GOVERNMENT RESPONSE TO THE REPORT OF THE JOINT SELECT COMMITTEE ON THE RETAILING SECTOR

FAIR MARKET OR MARKET FAILURE

December 1999

INTRODUCTION

The Government set up the Joint Select Committee on the Retailing Sector on 10 December 1998. It was given a reference to inquire into and report on the impact of market concentration in the retail sector and recommend possible revenue neutral courses of action for the Government to take.

The Committee presented its report, Fair Market or Market Failure, on 30 August 1999 which contained 10 recommendations. The report also contained a supplementary recommendation from Senator Ron Boswell and six supplementary recommendations from Senator Andrew Murray.

On consideration of the focus of the report, its recommendations and the overwhelming weight of submissions to the Committee, the Government has concentrated on and directed its response to that part of the retail industry associated with the retail grocery sector. It is within the retail grocery sector that the concerns emerged which have driven the recommendations of the Committee.

The following are the Government's official responses to the Committee's recommendations.

RECOMMENDATIONS

Recommendation 1

The Committee recommends that the Trade Practices Act be amended to give the ACCC the power to undertake representative actions and to seek damages on behalf of third parties under Part IV of the Act.

The Committee believes that, due to this measure, the ACCC may be burdened by an increased caseload. The Committee therefore recommends that the Government give consideration to providing extra funding for this purpose to the ACCC in future Budget Appropriations.

Response

The Government will proceed to implement this recommendation which is consistent with Government policy. The Government previously brought this measure forward in the context of the New Deal: Fair Deal package of fair trading measures in 1998. At that time, the measure was blocked in the Senate. However, the Government remains convinced that this initiative will be of significant advantage to small business, which will now be able to have action taken on its behalf by the ACCC.

Small businesses may not have the time, resources or legal expertise to engage in lengthy legal proceedings under Part IV of the Trade Practices Act. The ACCC is better placed to initiate legal proceedings on behalf of small business for significant and broad-ranging breaches of the competition provisions in the Act.

Given that this measure will impact on the operation of Part IV of the Trade Practices Act, the Government will need to consult with the States and Territories and seek their agreement, as per the requirements of the 1995 Intergovernmental Conduct Code Agreement. The Treasurer will write to the Premiers and Chief Ministers to seek their agreement, as per the requirements of the 1995 Intergovernmental Conduct Code Agreement.

The Government will monitor the effect of this measure on the ACCC's resources.

Recommendation 2

The Committee is of the view that the ACCC should consider heavily concentrated regional markets, such as that which exists in South East Queensland, when assessing acquisitions or mergers under the provisions of section 50 of the Trade Practices Act.

The Committee therefore recommends that section 50(6) of the Trade Practices Act be amended to provide for the definition of `market' to include a `regional market'. Thus, subsection 6 should provide that:

In this section: `market' means a substantial market for goods or services in Australia, in a State or a Territory, or in a region of Australia.

Response

The Government supports this measure as a means of ensuring that the impact on competition in a significant regional market is considered by the ACCC when assessing proposed mergers and acquisitions. The Government notes that whilst the ACCC's Merger Guidelines explicitly state that the relevant substantial market can be a regional market, amending section 50(6) as per the Report's recommendation will clarify the Government's policy intent and confirm current practice.

Given that this measure will require an amendment to Part IV of the Trade Practices Act, the Government will also consult with the States and Territories and seek their agreement on this measure, as per the requirements of the 1995 Intergovernmental Conduct Code Agreement.

Recommendation 3

The Committee recommends the establishment of an independent Retail Industry Ombudsman through which small business can bring complaints or queries relating to the retailing sector for speedy resolution. The Committee believes that the Retail Industry Ombudsman should consider, among other things, the application of the Retail Industry Code of Conduct (Recommendation 5) in his or her deliberations.

Where complaints received by the Ombudsman raise issues that fall within the jurisdiction of another established body, such as the ACCC, those complaints should be referred to such bodies for further investigation.

The Committee recommends that the Retail Industry Ombudsman be appointed and funded by the Government.

The Committee recommends that the Retail Industry Ombudsman be required to produce a bi-annual report to the Parliament in order to increase transparency in the retailing industry.

Response

The Government supports an Ombudsman scheme as a desirable alternative to costly and lengthy litigation for small and large businesses.

The Government will provide advice to the retail sector to assist it to establish a Retail Grocery Industry Ombudsman Scheme. The Government has already published guidelines on industry-based dispute resolution. In August 1997, the Government released Benchmarks for Industry-Based Customer Dispute Resolution to provide some guidance to industry on the desirable characteristics to be built into such schemes (namely: accessibility, independence, fairness, accountability, efficiency and effectiveness). The Government has also sponsored the production of a kit, Resolving Small Business Disputes: Six steps to successful dispute resolution, which provides advice to small business operators.

The Government believes that the best way to ensure the success of industry dispute resolution in the retailing sector is to place the responsibility in the hands of the retail industry. Clearly, industry players are best placed to know what kinds of disputes are likely to arise and how such disputes may most effectively be resolved.

Government policy is to support the establishment and development of industry self regulation. To this end, a committee is to be tasked to develop a Retail Grocery Industry Code of Conduct with the terms of reference as outlined in the response to Recommendation 5 below. These terms of reference advocate that the Committee constituted to develop the Code will also address the issue of an ombudsman scheme which will form part of the code and how it will structured with its jurisdiction, powers, review and reporting requirements defined and delineated.

To demonstrate its commitment to the success of the Retail Grocery Industry Ombudsman Scheme, the Government will fully fund the operation of the Scheme. The Ombudsman will be required to report on his or her activities and financial performance on a regular basis.

Recommendation 4

The Committee recommends that mandatory notification of retail grocery store acquisitions by publicly listed corporations be prescribed within the mandatory Code of Conduct (Recommendation 5), and approved by the ACCC, with a requirement that the ACCC consult with local authorities and other relevant parties in order to make an informed assessment of the likely impact on local businesses of such acquisitions. The Committee recommends that the ACCC also be required to assess and approve new store development applications on a similar basis, and to provide a detailed response to these notifications within 30 days.

The Committee appreciates that the drafting of a mandatory Code of Conduct may take some time to complete. The Committee therefore recommends that, as an interim measure, the Minister make a direction that mandatory notification be required to take effect immediately.

Response

The Government supports the idea of a code of conduct for the retail grocery industry (see response to Recommendation 5 below). However, the Government does not consider there is a need for mandatory pre-notification of retail grocery store acquisitions by publicly listed companies to be prescribed within a code of conduct. Mandatory pre-notification systems can be complex and difficult to administer. A pre-notification requirement would increase costs for businesses, and - most importantly - be unnecessary because the Trade Practices Act already prohibits acquisitions or mergers which would have the effect or likely effect of substantially lessening competition in a substantial market. However the issue of notification can be considered by the Retail Grocery Code of Conduct Committee in its discussions for possible inclusion in the Code of Conduct. This issue has been included in the Committee's terms of reference outlined in the response to Recommendation 5 below.

There is a commercial incentive for such parties in the retail industry to seek the views of the ACCC prior to embarking upon an acquisition that may involve very significant financial outlays and attract adverse publicity.

As development and town planning issues are the responsibility of State, Territory and local governments, the Government considers it is not appropriate for the ACCC to assess new store development proposals.

Recommendation 5

The Committee recommends the drafting of a Retail Industry Code of Conduct by the ACCC in consultation with retail industry groups and other relevant parties for the purpose of regulating the conduct associated with vertical relationships throughout the supply chain.

The Committee recommends that the Code of Conduct be a mandatory code, and should contain a precise form of dispute resolution, with the process of resolution clearly spelled out.

The Committee recommends that the Code of Conduct be drafted to include specific provisions that address:

(a) The general principle of `like terms for like customers' - where the ACCC may seek information from corporations, on a confidential basis, revealing key terms and conditions of contracts of supply.

(b) Transparency in `vulnerable' supply markets - where growers have to deal with a range of market characteristics, including perishability, market volatility and a high degree of risk exposure.

(c) Product labelling and packaging requirements - with a view to implementing a more equitable system than that which currently exists.

(d) Contractual uncertainty - in particular, the passing of ownership of produce and the circumstances under which produce can be returned.

(e) Truth in branding - so that businesses, which are subsidiaries of, or are substantially owned by, a listed public company or major retailer, note that association on shop front signage, in advertising, on stationery, and so on.

The Committee recommends that disputes falling under the Code of Conduct should not be limited to resolution by the Retail Industry Ombudsman. For example, disputes raising issues relevant to National Competition Policy or the Trade Practices Act would be more appropriately dealt with by the ACCC.

Response

The Government believes that properly formulated codes of conduct that enjoy the support of an industry can be of benefit to all industry participants. A Code of Conduct for the Retail Grocery Industry may help to resolve some of the difficulties that were raised in the context of this Inquiry.

The Government's preference is for industry to take ownership of self-regulatory schemes with minimal government involvement. The Government is committed to industry self-regulation to address marketplace problems as an alternative to onerous regulation. The regulatory option of mandatory codes will only be exercised where voluntary self-regulation has failed and where the market failure or social policy objectives addressed in a code are serious enough to warrant enforcement of the code at law.

The Government's policy with regard to the appropriate use of voluntary and mandatory industry codes of conduct is set out in the Codes of Conduct Policy Framework booklet (released by the then Minister for Customs and Consumer Affairs, the Hon Warren Truss MP, in March 1998) and the Prescribed Codes of Conduct policy guideline released by the Minister for Financial Services and Regulation, the Hon Joe Hockey MP, in May 1999.

The Prescribed Codes of Conduct guideline identifies a number of criteria which should be met in order for the Government to pursue a prescribed (mandatory) code. Among these are that there must be significant and irremediable deficiencies in any existing self-regulatory regime - for example, the existing voluntary code fails to address industry problems. A further criterion is that a range of self-regulatory options and `light-handed' quasi-regulatory options have been examined and demonstrated to be ineffective.

Such pre-conditions for a mandatory code have not been demonstrated in relation to the retail sector and it is clear that industry should be given a chance to design a self-regulatory mechanism before the Government considers intervening.

The Government is confident that the retail grocery industry is capable of resolving the kind of difficulties raised by the Committee in a voluntary code. Clearly, businesses within the retail sector are best placed to assess the nature of the difficulties being experienced, and therefore the best ways of resolving such difficulties. The Government is prepared, therefore, to give the industry itself the first opportunity to rectify its own problems, as identified in the Committee's report.

However, to ensure the success of a voluntary code, careful consideration needs to be given to the specific provisions and to the industry participants invited to subscribe. Codes may establish some ground-rules for commercial negotiations but should not inhibit competition and bargaining. Care would need to be taken that a retail code did not have the effect of inhibiting retail chains from driving hard bargains with suppliers that enable retail chains to offer consumers the best quality at the lowest prices.

A retail grocery code developed by the retail industry should not seek to bind manufacturers in their dealings with retailers. Accordingly, the `like terms for like customers' proposal may not belong in a retail code. In this regard, it is worth noting that the former price discrimination prohibition in the Trade Practices Act, section 49, was repealed in 1995 after the Hilmer Inquiry found the provision to be contrary to the objective of economic efficiency and of no assistance to small business.

In addition, the proposal for the ACCC to be able to obtain information about supply terms raises a number of issues. First, there is the question of whether it is the role of the ACCC to monitor price discrimination per se. Second, there is the question of whether the ACCC should have a right of access to information about supply terms. The Government believes that these would be inappropriate. Other suggestions made by the Committee for inclusion in a Code may also need careful consideration, particularly where regulations already exist (eg, labelling).

Finally, the Committee has proposed that the ACCC should be responsible for the drafting of the retail grocery industry code. The Government believes this proposal is inappropriate and would create a conflict of interest for the ACCC. However, it may be appropriate for the ACCC to be consulted during preparation of the Retail Grocery Industry Code.

To assist the process of developing the code, the Government proposes the establishment of an industry funded code committee to be tasked with developing a voluntary Code of Conduct for the retail grocery industry. It is intended that the Committee would start its deliberations in February 2000 and that the Code would finalised and operating by 1 July 2000. In order to ensure that the views of the various interested parties are adequately accounted for, the committee will comprise:

an independent chair appointed by the Government and with appropriate legal background;

two representatives nominated by the Australian Retailers Association;

two representatives of large retailers;

one consumer representative;

two representatives nominated by the National Association of Retail Grocers of Australia;

one representative nominated by the National Farmers' Federation;

one representative of small retail suppliers;

one general representative of small retail business; and

one specialist legal appointment by the Minister for Employment, Workplace Relations and Small Business.

To support this Committee, a secretariat will be established which will include two Government representatives (one from the Office of Small Business and one from the Australian Competition and Consumer Commission).

The Government will task the Code Committee with the following draft terms of reference in developing a code:

address the issue of an ombudsman scheme as part of the code and how it will be structured with its jurisdiction, powers, review and reporting requirements defined and delineated;

improving transparency in `vulnerable' supply markets - where growers have to deal with a range of market characteristics, including perishability, market volatility and a high degree of risk exposure;

raising product labelling and packaging standards;

reducing contractual uncertainty, in particular, the passing of ownership of produce and the circumstances under which produce can be returned;

branding, particularly whether businesses, which are subsidiaries of, or are substantially owned by, a listed public company or major retailer, note that association on shop front signage, in advertising, on stationery etc;

consideration of notification issues of retail grocery store acquisitions and of the acquisitions of grocery wholesalers by retailers and vice-versa.

The terms of reference deal exclusively with the retail grocery industry sector and do not apply to other areas of the retail sector.

The operation and effectiveness of the Code would be independently reviewed after three years of operation, or sooner if the Government believes circumstances warrant an earlier review. Should a review or developments indicate an unsatisfactory participation level, the Government could then pursue the option of a mandatory Code.

Recommendation 6

The Committee considers that the $1 million transactional limitation of section 51AC of the Trade Practices Act hinders access by some small businesses to the unconscionable conduct provisions of the Act. The Committee therefore recommends that this limit be increased to $3 million.

Response

The Government is committed to ensuring that the unconscionable conduct provisions are accessible to small business. The Government therefore acknowledges the views of the Committee and will seek to increase the $1 million transactional limitation of section 51AC of the Trade Practices Act to $3 million.

Recommendation 7

The Committee is concerned that Recommendation 2.1 of the Reid Report, which deals with the Uniform Retail Tenancy Code, has not been implemented. In particular, the Committee is concerned that, in major shopping centres, there is a lack of transparency with regard to the cost of floor space rent. That is, the seller (landlord) has knowledge - the buyer (prospective tenant) has none. Prospective tenants are therefore prevented from making informed decisions in assessing the `market rent' as it applies to particular areas of retail space.

The Committee therefore recommends that the Government re-visit this recommendation, with a view to implementing a Uniform Retail Tenancy Code through the operations of the Council of Australian Governments.

Response

Retail tenancy issues are the responsibility of State and Territory governments. The Commonwealth Government did consider these issues in the context of the Reid Report, but decided then not to proceed with the proposal. In addition, since that time, other changes have been implemented to deal with retail tenancy issues and the Government does not accept that it should re-visit this matter.

The Government gained a commitment from all State and Territory jurisdictions in December 1997 to introduce key minimum standards into their retail tenancy legislation or regulation. These standards covered issues such as disclosure, rent reviews, ratchet clauses, relocation expenses, outgoings and assignment. All jurisdictions (with the exception of the Northern Territory, which is currently developing its own retail tenancy regulation or legislation) have now substantially implemented these minimum standards. As a result retail tenants across Australia now enjoy considerably greater protection against unfair trading, and have also been spared the additional burden of compliance that would have been delivered by an additional layer of regulation.

Recommendation 8

The Committee recommends that major supermarket chains take note of widespread community and pharmaceutical industry concerns that the nature of the role played by pharmacists is unique, as it relates to matters of public health. The Committee is therefore of the view that expansion by the major chains into the dispensing of pharmaceutical products should be discouraged.

Response

Commonwealth, State and Territory Governments are currently conducting a National Competition Policy review of the legislation that regulates the ownership, location and registration of pharmacies. This Review is being chaired by Mr Warwick Wilkinson AM, and has presented its Preliminary Report to the Prime Minister. The Committee's views will be taken into account when the Government is considering its response to the Pharmacy Review's final report.

Recommendation 9

The Committee believes that there may be anti-competitive impacts where retailers and wholesalers are operated by the same, or related, entity. For example, where a major retailer enters the independent wholesaling sector, intimate commercial details could be gained from that wholesaler's dealings with its independent retail customers. The Committee therefore recommends that future acquisitions of wholesalers by retailers, and vice versa, be subject to mandatory notification and approval by the ACCC in order to assess the likely competitive impacts of such acquisitions.

Response

Further to the Government's policy discussed in the response to Recommendation 4, and noting again that the Trade Practices Act already prohibits acquisitions or mergers which would have the effect or likely effect of substantially lessening competition, the Government does not consider there is a need for mandatory notification of retailer-wholesaler acquisitions or vice versa.

However the issue of notification can be considered by the Retail Grocery Code of Conduct Committee in its discussions for possible inclusion in the Code of Conduct. This issue has been included in the Committee's terms of reference outlined in the response to Recommendation 5 above.

Recommendation 10

The Committee recommends that the Parliament reconstitute the Committee three years from the date of tabling this Report in order to review the progress of the recommendations, in particular the operation of the Code of Conduct, and to determine whether further legislative changes are required. Such changes may include:

(a) An amendment to section 46 of the Trade Practices Act 1974 to provide that:

Once it has been established that a corporation with a substantial degree of market power has used that market power, the onus of proof shifts to that corporation to prove it did not use that power for a prohibited purpose (as prescribed).

(b) An amendment to section 80 of the Trade Practices Act 1974 to include divestiture of assets as an additional remedy for contravention of Part IV, IVA, IVB or V.

Response

The Government shares the Committee's concern in seeing that measures arising from the Inquiry are successfully implemented and that identified problems in the industry are resolved. As already noted, the Government will be initiating an independent review of the voluntary nature of the proposed Retail Grocery Code of Conduct and the operation of the proposed Retail Grocery Industry Ombudsman after three years of operation, or earlier if required. Therefore at this stage, the Government will not be committing the Parliament to a further inquiry in three years time.

SUPPLEMENTARY RECOMMENDATION - Senator the Hon Ron Boswell

It is recommended that restricted licensing arrangements in certain retail areas including trading hours are maintained at the discretion of the State or Federal Governments without any imposition of penalty from the National Competition Council.

Response

Under National Competition Policy (NCP), all legislation regulating shop trading (including trading hours) will need to be reviewed, and where appropriate, reformed, by end-2000. These reviews seek to establish whether there is a net benefit to the whole of the community from retaining the restrictions. When weighing up the costs and benefits of restrictions, jurisdictions may consider a range of non-economic factors in decision making, such as those associated with regional development, welfare and equity. This is the `public interest test'.

Jurisdictions are free to decide the elements to be considered in any public interest test, but must demonstrate, among other things, that a comprehensive and complete evaluation of the relevant costs and benefits has been undertaken.

SUPPLEMENTARY RECOMMENDATIONS - Senator Andrew Murray

In responding to Senator Murray's supplementary recommendations, the Government considers that the general thrust of his views have been adequately addressed in the Government's responses to the recommendations of the Joint Select Committee on the Retailing Sector.