Grocery Retailers Agree to Self-Regulation

May 31, 2015 / Corporate & Commercial

The Food and Grocery Code of Conduct

In 2013 the Australian Food and Grocery Council (AFGC) and its members commenced engaging in discussions with Coles and Woolworths to improve the standards of business conduct in the food and grocery sector and in particular in the retail environment where the balance of power was heavily weighted towards the Retailer.

The Food and Grocery Code of Conduct (“the Code”) was in response to concerns raised in public debate in recent years.

The explanatory memorandum to the Code indicates that the purpose is:

• To help to regulate standards of business conduct in the grocery supply chain and to build and sustain trust and cooperation throughout that chain;
• To ensure transparency and certainty in commercial transactions in the grocery supply chain and to minimise disputes arising from a lack of certainty in respect to the commercial terms agreed between parties;
• To provide an effective fair and equitable dispute resolution process for raising and investigating complaints and resolving disputes arising between Retailers or Wholesalers and Suppliers; and
• To promote and support good faith in commercial dealings between Retailers, Wholesalers and Suppliers.

The Code is a voluntary Code which was submitted to both the lower and upper houses for approval in March 2015.  It is expected that the Code will pass into law in May 2015.  By November 2015 Retailers must have offered all Suppliers a right to review and alter their Grocery Supply Agreements (GSA) to comply with the Code.  By May 2016 all Code compliance Supply Agreements are to have been agreed and signed off by both parties.

Coles and Woolworths have signed the draft Code and have indicated that they will re-sign the Code when it is passed by Parliament.

The Code includes provisions setting out certain standards of conduct that cover the life cycle of the relationship between Retailers or Wholesalers and Suppliers.  It seeks to address the potential imbalance between Retailers and Suppliers with respect to the allocation of risks.  It also recognises Suppliers’ need for certainty in order to plan appropriately for their business, invest, innovate and expand capacity or develop new product lines.

The Code is based on the UK experience which created a similar Code to govern the Retailer Supplier relationship. However, unlike Australia the UK Code is mandatory.

The Code covers Retailers, which means those corporations that carry on supermarket business in Australia for the retail supply of groceries or carry on a business of purchasing groceries from a Supplier for the purpose of resale to persons carrying on a supermarket business in Australia for the retail supply of groceries.  It does not cover Coles or Woolworths liquor, Coles or Woolworths petrol convenience stores, Wesfarmers or Woolworths other stores.

It will be mandatory for Retailers who have signed up to the Code to enter into GSAs with each of their Suppliers.  This is designed to create visibility and clarity around the trading relationship.  This will become the most important trading document between the parties.  The GSA cannot be unilaterally changed by the Retailer and it will be a breach of the Code if the Retailer conducts business with the Supplier without a GSA in place.

The GSA will cover things such as:

• Terms of Agreement;
• Quality Standards;
• Delivery Criteria;
• Payment Terms;
• Categories of Products;
• Promotional Terms;
• Wastage;
• Ordering;
• General Warranties;
• Private Labels;
• Criteria for Termination;
• Date/Systems Access;
• Merchandising Support;
• Provision of Data Requirements and Confidential Information; and
• Price Increases.

There are some basic behaviours that the Code seeks to enforce in paragraph 28 of the Code, namely an obligation to deal lawfully and in good faith.  This clause is key to setting the tone of the Code.  There are also obligations of reasonableness and timeliness enacted into the Code dealing with a number of facets of the Retailer Supplier relationship.

The Code deals with a number of specific areas as follows:

• Supplier and Retailer payments;
• Waste and Shrinkage;
• Listing and Delisting;
• Shelf Space and Location;
• Promotions;
• Other Payments;
• Product and Supply Chain Issues; and
• Intellectual Property and Confidential Information.

In relation to each of these areas the Code sets out what is acceptable behaviour and what is unacceptable behaviour.

There are a number of key changes throughout the areas listed above which will change the nature of the relationship as compared to the present position.  Those changes are:

• A Retailer may not deduct payments from a Supplier’s invoices without explicit agreement from the Supplier.
• Retailers may not make unsubstantiated claims against a Supplier and demand payment.
• Retailers may not withhold legitimate payments due to a Supplier.
• Retailers may not challenge historical payments going back further than 2 financial years excluding the current year.
• The Supplier cannot be required to pay for any damage caused by the Retailer unless the damage is due to the Supplier’s negligence.
• Retailers will be required to publish their Range Criteria which should set out the hurdle rates and their selection criteria and standards.
• Suppliers will have the right to have any decisions made through a range review process reviewed by a senior buyer and request the basis for the decisions.
• A new line fee can only be levied if it reflects a reasonable estimate by the Retailer of the costs and risks to the Retailer in stocking, displaying or listing the grocery products.
• There need to be legitimate commercial reasons for a product delist.
• A Retailer must publish the Ranging and Shelf Allocation Principles and be seen to be acting in accordance with them.
• A Retailer must apply the Ranging and Shelf Allocation Principles fairly and equitably to all brands including private label.
• There are restrictions around rejection of products for quality.
• The Retailer must not directly or indirectly require a Supplier to make material changes to the supply chain for the duration of the GSA.
• The Retailer is contractually obligated not to share confidential information beyond the internal audience that has a ‘need to know’.
• Retailers need to identify what their internal procedures are for protecting confidentiality.

The Code also sets out a complaint resolution process which is firstly a formal written letter to the buyer outlining the Code compliance issue.  Secondly, a formal written summary of the issue to the senior buyer.  Thirdly, a formal written request for the issue to be reviewed by the Retailer’s independent code of compliance officer and fourthly, a complaint to the ACCC.

The Retailer must consider all complaints as long as they are submitted in writing with the appropriate level of detail and they must make all reasonable efforts to investigate the complaint within 20 business days.  On completion of the investigation the Retailer (Code Compliance Manager) has 5 days to provide the Supplier with a summary of the investigation and the proposed actions.  The Retailer has obligations to keep records for a minimum of 6 years and to report to the ACCC every 6 months in relation to the complaints received and what action has been taken to remedy the complaints.

The Code will set a new standard for relationships between Retailers and Suppliers and will be beneficial to harmonising the industry.

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This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.