Enhancing competition in retail

Speakers: 
Mr Rod Sims, Chairman
Conference: 
AFR Retail Summit, Melbourne
28 September 2016

At the AFR Retail Summit in Melbourne, ACCC Chairman Rod Sims discusses three related themes around competition and retail; first, removing restrictions, and using the competition laws to good effect; second, addressing misuse of bargaining power in the supply chain; and third, how consumer protection plays an important role in creating a level playing field and underpinning competition and our market economy.

Transcript: 

Check against delivery

Introduction

It is often said that no two economists can agree on anything. This observation flows from the fact that views on economics virtually always reflect the current economic circumstances within which they are put, and each economist’s own philosophy.

Circumstances constantly change, and most people bring different philosophical starting points to a debate.

One thing, however, on which all economists agree, is the importance of competition. It underpins all writing on economics.

Indeed, it was Adam Smith who first popularised the importance of competition. Eric Roll, in his pre-eminent work on A History of Economic Thought, interprets The Wealth of Nations to be arguing that the “preservation of free competition, if necessary by state action, was the principle of duty of economic policy.” (Page 132)

Helibroner, in his excellent book The Worldly Philosophers, mentions Smith’s most famous quote:

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

He then goes on to say the following in relation to the theories of Adam Smith:

“But self-interest is only half the picture. It drives men to action. Something else must prevent the pushing of profit-hungry individuals from holding society up to exorbitant ransom; a community activated only by self-interest would be a community of ruthless profiteers. This regulator is competition, the conflict of self-interested actors on the market-place.”

Competition is essential to our economic prosperity; it drives innovation and productivity, and it lowers costs and improves product quality.

While all economists welcome competition, of course businesses usually do not.

As someone who spent nearly 20 years heavily involved in commercial corporate strategy I know what you all know.

Businesses seek both to outperform their competitors, and to exclude them. Let me emphasise that it is not wrong to seek to exclude your competitors, it is after all part of the cut and thrust, provided this behaviour does not substantially lessen competition.

We see this in mergers and acquisitions. Businesses buy other businesses to gain operational synergies and to reduce the number of competitors. This is also fine, provided, as the Competition and Consumer Act 2010 (CCA) says, it does not result in a substantial lessening of competition.

There have been a number of recent retail mergers considered by the ACCC. Last month we said we would not oppose JB Hi-Fi’s acquisition of the Good Guys as we considered, on balance, that the combined company would face strong competition from Harvey Norman and others in that retail arena.

To gain merger approval in some complex matters, undertakings may be offered by the merger parties to address our concerns or the deals themselves may be restructured along the way. For example, we said we would not oppose the Metcash acquisition of Home Timber and Hardware subject to certain undertakings and, in the case of Coles acquiring Supabarn in Canberra and NSW, the merger parties decided to restructure the deal so that the final transaction ended up being much less anti-competitive than the original proposal.

I am pleased to say that there are many positive signs for competition in retail. In particular, competition is benefitting from online sales challenging the established bricks and mortar stores. I will return to this trend shortly.

Of course, the Competition and Consumer Act deals with competition in many ways.

With these comments in mind, today I will discuss competition in the retail sector under three related themes.

  • First, removing restrictions, and using the competition provisions of the Competition and Consumer Act to good effect
  • Second, addressing misuse of bargaining power in the supply chain and its relevance to enhancing competition, and
  • Third, and what is often forgotten, how consumer protection plays an important role in creating a level playing field and underpinning competition and our market economy

Removing restrictions, and using the competition provisions of the Competition and Consumer Act to good effect

Competition is enhanced in two ways, first by removing barriers to competition; second by enforcing a well balanced CCA. Both are crucial.

Legislative or regulatory restrictions on competition should be regularly tested to see if they are genuinely in the public interest or whether the costs now outweigh the benefits.

The recent Harper Review proposed many recommendations to improve Australia’s competition settings. On the retail front, the review panel’s final report said:

“Competition in retail markets has been an important focus for the Review, including…regulations on planning, zoning and trading hours, and specific regulations such as those affecting pharmacy and liquor retailing.”[1]

Liquor laws

Governments have obviously designed liquor laws to curb social health problems. However, we sometimes see traders or their representatives using liquor licencing laws as a competition shield or a way to game or delay new rivals.

This issue was at the heart of proceedings taken by the ACCC against two large liquor retailers some years ago.[2] In that case, Woolworths and Liquorland had made objections to applications by third parties for liquor licences. As part of a settlement of those objections, the third parties agreed to withdraw their applications for unrestricted licenses and instead accepted certain restrictions on their licence applications, and Woolworths and Liquorland agreed to not object to the new applications for restricted licences.

The scarcity of unrestricted liquor licences, and how significant such a licence would be to market entry, were important factors in the court’s assessment of the impact of those settlement agreements on the competitive process.

More recently, in a case in South Australia, Costco unsuccessfully argued for a special circumstances liquor licence in the Supreme Court following opposition from Woolworths and nearby pubs.[3]

Planning and zoning laws

Planning and zoning laws can be another barrier to entry, particularly in the retail sector. We identified this issue in our 2008 grocery inquiry and governments have been looking to address it since. As we said in making our submission to the Harper Review, land use restrictions can serve valuable social purposes, however they are inappropriate when used to protect existing traders from competition from new entrants.

Using competition laws to good effect

The ACCC has used competition provisions to good effect in several areas of the retail sector.

  • Several years ago, we stamped out practices where supermarket operators included terms in their leases preventing shopping centre managers from leasing space to competing supermarkets.
  • We intervened in shopper dockets and petrol retailing. By limiting the fuel discounts linked to supermarket purchases, and limiting the supermarket offers to a maximum of 4 cents per litre, the ACCC considers other fuel retailers can compete with supermarket chains on a more level playing field.
  • More recently, we resolved our long-running concerns about the petrol price information exchange service operated by Informed Sources (Australia) Pty Ltd. We now have undertakings paving the way for consumers to access petrol pricing information, for example via phone apps, at the same time as petrol retailers.
  • We have resolved our laundry detergents cartel litigation against Colgate Palmolive with an $18 million penalty and Woolworths with a $9 million penalty. The Court’s decision on our case against PZ Cussons Australia has been reserved.
  • Expedia and Booking.com recently agreed to reinvigorate price competition by amending contracts with Australian hotels. The ACCC investigated after accommodation providers raised concerns that parity clauses were anti-competitive as they stopped consumers from getting different prices from competing online sites.

Going forward, our main competition role in retail will be to ensure new entrants are not prevented from competing on their merits

While this is our key challenge across all sectors, the rise of online retail makes this particularly important in this sector.

We will, therefore, be alert to the consequences of large firms acquiring promising start-ups, we will closely monitor access to data issues, and we will continue to support the proposed Harper changes to section 46.

The proposed changes to section 46 have led to a strange debate. You would always expect some very large firms and their supporters to oppose the changes to section 46, with the removal of the words “take advantage” being the key change. They will more likely be the firms on the receiving end of section 46 action as they seek to protect their strong incumbent positions and exclude competition on its merits.

What has been strange, however, are some of the arguments used. We have been told, for example, that opening new stores in new areas will be prevented by the Harper section 46 changes.

This is, of course, an extremely strange argument. Not only is opening new stores in new areas pro-competitive but, in any rare case that such activity could substantially lessen competition (SLC), we already have the “effect of SLC” test in sections 50 and 45.

The former will get triggered by an acquisition; the latter by any agreement such as buying or leasing land.

The proposed Harper section 46 is about firms with substantial market power, which is a key hurdle, who interfere with the competitive process by preventing or deterring rivals or potential rivals from competing on their merits. As described in our recent draft framework for guidelines on the proposed section 46[4], the types of conduct likely to be captured include certain kinds of refusals to deal, predatory pricing, tying and bundling, and margin/price squeezing.

Indeed, the proposed changes to the law would not, for example, prevent the application of standardised national pricing and ranges in new supermarkets or retail stores designed to leverage efficiencies.

Say a national retailer opens up a new store in a regional town where it didn’t previously have a presence. The retailer has a standard range and uniform prices across the country. It is very hard to see how applying those prices in the new regional store will substantially lessen competition. In fact, it is likely to drive competition.

The relevant issue, which seems on occasion to be lost, is whether there has been an interference with the process of competition, not whether competition has resulted in some rivals with a higher cost-base being forced to close. 

Addressing misuse of bargaining power in the supply chain and its relevance to enhancing competition

The Australian Consumer Law protects suppliers from unconscionable conduct, the term for particularly harsh or oppressive behaviour that goes against conscience as judged against business and social norms and standards.

In the area of supermarkets and their dealings with suppliers, we achieved a landmark judgment and outcome in the Coles unconscionable conduct case. We are pursuing other allegations in the ‘mind the gap’ case against Woolworths, currently before the Federal Court.

The misuse of bargaining power in supply chains is a close cousin to misuse of market power. Rather than excluding rivals, however, it damages competition through undermining certainty, planning and investment decisions.

Hopefully not upsetting too many in the room, the AFR recently reported on a study that found one in five supply chain managers have elevated levels of psychopathy. Apparently, supply chain management professionals had similar levels of psychopathic traits to the broad prison population.[5]

While ACCC action against unconscionable conduct has seen changes in the way retailers behave, it would be naïve to think the problems have been solved.

The new Food and Grocery Code that arose from the focus on these supply chain issues has a lot of work to do and the ACCC is closely monitoring and responding to issues arising from its introduction.

Reports received by the ACCC suggest a majority of suppliers have chosen to enter Code compliant grocery supply agreements (GSAs) with the supermarkets.

While suppliers of Aldi, Coles and Woolworths who haven’t signed new GSAs still have the default protections provided by the Code, which overlay their existing terms, we are encouraging suppliers to get the benefit of clarity that finalising a GSA can bring.

We note the Australian Food and Grocery Council recently published the results of a survey revealing a number of Code-related issues.[6] The survey said suppliers raised things such as requests to suppliers to make up shortfalls in retailer profits, limited specificity of criteria for range reviews, and payment terms.

The issue of late payment of suppliers’ invoices by supermarkets has recently caused wider public comment including reports of some GSAs defining a 30-day payment term, for example, to mean 45 days.

We are looking at reports of behaviour associated with the Code and we are advising suppliers who have concerns about their dealings with the supermarkets to raise them with the ACCC, confidentially if required.

And it is not just grocery supply chains that are at risk of concerning behaviour. We have seen reports from other retail supply chains about heavy-handed negotiations and unreasonable terms and conditions and variations. We will, therefore, also be monitoring closely these other retail supply chains.

As a related point it is also very important that, from November this year, small businesses will have protections from unfair terms in standard form contracts.

The forgotten role of consumer protection in creating a level playing field and underpinning competition and our market economy

The Australian Consumer Law protects consumers, but it also has a powerful effect on competition. It enables businesses and retailers to compete on their merits, not falsehoods.

Someone suffering a ripping headache may have walked straight past general pain relief products to purchase Nurofen Migraine Pain believing, based on the labelling, that the product could better treat a particular type of pain.

When claims are misleading it is a lose-lose situation. The consumer ends up paying often a hefty premium for something that doesn’t really exist, and rivals miss out on sales.

We have taken a range of consumer actions in the retail sector as misleading and deceptive conduct can damage the competitive advantage held by honest traders.

A smaller business baking bread from scratch every morning in-store, may lose their unique selling position if the supermarket next door is selling par-baked bread as ‘Baked Today, Sold Today’ or ‘Freshly Baked In-Store’. Of course, I am referring to the Coles par-baked bread case the ACCC took where bread was promoted as ‘Baked Today, Sold Today’ and in some cases ‘Freshly Baked In-Store’, when in fact some products were partially baked and frozen off site by a supplier, on a few occasions overseas, transported and ‘finished’ at in-store bakeries within Coles supermarkets.

Misrepresentations can also damage competition by breaking consumer trust in particular terms or practices. For example, consumers may lose confidence if labelling claims such as ‘organic’ or ‘free range’ are misused. Ultimately, innovation suffers when consumers and businesses lose trust in the integrity of claims.

Health claims

We also have concerns about health claims made by big firms which are market leaders, or as part of industry-wide practices. In a matter currently before the Federal Court, we are alleging Heinz made false and misleading representations about the nature, characteristics and suitability of Little Kids Shredz products. Our concern centred on the alleged greater than 60 per cent sugar content.

We also issued infringement notices to address concerns we had about the labelling on Unilever’s Rainbow Paddle Pops and The Smith’s Snackfood Company’s Sakata Paws Pizza Supreme Rice Snacks. Logos and words on the packaging represented the products were approved or suitable as healthy options for school canteens.

However, the packaging also included a small font disclaimer on different sides of the package to the logos saying the product met the ‘Amber’ criteria of the National Healthy School Canteens Guidelines; meaning select carefully.

We considered these disclaimers were not prominent enough to correct the ‘healthy option’ representations created by the logos. Competitors who correctly label products are disadvantaged by this type of conduct.

Consumer Guarantees

With Australians collectively buying around 1.1 billion things a year[7] it is no surprise we get many reports about consumer guarantees. These are statutory rights a consumer has to a good free of defects and will often outlive and always apply regardless of a manufacturers’ or extended warranty.

Misrepresentations about consumer guarantee rights have been a staple of ACCC consumer actions and we have stepped these up again this year. One of our priorities involves looking at representations made by large businesses about express or extended warranties.

Large companies should avoid misleading consumers into paying for extra protections they already have under the law. Blunt misstatements of consumer rights (eg no refund statements) and blanket refusals to consider claims after the expiry of a manufacturer’s warranty without considering the application of the consumer law will attract our attention.

Earlier this year, Sportscraft paid penalties totalling $21,600 after we issued two infringement notices. We believe statements on Sportscraft’s receipts at the time may have misled consumers into thinking they would not be able to return or exchange faulty goods purchased from a clearance store.Retailers cannot exclude or refuse a consumer’s right to a remedy simply because goods are bought at a discount clearance store.

Sportscraft also stated on its website that it would not refund, exchange or credit note the item more than 21 days after purchase. Consumer guarantee rights apply for all purchases a consumer makes, and these rights cannot be removed or reduced by a business’s terms and conditions.

New car retailing

We are also keeping a close eye on new car retailers. The consumer guarantees provide that vehicles will be fit for purpose, free from defects and as durable as a reasonable consumer would expect. If a vehicle fails these guarantees, a consumer will have rights against the supplier and in some cases the manufacturer, who will have to provide a remedy.

As mentioned earlier, these rights are not limited by a manufacturer’s warranty and blanket refusals to consider claims after the expiry of a manufacturer’s warranty or solely through the strict conditions of those warranties will be of concern to us.

We are also looking closely at access to data issues in relation to motor vehicle repairs.

Product safety

When talking to retailers I always underscore the importance of product safety. Indeed, our case against Woolworths for misleading consumers about product safety hazards was one of our most significant actions in the past year. Woolworths made admissions and cooperated with the ACCC, but nevertheless was ordered to pay a substantial penalty given the seriousness of the conduct involved.

The Federal Court ordered Woolworths to pay more than $3 million in penalties for breaches of the ACL relating to safety issues with house brand products sold in Woolworths supermarkets, Big W and Masters stores. In some cases, Woolworths was aware of serious injuries resulting from defective products, but did not remove the item from sale or recall the product.

Woolworths subsequently removed the products from sale and recalled them, but not always before further injuries.

All companies should pay close attention to quality assurance and be proactive in detecting and removing unsafe products from their shelves. We have revamped the Product Safety Australia website, www.productsafety.gov.au, and no matter where you sit in the supply chain, I encourage you to pay it a visit.

Closing remarks

The profit motive provides a powerful incentive for retailers to outdo each other on price, product and customer service. While this greatly benefits us all, as we can all see, some minimal regulation is required. This is the role of the Competition and Consumer Act 2010 and the ACCC in enforcing that Act.

There are a number of other new regulatory issues for retailers: adjusting to new bans on excessive payment surcharges, new labelling requirements around country of origin labelling, and the review of the Australian Consumer Law to name a few.

Since I am in Melbourne, in grand final week, I cannot resist one last point.

In the mid 1960’s Milton Freidman said “we are all Keynesians now.”

As a lifelong Hawks fan, can I now say, but for this week only, “we are all Western Bulldogs fans now.”

Go Dogs.

Thank you for your time today.

Footnotes

[1] http://competitionpolicyreview.gov.au/files/2015/03/Competition-policy-review-report_online.pdf

[2] Australian Competition and Consumer Commission v Liquorland (Australia) Pty Ltd and Woolworths Limited [2006] FCA 826; [2006] ATPR¶42-123

[3] COSTCO Wholesale Australia Pty Ltd V Woolworth Ltd and Ors [2016] SASCFC 75

[4] https://consultation.accc.gov.au/compliance-enforcement/consultation-on-draft-framework-for-misuse-of-mark

[5] http://www.afr.com/business/retail/fmcg/why-supply-chain-managers-are-psychopaths-20160912-grevxs

[6] http://www.afgc.org.au/2016/07/food-and-grocery-code-of-conduct-supplier-survey-reflects-transition-year/

[7] http://www.roymorgan.com/findings/6562-state-of-the-nation-australian-retail-201511230537