Grocery Inquiry 2008
ACCC inquiry into the competitiveness of retail prices for standard groceries
The Report noted the 'biggest impediments to improved competition include:
1. The high barriers to entry for large supermarkets
2. a lack of incentives for the major supermarkets to compete strongly on price, and
3. the limited price competition from independent retailers.' (see preliminary government (Labor) response)
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)
An issues paper was released on 11 February 2008 - it set out 83 questions for comment.
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'
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.'
In relation to creeping acquisitions, 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)
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)
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
Note: Unit Pricing code was introduced
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)
Note: two discussion papers were released (view discussion papers). Little came of these discussions with a very modest change to the law, purporting to relate to creeping acquisitions, introduced by the Competition and Consumer Legislation Amendment Act 2011. This Act changed the reference in s 50(1) from 'a market' to 'any market' (purporting to remove any doubt that a merger will be prohibited if it substantially lessens competition in a market other than the market in which the merging parties compete; this had never been a problem in the past) and removing the word 'substantial' from the definition of market in subsection 50(6) (this was theoretically directed at creeping acquisitions, but has little to do with concept of creeping acquisition discussed in this report)
'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). The submissions are available from the inquiry home page.
"Twenty-two hearings were conducted across all Australian capital cities and in several regional towns. Seventy seven scheduled witnesses gave evidence to the inquiry during these hearings." (Report page 3)
Preliminary Government Response
The preliminary government response was delivered by Chris Bowen, then Assistant Treasurer and Minister for Competition Policy and Consumer Affairs in the Rudd (Labor) Government - view press release (5 August 2008). It stated:
The Rudd Government today released its preliminary action plan in response to the Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries (the Report).
"The Report reveals there is real reform to be had in Australia’s grocery sector.
Although the Report found that ‘grocery retailing is workably competitive’ it also highlights a number of factors that currently limit the level of competition including ’the complexities of planning applications…[which] provide the opportunity for Coles and Woolworths to ‘game’ the planning system to delay or prevent potential competitors entering local areas.’
According to the Report the biggest impediments to improved competition include:
- The high barriers to entry for large supermarkets,
- a lack of incentives for the major supermarkets to compete strongly on price, and
- the limited price competition from independent retailers.
The Government’s preliminary action plan in response to the ACCC’s recommendations covers four specific areas: zoning and planning laws; unit pricing; the Horticulture Code of Conduct and creeping acquisitions.
The Government intends to move in the following areas as a matter of urgency:
- refer the anti-competitive impacts of state and local zoning and planning laws to the Council of Australian Governments (COAG);
- the Government will consider the best way to introduce a mandatory nationally-consistent unit pricing regime. Issues such as the product range that’s captured and store size will need to be worked through in consultation with industry to ensure compliance costs are kept to a minimum. Unit pricing has proven to be a transparent and popular tool for overseas consumers;
- the Minister for Agriculture will work together with the horticultural industry through the Horticulture Code Committee to carefully consider the ACCC’s 13 recommendations to enhance the operation of the Horticulture Code of Conduct (which regulates trade in horticulture produce between growers and traders and provides dispute resolution procedures); and
- the Government will implement a creeping acquisition law, releasing a discussion paper by the end of August to gauge the best way forward.
The Report also highlights the positive impact ALDI has had in grocery price competition. The Government is committed to encouraging new entrants to the market (whether at the retail or the wholesale level) and has already relaxed restrictions that have prevented foreigners from buying vacant land to build new supermarkets.
The Government also welcomes the ACCC’s plan to review more cases so that restrictive provisions in leases between supermarkets and shopping centres that prevent or delay the entry of other supermarkets into a centre are prohibited under Part IV of the Trade Practices Act 1974 (the Act), where appropriate.
“I believe that our action plan, combined with the broader reforms that are already in train to further strengthen competition policy, such as the amendments to the misuse of market power provision and the criminalisation of serious cartel conduct, will ensure that the grocery market remains competitive,” the Assistant Treasurer said.
Finally, the Government is also fulfilling its election commitment made by the then Leader of the Opposition on the 11th July last year to set up a dedicated website that gives consumers a snapshot of local grocery prices. The GROCERYchoice website will be active from tomorrow Wednesday 6th August 2008.
“The ACCC has conducted a substantial amount of work to ensure only “like for like” items are included in the website,” Mr Bowen said.
Over the coming months we’ll be working with retailers and consumer organisations to further enhance the website with additional information and applications to help consumers make more informed purchasing decisions.
The website will provide a guide to consumers as to the cheaper supermarkets in their region. Consumers will then be able to make their choices based on customer service, convenience and other factors.
"The introduction of unit pricing combined with GROCERYchoice will empower consumers to find the best deals at the supermarket," Mr Bowen said.
“I would like to thank the ACCC for delivering this comprehensive and wide-ranging report into the grocery sector.”"
Change to the merger provisions
Two discussion papers were released following this report (view discussion papers). Little came of these discussions with a very modest change to the law, purporting to relate to creeping acquisitions, introduced by the Competition and Consumer Legislation Amendment Act 2011. This Act:
- changed the reference in s 50(1) from 'a market' to 'any market' (purporting to remove any doubt that a merger will be prohibited if it substantially lessens competition in a market other than the market in which the merging parties compete; this had never been a problem in the past) and
- removed the word 'substantial' from the definition of market in subsection 50(6) (this was theoretically directed at creeping acquisitions, but has little to do with concept of creeping acquisition discussed in this report)
A unit pricing code has been introduced and is mandatory for grocery retailers with more than 1,000 square metres of floor space who sell a minimum range of food-based grocery items. It is also applicable to online grocery retailers who sell the minimum range of food-based grocery items. The Code is contained in the Trade Practices (Industry Codes - Unit Pricing) Regulations 2009.
Following the Grocery Inquiry, the ACT Government issued the Supermarket Competition Policy, aiming to achieve a 'competitive and diverse supermarket sector'. Much of the policy has to do with release of land and its use. The Policy was reviewed (the Martin Review) and recommendations of that review were accepted. This was followed by the release, in January 2010, of the Supermarket Competition Implementation Plan. View ACT Government Supermarket Competition website.