Report argues against regulation for supermarket giants

29 January 2013
Kondinin Group

WHILE farmers around Australia argue that a mandatory code of conduct is just what the supermarket giants need to even the playing field, a new report states that regulation is the last thing that is needed.

The Institute of Public Affairs (IPA) has released Consumer first supermarket reform:
The market, not government, knows how to best meet consumer demand, which sends a very clear message – competition between supermarkets should be consumer-led.

According to the report, the absence of major supermarkets outside of capital cities can increase the price of groceries by 17%, which can equate to a $34.68 per week rise on the average household food budget, or nearly $1800 a year.

The IPA argues that any increase would affect lower income households who spend more of their income on food, and those in new suburbs, outer suburbs and rural and regional communities.

“The consequences of any increase would have a multiplier effect on local communities and
employment levels,” the report stated.

“With more supermarket entrants, particularly the growth of ALDI and entry of Costco, the supermarket sector is more competitive and driving competitive pressure to cut prices.

“The expansion of private labelled goods by supermarkets is directly in response to competition driven by consumer demand.”

Attempts to regulate a competitive market have already been undertaken in the Australian Capital Territory and resulted in upward pressure on prices.

IPA calculations on the ACT government’s data revealed an increase in the mean price of an ACT basket of groceries of around $8.02, or nearly 10% higher, compared to the cheapest basket.

The report takes the controversial view that people can make their own view of whether it’s a concentrated market or not, despite Coles and Woolworths already holding 70% of the market.

These figures are in stark contrast to the view taken by the ACCC’s 2008 Inquiry which stated that the pair accounted for between 55% and 60% of consumer expenditure on grocery items, with Woolworths accounting for at least 30% and Coles around 25%.

The institute concluded that while each of these shares of retail grocery sales is large for a single company, to say that the major supermarket chains enjoy an 80% share of grocery sales “exaggerates the position of the retailers”.

Last year the Australian Food and Grocery Council presented a paper for a voluntary code to provide a starting point in addressing what many farmers believe are “unreasonable contracts” being offered by Coles and Woolworths.

Australian Dairy Industry Council chairman Chris Griffin is an advocate of a mandatory code of conduct and a food sector ombudsman to oversee the whole supply chain, with the authority to name and shame.

He said the industry needed absolute transparency so that everyone was aware of the costs and returns of what was being achieved across the sector.

“We’ve got to understand what the cost of production is, what the cost of transport is, what the cost to the consumer is and all those areas within the supply chain so that everyone is receiving a fair return,” Griffin said.

As many Australian dairy farmers commiserate the two year anniversary of the milk price war, IPA said profit margins, of around 4% in supermarkets, were low in comparison to other food retailers.

“Meat, fish and poultry is 4.5%, fruit and vegetables, tobacconists and specialists, and convenience stores are 5%, liquor is 5.5% and bread and cakes are 10%,” the report said.

“Much of the opposition against lower prices is driven by producerism and vested interests whose profits are enhanced when consumers pay more.”

While arguments in the report have raised a few eyebrows, the IPA believes it has the answers.

It said the government should refrain from regulating against supermarkets providing cheap goods and private labelled goods in an effort to appease preferred producer interests.

“Doing so will lead to higher prices that disproportionately harm lower income households,” the report said.

It also advised the government to refrain from restricting expansion of any supermarket chain, arguing that it would reduce competition and lead to higher prices, placing unnecessary financial stress on people with lower incomes and living in rural Australia.