Labor's desperate supermarket salvo

Labor's threat to create a mandatory code regulating the supermarket duopoly smacks of rushed pre-election policy, and would harm the consumer benefits brought about since Coles' resurgence.

The threat of a mandatory code of conduct for supermarkets and a commissar of groceries looks, similar to the contentious media ’reforms’ and their commissar of news, like another of those desperate flailings of a despairing government that now appear to be surfacing on a daily basis.

While the government hasn’t yet committed to a mandatory code, the industry is, given the current climate of Gillard government hostility to business and its shift into re-regulatory mode, fearful that is what it will get despite having spent the past six months developing its own voluntary code of conduct, a code that would be overseen by the Australian Competition and Consumer Commission.

There have, of course, been numerous parliamentary inquiries as well as ACCC inquiries and investigations into the conduct of the big supermarkets chains. Despite the intensity of the scrutiny of their activities there have been no findings of any material or systemic improper behaviour, let alone unlawful behaviour.

The voluntary code, initiated by Coles, was a response to complaints from suppliers and farmers of the upstream effects of the price war between Coles and Woolworths and their increasing use of home brand products. There's no doubt that the two big supermarkets have been putting a lot of pressure on their supply chains, with the most visible example being their $1-a-litre milks.

Earlier this year, ACCC chairman Rod Sims told a Senate committee that the commission was concerned about the behaviour of the supermarkets and said it had received allegations of behaviour that, if true, would constitute breaches of competition law.

The allegations, from about 50 suppliers, could, he said, represent unconscionable conduct or misuse of market power. The ACCC, of course, also has the power to prosecute behaviour that leads to a substantial lessening of competition in a market or which involves predatory pricing. It actually has an armoury of responses to anti-competitive or unfair behaviour by companies with market power.

The chains’ voluntary code of practice isn’t designed to cover illegal behaviours but rather issues like breaches of contract or perceived unfairness. It would involve financial reparations for breaches of the code but not the penalties that could be imposed within a mandatory code. It would give smaller suppliers a forum and framework, overseen by the ACCC, for having their grievances heard and dealt with.

The chains, like any other businesses, are subject to competition law and can be prosecuted if they breach it. If there is a case for law reform it would, one would have thought, have already emerged from the myriad of inquiries and investigations they have already been subjected to or from the ACCC’s current inquiries. The case for a layer of new regulation, fundamentally specific to two companies, hasn’t yet been made.

The Gillard government’s current reflex response to just about every hot button business issue – whether its media law reform, coal seam gas, 457 visas, industrial relations, building codes or supermarkets – is more regulation, reversing the broad bi-partisan commitment to deregulation that got truly under way during the Hawke and Keating years.

While the market power of the chains means their behaviour does deserve particularly close scrutiny, which they do receive from the ACCC and the parliament, the price war ignited by Coles’ resurgence and regained competitiveness has delivered, and continues to deliver, very substantial consumer and economic benefit.

The combination of that competition, and not just in groceries but across the spectrum of their retail activities, their own improved productivity and the pressure they have imposed on competitors and their own supply chains to also become more efficient has been a bonanza for consumers.

The Deloitte Access Economics analysis commissioned by Coles last year estimated that prices for all goods at Coles had fallen 4.2 per cent in the 18 months from January 2010, or 7.9 per cent excluding cigarettes. It found that the savings to consumers of the goods in the ‘’Down, Down’’ campaign by themselves were just over $1 billion in that period.

Apart from the direct benefits for consumers, the supermarket wars and the competition between retailers obviously feed in to the broader economy.

The food price deflation of the past few years has helped moderate inflation and helped allow the Reserve Bank push interest rates down to historically low levels.

Given the need to improve the nation’s productivity and competitiveness, why is it automatically assumed that there must be something wrong if the chains, and other retailers, pressure their suppliers to improve their own productivity? There is, for instance, enormous potential within the agricultural sector to profit from the rising living standards in China if it can become more productive.

There is obviously, a delicate balance between creating pressure to lower costs and abusing market power, but that is why the ACCC has been given legislative authority to investigate and regulate companies with market power.

The risk in adding another layer of regulation via a mandatory power, before any actual findings of systemic improper behaviour, let alone unlawful behaviour, is that the intensity of competition between the chains is reduced, the pressure on their supply chains to lift their game is relaxed and the commissioner/commissar for groceries rather than the market is effectively left to decide the balance between consumer and supplier benefit.

In this ‘’non-campaign’’ period in the lead-up to the election there is enormous potential (some would say it is an existing reality) for hastily conceived and executed, poor-quality and politically-driven policy – from both the major political parties.

The greater risk, of course, is that a government frantically trying to shore up its core support ahead of an election it expects to lose pushes through a raft of hastily-conceived and under-analysed legislation with the support of the anti-business Greens and the Independents.

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