The ACCC's inquiry into grocery prices illustrates the danger of imposing an overstaffed and overzealous government agency on an industry. There are three major supermarket players and plenty of rivalry. Most large shopping centres have at least a Coles and a Safeway, and often also an IGA supermarket.
All three chains know that shoppers understand grocery prices better than those of any other goods. And it is hardly surprising that the chains keep a sharp eye on their competitors' prices.
Like hawkers in open-air markets, they are constantly adjusting prices in the light of their competitors' pricing decisions. The goods are so price-sensitive that vast swathes of market share would be lost if prices of one chain were to drift above those of another by more than a few percentage points.
Astonishingly, this does not seem to be understood by the Australian Competition and Consumer Commission and its chairman, Graeme Samuel. Samuel noted evidence from the chief executive of Woolworths that its managers were instructed to meet the prices of their competitors and drew attention to similar testimony given by IGA. In a statement that offers powerful insights into his lack of commercial experience, he said: "If Coles' instruction is exactly the same as Woolworths, we've got a pretty cosy arrangement, haven't we?"
Well, hardly cosy. In fact it's a dog-eat-dog world out there in commerce, where success depends on pleasing consumers and doing so in the midst of competitors whose own success, even survival, means providing better value to customers. The intensity of the competition depends on keeping costs as low as possible through bearing down on wages, eating into the margins of suppliers and choosing and presenting stock carefully. Unlike the ACCC, the supermarkets cannot simply whistle up ever-increasing funding courtesy of taxpayers.
Understandably, in view of the powers of the ACCC and its willingness to prosecute businesses that offer consumers goods at low prices, Woolworths' CEO declined to answer a pointed question about whether the company would sell below cost to match competitors' prices.
Ironically, during the course of the hearings, a report was issued by Concept Economics, Choice Free Zone, which had Samuel's predecessor, Allan Fels, as its lead author. The report points to issues that impede competition from bringing the lowest possible prices. These are the planning rules that restrict competition by designating areas for supermarkets.
Work I have done has found that Australia has less than half the shopping centre space per head than North America because of our planning laws.
This raises the cost of land for supermarkets and those costs must inevitably be factored into the prices consumers pay.
Supermarkets, in return for getting access to sites at a premium cost, will demand that rivals who have not paid these costs are excluded from the sites and prevented from setting up elsewhere.
The planning-derived scarcity of land for retailing has been muted in the case of whitegoods and some fashion lines.
State planning land supply restrictions have been countered by the sudden appearance of surplus Commonwealth land around airports, and with excellent transport infrastructure. This has led to the growth of Direct Factory Outlet sites around all our capital cities and the consequent unleashing of competition has brought a tremendous benefit to consumers.
Such areas are less well suited to supermarkets and have not therefore had the same effect in placing downward pressure on prices.
The Concept Economics report is particularly scathing about the planning restraints imposed on Sydney consumers. It argues that food prices in smaller shops may be up to 22% higher because of the constraints on competitive provision.
Rather than berating businesses for engaging in rivalry, the ACCC should concentrate on testing such claims. If they are found to have merit, their rectification falls squarely within the ACCC's competition bailiwick and the agency will have found a meaningful public service to pursue.
There is a range of overseas supermarket chains -- Wal-Mart, Sainsbury's, Pick n Pay -- that have been unable to find satisfactory sites in Australia. Removing barriers to these companies entering the market is the key measure to promoting lower prices.
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