Chapter 2Recent reviews into supermarket prices

2.1This chapter presents a summary of current and recent major inquiries and reviews into supermarket prices and similar trading practices.

2.2These reviews build a framework for considering the evidence received by the committee, by highlighting the key strengths and areas for change in Australia's competition and consumer regulatory environment. There are common themes across the findings of these reviews, including:

the recognised impact of higher inflation and stagnant or declining real wages growth on the cost of living;

the impact of current competition laws, policies and regulation on supermarket retailer behaviour and consumer prices;

high supermarket sector concentration in Australia and the imbalance of power between producers, suppliers, smaller retailers and major retailers and wholesalers;

the use of legal, but exploitative pricing mechanisms and behaviours by major retailers.

ACTU Inquiry into price gouging and unfair practices (2024)

2.3In August 2023 the Australian Council of Trade Unions (ACTU) commissioned an inquiry into business pricing practices, given rising inflation and cost of living pressures, to be led by former AustralianCompetition and Consumer Commission (ACCC) Chair, ProfessorAllan Fels AO.

2.4The ACTU committed to undertaking 'an inquiry into price gouging by big business in Australia' and that it would 'make findings and may make recommendations to the ACTU on policy solutions to limit future price gouging'.[1]

Key findings

2.5The inquiry noted that weak competition in 'many sectors' was enabling businesses to charge higher prices to consumers through a range of sometimes 'dodgy—although not prohibited—pricing mechanisms, and that this pricing is 'a contributor to inflation'.[2]

2.6The Fels Inquiry examined 'prices charged to consumers, the processes by which they are set, the profit margins and their possible contribution to inflation' rather than inflation and market power which are more commonly reviewed. It found that acceleration of inflation has been concentrated in non‑discretionary items such as food and groceries, utilities, transport, housing and other vital goods and services.[3]

2.7The inquiry found Australia's food and grocery sector:

is one of the most concentrated in the world;

has a stable average profit margin despite other volatility in the economy;[4]

has a lack of information symmetry between producers and consumers, and buyers (including retailers);[5] and

has evidence of potentially unfair price discounting and advertising practices.[6]

2.8In addition, Professor Fels identified a number of factors which could explain the substantially higher-than-expected corporate profits since the pandemic, including:

increased corporate concentration, including in Australia;

the reduced power of organised labour;

distributional conflict reinforcing profit-led inflation;

consumer psychology and access to information; and

informal price coordination in concentrated industries.[7]

2.9The Fels Inquiry found that 'the high ranking of price increases in staple groceries points to the extreme price pressures workers are currently facing' and real‑world impacts. A reported 60percent of households were facing food insecurity while having a least one family member in paid employment, and these pressures are significantly contributing to compromised nutrition, physical health concerns and negative mental and well-being impacts, particularly for low-income households.[8]

2.10Professor Fels noted that in general, various pricing practices are used by business, 'unreasonably high prices are not prohibited by competition law' andthat there should not be direct controls on such practices.[9] Professor Fels' Inquiry concluded:

Australians are paying prices that are too high, too often …

A significant part of the cost-of-living crisis has been caused by companies taking advantage of their market power and relying on gaps in Government policy to squeeze consumers and often suppliers to breaking point.[10]

Pricing mechanisms

2.11The Fels Inquiry outlined a number of pricing mechanisms used in markets to maximise profits. The mechanisms below are known to be used by supermarkets:

loyalty schemes—which offer points or discounts to encourage repeat business; these schemes:

-may not enable consumers to redeem benefits as expected;

-may not be well understood by consumers;

-make changes to terms and conditions which may be unfair to consumers; and

-collect, use and disclose data in ways which do not meet customer expectations;[12]

excuse-flation—where frequent, large price increases affect the ability of consumers to judge the fairness of prices and reject those which are excessive, including businesses using broader inflation trends as a justification for higher prices where their own costs have not increased accordingly;[13]

asymmetric pricing or 'rockets and feathers'—where the timing of price rise and falls are asymmetric and prices rise faster than they subsequently fall. Meat, fruit and vegetables were noted as key markets where this occurs;[14] and

algorithmic pricing practices—where machine learning algorithms can make dynamic pricing decisions in digitalized markets based on instantaneous data, and which may enable a complex environment in which algorithms independently adjust to each other—a subtle form of collusion which reduces competition.[15]

The power imbalance

2.12The Fels Inquiry found that limited costs and pricing information to producers and consumers makes it difficult to understand what is happening in the market and where practices may be unfair. However, buyers (including supermarkets) have 'near perfect information'.

2.13Professor Fels also pointed to the market power of supermarkets and food processors compared to farmers, and considered this to be 'a significant concern in the agricultural sector'. He continued that asymmetric price transmission was further exacerbated by the 'lack of transparency in the pricing mechanisms within the food supply chain', with farmers often having 'limited visibility into the end pricing of their products and the margins added by processors and retailers'—impacting on their ability to negotiate. [16]

2.14Noting that the power imbalance between the supermarkets and farmers manifests in several ways, the Fels Inquiry concluded that:

This power imbalance allows these large entities to dictate terms and prices to farmers, who, due to the perishable nature of their products and lack of alternative market avenues, often have little choice but to comply. Consequently, farmers are frequently caught in a position where they must accept prices that may not adequately cover their production costs or reflect the fair value of their labour and investment.[17]

Inquiry recommendations

2.15Professor Fels noted that greater transparency of prices, more investigations of overcharging, addressing excessive pricing in Australia's competition law and policy—a current policy gap—as well as other consumer protections could help improve competition and prices for consumers.[18]

2.16Professor Fels argued for:

improved transparency and scrutiny, including measures to address market concentration;

mandatory reporting;

fairer competition in the supply chain; and

better producer collective bargaining to address this information lopsidedness.[19]

2.17The Fels report pointed out that 'without special resources from the ACCC to monitor price movements it is impossible for consumers to have confidence that the law is being complied with'.[20] Further, the ACCC has no powers to 'even investigate whether [grocery] prices are excessive unless the government requires it to do so'.[21] The inquiry therefore found that the powers of the ACCC should be strengthened and investigations into excessive prices given a 'much higher priority'.[22]

2.18To address this, the Fels report, recommended the Australian Government establish a 'Commission on Competition and Prices to review Government and other restrictions on competition and high prices caused by a lack of competition'.[23] This issue is discussed in greater details in Chapters 7 and 8.

2.19In relation to supermarket prices the report found a 'strong case' for a comprehensive review of supermarkets, as well as making the Food and Grocery Code of Conduct (Grocery Code) mandatory, including by 'making the regulations legally enforceable by the ACCC and making membership of the code compulsory for large retailers'.[24]

2.20The recommendations included three relating specifically to food and groceries, particularly aimed at improving transparency across the supply chain (see also Figure 2.1):

Recommendation 4.12: It is recommended that there should be a comprehensive ACCC inquiry into competition and prices in the retail food and grocery industry.

Recommendation 4.13: The Food and Grocery Code should be fully mandatory i.e. membership of retailers is mandatory and the rules are mandatory.

Recommendation 4.14: The Food and Grocery Code should investigate creating a price register for farmers to assist them in understanding market prices across primary industries.[25]

Source: Fels Inquiry, pp. 10–12.

Government actions related to Fels Inquiry

2.21The Australian Government has implemented a range of measures aimed at addressing the high cost of living, with responses relevant to the Fels Inquiry including the establishment of:

a review into the Food and Grocery Code of Conduct; and

an ACCC inquiry into the supermarket sector.[26]

2.22The Australian Government is also providing $1.1 million to CHOICE, to provide price transparency and comparison reports on groceries, to be completed quarterly over three years. This reporting will commence in the second quarter of 2024, comparing the costs of a basket of groceries from different retailers, thus highlighting which retailers charge the most and the least.[27]

Food and Grocery Code of Conduct review

2.23The Food and Grocery Code of Conduct (Grocery Code) is a voluntary code prescribed under the Competition and Consumer Act2010, however once a retailer or wholesaler signs up to the Grocery Code it must adhere to its provisions. When introduced in 2015, the Grocery Code's aim was to address the 'imbalance of market power between supermarkets and their suppliers, especially smaller suppliers' and 'improve standards of business behaviour in the food and grocery sector.This includes the conduct of retailers and wholesalers towards suppliers'.[28]

2.24It is enforced by the ACCC, including through compliance checks.[29] Currentsignatories are Aldi, Coles Group, Woolworths Group, and Metcash, with their suppliers also automatically covered by the Grocery Code. As it currently stands, the Grocery Code will automatically sunset on 1April2025.[30]

2.25On 10 January 2024, Dr Craig Emerson was appointed to undertake a review of the Grocery Code, including to:

assess the effectiveness of the Code's provisions in achieving the purpose of the Code to improve the commercial relationship between retailers, wholesalers and suppliers in the grocery sector;

consider the need for the Code, whether it should be remade, amended or appealed;

the impact of the Code in improving commercial relations between grocery retailers, wholesalers and suppliers;

whether the Code's provisions should be extended to other retailers or wholesalers operating in the food and grocery sector;

whether the Grocery Code should be made mandatory; and

whether the Grocery Code should include civil penalty provisions.[31]

2.26The Grocery Code Review is due to report by 30 June 2024.[32] It is the second of two mandatory reviews of the Grocery Code.[33]

Interim report

2.27Dr Emerson released a substantive interim report on 8 April 2024, which found the current Grocery Code was not effective, especially as it contains no penalties for breaches, and because 'supermarkets can opt out of important provisions by overriding them in their grocery supply agreements'. The interim report therefore concluded that the:

… heavy imbalance in market power between suppliers and supermarkets in Australia's heavily concentrated supermarket industry necessitates an enforceable code of conduct. An effective code of conduct would benefit smaller suppliers and consumers by enabling suppliers to innovate and invest in modern equipment to provide better products at lower cost.[34]

2.28The interim report made eight firm recommendations, including that:

the Code be made mandatory, with all supermarkets with a revenue threshold of $5 billion subject to the mandatory Code;

the Code place greater emphasis on addressing fear of retribution against suppliers including through protections and supermarkets monitoring their commercial decisions;

annual reporting on disputes and results of confidential supplier surveys, by the Grocery Code Supervisor; and

significant penalties for non-compliance.[35]

2.29Dr Emerson suggested effective penalties must apply for breaches. Underamandatory code, the ACCC would:

… be able to seek penalties for major or systemic breaches of up to $10million, 10 per cent of a supermarket's annual turnover, or 3 times the benefit it gained from the breach, whichever is the greatest.

In pursuing breaches, the ACCC would need to proceed through the courts. This would usually require a supplier witness who was willing to provide evidence and to stay the course of legal proceedings.[36]

2.30As 'a low-cost alternative to court proceedings', the interim report also recommended independent mediation and arbitration mechanisms, similar to other industry codes, 'while also allowing for the complaint-handling provisions of the voluntary Code'.

2.31The report made three draft recommendations, subject to amendment depending on stakeholder feedback prior to the final report, covering:

alternative, informal, confidential and low-cost dispute resolution processes;

minimum standards which cannot be contracted out of supply agreements; and

increases to infringement notice amounts.

2.32The interim report also drew attention to other areas which may need additional protections, including:

fresh produce, given its perishable nature;

contracted prices and volumes; and

compliance checks by the ACCC.[37]

ACCC Supermarket sector inquiry

2.33A 12–month ACCC Supermarkets Inquiry commenced on 1 February 2024 to examine a range of issues, 'including the pricing practices of the supermarkets and the relationship between wholesale, including farmgate, and retail prices', as well as matters relating to other mechanisms used by supermarkets such as loyalty programs and discounts on future purchases. This inquiry will not extend to examining the operation or scope of the Grocery Code.[38]

2.34The ministerial direction by the Treasurer under the Competition and Consumer Act 2010 gives the ACCC compulsory information-gathering powers as part of the inquiry.[39] An interim report will be delivered by 31 August 2024, with a final report due by 28 February 2025.[40]

2.35In its Issues Paper (released as part of its inquiry) the ACCC pointed to concerns raised about 'price gouging', being 'prices and profit margins that are considered unreasonably high (or higher than would be expected in a competitive market)'. It also noted concerns with misleading pricing practices, 'shrinkflation', and data and privacy concerns with the increasing use of technology.

2.36The ACCC explained in the Issues Paper that it would examine—among other matters—competition between supermarkets at the retail level, and competition at different levels through the grocery supply chain; the difference in prices paid to suppliers and paid by consumers; and how supermarkets approach price‑setting, including discounts, and the role of small and independent retailers, including in regional and remote areas.

2.37The ACCC contended that effective competition, including in the supermarkets sector, leads to 'lower prices, better quality products and services and increased retail choice for consumers'. In addition, the ACCC observed that:

Competition between supermarkets also impacts farmers, manufacturers and wholesalers that supply supermarkets. Where suppliers have more choice about which retailers they provide goods to, this will typically improve their bargaining power and their long-run profitability.[41]

Competition Review

2.38In August 2023, the Government established a two-year Competition Review, comprising a seven-person Advisory Panel. The review will:

… respond to evidence that limited competition has contributed to a less dynamic and productive economy, and higher prices for consumers. Thereview will be looking especially at merger reforms and whether creeping or serial acquisitions in sectors such as supermarkets, liquor and hardware are adequately captured by current competition laws.[42]

2.39The Taskforce is working with state and territory governments. InDecember2023, treasurers nationally agreed to 'revitalise the National Competition Policy', including national reforms which are designed to help address cost of living increases.[43]

2.40Merger reform, being considered as part of the Competition Review, isdiscussed later in this report.

Other inquiries

2.41Other jurisdictions have responded to cost of living pressures, and in particular food and grocery price increases, through jurisdiction-specific inquiries.

2.42For example, on 7 March 2024, the Queensland Legislative Assembly established an inquiry into supermarket pricing, including consideration of the causes and effects of rising supermarket prices, and opportunities to increase transparency in the sector. The committee has now closed submissions and is holding hearings through April and May. It is due to report by 31 May 2024.[44]

The Treasury—Unfair trading practices

2.43In 2023, The Treasury conducted consultation on options to address unfair trading practices which are not prohibited, but which can 'nevertheless distort competition and result in significant consumer and small business harm. Theconsultation was led by the Commonwealth with state and territory ministerial support. The consultation sought evidence about the nature and extent of unfair trading practices resulting from potential gaps in the Australian Consumer Law, and their harm.[45]

2.44The consultation paper canvassed feedback on four policy options:

retain existing legislative framework (status quo);

amend statutory unconscionable conduct to include provisions relating to unfair conduct.

introduce a general prohibition on unfair trading practices as a separate protection (the approach in some other countries); or

introduce a combination of general and specific prohibitions on unfair trading practices for the most targeted and comprehensive approach (also used in other countries).[46]

2.45The Australian Government is currently considering submissions to this consultation. Amendments to the Australian Consumer Law can only be progressed with the agreement of the Commonwealth and four other states or territories (including at least three states) following formal consultation. TheTreasury indicated a decision on future direction would likely occur in 2024.[47]

Senate Select Committee on the Cost of Living

2.46On 28 September 2022, the Senate established the Select Committee on the Cost of Living, to inquire into and report on:

the cost of living pressures facing Australians;

the Government's fiscal policy response to the cost of living;

ways to ease cost of living pressures through the tax and transfer system;

measures to ease the cost of living through the provision of government services; and

any other related matters.

2.47The committee is due to report by 15 November 2024.[48] It released an interim report in May 2023, which considered wider cost of living pressures, drivers (including inflation) and experiences of consumers, as well as a specific chapter on food and groceries. The increasing cost of food and groceries were found to be 'a major contributing factor to the cost of living crisis'.[49]

2.48This more detailed chapter explored drivers and the impacts of food and grocery price rises, outlined key dynamics impacting the food and grocery sector, discussed food insecurity and inequality in Australia, and laid out some of the evidence received by the committee on proposed solutions to cost of living pressures as they relate to food and groceries.[50]

2.49A range of potential solutions were put to the committee and reported in its interim report including the need to:

address supply chain issues, including through a national food supply chain resilience plan and greater transparency between growers, processors and retailers;

ensure stronger competition and acquisition policies which change the balance between retailers and farmers, and major and independent retailers; and

enable stronger regulatory action by the ACCC.[51]

House of Representatives Standing Committee on Agriculture: Inquiry into Food Security in Australia

2.50On 26 October 2022, the House of Representatives Standing Committee on Agriculture Inquiry into Food Security in Australia commenced an inquiry into food security, including:

national production, consumption and export of food;

access to key inputs such as fuel, fertiliser and labour, and their impact on production costs;

the impact of supply chain distribution on the cost and availability of food; and

the potential opportunities and threats of climate change on food production in Australia.[52]

2.51The committee reported in November 2023, making 35 recommendations, including:

appointing a Minister for Food;

establishing a National Food Council;

making the Food and Grocery Code mandatory;

reviewing laws to 'ensure fair practices between different actors in the food supply chain and prevent unconscionable conduct';

regular ACCC reviews of perishable food supply chains;

measures to eliminate food waste; and

subsidisation of community stores in remote locations to make fresh food affordable.[53]

Footnotes

[1]Australian Council of Trade Unions (ACTU), 'Professor Allan Fels to chair ACTU price gouging inquiry', Media release, 9 August 2023.

[2]Professor Allan Fels AO, National Press Club Speech, Wednesday, 7 February 2024 pp. 1, 4–5 and 14; ACTU, 'Professor Fels' report shines a light on price gouging and unfair pricing', Media release, 6February 2024; Professor Allan Fels AO reporting to the ACTU, Inquiry into price gouging and unfair pricing practices: final report (Fels Inquiry), February 2024, pp. 2, 5 and 62–63.

[3]Fels Inquiry, pp. 2, 5 and 14.

[4]The report shows supermarket profit margins of around three to 3.5 per cent, contrasting with banking profit margin of around 26 to 35 per cent. Fels Inquiry, pp. 42 and 52.

[5]Fels Inquiry, pp. 54–55.

[6]Fels Inquiry, pp. 55–56.

[7]Fels Inquiry, pp. 22–23 and 26.

[8]Fels Inquiry, pp. 14–16.

[9]Fels Inquiry, pp. 2, 5 and 62–63.

[10]Professor Allan Fels AO, National Press Club Speech, Wednesday, 7 February 2024 pp. 1, 4–5 and 14.

[11]Fels Inquiry, p. 56.

[12]Fels Inquiry, pp. 31–32.

[13]Fels Inquiry, pp. 33–34.

[14]Prices rise quickly like rockets and fall slowly like floating feathers. Fels Inquiry, p. 34.

[15]Fels Inquiry, pp. 34–35.

[16]Fels Inquiry, p. 54.

[17]Fels Inquiry, p. 53.

[18]Fels Inquiry, pp. 2, 5 and 63–64.

[19]Fels Inquiry, pp. 54–55.

[20]Fels Inquiry, pp. 55–56.

[21]Fels Inquiry, p. 53.

[22]Fels Inquiry, p. 9.

[23]Fels Inquiry, p. 64.

[24]Fels Inquiry, p. 8.

[25]ACTU, 'Professor Fels' report shines a light on price gouging and unfair pricing', Media release, 6February 2024; Fels Inquiry, p. 69.

[26]ACTU, 'Professor Fels' report shines a light on price gouging and unfair pricing', Media release, 6February 2024; Australian Competition and Consumer Commission, 'ACCC to examine prices and competition in supermarket sector', Media release, 25 January 2024; The Treasury, Independent review of the Food and Grocery Code of Conduct 2023–24: consultation paper, February 2024, p. 3.

[27]The Treasury, Independent review of the Food and Grocery Code of Conduct 2023–24: consultation paper, February 2024, p. 21.

[28]Australian Competition and Consumer Commission, Food and Grocery Code of Conduct (accessed 14 February 2024); The Treasury, Statement by DrCraig Emerson, independent reviewer of the Food and Grocery Code of Conduct, 5 February 2024.

[29]Australian Competition and Consumer Commission,Rights and responsibilities under the food and grocery code(accessed 14 February 2024).

[30]Australian Competition and Consumer Commission, Trade and business covered by the food and grocery code (accessed 14 February 2024); TheTreasury, Statement by Dr Craig Emerson, independent reviewer of the Food and Grocery Code of Conduct, 5 February 2024.

[31]The Treasury, Food and Grocery Code of Conduct Review 2023–24 – Terms of reference (accessed 25March2024).

[32]The Treasury, Review of Part 5 of the Food and Grocery Code of Conduct: report, September 2023, p. 2; The Treasury, Food and Grocery Code of Conduct Review 2023–24(accessed 14 February 2024); TheTreasury, Food and Grocery Code of Conduct Review 2023–24 – Terms of reference (accessed 14February 2024).

[33]The Treasury, Review of Part 5 of the Food and Grocery Code of Conduct: report, p. 2; The Treasury, Foodand Grocery Code of Conduct Review 2023–24 – Terms of reference.

[34]Dr Craig Emerson, Independent Review of the Food and Grocery Code of Conduct: interim report, April2024, p. 1.

[35]Independent Review of the Food and Grocery Code of Conduct: interim report, p. 7.

[36]Independent Review of the Food and Grocery Code of Conduct: interim report, p. 1.

[37]Independent Review of the Food and Grocery Code of Conduct: interim report, pp. 1, 8, 56, 58 and 69.

[38]Australian Competition and Consumer Commission, 'ACCC to examine prices and competition in supermarket sector', Media release, 25January2024; The Hon Dr Jim Chalmers MP, Treasurer, Competition and Consumer (Price Inquiry—Supermarkets) Direction 2024, s. 5 and s. 6; Independent Review of the Food and Grocery Code of Conduct: interim report, pp. 70–71.

[39]Australian Competition and Consumer Commission, 'ACCC to examine prices and competition in supermarket sector'.

[40]Australian Competition and Consumer Commission,Supermarkets inquiry 2024–25 (accessed 14 February 2024).

[41]Australian Competition and Consumer Commission, ACCC Supermarkets Inquiry: Issues Paper, 29February 2024, pp. 5–6 and 8–9.

[42]The Treasury, Independent review of the Food and Grocery Code of Conduct 2023–24: consultation paper, February 2024, p. 23.

[43]Independent review of the Food and Grocery Code of Conduct 2023–24: consultation paper, p. 23.

[44]Queensland Parliament, Supermarket Pricing Select Committee (accessed 26 April 2024).

[45]The Treasury, Unfair trading practices - Consultation Regulation Impact Statement (accessed 26April2024).

[46]The Treasury, Protecting consumers from unfair trading practices: consultation regulation impact statement, August 2023, pp. 21, 23, 25 and 27.

[47]Protecting consumers from unfair trading practices: consultation regulation impact statement, pp. 2 and 20; The Treasury, Submission 53, p. 9.

[48]Parliament of Australia, Senate Select Committee on the Cost of Living (accessed 30 April 2024).

[49]Senate Select Committee on the Cost of Living, Interim report, May 2023, pp. 2–3 and 70–71.

[50]Senate Select Committee on the Cost of Living, Interim report, p. 2.

[51]Senate Select Committee on the Cost of Living, Interim report, May 2023, pp. 75–76 and 84–85.

[52]House of Representatives Standing Committee on Agriculture, Inquiry into Food Security in Australia: Terms of reference(accessed 24 April 2024).

[53]House of Representatives Standing Committee on Agriculture, Australian food story: feeding the nation and beyond: report, November 2023, pp. xix–xxv.