Emerson: Shield SMEs from supermarket “retribution”, encourage $5 million compensation payouts

Small businesses supplying Australia’s major supermarkets should be protected from retribution after raising a dispute, instead of fearing their products will be relegated to the bottom shelf or removed from sale entirely, according to the interim report on the Food and Grocery Code of Conduct.

That is just one of the key recommendations from Dr Craig Emerson, who on Monday released an initial report into the voluntary Food and Grocery Code of Conduct, the opt-in rulebook designed to protect small suppliers dealing with enterprises like Coles, Woolworths, IGA, and Metcash.

In his view, the Code ought to become mandatory for supermarkets commanding $5 billion in annual revenue.

Under that plan, the Australian Competition and Consumer Commission (ACCC) would also be empowered to level penalties of up to $10 million, 10% of a supermarket’s annual turnover, or three times the benefit gained from a breach of competition rules, in cases of significant market abuse.

Penalties of up to 600 penalty units — valued at $187,800 at time of writing — should apply to less serious breaches.

But Emerson also argued reforms should cut in well before the national competition watchdog pursues huge penalties.

Citing submissions to the review, Emerson said many small suppliers are petrified of even alleging improper conduct by supermarket customers in the first place, weakening the Code in its current form.

“With strong market power”, supermarket buyers and category managers can “engage in retribution against a supplier who complains about behaviour such as relegating a supplier’s product to an inferior location, slashing distribution to only a handful of stores or delisting them off the shelves altogether,” Emerson said.

“Whether or not such fears of retribution are justified in every case, the Review has heard compelling evidence that these fears are real for most suppliers, especially smaller suppliers, and act as a powerful deterrent to making formal complaints under the voluntary Code,” the interim report added.

An updated and mandatory Code would prohibit “any conduct that constitutes retribution against a supplier”.

Competition expert backs recommendations

Dr Michael Schaper, former deputy chair of the ACCC, told SmartCompany that fear of retribution “certainly does exist”.

“Through my ten years at the Commission, that was certainly something that was raised time and time again,” he said.

Crucially, the fear of retribution is enough to prevent some small businesses from stepping forward, even if they have no proof their supplier would actually punish them for making a valid complaint under the Code.

“Perception is just as important as the reality,” Schaper said.

“So regulators end up in a bind, because they feel that they can’t act, because they don’t actually have evidence and people willing to testify.”

This has created an “unsatisfactory state of affairs,” he continued.

Schaper — who recently completed a review of the Franchising Code of Conduct for the federal government — welcomed the push to make the Code mandatory, saying it mirrored the strengthening of Australia’s franchising framework since its inception in 1998.

“The recommendation to move to a mandatory framework and regulatory system is a very strong, very positive, and indeed an overdue one,” he said.

Supermarkets encouraged to compensate up to $5 million

For small businesses that do raise their complaints for mediation and independent arbitration under the Code, Emerson said supermarkets should be “encouraged to agree to arrangements” that provide up to $5 million in compensation for alleged mistreatment.

The Code — which currently includes no formal penalties for breaches — already “provides for compensation to suppliers of up to $5 million”.

However, no compensation has ever been awarded since the Code began was introduced in 2015.

Emerson also lit a fire under the key supermarket personnel who tacitly permit the mistreatment of small suppliers.

“If these practices are brought to the attention of top management and the board of directors, they might be shocked that such practices occur in their organisations, or at least say they are shocked,” he said.

“But they shouldn’t be shocked; they will have set in place the incentives that have led to such behaviour.”

The report, which does not support a forced divestiture power, is only the first in a broader process.

Stakeholders are now invited to share their views on the first batch of recommendations.

That final report is expected before June 30 this year.