Consumer

Big Spender

^{Graeme Samuel | OCTOBER 2008}

With food prices soaring, the big supermarkets have been demonised for hiking up prices. But according to the ACCC’s grocery enquiry, this public wrath is largely unfounded. Graeme Samuel explains why you’re paying more at the checkout.

It’s no secret that the cost of groceries has been rising in Australia in recent years. Every week Australians spend on average between 12 to 14 per cent of their after tax income on groceries, and any increases are keenly felt.

Public concern about those rising costs led the Commonwealth Government in January to call on the Australian Competition and Consumer Commission to conduct a public inquiry into the factors behind the price rises. After six months of travelling the country and considering more than 250 public submissions, the ACCC reported on its findings in July.

The inquiry examined competition between retail stores and investigated the competitiveness of all aspects of the grocery supply chain, from farm gate to the customer.

What it found were a number of factors, from drought and adverse weather events, through to international supply and demand changes, which had contributed to the growing costs of goods on supermarket shelves.

One of the most important questions the ACCC sought to answer from the outset was whether competition between retailers was delivering customers the best prices possible, or whether a lack of competition was in fact contributing to the rising cost of goods on the shelves. The inquiry found that increases in the gross margins of the major retail players in the last five years could only account for a maximum of one twentieth of the price rises.

The bulk of the increases were the result of the lingering drought and natural disasters on crops, as well as increases in the cost of producing those crops. For example, the international commodities boom has substantially increased the price of many raw products required for production, such as petrol and fertiliser.

In addition, increasing food inflation internationally has encouraged some Australian producers to export more of their goods and has in turn influenced the cost of those goods domestically.

While its impact on prices was not dominant, there was found to be some concern about how vigorous competition was between the major supermarket chains. While competition was found to be workable, it was not as vigorous as it could be.

As a result the ACCC recommended a number of changes designed to increase competition at the retail level. These included addressing planning and leasing issues that have made it difficult for new players entering the market and increasing the overall level of competition.

The inquiry also found little evidence to support the notion that farmers were receiving less of a margin for their produce than they had in the past as the result of pressure from the dominant supermarket chains.

Due to the high cost of packaged goods supplied by wholesaler Metcash, many smaller independent supermarkets found it difficult to compete with the larger chains on price alone, many instead relying on greater convenience and better location to win business. Where they did try to compete with Coles and Woolworths on price, they often relied on fresh products to make their profits.

The inquiry also found Metcash had put in place arrangements which discourage direct dealings between its suppliers and its retailers, potentially placing retailers at a further disadvantage in their attempts to compete with Coles and Woolworths on price. These arrangements are being further examined by the ACCC.

A positive for many shoppers has been the arrival of German chain ALDI in Australia. It has been found to have brought strong, new competition to the market by setting up its own supply network. While only supplying a much more limited range of products than its larger rivals, ALDI has been able to offer significantly cheaper prices on many of those goods it does sell. In areas where an ALDI supermarket has opened near an existing major supermarket, those stores have been forced to respond by dropping their prices, meaning even those customers who don’t shop at ALDI benefit from its arrival.

During the inquiry the ACCC examined concerns that larger chains were inhibiting competitors from entering the market or from expanding their existing presence. The inquiry found they were doing this in two ways. First, by using the town planning processes to deter or prevent competitors setting up new greenfield sites and second, by restrictive covenants in leases with landlords of shopping centres and malls preventing or constraining the provision of space to competitor supermarkets. The issue of town planning processes has been referred to the Federal Government for consideration at a Council of Australian Governments meeting, as it involves state and local governments. However, the implications of restrictive covenants is a matter for the ACCC, and will be further examined in the context of the application of the Trade Practices Act.

The ACCC report makes a number of further recommendations aimed at making the industry more competitive and assisting consumers get the best deal possible when shopping. These recommendations include mandatory unit pricing for significant supermarkets, to allow for weight-for-weight comparison of different sized products and across different brands. The ACCC recognised the potential cost to smaller sellers of introducing mandatory unit pricing, and therefore recommended that a study be undertaken to do determine which smaller retailers should be covered.

The ACCC’s report has highlighted a number of areas which the ACCC can subject to further close examination in the context of the Trade Practices Act. Other recommendations made in the report, particularly in relation to town planning processes have been referred to governments for further attention and response.

More information about the grocery inquiry and copies of the report are available at www.accc.gov.au or by calling 1300 302 502.

Graeme Samuel is chairman of the Australian Competition and Consumer Commission.