In all the questions and comments following the announcement of my review of the Food and Grocery Code of Conduct between the major supermarkets and their suppliers, one was barely mentioned: If the review succeeds in getting a better deal for suppliers, won’t that necessarily force up prices for shoppers? The answer is no.
Sound counterintuitive? In principle, higher prices for suppliers and lower prices for consumers can be achieved through increased competition in grocery retailing.
Various efforts have been made to quantify the degree of market concentration in grocery retailing in Australia. Some conclude there’s no problem, while others say Australian food retailers’ margins are higher than they were several years ago and higher than those of food retailers overseas.
Former chairman of the Australian Competition and Consumer Commission (ACCC), Professor Rod Sims, has pointed out that while in Australia Coles and Woolworths have a combined market share of more than 70 per cent, Britain’s top two supermarkets have a combined market share of 43 per cent, and the United States’ four largest supermarkets have a combined market share of just 34 per cent.
Only the ACCC supermarket price inquiry mooted by Treasurer Jim Chalmers, with its compulsory information-gathering powers, is fully capable of resolving this dispute.
Whatever the degree of competition in the Australian grocery retailing industry, it would be difficult to argue against more.
Two pro-competition measures were adopted for grocery retailing more than a decade ago.
In September 2009, with my support as competition policy minister, the ACCC removed more than 700 agreements between the major supermarkets and shopping centre owners that prevented shopping centre managers from leasing space to any other supermarkets.
These restrictive agreements had the effect of keeping out the likes of new competitor Aldi.
The second measure dealt with the practice of the major supermarkets of buying out small competitors in a local market. One of the two major supermarket chains told us they had obtained legal advice that the prohibition on creeping acquisitions applied only to the national market.
In May 2010, I introduced a bill into parliament clarifying that the prohibition of creeping acquisitions that substantially lessened competition in a market applied not just to the national and state markets but also to local markets.
My amendment – possibly the shortest in Australian parliamentary history – changed “a” market to “any” market, ensuring the prohibition on creeping acquisitions covered local markets.
In the last dozen years there have been no new substantive pro-competition policy measures bearing upon supermarkets.
The Food and Grocery Code of Conduct was introduced in 2015 as a voluntary code. It is therefore not enforced by the ACCC.
An obvious question for the current review is whether it should be made mandatory. That is an option contemplated in the review’s terms of reference.
Beyond the review of the Food and Grocery Code of Conduct and the mooted ACCC supermarket price inquiry, pro-competition options include examining planning and zoning laws that restrict the location of supermarket rivals near the incumbents, and removing any other identified impediments to new entrants.
The Coalition is now advocating divestiture powers that would force supermarkets to sell off parts of their operations if they abuse their market power. Another former ACCC chairman, Professor Allan Fels, is also advocating forced divestiture in these circumstances of an abuse of market power.
Introducing greater competition from overseas supermarkets is more easily said than done. Aldi started with two Sydney stores in 2001 and now has 591 outlets. Costco, the world’s third-largest retailer, entered Australia in 2009 and now has 15 stores.
Other actual and potential competitors are online grocery wholesalers that deliver directly to consumers. They save on the rental space and other costs associated with retailing. This is an emerging segment of the grocery market.
Governments – federal, state and local – have a role to play in removing barriers to entry confronting rivals to the major supermarkets. Many of those barriers are created, sometimes inadvertently, by those same levels of government.
The review of the Food and Grocery Code of Conduct can assist in improving the bargaining position of grocery suppliers to the major supermarkets. That’s worthy in its own right. But competition is the key that unlocks two doors – one to higher prices for suppliers and the other to lower prices for consumers.
Craig Emerson is managing director of Emerson Economics. He is a distinguished fellow at the ANU, director of the Australian APEC Study Centre at RMIT and adjunct professor at Victoria University’s College of Business.