In January 2008 the new Rudd Labor Government directed the ACCC to hold a public inquiry into the competitiveness of retail prices for standard groceries.
Since that time the ACCC has held hearings around Australia, received more than 250 public submissions and obtained and reviewed an enormous volume of data and documents from industry participants. The ACCC report has been released and its key conclusions are outlined below.
How competitive is supermarket retailing in Australia?
The ACCC concluded that supermarket retailing in Australia is ‘workably competitive’, with retail price competition keenest in relation to:
- products known by the supermarket chains to be used by consumers to assess value. There are around 300 of these known value items (KVIs), and
- the types of products stocked by ALDI. In this context ALDI (which is not a full-service supermarket and operates under a different business model to the major supermarket chains (MSCs)) was found to be a significant driver of increased competition in the geographic areas and product lines in which it operates.
Importantly, the ACCC said that the level of competition in grocery retailing has not been a substantial contributor to food price inflation in Australia. While food prices have undoubtedly increased, this has been driven by a range of other factors including high international demand, increased costs of production (in particular those driven by higher input costs associated with fuel and fertilisers) and adverse domestic weather conditions (particularly sustained drought and water shortages).
Such conclusions are consistent with a ‘workably competitive’ industry. In simple terms this means that there are several firms selling closely related products; the firms are not colluding; and incumbent firms do not face substantial long-run cost advantages. On the other hand, consumers are able and willing to switch between alternative suppliers. This is the type of competition that exists is most Australian industries. It is to be contrasted with the theoretical concept of ‘perfect competition’, where many producers sell homogeneous goods to many identical consumers. Such a concept can be a useful analytical tool, but it will rarely (if ever) match real world markets where firms are able to legitimately differentiate themselves and earn economic profits.
In this context the independent grocery retail sector was thought by the ACCC to compete mainly on the basis of convenience, service levels and local community ties, rather than on price. The ACCC acknowledged that the implications of another large-scale wholesaler entering the industry are unclear. As the only national wholesaler to the independent sector, Metcash can access significant economies of scale for the benefit of the independent sector. If there were two large wholesalers, it is possible that neither would realise the efficiencies achieved by Metcash.
Can competition at the retail level be improved?
The ACCC suggested that reducing barriers to new entry for retail grocery stores could potentially improve the competitive landscape in Australia. In this regard two particular barriers were identified.
- The MSCs were said to include terms in supermarket leases which prevent shopping centre managers from leasing space to competing retailers, or which provide commercial disincentives to them doing so. In saying this the ACCC acknowledged that these types of restraints often play an important role in underpinning investment in new centres. Under the Trade Practices Act 1974 (Cth) these types of restrictions will only raise concerns where they have the purpose or likely effect of substantially lessening competition in a relevant geographic area (which may well be the local or regional area surrounding the shopping centre in question). The ACCC has suggested that it will more closely scrutinise these restraints in the future and has encouraged independent retailers to bring any examples of interest to their attention.
- The ACCC said it was given evidence to show that supermarkets presently take advantage of planning/zoning objection processes to deter or delay new entry at the retail level. In light of this the ACCC recommended that all levels of government consider ways of taking into account the benefits of improved grocery competition in relevant zoning and planning laws and related administrative decisions.
Are there other concerns from farm-gate to check out?
The ACCC concluded that Coles and Woolworths account for around 50 per cent of fresh produce sold in Australia. However, despite this market share the ACCC uncovered no evidence to suggest the MSCs are acting in an anti-competitive way in their dealings with suppliers of fresh products.
A similar conclusion was reached in relation to packaged groceries, where substantial buyer power in the hands of Coles and Woolworths (accounting for around 70 per cent of sales) as well as Metcash was not thought to have stymied innovation and other forms of competition at the supplier level. To the contrary, the ACCC acknowledged that it is end consumers who often benefit from wholesale buyer power in the form of lower retail prices.
This is an important example of competition (and competition law) in practice. It is often simplistic and economically unsound to draw adverse inferences about the efficient and effective operation of a market merely by looking at market shares.
Similarly, it is important to note the ACCC conclusions that the existence of buyer power cannot be said to be either per se enhancing or destructive of downstream competition or final consumer welfare. Judgments on competitive and efficiency impacts in this regard are usually best tested on the evidence available from specific factual situations.
‘Creeping’ supermarket acquisitions
So-called ‘creeping acquisitions’ occur where a powerful market participant successively acquires smaller operators over time. The ACCC has previously expressed some concern that the existing competition laws do not adequately address the implications of this conduct and it therefore continues to support Federal Government plans for law reform in this area.
However, in the grocery inquiry the ACCC did not consider ‘creeping acquisitions’ to be a feature of the expansion of Coles and Woolworths in Australia, with only 10 per cent of new store openings by MSCs in the last two years arising from an acquisition or other displacement of an independent supermarket.
Introduction of unit pricing and ‘grocery choice’ price monitoring
Two further measures have been supported by the ACCC to improve the level of information available to end consumers about grocery prices.
- A mandatory, nationally-consistent unit pricing regime to be introduced within 12 months. The regime would apply to standard grocery items sold by significant supermarkets both on in-store price labels and in print advertisements.
- Consistent with previous Federal Government announcements, the ACCC will conduct a monthly survey of prices for typical grocery baskets across Australia and will publish the results on a dedicated consumer website (known as GROCERYchoice). This website is now active.
In relation to unit pricing we note that this type of direct pricing/marketing regulation often raises complex issues and can have unintended consequences that are not apparent from a review of the ‘headlines’. While it might also be thought the GROCERYchoice website would have little downside, it is worth noting that the time periods and the geographic areas that are being used for this purpose do not appear to closely match the likely geographic areas and time periods in which consumers make real life decisions (and in which competition actually occurs). Most consumers buy groceries on a weekly basis and ‘top up’ their requirements through the week, however the proposed price review will take place on a monthly basis. Similarly, retail discounting does not occur on a monthly cycle. Further, it might be expected that consumers will shop locally for the majority of their grocery needs, however the proposed price review will publish prices that cover very broad geographic areas. This mismatch calls into question the usefulness of the website for ordinary consumers. It would also be unfortunate if the unintended consequence of GROCERYchoice was to alter ordinary ‘workable competition’ and itself become a feature of the market.
We believe both of these proposals are worthy of careful consideration and we encourage businesses affected to participate in the refinement of these measures.
The Federal Government’s preliminary action plan
In response to the ACCC report and its recommendations the Federal Government has already indicated it will:
- ask the Council of Australian Governments to consider the possible anti-competitive impacts of state and local zoning and planning laws
- consider the best way to introduce a mandatory national unit pricing scheme. Consultation will now occur on issues such as the range of products and store sizes to be captured, while also ensuring regulatory compliance costs are not excessive
- release a discussion paper on a possible new ‘creeping acquisitions’ law by the end of August. No doubt the thorny issue of how past and long completed transactions can be dealt with under such a law will be considered. Again, we encourage parties interested in or affected by this reform to consider participating in the debate, and
- progress ACCC recommendations to improve the Horticulture Code of Conduct (which applies to trade in horticultural produce between growers and buyers).1
This rapid response from the government is indicative of a continued focus on the development of competition and consumer policy. We look forward to reviewing and commenting upon the detail of these proposals.
Endnote
1. We have not dealt with these ACCC recommendations in this overview.
This overview was prepared by Peter McDonald, Senior Associate, Melbourne.
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