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AustraliaBaird Report 1999

Fair Market or Market Failure
A review of Australia's retailing sector

Length: 247 pages

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About this Review

The focus was on the appropriate means of applying the 'public interest tests' in the Competition Principles Agreement and the impact of competition policy reforms on efficient delivery of community service obligations.

 

Terms of reference

The Joint Select Committee on the Retailing Sector is asked to inquire into and report on:

(a) the degree of industry concentration within the retailing sector in Australia, with particular reference to the impact of that industry concentration on the ability of small independent retailers to compete fairly in the retail sector;

(b) overseas developments with respect to this issue, highlighting approaches adopted in OECD economies; and

(c) possible revenue-neutral courses of action by the Federal Government (ie courses of action that do not involve taxation reform).

 

Executive Summary

Source: Fair Market or Market Failure A review of Australia's retailing sector (Commonwealth of Australia 1999) pp vii-xii

Over the past twenty years or so, Australia has seen the demise of hundreds of small grocery stores, butchers, bakers, florists, greengrocers, pharmacists, newsagents, liquor outlets and other small retailers as a direct result of the continuous expansion of major supermarket chains and major speciality retailers, often subsidiaries of the same conglomerate.

Thus, the market is heavily concentrated and oligopolistic in nature, where a small number of major chains (Woolworths, Coles and Franklins) each have a significant degree of economic influence or market power. This has placed significant pressures on small and independent retailers, leading to calls for legislative remedies to be imposed by government.

Not only is economic survival at stake, but so too the health and well-being of many small retailers, brought about by longer working hours and stressful dealings with the ‘big end of town’.

Retirement plans have been put on hold, family members have had to seek employment elsewhere, and lifetime commitments to grocery retailing have now come down to two options – to sell or to close.

Despite the growth of the major chains, consumers appear to be benefitting from the competitive forces of the current market structure. The evidence revealed that, since 1986, prices have fallen on average for baskets of foods and individual foods at supermarkets. Although there are some exceptions, the Committee accepts that economies of scale and scope have driven prices down in major supermarkets across Australia. Furthermore, surveys have revealed that there has been a shift in shopping habits from late in the week (Thursday to Friday) to Sunday. As a consequence, the ability of supermarkets or other stores to open on a weekend is a factor welcomed by many consumers.

By its recommendations, the Committee does not seek to invoke protectionist measures for small independent retailers. Rather, it provides for measures which it believes will enhance competition in the market place.

Market share

The market share of the three major chains amounts to around 80 per cent of the dry/packaged goods market. Woolworths suggested that this was not a correct measurement, arguing that the share should be measured against the ‘stomach market’, which includes food and groceries to take home, liquor to take home, and food catering (cafés and restaurants). This definition would effectively lower Woolworths’ level of concentration dramatically. The Committee is of the view that this argument is irrelevant to the issue at hand, and has concluded that the major chains enjoy a substantial degree of market power.

This market power is enhanced by vertically integrated structures, which enable the major chains to gain commercial advantages over the independents. High levels of efficiency, superior technology and buying power has lead the Committee to conclude that consumers are voting with their feet, deciding to frequent the supermarkets because of their price, range of products, extended trading hours, and the convenience of one-stop-shopping.

Despite this consumer satisfaction, the Committee is concerned about the activities of the major chains with respect to small retailers. Some of the evidence brought to the Committee’s attention indicates that their behaviour is inconsistent with their public image of being good corporate citizens.

Market cap

The National Association of Retail Grocers of Australia (NARGA) called for the market share of each major chain to be capped at 25 per cent, with divestiture taking place within 5 years where any one chain exceeds that figure. This would see Australia as being the only country throughout OECD economies to introduce a market cap specifically for the grocery retailing sector.

NARGA’s proposal would require Woolworths, a company owned by around 240,000 ordinary Australian shareholders, to shed one third of its stores, while Australia’s largest private sector employer, Coles Myer, would be required to sell off around 100 of its Coles/Bi-Lo supermarkets. In addition, around 36,000 jobs may be placed ‘on the market’, although many might simply be transferred to new owners.

The Committee heard compelling evidence that a market cap would be unworkable, and would effectively regulate the consumer.

Australian Competition and Consumer Commission (ACCC) Chairman Professor Allan Fels believes that, in at least some cases, some areas or some product markets, a market cap would mean that Australian consumers may be condemned to being supplied by inefficient, high cost operators. Professor Fels also pointed out that there are significant mechanical problems associated with a market cap. He said that there are problems about defining it, and there are problems about policing it.

The evidence also revealed that there are some independent retailers who feel that, at some stage of their business career, they would like to be able to sell out to a major chain. The imposition of a market cap would have the likely effect of preventing them from doing so, with a consequent reduction in the value of their stores.

Other difficulties associated with the imposition of a market cap include:
• the likelihood of avoidance schemes arising;
• the possibility that major chain employees (if re-employed) may transfer from higher paying jobs to lower paying jobs;
• the possible devaluation of shares owned by thousands of ordinary Australians; and
• the opportunity for foreign retailing chains to enter the market to the detriment of Australian-owned companies – evidenced by the recent arrival of German retailing giant Aldi.

In line with the market cap proposal, the Committee did not find a compelling case for divestiture of stores in the current market structure. However, as the major chains continue to grow, the Committee considers that there may be some merit in considering divestiture as a safeguard to unchecked growth, when levels of concentration are seen to impact negatively on competitive market forces, in particular markets.

Although the imposition of a market cap has had strong support from small retailers in various parts of Australia, the Committee is of the view that the problems faced by those retailers can be effectively addressed by other means.

Strengthening the Trade Practices Act

A significant body of evidence alleged instances of predatory pricing, where it was said that the major chains were prepared to lose money indefinitely in certain stores to wipe out the competition. The evidence was consistent and widespread, with the common complaint being that the difficulties lie in establishing predatory conduct under the current provisions of the Trade Practices Act.

The major chains vigorously refuted these claims. They accepted that their pricing policies were aggressive towards each other, but not predatory in principle. Chief Executive Officer, Mr Roger Corbett, said that Woolworths does not set out to undercut others as a matter of policy, but accepted that there may be exceptions in some stores across Australia. The Committee found that there were indeed, ‘exceptions’.

The Committee believes that the evidence clearly reveals a need to address the issue of predatory pricing, with a recommendation that the ACCC be given wider powers to bring representative actions, and to seek damages on behalf of third parties under Part IV of the Trade Practices Act.

The Committee also devoted a significant amount of time examining the merits of replacing the current ‘purpose’ test in section 46 of the Trade Practices Act with a ‘reverse onus of proof’ test. Compelling arguments were presented from proponents on either side of the debate, leaving the Committee unconvinced that such a measure would be appropriate at this stage. However, the Committee believes that a ‘reverse onus of proof’ test may well be appropriate should the core recommendations prove to be ineffective in preventing predatory conduct. The Committee therefore leaves this issue open for review when the Committee is re-constituted in three years time.

Other strengthening measures include:
• A recommendation that the Government give consideration to providing the ACCC with extra funding for the purpose of bringing representative actions under Part IV.
• A recommendation to provide for mandatory notification to the ACCC for approval of store acquisitions by the major chains and others (such as wholesalers Davids, FAL etc), with a requirement that the ACCC consult with local authorities and other relevant parties in order to make an informed assessment of the competitive impact on local businesses of such acquisitions. The ACCC will also be required to assess new store development applications on a similar consultative basis; and
• A recommendation to increase the $1 million transactional threshold in section 51AC of the Trade Practices Act to $3 million. This measure will enable the unconscionable conduct provisions to be available to a wider group of complainants.

The significance of the inquiry to small and independent retailers and the consistency of the evidence has lead the Committee to recommend further measures to protect small businesses from unfair conduct in the market place.

Retail Industry Ombudsman

The Committee believes that there is a significant problem to be addressed in relation to the practices of big business at the supply level, and with respect to their competitors. Furthermore, the evidence suggests that there is widespread confusion, particularly in regional and more remote parts of Australia, about the legal rights of small businesses and the opportunities that they have to take action. The consequence has been that unfair business conduct continues to undermine and damage those in less powerful positions.

The ACCC deals only with illegal behaviour. However, many complaints received during the course of the inquiry did not raise Trade Practices Act issues. The Committee therefore sees the need to establish a mechanism outside the ACCC through which retail industry participants can bring complaints or queries for speedy resolution.

The Committee believes that an appropriate dispute resolution mechanism should take the form of an independent Ombudsman, to be funded by government, who could attempt to resolve all sorts of complaints brought to it by businesses in the retailing sector. Where the complaints received by the Ombudsman raise issues that fall within the jurisdiction of another established body, or which it cannot resolve on its own, or where an issue of systemic breach of the law is raised, the Ombudsman could refer businesses for further assistance in appropriate cases, to the relevant industry, Commonwealth, State or Local government body (including the ACCC in respect of competition and consumer protection issues).

The Retail Industry Ombudsman would have the power to receive complaints, the expertise to give advice, and would be required to make all efforts to deal with them quickly and through mediation or referral. Compliance systems in industry would also ensure complaints are handled quickly and responsibly.

The Committee believes that support should be made available to the Retail Industry Ombudsman through an advisory panel made up of representatives of various relevant Commonwealth and State agencies that can then provide a network of assistance.

The Committee wishes to emphasise that the Retail Industry Ombudsman should be an independent officer, however, the Committee sees a link with the ACCC as being crucial, particularly in light of the fact that many of the complaints emanating from the retailing sector relate to competitors as well as suppliers, which may raise competition law concerns.

Code of Conduct

The Retail Industry Ombudsman would be backed by a mandatory Code of Conduct, which would regulate conduct in vertically integrated relationships throughout the supply chain. Being mandatory, the Code of Conduct would enable the courts to take into account provisions of the code in determining whether or not business conduct has been unlawful.

The Committee believes that a Retail Industry Ombudsman, together with the underpinning of the mandatory Code of Conduct into the Trade Practices Act, would bring behavioural change and increased transparency in the retailing sector, and has recommended that the Ombudsman produce a bi-annual report to Parliament.

Summary

The Committee is of the view that a viable independent retailing sector is essential to the overall well-being of the Australian economy. Viable independent retailers maintain competitive forces, and bring social benefits to Australian consumers. The Committee urges the Australian Competition and Consumer Commission to give consideration to these factors when applying the provisions of the Trade Practices Act 1974, the object of which is to enhance the welfare of Australians through the promotion of competition and fair trading.

The Committee has noted that, during the course of the inquiry, the major chains appear to have re-evaluated their relationships with small retailers, who have signalled this improvement in relations to the Committee. However, the Committee believes that the success of its recommendations will require the Retail Industry Ombudsman and the ACCC to adopt a vigorous approach in dealing with the systemic and ongoing problems raised during the course of the inquiry.

The committee also believes that an ongoing education program should be implemented by the ACCC to ensure that small retailers are made aware of their rights and obligations under the provisions of the Trade Practices Act 1974, and the overall benefits and safeguards provided by competition policy.

As a final measure, the Committee has recommended that the Parliament reconstitute the Committee three years from the date of tabling this Report in order to review the recommendations, and to determine whether further legislative changes are required to maintain a fair and competitive market.

 

Recommendations

The Committee made ten recommendations: (1) that ACCC be given power to undertake representative actions; (2) changes to the definition of market in s 50(6) (mergers) to include a regional market; (3) the establishment of a Retail Industry Ombudsman; (4) mandatory notification of retail grocery store acquisitions by publicly listed corporations; (5) the drafting of a Retail Industry Code of Conduct by the ACCC; (6) that the transactional limit for s 51AC of the TPA be increased to $3m; (7) that the Government revisit Recommendation 2.1 of the Reid Report, which deals with the Uniform Retail Tenancy Code; (8) that expansion by the major chains into the dispensing of pharmaceutical products should be discouraged; (9) that 'future acquisitions of wholesalers by retailers, and vice versa, be subject to mandatory notification and approval by the ACCC in order to assess the likely competitive impacts of such acquisitions' and (10) that the Committee be reconstituted after three years to review progress of the recommendations and determine whether further legislative changes are required - which may include amending s 46 (in relation to onus of proof for the purpose element) and amending s 80 to include divestiture of assets as an additional remedy.

Recommendation 1
The Committee recommends that the Trade Practices Act 1974 be amended to give the Australian Competition and Consumer Commission the power to undertake representative actions and to seek damages on behalf of third parties under Part IV of the Act.

The Committee believes that, due to this measure, the Australian Competition and Consumer Commission may be burdened by an increased caseload. The Committee therefore recommends that the Government give consideration to providing extra funding for this purpose to the Australian Competition and Consumer Commission in future Budget Appropriations.

Recommendation 2
The Committee is of the view that the Australian Competition and Consumer Commission should consider heavily concentrated regional markets, such as that which exists in South East Queensland, when assessing acquisitions or mergers under the provisions of section 50 of the Trade Practices Act 1974.

The Committee therefore recommends that section 50(6) of the Trade Practices Act 1974 be amended to provide for the definition of ‘market’ to include a ‘regional market’. Thus, subsection 6 should provide that:

50(6) In this section:

‘market’ means a substantial market for goods or services in Australia, in a State or a Territory, or in a region of Australia.

Recommendation 3
The Committee recommends the establishment of an independent Retail Industry Ombudsman through which small business can bring complaints or queries relating to the retailing sector for speedy resolution. The Committee believes that the Retail Industry Ombudsman should consider, among other things, the application of the Retail Industry Code of Conduct (Recommendation 5) in his or her deliberations.

Where complaints received by the Retail Industry Ombudsman raise issues that fall within the jurisdiction of another established body, such as the Australian Competition and Consumer Commission, those complaints should be referred to such bodies for further investigation.

The Committee recommends that the Retail Industry Ombudsman be appointed and funded by the Government.

The Committee recommends that the Retail Industry Ombudsman be required to produce a bi-annual report to the Parliament in order to increase transparency in the retailing industry.

Recommendation 4
The Committee recommends that mandatory notification of retail grocery store acquisitions by publicly listed corporations be prescribed within the mandatory Code of Conduct (Recommendation 5), and approved by the Australian Competition and Consumer Commission, with a requirement that the Australian Competition and Consumer Commission consult with local authorities and other relevant parties in order to make an informed assessment of the likely impact on local businesses of such acquisitions. The Committee recommends that the Australian Competition and Consumer Commission also be required to assess and approve new store development applications on a similar basis, and to provide a detailed response to these notifications within 30 days.

The Committee appreciates that the drafting of a mandatory Code of Conduct may take some time to complete. The Committee therefore recommends that, as an interim measure, the Minister make a direction that mandatory notification be required to take effect immediately.

Recommendation 5
The Committee recommends the drafting of a Retail Industry Code of Conduct by the Australian Competition and Consumer Commission in consultation with retail industry groups and other relevant parties for the purpose of regulating the conduct associated with vertical relationships throughout the supply chain.

The Committee recommends that the Code of Conduct be a mandatory code, and should contain a precise form of dispute resolution, with the process of resolution clearly spelled out.

The Committee recommends that the Code of Conduct be drafted to include specific provisions that address:

(a) The general principle of ‘like terms for like customers’ – where the Australian Competition and Consumer Commission may seek information from corporations, on a confidential basis, revealing key terms and conditions of contracts of supply.

(b) Transparency in ‘vulnerable’ supply markets – where growers have to deal with a range of market characteristics, including perishability, market volatility and a high degree of risk exposure.

(c) Product labelling and packaging requirements – with a view to implementing a more equitable system than that which currently exists.

(d) Contractual uncertainty – in particular, the passing of ownership of produce and the circumstances under which produce can be returned.

(e) Truth in branding – so that businesses, which are subsidiaries of, or are substantially owned by, a listed public company or major retailer, note that association on shop front signage, in advertising, on stationery, and so on.

The Committee recommends that disputes falling under the Code of Conduct should not be limited to resolution by the Retail Industry Ombudsman. For example, disputes raising issues relevant to National Competition Policy or the Trade Practices Act 1974 would be more appropriately dealt with by the Australian Competition and Consumer Commission.

Recommendation 6
The Committee considers that the $1 million transactional limitation of section 51AC of the Trade Practices Act 1974 hinders access by some small businesses to the unconscionable conduct provisions of the Act. The Committee therefore recommends that this limit be increased to $3 million.

Recommendation 7
The Committee is concerned that Recommendation 2.1 of the Reid Report, which deals with the Uniform Retail Tenancy Code, has not been implemented. In particular, the Committee is concerned that, in major shopping centres, there is a lack of transparency with regard to the cost of floor space rent. That is, the seller (landlord) has knowledge – the buyer (prospective tenants) has none. Prospective tenants are therefore prevented from making informed decisions in assessing the ‘market rent’ as it applies to particular areas of retail space.

The Committee therefore recommends that the Government re-visit this recommendation, with a view to implementing a Uniform Retail Tenancy Code through the operations of the Council of Australian Governments.

Recommendation 8
The Committee recommends that major supermarket chains take note of widespread community and pharmaceutical industry concerns that the nature of the role played by pharmacists is unique, as it relates to matters of public health. The Committee is therefore of the view that expansion by the major chains into the dispensing of pharmaceutical products should be discouraged.

Recommendation 9
The Committee believes that there may be anti-competitive impacts where retailers and wholesalers are operated by the same, or related, entity. For example, where a major retailer enters the independent wholesaling sector, intimate commercial details could be gained from that wholesaler’s dealings with its independent retail customers. The Committee therefore recommends that future acquisitions of wholesalers by retailers, and vice versa, be subject to mandatory notification and approval by the ACCC in order to assess the likely competitive impacts of such acquisitions.

Recommendation 10
The Committee recommends that the Parliament reconstitute the Committee three years from the date of tabling this Report in order to review the progress of the recommendations, in particular the operation of the Code of Conduct, and to determine whether further legislative changes are required. Such changes may include:

(a) An amendment to section 46 of the Trade Practices Act 1974 to provide that:

Once it has been established that a corporation with a substantial degree of market power has used that market power, the onus of proof shifts to that corporation to prove it did not use that power for a prohibited purpose (as prescribed).

(b) An amendment to section 80 of the Trade Practices Act 1974 to include divestiture of assets as an additional remedy for contravention of Part IV, IVA, IVB or V.

 

Membership

Hon Bruce Baird MP (Chair) (LP, Cook NSW)

Mr Harry Jenkins MP (Deputy Chair) (ALP, Scullin Vic)

Senator the Hon. Ron Boswell (NPA, Qld)
Mrs Kay Elson MP (LP, Forde Qld)
Senator Jeannie Ferris (LP, SA)
Mr Joel Fitzgibbon MP (ALP, Hunter NSW)
Senator Michael Forshaw (ALP, NSW)
Senator Andrew Murray (AD, WA)
Mr Gary Nairn MP (LP, Eden-Monaro NSW)
Senator the Hon Chris Schacht (ALP, SA)