Suppliers and the Food and Grocery Code of Conduct

Is your grocery-supply agreement compliant?

Last year was a big one for grocery suppliers. Following years of consultation with major food retailers and the Australian Food & Grocery Council, the federal Government formally introduced into parliament the Food and Grocery Code of Conduct.

The code, a voluntary, prescribed one under the Competition and Consumer Act 2010 (CCA), includes some significant and important provisions to ensure key elements of grocery-supply agreements (GSAs) are discussed and agreed upfront.

To whom does the code apply?

The code applies to all grocery retailers and wholesalers that have elected to be bound by it. This includes grocery companies that carry on a supermarket business and those that buy groceries from suppliers to resupply to supermarkets, both of which have given their written notice to the Australian Competition and Consumer Commission (which is responsible for regulating compliance with the code) to indicate their agreement to the code.

Current subscribers to the code include Coles, Woolworths, ALDI and About Life Pty Ltd. Those suppliers that deal with subscribing companies will automatically be covered by it.

In accordance with the code’s requirements, all subscribing retailers and wholesalers had until December 31, 2015 to offer their suppliers the right to review and alter their GSAs. All GSAs must be agreed and signed by both parties by June 2016 and retailers and wholesalers must comply with those GSAs.

Must be covered in a GSA

Retailers and wholesalers must only trade in groceries with suppliers if they enter into a written agreement (ie, a GSA), prior to supply. The GSA must cover (among other matters) the following:

• Any requirements the retailer or wholesaler has in respect of the delivery of the groceries.
  Any circumstances in which the retailer or wholesaler may reject the groceries.
• The period within which the retailer or wholesaler must pay the supplier for the groceries and the circumstances in which any payment, or part payment, may be withheld or delayed.
• If the GSA is intended to operate for a limited time only, the term of the GSA must be specified.
• In clear terms, any quantity and quality requirements relating to the groceries.
• If the GSA provides for termination by one or more parties to it, the circumstances in which a GSA may be terminated. Further, a retailer or wholesaler must not vary a GSA without the consent of the supplier, unless:
• The GSA provides expressly for the retailer or wholesaler to make the variation and sets out clearly the changed circumstances in which the variation can be made.
• If the variation involves a quantitative adjustment to the terms of supply, the GSA sets out the basis or methodology for calculating the adjustment.
• The variation is made in accordance with the agreement.
• The variation is reasonable in the circumstances.
• The supplier is given reasonable notice, in writing, of:

•  – The variation.
•  – The terms of the variation.
•  – The reasons for making the variation.

Conduct of retailers generally

The code also sets out a number of obligations and restrictions on a retailer in respect of its conduct with a supplier. For example:

• Payments to retailers:
  – Shelf allocation – a retailer must not charge a supplier for allocating a specific amount of space on the shelf for its products unless it is part of a promotional campaign. A retailer must also publish its ranging and shelf-allocation principles and act in accordance with those principles at all times.
  – Shrinkage – a retailer must not require a supplier to make payments to the retailer as compensation for shrinkage, eg, theft or loss occurring once a retailer has taken possession of groceries.
  – Other payments – if the retailer requires a supplier to pay for any of the following, the payment must be set out in the GSA and must be reasonable:
  – Payments for wastage.
  – Payments as a condition of being a supplier.
  – Payments for a retailer’s activities (eg, a buyer’s visit to the supplier, artwork or packaging design, consumer or market research or opening or refurbishing a store).
  – Funding for promotions.
  For each of these payments, the code sets out additional criteria that must be met before a retailer can request the payment:
• Payments to suppliers – a retailer must pay a supplier for products delivered and accepted in accordance with the GSA within the time agreed.
• Delisting of products – a retailer must not delist a supplier’s products unless this is in accordance with the terms of the GSA and only for genuine commercial reasons.
• 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 parties’ GSA) and only within 24 hours of the time of delivery of, and prior to, the retailer’s acceptance of the fresh produce.
• Intellectual property – in developing or producing own-brand products, the retailer must not infringe the intellectual-property rights held by a supplier in relation to grocery products, including rights relating to branding, packaging designs or advertising.
• 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).
• Good faith – a retailer must at all times deal with suppliers lawfully and in good faith.

Penalties for contravention

For retailers and wholesalers that subscribe to the code, a breach of the code will amount to a breach of the CCA, which may result in penalties.

What can suppliers do?

Suppliers should check whether their retailer or wholesaler is a subscriber to the code. If so:

• Obtain from them a copy of a GSA (if a GSA has not already been offered).
• Carefully review the GSA to ensure the matters set out in the code are dealt with.