Is big business getting too aggressive?
At a black-tie dinner on Wednesday, David Purchase will stand on the podium and try to instil fear into 200 guests including politicians, police, lawyers, government agencies and business leaders in an attempt to advance the debate on the treatment of big business to their smaller counterparts.
Purchase, who is executive director of the Victorian Automobile Chamber of Commerce, says it is an issue causing great concern as he watches small businesses getting squeezed out of existence, and with them employment opportunities.
"Many small businesses, be they suppliers to supermarkets, newsagents, independent service stations, new car dealers or motor vehicle crash repairers, are claiming that those big businesses with whom they deal are increasingly treating them unfairly and in some instances, unconscionably," Purchase argues.
Given there are more than 2 million small businesses registered in Australia employing more than 5 million, it is a concern for more than just Purchase about the long-term effects on employment and society at large.
The big and powerful are getting increasing airplay in the media as supermarket giants Coles and Woolworths thrash it out. But it is an issue far wider than Coles and Woolworths and raises questions about whether we want an efficient society with less jobs, or a less-efficient, high-cost society.
It is a phenomenon that isn't isolated to Australia. It has inspired much thought, including a book, Supercapitalism, by University of California professor Robert Reich, which argues that since the end of World War II, the world has seen a shift from the citizen to the consumer and investors. "The last several decades have involved a shift of power away from us in our capacities as citizens and towards us as consumers and investors."
Purchase draws on Reich's hypothesis to explain the new aggressive competitiveness of big business, some of which he believes have become a law unto themselves. "Under super capitalism, democracy charged with caring for all citizens has become less and less effective ... Because the consumer and investor are now king, large companies pursue policies and strategies that adversely impact on their small business suppliers," he will argue.
He is right. On the one hand Australians lament the rising power of big business such as supermarkets, but on the other hand they are demanding better deals, which sometimes results in suppliers being caught in the middle.
Investors are doing the same. On the one hand they demand higher profits to pay for higher dividends and lift the share price, but in a flat trading environment that often means cutting costs, including slashing staff.
In the past few months a plethora of companies on the ASX have announced staff cuts to try to keep a lid on prices. These include BlueScope Steel, BHP Billiton, Rio Tinto, QBE, Boral and Qantas. Shareholders rejoiced by lifting the share price of these companies.
In the past two years, the food and liquor discounting between Coles and Woolworths has never been as fierce or the cries from suppliers louder. Last year Coles estimated there had been price deflation of 2 per cent a year since the start of 2009, and matching competitor price cuts, which has saved consumers more than $2 billion a year.
Coles is focusing on improving its supply chain to further reduce costs and pass savings on to customers. It is also tackling its liquor business, a drag on grocery earnings.
The dairy farm industry was the first to raise attention in the price war crossfire, followed by the bread industry, then the beer giant Foster's, which pulled VB off its trucks in February 2010 after it found its product was to be sold at what it argued was below cost and would chip away at its brand and hurt independent liquor outlets.
While consumers benefit in the short run from the price discounts, there are longer term implications. Last year De Bortoli Wines went public with a warning on the impact of private-label wines being offered by the supermarket giants. In a column, I wrote that its boss, Darren De Bortoli, said private-label wines were reducing the amount of shelf space for branded wines. He said in most cases the private-label bottles were hurting the economics of private wine companies.
Many suppliers have been hit hard by the consolidation of businesses in numerous industries. Concentrated markets have negative effects on manufacturers and growers. Innovation shrinks when there is too much power, which doesn't help anyone.
If enough suppliers and smaller competitors are driven out of business, it will reduce choice and eventually drive up prices.
Purchase believes it should not be left to the market to sort out. "Yes, you heard correctly, market intervention, which I think is the only way many otherwise viable small businesses will survive, and retention of employment opportunities and other societal benefits achieved."
It is a complex issue and to stop the naysayers, Purchase offers a couple of examples where government intervention worked.
He says during the Fraser government the Petroleum Retail Marketing Sites Act 1980 was enacted, which prevented oil companies owning and directly operating more than 5 per cent of their branded service stations. It caused a stink, but it took 30 years before the legislation was quashed.
"From in excess of 22,000 service stations then to less than 6000 now, has the reduction in numbers and the reduction in competition done anything for the motorist, who certainly is not paying less for fuel, let alone the independent who is no longer in business?"
The other example of government intervention is the pharmacy agreement between government and the Pharmacy Guild of Australia, which prevents supermarkets operating pharmacies, which has stood the test of both sides of politics.
It is an interesting argument that is certainly worthy of debate.
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