Key findings

The ACCC made a number of key findings, including:

• while grocery retailing is 'workably competitive', there are a number of factors limiting price competition, including:
  • high barriers to entry and expansion (in particular, difficulties finding and accessing suitable sites as a result of planning and zoning laws acting as an artificial barrier to the establishment of new supermarkets, as well as restrictive provisions in leases preventing shopping centre operators from leasing space to competing grocery retailers)
  • limited incentives for the MSCs to compete strongly on price
  • limited price competition from independent retailers;
• the potential contribution to increased grocery prices of any possible weakening in the level of competition at the retail/wholesale level is limited. Food price inflation has largely caused by (other factors such as drought, world commodity prices and quarantine restrictions);
• ALDI has been a vigorous price competitor since entering Australia, having a dynamic impact on the grocery sector;
• Coles, Woolworths and Metcash have significant 'buyer power' with respect to packaged not fresh grocery products because many suppliers effectively have to deal with these buyers. However, competition between retailers is sufficient to ensure they cannot retain all benefits of the lower prices extracted through such buyer power;
• there is little evidence to support the proposition that the MSCs have simply 'bought out' the competition or that the acquisitions by the MSCs of smaller competitors over time are a significant current concern in the grocery retail sector;
• the prices Metcash sets for its wholesale packaged groceries are a significant factor holding many independent retailers back from stronger price competition;
• there is nothing fundamentally wrong with the grocery supply chain – the evidence does not establish that retail prices have risen while farm gate prices have stalled or fallen.

In response to these findings, the ACCC made a number of specific recommendations, including:

• appropriate levels of government should consider the likely impact on competition between supermarkets in the area of zoning and planning laws and decisions involving supermarket space, including whether proposals would facilitate the entry of a new supermarket operator to the area;
• the Horticulture Code Committee should consider a number of amendments to improve the effectiveness of the Horticulture Code of Conduct²;
• a mandatory, nationally consistent 'unit pricing' regime be introduced for standard grocery items (both in-store and in advertising), following an appropriate cost-benefit analysis of the implementation costs, along with an appropriate education campaign^3.

In addition, the ACCC made the following comments about future reform and enforcement action:

• although acquisitions by MSCs of smaller competitors over time do not appear to be a significant current concern in the grocery retail sector, the ACCC maintains it support for the introduction of a general 'creeping acquisition'⁴ law;
• the ACCC considered that for the most part there would be little justification for restrictive provisions in leases other than to prevent competitive entry, although it recognised that such provisions can sometimes play a role in attracting an 'anchor tenant' to a shopping complex, thereby allowing the development to proceed. The ACCC has stated it will be undertaking further reviews of such provisions (noting the possibility of further action) and called for independent retailers with evidence of these types of arrangements to contact the ACCC;
• the evidence does not justify further recommendations or support the need for other measures in the grocery sector, including those suggested by some submissions to deal with issues such as market concentration (for example, placing caps on the market shares of retailers), transparency throughout the grocery supply chains and price discrimination (eg by reintroducing the former prohibition against price discrimination in section 49 of the TPA).

Following the Report's public release, the Federal Government announced its 'preliminary action plan' in response to the Report. The actions announced, however, are relatively muted, reflecting the fact that there is little in the Report that the Government can act on. The Government's proposed plan consists of:

• establishing the grocerychoice website at http://www.grocerychoice.gov.au/;
• referring the anti competitive impacts of state and local zoning and planning laws to COAG for consideration;
• introducing a mandatory nationally-consistent unit pricing regime, after working through implementation cost issues with industry;
• working with the horticultural industry through the Horticulture Code Committee to consider the ACCC's thirteen recommendations aimed at enhancing the Horticulture Code of Conduct;
• implementing a creeping acquisition law, after releasing a discussion paper by the end of August to ascertain the most appropriate way forward. This is consistent with the Government's election promise.

The Federal Government also supported the ACCC's plan to review more matters regarding restrictive provisions in leases between supermarkets and shopping centres.

Coles and Woolworths can breathe a sigh of relief. The Report has identified grocery retailing as workably competitive (albeit with some limitations) and has cleared it from significantly contributing to increased grocery prices. No substantial problems along the supply chain have been identified and no substantial structural reforms to the MSCs operations or the grocery sector more generally have been proposed.

While, in the future, the MSCs will need to grapple with the introduction of a unit pricing regime and a creeping acquisition law (and any potential reforms flowing from a consideration of the zoning and planning laws), these were not surprise recommendations and are likely to have already been taken into account by the MSCs. Further, the MSCs appear to support the introduction of mandatory unit pricing.

One area of uncertainty for the MSCs will be the additional scrutiny the ACCC proposes to pay to restrictive provisions in leases going forward. While such scrutiny opens the possibility of action by the ACCC, it must be recognised that any assessment by the ACCC of the competitive effect of such a provision will turn on the facts of a particular case. Careful consideration of the Part IV implications for the use of restrictive provisions will continue to be required going forward. In this regard, it should be noted that the ACCC expressly rejected making a recommendation to impose an outright ban on restrictive provisions in leases or to restrict their enforceability beyond a certain period⁵.

To reduce barriers to entry and expansion in grocery retailing (to both independent retailers and potential new entrants), the Report has called for the government to examine current zoning and planning regimes. The implications for MSCs (or other retailers) will not be evident until specific policies and legislation are formulated. It is expected that the recommendations are likely to require a competitive analysis (i.e. a 'competition test') in respect of planning decisions of sites where supermarket developments are contemplated. It is questionable whether the introduction of a 'competition test' into the planning process would address the planning and zoning barriers identified by the Report. It may even introduce other barriers into the planning process.

For other supermarket chains (such as ALDI and Franklins) and independent retailers, the Report and the Government's response are likely to have mixed implications.

Depending on the reforms that are adopted following consideration of zoning and planning laws by COAG, there may be an improved ability for other retailers and new entrants to access supermarket sites. A greater focus by the ACCC on restrictive lease provisions between MSCs and shopping centres may also affect site access.

The introduction of mandatory unit pricing is likely to involve considerable implementation costs for smaller retailers, although such costs will vary depending on the time allowed for implementation. Before introducing the unit pricing regime, however, the Government has announced an intention to consult with industry to examine these likely costs and to which retailers the regime should apply. Chains and independent retailers should take the opportunity to participate in this consultation process.

For independent retailers acquiring products from Metcash, while there is a recognition that prices Metcash sets for its wholesale products are a significant factor holding back many independent retailers from stronger price competition, there is no recommendation offered by the ACCC to address this situation. The ACCC noted that Metcash's moves into IGA Fresh, and the terms and conditions imposed by Metcash, might have a negative impact on competition by independent retailers and will be the subject of further examination.

The most obvious and immediate implication for consumers will be the establishment and operation of the 'grocerychoice' website. The website is now active and is intended to assist consumers in locating the cheapest supermarket chain in their area without themselves having to compare prices across competing chains. Each month, the prices of typical grocery baskets for a range of supermarket retailers in 61 metropolitan, regional and rural regions across Australia (obtained from an independent survey) will be published on the website. While the grocerychoice website provides a snapshot of local grocery prices, it does not cover other factors that might influence consumer purchasing decisions (such as location, quality or product range).

Mandatory unit pricing – if and when introduced – is also likely to assist consumer when making purchasing decisions by allowing consumers to more readily compare prices between different sizes of the same product (for example, between 375gm and 700gm boxes of cereal), between different brands of product and between stores. The ACCC's recommendation that a public education campaign be introduced would help consumers to understand how unit pricing works and enable them to better take advantage of unit pricing information.

For those in the supply chain whether involved in the production of fresh or packaged products, there is little comfort in the Report with respect to their concerns about the perceived market power of the MSCs. Although acknowledging that the MSCs may have had 'buyer power' with respect to some categories of groceries, the ACCC found that such power does not appear to result in inefficient outcomes and in some cases can benefit consumers. In finding that there was no significant buyer power problem which warranted regulatory action, the ACCC declined to make any specific recommendations to address 'buyer power'.

For growers and traders subject to the Horticulture Code of Conduct, the ACCC's recommendations may result in a number of legislative amendments, following consideration of those recommendations by the Horticulture Code Committee and industry. In particular, the growers and traders should be aware that the ACCC has recommended that the TPA be amended to introduce civil pecuniary penalties and infringement notices for breach of the code⁶, and to give the ACCC enforcement powers to conduct random record audits.

Although the Inquiry focused solely on the competitiveness of the grocery sector, businesses in other sectors will be affected, to varying degrees, by the Report and the Government's response.

In particular, the proposed introduction of a 'creeping acquisition' law will be of general application and not limited to the grocery sector. While the Government has not yet formulated the creeping acquisition law, it is likely that it will be in the form of an amendment to the TPA. The introduction of such an amendment is likely to attract considerable debate about the merits of such a law including whether section 50 already adequately allows the ACCC to examine anti competitive acquisitions, the difficulty with identifying and comparing before and after states of competition, and the uncertainty likely to flow from any ability of the ACCC to retrospectively examine transactions. In this regard, it is worth noting that Senator Steve Fielding and Senator Andrew Murray have each both previously put forward creeping acquisition amendments which would, in broad terms, allow the ACCC to retrospectively examine any acquisitions in the preceding six or five years (respectively).

Consideration and subsequent reform of zoning and planning laws may also have flow on implications for other businesses, depending on the reforms adopted. Those most likely to be affected by such reforms are those involved in zoning and planning processes, for example, councils, developers and shopping centre operators.

While the Report contains a comprehensive summary of the competitiveness of grocery prices, it does not propose substantial structural reforms to the grocery sector. The recommendations made may result in some consumers being better informed about grocery prices but are unlikely to substantially address concerns (both by consumers and by small business) about the perceived market power of the MSCs or rising grocery prices.