The ACCC report into the state of competition in the grocery industry has been released, with a number of recommendations mooted to improve competition. It should be noted, however, that the ACCC believe the issue of food inflation may have been overstated in some quarters.

Australian Food News reports on the ACCC’s response to the major issues raised during the Inquiry.

In General – Key Findings

The ACCC suggest that the current nature of grocery retailing in Australia is “workably competitive” but outlined a few areas potentially limiting price competition. These were:
* high barriers to entry and expansion, particularly in relation to difficulties in finding new sites
* limited incentives for Coles and Woolworths to compete aggressively on price
* limited price competition that Coles and Woolworths face from the independent sector as independent supermarkets tend to focus on convenience and service. A key factor inhibiting price competition from the independent retailers was considered to be the wholesale prices of packaged groceries supplied by Metcash.

It was discovered that ALDI has had a “dynamic impact” on the grocery sector, leading to competitive response from Coles and Woolworths.

Price competition was found to be greatest on promotions of key value items – which are products known to be used by consumers to assess value between competitors.

Notably, the recent food price inflation was largely attributed to factors outside the control of supermarkets, the ACCC and the Government – a point of which the federal opposition will no doubt pick up on. “Any possible weakening in the level of competition in retailing is unlikely to have been a substantial contributor to food price inflation in Australian,” the Report indicated. “The gross margins of Coles, Woolworths and Metcash have increased over the last five years. However, ACCC analysis indicates that these increases in gross margins could have only made a small contribution to overall food price inflation.”

“In other words, the vast majority of grocery price increases in Australia are attributable to other factors, such as supply and demand changes in international and domestic markets, increases in the costs of production and domestic weather conditions.”

The grocery supply chain was considered to have nothing “fundamentally wrong” with it, and the ACCC claimed that the evidence they received did “not support the proposition that retail prices have risen while farm-gate prices have stagnated or declined”. A finding which is expected to be condemned by the farming sector.

Finally, the significant buyer power of Coles, Woolworths and Metcash appeared to concern the ACCC but they did report that the competition between retailers was “sufficient” to ensure some of the benefits of lower wholesale prices would flow to consumers.

Market Concentration

The ACCC determined that Coles and Woolworths account for approximately 70 per cent of packaged grocery sales in Australia and about 50 per cent of fresh product sales. “Coles and Woolworths have maintained a fairly consistent share of supermarkets above 1000 m2 over the last 10 years, with each having just over 30 per cent of stores nationally,” the Report stated. “Coles and Woolworths are much more significant in relation to larger stores, accounting for around 87 per cent of all supermarkets above 2000 m2.”

“There is little evidence to suggest that Coles and Woolworths have simply ‘bought out’ the competition. High concentration levels alone do not dictate the nature of competition. There are other markets internationally that are more concentrated but appear to be more competitive.”

Competition

Although the sector is “workably competitive”, the ACCC suggest that consumers would benefit from more competition.

Current barriers to entry are considered high and are consequently decreasing the potential for greater competition. Additionally, Coles and Woolworths have limited incentive to cut prices as the other will simply match their price, while most independent supermarkets simply don’t have the capability to compete on price.

“Evidence indicates that if one player attempts to lead prices down, the other will follow, making it extremely difficult for either one to win significant numbers of customers from the other through an aggressive pricing strategy. There is little incentive (and perhaps limited capability on the part of Coles) to upset the existing balance,” the Report concluded.

The inability for many independents to compete on price was, to a degree, attributed to Metcash (the wholesale supplier to independents). More competition may be needed according to the report but the implications of another large wholesaler were unknown. “… the implications of another large-scale wholesaler entering the industry are unclear. As the only national wholesaler to the independent sector, Metcash can take advantage of significant economies of scale. If there were two large-scale wholesalers, it is possible that neither would achieve the same economies of scale that Metcash has achieved.

Planning/Zoning Laws

Concerns about the restrictive nature of some lease arrangements, coupled with the tendency for major shopping centres to only be interested in Coles or Woolworths was alarming. Restrictive provisions in leases, which substantially lessen competition, are covered by the Trade Practices Act but the ACCC reported that enforcement had not been a priority due to the “very few concerns” that had previously been raised. As such, they will be undertake a review of certain cases and “may take further action”.

Horticulture Code of Conduct

Due to the short period of time it has been in place it was difficult to establish its’ effectiveness but some tweaking was recommended by the ACCC to make it more “workable”. This included 13 recommendations and the advice that industry feedback be sought on any changes.

Unit Pricing

As expected the unit pricing scheme was considered to be useful for consumers and was recommended to become mandatory.

Recommendations

• Lower barriers to entry and expansion in both retailing and wholesaling sectors
• A number of changes to the Horticulture Code
• Unit pricing legislation (including a public awareness campaign and consultation with industry to establish how costs will vary based on the implementation timeframe)
• Introduction of a creeping acquisitions law
• All appropriate levels of government to examine zoning and planning laws to discover ways to ensure competition is not limited by restrictive leases. Particular regard to be given to whether proposals will facilitate the entry of a competitor not currently trading in the area
• The ACCC was also willing to assist the Federal Government with their GROCERYchoice website – prices will be updated monthly on a wide range of products

Ideas Dismissed by the ACCC

• Placing a cap on the market share of any single retailer
• Separating the wholesale and retail divisions of Coles and Woolworths
• Greater transparency in the supply chain (although this was addressed to some extent in the changes recommended to the Horticulture Code)
• No recommendation made with regard to claims of price discrimination (whereby single supplier charges a different price for the same good to different buyers) – evidence did not support the need for a legislative change
• Predatory pricing legislation – no specific recommendations were outlined by the ACCC in their report

The full report can be found at: www.accc.gov.au/content/index.phtml?itemId=838251

The impact of unit pricing can be found at: www.ausfoodnews.com.au/2008/07/15/research-establishes-impact-of-unit-pricing-on-retailers.html.