Coalition’s warning to retail giants

David Crowe
October 30, 2013
The Australian

THE supermarket giants will be put on notice over harsh bargaining tactics that damage food producers as the Abbott government vows to help the “fragile” industry fight back against cheap imports. Firing a warning shot at Coles and Woolworths, the government will outline plans to tackle concerns about the retailers’ market power amid fears of further job cuts at grocery suppliers.Small Business Minister Bruce Billson will tell food industry leaders in Canberra today of his concern that market pressures will “stifle” local suppliers and lead to higher grocery prices for consumers.

Wesfarmers chief executive Richard Goyder, whose business includes 750 Coles supermarkets, moved to head off any new constraints on the company by insisting he had to keep driving down costs to match global competitors.The minister’s warning on market power signals one of the targets in a review of competition policy to be conducted next year, in the wake of new figures showing the $111 billion food and grocery sector is losing sales and jobs. Mr Billson will use his speech to the industry summit today to focus attention on the role of big retailers, although he will not prejudge the outcome of the looming review.

“While intensified competition between the two major chains has reduced grocery retail prices, there are concerns that those reductions come at the expense of suppliers and impact on the longer-term durable benefit to consumers,” he will say. “We have to ask ourselves: will these price and market pressures impact on the viability of the food-and-grocery industry over the long term and will they stifle innovation and investment by suppliers? And will this result in higher grocery prices in the longer term?”In a test for Tony Abbott on industry policy, the Prime Minister and his colleagues are being asked to decide on financial support for fruit processor SPC Ardmona in the wake of job cuts at Golden Circle, Bird’s Eye owner Simplot and McCain Foods.Mr Billson will pledge to cut costs for food growers and grocery suppliers through government action such as scrapping the carbon tax, reducing the company tax rate and reviewing workplace laws.In a draft of the speech obtained by The Australian, he will note the “fragile” state of the food-and-grocery industry and the investigation by the Australian Competition & Consumer Commission into the supermarkets’ power over suppliers.”Some of the alleged behaviour by supermarkets may not necessarily be breaches of the competition laws,” Mr Billson says in the draft.”At the same time, this does not mean that the status quo is necessarily delivering the most efficient or optimal outcomes in the market.”If unduly harsh bargaining practices are being used, they could, indeed, reduce incentives for suppliers to invest and innovate.

It is these question marks over competition policy which we want to examine.”The Australian revealed on Monday that the food-and-grocery sector had lost ground again in the past year even as employers increased their exports and poured more capital into upgrading their factories.About 150 executives will attend the conference in Canberra, which will hear from Mr Billson as well as parliamentary secretaries Bob Baldwin and Josh Frydenberg.Shaping the discussion, the Australian Food and Grocery Council will issue a report from Deloitte Access Economics that forecasts a $485 million gain to annual economic growth if state and federal governments remove red tape holding back the sector.The report, obtained by The Australian, urges reforms such as setting up a “one-stop shop” to replace overlapping federal and state regulators who add costs to food-and-grocery suppliers.Direct costs on employers include recruiting staff to deal with compliance, paying fees to regulators and hiring advisers to sort out regulations.

One way to get rid of unnecessary regulation would be to cut the budgets of regulators by one-third to one-half, the Deloitte Access Economics report says in one of its most contentious recommendations. The findings, based on talks with 30 food-and-grocery manufacturers about the impact of red tape on their costs, blame “slow approval processes” and “nano-regulation” for making life difficult for employers. Food companies unhappy with new rules had no effective mechanism to appeal against them, the new report says.”For example, investors considering a new product launch may be discouraged by threats of future new regulations, a ‘fat’ tax, advertising restrictions, national container deposit legislation, front-of-pack labelling star scheme, and many other policies that are floated from time to time,” it says.

A government working group is developing a scheme to put star ratings on food according to health guidelines, but the Deloitte report says this would cost the industry $272m to implement, where an industry code of conduct would cost $72m.Airing the frustration within parts of the Coalition over Coles and Woolworths, rural Liberal MP Sharman Stone took aim at the two companies. “The unconscionable use of market power by the two supermarkets, who together own some 80 per cent of the market share for food retailing in Australia and the subsidies paid to most other food growers and manufacturers in the competing economies, makes it extraordinarily difficult for Australia’s food manufacturing sector to find a level playing field,” she wrote.Dr Stone’s attack, in a formal submission to the Productivity Commission last Thursday, is privately backed by Liberal and Nationals MPs who want reforms to prevent the two big retailers from increasing their market share.Mr Goyder noted that Coles and Woolworths faced increasing competition from Aldi, which has 300 supermarkets, as well as foreign retailers. “The gorilla on our doorstep is Amazon. They are a very strong competitor and if Wesfarmers isn’t strong, lean. . . and innovative then Amazon will eat our lunch and our aim is to eat their lunch, make their time in Australia as hard as it can be by being as good a business as we can,” he told a forum yesterday.

“I find it slightly ironic that we now get criticised for lowering food prices at a time when families are under more budgetary pressure than they ever have been . . . if we’re not competitive, then we’ll be out of the game because Amazon or any of these other businesses will eat us.” – See more at: http://www.theaustralian.com.au/national-affairs/coalitions-warning-to-retail-giants/story-fn59niix-1226749321431#sthash.TvvVTDU6.dpuf