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August 8, 2008

ACCC in firing line over competition review

The recently published Australian Competition and Consumer Commission (ACCC) inquiry into competition in the Australian grocery sector has been heavily criticised by independent retailers and suppliers while more positive reaction has been fairly muted in tone. Ben Cooper reports.

The recently published Australian Competition and Consumer Commission (ACCC) inquiry into competition in the Australian grocery sector has been heavily criticised by independent retailers and suppliers while more positive reaction has been fairly muted in tone. Ben Cooper reports.

Anyone who was left unimpressed by the UK’s Office of Fair Trading grocery market inquiry last year should take a look at what is going on in Australia, where the Australian Competition and Consumer Commission (ACCC) has just published its review of the Australian retail grocery sector.

The ACCC’s conclusions that the market is “workably competitive” and that the dominant players, Coles and Woolworths, are not abusing their positions has been roundly criticised by both the National Association of Retail Grocers of Australia (NARGA), and supplier groups. Meanwhile, reaction from stakeholders who have taken a more positive view of the findings has hardly been effusive.

The review, commissioned six months ago by the incoming Labour government in response to rising food prices, concludes that food price inflation has been due to external factors, and found no evidence that the gap between retail and farmgate prices had increased as supplier groups had alleged.

However, in spite of its overall conclusions, the ACCC said “a number of factors currently limit the effectiveness of price competition”. The three impediments to lower retail prices identified by the ACCC are barriers preventing new entrants from opening new stores, limited incentive for the majors to compete aggressively on price, and the fact that independent operators are supplied primarily from one wholesaler which inhibits their ability to compete on price.

To counteract these factors, on the ACCC’s advice the Government has set up a price comparison website, while the ACCC has also recommended mandatory unit pricing and reforms to planning legislation to boost competition.

Those critical of the report suggest that the ACCC has been too credulous of the submissions made by Woolworths and Coles while paying less heed to submissions from other stakeholders.

“There is not a single indication in the report that they have disagreed with anything that Woolworths and Coles have said to them,” NARGA chief executive Ken Henrick told just-food. “There were 250 submissions in total, and almost all of them said market concentration was a serious issue impacting throughout the supply chain, and most of the commissions were ignored.”

Henrick said the ACCC was misguided in suggesting that the arrival of Aldi had increased competition, when Aldi’s geographical spread and product range was so much smaller than that of either Coles or Woolworths.

Kevin Rudd’s Labour government had pledged last year when in opposition to tackle the issue of grocery prices, and turned to the ACCC for answers. But Henrick questioned whether the ACCC had a sufficient grasp of the subtleties of the retail industry to undertake such a review. “They [the Government] have raised expectations that they would do something; they have relied on the ACCC to deliver on it and the ACCC has not been up to it. They are public service economists and clerks and they simply don’t understand the industry.”

Woolworths said the report had found the market to be functioning fairly. Woolworths spokesperson Benedict Brook told just-food: “We always said that we looked forward to the inquiry as we were confident that we work very fairly, and we are very happy for the ACCC to look into the way we do business. There were some very good submissions from other organisations and the ACCC has taken them all into account and come up with what we think is a very fair conclusion that shows that Woolworths and other supermarkets are generally working in a very fair way.”

A key element in the ACCC’s findings was always likely to be its estimation of market shares, which are disputed by the market leaders and the independents. Although the ACCC puts the Woolworths and Coles combined share of the packaged food market at 70%, higher than its previous estimate, and their share of fresh food at 50%, NARGA believes the ACCC is still underestimating the strength of the two dominant players.

The introduction of is the most tangible and immediate policy outcome from the review but the first few days have not gone well. Popular reaction has been generally critical, while industry representatives have expressed serious reservations about the methodology behind the scheme.

While it has only been operational for a few days, public criticism has already led to Assistant Treasurer Chris Bowen making public statements reiterating that the system would be refined in coming months in consultation with industry. As for the other measures relating to unit pricing and planning legislation, it is even earlier days for these initiatives.

However, the unit pricing move was enthusiastically welcomed by the Australian consumer group, Choice. “Unit pricing will help consumers make significant savings if they use it to pursue the best value between brands and supermarkets,” said Choice spokesperson Christopher Zinn. “Choice has campaigned for unit pricing for many years because it will help drive competition. Overall it’s expected to return millions of dollars to consumers.” Choice also welcomed the proposed planning reforms.

However, the ferocity of the adverse reaction to the ACCC’s review and the fairly subdued nature of the positive observations that have been made would seem to imply that the review has not moved the debate forward significantly.

The extent of competition in the Australian grocery sector, and the degree to which this adversely impacts on consumers, independent retailers and suppliers, has been a hotly debated issue for some time. Rather than settling anything, the ACCC review has merely become one more debating point.

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