Food and grocery and Australia’s competition law

Speakers: 
Mr Rod Sims, Chairman
Conference: 
Australian Food and Grocery Council Industry Leaders Forum
1 October 2014

Addressing the AFGC Industry Forum in Canberra, ACCC Chairman Rod Sims welcomes the Harper Review draft report and discusses proposed areas of microeconomic reform where the food and grocery sector stands to benefit. He also covers industry efforts to develop a code of conduct to address unfair practices in the grocery sector and provides an update on the ACCC's activities in the areas of credence claims, carbon tax repeal and product safety.

Transcript: 

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Introduction

Thank you, it is a pleasure to be here.

Today marks the 4th day since the Hawks great AFL grand final victory and, more important, it also marks the 40-year anniversary of Australia’s competition and consumer laws and its administration.

The Trade Practices Act began its life on the 1st October 1974.

Since the early days, speaking to industry leaders about the workings of the Act and our activities has been one of our highest priorities.

I am pleased to continue that tradition today. The three topics I will cover are:

  • Some of the ACCC’s recent enforcement and compliance activities
  • The proposed Grocery Code of Conduct and, of course,
  • The Harper Competition Review.

Enforcement and compliance activities

The ACCC’s enforcement activities should not come as a surprise. We are telegraphing our priorities through our annual strategic review and regular public references.

As part of the review process, we consult with the AFGC, consumer groups and very many others, to take stock of our priorities and look to new areas of focus.

At the end of the process, we publicly disclose areas for attention, well ahead of action arising from investigations or other compliance activity.

Credence claims

Our work in the area of credence claims is a case in point. We had been very public about our interest in this area well ahead of taking enforcement action.

When making promotional claims about food or grocery products, the ‘who’, ‘what’, ‘where’ and ‘how’ must be accurate.

We have seen many outcomes in the past year including:

  • On the ‘who’ made it, Carlton & United Breweries (CUB) provided an undertaking to the ACCC in which it admitted that it was likely to have breached the Australian Consumer Law by using labelling that the ACCC was concerned represented that Byron Bay Pale Lager was brewed by a small brewer in Byron Bay, when it was in fact brewed by CUB in Warnervale.
  • On the ‘what’ is in it, Saskia Beer’s Barossa Farm Produce recently acknowledged that the labelling and promotion of her “The Black-Pig” smallgoods were likely to have breached the law because they represented that the pork used in The Black-Pig products was from heritage Berkshire pigs or other black pig breeds and that the pigs were free range, when this was not the case.
  • On the ‘where’ it is from, Basfoods recently paid penalties following the issue of three infringement notices by the ACCC, and provided an undertaking to the ACCC to address the ACCC’s concern, among other things, that Basfoods had represented that its ‘honey’ product was from Victoria, when it was from Turkey.
  • On the ‘how’ it is made, just last week the Federal Court handed down a $300,000 penalty against Pirovic Enterprises Pty Ltd after finding that its 'free range' egg claims were false or misleading.

When credence claims are misused the damage is done in three ways:

  • First, consumers are misled into paying more for a premium feature that doesn’t exist
  • Second, competitors who can legitimately make a credence claim unfairly lose their competitive advantage, and
  • Third, and perhaps most important, innovation suffers when consumers and businesses lose trust in the integrity of claims.

Product safety

Product safety is another continuing priority.

Consumers are entitled to expect the goods they purchase are safe. And, when product defects are identified, consumers expect sellers will act swiftly to avoid further harm.

Our message is clear. Everyone in the supply chain should ensure they have effective quality assurance processes in place to prevent unsafe products from reaching the shelves.

This is particularly the case where companies look to reduce their costs by sourcing products from overseas manufacturers.

We have recently instituted proceedings in the Federal Court against Woolworths alleging false or misleading representations about the safety of some of their home brand products.

We also allege that Woolworths failed to file mandatory reports as required by the Australian Consumer Law.

When a supplier becomes aware that a product has or may have caused death, serious injury or illness, there is a two day window to report the incident.

Carbon

We have also been working hard to ensure cost savings from the carbon tax repeal are passed on by businesses.

As part of our role, we have issued over 250 substantiation notices to electricity, natural gas and synthetic greenhouse gas businesses.

These businesses are required to respond explaining how the carbon tax repeal affects input costs and prices for their goods.

They were also required to provide a substantiation statement to the ACCC and publish this statement on their website.

These statements set out the business’ estimated average cost savings from the repeal being passed on to each class of customer.

Compliance with these requirements has been high; we received more substantiation statements than expected.

This shows that businesses supplying regulated goods are taking the ACCC’s role and powers seriously and are conscious of doing the right thing.

The ACCC is continuing to analyse the information provided in the substantiation statements and responses to the ACCC’s substantiation notices, and will report on its activities in the next quarterly report to the Minister, which is due by 28 October.

The ACCC had an enforcement role on the way in, and now it has a separate enforcement role to deal with the repeal of the carbon tax. We recently instituted court proceedings against SGG supplier Actrol Parts Pty Ltd alleging that it made false or misleading representations about the effect of the carbon tax.

The bottom line is if you made a representation of price increases as a result of the carbon tax on the way in, be prepared to show and explain your price decreases to the ACCC on the repeal of the tax.

If businesses do not comply with their obligations in this area, we will take appropriate action.

Competition

There is also much happening on the competition side of our enforcement activities which is of relevance to AFGC members. For example:

  • Late last year, we instituted legal proceedings alleging a laundry detergent cartel. We allege that cartel and other anti-competitive arrangements were made and given effect during a transition to ultra-concentrate products.
  • In May, the ACCC commenced court action alleging an attempted egg cartel. The alleged attempt sought to obtain agreement by egg producers to reduce supply, which if successful could have affected the egg prices paid by consumers.

Food and grocery code of conduct

The Grocery Code put forward by Coles, Woolworths and the AFGC goes some way to addressing unfair practices in the grocery sector.

Discussion of such a code followed very vocal complaints by the AFGC and suppliers concerning the behaviour of the major supermarkets towards their suppliers.

Australian suppliers have raised concerns relating to the unfair transfer of risk from supermarkets to suppliers, and of unilateral changes to the terms of trade by supermarkets such that certainty of contract was lost.

Earlier this year, following an in-depth investigation, we took court action against Coles for alleged unconscionable conduct towards suppliers in relation to its Active Retail Collaboration (ARC) program. The ACCC alleges that Coles used undue pressure and unfair tactics in negotiating with suppliers, provided misleading information and took advantage of its superior bargaining position, so that its overall conduct was in all the circumstances unconscionable.

This matter is still before the court.

As advised at the time, the proceedings arise from a broader investigation which is continuing, and we expect further action shortly.

We certainly welcome, therefore, industry’s recognition of the need for action and their efforts to develop a code.

The ACCC considers that a ‘supermarket’ industry code of conduct that provides clear rights and legally enforceable norms of conduct would be of considerable assistance to food and grocery industry participants.

However, many of the protections of the Code are qualified and retailers and suppliers are able to agree to ‘contract out’ of Code provisions.

This raises an issue of whether the Code will address the problems which industry has identified if norms of conduct in the Code are able to be traded away, rather than always enforceable.

I note consultation on the draft Code has recently closed. I think all of us would agree that these issues about the enforceability and coverage of the Code need to be addressed before we reach a conclusion on this issue.

Harper review

The Harper Competition Review is the most significant review in this area for over 20 years and the ACCC welcomes the review panel’s Draft Report.

It comes at a time of debate over micro economic reform strategy. This debate was highlighted in an OpEd by Peter Harris, Chairman of the Productivity Commission, in Monday’s AFR.

Peter said Australia should stick with its past successful strategy of favouring the many over the few by focusing on removing barriers to competition generally, rather than pursuing policies that favour particular sectors.

I agree with him completely. So, it seems, does the Harper Panel review.

Indeed, we strongly agree with the review panel that there is a need to reinvigorate Australia’s competition policy, and ensure that it evolves.

The ACCC particularly appreciates the detailed consideration of microeconomic reform issues, many of which are of direct relevance to all AFGC members, for example, in relation to shipping and improving market signals for the use of and investment in roads.

The ACCC raised many of the matters addressed by the Harper panel in its submission.

As we all know, transport infrastructure is a critical input for business-to-business transactions, and reforms will have significant economy-wide benefits, particularly for suppliers of food and groceries.

On road infrastructure provision and pricing, we support the panel’s recommendation on introducing cost-reflective road pricing that is linked to road construction, maintenance and safety.

A key benefit is that such changes would make road investment decisions more responsive to the needs and preferences of road users. This would see particular road bottlenecks addressed much more effectively than they are today.

Importantly this can be done without road users paying more overall. The Productivity Commission has found that revenues derived from motorists from all sources are about the same as total expenditure on roads by all governments. More effective road user charges can be offset by lower fuel taxes which currently account for one quarter of fuel prices.

The ACCC also welcomes the draft recommendations to deepen competition in liner and coastal shipping services. This will also reduce your production costs.

Similarly, the ACCC is encouraged by the recommendation that all governments should include competition principles in the objectives of planning and zoning legislation.

We often hear in relation to micro economic reform that all the low hanging fruit has been picked, and that all the really important reforms have been made.

This is nonsense.

The reforms to shipping are low hanging fruit, and can be implemented quickly.

And the road reforms are fundamental to our economy.

The ACCC is also pleased that the review panel has undertaken a thorough consideration of Australia’s competition law.

In so doing, they have clearly had regard to established international approaches to setting the appropriate boundaries of such laws. Australia’s competition laws are behind international best practice in important respects.

For example, an important recommendation from the Draft Report is that section 45 of the CCA should extend to cover 'concerted practices' which have the purpose, or have or would be likely to have the effect, of substantially lessening competition.

This recommendation recognises a gap in the laws relating to anti-competitive behaviour by firms that should be competing vigorously.

Currently, other than in banking, competing firms can provide information or signal to their competitors their future pricing information in a way that reduces competition, in ways that avoid Australia’s competition laws. This would not be allowed overseas, and with the Harper review will hopefully not be allowed in the future in Australia either.

This is consistent with arguments previously made by the ACCC and reinforces the important principle that competition laws should have economy-wide application.

Another important recommendation involves section 46, the misuse of market power. The Harper Review’s recommendations seek to make this section workable and more focused on the competitive process, rather than the protection of individual competitors.

Cleverly, they have also included defences which seek to deal with some alarmist views about what the recommended changes might mean.

Competition law only involves a small number of things companies should not do. Broadly it says do not engage in cartels; do not have mergers or agreements which substantially lessen competition; and do not misuse your market power.

A misuse of market power essentially involves behaviour that seeks to exclude others from the competition playing field. This can be via refusal to supply, buying up all available land or other essential inputs, predatory pricing, and anti-competitive rebates or bundling of goods.

I see it as a contradiction for some to argue for opening up new areas of our economy to competition, while also arguing against changes that make section 46 an effective part of our Act and in line with overseas practice.

Further we also broadly welcome this review’s merger recommendations as they would achieve two important things.

First, they provide a more streamlined formal exemption option for those who are unhappy with the informal merger assessment system.

Second, they would restore the Australian Competition Tribunal as a place of review, not first instance decision maker.

Finally, we will closely consider the Draft Report’s analysis of institutional issues and look forward to the community discussion it will generate.

In this area, we will be particularly interested in better understanding the problems the recommendations are directed towards addressing.

The ACCC will provide a detailed response to the Harper Competition Review Panel.

Like our initial and supplementary submissions, our response to the draft report will focus on making markets work for everyone.

Closing remarks

It is a time of transition for the food and grocery sector in terms of competition and consumer issues; businesses are adapting to the carbon tax repeal, credence claims now have more prominence, the proposed Code of Conduct is going through the Treasury process, and the Harper review has handed down its draft report.

It will be an interesting period ahead.