* Report proposes mandatory code of conduct for supermarkets

* Cos should be fined up to A$10 mln or 10% of revenue for conduct breach, report recommends

* Rejects calls to give regulators power to break up big chains

SYDNEY, April 8 (Reuters) - Australia's major supermarkets should face hefty fines if they do not comply with an industry code of conduct when dealing with suppliers, a government-commissioned report said while rejecting calls to give regulators the power to break up the big chains.

Supermarkets with more than A$5 billion ($3.3 billion) in annual revenue - which at present are Woolworths, Coles , Germany's ALDI and wholesaler Metcash - should be forced to comply with the code of conduct that has until now been voluntary, the interim report by former competition minister Craig Emerson recommends.

"The existing Food and Grocery Code of Conduct is not effective. It contains no penalties for breaches and supermarkets can opt out of important provisions by overriding them in their grocery supply agreements. I firmly recommend the Code be made mandatory," Emerson said in the report.

Companies should be fined up to A$10 million or 10% of revenue if they do not comply with the code, according to the report. The final report is due in June. Woolworths and Coles booked sales of A$64 billion and A$41 billion in 2023.

The two biggest grocers in Australia ring up two-thirds of the country's grocery sales between them, prompting calls from growers and opposition leaders to break up the supermarket giants to improve competition and prices.

Emerson's report, however, recommends against giving the antitrust regulator power to make supermarket operators sell assets, saying it could lead to higher market concentration.


Australia's centre-left Labor government, of which Emerson is a former minister, is trying to show it can tame a cost of living crisis that has fuelled criticism of supermarkets where shelf prices have surged with a hike in fuel and labour costs.

While there are six inquiries underway into the sector, the government has ruled out demands to introduce divestiture powers as demanded by the rural-focused Nationals, which are part of the conservative opposition, and the left-leaning Greens.

"The whole point of this interim report is how do we make the code tougher and more compulsory, better dispute resolution and processes and bigger penalties for people who do the wrong thing," Treasurer Jim Chalmers told reporters.

Divestiture powers were "not something we've been exploring because we have found better, more effective ways to deal with some of the issues in our competition policy landscape".

Nationals leader David Littleproud, who has called for break-up powers over the supermarkets, told reporters the government had been too slow to "take action on supermarket price-gouging".

A spokesperson for the Australian Competition and Consumer Commission, which would oversee a mandatory code of conduct and which is conducting a separate review of the sector, said Emerson's report highlights "several changes that the ACCC sees as important, such as meaningful penalties and a more independent dispute resolution process".

A Woolworths spokesperson said the company supported making the code of conduct mandatory but added that it should apply to other large competitors like Amazon.com and Costco which had bigger revenues globally.

A Coles spokesperson said the company was committed to "delivering value to our customers while maintaining strong, collaborative relationships with our valued suppliers". ($1 = 1.5232 Australian dollars) (Reporting by Renju Jose and Byron Kaye in Sydney; Editing by Lincoln Feast and Himani Sarkar)