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Tuesday, 22 October 2002
Page: 5647

Senator MURRAY (7:19 PM) —I rise to speak on the September report of the ACCC to the Senate on prices paid to suppliers by retailers in the Australian grocery industry. The report was a response to an order of the Senate dated 8 February 2001, initiated by me. At the heart of this report is the question of fair competition. It is not a question of whether the supermarket sector will continue to be dominated by Coles and Woolworths, because plainly that is likely to continue to be the case for the foreseeable future; it is a question of whether there will be sufficient competition allowed to those two, whether there will be sufficient diversity of choice allowed to counter the dangerous oligopolisation of the sector and whether there will be sufficient critical mass to nurture the independent sector so essential to our social and economic fabric. The Baird committee report two years ago sounded strong alarms. This ACCC report adds to the concerns.

In the past decade consolidation within the grocery retailing and wholesaling sector has been rapid. In 1991 there were 11 major players. There are now four, including Woolworths and Coles, which jointly hold almost 80 per cent of the national market for branded packaged grocery products. Australia now has the most highly concentrated grocery industry in the developed world. In passing, I might say that I fear it will get worse if Graeme Samuels, the putative replacement for Allan Fels, turns out to be Australia's own version of Harvey Pitt.

Compare the almost 80 per cent of national market share held by Woolworths and Coles with the 34 per cent held by the top five supermarket companies in the United States, the 52 per cent held by the top three in the United Kingdom, the 53 per cent held by the top three chains in Germany or the only seven per cent held by the top five supermarket companies in Japan. While the number of major players in the Australian grocery industry fell from 11 to four in the decade to December last year, the number of independent grocery retailers fell by about 50 per cent, according to the Australian Bureau of Statistics—from 8,270 stores in 1992 to 4,197 in 1999. Do Australian governments really want the destruction of the grocery small business sector to continue?

Regrettably, the ACCC report is based on limited data, and that is not their fault. Fifty significant suppliers were approached; of the 35 responses, only 19 provided a sufficiently detailed and cooperative response. I cannot help but harbour deep suspicions as to improper motives for non-cooperation. Alternatively, were any suppliers put under duress not to cooperate? My advice to the ACCC would be: quite a number of suppliers evidently have something to hide or were forced to go to ground; go back and dig some more.

In essence—and it is no surprise—the ACCC confirms that Woolworths and Coles get the best supplier price more often than their competitors do. Some people might presume that this is because of the economies of scale which accrue from the mere size of those supermarket chains, but that is not always so. Grocery suppliers prices are determined by efficiencies within their own operations, as well as by the size of the purchase order. Typically, a major supermarket chain buying product from a manufacturer for delivery to one or more of its distribution centres will order quantities similar to those ordered by the major wholesalers supplying the independent sector. They are very similar customers in size terms. Yet the chains are often given or extract a price advantage over their competitors, giving them an obvious competitive advantage over similar sized buyers.

Why do Woolworths and Coles get the best available price more frequently than the wholesalers? The report does not resolve this critical issue, and that is a failing that must be addressed. The report does point to the need to consider whether suppliers are ever victims of intimidatory behaviour by the chains, as is alleged. Chart 5.3.2 of the ACCC report indicates that in 1999-2000 the major supermarket chains enjoyed a price advantage expressed as a ratio of 10 to four; in 2000-01 it was a ratio of 12 to eight. The question must be asked: are the grocery suppliers at times vulnerable to an undue exercise of market power? Most significantly, the Australian Food and Grocery Council, which represents the major suppliers to the grocery industry, observed in its submission to the ACCC that:

... there exists a disproportionate distribution of power in favour of the retailer/wholesaler over the supplier in the Australian grocery sector ...

The independent sector begins each day at a competitive disadvantage versus Woolworths and Coles. Their disadvantage begins with the prices they can get from their suppliers— the ACCC has demonstrated that fact. The ACCC report clearly indicates that suppliers have little power in their dealings with Woolworths and Coles. They could be open to commercial duress or pressure as a result of that market power. The suppliers' peak body, the Australian Food and Grocery Council, admits to their limited countervailing power against their major customers. There are dangers to competition in allowing unfair price discrimination, because the consequent destruction of competitors can lead to the destruction of competition. The ACCC must be aware that chains could use price favouritism to subsidise lower prices in those markets in which the chain faces competition from independents.

The National Association of Retail Grocers of Australia has argued in its submission to the Dawson review of the Trade Practices Act that the TPA should be amended to introduce a new prohibition against such anti-competitive price discrimination. That would go a long way to guaranteeing a competitive result. It would also give suppliers some comfort in their dealings with powerful chains. NARGA also argues as a corollary that another new prohibition be inserted into the Trade Practices Act to prevent entities with a substantial degree of market power from engaging in coercive or intimidating conduct or conduct inducing a supplier to unfairly discriminate against competitors of the powerful entity.

The Dawson committee needs to have regard to the Baird report and this ACCC report. The specific dangers of price discrimination in a highly concentrated market as outlined in the ACCC report include: the possibility of lower supplier prices to the major supermarket chains being subsidised by high supplier prices to the other buyers; the raising of barriers to new entrants to the industry; the prompting of independent grocery retailers to exit the industry, thereby pushing the independent sector below the critical mass required to sustain a viable competitive force; and reduced vigour in the competitive process and a greater likelihood of parallel conduct or tacit collusion involving those remaining in the industry.

Without the independent grocery retailers, Australian supermarket customers would face the very real danger of a duopoly or oligopoly engaged in market-sharing and profit-taking rather than competition. The ACCC has identified this as a real danger and I quote from its report:

From the earlier discussion of market participants it is apparent that, generally, the grocery market is highly concentrated. It could become more so if price discrimination in supplying grocery products caused non-chain retailers to incur higher costs e.g. the lower price given to the major chains is `subsidised' by higher prices charged to other buyers ... If price discrimination resulted in a further increase in market share for one or both of the chains, this would confer even greater economies of scale and scope. It would make viable entry by independents even more difficult and unattractive. Should one (or both) chains raise prices, smaller retailers would then have every incentive to follow suit. Although all independent retailers will not exit, those remaining are therefore unlikely to be a real constraint on the chains ... A reduction in the number of retailers and in diversity might more easily enable parallel conduct or tacit collusion.

That quote indicates the ACCC recognises that there is a problem. I suggest that it needs to do much more about the issue.