Former Labor minister Craig Emerson has told the government it should not force large supermarkets to sell off stores, but should fine them if they mistreat suppliers.

The government asked Dr Emerson to examine how effective current guidelines are in ensuring supermarkets deal fairly with their suppliers.

Those guidelines are set out in a voluntary code of conduct, which the supermarkets drafted themselves. There are no penalties for breaches.

In an interim report, Dr Emerson said there should be a mandatory code penalties as high as 10 per cent of annual revenue.

He also stepped outside his scope to warn the government against divestiture (forced sale) powers, which he said would not be a credible way to boost supermarket competition.

The Greens and the Nationals both favour supermarket divestiture powers and there has been some suggestion the Liberal party is also considering it.

But Prime Minister Anthony Albanese has ridiculed the idea as a "soviet" approach.

Supermarkets write their own rules and don't have to follow them

Supermarkets devised the voluntary code of conduct in 2015 in response to public anger about their treatment of suppliers.

Australia has a highly concentrated supermarket business, with Coles and Woolworths accounting for two-thirds of the market.

This gives them significant leverage over suppliers, especially small suppliers, who have long complained they are squeezed on price and mistreated or even threatened if they complain.

The voluntary code states supermarkets should not be "reckless" or "unreasonable" in their dealings with suppliers. But suppliers told Dr Emerson it was nearly impossible to hold supermarkets to account given the code was voluntary.

Suppliers can launch a dispute if they feel the code has been breached, with theoretical reward of up to $5 million in compensation. But they must prove their case before an arbitrator the supermarkets themselves have appointed. Only six disputes have been initiated and none won.

Supermarkets said this showed there were few problems, but suppliers said it reflected their fear of retribution if they caused trouble.

"[That] is a palpable reality and needs to be called out," industry body Fresh Markets Australia said in a submission to the review.

"Suppliers risk severe repercussions, including slashed orders … should they dare to challenge unfair treatment or advocate for their rights."

Call for legal penalties plus better mediation

Dr Emerson recommended a mandatory code of conduct for the four biggest players: Coles, Woolworths, Aldi, and wholesaler Metcash.

This would turn the voluntary guidelines into legally-binding obligations, with penalties attached. Major breaches could attract a fine of 10 per cent of annual turnover, $10 million, or three times the value of the breach, whichever is largest.

But extracting these penalties would not be easy.

The ACCC could apply infringement penalties of up to $187,800 for minor breaches, but if it wanted the maximum it would need to take a supermarket to court, and would need a supplier willing to 'go the distance' through what could be a drawn-out process.

That would raise the same fear of retribution, and while he called for anti-retribution protections to be added to the code, Dr Emerson acknowledged the court option would likely be reserved for the most serious cases.

Accordingly, he also recommended a new independent mediation process. Instead of a supermarket-appointed arbiter, a supplier could seek to go through an independent mediator.

Should mediation fail, there would be an option for independent arbitration to award possible compensation.

Supermarkets could not be forced to play ball with this process, since the Australian constitution requires both parties to consent to arbitration.

But Dr Emerson suggested non-compliant supermarkets would be "judged harshly", seeing it as a choice between a court of law and "the court of public opinion".

Supermarket divestiture not 'a credible threat'

Dr Emerson also rubbished calls for divestiture powers, which could force supermarkets to sell stores if they have too much market share.

He said such powers would "lack credibility" because there was no obvious buyer for offloaded stores.

"If [large players] were prohibited from buying the divested stores, that would leave only smaller supermarket chains and foreign supermarkets as potential buyers."

"If these chains were not interested, or were not in a position to buy, these stores would be forced to close. This would be at the cost of the jobs of the workers in those stores and of inconvenience to local shoppers," he said.

The Nationals have been strong supporters of divestiture powers, but Nationals leader David Littleproud last week appeared to walk that back slightly, saying only that he supported it "in principle".