the competition and intellectual property concerns that can arise when a retailer happens to also be offering a competing home brand product.

Frankly, I’ve not seen much like it before and I’m struggling to think of another sector where it occurs. Think about it – in nearly any other industry the supplier of the product sets their wholesale price – taking account of their costs and margin. They then provide the product to a retailer who sets their retail margin. And away they go.

Competition can occur on both wholesale and retail margins – but often it’s the retail margin that gets squeezed. I’ve not seen too many instances where it’s only the wholesale margin that is squeezed. While at face value this is good for the consumer – in the long run I worry that we won’t have many suppliers left in an industry that competes predominately at the wholesale level.

I am not sure whether it is for the Code to solve this issue – maybe it’s related to the vertical integration of some retailers. Maybe it’s something that the ACCC will need to take a further look at. I think that the consumers would understand that some products do need to go up in price eventually.

My concern is that retailers may knock back a price rise from suppliers, but may be quite comfortable with increasing the retail price without passing anything back. Shoppers would be right to question the fairness behind something like that.

Conclusion: When I came into the role of reviewing the Code I was faced with a bit of a daunting history – including ACCC enforcement action and two dominant players who had a poor history of dealing with their suppliers.

Today I think that industry has made positive steps. To say it is only a direct relation to the Code would probably be an overstatement. But the Code has had a positive impact for change. Brad Banducci and John Durkan have backed up their positive comments in relation to the Code with real action, though there is more that can be achieved. I call upon them to again lend their support.

This is an opportunity to build on the current momentum, to continue to foster a change in business culture across the sector, and to strengthen the safeguards for suppliers ahead of fierce competition on the horizon.

I look forward to your reactions to some of the issues I’ve outlined and work together to ensure that this industry continues to be the great Australian success story I believe it is.

Thank you everyone for listening. I am more than happy to take some questions – or please feel free to touch base with me or the review team to discuss any of the issues related to the Code.

We’re more than happy to continue to take submissions as needed throughout the review process and talk to anyone who wants to raise issues.

Contact details are on the Review website, but please feel free to chat to members of the Review team are here today and tomorrow. You can also get in contact through Tanya and the AFGC team.