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Executive Summary
Over the past twenty years or so, Australia has seen the
demise of hundreds of small grocery stores, butchers, bakers, florists,
greengrocers, pharmacists, newsagents, liquor outlets and other small retailers
as a direct result of the continuous expansion of major supermarket chains and
major speciality retailers, often subsidiaries of the same conglomerate.
Thus, the market is heavily concentrated and oligopolistic
in nature, where a small number of major chains (Woolworths, Coles and
Franklins) each have a significant degree of economic influence or market
power. This has placed significant pressures on small and independent
retailers, leading to calls for legislative remedies to be imposed by
government.
Not only is economic survival at stake, but so too the
health and well-being of many small retailers, brought about by longer working
hours and stressful dealings with the ‘big end of town’.
Retirement plans have been put on hold, family members have
had to seek employment elsewhere, and lifetime commitments to grocery retailing
have now come down to two options – to sell or to close.
Despite the growth of the major chains, consumers appear to
be benefitting from the competitive forces of the current market structure. The
evidence revealed that, since 1986, prices have fallen on average for baskets
of foods and individual foods at supermarkets. Although there are some
exceptions, the Committee accepts that economies of scale and scope have driven
prices down in major supermarkets across Australia. Furthermore, surveys have
revealed that there has been a shift in shopping habits from late in the week
(Thursday to Friday) to Sunday. As a consequence, the ability of supermarkets
or other stores to open on a weekend is a factor welcomed by many consumers.
By its recommendations, the Committee does not seek to
invoke protectionist measures for small independent retailers. Rather, it
provides for measures which it believes will enhance competition in the market
place.
Market share
The market share of the three major chains amounts to around
80 per cent of the dry/packaged goods market. Woolworths suggested that this
was not a correct measurement, arguing that the share should be measured
against the ‘stomach market’, which includes food and groceries to take home,
liquor to take home, and food catering (cafés and restaurants). This definition
would effectively lower Woolworths’ level of concentration dramatically. The
Committee is of the view that this argument is irrelevant to the issue at hand,
and has concluded that the major chains enjoy a substantial degree of market
power.
This market power is enhanced by vertically integrated
structures, which enable the major chains to gain commercial advantages over
the independents. High levels of efficiency, superior technology and buying
power has lead the Committee to conclude that consumers are voting with their
feet, deciding to frequent the supermarkets because of their price, range of
products, extended trading hours, and the convenience of one-stop-shopping.
Despite this consumer satisfaction, the Committee is
concerned about the activities of the major chains with respect to small
retailers. Some of the evidence brought to the Committee’s attention indicates
that their behaviour is inconsistent with their public image of being good
corporate citizens.
Market cap
The National Association of Retail Grocers of Australia
(NARGA) called for the market share of each major chain to be capped at 25 per
cent, with divestiture taking place within 5 years where any one chain exceeds
that figure. This would see Australia as
being the only country throughout OECD economies to introduce a market cap
specifically for the grocery retailing sector.
NARGA’s proposal would require Woolworths, a company owned by
around 240,000 ordinary Australian shareholders, to shed one third of its
stores, while Australia’s largest private sector employer, Coles Myer, would be
required to sell off around 100 of its Coles/Bi-Lo supermarkets. In addition,
around 36,000 jobs may be placed ‘on the market’, although many might simply be
transferred to new owners.
The Committee heard compelling evidence that a market cap
would be unworkable, and would effectively regulate the consumer.
Australian Competition and Consumer Commission (ACCC)
Chairman Professor Allan Fels believes that, in at least some cases, some areas
or some product markets, a market cap would mean that Australian consumers may
be condemned to being supplied by inefficient, high cost operators. Professor
Fels also pointed out that there are significant mechanical problems associated
with a market cap. He said that there are problems about defining it, and there
are problems about policing it.
The evidence also revealed that there are some independent
retailers who feel that, at some stage of their business career, they would
like to be able to sell out to a major chain. The imposition of a market cap
would have the likely effect of preventing them from doing so, with a
consequent reduction in the value of their stores.
Other difficulties associated with the imposition of a market
cap include:
- the likelihood of avoidance schemes arising;
-
the possibility that major chain employees (if re-employed) may
transfer from higher paying jobs to lower paying jobs;
- the possible devaluation of shares owned by thousands of ordinary
Australians; and
- the opportunity for foreign retailing chains to enter the market
to the detriment of Australian-owned companies – evidenced by the recent
arrival of German retailing giant Aldi.
In line with the market cap proposal, the Committee did not
find a compelling case for divestiture of stores in the current market
structure. However, as the major chains continue to grow, the Committee
considers that there may be some merit in considering divestiture as a
safeguard to unchecked growth, when levels of concentration are seen to impact
negatively on competitive market forces, in particular markets.
Although the imposition of a market cap has had strong
support from small retailers in various parts of Australia, the Committee is of
the view that the problems faced by those retailers can be effectively
addressed by other means.
Strengthening the Trade Practices Act
A significant body of evidence alleged
instances of predatory pricing, where it was said that the major chains were
prepared to lose money indefinitely in certain stores to wipe out the
competition. The evidence was consistent and widespread, with the common
complaint being that the difficulties lie in establishing predatory conduct
under the current provisions of the Trade Practices Act.
The major chains vigorously refuted
these claims. They accepted that their pricing policies were aggressive towards
each other, but not predatory in principle. Chief Executive Officer, Mr Roger
Corbett, said that Woolworths does not set out to undercut others as a matter
of policy, but accepted that there may be exceptions in some stores across
Australia. The Committee found that there were indeed, ‘exceptions’.
The Committee believes that the
evidence clearly reveals a need to address the issue of predatory pricing, with
a recommendation that the ACCC be given wider powers to bring representative
actions, and to seek damages on behalf of third parties under Part IV of
the Trade Practices Act.
The Committee also devoted a
significant amount of time examining the merits of replacing the current
‘purpose’ test in section 46 of the Trade Practices Act with a ‘reverse
onus of proof’ test. Compelling arguments were presented from proponents on
either side of the debate, leaving the Committee unconvinced that such a
measure would be appropriate at this stage. However, the Committee believes
that a ‘reverse onus of proof’ test may well be appropriate should the core
recommendations prove to be ineffective in preventing predatory conduct. The
Committee therefore leaves this issue open for review when the Committee is
re-constituted in three years time.
Other strengthening measures include:
- A recommendation that the Government give consideration to
providing the ACCC with extra funding for the purpose of bringing
representative actions under Part IV.
- A recommendation to provide for mandatory notification to the
ACCC for approval of store acquisitions by the major chains and others (such as
wholesalers Davids, FAL etc), with a requirement that the ACCC consult with
local authorities and other relevant parties in order to make an informed
assessment of the competitive impact on local businesses of such acquisitions.
The ACCC will also be required to assess new store development applications on
a similar consultative basis; and
- A recommendation to increase the $1 million transactional
threshold in section 51AC of the Trade Practices Act to $3 million. This
measure will enable the unconscionable conduct provisions to be available to a
wider group of complainants.
The significance of the inquiry to
small and independent retailers and the consistency of the evidence has lead
the Committee to recommend further measures to protect small businesses from
unfair conduct in the market place.
Retail Industry Ombudsman
The Committee believes that there is a significant problem
to be addressed in relation to the practices of big business at the supply
level, and with respect to their competitors. Furthermore, the evidence
suggests that there is widespread confusion, particularly in regional and more
remote parts of Australia, about the legal rights of small businesses and the
opportunities that they have to take action. The consequence has been that
unfair business conduct continues to undermine and damage those in less
powerful positions.
The ACCC deals only with illegal behaviour. However, many
complaints received during the course of the inquiry did not raise Trade
Practices Act issues. The Committee therefore sees the need to establish a
mechanism outside the ACCC through which retail industry participants can bring
complaints or queries for speedy resolution.
The Committee believes that an appropriate dispute
resolution mechanism should take the form of an independent Ombudsman, to be funded
by government, who could attempt to resolve all sorts of complaints brought to
it by businesses in the retailing sector. Where the complaints received by the
Ombudsman raise issues that fall within the jurisdiction of another established
body, or which it cannot resolve on its own, or where an issue of systemic
breach of the law is raised, the Ombudsman could refer businesses for further
assistance in appropriate cases, to the relevant industry, Commonwealth, State
or Local government body (including the ACCC in respect of competition and
consumer protection issues).
The Retail Industry Ombudsman would have the power to
receive complaints, the expertise to give advice, and would be required to make
all efforts to deal with them quickly and through mediation or referral.
Compliance systems in industry would also ensure complaints are handled quickly
and responsibly.
The Committee believes that support should be made available
to the Retail Industry Ombudsman through an advisory panel made up of representatives
of various relevant Commonwealth and State agencies that can then provide a
network of assistance.
The Committee wishes to emphasise that the Retail Industry
Ombudsman should be an independent officer, however, the Committee sees a link
with the ACCC as being crucial, particularly in light of the fact that many of
the complaints emanating from the retailing sector relate to competitors as
well as suppliers, which may raise competition law concerns.
Code of Conduct
The Retail Industry Ombudsman would be backed by a mandatory
Code of Conduct, which would regulate conduct in vertically integrated
relationships throughout the supply chain. Being mandatory, the Code of
Conduct would enable the courts to take into account provisions of the code
in determining whether or not business conduct has been unlawful.
The Committee believes that a Retail Industry Ombudsman,
together with the underpinning of the mandatory Code of Conduct into the
Trade Practices Act, would bring behavioural change and increased
transparency in the retailing sector, and has recommended that the Ombudsman
produce a bi-annual report to Parliament.
Summary
The Committee is of the view that a viable independent
retailing sector is essential to the overall well-being of the Australian economy.
Viable independent retailers maintain competitive forces, and bring social
benefits to Australian consumers. The
Committee urges the Australian Competition and Consumer Commission to give
consideration to these factors when applying the provisions of the Trade
Practices Act 1974, the object of which is to enhance the welfare of
Australians through the promotion of competition and fair trading.
The Committee has noted that, during
the course of the inquiry, the major chains appear to have re-evaluated their
relationships with small retailers, who have signalled this improvement in
relations to the Committee. However, the Committee believes that the success of
its recommendations will require the Retail Industry Ombudsman and the ACCC to
adopt a vigorous approach in dealing with the systemic and ongoing problems
raised during the course of the inquiry.
The committee also believes that an
ongoing education program should be implemented by the ACCC to ensure that
small retailers are made aware of their rights and obligations under the
provisions of the Trade Practices Act 1974, and the overall benefits and
safeguards provided by competition policy.
As a final measure, the Committee has
recommended that the Parliament reconstitute the Committee three years from the
date of tabling this Report in order to review the recommendations, and to
determine whether further legislative changes are required to maintain a fair
and competitive market.
Hon Bruce Baird MP
Chair
August 1999
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