Grocery update: AFGC Leaders Forum

Speakers: 
Mr Rod Sims, Chairman
Conference: 
Australian Food & Grocery Council Leaders Forum, Canberra
8 November 2016

Australian Competition and Consumer Commission Chairman Rod Sims provides an update on grocery issues at the Australian Food & Grocery Council Leaders Forum in Canberra. He talks about the Food and Grocery Code of Conduct, misleading health claims, recent work in agriculture and the ACCC's role in assisting with competition issues and free trade agreements.

Transcript: 

Check against delivery

Introduction

It is a pleasure to be back. We talk to the Council about many issues throughout the year and we always welcome the opportunity to speak at this forum.

Our work has a bearing on you as competitors, suppliers, advertisers, manufacturers and exporters. Today, I have four topics of interest:

  • First, the Food and Grocery Code of Conduct and recent concerns
  • Second, what we see as deliberate and cynical advertising by larger businesses making misleading health claims
  • Third, I will update you on all the work we are doing in agriculture, including our market studies, and
  • Finally, I will touch on some of the very important, but less well-known, work we do on free trade agreements. 

The Food and Grocery Code of Conduct and recent concerns

The Food and Grocery Code, as you know, came into effect in March 2015 to help improve the commercial dealings between the supermarkets and suppliers in Australia’s grocery sector.   

The AFGC played a pivotal role in shaping the Code and continues to lead the way during the Code’s implementation through education and training for suppliers.

Enforcing compliance with industry codes, including the Food and Grocery Code, is a priority for the ACCC and we are currently undertaking compliance checks or ‘audits’ on the Code signatories Aldi, Coles and Woolworths.

These audits are timely, given the transitional arrangements for the supermarkets ended on 1 July 2016.

Now all their suppliers have the benefit of the Code’s protections, whether they have signed new Grocery Supply Agreements (GSAs) or not.

As we noted in August, while suppliers can and should take advantage of the benefits of the default provisions, they should also take into account the certainty that negotiating a GSA can bring and using the default provisions as a foundation for those negotiations.

Delisting, profit shortfall payments and extended payment terms

While the issues differ from retailer to retailer, our audits to date have identified some areas of concern which we have recently raised with each of Aldi, Coles and Woolworths.

Under the Code, retailers can only delist a supplier’s product for genuine commercial reasons and must give reasonable written notice, as well as inform the supplier of their right to have decisions reviewed by a senior buyer.

It appears from our audit that the retailers are not always adhering to those requirements:

  • Some delist notices did not give suppliers reasonable notice; the worst examples were delistings that appear to have occurred on the same day as the notice was served. In others, suppliers were faced with the deletion of multiple products but were given less than a month’s notice to deal with stock levels that may have been maintained by the supplier on a national basis.
  • Some delist notices did not include any real reasons for delisting and where reasons were provided, they were typically very general in nature and lacked any details specific to the supplier.  For example, in some instances, retailers largely cited a failure to meet ‘commercial sales or profitability targets’ without providing any real detail.  This must raise doubt as to whether the decision was made for genuine commercial reasons.
  • The supplier’s right to have the delisting decisions reviewed was also often overlooked in notices and basic information about this option, such as the relevant senior buyer’s name and contact details, was consistently missing in delist notices.  

These deficiencies in the standard of conduct by the retailers is disappointing, particularly given the key objective of the Code is to improve transparency and certainty. We are looking at these concerns closely and will be looking to the supermarkets to address them quickly.

I understand the AFGC has heard similar complaints through its supplier surveys which found a lack of specificity of criteria for range reviews and delistings.

These surveys also raised more concerning issues, such as requests for payments to make up shortfalls in supermarket profits and extended payment terms.

We are extremely concerned to see these issues arising again, despite the high profile enforcement action the ACCC has taken against Coles and more recently against Woolworths in relation to its ‘mind the gap’ scheme.

However, AFGC members are not bringing these matters to us despite our call for these complaints to be reported to us.

I encourage suppliers with concerns to come forward and raise them with the ACCC; this can be done confidentially or anonymously, as has been the case in previous investigations.

Positive changes

Overall, however, the ACCC is pleased to see the supermarkets making real and positive changes to their business culture that recognises the important need to treat suppliers fairly and with respect.

They have implemented changes to internal procedures to meet their obligations under the Code, and have generally been responsive to concerns raised by the ACCC.

As I mentioned earlier, the Code has been an industry-led initiative and its success ultimately depends on all sector participants.

I would also add that, in my commercial experience, it pays in the longer term to have respectful relationships with your suppliers. 

Metcash committed in March 2015 to adopt all elements of the Code in its wholesale business for a 12 month period, but that period has now elapsed. The ACCC now encourages Metcash to sign up to the Code as a wholesaler.

The ACCC will certainly continue to monitor compliance with the Code and the Competition and Consumer Act 2010 more broadly to foster a sustainable and competitive grocery sector.

Deliberate and cynical advertising by large businesses around health claims

Another priority area for the ACCC is cracking down on large businesses that make misleading health claims.

Our enforcement action against Nurofen is a prime example. The Federal Court found that Reckitt Benckiser (Australia) Pty Ltd engaged in misleading conduct by representing that its Nurofen Specific Pain products were each formulated to treat a specific type of pain, when the products were identical.

We have concerns about false or misleading advertising and labelling in the food industry for two reasons:

  • consumers need accurate information so they can make well informed choices, and
  • businesses should be able to compete on their merits, not by relying on falsehoods which put other competitors at a disadvantage.

If you are going to put a so-called ‘health halo’ on your product make sure you don’t create an overall impression that is likely to mislead. Claims as to health benefits of food are particularly important triggers for consumers and therefore of ACCC interest. Those directed to choices for children are particularly important and hence some of our recent enforcement activity.

We have dealt with several products during the past year.

In a matter currently before the Federal Court, we are alleging Heinz made false and misleading representations about the nature, characteristics and suitability of Little Kids Shredz products. Our concerns centre on allegations that these products contain more than 60 per cent sugar.

Earlier this year, we issued infringement notices as a result of concerns we had about representations on the packaging of Unilever’s Rainbow Paddle Pops and The Smith’s Snackfood Company’s Sakata Paws Pizza Supreme Rice Snacks.

Logos and words on the packaging of these products represented that they were approved or suitable as healthy options for school canteens. However, on the back of the packaging there was a small font disclaimer stating that the product met the ‘Amber’ criteria of the National Healthy School Canteens Guidelines; this means “select carefully”.

We considered these disclaimers were not sufficiently prominent to correct the ‘healthy option’ representations created by the logos and wording used on the front of the packaging. 

In addition, this time last year, Arnott’s Biscuits Ltd provided a court enforceable undertaking and paid $51,000 in penalties following the issue of five infringement notices in relation to representations made on the packaging of its Shapes Light & Crispy products.

Arnott’s represented on packaging that Shapes Light & Crispy contained “75% less saturated fat”.  In making the “75% less saturated fat” representation, Arnott’s was actually comparing its Shapes Light & Crispy product not to the original Shapes but to potato chips cooked in 100% palm oil. The ACCC considered that this was a false or misleading representation about the fat content of the products. 

Free range

Since I spoke to you last, we have seen some further outcomes in the courts involving free range egg claims.

Free range is a powerful claim for businesses to distinguish their products. Consumers are willing to pay a large premium for free range eggs on the understanding that they are getting something quite different to ‘cage’ and ‘barn laid’ eggs.

In April, the Federal Court imposed a penalty of $300,000 on Derodi Pty Ltd and Holland Farms Pty Ltd, trading together as Free Range Egg Farms, for making false or misleading representations in their labelling and promotion of eggs as free range.

Then in May this year, the Federal Court found Snowdale, one of Western Australia’s largest egg producers, had made false or misleading representations that its eggs sold between April 2011 and December 2013 were free range.

In that case, following a contested hearing, the Court found that most of the hens from the Snowdale sheds did not move around on an open range because the farming conditions significantly inhibited them from doing so. These conditions included the number of pop holes, the number of birds per metre of pop hole, flock size inside the shed and shed size.

Where free range egg claims are not true, consumers are harmed and, no less important, other egg suppliers who are producing genuine free range eggs are competitively disadvantaged.

On 31 March 2016, Consumer Affairs Ministers agreed to make an information standard for the labelling of free range eggs, with a view to the standard being in place within a year.

Once the law changes, the ACCC will revisit its guidance on how it approaches the application of the misleading conduct provisions to free range egg claims.  

We are doing considerable work in the agriculture sector, including using market studies

Last year we made the agriculture sector a priority. We received additional funding to put together a dedicated Agriculture Unit and Mick Keogh joined the ACCC as a Commissioner to provide his considerable expertise in the sector.

Staff from the Agriculture Unit travelled extensively to meet with farmers, agents, processors, wholesalers, retailers and many others involved in agriculture industries.

Another important part of our engagement with the sector is our Agriculture Consultative Committee.

The Committee provides representatives from across the sector, including the AFGC, with a forum to discuss emerging competition and fair trading issues.

We have carried out these processes with the aim of:

  • improving our understanding of the competitiveness of agriculture supply chains and how this affects farm gate outcomes; and
  • increasing the understanding and awareness of agricultural businesses about the role of the ACCC in dealing with competition and fair trading issues.

Cattle and beef market study

Market studies are a prominent part of the ACCC’s agriculture work. These are research projects, which can take a number of forms. They may involve a broader analysis of an industry, up and down the supply chain, or a focus on more discrete issues.

Market studies are now part of ‘business as usual’ for the ACCC and the cattle and beef industry is the subject of our first market study in the agriculture sector.

We released an interim report for the cattle and beef market study on 31 October. This study was conducted by Mick Keogh, Commissioner Sarah Court and myself. The report focuses on issues affecting the efficiency of cattle production and prices, including:

  • the transparency of price information
  • the independence of assessing and grading carcasses, and
  • market structures and some very concerning practices which affect competition.

We have made recommendations for improvements in these areas. We will also use what we have learned from this market study in future assessments of mergers and particular investigations.

I would encourage you to read the report. We are interested to know if there are similar competition or fair trading issues in other industries including the food and grocery sector.

Horticulture and viticulture

The horticulture and viticulture industries have been another area of focus for the Agriculture Unit. 

ACCC Deputy Chair, Michael Schaper and Commissioner Mick Keogh led a series of workshops in regional Australia to speak with growers and agribusinesses about how competition and fair-trading issues affect them.

We recently released a report on the issues raised with us throughout this process and how the ACCC will respond.

Some of key issues raised included:

  • The ineffectiveness of the current Horticulture Code of Conduct
  • Concerns about late and non-payment of growers by wholesalers
  • A fear of raising complaints due to concerns about retribution, and
  • Uncertainty in contracting practices across both industries.

Having identified these issues, the report recommends the Horticulture Code be amended to provide greater coverage, through the inclusion of pre-2006 agreements, and penalties and infringement notices should be available for breaches of the Code to encourage widespread compliance.

The report identifies a number of areas in which the ACCC will be conducting further work in the horticulture and viticulture industries.

These include examining allegations of late payments, interactions between growers and retailers under the Food and Grocery Code, and assessing standard form contracts across both industries to promote compliance with the upcoming business-to-business unfair contract term law.

The report notes there a number of contracting and competition issues in the viticulture industry that require further consideration and the  Agriculture Unit will be looking at these in greater detail.

Dairy

We have also been active in the dairy industry this year, and this will continue into 2017.

It is well-known that we have been investigating issues relating to the price cuts to dairy farmers announced by Murray Goulburn and Fonterra in May this year.

We are considering whether the processors’ conduct was misleading and deceptive or unconscionable under the Australian Consumer Law.  

I do realise that the time such investigations take, while necessary given the potential for court-based outcomes, is frustrating for everyone. But these investigations are now at an advanced stage.

In addition, following a request from the Federal Government, the ACCC today has commenced an inquiry into the dairy industry.

The inquiry begins with the release of an issues paper and a call for submissions. The inquiry will cover all product and geographic markets to identify structural and behavioural issues that affect the industry’s performance.

It will involve substantial input from farmers, processors and others involved in the industry through public and private hearings and written submissions to identify and understand the key issues.

Unlike the beef study, it will also empower the ACCC, where necessary, to compel parties to provide specific information.

Unfair contract terms

I must also mention that next week on 12 November, new laws protecting small businesses from unfair terms in standard form contracts come into effect.

As the ACCC is responsible for ensuring compliance with the new law, we have reviewed contracts from a broad range of industries, including the agriculture sector, to identify and flag terms that may raise concerns under the new law.

We will soon release an industry report on our findings. Any outstanding issues that have not been addressed at that time may become the subject of enforcement action after the laws come into effect on 12 November.

We consider these reforms will encourage a significant change in dealings between large and small businesses. It is important that small businesses understand and use these new rights in their dealings with large businesses, in parallel with ACCC compliance and enforcement activity.

The important, but less well-known, work we are doing on free trade agreements

As you know, Australian governments continue to pursue the liberalisation of trade and investment internationally. The ACCC is supporting this pursuit.

If our trading partners have competition laws that apply to all commercial activities and they have independent competition authorities that enforce those laws in a fair and non-discriminatory manner, this will help to ensure trade liberalisation is not thwarted by ‘behind the border’ barriers.

To this end, the ACCC is assisting DFAT on competition issues in relation to the negotiation of a number of FTAs.

Our main involvement has been with the Regional Comprehensive Economic Partnership, which is the proposed free trade agreement between Australia, NZ, Japan, Korea, India, China and the ten ASEAN countries, where we have been part of the Australian negotiating team.

From where we sit, competition provisions are an important part of a modern and credible trade agreement.

We look forward to seeing how the negotiations play out.

As this quick tour of issues shows we are involved in many issues of interest to you all here today.

Thanks very much for your time.