Chapter 2
Unit Pricing
2.1
The Unit Pricing (Easy comparison of grocery prices) Bill 2008
aims to mandate the provision of unit pricing information by retailers of pre-packaged
grocery products in Australia, with some exemptions for smaller, single premise
shops, and for itinerant retailers. This chapter explains what unit pricing is,
reviews its current status in Australia, and examines the perceived costs and
benefits associated with the introduction of a mandatory unit pricing scheme.
What is unit pricing?
2.2
Unit pricing involves retailers providing a price per standard
unit of measurement in addition to the sale price. The standard unit of
measurement will vary depending on the measurement by which the particular item
is normally sold. Under the Unit Pricing (Easy comparison of grocery prices)
Bill 2008, the unit price is defined as:
The final price, including GST and all
other taxes, for one kilogram, one litre, one metre, one square metre or one
cubic metre of a grocery product, except in respect of grocery products sold by
number, where unit price is the final price, including GST and all other taxes
for an individual item of the grocery product.
2.3
Consequently, shelf price tags would display two prices – the
price of the item and the unit price (see examples at Figure 1). Unit pricing
does not generally involve manufacturers of pre-packaged products
changing or adding any markings to the label on individual grocery items.
Figure 1- Examples of shelf labels with unit pricing
information
2.4
Unit pricing is designed to allow consumers to compare the price
of an item by some standard measure, such as weight or volume, so that they can
easily ascertain which product and/or size of product is cheaper. Choice magazine
gives as an example the price of a 1.2kg tin of Pedigree dog food compared to a
smaller tin of the same product. Many people would purchase the larger tin,
expecting it to be better value for money, however, if unit pricing information
had been available they would have discovered that the 1.2kg tin cost $2.21 per
kilogram and the smaller tin just $1.81 per kilogram.[1]
Thus, advocates of unit pricing argue that it provides customers with the
information that they require to make an informed choice about the products
that they purchase.
Unit pricing in Australia
2.5
A number of states in the US, such as New York and Florida, have
legislated to require supermarkets to display unit prices. Similarly, a 1998
Directive of the European Parliament and of the Council requires European Union
member states to ensure that unit prices are displayed in supermarkets.[2]
2.6
In Australia, apart from some fresh foods, such as meat and
cheese sold in random weight packages, grocery retailers are not required to
provide unit pricing information for most grocery products. However, in
November 2007 ALDI introduced unit pricing on a voluntary basis. Shortly after
the ALDI announcement, Woolworths indicated that it would be conducting a trial
of unit pricing early in 2008,[3]
with a view to rolling it out nationally.
2.7
The other major Australian grocery retailer, Coles, provides unit
pricing information on its online shopping site, but not in its supermarkets. However,
at a hearing of the Australian Competition and Consumer Commission (ACCC)
inquiry into the competitiveness of retail prices for standard groceries, on 26 May 2008, Coles' representative indicated that they were looking to introduce unit
pricing nationally.[4]
All three companies have indicated that they believe there should be a
national, mandatory, scheme for the provision of unit pricing information.
2.8
On 31 July 2008, Franklins, which has around 80 grocery stores in
NSW, also announced that it would introduce unit pricing from September 2008.[5]
ACCC inquiry
2.9
As part of their inquiry into the competitiveness of retail
prices for standard groceries, the ACCC were asked to investigate the
representation of grocery prices to consumers. In their report of July 2008,
the ACCC recommended that
a mandatory, nationally-consistent unit pricing regime be
introduced for standard grocery items both on in-store price labels and in
print advertising [and that] the unit pricing regime apply to significant
supermarkets, including Coles, Woolworths, ALDI and large independent stores...[6]
2.10
The report notes, however, that
The incremental benefits of unit pricing are likely to decrease
as store size decreases due to the smaller range of substitute products in
small stores. Further, smaller stores will face higher implementation costs
relative to turnover compared to larger stores.[7]
2.11
In evidence to the committee, representatives from the ACCC also
noted that smaller stores may not have sophisticated computerised systems that
would easily accommodate unit pricing.[8]
The ACCC report therefore recommends that, before unit pricing is introduced, a
detailed cost-benefit analysis should be undertaken to determine to which
stores unit pricing should apply.[9]
2.12
In a press release of 5 August 2008, the Assistant Treasurer
announced that the Government would consider the best way to introduce a
mandatory
nationally-consistent unit pricing regime.[10]
Queensland proposal
2.13
On 26 June 2008, the Queensland government announced its
intention to introduce mandatory unit pricing in Queensland supermarkets. The Queensland
proposal requires retailers who sell a range of grocery items, including staple
foods, to display unit price information. The proposal provides exemptions for grocery
products which are sold:
- from a shop with a floor area, used for the sale or display of
grocery products, which does not exceed 200 square metres; or
- by an itinerant retailer, for example, a retailer selling from a
mobile sales unit or store.
2.14
The Queensland government has called for public submissions on
the regulatory impact statement for the measure. Submissions closed on 28 July 2008.
Consumer demand for unit pricing
2.15
Eighty-nine per cent of respondents to a Choice survey
conducted in February 2008, indicated that they would find comparative product
pricing ‘very useful’ or ‘somewhat useful’.[11]
However Ken Henrick, Chief Executive of the National Association of Retail
Grocers of Australia (NARGA) claims that, based on the information available to
NARGA, 'there is little public demand for unit pricing of groceries'.[12]
Coles has also indicated that ‘we’ve not had feedback from our customers that
unit pricing is a significant issue for them’.[13]
2.16
NARGA argues that the high number of respondents to the Choice
survey saying that they would find unit pricing useful was on the basis that:
...having unit pricing available does not ‘hurt’ as it appears to
be a costless addition to the information currently available about the goods
they purchased. If the questionnaire had asked respondents whether they would
support ‘unit pricing’ in the context of increased costs to the sector, which
would in turn lead to higher prices, the response may have been different.[14]
Arguments supporting unit pricing
2.17
According to the Consumer Action Law Centre unit pricing:
- reduces consumer confusion and increases consumer confidence;
- enhances consumer sovereignty and welfare; and
- promotes price competition, reduces prices, and is
anti-inflationary.[15]
2.18
In their submissions to the
inquiry, consumer advocacy groups[16]
argue that unit pricing makes it easier for consumers to perform price
comparisons between products and can enable consumers to switch container size
within brands, and to switch brands (to that with the lowest unit price
container size). Grocery products are sold in a vast array of variable sizes (for
example, 175 grams, 680 grams, 1.25 litres etc). Most consumers don't have the
time and/or the mathematical ability to determine the best value buy when faced
with such an array of non-standard measurements.[17]
As the Queensland Consumers Association notes:
Without unit price information, consumers have to do the calculations
themselves and understandably few do this and rely on rules of thumb about "value
for money" such as larger sizes are always the lowest unit price. Yet, as
indicated by our research and highlighted in Senator Fielding's second reading
speech, often, these are (sic) assumptions are incorrect.[18]
2.19
The provision of standardised, easy to understand, unit pricing
information increases the transparency of grocery prices, making it easier for
consumers to assess the value for money of the products that they purchase.
According to the Queensland Consumers Association, consumers may use unit
pricing information in a variety of ways:
Some will use it to reduce their expenditure on grocery items
thus releasing money for other uses. Others may spend about the same amount but
get more for their money. Others may even increase their total expenditure if
they choose to buy more products with higher unit prices. But, overall
consumers and the economy benefit.[19]
2.20
As well as providing potential benefits to individual consumers,
it is argued that unit pricing will have a general anti-inflationary effect. Because
unit pricing leads to changes in consumer behaviour, including switching to
lower-priced package sizes and brands, it makes demand more price-elastic.
As a result, competition between manufacturers and between
retailers increases thus helping to reduce price inflation.[20]
2.21
An analysis undertaken by Citi Investment Research and Insight
Partners, which was tabled at the committee's Melbourne hearing by the Consumer
Action Law Centre, also suggests that unit pricing could be an inflation
reducing initiative.
We believe a unit pricing regime could lead to a one-off 0.14%
reduction in inflation. This will occur, if all other factors remain unchanged,
because consumers spend less on groceries.[21]
2.22
Estimates of the potential savings to consumers from unit pricing
range considerably. The report by Insight Partners and Citi Investment Research
estimates that the introduction of unit pricing would result in a 1% reduction
in expenditure overall, saving the average household around $96 per year.[22]
However, the report estimates that the potential savings to individual price-sensitive
consumers could be much higher. For example, based on a pricing survey
conducted in Woolworths and Coles stores by the researchers, consumers
purchasing the lowest unit price pack size of branded products could save as
much as 21% on packaged groceries, while a further 34% could be saved if
consumers switched to private labels (i.e., own brands).[23]
2.23
This is consistent with research conducted by the Queensland
Consumers Association which found that
for 25 pre-packaged grocery items, by buying only brands and
sizes with the lowest unit price consumers could reduce a $94 grocery bill by
almost 50 per cent.[24]
2.24
Advocates of unit pricing also argue that, even if unit pricing
is not used by a consumer to save them money, it may be used as an indicator of
the relative quality of the products that they are purchasing.[25]
2.25
Unit pricing also allows consumers to more easily recognise when
package content sizes are adjusted by manufacturers, resulting in the consumer
paying the same amount for less product.[26]
For example, a can of tomatoes might be reduced in size from 400 grams to 390
grams by the manufacturer, but the shelf price would remain the same. If
unit-pricing was in place it would show an increase in the price per kg of the
tomatoes, alerting price conscious consumers to the change.
2.26
Additional benefits identified by Jarratt in his review of unit
pricing systems in the European Union and the USA include:
- a greater focus by retailers on price and value for money rather
than brand;
- easier and cheaper entry into the market of new products and of
new manufacturers;
- reduced need for prescribed package sizes; and
- increased demand for, and easier promotion of, retailers' own
brands.[27]
Arguments against mandatory unit pricing
2.27
Those opposed to the mandatory implementation of unit pricing,
such as the National Association of Retail Grocers of Australia and Metcash, argue
that the advocates of unit pricing overstate the likely impact on savings to
customers.[28]
In particular, assertions that unit pricing could result in savings of 40+ per
cent on groceries are considered to be grossly overstated, as they are based on
assumptions that consumers will switch brands to purchase the lowest unit
priced product.
2.28
NARGA assert that many shoppers are loyal to particular brands of
products and are unlikely to switch brands on the basis of cost alone.
For the majority of shoppers price is not
their main interest when purchasing a product...many years of research have
marked it as a lower level concern.[29]
2.29
In addition, purchase choices are influenced by the quality of
the product, preparedness to try innovative products, experience, and peer
recommendations.[30]
2.30
The Metcash submission to the ACCC agrees, noting that:
the very same research cited by unit pricing proponents
indicates that the benefits of unit pricing are limited – where unit prices are
displayed on shelf tags alone, almost all changes resulted from a shift to
larger sizes but not to different brands. Brand switching only occurred when
stores published ‘lists’ that showed SKUs [stock keeping units – number of
particular variations of an item] in increasing unit prices, which is
impractical to implement widely.[31]
2.31
Metcash go on to argue that
Enticing customers to switch to
larger sizes would not necessarily benefit consumers in the long run. The
perishable nature of food items, and the cost of transport, storage and wastage
mean that shoppers would not necessarily benefit from purchasing larger sized
packages.[32]
2.32
NARGA also assert that the introduction of unit pricing will
benefit those stores which have access to a wide range of generic products,
namely the large supermarket chains such as Coles, Woolworths and ALDI, and
disadvantage smaller retailers. This would appear to be supported by an
analysis of the likely impact of unit pricing undertaken by Citi Investment
Research and Insight Partners[33]
and by evidence given to the ACCC by Coles' Chief Operations Officer, Mr Mick McMahon,
who indicated that
I actually think it will help our house brand sales, because it
will demonstrate even more the value that’s in those brands.[34]
2.33
In addition to providing an advantage to stores stocking generic
products, NARGA suggests that unit pricing will affect Australian farmers and
manufacturers as
a high proportion of these generic products are imported, [so]
local farmers and manufacturers will be disadvantaged by a move to compulsory
unit pricing.[35]
2.34
The Queensland Retail Traders and Shopkeepers Association concur
with this assertion arguing that:
unit pricing would favour cheaper imported products at the
expense of Australian produce.... When price is the focus, they (supermarkets)
can get away with more and more cheaper foreign products which are
mass-produced, with less hygiene standards and are of poor quality. If the
government is led down this track of unit pricing it could potentially lead to
dark days for Australian farmers and once you get rid of choice and competition
then the cheap imported products will go up in price.[36]
2.35
In contrast, in its submission to the inquiry, Growcom, the peak
representative body for the Queensland horticulture industry, states that,
based on preliminary investigations, it 'does not believe that the introduction
of mandatory unit pricing would have a large impact on the Queensland
horticulture industry'. However it goes on to state that
if processors feel any negative economic impacts, these would
most likely be passed down the supply chain to growers.[37]
2.36
Finally, it has been argued that unit pricing may provide a
disincentive for shops to discount perishable goods at the end of a trading
day, as retailers will not have time to re-calculate unit prices. As such,
customers would not benefit from being able to purchase these items at reduced
prices and fresh products, such as bakery items, would end up being sent to
landfill if not sold.[38]
The Committee notes, however, that the Bill would not appear to preclude such
items being sold at, for example, half the marked price.
Costs of implementation and impact
on industry
Implementation costs
2.37
Consumer groups argue that, for grocery retailers with automated
labelling systems, the cost of implementing unit pricing will be one-off,
relatively small, and far outweighed by the benefits to consumers. For example,
Mr Ashton from the Consumer Action Law Centre told the committee that
...the costs, in my view, are very small. They are real and they
cost those individual supermarkets money, but compared to the hundreds and
hundreds of millions, if not more, in savings that every year grocery shoppers
will benefit from, the implementation costs are very small.[39]
2.38
But some industry representatives argue that the cost of
implementation may be quite significant, especially for small retailers, and
will, in all likelihood, be passed on to consumers through higher grocery
prices.
2.39
In its submission to the inquiry, Metcash indicates that it would
cost their independent supermarket sector approximately $10 million to comply
with the unit pricing requirements set out in the Unit Pricing (Easy comparison
of grocery prices) Bill 2008, in a 12 month timeframe. This estimate would
increase if small stores[40]
were required to comply, and would increase significantly if shelf stripping
needed to be replaced to comply with shelf ticket size requirements.[41]
2.40
In addition to the costs associated with initial implementation,
Metcash estimates that it would incur additional ongoing costs of $0.4 million per
annum, associated with additional data entry for unit pricing requirements,
while the ongoing costs for individual independent grocery retailers was
unknown.[42]
2.41
In respect of the large supermarket chains, Coles has estimated
the cost of implementing a unit pricing scheme to be around $10 million if unit
pricing was rolled out over a 12 month period, allowing them time to ‘get the
IT right’ and then to replace pricing tickets ‘in the normal course of business.’[43]
If it had to be done more quickly, then the costs would rise accordingly.
If I sent a team out today to change over 27,000 shelf edge
tickets in 749 supermarkets, that would be a big cost, $20 odd million. If we
were able to just do it in the normal course of business it’s still an
incremental cost, but by no means as large.[44]
2.42
In evidence to the ACCC grocery inquiry, Woolworths estimated the
cost of implementing unit pricing nationally, along the lines of the trial that
they are currently conducting, to be approximately $4 million.[45]
If they were given 12 months in which to implement changes to shelf labels etc,
allowing it to be done in the normal course of such things, they state that it
could be achieved at no additional cost.
2.43
However, in their submission to this inquiry, Woolworths estimated
the cost of implementing unit pricing in accordance with the Unit Pricing (Easy
comparison of grocery prices) Bill 2008 to be $30 million, due to the need for
in-store redesign and technology upgrades.[46]
2.44
In an exchange with the Chair, Mr McDonald, from Metcash
explained to the committee why the need for larger labels, in order to comply
with unit price font size requirements, could result in the need for store
re-designs.
I have brought two examples of the larger labels. In our
environments very few stores actually use these larger labels because we have
to put new shelf stripping on and whatnot, and as you do that, if you can just
compare the size of these two, if you times that by six shelves, all of a
sudden you have lost 10 to 15 centimetres of shelf space, and then we have to
start re-laying stores to fit products back in again. The changes from one
shelf label size to another are not just the cost of the label, which is
insignificant between the two sizes here, but also the cost of the stripping in
stores, because it has to be replaced, and as well there is the loss of shelf
space. In turn, we have to re-lay a store to fit the same amount of products
back on the shelves.
CHAIR—The size of the strip on the supermarket labels affects
how many products you can put in the store?
Mr McDonald—Absolutely, yes.
2.45
The figures provided by grocery retailers underscore the fact
that the costs of implementing a mandatory unit pricing scheme will vary
significantly, depending on the particular requirements of the scheme and the
capacity of the grocery retailer. Given that implementation costs are likely to
be passed on to consumers, thus potentially undermining any savings that access
to unit pricing information may generate, the committee believes that it is
essential that any mandatory unit pricing scheme finds the right balance between
maximising the usefulness and effectiveness of the scheme for consumers and
minimising the costs of implementation to grocery retailers.
Potential impact of unit pricing on
the grocery industry
2.46
According to a market analysis undertaken by Citi Investment
Research and Insight Partners[47]
the Australian grocery industry would feel the impact of unit pricing in two
ways. Firstly, unit pricing would see consumers shift their purchasing to higher
value, more economical pack sizes, resulting in a 'loss of some margin premium
for convenience'.[48]
This means that
From a retailer's perspective, the quantity of product purchased
will be unchanged. However, the shift to more economical pack sizes will reduce
the overall dollar value of sales, as shoppers become smarter.[49]
2.47
Secondly, unit pricing may see consumers switch to private label
products, such as Woolworths' Homebrand or Coles' Smart Buy. Increased
uptake of private label products would impact significantly on branded
suppliers, with an estimated 1.5% reduction in sales.[50]
2.48
Overall, the Citi analysis estimates that the introduction of a
mandatory unit pricing scheme in Australia would result in an estimated $810
million reduction in revenue for the grocery industry, with the burden shared
across grocery retailers and grocery suppliers.[51]
The analysis estimates that Earnings Before net Interest and Tax (EBIT) would
fall by an average of 5.1% for retailers, 5.3% for suppliers and 1.7% for
commodity input providers.[52]
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