The Retail Duopoly and the Competition Regulator

Little seems to stand in the way of the duopolistic power of Coles and Woolworths. Regulatory authorities such as the ACCC are supposed to ensure competitive and conscionable market relations. In this article, Evan Jones finds that the regulator faces a tough battle, partly because it consistently fails to use many of the resources at its disposal.

Coles and Woolworths may reasonably be labeled a duopoly. There are retail behemoths overseas, but in no other country is a significant section of the retail dollar so concentrated.

How we got to this point involves a case study in the power of capital, both in the market and in politics, of regulatory complicity, of economists’ ill-education and of a legal culture sympathetic to corporate dominance of the marketplace. Certainly there has been consumer benefit (albeit uneven) in the form of lower prices. But it is a story of the regrettable acquisition and use and abuse of market power.

The road to the current duopoly dominance and its adverse consequences has been outlined in my article in The Conversation in April, following the milk price war initiated by Coles under its new management imported from the British giant Tesco.

The Australian Competition & Consumer Commission (previously the Trade Practices Commission) is the body designated to inhibit the acquisition and misuse of market power. Probably Allan Fels (1991-2003) was the only chairman to be generally assertive (though with unfortunate lapses) in the administering of the 1974 Trade Practices Act. However, the period of the chairmanship of Graeme Samuel (2003-11) witnessed the entrenchment of the retail duopoly, though many opportunities arose to inhibit that outcome. Under Samuel, Metcash was seen as the major threat to competition, whereas it is the major force countervailing the duopoly.

In a speech on 10 October, Rod Sims, newly appointed ACCC Chairman, broke ranks with his predecessor by claiming “Many smaller suppliers to the supermarkets feel they lack a real ability to negotiate supply arrangements.’’ Sims added: ‘The ACCC can and will watch closely to ensure any such dealings do not involve unconscionable conduct by the supermarkets.”

The impediments to effective action are formidable. The ACCC has to confront the reality and the extent of unconscionable conduct with respect to supplier relations and the associated powerlessness of suppliers, which has, to date, proved elusive. ACCC pronouncements highlight that, yes, unconscionable conduct is in the 2010 Competition and Consumer Act (CCA), which replaces the Trade Practices Act. Effectively, however, they direct the potential victim to go away and sort it out themselves (‘How can I stop this from happening to me?’). The ACCC declines to acknowledge that the significant inequality of bargaining power, linked to the lack of alternatives for suppliers, precludes preventative action by the suppliers themselves.

Admittedly, the regulators face an uphill battle against a judicial culture supportive of the big against small – transparent in ACCC v Berbatis (2003) – but if the regulator does not mount cases the adverse precedents will never be overcome, and the relevant sections of the CCA will continue to be inoperative.

Next, the new Chairman has to actively invite and protect feedback from suppliers. In 2005, the ACCC acquiesced to Woolworths’ takeover of 21 prime stores and sites in Western Australia from Foodland, in spite of local opposition. The ACCC refused to grant confidentiality to evidence from opponents of the takeover. More significant, the ACCC again declined to grant confidentiality to suppliers submitting evidence to the large scale 2008 inquiry and report, Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries. The report’s forbidding size occluded the shallowness, even shamefulness, of its analysis.

By contrast, the earlier (Reid) House Industry Committee produced a report on these issues that was an exemplar in principled investigative inquiry. The bipartisan 1997 report, Finding a Balance: towards fair trading in Australia, exposed corporate predation against small business in a variety of sectors. Confidentiality afforded submitted evidence was an integral part of the inquiry’s success.

The report led to the insertion of the seminal ‘business to business’ unconscionable conduct provision (s.51AC) in the Trade Practices Act (now Schedule 2, s.22 of the CCA). The report also led to the creation of the post of Small Business Commissioner within the ACCC (unfortunately the Commissioners have been consistently missing in action).

In particular, the ACCC’s approach to understanding and regulating ‘retailer buyer power’ has been parlous. The crucial chapters of the 2008 grocery prices report on buyer power are embarrassing. Chapter 14 (‘Buyer power’), rooted in a priori abstractions, is theoretical mumbo jumbo; Chapter 15 (‘Evidence of buyer power’) opaquely refers to the existence of buyer power abuse but quickly moves the text along to contradictory claims of beneficence. Given the ACCC’s hostility to anti-duopoly evidence, the ‘hosing down’ character of chapter 15 is predictable but inexcusable.

The UK Competition Commission’s large-scale 2000 report, A report on the supply of groceries from multiple stores in the United Kingdom documented buyer abuse of the supplier relationship (Ch.11). The ACCC has cited this report but has ignored these findings. Experts in this field, like UK academic Paul Dobson, might have been consulted but have been ignored.

The ACCC’s own library contains a volume containing elaborate excursions into retail buyer power. The Proceedings of the Fordham Corporate Law Institute’s 2000 conference on antitrust law and policy has probably never been opened.

A mere six months after the ACCC delivered its 2008 report beatifying the retail duopoly, we are informed that: “In an effort to extract an extra $500 million from suppliers, the Coles supermarket chain is threatening to remove some products if suppliers refuse to pay higher rebates.” At the same time, giant dairy processor National Foods was offering Tasmanian dairy farmers sub-starvation farm gate prices.

In July 2011, the ACCC duly handed down its blessing on Coles’ $1 sub-cost pricing of its house brand milk. It has taken another resources-consuming Senate inquiry into the dairy industry to elicit evidence from the industry on its complex character and the deleterious effects of the price war, especially on those States whose production goes predominantly to domestic consumption.

The ACCC Chairman has expressed formal concern for smaller suppliers’ subjection to the retail duopoly. But to convert this concern into action is going to require comprehensive spring-cleaning of a resolutely myopic culture within his organisation with respect to this vital domain. I fear that the ACCC’s promise to ‘watch closely’ is the most we can expect from the regulator in the near future.

Evan Jones is an Honorary Associate in Political Economy at the University of Sydney.