The Government wants grocery suppliers to challenge the power of Foodstuffs and Countdown. Will they?

Newly minted Grocery Commissioner Pierre van Heerden faces a critical task: he must rebalance the relationship between the supermarket duopoly and suppliers.

The supplier-retailer relationship is a key target of the Government's new Grocery Industry Competition Act which came into force this week.

This act introduces a supplier code of conduct which Commissioner van Heerden will oversee, it forces the big two of Countdown and Foodstuffs to open up their wholesale networks for supply to competitors against the threat of regulatory intervention if they don't behave fairly, and creates a new dispute resolution scheme for suppliers to use when things go wrong.

To enforce the regime, the new act labels Foodstuffs and Woolworths as regulated grocery retailers, giving them obligations to both suppliers and potential wholesale customers.

A proposed draft supplier code of conduct was out for consultation until this week. It has some key obligations for the duopoly when it comes to how they treat suppliers.

It's based on the Australian version, but has one very significant difference - it is mandatory.

The NZ draft code prohibits the duopoly from putting suppliers under duress that could likely stop the supplier from selling their goods elsewhere. Another obligation means Foodstuffs and Countdown must not threaten a supplier with business disruption, or termination of a grocery supply agreement, without reasonable grounds.

Former head of the NZ Food and Grocery Council, Katherine Rich, revealed in 2020 that supermarket suppliers had “little or no negotiating power” when striking deals with Foodstuffs and Woolworths.

Rich said supermarket suppliers were forced to be a price taker from retailers, against a threat their products would be booted from shelves if they don’t accept the price. She even went as far as to call some store owners “bullies”.

This view was backed by a study of its members undertaken by the Commerce Commission as part of its market study into the sector, which found New Zealand supermarkets were making $1 million every day in excess profits.

Suppliers told the Commission there was very limited competition in the NZ grocery market.

Rich also took aim at the complex rebate and payment arrangements the retailers have with suppliers, saying suppliers had to pay for merchandising and shelf space, for example.

Co-operative Foodstuffs' annual results showed the significance of these payments, with its North Island operation reporting supplier repatriate rebates of $24.8 million for its 2023 financial year. Supplier repatriate rebates are paid to Foodstuffs North Island by suppliers as part of standard trade terms and then distributed back to members subject to those terms of trade being met, Foodstuffs said.

Other tweaks the Government has made legislatively to help bolster the ability of suppliers to negotiate with the duopoly included allowing collective bargaining between suppliers and retailers through an exemption from Part 2 of the Commerce Act, and strengthening unfair contract term provisions in the Fair Trading Act to allow suppliers to take action themselves, rather than action having to come from the regulator.

Will it be enough?

But is this going to be enough to make suppliers feel comfortable enough to challenge the regime?

Competition lawyer Jennifer Hambleton said there were "lots of positive aspects" for suppliers in the act and the obligations outlined in the code should help rebalance the relationship between the two.

The MinterEllisonRuddWatts partner said suppliers would be able to complain about a potential breach of the supply code and then the Commission had powers to investigate, with the Grocery Commissioner taking the lead.

A range of enforcement tools could be used if the regulator finds a breach, including taking court action and seeking penalties for breaches or compensation orders, or doling out warnings and compliance letters, and potentially making them public.

"I would hope suppliers would feel safe enough to complain to the Commerce Commission. But when we did the market study, there were a lot of suppliers who weren't keen to put their head above the parapet in terms of providing information to the Commerce Commission in terms of retailers."

As well as the code of conduct and wholesale supply regime, Hambleton said it was important to remember the Grocery Commissioner will have powers to monitor and assess the market. And those powers come with data collection abilities, particularly in terms of unpicking how wholesale deals are stuck.

Whether the legislative changes work or not, Hambleton says the Government has left itself plenty of room to move and add additional tools into the grocery competition act "if it's not doing what they want it to do".

An example of how the Government might tweak the law included the "regulatory backstop", or threat that the regulator could set the terms for access to the duopoly supply chains. It could impose access terms for retailers to meet to require whole supply that is on "non-discriminatory terms", Hambleton says.

The real proof in the supermarket regulatory pudding, of course, will be whether consumers see any change at the till.

With increased compliance costs inevitable as a result of the regulation, Hambleton says, the new law and contract tweaks might result in a better balance between grocery retailers and suppliers. 

"But at what cost? And will that be passed onto consumers? I think the question is what does this ultimately mean for consumers."