Australia: The new Food and Grocery Industry Code of Conduct - changing the way in which food and grocery suppliers do business with retailers

Last Updated: 5 December 2013
Article by Amy Cowper and Kathryn Edghill

In what the Australian Food and Grocery Council (AFGC) has called an "historic agreement", Australia's two largest grocery retailers and the AFGC have finally reached agreement on the provisions of a new Food and Grocery Industry Code of Conduct (Code). If implemented, and if a retailer subscribes to the Code, it will have significant impact on supply chain relationships, including those businesses that are involved in the manufacture and supply of food and groceries to retailers in Australia, whether they be local suppliers or overseas suppliers.

How the Code will assist Suppliers?

The majority of the obligations imposed by the Code will fall on the retailer, which, given the well documented allegations raised by suppliers of the inappropriate use of market power by retailers should provide more certainty, transparency and fairness for suppliers in their dealings with retailers.

If particular, the Code's stated intention is to:

  • help regulate standards of business conduct in the food and grocery supply chain;
  • provide greater transparency and certainty in commercial transactions in the grocery supply chain;
  • minimise the likelihood for disputes arising from a lack of certainty in respect of the commercial terms agreed between the parties;
  • provide an effective, fair and equitable dispute resolution process for raising and investigating complaints and resolving disputes arising from the commercial dealings between the parties or otherwise under the Code; and
  • assist industry participants in monitoring the operation and efficacy of the Code in an industry-wide roundtable.

What are some of the key requirements under the Code?

Some of the key aspects of the Code include:

  • agreement must be in writing: retailers must only trade in groceries with suppliers if they enter into a written agreement (Grocery Supply Agreement), prior to supply, which must set out (amongst other things):
    • any requirements the retailer has in respect of the delivery of the groceries;
    • circumstances in which the retailer may reject groceries;
    • the quantity and quality requirements relating to the groceries;
    • the circumstances in which it may be terminated (if the Grocery Supply Agreement provides for termination);
    • that the parties must deal with each other lawfully and in good faith;
  • variations: substantive restrictions on retrospective and unilateral variations to Grocery Supply Agreements;
  • shelf allocation: greater transparency on the basis of shelf allocation for branded and private/home label products - suppliers will not be forced to make payments to a retailer in order to secure better positioning on supermarket shelves (save for promotions);
  • de-listing of products: restrictions on de-listing a supplierˇ¦s grocery products unless it is in accordance with the terms of the Grocery Supply Agreement and only for genuine commercial reasons;
  • shrinkage: restrictions on retailers requiring suppliers to make payments to the retailer as compensation for shrinkage, for example theft or loss occurring once retailer has taken possession of groceries (historically, some suppliers have been expected to fund shrinkage and wastage in a retail business even though they have no control over that business);
  • stocking: restrictions on retailers requiring suppliers to make any payment as a condition of stocking or listing that supplier's groceries except in particular instances;
  • product quality and standards: a retailer may only reject fresh produce supplied by a supplier if it fails to meet fresh produce standards and/or quality specifications provided by the retailer to the supplier (or contained in the partiesˇ¦ Grocery Supply Agreement) and only within 24 hours of the time of delivery of and prior to the retailerˇ¦s acceptance of the fresh produce;
  • intellectual property: a recognition of the importance of intellectual property rights and confidentiality in driving innovation and investment in new products, protecting suppliers from their branded groceries being adopted by the supermarkets and used to create their own range;
  • disputes: a low cost and fast track dispute resolution mechanism for retailers and suppliers, including mediation and arbitration; and
  • Code Compliance: a Retailer must appoint a Code Compliance Manager (who must be independent of, and not managed by any member of a buying team in relation to a Retailer).

Who must comply with the Code?

The Code is voluntary, so those retailers that volunteer to participate will be bound by and must abide by the Code and once they "opt-in". It will apply to all new and existing agreements the retailer has with its various suppliers.

When will the Code come into effect?

The Code will commence when it is prescribed as a voluntary industry code by regulation under the Competition and Consumer Act 2010 (Cth) (CCA).

The Australian Government and the Australian Competition and Consumer Commission (ACCC) will first need to further review the Code to ensure that there are not unintended consequences, before putting it out for public consultation which will allow other retailers and suppliers not involved in the process to provide input.

The Code will then undergo a process of a two-stage regulatory impact statement and go through the cabinet process before it can be implemented through regulation.

Once the Code comes into effect, it will apply to all new Grocery Supply Agreements and to all existing agreements, following a 12 month transition period (or 6 months after a retailer agrees to be bound by the Code, whichever is earlier).

What are the penalties for contravention?

For those parties that subscribe to the Code, a breach of the Code will amount to a breach of the CCA, which may result in substantial penalties.

However, it is not intended to exclude any person or the ACCC from enforcing any rights, or seeking any remedies available in respect of the conduct of any retailer bound by the Code, including, but without limitation, those arising under the CCA or any other legislation.

What can suppliers do to get ready?

Once the Code comes into effect, suppliers should check whether their retailers are subscribers to the Code and if so, ensure that both they and their retailers are complying with their obligations under the Code.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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