NATIONAL COMPETITION POLI CYAND THE RETAIL SECTOR

Dee Margetts

T he time has come 10 proclaim thnt the great nco-libera lexperiment of the past 30 years has failed , that the emperor has110 clothes... Labor, in the international tradition of socialdem ocracy. con sistently argue s for a cen tral rule for govern mentin the regulation of ma rkets and the prov ision o f publ ic goods . . .The Libera ls. embracing the nco-l iberal tradit ion of ant i­regulation . seck 10 red uce the agency of the state in privatemarkets as mu ch as po ssible .. .As President Sarkozy put it "Lelaissez-falre, c'est fini", (Rudd. 2009: 25. 28. 29)

National Competition Policy (NCP), one of Australia's major socio­economic policy changes , was introduced in 1995, providing significantpowers to senior officials of the Council of Austra lian Gove rnments anda range of other senior State and Federal bureaucrat s to enforcederegulation and facilitate other forms of ' free ' market restructuring ofAustralia 's domestic econo my,

By 2009. Prime Minister Kevin Rudd was endeavo ur ing to link neo­liberalism specific ally with the Liberal Party in Australia and to claimthat Labor has consistently promoted social democratic policy. Rudd didnot ack nowledge that the push to implement cconom ic globalisation andNCP was grea test during the Hawke-Keating era and, although thesubsequent Liberal Coalition Government became involved, (he initiationand implementation of such a widely impacting policy change has playeda major role in Australia 's current 'n co-liberali sm "! In his essay in The

Rudd himself reportedly played a major role in the implementation of ~CP whenhe was a Senior official in Queensland's Goss Labor Government. (Mike SteketeeI0/1108. ''''1':1/\\ 1111·.l h i'/ lf/fj /mliml.llel\ s .("ol1J. llII!i!ory/O,15 J97,l.W1Yl 6/J­75l:J.u m.lmIlJ. accessed 24 I\ pril 2009).

NAT I O~AL CO il ll'ETIT IO~ I'D Lie" 69

Monthly magazine, Rudd tended to link the Hawke/Keatin g em with onlypositive changes 10 Australia' s political economy:

Examples of such a (soci al-democratic ) government are theAustra lian Labor governments of Bob Hawke and Paul Keatingduring the 19ROs and early '9 0s program of economicmodernisa tion. Their reforms internationalised the Australianeconomy. removed protectionist barriers and opened it lip 10

greater competition ({bid: 25).

Rudd then claimed that the Hawke/Keating Labor Governments wereable to dramatically improve the productivi ty of the Australian privateeconomy at the same time as expanding the role of the state in providinghealth and educational services (ibid: 25 ).

1\ more careful assessment of NCr, as a central feature of policiessupported by both major par ties in the last two decades, is needed .Research into the impacts of deregulation of important parts ofAustralia's grocery supply sec tor, such as Australia's dairy industry, hasalready put forward ser ious cha llenges to a range of NCP outcomeassum ption s (Margetts. 2007a) of the public ' benefits' of Ne p such as' lower prices and improved cho ice for consumers ' (Hilmer et ol, 1993:1). Therefore the assumptions that new retail stores find newmanufacturers resulting from NCr would be the main source of new jobsin Austra lia (Hilmer et ot, 1993: xv) should also have been assessed bythe Federa l Government.

Rudd cla imed that, while the Coalition was in government, it set aboutderegulating the labour market on the basis that human labour was no .different from other commodities (Rudd, 2009: 28). This article willargue that the combination of labour market deregulation (which beganunder Lahor) with forced deregulation of trad ing hours, and thecombined impacts of NCr on Australia' s retail and retail supply sectorssuch as the removal of Statutory Marketing Authorities and the PricesDiscr imination Provisions of the Trade Practices Act / 974, have yet tobe proper ly assessed by the Federal Government.

Prior to the 2007 Federal election, the ALP campaigned against risinggroce ry prices and in September of that year, as Opposit ion Leader, Rudelpromised to engage the Australian Competition and ConsumerCommission (ACCC) to conduct an inqu iry into the prices charged bythe major supermarket chains (ABC News, 2007). Soon after gaining

70 JO URNAL O F A UST RALIAN POLITI CAL ECOt\OMY 1\'0 67

gover nment, Labor announced that it would follow through on thispromise by commiss ioning a full inqu iry into Australian groce ry prices.

The ACCC Groc ery Price Inqui ry Report strongly criticised Metcash (themajor supplier of Australia 's independent grocers) (ACCC, 2008: 153­199) but largely avoided criticising the much more market dominant\Voolworths and Coles for their impacts on retail com petitors andsuppliers as well as consum ers. The AC CC claimed that it analysed <theextent to which comp eti tion (or lack of it) has contributed 10 increasedgroce ry prices ' but concluded that, desp ite a range of factors limiting thelevel of price competition, the grocery retail sector was 'workablycompetitive ' (ACCC, 2008: xiii-xiv) , This art icle prese nts a less benignview of combined impacts of NCP and labour market deregulation 011

mar ket behaviour in Australia 's grocery retail sec tor.

T hc T hcorc tiea l Basis of Anstra lian Retail Der egnlation

The implicit theoretica l basis of the Hilmer Inquiry that led to theestablishment of NCr had been prom oted in the corpora te-focussedIndustry Assistance Commission 's (lAC) inquiry into Government Non­Tax Cha rges (lAC, 1989; Margeu s. 200 I: 29). The lAC argued that theissue of market power was not just whether a natural monopoly existedbut whether the entry or exit by riva l firms is feasible, and so theysupported private monopolies or oligopo lies if the market was consideredto be 'contestable' ( lAC, 1989). As is exp lained below, l lilmer et al( 1993) not only reflected the views of "contestability" theory (aspromoted by the lAC) but they also treated the more mainstreammarket/com petiti on theory as outdated.

However, even the classical supporter of free market ent ry, GeorgeStigler,2 had outlined what he considered the two features of competitionnecessary for the support for market deregulation. Firstly that eacheconomic unit be sufficiently small so it exerts an imperce ptibleinfluence on prices; and seco ndly that neither government nor privateassoc iations erect obstacles to the movement of resources into and out ofindustries. or regulate the prices paid or received by economic units(Stigler, 1987: 13). The two points together could only fully apply in

2 Close friend and associa te of the famous Chicago School monetarist economist.Milton Friedm an.

~ATlU~A I. CU,\ IPET IT IO:\, I-'O U CY 71

cases of ' perfect competition' . Stigler had retain ed the view of thes ignificance of market share desp ite the published work of economistssuch as Willi am Baumel, wh o wer e pushing for fur ther marketdereg ulation as a result of the add ition of their co nce pt of ' perfec t ma rke tcontes tability ' to the co ncept of ' perfect compe tition' .

Baum e l applied the conce pt of a 'perfectly contestab le market' tomonopolies and o ligopolies in certain types of indu st ry sec to rs, such ascity- to-city air services (Baumel , 1982(b): 7), despi te admitting thatneither ' perfec t competition ' nor ' perfect con testability ' wer e common.He also made it clear when includ ing the possibi lity of oligo polies andmonopolies in the co nce pt of market co ntestability that ' perfectlycontestable marke ts ' were no more C0 I11111011 on the rea l wor ld than'perfectly competitive markets ' (Ba umel, 1982(0): 2). He did, how ever,ind icate that even though mark ets arc rare ly, i fever, perfectly contestablethe con cep t of ' perfect co ntestability ' could be more frequently appliedthan ' perfect co mpetition ' and that con restability wa s merely a broaderidea and a benchmark of wider applicability than perfect competition(Baumel, 1982(0): 3).

Baumols definition of ' perfect contestability ' refers to the potent ialab ility of free entry for a new market player as well as the potentia l for acost-free ex it. It also requires that the incu mbent market operator/s willrestrict their pric es to that of marg inal cos t and hen ce no supernormnlprofit:

...a contestable market never offers more than a normal rate ofprofit - its economic profits must be zero or negative, even ifi t isoligopclistic or monopolistic. The reason is simple. Any positiveprofit means that a transien t entrant can set lip business, repli catea profit-making incumbent's output at the same cost as his,undercut the incumbent's prices slightly and still cam profit(Baumel. 1982(0): 4).

The Baumol emphasis on potential (and 110 t necessarily actual) ease o rmarket entry , has been cha llenge d by economist \Villiam Shepherd furignor ing internal marke t features such as market structu re, demandelasticity , lags, brand loyalties, price d iscriminat ion, cost d iffere nces.info rmat ion gaps, and stra teg ic behaviour. Shepherd cr iticise d the factthat the rising preoccupat ion with o ligopoly and monopoly ratios tendedto neglec t the differences amon gst individual firms ' behaviour, resu ltingin the ignor ing of blow n out market shares and the prevalence of price

72 JOURNAL OF AUS"IRALlAf'.: POLITICAL ECOl\O MY No67

discrimination (Shepherd , 1984: 574). Shepherd portrayed the push foraccep tance of the con testab ility concept as part of an ' . .. optimistic new­Chicago- school view.. . ' , wh ich regarded internal and ex tern al eleme ntsof market power as small and/or shor t lived. He cla imed that existingmarket power was being j ustified on the ass umption of grea tereconomies of scale and better effic iencies (Shepherd, 1984: 575).Significa ntly, She phe rd noted that Baumel et til provided little in the wayof practical examples of where such a concep t of contestab ility ino ligopotistic or monopolistic market circumstances ex isted or actuallyworked (Shepherd, 1984: 576) . Shepherd later found that, as the'deductive results ' hold only when the pre-conditions of contestabilityex ist, they were not observable in any markets (S hepherd, 1995) .

For those in favour of strong market deregu lat ion , the Baumel theo ryplace s the hypoth etical benefit s of contes tability and deregulation abovethe impacts of blown out marke t shares and corporate mark etdom ination. Ironically, the Baumol theory of contes tabi lity has notinfluenced basic economic texts ' positions on competition. Fo r instance,in the late 19805, Samuelson and Nordhaus did not includ e a discussionof contestab ility in thei r definitions of free market competition. Instead,they pointed out that imperfec t com petit ion. monopoly e lements <111(1externalities amount to se rious deviations from perfect competition(Samuelson & Nordhau s, 1989: 44).

What is meant by perfect competition? It is a technical economicterm that refers to a market in which no firm or consumer is largeenough to affect the market price (Samuelson & Nordhaus, 1989:42).

The significance of these theories regarding competition and marketsfrom an Australi an perspective is that the focus of the Hilmer Reportreflects the views of 'contestab ility ' theory rath er than main streamcompetitive market theory and treats the mor e mainstreammarke t/competi tion theory as outdated. Thus, its definition of' competition ' is substantially different from that of Samuelson (above):

St rh 'ing or putentlal strlvtng: it was once thought that marketswould be efficient only when a Humber of firms were actuallycompeting. Recent work suggests that the real likelihood ofcompetition occurring (potential striving) can have a similareffect on the performance of a linn as actual striving...Thus. amarket which is highly open to potential rivals ~ known as a

NATIO :'\AL COM I'ETlTIO~ ro t.rev 73

highly contestable market - may be of similar efficiency as amarket with ac tual head-to-head competition (Hilm er {'I al, 1993:2 )) .

Similarly, the Hilmer Report makes no speci fic ment ion of Galbraith'sconcerns about corporate market power abuse and mainstreameco nomists' views on the significance of market share and the numbersof market competitors:

Two or more persons or entities : early economic worksugges ted thai large numbers of competitors were important forthe effectiv e working of competitive forces. However. in somecases competition between a few large Fi rms may provide moreeconomic benefit than competition between a large numb er ofsmall firms. Th is may OL'Cur due to economics of scale andscope, not only in production but also in marketing. techno logyand, increasingly. in management (Hil mer i' 11i1. 1993: 3).

Hilmer needed to have added that, even from Bnumol ' s point of view,'some cases ' arc those wh ich fit within the definit ion of ' ccntestability'.That means that, if Ncr was to use the Baumol theoretica l position, itwould be necessary to assess whether the basic pre-cond itions ofcontcstability existed in the sector which was being exam ined. Eventhough Hilmer seemed to accept contestability theory as if it was nowunchallengeable, from the point of view of those such as Shepherd this isclearly not the case . Even 13<llul101 admitted that ' perfect coutestability'is uncommon. The preconditions for con testnbility, accord ing to Baumel(l 982bI. arc as follows:

a perfectly contestable market must have free entry and costlessmarket exit;

contestable market prices must 110t be greater than marginalcosts; and

incumbent firms in contestable markets must never have morethan a normal rate of profit and its economic profit s must bezero or negative,

J Hilmer' s references cited Hnumol ( 1982) and Gilbert (1989) (H ilmer el al, 1993:2)

74 lO URKALOF AUSTRALIA N POLITI CAL ECOKOMY K067

The benefit s emphasised by cont estability theory are that hugecorporations in a 'contestable oligopo ly' can lise their size to keep costslower and, if they are in a position to achieve ' equ ilibr ium', these lowercosts can "guarantee opt imality '. (Baumol, 1982a: 2). Apart from the factthat this presump tion is an empir ical proposition that needs to be tested .there was no discuss ion regard ing how such corporations were likely totreat their suppliers.

Since the applica tion of con testab ility theory is itself con testab le, and thishas been a major theoretical basis for the treatment of markets underNep, both the main stream market theory guidelines and the basic pre­conditions for contestability should have bee n carefully assessed insectors such as retail after NCP~drive ll changes had been implemented .Hilmer himself has admitted that NC P had not been based on 'provenprinciple s ' :

Many of the areas of competition policy are 1/01 nmcnoble 10

simple answers based 0 11PI'O\,('" principles. The economic logic011 which competi tion policy is based is still being form ulated..."

(Hilmer, 1994: xiii) (Emphasis added)....

Despite this 'admission of the lack of proven theoretical principles, theHilmer report ' s approach was app lied to almost every aspect ofAustralian soc iety via a compul sory (and dra conian) national legislativereview. John Brtttlaud has recent ly stated that ' .. .contestability theorypres umes that [market] inefficiency can be detected and that cor rectiveregu latory sanctions ca n be imposed.. .' and adds that Baumol et at in1998 had pres umed that regulators cou ld' ... emp irica lly detect situationsin which no schedule of price s wou ld be available to the incumbentmonopolist that would forestall ent ry of competitors and the loss ofprod uction economics. ' (Brat land, 2004: 5) . However, Bratla ndcon siders that such ' objective ' information on opportunity costs neverexists (Brat land , 2004: 26). These type s of cont estability assumptionsand challenges to these assumptions make a systematic check of theoutcomes of NeP-drivcn changes even more vital.

4 Th is stateme nt WilS repented by Hilmer in 1995 at the Higgins Memorial Lecture(Hilmer, 1995a), and in the Economlc , IIm()·.sis ell/d Poliq j oumnl tha t same )'l'ar

(Hilmer, !99.5b; 2-\).

NATl O:\'A L CO M PETI TI ON 1>(Ju e,' 75

W ha t C ha nges Did NC I' Make to the Aust ra lian Reta ilIn dus try? What Role Did the NCC Play?

In addition to the overa ll NCP legis lati ve review, the Hilmer Reportrecomm ended that NC P changes should to be introduced viaamendments to the Trade Practices ACI /9 74 which includedrecomm endin g removal of the Prices Discrim ination Pro vision (S 49).This recommendation had the potential to take on greater significanceafter other NCP chan ges increased the market power of corporateretailers and dimini shed the market power of many in their supply sector(Margetts, 2009). The NCP Legislative Review required all local, stateand federa l legis lation to be reviewed and repealed or amended if a casecould not be put forward to gain the acce ptance of the NationalCo mpetition Council (NCC) and the Federa l Treasurer that retainingcertain laws and regulations was :

in the publi c interest; andcould not be replaced by a more market-based altern ative.

For the retail sector, in addition to the move towards further deregulationof liquor licensing and tradi ng regulations (which attracted considerablepubli c interest debate), one of the most obvious targets pursued by theNeC, then under Graeme Samuel as President , was to push hea vily forfurther deregulation of retail tradin g hours. Even though Samueladmitted that NCP agreements did not mandate the remova l of retailtrad ing hours regulations. he described them as ' anti-competitiverestrictions ' (Samue l, 199R: 7). The NCC also produ ced a Shop TradingHours lea flet which said:

In 1995 all govcnuncnts agreed 10 work together i ll a co­ordinated manner towards introducing greater competition intoour economy where it benefited the- overall community (Nee,2000).

Th is statement is challengeable in two ways. First , as we have seen,NCP was based a ll ' contcstability ' theory, rather than the existingcompetitive market theory. Tha t means that 'contestability ' does notnecessaril y mean greater competition, espec ially if it is used to supportmarket domin ation and/or oligopson istic buy ing power. Seco ndly, thereis a fundamental asymmetry in the prescr iptions. Those see king to retainexisting regu lations were required to convince the Nee that they were in

76 JOURNAL OF AUS TRALIAK POLITICAL ECONOMY No 67

the public interest. There was no requirement lor the removal ofregulations 10 be proven to 'benefit the overall community' (NeC, 2000).Moreo ver, the Nr.C has shown itself a biased j udge of what constitutesthe public interest.

Even though Hilmer himself ill 1995 had clearly stated that therecommended processes and institutions of Ncr leave much of thecompetition policy squarely in the political domain (Hilmer, 1995b: 19),in areas such as trading hours deregulation the NCe only accepted Stategovernment political judgements of public interest if they coincided withthe NCC' s own decisions. An example of this inbuilt prejudice is that,when the majority of the Western Australian electorate voted in the 2005Referendum that urban retail trading hours deregulation would not be inthe public interest, the NCe chose to ignore the result, despite havingpromoted the results of a ' non-compulsory referendum' in Bendigo on.their 'Shop Trading Hours' leaflet (NCC, 2000).

There has been considerable criticism over the years from small orindependent retail competitors and suppliers, as well as many consumers,regarding the impacts of further deregu lation on the market power of theAustralia' s major supermarket chains. For instance, 285 of the 332submissions to the Joint Select Committee on the Retail Trading SectorInquiry expressed opposition to the increasing market power of thecorporate retail sector whilst there were only 22 which were supportiveof further retail deregulat ion: the remainder were unclear or unspeci fied(JSCRTS 1999)5 A major incentive for corporate retailers to push forfurther retail trading hours deregulation would have been the labour costadvantages gained through changes to Federal employment relationslaws.

Changes to Corporate Employment Relations Law s

In October 1997, Professor Hilmer had been asked by the BusinessCouncil of Australia to head a major research project to recommendreforms to Australia' s labour markets." The Keating Government had

5 Set' Ti.lbk I below.6 In 1995. Hill Scale s, who at [hat time was the Industry Commi ssion Cha irman.

stated that the major waves of reform oft raded goods and deregulation of financial

NATl O:"O AL CO M I'ETI Tl Oi'\ POLIC Y 77

\ \' A Trading Hou rs S IIITCyS

In 200&, on behalf of the \V A Department of Premier and Cabine t,Luscombe nnd Associates publi shed a Ret ail Trad ing Hours SurveyPreliminary Repo rt three years after the WA Retail Tradin gRefe rend um. Respondents were asked •Ar e there [my changes thatyou would like to see to the hours that shops are open at themom ent '!' 49.8% sa id they wo uld like to see changes , 48,8% saidthere did not have changes they would like to see and 1.4% wereunsure. However, 53% of Respo ndents agreed that ' Protectin gsmaller shops fro m bigger retailers is more important than allowingpeop le a wider choice of shopping hours ' (Luscombe and Associate sPty Ltd, 2008)

The community opinions on retail trading hours tend to depend onhow survey questions are asked . In recent years, major supermarketchains have conducted a range of surveys or peti tions askin gwhether their customers wa nted increased shop trad ing hours. Forinstance , in 2009, Coles said that four years after the \V A RetailTrading Hours Referend um, public fee ling had changed, however,they onl y surveyed suburban res ident s. Th eir pre ss re lease said"... two thirds of Perth residents support longer shopping hours onwee kdays and Sunda ys ' . However, Coles did not provide tlnyinfor mat ion abo ut how the questions were asked (Palmer, Danie l,2009)

already introduced enterprise barga ining when the newly elec ted HowardGov ern ment in 1996 introd uced major changes to Austra lia ' sem ployment relations laws via the Workplace Relations Act (/996) thatenabled large corpo rate employers to offe r individual contracts (A \VAs)to their employees (Bray, Waring & Cooper, 2009: 279). As corporatemarket power had already been enhanced by changes such as the removalof the Prices Discriminat ion Provision of the TPA, these FederalGovernment leg islative changes Illay have provided even greaterpoten tia l for large retail corpora tions to improve their market share andprofit margins,

markets provided the impetus for reform in the 'non-traded' sectors such as labourmarkets (Scales. JI)95: 4 1).

78 JOURNAL or AUS TRALIAN PO LITICA L ECOi\'O~lY No 67

David Peetz has argued that Individual contracts increased llexibility inhow employers pay for workin g hours. Peetz referred to the work s ofCole, Call us & Van Barneveld (200 1), Mitche ll & Fetter (2003) andRasmussen and Decks (1997) to highlight that individual contracts focuson reducing or abolishing overtime pay, increasing the standard hours perweek, and reducing or aboli sh ing penalt y rates for working at nights oron weekend (Peetz, 2005: 47).

A\VAs could be used by corporations such as the major supermarketchains throughout Australia and by any businesses in Victoria or theTer ritor ies. A\VA' s would have created considerably more incent ive forthe major corporate supermarket chains at that time to push for extendedtrading hours, especially as the Federal employment relations legislationcould be applied to corporations, whilst small businesses in States otherthan Victoria and the Territories were still under State employmentrelations laws and therefore could not necessarily force A\VA' s on theiremployees. This division meant that the major supermarket chains couldprepare for a situation where longer trading hours did not require them topay penalty rates and therefore facilitated and enhanced profit marginsfrom after-hours trade compared to the conditions facing theirindependent retail competitors.

T he Sources of T rad ing Hours Changes

Although there are some consumer bodies supporting longer tradinghours, after Ncr was introduced, the push to remove existing retailtrading hours regulations tended not to come from the community orState governments themselves but from the NeC, the corporate retailsector and bodies such as the States' Chambers of Commerce andIndustry.

Table I on the opposite page provides a summary of the 22 submissionsto the 1999 Committee Inquiry in to the retailing Sector which expressedsupport for further retail deregulation, such as deregulated trading hours.

~,\TI()~,\ L CO~ I I'ET I TlO7\ ror .rcv 79

Tahi r 1 Support ers of Furt her nl' tail Dcrc gul atlon I\lakingSuhmis sions to .lsen T Retail Trading Inqui ry, 1999

Source: JSCRT (1999) votur ncs of Submi svions CD

Suh. Su hllli \ \i on So urce Ut"\ t"ripli on .\ddil lonal~o, Submhhon /s19 Srapt cdon . G Dr. (D.-.:f{lClI. Visiting Law Academic invited by the

UK) C ' tcc secre tariatto critique the NARCiAsubm ission

2fJ I 'cnglllc y, W Pro f, (NS\\' ) Vi~itil1g Law Academic in vited by theC ' tcc secre taria t to critique the NARCiAsubmission

57 Australian Retailers (Dom inated b) ' the corporate retai lAssociation. S)'(In.:)' sec tor ](NSWI

99 j- Elcvcn Sto res (Vid Co nvenience StoresHJ.l Haxt, H ~ l r (Vic) Fonner Cha ir orthe TPC [P redecessor of

the ACCC) Frcchills partner and longlim" suooortcr (If co reo r.uc inte rests,.. Cole s Supe rma rkets ~ISC ) C>KA, IMlB,

(V ic) 16KC. 16tlO

I" NT Chamber of Ch amber of Co nunc rccComme rce &. Industrv

191 "C('(' ACT) Com rc unon Commission197 Convenience Stores Convenience Stores

Aus tralia (NSW)

200 Frauklins Ltd (NSW ~ISC 200R221'1 Jcbb Holl and Diuravi , Economists &. Property Advi sor (Report 228A

Melbourne (Vic) Commissioned bv Woo lworth..)229,\ \\ 'oo lw"lrlhs, Sydney ~ I SC 229(',229E

(NSW)235 ~ IC Australia (NSW) wholesale Distributors 10 Convenience

Stores &.Mim Suoc rmarkcts245 Au stralia n Consumers Co nsumer s Associ atio n

Ass'n. Ma rrickvillc(NSW l

2KI Australian Cha mbe r of Business (m ostly big business)Commerce & Ind ust ry, Rep resentative sBarton (ACT)

283 l.a w Co uncil of Ausu alia , l ong l ime suppo rter of co rpo rateBraddon (ACT) interests

'" Barbara ~IJidlllent , Small Busin ess Advi sorMars arcr River (\\'A)

' 99 Howa rd Smith ltd, ~ Iajo r Hardwa re Distributor sSvdncv (NSW )

30~ Visitor lnforrnation Visilor Ce ntre 30MService s, Bendt '0 (Vic)

309 Sandh urst Tru stees, FinanciersBendigo (Vic )

310 Bondi '0 Tru st (Vi c Financie rs.. .. .

80 JOURNAL OF AUS TRALIAN PO LITICAL ECO NOM Y No 67

Some Ba sic Quest ions Regard ing the Hl'tail Sec tor

What impacts (such as prices, choice, convenience, service, ctc)have NCr changes been having on consumers?\Vhat impacts have NCP changes been having on the grocerysupply sector'!If there are problems either arising or not improving, whatmight be the causes of the problems and what needs to bechanged? .

The ACCC Grocery Price lnquiry

In the lead-up to the 2007 Federal Election, Opposition Leader KevinRudd responded to growing media attention regarding rising groceryprices by promising that should they be elected to office, the new LaborGovernment would be commissioning an inquiry into Australian groceryprices. A few months after the Rudd Government took office, in hisnews conference announcing the commissioning of the ACCe inquiry,the Minister for Competition Policy, Chris Dowen, stated the mainreason behind the inquiry:

While inflation has been low in Austra lia over the last few yea rs.food in flat ion has been higher than the average. And there'sconsiderable evidence to suggest thai . .. Australian food inflationhas been higher than the world average. And of course, thaIaffects working families and all Australians everyday as they goto the supe r marke t (Bowen, 2008)

Deserving of examination is the manner in which the ACCe handled th e

grocery prices inquiry and how its inquiry methods relate to testing thetheories of market competition and contestability. or relevance is thatthe ACCe avoided checking the impacts on NCr On Australia' s groceryand grocery supply sectors.

The Grocery Prices Inquiry Announcement commenced on the 30·h ofJanuary 2008. However, the Issues Paper, upon which the submissionsto the inquiry were expected to be largely based, was not published untilthe ll lh of February at which time the deadline for submissions was alsoannounced for j ust four weeks later (5 pm 0 11 the Il lh of March).

~ATIO:\'A L CO ,\ I PET ITION 1)() L1C \ ' HI

ACCC Inqniry Issncs Paper

The release of the ACCC Issues Paper indicated some ser ious problemsin the manner in which the inqu iry was likely to be undertaken. Apar tfrom the short dead line, two obvious indicators that the ACCC might beable to prevent considerable detailed evidence on what had beenoccurring in the retail and retail supply sec tors since the introduction ofNCP were:

the warn ing/threat that protection for vulnerable witnesses via evidenceconfidentiality would be restr icted to some specific and limitedcommercial in confidence criteria. and

the limited years for which the ACCC was reques ting data and evidence .

Lack of Confidcntiality Protection

If the ACCC was not willing to provide ,my reasonable protection forthose who may have been affe cted by market power abuse or who werevu lnerable to abuse as a result of any evidence they provided to theinqui ry, that would indicate that there was an unwillin gness to find outwhat was really happening in Austra lia's grocery supply sector. Anyo newish ing to present submissions to the inquiry was requ ired to call theirsubmission a ' public submiss ion' and inclu de their name; and then onlynpply for a 'confidential annexure ' , approval for which was limited to' trade secrets' and "costs of manufacturing ' . This did not includ edeta iled reports of market abuse; and the ACC C said it would deci de ifsuch requests for confidentiality were in the public interest, ns oppo sed tothe risks to those most vulnerable ill the sector (ACCC, 2008,,: 3).

\Vith 11 0 pro tection for evidence from vulnerable grocery sector suppliersor competi tors, at the very least, the inqu iry should have made sure thatwidespread confidential surveys were undertaken so that wha teverevidence they received regarding vulnerable suppliers or competitionscould be properly assessed. This did not happen.

The ACCC Issues Paper contained R3 questions cove ring a wide range ofexamp les of potential retail grocery and supply market problems.However, the lack of protect ion for vu lnerab le competitors and supplierscould have put them at serious risk from those with sufficient market

H2 JOURNAL OF AUSTRA LIAN POLITICAL ECOr\O~I Y N067

power to damage them for speaking out to prov ide evidence that suchbehaviour had been raking place (ACCC, 200S).

On the ACCC website, only 2 of the 250 submissions were stated as' confiden rial"? Clearly, although the discussions within the Issues Papermentioned a wide range of potentia l market power abuse problemswithin the supermarket supply sector, the ACCC inquiry did notencourage confidential submissions which could provide them withdetailed evidence of such behaviour. The significance of this stance canbe seen months later from the ACCC Report 's Overview:

III scrutinising the information befo re the inq uiry, it has becomeclear that some indu stry parti cipant s, rcprcscutntivc groups andco mmentators have made unsupported cla ims to the inquiry andin the med ia. These claims we re based on generalisations andther e was a failure to provide facts to support these claims(ACCC, 2008d: xiv) (emphasis added) .

During the Inquiry, 39 of the 78 sets of witnesses attending publichearings for the Inquiry had bcen summonsed, all of whom, with theexcep tion of \Vest tield and Colonial First State. were grocery suppliers.35 of the total 78 sets of witnesses gave some of their evidence as' transcript-in-cou fidence '. and 20 of those 35 witnesses had beensummonsed, As the major supermarke t chains (!vISCs) would have beenaware both of who they were and the general nature of the questionsasked, it is unlikely that those witnesses would have felt comfortable inproviding evidence of market power abuse in specific circumstances.However, the submissions and evidence from the wide range of supplierrepresentative bodies did provide frequent claims of the abuse of marketpower by the MSCs, but the time pressure for their evidence to besubmitted made it difficult for them to conduct surveys of their membersto back up their claims (ACC C, 2008b, 2008e).

7 Compare this 10 the 1997 Reid Com rmucc Report. which acce pted 113 of its 198Submissio ns 3 S confi de minl and anot her 3 as ' name withheld ' . II bad receiveddist urbing evidence of market power abuse in the rcuril sec tor ami culle d for theAC CC to investigate such complain ts and enforce the law in relation to the misuseof marketing light of 11\1: high degree of conccmnnion in the retail sec to r (House ofRepresentatives Sta nding Commincc onlndustry, Sc ience and Technology. 1997:135).

NATI OXAI. C()~ I PETITIO~ l'OLle y 83

Limits on Data and Evidence Rcqucstcd

Moreover, the Issues Paper also only asked for data going back ·5 to 10years ', which made the ACCC unable to assess whether changesaffec ting the grocery retai l sector were a result of the introduction andimplementation of aspects of NCr had been introduced in 1995. Suchdata would need to go back at least 15 10 20 years , Appendix A of theIssues Paper provided a list of public reviews of grocery mergers andacquisitions going back less than 4 years.

This limited data request, along with the restrictions Oil con fidentia lity,could be seen to co incide with the ACCC ' s cla ims that the evidenceprov ided failed to support many of the c laims within submissions byreprese ntative groups. However. data and evidence in a timeliue of up toonly 5 years cannot provide a clear picture of the nature and possiblemajor causes of current grocery market prob lems in Australia as thegraph s below indicate.

Figure I: CPI and Food CPI 1969 . 2009

Years

,\ '0111"('('; ADS data via Reserve [l anl l l1l11·.I"1J1.I.gO\'.Il IlISfll i isf it'sIB lI lh·t;IIIGfJ2hist.xls

84 JOURNAL OF AUSTRALIA N POLITICAL ECOl\OMY No 67

Figure I (on the preceding page) indicates that it was in the mid -1990 'sthat (he index of food price began to rise at a higher rate than the overallConsumer Price Index (C PI).

The years during which CPI and food price inflation appear to havebeco me more disconnected indicate that 5 to 10 years does not give usthe full picture of what has been happening to food (and overa ll grocery)prices.

Figure 2 illustrates the published dry pac kaged grocery market shares ofCo les, \Voolworths and Frnnklins. In 1975, their combined mar ket sharewas 39 .6 percen t (Woo lworths 17.7, Co les 17.5 aud Franklius 4.4). By1995, their combined publi shed market share had grown to 73.3 percen t(Woo lworths 33. 1, Co les 24.3 and Franklins 15.9) bUI Figure 3 showsthat, from 1995, Franklins discount grocery chain began dropping fromits highest market share to insign ificance.

Fig ure 2: AU<l; h"3.li:m Packaged Grecery Market Sh3.1'e1975·2002

M Sh

aa

rk r

ee

% o r- TTT

...... ...... ...... -->o. NlDlDlDlDlDlDlDlDlDlDUllDl.OO~~~roOJroOOrolDlDlDlDlDOm ....... lD ...... wm ........ t.O ...... w m ........ lD ......

Year

• Frank lins

I~ Coles

Woolworths

Sourcesfor Fi1:III"(, 1 and Fi1:/I,.(' 3 · Retail World Annua l Reports (l 975· IlJ92). AustralianGU)(t'I)' Industry Marketi ng Guides ( 1992-2002 )

:"i AT IO:\'AL CO :\ I I ' ''~lTflO:\' 1'()I .1C Y 85

Figure 3: Frank lin... Packaged Grocery Market Share1975·200 2

k re

I. ,rTTI1TT1T "f'~~~~~~~~~~~~~~~~~~~~~~~~~N~~

ww~wwwwwwwwwwwwwwwwwwwwwwooo~~~~~roro~rooooooooororowwwwwwwwwwooo~m~oowo~~w~~m~oowo~~w~~m~oowo~~

16161412

a 106 I

n,c

%

M Sh

ar

Year

By 2002, Coles and Woolworth, ' combined dry packaged market shareshad reached 76.7 percent, and Franklius by that time was ju st 2.3 percent.From then on, the dry packaged market share s of each major supermarketchain ceased to be annually published. This begs the question of howmuch impact Nep legislati ve changes, such as the removal of the PricesDiscrimination Provision. has had on market domin ance and whatimpacts such growing marke t dominance had on retail competitors,consumers and suppliers over the last 15 to 20 years.

T iming of th e lnquiry

As the time available between the release of the Issues Paper in February2008 and the official deadline for submissions was a mere four weeks,the number of submissions accep ted afte r the offic ial dead line (129)exceeded the numb er before the deadli ne ( 119 with I numb er missing).As noted, this time would have been insuffi cient for most representativegroups to effective ly survey their members to respond on time to theACCC. There would, however, have been time duri ng the inquiry for the

H6 JOURNAL OF AUS1R ALlAN POLITICAL ECONOMY No 67

ACCC to conduct confidential surveys of thuse sectors whose memberswou ld have been reluctant to prov ide publi c evidence to those question sin the ACCC Issues Paper, which may have made them vulnerable forabuse by those with greater market power in the sector . The ACCC chosenot to undertake such surveys . The public hearings were held betweenApri l I 10 30 May 2008 and the report ing dale was 3 1 July 2008 .

How Did the ACCC Handle It ?

When Graeme Samuel was President of the NCe, he had played asignificant role in the push for retail tradin g hours deregulation in allSlates and Te rritories. The decision to appoint Samuel to head theACCC Grocery Prices Inquiry should therefore be question ed. Under hisleader ship , the NCC had threatened to hold back NCP Tranche Payment sfor any State whi ch did not agree to ful l trading hours deregulation ;therefore it is unl ikely that he would encourage the inq uiry to assesswhether he had been right or wrong in his previous behaviour as head ofthe NCe.

To put the ACCC Report in some context, the structure of NC P was ' notabout the pursuit of competition per .se' (Hilmer et al, 1993: xvi) butrather to enable the businesses in the nation's corporate sector 10 findways to reduce their costs (Margeus, 2007b: 19). As noted, rather thanappl y basic market theory and its app lication in trade practices decisions,NCP was based 0 11 the Baumel theory of ' contestability ', which is whyso much more of the emphas is appeared to be on deregulat ion rather thanmarket power, comp etitio n or avoiding market failures.

If the ACCe we re really interested in whether the Australian groceryretail sector was ' contestable ' , it would be necessary to acc urately assesswhether and how much the sector fitted within the following guidelines :

• a perfectly contestable market must have free ent ry and cos tlessmarket exit;

• contestable market prices must not be greater than marginalcosts; and

• incumb ent firms in contestable markets must have zero ornegative economic profit (never above normal).

Did the ACe C inqui ry assess the level of competition in terms of marke tdomination in Austra lia' s grocery sector and if. so what did it concl ude?

:\,,\' 110 :,\,\ 1. C():,\ U' t;T IT IO :,\ I'OLICY H7

The ACCC admitted that the Australian groce ry retail market wascriticised as being too concentrated and that the 'regular statements 'being made by industry commentators were that the two largest groceryretailers, Coles and \Voolworths, accounted for SO perce nt of groceryretail sales' (ACCC 2008d: 54). However, the ACCC look the followingview":

Based on the information available to it. the ACCe's view is thatthe MSC' s account for bet ween 55 to 60 percent of consumerexpend iture on grocery items. Woolworths accounts for at least30 per cent and Coles around 25 per cent . Alth ough each oftheseshares of retail grocery sales arc large for a single company. tosay that the ~'ISC' s enjo y an RO per cent share o f the grocery salesexagge rates the position o f the retaile r (ACCe . 2008d: 58).

The ACCC'c conclusion was that, even though the !\'tSC ' s mainta in alarge sha re of the sales of packaged groce ries and that this ' may raiseconcerns', this position needed to be assessed ill conjunction with otherfactors such as ' barriers to entry and expans ion before any conclusionsare draw n' (ACCC 2008d: 80). That means that the ACCC wasdependent on establishing that the grocery sector could be considered' contestable ' , which it manifestly failed to do.

Free entry and costl css market exit? The ACCC admitted that therewas ' . .. limited room for more major grocery retailers ' and that to enterthe market effectively it was necessary to obtain competitive wholesalegrocery prices (ACCC. 2008d: 2 17). It had already acce pted that accessto such levels of wholesale marketing in the current grocery marketsituation would be extremely difficult as Metcash had increased in sizeconsiderably in order to survive competition from the MSCs. The ACCCalso admitted that the entry of a new and com petitive wholesaleroperat ion wou ld be very hard to achie ve:

The impl ication o f another large-sca le whole saler entering themarket arc uncl ear. As the only national wholesale r 10 theinde pendent sec tor, Mctcnsh can lake ad vantage of s ignifican t

8 The MSC grocery ma rket share ofa round 78 percent was based on the ACr-.: iehenpublished dam of pnckagcd grocery mark et share (ACCC 200Sd : 59) .

9 This was based largely 011 the argued position of wootwonhs. thai grocery marketshare should be based on the ' share of stomuch' wh ich included all food retailers.speci ally food markets. take-awa y food s. cnfc s and restaurants (ACCC 20mhl : 56).

8M JO URKAL OF AUS TRALIAN POLI TICAL ECOI\O ~IY 1'\067

economics of scale. If there were two large-scale wholesalers itis possible that neit her would achieve the sumo economies ofscale that Metcash has achieved. (ACCC.2008d : 153).

The ACCC Repor t also stated that they co nsidered that a who lesalerwould need to have guara nteed annual sales of at least S800 million to beviable (ACCC, 2008d: 193). Cost barriers to entry were thereforesubstantial given the nature of the retail and who lesale grocery marketdominance, so this precondi tion to con testability was high lychallengeable.

Con testable market prices must not be gre ater than market cos ts.

The ACCC tended to assess market costs 0 11 the average margins of thet\·lSCs, claimed to he small.l " However, give n the substantial profitlevels of the two major MSCs, this em phasis tends to ignore the fact thatvertica lly integrated MSCs can enab le their retail margins to look smallas they can create their own wholesale margins by retain ing a higherpercent age o f their profits from their wholesale rather than their retailsec tor.

An examp le of this phenomenon is bee f retailing. The ACCC states thatthe 'average decline in the gross margins of meat was 1.5 percentagepoints from 2002-03 tn 2006-07' (ACCC 2008d: 143). However, whilstthere were strong criticisms regarding the gaps between cos ts andsuper market prices, the ACCC avo ided providing data to showcom parisons between retail prices. farm gate prices and marginal costs.Their exp lanation for leaving it out was as follows:

The supply chain for beef is long and complex with the farm ga leprice of livestock only one of the numerous inputs into theeventual cos t of a cut of beef. As such. direct comparisonsbe tween farmgatc and retail prices arc difficult and notnecessarily instructive (ACCC 2008: 355).

10 "I he- ACCC cited woclwonhs' ave rage supermarket [p re-tax] margins as around fJ

pe rcen t and Cole s aro und 3.5 percent (ACCC 200S b: 125).

:\: '\T IO~'\ L CO:'l I I'ETIT IO~ ro t.rev 89

Figure 4: YearlliIgHS CW Vs Refill Beer Prices1984 - 2007

2000.00

D; 1500.00 . 'l --+- Yearling

<Ii HSCW~ 1000.00~ Retailu 500 .00 Beef'C"-

0.00,~ ...,

<0 <0 <0 <0 <0 <0 a aa> a> <0 <0 <0 <0 a a.. .... a w '" <0 ...,

'"Ye ar s

SOl/fee: Aust ralian Beef Associatio n

However, as Figure 4 above clearly shows, in recent years there has beena growing gap between farmgate yearling and retail beef prices. Thetrend in the data provided by the Australian Beef Association (ABA) foryearling beef was similar to that produced by the ACCC itself on beef inits 2007 report to the Minister for Agric ulture, Fisher ies and Forestrywhich examined the difference between farmgate and retail prices(ACCC 2007a: 13). The ACCC' s response in 2007 was that:

The supply of fresh meal involves a long <11 11..1 complex supplychain. The cost of livestock is a ni)' one compo nent of the lotalcos t incurred b)' supermarkets (and other retailers) in prov idingfresh meat 10 consumers. . . (ACCC 2007b).

But the serious conce rns expressed in the ABA ' s submission to theACCC 's 2008 Grocery Price Inquiry regarding the growing gap betweenfarmgate and retail pricing were fa r from unique (ABA 2008). or thethirty eight pr imary producers ' organizations which made submissions (0

the Grocery Price Inquiry (covering virtua lly a ll of Australia 's primaryproduction) the majority (thirty) specifically claimed that there is agrowing gap between farmgate and retail pricing (ACCC 2008c, 2008d).

The re were also strong arguments put lip in organizations such asGrowSA's submission that:

,. ,There is a clear trend of these (MSCs) using their marketpo wer 10 push costs. risks and resp onsibi lities down the supply

90 JOU RNAL OF AUSTRALIAN POLITICAL ECO t\OM Y No 67

chain . Anecdotally, tell years ago growers worked 0 11 a rule ofthumb of farm gate retu rn being about 50 per cent of retail price.Today this margin is gene rally less than 20 per cent. Grower s"profi t mar gins continue to decrea se, while the profit margins ofthe maj or retailers remain at record highs (GrowSA 200&:5).

The Western Austra lian Departm ent of Agr iculture supported similarconcerns:

The disconn ect between their costs of p roduct ion and the pricesbeing offered is rapidly approa chi ng a point where many smalland mediu m sized food producers claim they arc becomi ngunviable. or where alte rnative uses 10 agriculture becomeincreasingly attractive becau se of better return s 011 inves tment.. .In additio n, loca l consumers arc becoming incre asinglyconcerned abou t the high cost of food 011 top of other risingpressure s all household incomes. Producers of our agriculturalraw mater ials arc also reachin g n point where they arc unabl e tosec the basis for the large di fferent ials between what they arcbe ing paid for their produce, and the prices being charged by thelarge retailers (\VA Dep"t o f Agriculture and Food 2008: I).

It can therefore be clearly stated that, for Aus tralian primary produce, if'contestable market prices must not be greater than market cos ts' theev idence strongly cha llenges the pre-con dition that grocery retailing ofprimary produce in Australia is in a 'contestable market' .

Profit Levels of Incumbent Fin ns

The ACCC Report admitted that Woolworths was currently achievingone of the highest earni ngs before intere st (EBIT) margins in the wor ldand that Co les ' EBIT margin was lower but similar to the average EDITmargins of major overseas grocery reta ilers. Nevertheless, similar to theACCC 's concl usions about the impacts of the other contestability pre­conditions, it avoided assessing contestability 011 this basis by saying:

. . .the size o f MSC profi ts in recent yea rs have been cited illpubl ic discussio n as evidence of a lack of competition in groceryretailing. Howe ver, profits in simply do llar terms alone arc rarelyinstructive abou t the level of competition in a market.. . (ACCC2008: 125-126).

j\, ATl UXAL CO~ I PF:TnlO :'\' I'OUCY 91

Conclusion

Market dominance, according to classical market theory. means thatmarket prices can be manipulated and controlled. The level of marketdominance of the MSCs in Australia 's groce ry sector is substantial. ACNielsen's 'Scan'Trak ' data shows that the MSC' s market share of the drypackaged grocery market was 78% (ACCC 2008: 75): even Woolworths'argument that ;"lSC 's market share was 55 to 60 percent of the ' share ofstomach' (ACCC 200&: 56-58) confirms the existence of marketdominance.

National Competition Policy was based on 'c ontestability theory' , whichaccepted corporate market domination in ' contestable markets' .However, the three basic pre-conditions of 'contestability theory' , as setout by Baumel (!I at,did not apply to the Australia' s grocery sector at thetime of the Grocery Price Inquiry. Whether the retai l grocery sector was' non-contestable' and/or market domin ated, the impacts of NCr a ll

corporate power abuse in Australia's grocery supply sector were notadequately assessed.

This article has focussed on the theoret ical basis of NCr relating to theretail sector, the impacts of the ACe C's targeting of the retail sector andthe improper assessment of market competition and contestability in theGrocery Price Inquiry , but there ure many other aspects of how theACeC's inquiry was conducted that need to be investigated. Inparticular, key unresolved questions are the impact that Ncr has had onretai l and wholesale market dominance and the impact that marketdominance is having on Australia' s grocery supply sector. There is abroader public interest at stake.

Dee J\!argelfs is a former Federal ami Slate parliamentarian who hasbeen undertaking PhD research since 2006 0 11 the impacts of NationalCompetition Policy.

dee I@iillel.llel.oll

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