On 31 July 2008, the Australian Competition & Consumer Commission (ACCC) provided its Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries (the Report) to the Minister for Competition & Consumer Affairs. The Report is a comprehensive examination of the competitiveness of the Australian grocery sector, from the farmer to the consumer. Among the many matters that the ACCC sought to grapple with was whether in recent times the "gap" between prices at the farm gate and the check-out prices for groceries are widening, such that farmers are now "getting less" than they used to. The ACCC also assessed concerns submitted to it about the long-term ability of small family operated independent supermarkets and small retailers to compete with the major supermarket chains, namely Coles and Woolworths (MSCs).

The ACCC received "vast quantities of data, information and documents" during its inquiry. It considered over 250 public submissions and its final report was 570 pages (not including appendixes).

ACCC findings

The key findings of the ACCC were that:

  • The retail grocery sector is "workably competitive";
  • The "vast majority" of grocery price increases in recent years are attributable to factors other than a weakening in competition in retailing, such as due to supply and demand changes in international and domestic markets and domestic weather conditions;
  • There was no evidence identifying anything "fundamentally wrong" with the grocery supply chain leading to higher retail prices paid by consumers while prices at the "farm gate" obtained by suppliers have stagnated; and
  • Price competition on "key value items" is strongest;
  • The impact of ALDI has brought about competitive responses on many products;
  • The MSCs and Metcash (the major wholesaler to the independent sector) have "significant buyer power" allowing them to obtain benefits of the lower wholesale prices they extract yet, notwithstanding this, competition at the retail level is sufficient to ensure that "at least some" of these benefits flow to consumers in the form of lower prices.

The findings that retail competition is "workably competitive" and that there is nothing "fundamentally wrong" with competition in the grocery supply chain are significant. They should be distinguished from ideal, but generally artificial, notions of 'perfect' competition. The concept of "workable competition" has been recognised as an important feature of Australian competition law since it was endorsed in the seminal case of Re QCMA1, where the Trade Practices Tribunal (as the Australian Competition Tribunal was then called) cited with approval the following statement:

"Where there is workable competition, rival sellers, whether existing competitors or new potential entrants into the field, would keep this power [to choose its level of profits by giving less and charging more] in check by offering or threatening to offer effective inducements..."

ACCC key recommendations

The three key reform proposals positively recommended by the ACCC are:

  1. mandatory "unit pricing" in supermarkets. Under unit pricing, a retailer would not only have to display the total price of an item, as is generally the practice, but they would need to display the price of that item per unit of measure (eg per litre, per kilo, etc);
  2. amendments to the Horticultural Code of Conduct; and
  3. all appropriate levels of government should, when considering a planning application involving retail space for a supermarket, have regard to the impact on competition between supermarkets in that area.

The Government has already announced it will consider a nationally consistent unit-pricing regime. It has also announced it will consider the ACCC's specific recommendations to the Horticultural Code. The Government will also refer the issue of the anti-competitive impact of planning laws to the Council of Australian Governments. In this respect, the key findings of the ACCC are likely to be largely accepted, although the detail of any legislative reforms will be critical. In particular, the introduction of a requirement for planning bodies to have regard to the competitive effects of a particular planning application will need to be carefully managed to ensure that the application process is not further delayed by complicated submissions dealing with competition law matters. The ACCC has also indicated that following the receipt of information obtained during its inquiry that it will undertake reviews of specific cases of leases in some shopping centres, suggesting that further scrutiny of leases in key sites are likely to continue regardless of any specific legislative reform proposals.

Creeping acquisition laws

In addition to its key recommendations, the ACCC also expressed its support for laws dealing with "creeping acquisitions". The Government has since released a discussion paper on creeping acquisitions (discussed in this Newsletter).

What the ACCC rejected

Finally, the Report is significant not simply for what it recommended but what it rejected. The ACCC specifically rejected calls for more radical reforms of the grocery sector of the TPA raised in the inquiry process such as:

  • placing market share "caps" on Woolworths and Coles
  • separation of the wholesale and retail functions for Woolworths and Coles
  • broader amendments to section 50 of the TPA which deals with restrictions on mergers or acquisitions on competition grounds (other than for creeping acquisitions).

Implications for the grocery sector

These conclusions in the Report – and the specific rejection of wider reforms - are no doubt on balance good news for the MSCs. In short, the reforms recommended by the ACCC are relatively modest and reflect the ACCC's conclusion that competition is "workably competitive" in the sector. Equally, the conclusions of the ACCC in the Report will no doubt disappoint many groups who held the view that competition was defective in the grocery sector. The ACCC was acutely aware of these expectations and it noted:

"In scrutinising the information before the inquiry, it has become clear that some industry participants, representative groups and commentators have made unsupported claims to the inquiry and in the media. These claims were based on generalisations and there was a failure to provide facts to support the claims."

The Government is now considering the detail of the Report. The next steps will be the Government's reform process, part of which has already been announced. When the details of those reforms are released, we will continue to keep you updated with their implications.

Footnote

1. Re Queensland Co-operative Milling Association Ltd & Defiance Holdings Ltd (1976) ATPR 40-012 at 17,425 – 17,426.

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