Code of practice should check supermarkets

The decision by supermarket giant Foodstuffs New Zealand to force its suppliers in the Wellington region to pay a 3 per cent "promotions rebate" on every product they sell in a supermarket highlights the need for some transparency and scrutiny over the way supermarkets do business in New Zealand.

The rebate amounts to a 3 per cent deduction for suppliers, and is likely to be rolled out to other regions in New Zealand. Many suppliers were stunned by the way it was announced out of the blue, in a letter they received recently. Suppliers often spend months negotiating contracts with supermarkets, and they don't expect them to be unilaterally changed by a supermarket in this way.

Suppliers are already struggling in the present economic climate, and they are fuming at the news.

But there's nothing they can do about it, because supermarkets have all the power in New Zealand, and any supplier who publicly complained about their latest move would probably be penalised by having their contract with the supermarket suspended.

The problem is that we have the most concentrated supermarket sector in the world, with just two supermarket chains controlling about 95 per cent of our grocery retail sector. Our grocery retail market has become so consolidated, and the buying power of supermarkets so extensive, that they can dictate terms and conditions, as well as prices, to suppliers.

Given their market dominance, it doesn't pay for suppliers to get offside with them, or refuse any requests, no matter how unreasonable they may seem.

In practical terms, most suppliers are faced with the prospect of capitulating to their demands, or going out of business. That's why there's an expression called "cliffing" in the grocery retail trade. It describes the situation suppliers sometimes find themselves in when negotiating with a supermarket. Either they agree to the supermarket's demands, or they jump off a cliff - that is, have their products kicked off the supermarket shelf.

The situation is made more difficult for suppliers because there is no transparency around how supermarkets operate; no rules as to what constitutes fair, or unfair, business practices, and no oversight or scrutiny of the way supermarkets do business with suppliers, to ensure they don't abuse their market power.

In Britain, an investigation into their grocery retail sector concluded supermarkets were engaging in trading practices that "transferred excessive risks and unexpected costs" to suppliers. As a result, the British Government has developed a Supermarket Code of Conduct which seeks to ensure supermarkets treat suppliers fairly and don't engage in unfair trading practices. The code is incorporated into every contract between large grocery retailers and their suppliers.

While relationships are still challenging, the very existence of the code reportedly knocked out some of the worst supermarket behaviour overnight.

The British Government has also agreed to set up a Groceries Code Adjudicator to monitor and enforce their code. Suppliers can approach the adjudicator if they believe they've been treated unfairly, and complaints will be handled anonymously.

I believe we need the same thing here.

I have spoken to numerous suppliers who claim supermarkets use a variety of tactics that can make life very difficult for them. They can penalise suppliers if they supply another supermarket chain, by giving them poor shelf space or even threatening to delist them.

They can put rival products on the bottom or top shelves and their own home brand products at eye level. They can require suppliers to pay for the cost of "specials" and promotions, and to pick up more and more costs such as freight, warehousing, food handling and marketing.

These sorts of tactics can be devastating for small suppliers, in particular, and put them under severe financial stress. But they have no recourse, even if they believe supermarkets are engaging in anti-competitive trading practices.

That's why, if the Government wants to support our struggling food sector and protect its members against unfair trading practices, it should follow the lead of Britain and develop a supermarket code of practice here.

The code would set out fair rules for suppliers, bring some transparency and clarity to the supply chain, and ensure that suppliers weren't unfairly treated.

It would benefit consumers, too, because if small suppliers are forced out of business by anti-competitive practices, this will have a detrimental effect on consumer choice as well as on competition in the sector.