Supermarkets agree to submit to supplier code but defend home brands

Tuesday, 26 October 2021

Home brand products are one of the touchy subjects in a prospective code of conduct for supermarkets.

Countdown and Foodstuffs say a code of conduct for the groceries’ industry shouldn’t limit their ability to offer home-brand products, or allow suppliers to negotiate collectively as if they were in a union.

The Commerce Commission spent the third day of its market-study conference into the $22 billion industry nutting out how to design a mandatory code setting out how the major supermarkets should treat suppliers.

The supermarket chains have agreed to support a code based on one in Australia, under which major retailers and wholesalers “volunteered” to abide by a scheme overseen by a government-appointer reviewer that sets rules and provides for the mandatory arbitration of disputes.

But Food and Grocery Council chief executive Katherine Rich suggested the commission could adopt elements of a more prescriptive UK regime under which a government-appointer adjudicator has the power both to arbitrate disputes and fine supermarkets up to 1 per cent of their annual turnover.

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If the latter penalties were applied in New Zealand, Countdown and New World and Pak ‘n Save franchise owner Foodstuffs could be fined the best part of $100 million for breaches of a new code.

Appearing by video link from the UK, former UK supermarket ombudsman Christine Tacon told the commission its regime banned large retailers delaying payments to suppliers, unilaterally changing agreements, ‘delisting’ suppliers without reasonable notice, or normally charging for shelf space.

Commerce Commission chairwoman Anna Rawlings presents the commission's draft report into the grocery sector in July.

“Suppliers told me right to the end of my time as the adjudicator that retailers were still hard bargainers, but suppliers knew where they stood,” she said.

During her seven years in office, groceries prices fell 8 per cent, choice increased markedly “driven by online businesses having greater ranges and a focus by many retailers on innovation”, Tacon said.

But former Australian Competition and Consumer Commission chairman Graeme Samuel told the Commerce Commission that the Australian system had advantages, as arbitration was a good way of achieving cultural change.

“My view was that ‘enforcement’ was a second-best way of dealing with issues between suppliers, retailers and wholesalers.”

Rich said that over the past 20 years there had been a “methodical shift of costs and business risk from retailer to supplier, and of profit margins from supplier to retailer”.

“You have heard many marketing buzzwords saying that supermarkets are customer driven and customer focused, but like any businesses, they are profit-maximising entities,” she told the commission.

“As such, and unconstrained by effective competition, they regularly make decisions to maximise profits which seem against the interests of consumers in terms of choice, availability of lower-priced options, and access to innovation,” she said.

In July, Rich said one New World store owner had said their strategy was to “break people”, in reference to their dealings with suppliers.

Countdown strategy director Josh Gluckman said it supported a mandatory code overseen by a grocery ombudsman, but not a right for suppliers to collectively negotiate with supermarkets.

The latter might seem attractive in principle, but would have a number of issues in practice, he said.

Although 900 of Countdown’s 1400 suppliers were small firms and it had increased its range over the past 10 years, some of the suppliers it dealt with were large multinationals such as “Coke” and Unilever which appeared to have larger profit margins than Countdown, Gluckman said.

“In those instances, it's certainly in New Zealand's interests and in our customers’ interests for us to be able to negotiate firmly but fairly, which we do,” he said.

Rich said the industry code should impose “safeguards” on home brands or private labels, which she said had been the major winner as Foodstuffs North Island rationalised categories and “reduces choice on the shelf for consumers”.

But Foodstuffs NZ merchandising manager David Stewart said home brand products were highly valued, in particular by its “budget conscious customers”, and were a significant feature of competitive grocery markets around the world.

They were often made by local firms, giving them “valuable economies of scale”, he said.

Gluckman said Countdown didn’t think “some of the posture being adopted towards private labels” by some submitters was in the interests of Kiwis “and we certainly don't think it's in the interest of lower prices, if that's something that we're looking to see achieved”.

Both supermarkets and suppliers have been accused of seeking to incorporate conditions in their agreements that either restrict suppliers from selling to other retailers or that guarantee suppliers a set proportion of a supermarket’s range.

Rich said she had only heard of the former type of arrangement.

“Contracts tend to get written so they are 100 per cent in favour of the retailer, not the supplier,” she said.

Gluckman said The Warehouse, the Chemist Warehouse, Costco and HelloFresh were among organisations that should also be covered by the code.

But Rich said it was only the supermarkets that had the market power that required it.

“Let’s just start with the duopoly and of course if other major supermarket groups enter, they should be covered by it too.”

The Commerce Commission has committed to complete its market study of the industry by March 8.