Addressing the Australian Food and Grocery Council’s industry forum in Canberra, ACCC Chairman Rod Sims provides a regulator’s perspective on the debate surrounding the market share held by the two major supermarket chains. Mr Sims covers supplier issues, the proposed industry code, credence claims and mergers. He also explains the ACCC’s enforcement role and how it must always act on the basis of facts and evidence in taking court action.
Check against delivery
As you all know we are having a debate in Australia about some of the implications of the significant market share held by the two major supermarket chains (MSCs), across many sectors.
The Australian Competition and Consumer Commission considers this to be a healthy debate. It is a debate, however, which some seek to counter by arguing one of two lines.
First, that those complaining about the market power of the two MSCs are wanting to use the Competition and Consumer Act 2010 (Act) simply to protect individual competitors, rather than the competitive process. Second, that we must avoid excessive regulation, and let the free market work.
I do not accept either argument in this instance.
First, there have always been people wanting to use the Act to protect specific competitors, rather than the competitive process, and there always will be.
At the ACCC, however, we are completely clear that our role is only to protect the competitive process, and this is how we see the current debate.
It is simply incorrect to label all those who question aspects of the degree of market power of the MSC’s as people wanting to protect inefficient businesses.
Second, we see the main MSC issues as capable of being dealt with under the Act, and we do not see use of the Act as excessive regulation.
Indeed, effective implementation of the Act is vital for the success of our market economy. It provides clear and wide boundaries within which we can all benefit from the power of the profit motive.
It is incorrect to argue that a market economy needs no regulation. It requires a modest amount of appropriate regulation to be effective, and this is what the Act provides.
Let me illustrate all of this by making three points, as follows.
- The MSC issues that the ACCC is investigating fit within the Competition and Consumer Act and exclusively go to issues of concern over the competitive process.
- It is important that everyone understand the ACCC’s role under the Act and how this plays out.
- There will be a fascinating debate in the context of the Root and Branch Review, and we welcome this.
The MSC issues that the ACCC is investigating fit within the Act and exclusively go to issues of concern over the competitive process
Today I will touch on some issues, as follows:
- supplier issues
- the proposed code
- shopper dockets
- credence claims
- mergers, and
- product safety
In July this year, I provided an oral update to Senators in relation to the ACCC’s investigation into the major supermarket chains in Australia. This update followed on from the written statement I provided to the Senate in February this year.
As set out in my written statement to the Senate, following confidential responses to our call for suppliers to come forward, the ACCC has been investigating:
- whether the major supermarket chains engaged in unconscionable conduct in their dealings with their suppliers; in essence, allegations involving demands for various payments from suppliers above and beyond that negotiated in their terms of trade, and
- whether the major supermarket chains misused their market power by discriminating in favour of their own house brand products.
My statement noted that the allegations raised and subsequently illuminated in our investigations included allegations of some conduct which the ACCC considers did not conform with acceptable business practice and may involve contraventions of the law.
I was very clear in identifying that the conduct in question was not necessarily identical across suppliers, product lines or even supermarkets.
Since my statement, intense investigation has continued with extensive evidence being obtained including through use of our statutory information gathering powers.
In response to queries in June this year, I advised Senators that we would expect to form a view by the end of the year on whether we think there are contraventions of the law in relation to the treatment of suppliers.
We remain on track to conclude the investigation phase of key aspects of the investigations into the treatment of suppliers by the end of this year. This will place the ACCC in a position to make a final assessment, obtain further necessary legal advice and form a view one way or the other on the action we may take on those aspects around the end of the first quarter of 2014.
While these timeframes are longer than initially hoped for, they reflect the complexity and breadth of investigations and the challenges associated with gathering evidence while safeguarding the business relationship witnesses have with the supermarket chains.
The proposed code
ACCC investigation and possible action may address some of the issues which are being identified, but will not be able to address all issues resulting from market structure and market power.
The ACCC is on the record as saying that, on balance, we see merit in the introduction of a legally enforceable supermarket and grocery industry code of conduct with clear and real obligations to allow the ACCC and industry to know when traders have crossed the line.
Such a code could, for example, enable more effective enforcement of contracts, encourage supplier investment, see a more appropriate sharing of risk and allow more effective dispute resolution. Of course, any code will impose some transaction and compliance costs, and cannot address all the issues that arise from market power.
Examples of codes that are currently in place are the Horticulture Code of Conduct and the Franchising Code of Conduct. While these mandatory codes of conduct have some important limitations, they provide a framework for the ACCC to take enforcement action where appropriate.
They also, however, highlight that it is vital to make sure codes are workable and enforceable.
We have concerns with the proposed supermarkets code which relate primarily to the coverage of the code. Our view is that if there is to be a code it should be effective; otherwise it would be better to have no code.
While the code may be seen as increased regulation in Australia it may help address these broader issues resulting from market structure and market power which have arisen through our supermarkets investigations. It is important to understand that many other advanced countries, for example, the UK, Japan, Korea and Italy, have laws addressing unfair conduct between large retailers in their dealings with suppliers.
The ACCC is also looking into the competition implications of the trend to larger and longer fuel shopper docket offers.
The current investigation involves an assessment of whether Coles and/or Woolworths may be distorting price competition between fuel retailers by offering discounts on fuel purchased from their retail fuel sites in circumstances where, due to retail fuel margins, the discounts may be difficult or impossible for equally efficient competing retailers to match, due to the nature of Coles’ and Woolworths’ activities in other (unrelated) markets.
The arrangements may have the effect of denying equally efficient competitors access to a sufficient customer base to be able to compete effectively, and may also have the effect of increasing the underlying level of petrol prices. Shopper docket arrangements may potentially raise concerns under a number of provisions of the Act.
I am concerned about the escalating shopper docket petrol discounts, now reaching up to 45c per litre in some cases. I am also concerned that despite placing retailers on notice about our concerns, the behaviour has continued and indeed escalated.
While they may provide short term benefits to some consumers, the likely harm to competition and the competitive process, and therefore to other fuel retailers and other consumers, may be quite substantial.
The investigation is nearing completion and will be finalised shortly.
New to our priorities this year is an interest in credence claims, particularly those in the food industry with the potential to have a significant effect on consumers and the competitive process.
Consumers are increasingly placing weight on premium claims and are likely to value the types of claims that directly affect the integrity of the product, such as where something was made, grown or produced and how it was made, grown or produced. These are claims made by producers that a consumer cannot test or validate; for example, a claim such as ‘free to roam’. These claims, if made improperly, have an impact on consumers, and equally important can give suppliers an unfair competitive advantage.
We have been working on these matters with actions in relation to a number of ‘free range’ claims, we have tackled alleged misrepresentations in the labelling of extra virgin olive oil and taken on country (or region) of origin claims from sheepskins to meat and fruit and veg.
In June this year, we commenced civil proceedings in the Federal Court against Coles in which we are alleging false, misleading and deceptive conduct in the supply of bread that was partially baked and frozen off site, transported to Coles stores and ‘finished’ in-store. The products were then promoted as ‘Baked Today, Sold Today’ and/or ‘Freshly Baked In-Store’ at Coles stores with in-house bakeries.
The legal action covers various ‘Cuisine Royale’ and ‘Coles Bakery’ branded bread products. The ACCC alleges that labels on these par baked products stating ‘Baked Today, Sold Today’ and in some cases ‘Freshly Baked In-Store’, and nearby prominent signs stating ‘Freshly Baked’ or ‘Baked Fresh’, were likely to mislead consumers into thinking that the bread was prepared from scratch in Coles’ in-house bakeries on the day it was offered for sale and that it was entirely baked on the day it was offered for sale.
This is in the context where many nearby competing “hot bread” shops essentially do bake from scratch.
This case is contested by Coles and will be determined in the Federal Court.
There have been calls for government to regulate the meaning of various phrases such as “free range”, but this can be difficult to do, especially when like phrases are used. It is worth considering whether it is better simply to rely on the Australia Consumer Law to see if a traders description of its product are misleading. For example, late last year, the Federal Court ordered Pepe’s Ducks to pay $375,000 in pecuniary penalties after engaging in false, misleading and deceptive conduct in relation to the promotion and supply of its duck meat products.
Pepe’s Ducks used the phrases ‘open range’ and ‘grown nature’s way’ on its product packaging, website, delivery vehicles, signage, stationery and/or merchandise. This was often in conjunction with pictures of a duck in the outdoors walking on grass against a background of a lake with hills behind, in circumstances where the ducks were raised in barns and were not allowed to spend any of their time outdoors.
One of the ACCC’s recent priorities has been to closely scrutinise mergers and acquisitions in concentrated markets.
Australia has many markets that are highly concentrated, which is perhaps not surprising given the relative size of our population. Supermarkets and liquor are often identified as two such markets.
In line with this, acquisitions of existing stores or new developments by Coles and Woolworths continue to generate concern, particularly around the size and reach of the MSCs across an increasing range of consumer markets.
In the grocery sector, the MSCs have achieved significant market shares over time, through new store growth, as well as through acquisitions of existing stores and leases.
In the past financial year, Woolworths’ accounts indicate that it has increased supermarket store numbers by 25, bringing its national total to nearly 900, while Coles has increased its supermarket numbers by seven, giving it about 750 nationally. In liquor, Woolworths leads with almost 1,200 takeaway packaged liquor stores across Australia, while Wesfarmers owns around 800.
The Act requires the ACCC to focus only on the competitive impact of the acquisition in question. Even if the acquiring firm has previously and recently made similar (but separate) acquisitions, the ACCC must focus only on the impact of the current acquisition, not the combined effect of acquisitions by that firm.
This means that the ACCC’s focus will in many cases be limited to analysing the impact of an acquisition on a local retail market, given that the acquisition of one store is most unlikely to substantially lessen competition at a national, state or regional level.
In many cases, the local market is as narrow as a few kilometres from the site to be occupied, if the evidence indicates that customers don’t usually travel further than this to purchase their groceries or liquor.
While these acquisitions may seem relatively small, they may have important effects at a local level. When the MSCs acquire an independent supermarket, with which they compete on a local level, they remove an alternative from the market, which could have a different product range, price or service offering.
This reduces consumer choice and as a result, may significantly reduce competition, for instance, if the number of supermarkets operators in a local market decreased from, say, four to three or three to two. Where barriers to entry are high, that competition is unlikely to be replaced by either an MSC or a new independent supermarket.
However, an acquisition that will reduce the number of firms in a market will not necessarily reduce competition substantially. The ACCC must also look at other factors, such as whether the remaining firms in the market are likely to provide enough competition, or whether the threat of new firms entering the market is sufficient to stop the acquirer from increasing prices.
The ACCC must weigh up all the relevant factors and decide whether the acquisition should be opposed. In order to do this, we must believe that we can convince the Federal Court that the acquisition will substantially lessen competition in the relevant market/s. In some cases, the ACCC’s investigation may conclude that while the acquisition may lessen competition, the independent retailer being acquired is not a strong competitor and the proposed acquisition is unlikely to substantially reduce competition. If this is the case, the ACCC cannot intervene in such acquisitions.
I should emphasise that the ACCC’s role under the legislation is not to protect existing firms in a market when a large retail chain opens a store in their area. Equally, we cannot take into account factors such as how the entry of a large chain will impact on the character of a local area or the preferences of the local community, although these may be important considerations for its residents and ultimately the local panning authorities.
Product safety issues which have the potential to cause serious harm to consumers will always be a priority for the ACCC. The ACCC is the national agency responsible for product safety of consumer products.
Broadly, it is our job to recommend where product safety regulation is required, to enforce and encourage compliance with the laws and increase consumer awareness about the hazards.
Through our product safety work the ACCC has noticed a growing trend and correlation between increased direct sourcing of less expensive products from overseas by retailers of ‘fast-moving consumer goods’, and an increase in consumer injuries and a sharp increase in the number of recalls of those goods.
We are concerned by the incidence of retailers who appear to be supplying unsafe goods.
We are also concerned by indications that some retailers appear not to have satisfactory processes in place to properly meet their responsibility to ensure the safety of the goods they sell.
The ACCC has other enforcement options, in addition to the specific product safety provisions, which it will apply if retailers contravene the law as a result of taking short-cuts in their product design and purchasing procedures. There are, for example, likely to be scenarios where the supply of unsafe goods raises concerns about false or misleading representations.
Let me be very clear: if retailers are discovered to have taken short-cuts in applying basic quality assurance and control measures, at the expense of consumer safety, we will take action in any way we can.
It is important that everyone understands the ACCC’s role under the Competition and Consumer Act and how this plays out
As I alluded to earlier, the profit motive works for the good of society, but it only does so if it works within boundaries which are largely set by the Competition and Consumer Act.
It is important for us to explain where those boundaries are, and to enforce the Act, so that people can have faith that a market economy works for them.
The ACCC plays a fundamental role in our market economy. We have four main functions:
- First, as the competition regulator. This involves preventing agreements or mergers which substantially lessen competition, preventing cartels and preventing a misuse of market power for purposes of damaging competition. These laws are essentially about protecting the competitive process.
- Second, the ACCC is the national consumer regulator, which in essence means making sure that consumers aren’t misled or deceived. Consumers in this case include small businesses who are buying from larger businesses. As the consumer regulator, the ACCC also has a role in preventing unconscionable conduct, either between business and consumers or between businesses and other businesses.
- Third, the ACCC is the product safety regulator. The ACCC gets involved in recalling faulty products, and setting and enforcing safety standards and bans.
- Finally, the ACCC has a role where normal market mechanisms don’t work, in essence where you have monopoly infrastructure. The ACCC has an important regulatory role in communications, transport, rural water and, through the Australian Energy Regulator, in energy.
All these activities are geared towards making markets work.
In enforcing the Competition and Consumer Act 2010 we work through the courts. That is, we cannot ourselves determine an enforcement outcome in a contested matter. We must convince a court to rule in our favour on the basis of evidence that we put forward.
This means that investigations take time as we need evidence, not assertions. We must always act on the basis of facts and detailed evidence.
Our approach is critical to ensure that our interventions are fair, well considered, reflect market and commercial realities, and are likely to achieve a sustainable and sensible outcome.
The ACCC will, before taking any action, first see economic harm in accordance with the philosophy of our Act and, if we do, then assess our prospects in court. Indeed, under the Legal Services Directions from the Attorney General, we need advice from external counsel before we can commence proceedings.
Our enforcement role, therefore, is not to be a decision maker. This is for the courts which are, of course, the ultimate umpire, as they should be.
Take our shopper docket investigation as an example where the ACCC’s role as an enforcement agency has been sometimes misunderstood.
The ACCC has no power to ban shopper dockets, nor do we want the power to ban promotions. I suspect people in this room do not want us to have this type of power either.
As an enforcement body, the ACCC can investigate market activity and, where appropriate, take court action seeking injunctions to stop conduct and seek penalties in appropriate cases.
The court processes mean that we must meet appropriately high legal and evidentiary requirements. This provides an important balance to our role as an investigator.
This all, however, takes considerable time and requires patience.
The ACCC in its enforcement role working through the courts is very effective.
We’ve seen, for example, a number of positive outcomes from our cartel cases. In one case, against 15 international airlines in respect of price fixing of certain charges, 13 airlines have paid a total of $98.5 million to date. This result shows that we can take on big competition matters and achieve important results.
Recently we have had judgments that saw a $2m penalty against Koyo for cartel conduct relating to the supply of ball and roller bearings; and a penalty of $1.35m against Viscas for anti-competitive arrangements with competitors in relation to the allocation of projects involving the supply of high voltage or extra high voltage land or submarine cable.
We also have important cartel cases before the courts. Late last year we instituted proceedings in relation to two alleged cartels. One relating to an alleged forklift LPG cartel operating in Sydney and the other action alleges price fixing in relation to the supply of wire harnesses to Toyota.
Only last month the federal Court found Cement Australia contravened Section 45 of the Act in numerous ways by entering into flyash contracts with four power stations in South-East Queensland.
And in February this year we instituted proceedings against Visa alleging misuse of market power relating to Dynamic Currency Conversion services.
On the consumer side we take some form of enforcement action nearly once a week. We have instituted proceedings against AGL, Origin and Energy Australia in relation to their door-door selling activity; against Scoopon for alleged breaches in relation to online group buying; and against a number of Harvey Norman franchisees and Hewlett-Packard for issues to do with consumer guarantees.
In July 2013 a $3m penalty was awarded against Hewlett-Packard; while in May 2013 a $1.555m penalty was award against AGL and a further $200,000 against the marketing company, CPM Australia.
When the courts do find breaches of our Act, not only are the penalties important, but the wider deterrent effect is much larger. Other companies take notice, and behavior fundamentally changes.
I recognise that investigations take considerable time and are expensive, but they are effective. Often simply beginning an investigation changes individual company behavior even if a matter does not get to court. If a matter does get to court, it can dramatically change the behavior of many companies.
Given all of above I am often amused by two often repeated comments.
First, I have been asked on a number of occasions by journalists if the ACCC has much on besides the above matters in relation to the MSCs, and if I find time to focus on any other issues. Given that we have around 100 in depth investigations under way, only a very few of which involve the MSCs, and given our compliance, merger, safety, authorisations, communications, transport, water and other activity, you will understand my amusement. And I would spend at most only 1-2 per cent of my time on activity involving the MSCs.
Second, when a politician or others see a possible breach of our act they expect us to investigate immediately. It is as if our staff are like the fireman in those old films just waiting to slide down the pole. The reality is, of course, very different. Our resources are very limited and our investigators are fully stretched. Our most difficult issue is to decide what to investigate and what not to.
Taking on a new investigation comes at the cost to others.
There will be a fascinating debate in the context of the Root and Branch Review, and we welcome this
The Government has indicated its intention to have a ‘root and branch’ review of Australia’s competition laws.
The ACCC welcomes this review as an important opportunity to ensure the laws we administer are appropriate and serve to enhance the welfare of Australians.
The Government has indicated that the review will not only cover the existing law, which includes the provisions governing misuse of market power, unconscionable conduct and provides for collective bargaining and industry codes, but also address structural economic issues related to the competitiveness of the Australian economy.
This suggests the review will be similar in nature to that conducted under the ‘Hilmer’ Review of National Competition Policy in the early 1990s.
The Hilmer Review showed Australia and the world that competition policy can be a powerful tool to enhance productivity, growth, incomes and a nation’s overall economic standing.
The ACCC will put its views to the Review Panel, guided by its terms of reference, but not beforehand in a public debate.
Along with the ACCC, I suspect there will be many other groups keen to have a say. I strongly encourage all of you to get involved in the review, be it through consultation with the Review Panel or by making a submission when they are inevitably called for.
Thank you for your time today.