The end of a Grocery Supply Code grace period, meant to provide a better playing field for grocery suppliers, has seen some suppliers inconvenienced with “dozens and dozens” of individual supply agreements from Foodstuffs South Island.
Instead of receiving a single contract, a supplier told Newsroom they received a stack of agreements that weren’t standardised and contained different terms, including “some nasty barbs”.
This is a change for Foodstuffs South Island, which along with Foodstuffs North Island, by and large, negotiate with suppliers and send an agreement each.
It has about 200 Foodstuffs retailers across the mainland, as well as a Four Square on Stewart Island.
Foodstuffs South Island operates New World, Pak’nSave, Raeward Fresh, On the Spot and Liquorland stores, as well as wholesaler Trents.
The Grocery Supply Code of Conduct grace period ended on March 28. The code was put into effect in September 2023.
The grace period applied to all existing supply contracts, with retailers then required to offer suppliers varied supply agreements that are consistent with the code, including the obligation to deal with grocery suppliers in good faith.
Most breaches of the code of conduct could be punished with the greater of $3m, the value of any commercial gain or 3 percent of revenue.
Interestingly, the merger application Foodstuffs North Island and South Island put to the Commerce Commission in December (a final decision is due May 31) said that the merged entity would be more likely to procure using a single national contract.
This lack of duplication, as well as other factors, was cited as having the potential to provide better value for customers.
Foodstuffs acknowledged the different approaches being taken by the two cooperatives.
“As Foodstuffs South Island stores are each documenting direct arrangements with suppliers, this means some suppliers may have received multiple agreements from different South Island stores if they have a lot of direct arrangements.”
Grocery Commissioner Pierre van Heerden said he was aware some elements of grocery supply agreements were being negotiated at a store-level, and that the Commerce Commission was closely monitoring the effectiveness of how supply agreements were being offered, the nature of the agreements and assessing whether there were any potential compliance matters that may need to be addressed.
Van Heerden encouraged suppliers to seek legal advice on any agreements offered by major supermarkets and approach the commission if they had any concerns about the process in which they are being offered.
Aussie review
Following closely behind the full implementation of New Zealand’s grocery code of conduct, the Australian government released an interim review of its code earlier this week.
Led by former Labor minister Craig Emerson, the Aussie inquiry suggested changes were needed to deal to “a heavy imbalance in market power between suppliers and supermarkets in Australia’s heavily concentrated supermarket industry”.
Emerson found the existing code wasn’t effective, contained no penalties for breaches and allowed supermarkets to opt out of important provisions by overriding them in their grocery supply agreements.
He suggested the Australian Competition and Consumer Commission (equivalent to New Zealand’s Commerce Commission) should be able to seek penalties for major or systemic breaches of up to $10m, 10 percent of a supermarket’s annual turnover, or three times the benefit it gained from the breach.
This is stronger than the New Zealand regulator’s powers, laid out above, by a multitude of three or more.
Another point raised in the Australian inquiry was “compelling evidence” a fear of retribution had led to a lack of disputes being brought by suppliers.
Though it provides for compensation to suppliers of up to $5m, no compensation has ever been awarded.
The lack of disputes brought under the existing Australian code of conduct had been heralded as proof of its success and that it had greatly improved the operating conditions.
Merger
Assessing the Foodstuffs merger mentioned above, last week the Commerce Commission said it was not currently satisfied a merger would not substantially lessen competition.
The commission said the merged entity might be able to extract lower prices and more favourable terms from suppliers.
“This is based on our current view that in the factual, the merged entity may be able to unilaterally extract more favourable terms from suppliers than it would in the counterfactual because of an increase in its bargaining power relative to suppliers. This may cause immediate harm to suppliers regardless of whether the merged entity purchases less product from them. In addition, we are concerned that harm may also arise if suppliers have less ability and incentive to invest and innovate over time because the subsequent imbalance of bargaining power increases risk and reduces their profitability.
“This increase in buyer power may also reduce the ability of suppliers to invest, resulting in effects such as reduced capacity, quality or innovation in the supplier’s market; the merged entity may have greater ability and incentive to increase the penetration of private label products -potentially resulting in some suppliers of branded grocery products getting squeezed out and less choice/range for consumers; and/or some suppliers that are currently only supplying either Foodstuffs North Island or South Island could be forced out of the market if the merged entity elects not to stock their product(s).”
As well as removing a distribution channel for those suppliers, it said this could have an impact on the market more generally if it is not viable for that supplier to supply the market without supplying the merged entity; and that the proposed merger could create coordinated effects by increasing the ability and incentive for the merged entity and Woolworths to coordinate their behaviour to collectively exercise market power in upstream markets.
Supermarket price manipulation by obfuscation ?