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Coles, Woolworths sign code of conduct

After 14 months of negotiations, Australia’s two largest supermarket retailers, Coles and Woolworths (ASX: WOW) have agreed to a voluntary code of conduct.

According to the Australian Financial Review (AFR), Woolies and Coles – owned by Wesfarmers (ASX: WES) – will not be able to retrospectively alter contract terms and will be prohibited from developing private label products using suppliers’ intellectual property. Retailers will also be unable to charge suppliers for products stolen from their stores.

The news is quite astonishing really, and shows the market power that the two retailers exercise over suppliers. Firstly, it would seem logical that supermarkets should be responsible for products that are shoplifted, much like other retailers such as David Jones (ASX: DJS) and Myer Holdings (ASX: MYR). And the first two rules would appear to cover acts that are illegal (and if not should be) anyway.

The AFR reports that suppliers welcomed the agreement, saying the code goes further than the UK’s Grocery Code of Conduct in issues of private label. As part of the agreement, Woolies and Coles also have to appoint an internal compliance officer, and report every six months on their compliance with the provisions. Senior retail executives must sign off on the documents, ensuring the compliance has high-level support from senior management within the company.

The new code will apply to all new grocery contracts and retrospectively applied to all existing contracts, once the code is in place, following a 12-month transition.

It appears to be a major win for suppliers such as Goodman Fielder (ASX: GFF) and Coca-Cola Amatil (ASX: CCL), with the supermarket retailers also forced to outline how they allocate product space on shelves, and to ensure that private label products are not favoured over branded products.

Foolish takeaway

The code of conduct may also relieve some pressure on the supermarket retailers from the Australian Competition and Consumer Commission (ACCC), which has been investigating a number of complaints by suppliers. But the good news should be welcomed by consumers, who will continue to have a choice when it comes to branded-label or private-label products.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Coca-Cola Amatil. You can follow Mike on Twitter @TMFKinga

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