Consultation paper: New Zealand Grocery Supply Code of Conduct

How to have your say

Submissions process

The Ministry of Business, Innovation and Employment (MBIE) seeks written submissions on the issues raised in this consultation paper by 5pm on 5 July 2023.

Your submission may respond to any or all of these issues. Where possible, please include evidence to support your views. For example, please include references to independent research, facts and figures, or relevant examples.

Please use the submission template provided below:

Submission form: Consultation on New Zealand Grocery Supply Code of Conduct [DOCX, 456 KB]

This will help us to collate submissions and ensure that your views are fully considered. Please also include your name and (if applicable) the name of your organisation in your submission.

Please include your contact details in the cover letter or email accompanying your submission.

Further information about how to make a submission is available on the Have your say page at the link below.

Have your say: Draft Grocery Code of Conduct

Use of information

The information provided in submissions will be used to inform MBIE’s policy development process and advice to Ministers on a Grocery Code of Conduct for New Zealand. We may contact submitters directly if we require clarification of any matters in submissions.

Release of information

MBIE intends to upload PDF copies of submissions received to MBIE’s website at www.mbie.govt.nz. MBIE will consider you to have consented to uploading by making a submission unless you clearly specify otherwise in your submission.

If your submission contains any information that is confidential or you otherwise wish us not to publish, please:

• indicate this on the front of the submission, with any confidential information clearly marked within the text
• provide a separate version excluding the relevant information for publication on our website.

Submissions remain subject to request under the Official Information Act 1982. Please set out clearly in the cover letter or email accompanying your submission if you have any objection to the release of any information in the submission, and in particular, which parts you consider should be withheld, together with the reasons for withholding the information. MBIE will take such objections into account and will consult with submitters when responding to requests under the Official Information Act 1982.

Private information

The Privacy Act 2020 establishes certain principles with respect to the collection, use and disclosure of information about individuals by various agencies, including MBIE. Any personal information you supply to MBIE in the course of making a submission will only be used for the purpose of assisting in the development of policy advice in relation to this review. Please clearly indicate in the cover letter or email accompanying your submission if you do not wish your name, or any other personal information, to be included in any summary of submissions that MBIE may publish.

Introduction

On 8 March 2022, the Commerce Commission (the Commission) published its final report on the market study into the retail grocery sector in New Zealand.

Market study into the retail grocery sector: Final report, 8 March 2022 (the Commission’s Final Report) [PDF, 8.7MB](external link) — Commerce Commission

It found that competition in the retail grocery sector was not working well for consumers and recommended changes to increase competition and help improve the price, quality and range of groceries and services available to New Zealanders.

One of the problems identified by the Commission is that there is an imbalance in negotiating power between the major grocery retailers and their suppliers. As a result of this imbalance, suppliers are often forced to accept unfavourable terms, including costs and risks that retailers are better placed to manage. Suppliers also report that they often have inadequate transparency and certainty about the terms of supply. This impacts suppliers’ ability and incentives to invest and innovate, including developing new grocery products. In extreme cases, it may result in suppliers being forced to exit the market.

Poor conditions for suppliers can also create flow-on consequences for consumers, including higher grocery prices (due to supply shortages where suppliers are forced to exit the market) as well as lower quality and a more limited range of grocery offerings available at supermarkets (due to lack of innovation in the sector).

The Commission recommended a mandatory grocery code of conduct to govern relationships between the major grocery retailers and their suppliers. This would constrain the major grocery retailers’ ability to use their strong negotiating power to secure suppliers’ agreement to unfavourable supply terms and conditions.

Commission’s Final Report (para 9.148-9.155) [PDF, 8.7MB](external link) — Commerce Commission

On 30 May 2022, the Government announced that it would establish a mandatory Grocery Supply Code of Conduct for New Zealand (Code) as part of its response to the market study.

Objectives of the Code

The Bill sets out the purpose of the Code at clause 13. That is to promote competition and efficiency in the grocery industry for the long-term benefit of consumers in New Zealand by:

• promoting fair conduct, and prohibiting unfair conduct, between regulated grocery retailers, the related parties referred to in section 14A, and suppliers; and
• promoting transparency and certainty about the terms of agreements between regulated grocery retailers, the related parties, and suppliers; and
• contributing to a trading environment in the grocery industry in which businesses compete effectively and consumers and businesses participate confidently; and that includes a diverse range of suppliers.

We consulted on requirements to be included in the Code in 2022

In July 2022, we released a consultation paper titled ‘New Zealand Grocery Code of Conduct’ and invited submissions from interested parties.

Have your say: Grocery Code of Conduct

We received 20 responses. Submitters provided wide support for the Code, and for most of the preferred requirements proposed in the consultation document. However, there were some aspects of the Code which attracted differing views from submitters, and areas where some submitters preferred to see more detail, before providing comprehensive feedback.

We are seeking feedback on an exposure draft of the Code

We are now seeking submissions on an exposure draft of the Code.

Exposure draft Grocery Supply Code Regulations [PDF, 241 KB]

We are undertaking this additional round of consultation for the following reasons (Consultation on the draft Code is also a statutory requirement under the Bill):

To provide stakeholders with information on the decisions the Government has made on the Code to date

Following consultation in 2022, the Government has agreed the broad content of the Code. This consultation document explains these decisions, which are reflected in the attached exposure draft. These decisions are not final, and further refinements may be made to the Code following consultation.

To ensure the Code is workable, and adequately reflects policy decisions made

We are seeking feedback on whether the obligations, restrictions and responsibilities in the draft Code achieve the intent of the policy decisions made to date. We are also seeking feedback to ensure the Code is workable and does not cause practical issues for compliance.

To seek further feedback on specific issues

In many areas, the exposure draft adopts the preferred options set out in the 2022 consultation document. However, there are some areas which diverge slightly from these original proposals, and some areas which attracted differing views. We are seeking further feedback from stakeholders on these.

Timing and next steps

Consultation on the exposure draft is open until 5 July 2023.

After submissions close, MBIE will undertake further analysis and make recommendations before final Cabinet decisions on the Code.

What is in this consultation paper

Part A of this consultation contains a high-level description of the Code, how it will be enforced, implemented, and ongoing arrangements for review.

Part B contains a short description of the each of the policy decisions made on the Code, and where each of these policy decisions are outlined in the exposure draft.

Part C contains a description of a few policy proposals which are not included in the draft Code, where we would like further advice from stakeholders.

Part A – How the Code will work

The Code will be implemented as secondary legislation under the Bill

Government is currently progressing the Grocery Industry Competition Bill (the Bill). We expect parliament to pass the Bill into Law soon.

The Bill allows for the creation of a Grocery Supply Code. The first Code will be made by Cabinet, through Order in Council. After this first Code is made, the Commission will become responsible for making any subsequent amendments.

As indicated above, the Bill sets out a purpose for the Grocery Supply Code and processes that must be followed for the making of a Grocery Supply Code.

The Code will initially apply to the regulated grocery retailers set out in clause 8 of the Bill

Initially, the Code will apply to Foodstuffs North Island, Foodstuffs South Island and Woolworths New Zealand, including franchises and other bodies connected to these businesses. The Code will therefore apply to the majority of New Zealand’s supermarket brands, including Countdown, Pak’nSAVE, New World and Four Square.

The Bill allows other retailers to be designated as a regulated grocery retailers for the purposes of the Code, on the recommendation of the Minister of Commerce and Consumer Affairs.

The Commerce Commission will be responsible for monitoring and enforcing compliance with the Code and making subsequent versions of the Code

The Bill provides powers for the Commission and the new Grocery Commissioner to monitor the performance of New Zealand’s retail grocery sector and enforce compliance with the Code. One of the more significant enforcement powers is the ability of the Commission to issue court proceedings seeking pecuniary penalties for breaches of the Code (more information on these penalties is provided in Part B, below).

Outside of the Commission’s enforcement powers, the Bill also provides for a dispute resolution scheme to resolve disputes related to the Code. The scheme may hear disputes relating to the Code brought by suppliers and is able to employ both consensual dispute resolution processes that result in an agreement (such as mediation) and determinative processes (such as adjudication).

Once the first Code is made by Order in Council, the Commission is responsible for making any subsequent versions of the Code. There is no time limit on when the Commission may make a determination setting out a Code, so long as it follows the relevant provisions in the Bill.

The Bill also requires that the Commission complete a review the Code within two years of it coming into force. This ensures that the effectiveness of the Code will be evaluated promptly.  It also provides an opportunity for the Commission to make any amendments to improve the Code, if it has not already done so.

The Code is closely modelled on the Australian Code

The Code is largely modelled on the Australian Food and Grocery Code of Conduct (Australian Code). The Australian Code has been in place since 2015 and has proved to be beneficial. Adopting an approach to the Code that broadly aligns with requirements in Australia means that much of the Code will be based on tried and tested interventions.

We also consider that there are efficiency benefits with aligning the Code with the Australian Code, due to the close economic relationship between New Zealand and Australia. Several businesses that will be affected by the Code operate in both countries.

There are, however, some key differences. As examples, the Australian Code is not mandatory, is not subject to the same regulatory oversight that will provided by the Grocery Commissioner and does not provide for civil pecuniary penalties as an enforcement mechanism and deterrence against non-compliance.

Part B – Policy proposals included in the Draft Code

This part of the consultation document describes the key parts of the Grocery Supply Code.

Exposure draft Grocery Supply Code Regulations [PDF, 241 KB]

Schedule 1 – transitional, savings and related provisions

Part 1 – Transitional provisions

The transitional provisions describe how the Code will apply to grocery supply agreements which were agreed prior to the Code coming into effect (existing agreements). A grace period is provided for existing agreements. During this period, most of the provisions within the Code will not apply.

This grace period lasts for 6 months, or until the agreement is varied to ensure consistency with the Code. After this grace period, the Code applies to existing agreements as if they were entered into after the Code was implemented. The grace period does not apply to the good faith obligations, which will come into effect in relation to all agreements, from the day the Code takes effect.

After the 6-month period ends, the requirements of the Code will apply regardless of any provisions of existing agreements to the contrary.

Schedule 2 – Grocery Supply Code

Clause 5 – application to existing agreements

Clause 5 builds on the transitional provisions noted above. This section requires a retailer to offer to vary any existing supply agreements that do not comply with the Code. Retailers must offer to vary such agreements within 6 months of the Code coming into force.

This part does not require any amended agreement to be signed by the supplier. Retailers will not be in breach of the Code for being party to any non-compliant, existing agreement, so long as they make reasonable offers of variations described above.

The Code contains several examples of how these transitional provisions will apply under different scenarios.

Part 2 – good faith

This part of the Code imposes general obligations on retailers to act in good faith when dealing with suppliers. It provides a list of factors which may be taken into account when considering whether a retailer has acted in good faith.

The intent of including an overarching good faith obligation in the Code is to ensure that retailers engage in fair processes when dealing with suppliers, and do not leverage their negotiating power to coerce suppliers into accepting unfavourable terms. The obligation directs fairness of processes, for clarity and objectiveness. It does not include any specific requirements for fairness of outcomes.

Part 3 – content of grocery supply agreements and variations to supply agreements:

This part of the Code imposes general requirements and minimum content which grocery supply agreements must contain and limits the circumstances where a retailer may vary the agreement without the consent of the supplier. The intention of this part is to ensure that suppliers have transparency and certainty around the terms of supply.

Clause 7 requires supply agreements to be written in plain English, provided to the supplier, and retained by the retailer during the term of the agreement and for up to seven years after the agreement expires.

Clause 8 prescribes minimum content which all grocery supply agreements must contain.

Clause 9 restricts the circumstances where retailers can make unilateral variations (variations made without the consent of the supplier) to supply agreements. It allows for unilateral agreements to be made in specific circumstances, where the variation is provided for in the supply agreement and is reasonable in the circumstances.

Clause 10 requires that retailers must not make retrospective variations (variations that modify something in the past) to supply agreements in any circumstances.

Part 4 – general conduct provisions

This part of the Code prohibits retailers from engaging in a range of specific conduct, which the Commission heard is detrimental to suppliers. It covers the following matters:

Clause 11 – transport or logistics services

Retailers may profit from requiring suppliers to use a particular logistics or transport service to deliver goods to the retailer. This service can be an in-house logistics service (owned by the retailer), or a third-party service which provides a payment to the retailer. Requiring the use of such services may come at the expense of the supplier, where such services could be more expensive, less convenient, or of poorer quality than alternatives.

This clause seeks to addresses this issue, by preventing retailers from requiring suppliers to use a particular transport or logistics service to deliver goods to the retailer. It is not intended to prevent retailers from imposing service standards which the supplier’s chosen transport or logistic service must meet.

Clause 12 – payment to suppliers

Payment terms

Some suppliers have raised concerns that payment terms in the industry significantly favour major grocery retailers. Some suppliers have reported waiting up to 60 days to be paid, and the retailer may still receive a settlement discount.

See Commission's Market study at 8.129 [PDF, 8.7MB](external link) — Commerce Commission

Delayed payment can cause cash flow issues for suppliers and can force them to spend valuable time chasing payments.

Clause 12 seeks to address this issue by requiring retailers to pay a supplier’s invoice within the time set out in the supply agreement. It also requires that any payment time set out in the agreement must be ‘reasonable’.

Though it is not included in the exposure draft, the Code could also set a maximum time within which invoices must be paid. This would provide greater certainty regarding what may be reasonable. However, it would be a less flexible option. It also comes with a risk that the maximum payment period specified becomes the industry norm.

We are seeking feedback on whether a maximum payment period of 20 calendar days from when a retailer receives an invoice should be set out in the Code. We consider that this period strikes a good balance between allowing enough time for retailers to make payment, while ensuring suppliers are paid promptly.

Set-offs

A set-off is where a retailer deducts an amount it is owed by a supplier when paying a supplier’s invoice. This practice can be an efficient way of reducing the number of payments between a retailer and supplier. However, some suppliers have raised concerns about retailer’s automatically deducting amounts from a payment.

See Commission's Market study at 8.145 [PDF, 8.7MB](external link) — Commerce Commission

Set-offs can result in a supplier receiving less money than expected if not done transparently. If the supplier disagrees with the amount deducted, it can require them to spend time seeking the correct payment from retailers. This can interrupt a supplier’s cash-flow, which may have flown on impacts for their business.

Clause 12 seeks to address this by placing some restrictions around when a set-off may be applied by the retailer. It requires that a supplier gives written consent before a set-off is applied by the retailer, expect where the supply agreement provides for the set-off and the set-off is reasonable.

Clause 13 – payment for shrinkage and clause 14 – payment for wastage

As defined in the Code, shrinkage is the loss of grocery products due to theft or accounting error that occurs after a retailer or wholesaler has taken possession of them. Wastage is the loss of grocery products that are unfit for sale.

Suppliers have suggested they can be asked to contribute to shrinkage and wastage that occurs after the retailer has taken possession of the products. This is despite the supplier having little ability to manage such loss.

Clauses 13 and 14 seek to address this issue by:

a. prohibiting retailers from requiring payment for shrinkage

b. restricting the circumstances where a retailer can require payment for wastage that occurs once the retailer (or any contractor or agent of the retailer) has taken possession of the products.

Clause 13 mirrors the Australian Code. Clause 14 follows the Australian Code, but also includes 2 additional requirements in relation to wastage:

a. 14(2)(c) requires that the wastage be mainly the result of the actions or omissions of the supplier, before the retailer may claim for wastage which occurs while the products are under the retailer’s control

b. 14(2)(g) requires that the retailer must submit any claim for wastage no later than 6 months after the goods are received.

Clause 15 – payments as condition of being a supplier; clause 16 - payments for a retailer’s business activities and clause 17 – funding of promotions

The Commission heard examples of suppliers bearing a disproportionate share of costs for other things which benefit both parties. Clauses 15, 16 and 17 seek to address this by:

a. prohibiting payments as a condition of supply, except in relation to new products (See 15(2)(b)(ii)), and on the condition that such payments are reasonable.

b. prohibiting payments for the retailer’s own business activities except where reasonable, and when set out in the supply agreement

c. requiring that supplier payments with respect to promotions, or a retailer’s own business activities, be allowed only when set out in the supply agreement and where these payments are reasonable.

Clauses 15 and 17 largely mirror the Australian Code. Clause 16 follows the Australian Code closely but includes some additional examples of what a retailer’s business activity might include (see 16(2)(f), which relates to merchandising and 16(2)(g) which relates to the transport of goods within a retailer’s distribution network).

We considered whether clause 17 should also include an additional restriction which prohibits retailers from requiring suppliers to fully fund the cost of promotions. However, we consider the reasonableness test set out in 17(3) to be sufficient in ensuring better sharing of costs. We also note that such a requirement will also be relatively easy to circumvent by, for example, the retailer providing nominal payments towards the promotion.

We understand that some suppliers prefer to undertake their own merchandising of products within a retailer’s store. These clauses are not designed to prevent this from occurring.

Clause 18 – delisting products and clause 19 – process requirements relating to delisting

Delisting refers to decisions made by retailers to stop stocking certain products. It is a critical issue for suppliers, as having a product delisted can significantly impact their business.

Clauses 18 and 19 seek to provide greater certainty to suppliers regarding delisting decisions. It requires such decisions be made only in accordance with the supply agreement and for genuine commercial reasons.

Clauses 18 and 19 closely follow the Australian Code, but include 2 additional provisions which require:

a. retailers to provide 6-months' notice before delisting fresh fruit and vegetables

b. retailers to undertake a range review before delisting a product.

Clause 20 – funded promotions

The Commission heard that it is common for some retailers to stockpile products at a reduced price during a supplier’s buy-in period for a promotion.

See the Commission's Market Study at 8.109 [PDF, 8.7MB](external link) — Commerce Comission

After the promotional period ends, the retailer may then have left-over stock which it bought from the supplier at the discounted promotional rate, which it can sell at a higher price, outside of the promotional period. This practice is referred to as investment or forward buying.

Clause 20 is modelled off the Australian Code. Among other things, it requires retailers to take care when ordering product in connection with a funded promotion. If the retailer over-orders, and sells that product above the promotional price, it requires the retailer to pay the difference between the supplier’s promotional price and the supplier’s full price for the product.

Like other promotional activities, investment buying may have benefits to consumers. Any restrictions around such practices must therefore be carefully framed to manage any undesirable impact on consumers if the restrictions result in reducing the frequency of such activity. We are interested in how the restrictions at clause 20 (particularly those described above) might impact current practices regarding investment buying and funded promotions.

Clause 21 - fresh produce standards and quality specifications

The Commission heard that suppliers of fresh fruit and vegetables are particularly vulnerable to retailers misusing their bargaining power.

See the Commission's Market Study at 8.59 [PDF, 8.7MB](external link) — Commerce Commission

Aside from export markets, many suppliers have few alternative buyers for their produce on the scale of the major grocery retailers. Fresh produce is also highly perishable, and growers cannot pause production because demand is low. As a result, suppliers of fruit and vegetables have limited ability to delay supply while seeking to negotiate better terms.

Clause 21 seeks to provide additional transparency and certainty for suppliers of fruit and vegetables by requiring retailers to have specific standards for fresh produce. These standards must include any quality standards, and retailers would be required to accept any produce that meets these standards within 24 hours of receiving the produce. Where a retailer rejects fresh produce, it must notify the supplier in writing within 48 hours of receiving the produce. Clause 21 closely mirrors the Australian Code.

Clause 22 No duress about supplying to competitors, Clause 23 – business disruption and Clause 28 – freedom of association

Significant imbalances in negotiating power can mean that suppliers are reluctant to come forward with complaints, or take other action in their interest, for fear of retaliation. Clauses 22, 23 and 28 seek to address this by:

a. prohibiting retailers from placing suppliers under duress, in an attempt to prevent them from supplying other parties (see clause 22)

b. prevent retailers from threatening to disrupt a supplier’s business or terminate a grocery supply agreement without reasonable grounds (see clause 23)

c. preventing suppliers for hindering any lawful association of suppliers (see clause 28).

Clause 24 – intellectual property rights and clause 25 – confidential information

The Commission heard that some suppliers face pressure to provide their own products under a retailer’s private label.

See the Commission's Market Study at 8.186-8.193 [PDF, 8.7 MB](external link) — Commerce Commission

Suppliers have also raised concerns that confidential information regarding their products have been used by the retailer to develop the retailer’s own private label products. These issues may reduce incentives for suppliers to invest in product development.

Clauses 24 and 25 seek to address these issues by requiring retailers to respect suppliers’ intellectual property. They also seek to ensure any confidential information the retailer obtains about a supplier’s product is only used for the purpose for which it was obtained and is not shared with parts of its business which may be involved in developing its own brands.

Clauses 24 and 25 mirror the same protections provided in the Australian Code.

Taonga and mātauranga Māori*

There may be aspects of a supplier’s product, or the way it is made, which may hold significance for the supplier but not meet the legal definition of intellectual property. One such example could include knowledge of production techniques which may be considered taonga or cultural treasure.

We would like to hear from suppliers whether they consider any part of their current business practices, or their products, taonga. If so, we would be interested to know whether there may be any issues connected with the supply of groceries which may mean that the Code should recognise taonga, and ensure it is treated appropriately by a retailer.

Te Puni Kōkiri (TPK) is leading Te Tumu mō te Pae Tawhiti, the all-of-government work programme relating to issues raised in the WAI 262 claim.

Te Pae Tawhiti: Wai 262(external link) — Te Puni Kōkiri | Ministry of Māori Development

Part of this work includes the development of a sui generis (unique) intellectual property policy and legal system for taonga and mātauranga Māori.

Given the work currently underway in this area, the purpose of the Code, and the complexity of the issues involved, any provisions within the Code relating to taonga would need to be carefully considered and specific to the trading relationships between suppliers and retailers. It would be inappropriate for the Code to create new intellectual property rights in this area. However, there may be other options for ensuring culturally significant practices are recognised in the Code.

Further information and guidance regarding IP rights over creations that contain a te Reo Māori or Māori design elements, can be found at the Intellectual Property Office website:

Māori IP(external link) — New Zealand Intellectual Property Office

*Taonga refers to a treasured possession, including property, resources, and abstract concepts such as language and cultural knowledge. Māori “Traditional Knowledge” is called mātauranga Māori. Mātauranga Māori is central to te Ao Māori (the Māori world view). It forms the basis for many aspects of our unique national identity, for both Māori and non-Māori in Aotearoa. Iwi, hapū and whānau are the owners, inheritors and kaitiaki of this taonga.

Clause 26 – product ranging, shelf space allocation and range reviews

Product ranging refers to decisions made by designated retailers about which grocery products to stock. Different retailers will have different approaches to product ranging to provide the best competitive offering to consumers.

Shelf allocation is specifically about where stock is placed on the shelves in a retail store. The position of a product affects turnover because some positions on the shelf are more appealing to consumers.

A range or category review is a review of the products a designated retailer stocks in various product categories to evaluate how successful they are. This consultation paper refers to ‘range reviews’, but means any similar review undertaken by the designated retailer.

Decisions relating to shelf allocation and product ranging affect how well a supplier’s product may sell. Requiring non-discrimination on product ranging and shelf allocation may help prevent designated retailers from using different approaches for their private label products and other suppliers.

Clause 26 requires retailers to publish, and act in accordance with principles relating to range reviews and shelf allocation. It requires that the retailer apply these principles without discrimination.

It also requires early, written warning of range reviews – including an opportunity for suppliers to discuss the outcome of such a review.  

Clause 27 – price increases

The Commission heard concerns from suppliers regarding the process for seeking price increases from retailers.

See the Commission's Market Study at 8.140 [PDF, 8.7MB](external link) — Commerce Commission

Clause 27 seeks to addresses these issues by requiring retailers to respond to price increases within 30 days.

This clause is modelled closely on the Australian Code. However, it includes one small modification at 27(3), which provides for situations where the retailer may require further information from the supplier to make an informed decision regarding the price increase. In such cases, the 30-day period does not begin until the supplier provides such information.

Penalty levels

The Bill provides 4 different tiers of civil penalty levels for breaches of the legislation. The Bill allows for the Code to set out which of Tiers 1,2 or 4 may apply for breaches of the Code (Tier 3 does not apply to the Code).

a. Tier 1 – the maximum is $500,000 for an individual. In any other case it is the greater of $10 million, or three times the value of any commercial gain, or 10% of annual turnover.

b. Tier 2 - the maximum penalty is $200,000 for an individual. In any other case it is the greater of $3 million, or the value of any commercial gain, or 3% of annual turnover.

c. Tier 4 – the maximum penalty under this Tier is $30,000 for an individual or $300,000 in any other case.

Maximum penalties need to be set at a level which sufficiently deters non-compliance and is proportionate to the level of harm which may be caused by the non-compliance.

The exposure draft sets Tier 2 as the maximum penalty level which applies to breaches of the Code. Retailers regulated by the Code are likely to be large businesses with high annual turnover. Maximum penalty levels need to be set at a level which takes this into account and ensures there is sufficient incentive to dissuade non-compliance.

However, MBIE will be undertaking further analysis on this approach, including on whether different tiers of penalty levels should apply to different breaches of the Code. Stakeholder feedback on penalty levels will be important for informing this analysis, ahead of final decisions on the Code.

We would like to know if you think there are any aspects of the Code that would have such a significant impact that they would merit a higher penalty than Tier 2.

Similarly, we seek your views on whether the Tier 2 penalty is appropriate for some of the more procedural elements in the Code, or provisions where a contravention would not have as significant an impact on competition.

Requirements to provide written statements when relying on reasonableness exceptions

In several places, the Code provides exceptions for prohibited conduct if certain requirements are met (mainly, whether the conduct is reasonable and provided for in the supply agreement). These are necessary exceptions to ensure the Code is flexible enough to deal with the many types of scenarios that could arise between retailers and suppliers.

When relying on these types of exceptions, the Code requires the retailer to provide a written statement to the supplier which sets out why they consider the exception to apply. The aim of these requirements is to improve compliance with the Code and transparency regarding the use of such exceptions.

A list of the clauses where these requirements apply is set out below. For the more significant prohibitions in the Code, a statement is required each time the retailer relies on the exception. In other cases, it is required only at the request of the supplier. 

a. when making unilateral changes to a supply agreement – see clause 9(5)

b. at the request of the supplier, when setting-off a payment –see clause 12(4)

c. when requiring a payment for wastage – see clause 14(3)

d. when requiring payment as a condition of supply – see clause 15(4)

e. when requiring payments for a retailer’s business activities – see clause 16(7)

f. at the request of the supplier, when requiring payments for promotions – see clause 17(5)

g. at the request of the supplier, when making delisting decisions (which, in line with the Australian Code, also includes a requirement for the retailer to review the delisting decision on request of the supplier) – see clauses 19(3), 19(4) and 19(5).

Part C – other proposals we are consulting on

There are some provisions in the Australian Code which are not included in the exposure draft. We are seeking feedback on whether these provisions should be included in the Code.

Australian Code(external link) — The Legislation Register

Payments for better positioning of groceries

The Australian Code prohibits retailers from requiring payment for securing a more desirable position on its shelves, or an increase in shelf space, except where:

a. the payment is reasonable

b. is required under the grocery supply agreement

c. the agreement sets out the circumstances when such payments are required.  

The New Zealand Grocery Supply Code could include a similar clause. However, we are seeking feedback on whether such payments are a problem in New Zealand. Placing restrictions on such payments may have unintended consequences for suppliers and retailers who may like to come to such arrangements for their mutual benefit.

It is worth noting that clause 26 requires retailers to publish their shelf allocation principles, and act in accordance with those principles. This will provide better transparency and consistency regarding shelf allocation decisions.

Changes to supply chain procedures

The Australian Code prevents retailers from making any material changes to supply chain procedures, except where reasonable notice is given. If reasonable notice is not given, then the retailer must compensate the supplier for any costs incurred as a result of the retailer failing to give notice.

Clause 8 of the Code requires all supply agreements to detail requirements about the delivery of groceries, and clause 9 places restrictions on unilateral changes to supply agreements. Read together, we consider this would prevent a retailer from unreasonably changing supply chain procedures. Further restrictions may therefore not be needed.

We are seeking feedback on whether submitters are aware of any particular issues arising from changes to supply chain procedures in New Zealand, and whether these would warrant additional protections in the Code.

Transfer of intellectual property rights

As noted above, the draft Code contains protections which seek to ensure that retailers respect the intellectual property rights of suppliers and don’t misuse or disclose confidential business information.

The Australian Code provides an additional protection. It prohibits retailers from requiring a supplier to transfer or exclusively licence any intellectual property held by the supplier, as a condition of supply of an equivalent home-brand product. We would like feedback from stakeholders on whether it would be beneficial for the Code to include a similar protection.

Final questions