The interim report of my review of the food and grocery code of conduct has been guided by widely accepted economic principles. It recommends intervention through a mandatory code where a supermarket abuses its superior market power in dealings with smaller suppliers, while providing options for the parties to resolve disputes through agreed mediation and arbitration.
Driving the review is the basic principle that competition is good, and more competition is better. It’s as old as Adam Smith, who turned 300 last year. Australia’s remote geographic location and its scattered, sparse population mitigate against a highly competitive supermarket industry.
A role for government regulation can be enlivened when worldly practice deviates from the perfectly competitive model. That’s why Australia, like all western nations, has competition laws and a regulator. In our case they are the Competition and Consumer Act 2010 that, as competition minister, I had the privilege of ushering through parliament, and the corporate watchdog, the Australian Competition and Consumer Commission (ACCC).
Treasurer Jim Chalmers has directed the ACCC to conduct an inquiry into Australia’s supermarkets, which will include their approach to setting prices for their customers. My inquiry, however, deals with the behaviour of supermarkets towards their suppliers, especially the smaller ones.
A threshold question arises from the two inquiries underway: if government intervention results in suppliers getting a better deal from supermarkets, won’t that result in higher prices for shoppers?
Well, no, not necessarily.
If a small number of supermarkets in a concentrated industry have much greater market power than their smaller suppliers, they will be capable of denying suppliers the opportunity of achieving even a normal profit to sustain their ongoing viability.
Smaller suppliers might be earning insufficient returns to warrant new investment in innovation and equipment that would enable them to offer better-quality products at lower prices.
Some might describe this as desirable creative destruction, after economist Joseph Schumpeter, but that refers to the emergence of disruptive, new, productivity-raising technologies that remove poor adopters from the market.
When the supermarket industry tends towards monopsony – where a small number have market buying power over their suppliers, the destruction of those suppliers is not creative.
Of course, this doesn’t mean that every supplier, regardless of how inefficient it might be, deserves a living; they need to compete with each other and with new market entrants to improve their efficiency, innovate and lower their prices.
Yet they have no hope of doing so if their margins are so low that the best they can hope for is white-knuckled survival.
While there is an economic case for government intervention to counter monopsony power in the supermarket industry, the only customised policy instrument at present is a voluntary code of conduct that contains no penalties for breaches, leaving the watchdog chained to the back porch.
Since 2021, only six disputes have been initiated by suppliers and none has resulted in the awarding of compensation.
Supporters of the voluntary code argue this is testimony to its success in resolving supplier problems amicably. They argue further that the only alternative is a mandatory code, which would oblige the ACCC to take court action spanning several years, by which time a nervous small-supplier complainant will have gone broke.
Opponents of the voluntary code point to the small number of disputes as evidence not of its strength but of its weakness. At the heart of the problem, they say, is supplier fear of supermarket retribution if they make a complaint. The review has heard that the fear of retribution is endemic to the supplying businesses.
The interim report seeks to achieve the best of both worlds by making the code mandatory while importing dispute-resolution processes from the voluntary code and strengthening them.
Suppliers’ fear of retribution would be mitigated by creating a channel for them to make confidential complaints directly to the ACCC. That information would be used in the ACCC forming preliminary views about systemic, anti-competitive behaviour of the relevant supermarket.
Recommended maximum penalties for serious breaches of the code are the largest of $10 million, 10 per cent of turnover or three times the benefit gained from the contravening conduct.
Owing to constitutional limitations, arbitration can only be entered into voluntarily; it cannot be imposed on the supermarkets by law. The review therefore urges supermarkets to agree to mediation and arbitration that could involve qualified, independent mediators and arbitrators if requested by a supplier, with compensation capped at $5 million – a sizeable sum for a small supplier.
In all, the interim report makes eight firm recommendations that will not change and a further three on which stakeholder feedback is sought.
The philosophy guiding the report is to intervene efficiently and effectively where market failure on the buying side is evident. The report resists pressure for the government to get involved in every disagreement between commercial parties and rejects populist policies such as forced divestiture of supermarket stores.
Craig Emerson is independent reviewer of the Food and Grocery Code of Conduct. He is director of the APEC Study Centre at RMIT University, a visiting fellow at the ANU and adjunct professor at the Centre of Policy Studies.