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Competition and the nation's supermarket trolley: a perspective of the Australian Competition and Consumer Commission: speech to the Food and Grocery Council of Australia, Canberra, 16 September 2003



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Australian Competition and Consumer Commission

Promoting Competition and Fair Trading

Speech to the Food and Grocery Council of Australia Canberra, 16 September 2003

Competition and the nation’s supermarket trolley: A perspective of the Australian Competition and Consumer Commission

Graeme Samuel, Chairman

Introduction

In this country, at this time, our tables are piled high with riches. It is a fact that

Australia’s food and grocery sector produces, distributes and retails drink and

foodstuffs with an admirable technical efficiency.

Because the Commission’s interest is in the operation of economically efficient

markets, I want to make some brief introductory comments about how efficient markets

produce measurable benefits, and about the role of the Commission.

The Commission’s job is to ensure compliance with, and enforce the nation’s

competition and consumer laws. By doing so, our objective is to enhance the operation

of efficient and competitive markets. In this we are scrupulously even-handed. We

apply the Act to all - no matter how powerful they may be - for the benefit of all

Of course, there is a more profound purpose here - the Act itself is underpinned by the

notion that competition and markets provide the basis for high rates of growth, an

enhanced productivity performance and employment growth. This is, I note, a

prediction validated by the Australian experience.

By enforcing the law the Commission works to benefit both consumers and businesses.

Consumers have an interest in being supplied competitively, efficiently and honestly.

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But as well as benefitting consumers, competition and consumer law works to the

advantage of the business community.

Firms have an interest in being supplied competitively and efficiently, and have an

interest in selling to buyers who have to compete for output. Competition and

consumer protection law provides an assurance to men and women in business that they

will have the opportunity to compete fairly for all possible business, and that they will

be able to keep the rewards of success.1

When compared to other OECD countries, Australia has done very well. For example,

during the nineties Australia’s annual rate of growth, at constant prices, averaged 3.6

per cent. This compares to 3.2 per cent in the United States and 1.9 per cent in

Germany and France.

As well, Australia has benefitted from a marked increase in productivity.

Unlike the 1960s and 1970s, our productivity performance during the nineties was not

part of a world-wide productivity boom. Over the past ten years, Australia made gains

of three per cent per annum and was one of only three countries to experience strong

growth in productivity.

Having sung of the economic virtues that generally result from competition, I now want

to speak on subjects that have a direct bearing on the food and grocery sector.

Prominent amongst these are:

• the grocery industry code of conduct

• mergers and acquisitions

• the operation of section 46

1 Shenefield, J.H. and Stelzer, I.M.: The Antitrust Laws: A Primer (The AEI press, Washington D.C., 1998)

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• the inquiry of the Senate Economics Committee into the effectiveness of the

Act in protecting small business, and;

• labelling.

As well, I will outline for you the Commission’s strategies on enforcement and

compliance.

Code of conduct

The current review of the Retail Grocery Industry Code of Conduct provides a good

opportunity to examine the effectiveness of existing arrangements.

Of course, the background to the development and implementation of the code is

familiar to you - and very familiar to us.

The Commission has been involved in considering about forty codes in various

industry sectors. We have had informal consultations, and have been involved in

working parties reviewing codes of practice. As part of the Commission’s

authorisation process, we have formally examined codes for potentially anti-competitive elements. Examples of codes include the Franchise Code, which is a

mandatory code, and voluntary codes like the Supermarket Scanning Code, the Cinema

Code and the Commercial Television Industry Code of Practice.

Our general view is that effective voluntary codes - that is, industry self regulation or

co-regulation - generate benefits for industry, the consumer, for the government, and

for the Commission as a regulator.

We are not alone in our thinking here. The Office of Fair Trading in the United

Kingdom has since 2001 introduced a new scheme to approve codes of conduct. The

result is a lighter, but effective regulatory touch, which still produces benefits for

consumers.

Of course, the key word here is effective.

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Codes that fail to meet objectives have little value to either industry or consumers.

They are, in fact, likely to be counterproductive. An ineffective code makes for

increased compliance costs and results in little offsetting benefit.

Moreover, if ineffective codes are perceived to be the rule rather than an intolerable

exception, it is conceivable that pressure would develop for the introduction of

mandatory codes.

The Commission considers that the mediation provisions of the Retail Grocery Industry

Code appear to be delivering results. We continue to work closely with the

ombudsman in various areas of complaints and continue to examine how some of the

processes under the code can be improved. In particular, transparency in dealings

between growers and wholesalers has been identified by us as an area warranting

further attention.

That said, there are issues involved in dealings between some raw material suppliers

and processors, although these tend to vary with the product involved. In many cases,

these issues will tend to be addressed in collective negotiations.

Questions have also been raised about the level of transparency of pricing and terms

between grocery suppliers and wholesalers and retailers. Many of you are aware that

the Commission last year released details of a comprehensive voluntary survey. This

survey demonstrated that the major retail chains did not always receive the most

favourable terms of supply. In this report, and on this issue, we also identified industry

claims that ‘like treatment for like performance’ has greater relevance than ‘like

treatment for like customers’.

Now, the Commission understands that the membership of the Food and Grocery

Council makes a diverse group, and that members have different views on the

desirability and effectiveness of a code.

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It is clear, however, that if a voluntary code is to work, then industry members must

commit themselves to making it work. Clearly, code sponsors must be able to

demonstrate that members are prepared to observe provisions.

A code will only be effective if it addresses issues that are important to participants.

Key considerations include the definition of the objectives of a code and resulting

benefits, the development of relevant and appropriate rules and the calculation of the

cost of code administration.

The Buck Review provides the industry and individual firms the chance to make

critical and constructive comment on how a voluntary code should work best. Because

the review is an opportunity for you to shape the future operation of your industry, it is

an opportunity that should not be ignored.

Mergers and acquisitions

Mergers and acquisitions in the retail and wholesale grocery markets is a subject that

has, often enough, consumed the Commission’s attention and grabbed public attention.

The example closest to you would be the sale in 2001 of the Franklins chain.

At the time, the Commission accepted that the Franklins business was in rapid decline,

and that the withdrawal of key stakeholder support was imminent. Our primary

concern that an collapse of the chain would see the bulk of stores go to the major

supermarket chains, and fewer stores available for independents and new entrants.

That is, by not acting, by refusing to countenance a merger, the result would have been

increased concentration and reduced competition.

The Commission agreed to the sale of 200 stores to independent retailers, and a

maximum of 67 stores being sold to Woolworths. Independents were offered around

two-thirds of the total sales value of the Franklins stores.

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Approval of the agreement was conditional on the parties to the acquisition providing

the Commission with enforceable undertakings to transfer stores that were designated

to independents to those independent chains. In addition, to address concerns about

local competition, the Commission required the divestiture of some Woolworths stores.

In the food and grocery industry, concerns about the state of competition - both current

and prospective - have often been framed by concerns about creeping acquisitions.

It has been said, often enough, that there needs to be action taken against the

phenomenon of creeping acquisition.

The relevant law in this area is enshrined in s.50 of the Act. As an enforcement agency

the Commission is required to enforce the law as it exists, and, where appropriate, bring

cases before the Federal Court for judgement.

Section 50 generally prohibits mergers or acquisitions that would substantially lessen

competition.

In considering mergers or acquisitions, the Commission is required to make an

assessment along the following lines. First, we define the relevant market. Then we

assess whether or not the market is substantial. Finally, we determine if the acquisition

is likely to substantially lessen competition.

Some of the factors relevant to evaluating the competitive impact of a merger or

acquisition include:

• The height of barriers to entry

• The level of concentration

• The level of import competition

• The degree of countervailing power, and

• The dynamic characteristics of the market including growth, innovation and

product differentiation.

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Thus, to ensure dependability and fairness in process, the Commission’s approach is to

examine closely the circumstances of each case and to apply well-known and defined

criteria.

This process, I believe, generates coherent and consistent results. Moreover, this

approach better protects the dynamic operation of the market and the gains generate by

competition than a policy that fixes levels of market share.

The Commission recognises that detriment to independent operators could result from

creeping acquisitions. There is the potential for a loss of sales volume at the wholesale

level to give rise to a loss of economies of scale. This, in turn, could generate cost

pressures on the entire independent grocer sector. The Commission acknowledges this

potential. But the difficulty remains that each individual acquisition must be

considered against the test specified in section 50. That is, will the acquisition of a

single supermarket result in a substantial lessening of competition?

But I also note that the focus on ‘creeping acquisitions’ has the potential to generate

unintended and perhaps harmful consequences. This potentially could arise when

incumbents seek to sell properties in a market made thinner by a prohibition on

creeping acquisitions. Creeping acquisitions provide an exit path for those wishing to

sell their business. Organic growth by Coles and Woolworths does not provide that

exit. Stopping creeping acquisition may remove an exit path, but will not address

increases in market shares through organic growth.

The context is a market for food and groceries undergoing dynamic change. Recent

alliances between the majors and petroleum companies have injected a new market

dynamic. It brings behaviour in non-food markets into the equation in a way not

previously envisioned and the Commission is examining developments closely.

Certainly, it is true that Woolworths and Coles are major players in the Australian

market. They operate over 1,300 supermarkets. And on a national basis they account

for a majority of market share.

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However, aggregate market share may not fully indicate the state of competition in a

market.

We need to consider the stability, not just of the aggregate share of Woolworths and

Coles, but of individual market shares. Whilst aggregate share might be static or only

slowly increasing, component shares can vary in a way that reflects the degree of

competition between the two major chains. Certainly, in Australia during recent times,

Woolworths has increased sales and share at a greater rate than Coles - a matter of

quiet satisfaction to Woolworths, I’m sure. Moreover, independents have shown a

preparedness to expand operations.

Section 46

I want now to turn to the operation of section 46.

Section 46 applies to the misuse of market power. Businesses that have a substantive

degree of market power are prohibited from taking advantage of that power for the

purposes of eliminating or substantially damaging a competitor, preventing entry into

markets or deterring a person from engaging in competitive conduct.

Broadly, the objective of s.46 is to protect the competitive process by preventing firms

with substantial market power from engaging in illegitimate, unilateral, anti-competitive conduct. As such, small businesses are assured a measure of protection

from the predatory actions of powerful competitors.

Of course, it is an inevitable part of competition that some firms will be damaged, and

others prosper. Some will close because they cannot compete effectively.

This is an important feature of a vigorous, competitive market and an important part of

achieving the most efficient use of the nation’s resources.

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I do not pretend that it is an easy task to achieve a perfect balance between prohibiting

anti-competitive conduct and ensuring robust competition that, on occasion, will

necessarily work to the detriment of individual firms.

The perfect balance requires that the law be in perfect shape and perfectly enforced.

Most recently, the misuse of market power elements of the Act have been considered in

the High Court case regarding Boral, and the case involving Australian Safeway

Stores Pty Ltd which the Commission has sought special leave to appeal.

The findings of the High Court in Boral have implications for the future, effective

operation of s.46. And I want canvass some of the issues in the context of

Commission’s submission to the Senate Economics Committee Inquiry into the

effectiveness of the Act in protecting small business.

Briefly though, in proceedings brought by the Commission in the Federal Court, we

alleged that Safeway had a policy of removing a particular baker’s products from sale

when similar products were sold on special at nearby independent stores.

We alleged that Safeway’s conduct variously involved anti-competitive agreements,

misuse of market power, exclusive dealing and resale price maintenance and

contravened ss.45, 46, 47 and 48.

We further alleged that when Safeway discovered that its retail competitors were

selling bread at what it regarded as an unacceptably low price, it put pressure on the

baker supplying these retailers by refusing to accept further supplies from the baker

until the retailer stopped selling the cheap bread.

The allegations raised highly complex issues of trade practices law. In December 2001

the Federal Court determined that Safeway had not breached the Act - a decision that

was appealed by the Commission.

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Recently the Full Federal Court held that, in some instances, Safeway engaged in price

fixing and an abuse of market power.

Specifically, the majority of the court found that on four of nine instances pleaded

against Safeway the company had misused its market power as a wholesale purchaser

of bread for an anticompetitive purpose.

The court held that Safeway had not engaged in misuse of market power in respect of

the other five instances pleaded by the Commission.

After careful consideration of these specific decisions, the Commission sought leave to

appeal.

In our submission to the Senate Economics Committee, we noted that case law has

provided increasing clarity to the operation of s.46. However, several recent judicial

decisions, particularly the Boral appeal in the High Court, have raised issues as to the

application and operation of s.46.

It appears that s.46, as presently drafted and as interpreted by the courts, does not

appropriately implement the stated policy intentions of Parliament. There is not

sufficient time to cite the fine detail of our arguments here, so I will just stand one

example up for inspection.

It is possible that, in supporting a restrictive interpretation of the requirement for a

corporation to hold a ‘substantial degree of power in the market’, the Boral decision of

the High Court may result in a narrower application of s.46.

In 1986, s.46 was amended. The heading of the section was changed from

monopolisation to misuse of market power. Significantly, the application threshold

was intended to be lowered from substantial control to ‘a substantial degree of power in

a market’.

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The majority judgements in Boral indicate that the threshold test for the purposes of

s.46 have been effectively restored to monopoly or near monopoly, contrary to

Parliament’s intention in 1986.

The Commission takes the view that it is desirable to provide guidance to the courts

and certainty to market participants. The policy intention behind s.46 should be given

effect by amending s.46 to clarify the following principles:

• the threshold of ‘a substantial degree of power in a market’ is lower than the

former threshold of substantial control

• the substantial market power threshold does not require a corporation to have an

absolute freedom from constraint - it is sufficient if the corporation is not

constrained to a significant extent by competitors or suppliers

• more than one corporation can have a substantial degree of power in a market, and

• evidence of a corporation’s behaviour in the market is relevant to a determination

of substantial market power.

It is desirable that such changes be made as soon as practicable.

As well as misuse of market power, the Commission has suggested what we consider

other desirable modifications to s.46. The main changes include:

• the clarification of the ‘take advantage’ element of the provision

• in cases of predatory pricing, an amendment that a finding of recoupment be not

required to establish contravention, and

• clarification of whether or not s.46 applies to any use of market power with a

proscribed purpose, irrespective of where the conduct occurs.

You will find the reasoning that supports these brief conclusions in our submission to

the small business inquiry.

Labelling

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The Commission has been closely involved in reviews of food standards, including the

labelling of foodstuffs.

You probably are aware that the Commission wrote to the Council last year seeking

assistance in informing members that labelling was an important issue and that when

food labels were being re-designed in anticipation of new laws, some thought needed to

be given to fair trading laws and the message consumers would take from new labels.

Common labelling traps for manufacturers and sellers are:

• False country of origin claims - such as ‘Australian’ when a product is made from

a blend of Australian and imported produce (for example, the Viva Olive Oils case);

• Inaccurate pictorials or descriptors - such as ‘low GI’, ‘all real fruit’ or ‘grilled’

(for example, the McDonalds’ patty case)

• Inaccurate or incomplete claims about a product’s virtues - such as that it

‘improves your health’ or “reduces the risk of heart disease (for example, the

Meadow Lea Gold’n Canola case), and

• Absolute claims such as ‘totally fat free’ or ‘100 per cent GM free’ or ‘100 per

cent freshly squeezed orange juice’ - when concentrates have been included or

sugar added (such as in the Outback Juice matter).

An often overlooked fact related to these sorts of labelling problems is that they are self

made problems. Manufacturers choose to call their products ‘all Australian’ or ‘100

per cent GM free’ with the object of attracting consumers and gaining a marketing

advantage. No one compels them to make such claims.

A claim that is false will clearly breach the Act.

But you should also remember that a claim that is true can still be misleading and

therefore also breach the Act. I do not want to express a final Commission view here,

but it seems to me that representations such as ‘ninety five per cent fat free’ may be

literally true, but may convey to consumers an impression that the food in question is

lower in fat than comparable products.

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Can you imagine anyone selling a full strength beer on the basis of what some may

regard as an accurate representation ‘ninety five per cent alcohol free’?

So how do you manage the risks? At least part of the answer - particularly for

advertisers and sellers - lies in good compliance systems.

The new ‘key ingredients’ regime should see more complete information made

available to consumers. However, the Commission will continue to be vigilant in

relation to food labels. We will be particularly swift to act where we see:

• health risk or detriment associated with representations

• systemic consumer complaints, and /or

• an unfair competitive advantage being gained by traders that play loose with the

truth.

Competitors are also free to bring court proceedings if they believe the have suffered

from misleading conduct in breach of the Act. In fact, a significant number of the ‘fair

trading’ type complaints received by the Commission comes from companies that

believe they have been roughly handled.

Future directions for the Commission

I want to conclude my remarks today by outlining what the approach of the

Commission in the future to enforcement, compliance and publicity.

The Commission has obligations under the Trade Practices Act to investigate

allegations of unlawful behaviour. In doing so we are indifferent to the size of the

party or the volume of protestations.

If a large business treats small business unfairly, in an unconscionable manner, then the

Act will be enforced. If a business treats consumers unfairly and in a misleading and

deceptive manner, the full force of the Act will be applied. If a business colludes with

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another business, then the full force of the Act must and will be brought down upon the

offending businesses.

It’s important we utilise our resources to achieve wide-reaching results in the areas of

enforcement and compliance.

The approach of the Commission reflects this thinking. Enforcement strategies are

either curative or preventative, and range in intensity from contested hearings in the

courts, through hearings by consent, formal section 87B undertakings, administrative

settlement, informal resolution to education programs.

This differential approach means that we most efficiently apply resources to areas of

greatest enforcement need, and most effectively ensure compliance.

One of the important roles of the Commission is to inform the public of the activities of

the Commission itself.

This was the clear intention of Parliament, which in s.28 of the Act provided that the

Commission make available to persons in trade, consumers and the public, information

about the operation of the Act and matters concerning the rights and interests of

consumers.

In providing such information, the Commission accounts for its actions to the

Australian public. As is proper, the community has a right to be informed of, and to

assess and judge the work and decisions of the Commission.

I will continue to use the media as a forum for informing the public of their rights and

responsibilities under the Act.

Of course, publicity attending an adverse judgment of say, pricing fixing or

unconscionable conduct, can lower a firm’s standing and reduce sales. A good

reputation is highly prized by businesses. Those planning unlawful anti-competitive

behaviour therefore put at risk a valuable asset.

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As a result, the Commission should not and will not be cavalier in its treatment of

individuals or corporations about whom we allege wrongdoing - not in public, and not

in private.

Conclusion

I’ve outlined to you some of the work of the Commission in, I hope, areas of direct

interest to you. I’ve emphasised the positive economic and social benefits that result

from vigorous competition. And I have explained some of the Commission’s reasoning

in suggesting that, on s.46, it is desirable to provide guidance to the courts and certainty

to market participants.