The supermarket watchdog has slammed former Victorian premier Jeff Kennett for "flawed" decision-making and failing to comply with its directions.
The Food and Grocery Code Independent Reviewer Chris Leptos has slapped Mr Kennett over his work as an arbiter between suppliers and Coles, saying his behaviour demonstrates the overseer needs new powers including fines for non-compliance and the ability to force access to his files.
Mr Kennett's role – held since 2014 – is paid for by Coles but is intended to be an independent decision-maker in disputes between the supermarket giant and its thousands of suppliers.
Neither Coles or Mr Kennett accept the criticism. The former premier vigorously defended his work and said the report "calls into question the role of the reviewer" who he argued is trying to drum up complaints amidst a review of the system.
"I find it totally disappointing because it shows the system has failed and he's maligned both Coles and myself."
'Declined to comply'
In its annual report, the reviewer – a function inside the Commonwealth Treasury Department – found Coles "did not comply with the code" and Mr Kennett "declined to comply with the recommendations resulting from my independent review" into his work.
In addition, it said Mr Kennett's behaviour – including declining access to files in five separate requests – means the laws need to change.
Coles said the files included confidential supplier information, and that the legislation does not give the reviewer access to them.
The reviewer said he agreed to have the confidential parts redacted, but the files were still withheld.
"I believe that clause 37A of the code gives Independent Reviewer the power to request the complaint files," Mr Leptos told the ABC.
In his report, Mr Leptos said he had referred Coles to the Australian Competition and Consumer Commission (ACCC) and recommended the competition watchdog take action over the situation and access the files.
A spokesperson for the regulator confirmed the request had been received.
"The ACCC has received the report from the Independent Reviewer and is considering it," a spokesperson said.
"My conclusion, regrettably, is that Coles and its Code Arbiter are not acting in accordance with the spirit of a voluntary code," the Food and Grocery Code Independent Reviewer annual report for 2021–2 read.
"I believe this highlights the weakness at the core of the current Code – specifically, that it is a voluntary undertaking with zero compliance penalties."
Speaking specifically about Mr Kennett and his employer, the reviewer said the intolerable situation requires new legislation.
"My observations of Coles and its code arbiter have caused me to conclude that changes to the Code are necessary," Mr Leptos wrote.
One of those changes would be that the ACCC is required to conduct an investigation when it receives a referral from the reviewer, something the supermarket's overseer has done with Mr Kennett.
Supermarket overseer
In 2015 the code was introduced to try and address the power imbalance between the supermarket giants and their suppliers. Among other things, it provides a process for dispute resolution.
Coles, Woolworths, Aldi and Metcash all signed up to be signatories to the code.
The four big players have more than 80 per cent of grocery market share, with Coles and Woolworths making up more than 65 per cent of revenue.
Woolworths controlled 37.1 per cent of the food and grocery sector in the 2021-22 financial year, according to IBISWorld data used in the report.
Its key rival Coles had 27.9 per cent market share, Aldi 9.5 per cent and Metcash – a supplier to IGA and Foodland – 6.9 per cent, with 18.6 per cent denoted as "other".
Mr Kennett's role pre-dated the code and was successfully trumpeted by Coles as the model to follow. All the signatories to the code now have independent arbiters.
Few complaints
But Australia's supermarkets either treat their large and small suppliers with exquisite grace when it comes to shelf space, price rises and margin squeezes … or the system does not work.
In the past two years there have only been five complaints – all to Coles.
Of those, one was about accounting practices with another about freight charges and both were resolved swiftly by Mr Kennett.
Mr Leptos said the small number shows that requiring a formal written complaint means suppliers will not generally do it.
"When complaints come to the Independent Reviewer directly, I encourage those suppliers to contact the code arbiters," he said.
"As Coles, and the code arbiter, have denied me access to the complaint files, I don’t know what is in those files."
Why no complaints?
In an opinion article in Food & Bev Industry News, Mr Leptos spelled out two big problems.
"Many suppliers believe that they cannot negotiate forcefully with the big supermarkets because of the risk of being down-shelved or delisted, and the resulting drop in sales volume means their unit costs would increase dramatically," he wrote.
"Secondly, some suppliers believe that they cannot candidly complain to the supermarkets when there is poor conduct by supermarket buying teams, because the likelihood and consequence (perceived or real) of retribution is significant."
This is much less of a problem in the UK, he noted, because while the UK supermarkets are large, there are many of them.
"The four largest supermarkets account for about the same percentage as Woolworths and Coles. As a result, suppliers have multiple avenues through which they can sell and still achieve the volumes they need to be viable," he wrote.
'Extraordinary' report
Mr Kennett said Mr Leptos had used the experience of one New Zealand-based supplier to come to an incorrect conclusion.
"He (the reviewer) did not interview anyone at Coles nor at the supplier," he responded.
"What he relied upon was the complaint by the supplier and my very detailed investigations. He did not accept those and has decided to write this report.
The reviewer "totally failed the process" Mr Kennett alleged.
"When you get anyone making a complaint they use, at times, understandably very lively adjectives … you can’t get to the basis of those complaints unless you interview on both sides."
Mr Leptos said he reviewed the original complaint, as well as interviewing both Mr Kennett and the aggrieved supplier.
"I have detailed records of those interviews," he added.
Woolworths woe
A survey of 407 suppliers by the reviewer showed the best and worst supermarkets to deal with.
The respondents were varied: some sold less than $1 million of product annually, others well over $1 billion. Most sold between $10 million-$50 million to Australian supermarkets in a year.
Half indicated that they were "always treated fairly and respectfully by their retailer/wholesaler".
But 9 per cent noted the supermarket "acted unreasonably at times" and a further 2 per cent said their retailer/wholesaler "frequently acts unreasonable or with duress".
According to the survey, Aldi was the best to deal with, Woolworths the worst.
In a statement Woolworths said that, earlier this year, it widened the scope of its code arbiter's role to receive informal complaints from suppliers, something that was requested by the independent reviewer.
The supermarket's arbiter is experienced employment lawyer Helen McKenzie.
"This report is one of a number of sources of feedback we draw on to monitor the health of our supplier relationships," the statement said.
"We will review the feedback carefully and work to address it with our suppliers."
Price rises
Supermarkets must give their arbiter information around price increases, including the number of price rise notifications received from suppliers, the number of negotiations entered and the time it took to conclude negotiations.
Spiralling increases in the cost of fertiliser, machinery and petrol meant a surge in the number of suppliers telling the big supermarkets they needed to pass on increased costs.
The report lists how they were treated:
- Woolworths got 2,104 notifications of a price rise from suppliers. Suppliers requested negotiations with respect to 1,627. Of those 1,176 negotiations (72 per cent) were not concluded within 30 days of the request.
- Coles had 4,126 notifications and 664 negotiations, of which 552 negotiations (83 per cent) were not concluded within 30 days.
- Metcash had 739 notifications in a half-year period, entered negotiations for 24 notifications, with 12 negotiations (50 per cent) not concluding within 30 days.
- Aldi had 1,140 notifications and entered negotiations for 21 notifications, with 7 negotiations (33 per cent) not concluding within the 30 days.
In his annual report as Coles arbiter, Mr Kennett passed on the information, but noted the huge amount of work it created.
"May I make an observation, that in a time of higher inflation, supply chain interruptions, the impact of floods, this requirement is particularly bureaucratic and time consuming and therefore costly to Coles and all supermarkets," he argued.
"I am not sure the inclusion of this clause ever envisaged the events described above coming into play as they have together over the last six months.
"Sadly, I expect these issues to continue throughout 2023."
Coles response
In a statement, the Coles Group refuted the criticism.
"We disagree with the report's conclusion about Coles noting it's based on one disputed supplier issue out of 1,925 suppliers," the statement read.
"We are committed to working with our suppliers in a fair and transparent way and complying with the requirements and spirit of the code."
The supermarket pointed to its good results in the supplier survey conducted by the reviewer.
"This year's survey results show most suppliers say they have fair dealings with us and there has been substantial improvement overall across the areas surveyed," the company said.
"We understand fair, reasonable and good faith supplier management practices are fundamental to the success of our business and we will always work hard to continue to improve and strengthen our supplier engagement."
More to come
The independent reviewer wants changes to the law to beef up its powers. The recommended changes are:
- Allowing suppliers to raise concerns with code arbiters informally (i.e. not required to be in writing);
- Give the reviewer power to access complaint files "to evaluate the adequacy and consistency of the code arbiters' processes";
- Require the ACCC to conduct an investigation when requested by the independent reviewer;
- Introduce fines "for material non-compliance" with the code. Material means serious.
Dr Andrew Leigh, Assistant Minister for Competition, Charities and Treasury, welcomed the report.
"The Independent Reviewer has pointed to weaknesses at the core of the current Code, including examples of supermarkets refusing to comply with the spirit of the Code."
In September Dr Leigh released the terms of reference for a review of the dispute resolution system for suppliers and supermarkets.
"Treasury is undertaking this review to assess whether the current provisions are working as intended to provide industry participants with effective, fair and equitable dispute resolution processes," he said.
"I encourage all stakeholders to make submissions to this review."
The report is due by April 30, 2023.
