This was published 5 months ago
Opinion
If the PM thinks this supermarket sweep is enough, he’s off his trolley
Rod Sims
Professor, former chair of the ACCCIf Australian consumers and suppliers are to realise the benefits of real choice, our supermarket sector requires fundamental reform that goes way beyond a Code Of Conduct review.
Announcing the Food and Grocery Code Of Conduct review this week, Prime Minister Anthony Albanese said: “We’ve made looking after consumers a key priority over the past 18 months, and we’ll keep looking at every option to make sure Australians aren’t paying more than they should or getting less than they deserve. If there are further steps that are needed, then the government will not hesitate to take action.”
This last sentence is vital to ensuring changes take place because only focusing on a review of the Code will not pick up all the relevant issues. As a starting point, we need to understand that the Code represents stunningly poor public policy. Remember, it was put in place in response to the appalling treatment by the supermarkets of their suppliers: pay us money now, to which we are not entitled under any contract, with an explicit or implied threat of being delisted.
For starters, there are no penalties applied if the Code is breached. Imagine if our traffic laws said the speed limit was 100km/h but if you exceed this there is no penalty. Such an approach only brings contempt for our laws. Second, supplier complaints inevitably end up with the supermarkets. What supplier will complain when they risk retaliation that would put their entire business at risk?
Finally, the Code is voluntary, so the supermarkets can walk away when they wish. It is unfathomable that such poor policy exists. It favours large businesses over small businesses and farmers. Hopefully changes to address these flaws in the Code can be quickly dealt with in this review.
However, to see whether lower supplier prices are being passed on to consumers, and to come up with any further solutions that may be required, the Code review will need information-gathering powers. How have the supplier and retail prices moved through time, why and how often? What considerations affect supermarket price setting? What targets are set for category managers? Why have supermarket profits increased recently; through an increase in margins between what is paid to suppliers and the prices charged to consumers, or through efficiencies? Getting this information voluntarily from the supermarkets will not work.
But much more will be needed to meet the prime minister’s stated objectives. Australia’s supermarket sector is extremely concentrated by international standards. Coles and Woolworths have a combined market share of at least 70 per cent. Aldi is the next largest player with a share of about 10 per cent.
The United Kingdom has five major players in its grocery industry with a combined market share of about 75 per cent. Their top two supermarkets have a combined market share of 43 per cent. Germany’s four largest supermarkets have a combined market share of just under 70 per cent. The United States’ four largest supermarkets have a combined market share of 34 per cent.
Greater competition among the largest grocery retailers in peer countries would seem to benefit those countries’ consumers. In the United Kingdom, for example, despite operating in an environment with accelerating inflation, in early 2023 Tesco, Sainsbury’s, Asda and Morrisons entered a price war with Aldi and Lidl, reducing prices to keep the discounters from eroding their market share. This lowered the price mark-ups UK consumers would have faced without healthy market competition.
Australia seems only to have had significant discounting when new entrant Aldi arrived in the market in 2001. This entry brought lower prices to Australian consumers. Kaufland, part of the world’s fourth-largest retailer, later tried to enter the Australian market. It appeared that a lack of access to attractive sites saw them give up four years ago. Given this, there are some obvious steps the government can take, over and above, fixing up the Code.
Most importantly, strengthen Australia’s merger laws as the ACCC is suggesting, including measures to address small “creeping acquisitions”. It will yield surprising early results to bring more competition to the sector.
Also important will be introducing laws to prevent unfair practices so that those with market power do not “cross a line” in their treatment of consumers and suppliers; for example, the large supermarkets demanding to see the contracts for inputs that suppliers use and then approaching those parties directly to supply home brand goods.
Other steps should also be taken. First, ensure that land banking by the incumbents, as well as planning laws, are not preventing access to sites for new players. Second, ensure that supermarket leases at shopping centres do not prevent competition. Third, ensure suppliers in key areas are not tied to the incumbents such that new entrants are prevented from accessing necessary supplies.
These are all sound steps to take to achieve the prime minister’s objectives. We need the interests of consumers and suppliers appropriately considered alongside the interests of the two dominant supermarkets.
Rod Sims is a Professor at the ANU in the Crawford School of Public Policy. He is also an Expert Adviser to the Commonwealth Treasury’s Competition Task Force. From 2011-2022 he was Chair of the ACCC.
The Opinion newsletter is a weekly wrap of views that will challenge, champion and inform your own. Sign up here.