The food and grocery code of conduct should be made mandatory to help rectify the heavy imbalance between suppliers and supermarkets, an inquiry by former Labor minister Craig Emerson has recommended.

Emerson says in his interim report, released Monday, that the mandatory code should apply to all supermarkets with annual revenues of more than $5 billion (indexed for inflation). This would cover Coles, Woolworths and ALDI, and wholesaler Metcash.

As well, the code “should be strengthened to better protect suppliers, with new protections against retribution, since suppliers’ fear of retribution compromises the code’s effectiveness,” the report says.

It says while many stakeholders said the voluntary code, introduced in 2015, had improved the supermarkets’ behaviour, the inquiry heard “many examples of opportunistic behaviours persisting”.

The voluntary code doesn’t contain penalties. Although it provides for compensation for suppliers (up to $5 million) if a code arbiter finds in the supplier’s favour, no compensation has been awarded. Since the beginning of the dispute-resolution provisions in 2021, only six disputes have been lodged with code arbiters.

The voluntary code applies only to supermarkets that elect to be bound by it. The inquiry says for the code to be effective it needs “to capture as much adverse conduct as possible, be subject to the credible threat of effective enforcement and not be undermined by the threat of signatories walking away from their commitments”. Only a mandatory code could achieve this, it says.

The report makes a number of firm recommendations, that won’t change, and others on the detail of which it will consult with stakeholders before the final report goes to the government mid-year.

To enforce the mandatory code the Australian Competition and Consumer Commission would be able to seek penalties of up to $10 million, 10% of a supermarket’s annual turnover or three times the benefit it gained from the breach – whichever was the greatest.

But Emerson – who served as competition minister in the former Labor government – says relying on legal proceedings alone wouldn’t be effective, and he proposes “a low-cost alternative” as well.

This would replicate processes for independent medication and arbitration operating in other industries, while also allowing for the way complaints are handled under the present voluntary code.

Supermarkets would be strongly encouraged to pay compensation where that was recommended, which could be capped at $5 million.

Among the firm recommendations is that the code should have more emphasis on addressing the fear of retribution. Also, supermarkets “should ensure that any incentive schemes and payments that apply to their buying teams and category managers are consistent with the purpose of the code”.

The draft recommendations on which the inquiry will consult are that

the mandatory code should include informal, confidential and low-cost processes for resolving disputes, providing options for independent mediation and arbitration – various suggestions are made on how this could be done

• supermarkets are encouraged to commit to pay compensation of up to $5 million to resolve disputes, where that is recommended
• specific obligations under the code should set minimum standards that cannot be contracted out of in supply agreements
• the government should consider increasing infringement notice amounts for the code.

The inquiry rejects the recommendation from former ACCC head Allan Fels’ inquiry into price gouging for a power to force divestiture to address market power issues.

Divestiture could result in greater market concentration, or other problems, the Emerson report says. “This review’s recommendations to make the code mandatory, with heavy penalties for major breaches will, alongside effective enforcement of the existing competition laws, constitute a far more credible deterrent to anti-competitive behaviour than forced divestiture laws.”

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