You may never have thought about the ethical ambiguity of your supermarket choices. But Gary Mortimer has studied them.
Take milk, for example. When people go to the refrigerated shelves in Coles or Woolworths, many will grab the cheaper store-brand milk.
But, says Dr Mortimer, senior lecturer in marketing at the QUT business school and an expert in shopping behaviour, “when we ask those people about the ethical considerations of their choice, they’ll say they want to support farmers”.
In psychological terms it’s a simple case of cognitive dissonance. As individuals, we are apt to feel sympathy for the suppliers that the retail giants must be screwing to keep prices down and profits up. But as consumers we want cheap stuff.
So, as citizens collectively we have to determine the point at which the market power of corporations ceases to provide benefits to society and becomes a threat that must be reined in. Harder still, we have to decide how much to rein it in.
As professor Ian Harper, chairman of the committee reviewing Australia’s competition policy, said after the release of its draft report last month, it comes down to balancing the efficiency that comes with size against the “potential detriment to Australian consumers due to the reduction in competition”.
And if you want an example of the difficulty of finding that balance, there is none better than Colesworths, as the duopoly of giants that dominates Australia’s food retail industry is often shorthanded.
And Coles and Woolworths don’t just dominate the food industry. They are everywhere in our lives.
Coles is not the just “prices are down, down” supermarket. Its parent company Wesfarmers also owns Target, Kmart, Bunnings Warehouse, Officeworks, Bi-Lo, Liquorland, First Choice Liquor and Vintage Cellars. Not to mention a couple of coal companies, a half-dozen or so chemical and fertiliser makers, and a bunch of other industrial brands.
Likewise, Woolies are not just the “fresh food people”. They are also – like Coles – alcohol people, through BWS, Dan Murphy’s and Cellarmasters. And hardware people, via Masters Home Improvement.
Both retailers are also in the fuel business. And financial services: home insurance, travel insurance, life insurance – even pet insurance – credit cards and phone plans. And more.
But food is the main thing. Between them, says Gary Mortimer, they share about 72 to 74 per cent of the market.
“There are differences across sectors,” he says. “Their market share in fresh produce, deli lines, meat, bakery is less than their dry grocery share.”
There are only two other reasonably large players, IGA with nine or 10 per cent and the newcomer, Aldi, now with about 11, he says.
Other sources suggest the concentration is even greater. A discussion paper on the future of agriculture released this week reckoned that in the grocery sector the four largest players accounted for 98 per cent, with Woolworths (43 per cent) and Coles (37 per cent) dominating.
By comparison, in the United Kingdom five major retailers control just over 70 per cent of supermarkets and in China the largest five control 38 per cent. In the United States, Walmart is the largest player with 25 per cent of the market.
Massive market share
That gives our supermarkets way too much power in the eyes of many, notably the minister for agriculture, Senator Barnaby Joyce. Speaking to farmers on Monday, the same day as the agriculture green paper came out, Joyce cited some of its findings, notably that whereas a hundred years ago farmers received 80 or 90 per cent of the value of the produce, that had fallen to 50 per cent by 1950, and to just 10 or 15 per cent today.
“There is still a lot of money in agriculture today,” he said. “It’s just that different people get it. The farmer gets far less and to be honest, so does the taxation department.”
Joyce spoke of the need for a mandatory code of conduct for supermarkets and stronger investigation powers and penalties under the competition laws.
“It is always in the interest of any entity to strive for the position where you can pay less than a product is worth and sell it for more than it should genuinely retail,” he said.
Joyce nominated several sections of the competition laws relating to the misuse of market power and unconscionable conduct as being in need of reform, but did not go to specifics, which is understandable given the competition review still under way. But he hinted: “There are far more stringent controls of this monopolistic problem in other countries – countries who celebrate a greater heritage in market conditions than those that exist in our nation.”
Nationals senator wants stronger penalties
One can get an idea what Joyce was alluding to by going to one of his National Party colleagues unconstrained by ministerial position: new Queensland senator Matthew Canavan, who was Joyce’s chief of staff prior to the election.
Canavan is unusual in the Nats in that he is neither a farmer nor a small businessman. He is an economist who has spent most of his adult life working for the Productivity Commission.
He’s unusual too for an economist, particularly for one with a background in the Productivity Commission, as is shown by an anecdote from this week.
On Tuesday night, while the rest of Australia was remembering the life and weighing the reforming legacy of former prime minister Gough Whitlam, Canavan had organised an event to celebrate another political life, that of Sir John “Black Jack” McEwen, long-time leader of the Country Party (as the Nationals were then), who retired in 1971, the year before Whitlam was elected.
McEwen was in many ways Whitlam’s opposite, but the key difference here was in their attitudes to protectionism. Whitlam was for opening Australia to the world. He slashed tariffs. McEwen was the great advocate of tariffs and protectionism, and for this reason is not well regarded by most modern economists. Says Saul Eslake, chief economist for Bank of America Merrill Lynch: “It was his view that Australians should have been forced, as we were, to pay high prices for goods made in Australia simply because they were made in Australia.”
Yet Canavan is an admirer of McEwen. While he is by no means a protectionist in the McEwen mould, he has big reservations about the current economic orthodoxy, which gives such primacy to the interests of consumers.
He railed against it in his maiden speech to the senate in July.
“Our competition laws are too focused on protecting against monopoly power. But just as economically ruinous can be too much buying power, or monopsony,” he said.
Indeed monopsony was probably the bigger issue for Australia.
“Too-low prices can be just as detrimental as too-high prices because they lead to lower supply and reduce incentives to invest in new technologies. To protect small businesses we need stronger competition laws. We need an effects test in the Trade Practices Act. We need … stronger penalties for dominant businesses that do the wrong thing.”
And when he talks about stronger penalties, Canavan is not suggesting half measures. He is not afraid to canvass the nuclear option: the forced break-up of big corporations that abuse their market power.
He raised it in a media release this week, and again when speaking to The Saturday Paper, specifically in reference to the market behaviour of the big two supermarket chains, which he considers “outrageous”.
“We should make our penalties such that they care if they get caught. If they are not sufficient right now to encourage that state of mind, well let’s increase the penalties.
“One way to do that is to say that if they continue to do this, if there are substantial breaches, then the ACCC [Australian Competition and Consumer Commission] can go to a court and ask for them to be split up.”
Such provisions exist elsewhere in the world, he says. He notes that the degree of market concentration the big two enjoy in Australia would not be tolerated in the US, for example. The Department of Justice there uses something called the Herfindahl–Hirschman Index as a measure of market concentration. A score of more than 2000 indicates a dangerously high level of market power.
“Australia’s retail market scores over that ,” says Canavan. “If this was the US, alarm bells would be ringing in the Department of Justice.”
Suppliers getting raw deal
Not that Canavan would advocate immediate divestiture just because Coles and Woolies are so big, although others would. The Council of Small Business, in its submission to the competition policy review, called for the “voluntary” break-up of the big two. Canavan would only favour their break-up if they did not change their bullying ways in future.
So would independent senator Nick Xenophon, who has actually produced draft legislation.
“Other countries have it,” he says. “It is rarely used, but the mere fact that it exists acts as a powerful disincentive to the abuse of market power.”
As things now stand under Australian competition law, Xenophon says, “big operators too readily use predatory discounting to drive smaller competitors out of the market”.
And to screw their suppliers. There are many examples, both large and small, although the ones we know about are likely just the tip of the iceberg.
A common problem is that suppliers are too afraid of the retailers to go public with their complaints.
Some do, such as the honey producers a few years back who complained they were being sent broke because Coles and Woolworths had played them off against each other to the point where their contracts to supply own-brand honey were below the cost of production.
But many more don’t, and Xenophon has a large collection of them. Such as the small family farm that thought it had contracted with Woolworths to provide certain fresh vegetables and planted six months’ supply, only to be told three months after planting that Woolies would “no longer be ranging this line”.
We can’t be more specific here because the supplier concerned is afraid of the consequences for its residual contracts with the supermarket giant.
The level of fear is attested to by none less than the competition regulator itself, the ACCC, in its current federal court action against Coles for unconscionable conduct in dealings with suppliers.
The ACCC claim says Coles set aside at least one day each calendar year, which was referred to within Coles as “Profit Day” or “Perfect Profit Day”, and set targets for business categories of money to be “secured” from suppliers.
The details are complex, and Coles is defending the action, but ACCC chairman Rod Sims sums it up thus: “We’re alleging that Coles took advantage of its superior bargaining position to demand money that it either knew or ought to have known it didn’t have a right to. And we’re alleging applying undue pressure by, in some cases, threatening measures that were commercially detrimental, pressing suppliers for urgent responses and making multiple demands.”
But the ACCC had trouble getting those suppliers to provide details.
“It became clear,” the regulator said in a statement about the investigation in May, “that suppliers were reluctant to speak to the ACCC for fear of what they perceived may be the consequences of providing information to the ACCC.”
It was only after an assurance by Sims that information could be provided confidentially that the ACCC managed to get about 50 suppliers to come forward.
The current case only involves Coles, but nonetheless comes at a very bad time for both the big retailers, with the parliament due next year to consider the recommendations of the competition review. And with the likes of Xenophon, the Nats and the Greens all intent on nobbling the power of the duopoly.
“There will no doubt be a big fight in the Coalition about all this,” predicts Xenophon.
The preconditions are certainly there. For all the claims to being the party of small business, many in the Liberal Party are closer to big business than are their partners in the Nationals. And there are genuine philosophical and policy differences.
Eslake backs consumers
At a practical level, competition policy comes down to a zero-sum game, as Saul Eslake notes.
“Its hard to see how the grievances of farmers [and other suppliers] can be addressed without forcing consumers to pay more,” he says.
“I always start with the principle that producers exist to serve consumers, not the other way round. The National Party in a sense is founded on the reverse assumption.”
Eslake is notably unsympathetic to the complaints of the farmers.
“We don’t believe in the family shoe factories anymore,” he says. “The ambitions agriculture should have in the 21st century will not be achieved if we persist in farming structured as it was in the 19th century.”
He is even less impressed with Senator Joyce. Eslake named his “mad” cocker spaniel Barnaby, on the basis that it “made a lot of noise and ran around in circles without ever making any sense”.
But there is a serious point here.
“By and large the big supermarkets have been delivering for consumers. And people have been voting with their feet,” Eslake says.
There is evidence to back that view. Professor Caron Beaton-Wells, a competition policy expert at the University of Melbourne law school, points to a wide-ranging review done by the ACCC in 2008.
“That was largely a price inquiry because at the time prices were high. The ACCC concluded the sector was ‘workably competitive’. That’s somewhere between not perfect and not failing in terms of market structure,” Beaton-Wells says.
“It was a very controversial finding. They also found in terms of retail–supplier relations … nothing fundamentally wrong with the supply chain. That was also a very controversial finding.”
Professor Harper’s new competition policy review appears to have backed up the ACCC’s 2008 conclusions.
“Now Harper’s taken a fresh look, and on the issue of competitiveness, effectively Harper has agreed with the ACCC. On the other side, about supply chain relations between suppliers and retailers, and the allegations around bullying tactics, they’ve essentially said it can be left to the ACCC and the courts.”
Purpose vs effects
That’s not to say nothing is likely to change. There is much stronger evidence now of the abuse of power by the big supermarkets towards their suppliers.
“The view has been taken by a number of commentators, including people like Barnaby Joyce, that the relevant prohibition on the misuse of market power is not working,” Beaton-Wells observes. “And that is a debate that comes down to whether we should have, as we currently do in the act, a ‘purpose test’, or the alternative, which is an ‘effects test’, or whether we should have both.”
“At the moment,” she says, “the law proscribes a firm with substantial power from using that power to damage a competitor.”
But the ACCC has rarely used its power to call a trader to account, because it is so difficult to prove purpose.
“Behaviour that might damage a competitor might actually be pro-competitive behaviour,” she says. “It might show that you are very efficient, or an innovator, or have such economies of scale that you can drive your costs down to such a level that others can’t survive.”
“So you could end up damaging a competitor, though that’s not your purpose. So the view’s been taken that the law doesn’t capture a lot of conduct that might in the long run be damaging to competition and consumers.
An effects test, by contrast, would proscribe a firm using its market power in such a way that lessens competition, whether or not as a deliberate strategy.
“That’s the view supported by the ACCC,” Beaton-Wells says, “It’s the view I support. It would be consistent with the position in other major countries, the US and the EU.”
“And Harper has come down in support of an effects test. Now, big business doesn’t like that. Exactly what form that takes, well, there’s a way to go.”
What about the option of forced divestiture?
“Divestiture? Bad idea,” she says. “That’s never got any support from the competition community, either the economists or the lawyers that I am aware of.”
“If you were to introduce things like market capping or divestiture, you’d take away the incentive from firms to do the very thing the law is trying to encourage, because they wouldn’t be able to grow beyond a certain point.”
Anyway, as she and others note, new players are now in the market, giving suppliers more retailers to deal with.
But there’s always some space between the theory and the reality.
As Gary Mortimer points out, the reality is that Aldi’s entry into the market has only increased the pressure on the big two to sell cheaply. Aldi’s range of products is also much more limited, and 98 per cent “private label”, as the supermarkets’ own brands are called.
“In response to that, we’ve seen what we refer to as range rationalisation,” he says.
That is, Coles and Woolworths have reduced their ranges and increased the proportion of private label generic products on their shelves.
Which is decidedly not good news for suppliers. Or maybe, ultimately for consumers, because it limits choice.
We might think about that, next time we’re standing in front of the dairy cabinet, mulling over which milk to buy.
This article was first published in the print edition of The Saturday Paper on Oct 25, 2014 as "Supermarket forces". Subscribe here.