Grocery Inquiry 2008

• ACCC inquiry into the competitiveness of retail prices for standard groceries

• Home page for the Inquiry

 

• Terms of reference

  On 22nd January 2008, Chris Bowen (Assistant Treasurer and Minister for Competition Policy & Consumer Affairs) requested that the ACCC hold a public inquiry into the competitiveness of retail prices for standard groceries pursuant to Part VIIA of the Trade Practices Act 1974.

• Chris Bowen's letter to the ACCC provided that "Matters to be taken into consideration by the inquiry shall include, but not be restricted to:

  * the current structure of the grocery industry at the supply, wholesale and retail levels including mergers and acquisitions by the national retailers

  * the nature of competition at the supply, wholesale, and retail levels of the grocery industry

  * the competitive position of small and independent retailers

  * the pricing practices of the national grocery retailers and the representation of grocery prices to consumers

  * factors influencing the pricing of inputs along the supply chain for standard grocery items

  * any impediments to efficient pricing of inputs along the supply chain and

  * the effectiveness of the Horticulture Code of Conduct, and whether the inclusion of other major buyers such as retailers would improve the effectiveness of the code." (see Report page 1)

• Summary

• In his joint press conference with Chris Bowen MP following the release of the Report, Graeme Samuel made the following observations relating to the competitiveness of the grocery market:

  'Food prices in Australia have risen significantly but only a small part of this can be blamed on any lack of competition. ...

  ... there is little evidence of any weakening of price competition in grocery retailing and wholesaling has played a significant role in explaining recent increases in food price inflation.

  ... overall the grocery market is, as the Minister has said, workably competitive. That term is used to describe a market in which competition exists but it is definitely not as competitive as it should be. In a working competitive market there is sufficient competition to protect consumers from monopolistic practises but there is a lack of the type of strong and vigorous competition that means consumers are getting the best deal possible.

  Being workably competitive means that Coles, Woolworths and Metcash have little incentive to destroy the current balance through vigorous price competition. Some of the impediments to more vigorous competition are, first, high barriers to entry due to difficulties new or expanding players have in finding new sites. The behaviour of Coles and Woolworths with their restrictive agreements at shopping centres and gaming of planning objection processes has increased these barriers....

  Finally, we found that there is limited price competition from the independent supermarkets. Many independent supermarkets compete on factors other than price such as convenience, which is fine. However for those independents that want to compete on price the wholesale price at which they can buy packaged groceries is a significant factor holding them back.

  Metcash's position as the only grocery wholesaler to these supermarkets weakens the competitive threat that the independents can impose in the grocery industry.'

  He also observed that the inquiry found 'no across the board evidence to indicate that there are significant structural problems in the supply chain'.

  Samuel noted that the ACCC made recommendations in three areas; planning laws, the Horticulture Code and 'the introduction of mandatory unit pricing for all significant supermarkets. Unit pricing will assist consumers in comparing prices and will add to the competitive tension between different products and between supermarkets'

  Samuel also noted that they would be looking more closely at conduct that might infringe Part IV of the TPA: 'We'll also be taking a close look at restrictive agreements and leases. Up until the grocery inquiry we had not heard many complaints about these, but the grocery inquiry has prompted industry participants to complain, and the ACCC will be closely considering all issues on particular leases under Part IV of the Trade Practices Act'

• Key findings

• General

  The ACCC made the following key findings (pages xiv-xv of the Report)

  'Grocery retailing is workably competitive, but there are a number of factors that currently limit the level of price competition, including:

  * high barriers to entry and expansion, particularly in relation to difficulties in finding new sites for development

  * the limited incentives for Coles and Woolworths to compete aggressively on price

  * limited price competition that Coles and Woolworths face from the independent sector. Independent supermarkets tend to focus on convenience and service. A key factor inhibiting price competition from the independent retailers is the wholesale prices of packaged groceries supplied by Metcash.

  Price competition is strongest on promotions of key value items (which are products known by the supermarkets to be used by consumers to assess value). This is to be expected, given that the pricing of these products is most likely to encourage consumers to change where they buy groceries.

  ALDI has been a vigorous price competitor since its entry into Australia and has the incentive and ability to engage in sustained price competition. This has had a dynamic impact on the grocery sector and brought about competitive responses from Coles and Woolworths on many products.

  Any possible weakening in the level of competition in retailing is unlikely to have been a substantial contributor to food price inflation in Australian. The gross margins of Coles, Woolworths and Metcash have increased over the last five years.

  However, ACCC analysis indicates that these increases in gross margins could have only made a small contribution to overall food price inflation.2 In other words, the vast majority of grocery price increases in Australia are attributable to other factors, such as supply and demand changes in international and domestic markets, increases in the costs of production and domestic weather conditions.

  The ACCC has not identified anything that is fundamentally wrong with the grocery supply chain. Evidence provided to the inquiry does not support the proposition that retail prices have risen while farm-gate prices have stagnated or declined. While there may be some instances where this has occurred, generally movements in farm-gate pricing are set by supply and demand in competitive markets. Changes in the wholesale prices that Coles, Woolworths and Metcash pay suppliers are reflected in movements in shelf prices over time.

  Coles, Woolworths and Metcash have significant buyer power in relation to many packaged grocery products because many suppliers effectively have little option other than to deal with these buyers. Competition between retailers is, however, sufficient to ensure that Coles and Woolworths cannot simply retain all of the benefits of the lower wholesale prices they extract—at least some of the benefits flow to consumers in the form of lower retail prices.'

  Creeping acquisitions

  In relation to creeping aquisitions, the Report noted that "Recent growth by the major supermarket chains (MSCs) has largely occurred through organic growth rather than growth through acquisitions. While creeping acquisitions are not currently an issue in the grocery industry, they are a broad issue that can affect many industries. The ACCC accordingly maintains its support for the introduction of legislation that would better allow it to address creeping acquisitions more generally." (page 525)

• Predatory pricing

• In relation to predatory pricing, the Report noted that the "ACCC was not presented during the inquiry with examples of conduct that would appear to constitute predatory pricing. It does not consider that specific predatory pricing rules need to be introduced for grocery retailing. However, it recognises that predatory pricing is a potential concern in the grocery industry" (page 525)

Key Recommendations

The Government has indicated it will move on four key recommendations as a matter of urgency: see preliminary government response

1. zoning and planning laws which may have anti-competitive impacts

2. introduction of mandatory nationally-consistent unit pricing

3. consider the ACCC's 13 recommendations to enhance the Horticulture Code of Conduct; and

4. implementing creeping acquisition laws (discussion paper to be released by the end of August)

Key statements

Forthcoming

Membership

ACCC

Submissions and meetings

'The inquiry held hearings around Australia, received over 250 public submissions and obtained vast quantities of data, information and documents from Coles and Woolworths, other retailers, Metcash and many suppliers.' (Report page xiii)

"Twenty-two hearings were conducted across all Australian capital cities and in several regional towns. Seventyseven scheduled witnesses gave evidence to the inquiry during these hearings." (Report page 3)

Legislative changes

Proposed: introduction of creeping acquisition laws

 

Reporting Body

ACCC

Status

Complete (31 July 2008)

Focus

Compettiveness of grocery prices