Transcript
Check against delivery.
Much to the bemusement of the locals and the bewilderment of my accountant, my wife and I own a small merino sheep farming enterprise, located in southern NSW.
Our humble enterprise produces around thirty bales of fine merino wool each year.
One of the things that always strikes me is the complexity of the post-farm supply chain that our modest parcel of wool feeds into, after it leaves our farm.
Our wool is transported to Melbourne, then tested, and sold at auction to buyers who ship it to perhaps China, Bangladesh or India for initial processing.
It might then be traded to Japan or Korea to be spun into yarn and woven into fabric, before being re-exported to Malaysia, India, Europe or North America to be manufactured into garments. Some of these might even eventually be exported back to Australia.
The complexity of that supply chain, and the fact that market forces generally keep it working effectively and that it ultimately delivers a product that meets consumer needs, is something that is easy to overlook.
The operation of such supply chains work is the subject of considerable research and analysis by economists and policymakers, especially when those supply chains fail to work.
It occurs to me that most of the attendees here this evening are actively engaged on a daily basis in managing supply chains that are perhaps equally as complex, and at the same time essential to ensure supermarkets have available the food and grocery products needed by Australians.
Given the critical importance of supermarkets and their associated supply chains to the daily lives of every Australian, and that the sector has not be subject to a detailed review since 2008, we have welcomed the government direction to conduct an inquiry.
The ACCC supermarkets inquiry will examine the evidence to determine whether supermarkets are providing Australian shoppers with food and groceries at reasonable prices, without exploiting their suppliers.
The inquiry has been initiated over concerns that food and grocery prices have increased substantially over recent years, while supermarkets profit margins have also grown.
Adding further impetus are claims that supermarkets are using their market power to depress prices paid to their suppliers, or to impose harsh and unbalanced contract conditions.
The referral from the Treasurer to conduct this inquiry confers powerful information gathering powers on the ACCC, which we will use to conduct an objective and robust investigation.
There has already been a considerable variety of opinions expressed, pre-empting the inquiry findings.
Pundits and commentators have relied on a range of different factors to support their case. Those supporting the status quo cite what they claim are relatively low profit margins reported by the major supermarkets, or argue for a broad definition of markets which dilutes the apparent market share held by major players.
Those supporting major regulatory intervention cite the internationally high concentration of Australia’s supermarket sector, and a range of market behaviours that harm customers and suppliers.
While punditry is understandable given the significance of supermarkets in the daily life of every Australian, much of it is unfortunately simplistic and does not necessarily help in achieving a robust outcome for this inquiry.
For example, the relative margins and profitability of the dominant participants are of limited utility absent a careful consideration of their risk exposure.
Similarly, sectoral concentration ratios can be a poor proxy for the nature and extent of competition in the sector, which is a key issue that requires consideration.
As you are all aware, the ACCC inquiry processes are at a relatively early stage – in football parlance we are getting close to quarter time. And as any football follower is acutely aware, predicting the outcome prior to quarter-time is inherently risky.
However, I thought it might be worthwhile to provide some comments about the Inquiry processes, and some of the high-level thinking that is occurring that will guide our detailed consideration of specific issues.
Starting with Inquiry processes, on the 1st February, 2024 the Treasurer directed the ACCC to conduct an inquiry into the supermarket sector, with broad terms of reference.
The direction requires us to provide an Interim Report to the Treasurer by 31st August 2024, and a final report by 28th February 2025.
After establishing an Inquiry team, the ACCC released an Issues Paper on 29th February, called for submissions and initiated a consumer survey.
The online, voluntary consumer survey canvassed perceptions of supermarkets, as well as consumer shopping habits. It generated perhaps the strongest response we have ever received to such a survey, with over 21,000 respondents completing what was a quite comprehensive set of questions.
While we recognise the limitations of such surveys, our initial demographic analysis indicates we achieved a broadly representative response in terms of age, location, and income levels.
We anticipate our detailed analysis of the responses will provide us with a good understanding of consumer perceptions and behaviours, which is important in discerning how competition works in the sector and other issues relevant to consumers.
We have also received a substantial number of stakeholder submissions, many of which claimed confidentiality over all or parts of their contributions. We have processes we are required to undertake in these cases and would anticipate soon publishing those submissions that we are able to.
In March we started issuing our first set of s95ZK notices to the major supermarkets, requesting information relevant to our Inquiry. Responses are currently being received, and we would anticipate issuing further notices over the coming months. Complying with these notices can entail providing very substantial tranches of information.
Further stages of our inquiry are likely to involve detailed engagement with a wide range of relevant stakeholders including both representative groups and individuals.
We will also be undertaking analyses of large volumes of data from various sources including in response to our notices, and we may seek further engagement with individual stakeholders in conjunction with those analyses.
We anticipate conducting some detailed investigations of specific supply chains to obtain a clear understanding of margins and profitability of participants involved.
This may involve seeking additional information from participants, some of which are represented in this room. We understand the burden this can impose, so will make efforts to minimise that.
We anticipate the interim report due by the end of August will detail some initial findings and observations. Our final report in February 2025 will include our findings, as well as any recommendations for policy change that we consider are necessary.
As I stated at the commencement of my talk, our inquiry will examine the evidence to determine whether supermarkets are providing Australian shoppers with food and groceries at reasonable prices, without exploiting their suppliers.
Our key focus will be on the role that supermarkets play in the multiple supply chains involved. As well as our normal focus on competition and consumer issues, we will closely consider whether there is evidence of what economists refer to as ‘market failure’ in those supply chains.
‘Market failure’ refers to a situation where a market, in the absence of intervention, fails to allocate resources efficiently.
Market failure can arise due to the nature of the market (for example a market dominated by a small number of major participants), the nature of the goods (for example the presence of externalities or public goods) or the availability of information (for example some participants holding key information not available to others).
Reflecting on my earlier example of the wool supply chain, it is arguable there is limited evidence of market failure in that industry because the supply chain is not dominated at any stage by one or two major players, there is good transparency of prices and volumes throughout the supply chain, and there are agreed testing and quality standards that facilitate confident trading, even across international boundaries.
Our inquiry into supermarkets will focus, firstly on whether any participants have market power, the extent of that market power and the consequent market failure.
Market power arises when a single firm, or a group of firms, can influence prices, quantity, quality, or the provision of key information relating to goods and services within the market.
In the case of supermarkets, market power could provide the ability to charge consumers higher prices or provide lower quality than would be the case in a well-functioning market. It could also be utilised to pay suppliers less and to impose contractual obligations on them that would not be possible in a well-functioning and competitive market in which suppliers have multiple options.
Some have argued that major supermarkets do not have market power, because they need to compete strongly on price to attract consumers.
Pricing practices, however, such as frequent sales and discounting, was/now pricing, volume linked discounting and member prices can make pricing opaque and complicate price comparisons, diminishing the ability of consumers to make price-based choices.
We will be conducting a detailed analysis of the nature of price competition as part of our inquiry, informed by the responses we have received from consumers, and detailed retail pricing data extending over multiple years.
Consideration of supermarkets’ market power requires an assessment of both the consumer and supplier sides of the market. It is also the case that market power may not just be reflected in prices charged to consumers or paid to suppliers.
It can also be reflected in the terms of contractual arrangements that the entity has with its customers or suppliers.
For example, an entity with market power may negotiate the price they are prepared to pay a supplier, but also impose a range of other conditions on that supplier which imposes risk or additional costs.
Requirements to fund promotions, extended payment terms, inventory and distribution obligations, exclusivity provisions and the unilateral ability to change price and volume are all examples of contract conditions that add costs or potential costs onto suppliers but may not be evident from a simple analysis of prices.
Market power is not simply a function of scale or market share, although both can confer market power. A further key factor, especially in relation to maintaining market power over time are the barriers to entry and expansion that constrain new competitors from emerging or existing players from expanding.
Barriers to entry and expansion will be an important subject for the ACCC to consider carefully as part of our inquiry.
I’m sure everyone in this room has a view about the extent of market power that major supermarkets have in Australia, no doubt informed by your negotiations with them over many years.
However, the presence of market power may not constitute something which requires a response from Governments or regulators like the ACCC.
It is not illegal or harmful for an entity to have, or to seek to have market power. In fact, seeking market power often drives investment and innovation.
However, given the possible consequent adverse impacts on both consumers and suppliers, our focus will be on whether net outcomes can be improved through market interventions.
The potential impacts of market failure on the consumer side are often talked about, and may include higher prices, lower quality and poorer service.
The potential impacts on the supplier side are much less commonly considered but could include persistently low levels of sectoral profitability that disincentivises investment and innovation, exposure of suppliers to high levels of risk or unexpected costs, or restrictions on suppliers that prevent them switching to alternative market opportunities.
Complicating the consideration of potential impact on suppliers is the reality that there is a wide variety of entities which supply supermarkets, ranging from small sole-traders right through to enormous multi-national corporations.
There are obviously large differences in the market power imbalances that arise between supermarkets and their individual suppliers, and therefore any potential impact that may arise from the exercise of that market power.
For example, a large multi-national food manufacturer might supply some ‘must have’ products that supermarkets consider essential as part of their consumer offering. That manufacturer has a much stronger bargaining position than a fledgling producer struggling to secure space on supermarket shelves.
A further issue that is relevant to consideration of any market power impacts is the need to differentiate between impacts on individual participants in a market and impacts on participants more generally.
It can be argued that the ‘pressure’ applied by the major supermarkets on their suppliers should result in innovation and investment by some suppliers, who become more efficient. This can result in the less efficient suppliers eventually exiting. Such economic dynamism ultimately benefits consumers through greater economic efficiency.
However, while economic dynamism is a desirable feature of a market-based economy, if the outcome is the depression of profits and a reduction in innovation on a sector-wide basis, then relevant supply chains will progressively become less efficient and ultimately consumers and the broader economy will be worse off.
As you will appreciate from even this brief discussion, there are some complex issues that our inquiry will seek to investigate, and our findings and recommendations have the potential to have significant economy-wide impacts.
We are also very aware that many stakeholders already have strongly held views on these issues, which means we need to be very objective and reliant on facts in reaching any conclusions.
I am very aware our inquiry is of very significant importance to the organisations that are represented here, and that each of you and the Australian Food and Grocery Council have a very strong interest in our inquiry processes and ultimately our findings and any resulting recommendations.
I anticipate and indeed welcome and encourage your continuing engagement as the inquiry progresses.
Thankyou.