• Changes to the Competition and Consumer Act, including the power to divest supermarkets if found to have misused their market power, are key recommendations from the Senate Select Committee on Supermarket Prices. But Labor and Coalition senators delivered dissenting reports. (Source: Getty)
    Changes to the Competition and Consumer Act, including the power to divest supermarkets if found to have misused their market power, are key recommendations from the Senate Select Committee on Supermarket Prices. But Labor and Coalition senators delivered dissenting reports. (Source: Getty)
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Suppliers and consumers are being squeezed to breaking point and a signifiant part of the cost-of-living crisis has been caused by companies taking advantage of their market power and gaps in government policy, Allan Fels said on the release of the report into his five-month inquiry into price gouging and unfair pricing.

“The level of concentration in the Food and Grocery sector, as well as the relative position of producer warrants closer attention from the ACCC, in particular whether supermarkets are passing on price decreases in a prompt manner.

“Enhancing transparency across the supply chain is crucial,” Fels said.

Australians are paying prices that are “too high, too often” and there is much the government can do, he said. 

The review looked at a broad range of industries including banks, wholesale electricity and retail pricing, early childhood education and care, supermarkets, and electric vehicles.

Fels made 35 key recommendations: six relate to prices, four relate to mergers and divestiture, five relate to competition policy, and 20 relate to issues in specific industries.

In regard to Food and Groceries, Fels made three recommendations:

Recommendation 4.12: It is recommended that there should be a comprehensive ACCC inquiry into competition and prices in the retail food and grocery industry.

Recommendation 4.13: The Food and Grocery Code Review should be fully mandatory.

Recommendation 4.14: The Food and Grocery Code Review should investigate creating a price register for farmers to assist them in understanding market prices across primary industries.

Fels said that what was most significant, was the average profit margin of the sector had remained “remarkably stable despite the enormous volatility in prices throughout the domestic economy”.

It is well established that Australia has one of the most highly concentrated food and grocery sectors in the world, with Woolworths and Coles accounting for 65 per cent of the market. Compare that to the UK, where 65 per cent of the market is split across four grocers.

The kicker is high prices, including coordinated high prices are not prohibited by competition law except where there is unlawful collusion. That means duopolies are free to charge high prices, and the ACCC has no power to even investigate if prices are excessive unless the government asks it to.

As Fels explains, duopolies have a mutual incentive not to decrease prices, and while there are concerns Coles and Woolies are unfairly putting pressure on suppliers, there hasn’t been a “price war” in many years.

Fels’ four key findings were: 

  1. There is insufficient competition in the food and grocery sector as evidenced by poor price transmission to final consumers.
  2. Market power is exercised over farmers and many other suppliers. In addition, the gain in profits from this is not passed on, certainly not promptly or fully, to consumers because of market power and a lack of competition in the product market.
  3. Price transparency for those down the supply chain of supermarkets is low, and this is one barrier to effective price transmission.
  4. Supermarkets have not been transparent with customers about price histories of their displayed items and their correlated discounts.

Fels report found that when input costs rise for farmers (e.g. feed, fertiliser, labour) or there’s a supply shortage leading to increased farmgate prices, supermarkets were quick to pass on those costs to consumers, but the reverse was not always true.

“This asymmetry benefits retailers and processors, who can maintain or even increase their profit margins, while farmers and consumers see less of these benefits,” it said.

“A timely example of this was evidence from Brendan O’Keeffe from NSW Farmers who noted that despite lamb prices which had been decreasing for six months, a recent announcement by Woolworths that lamb prices would be decreased as a “Christmas gift”.

“This announcement highlighted to Mr O’Keeffe the lack of competition in the food and grocery sector “a normal business practice in a competitive market should not be in the news ... they’re allowed to position it as a Christmas gift to consumers”.

“Plainly, when those at the top of the supply chain experience an upward price shock they raise the prices like rockets, but when the reverse occurs, they fall like feathers. The upshot of this dynamic is that consumer surplus is eroded, prices stay higher for longer and the task of monetary and fiscal policy makers to control inflation is that much harder.”

The inquiry found that for workers, the acceleration of inflation has been concentrated in non-discretionary items, covering food, utilities, transport, housing costs and other essential goods and services that cannot be avoided.

Total food and non-alcoholic beverages prices, covering the full range of workers’ staple shopping, have risen 15.2 per cent in 2.5 years from March 2021 and September 2023, compared with a cumulative rise of 15.4 per cent over 10 years from December 2009 and December 2019.

Among the top 30 price increases over the same period were cheese (up a cumulative 27.3 per cent), bread (up a cumulative 24.1 per cent), milk (up a cumulative 22.7 per cent), ice cream and other dairy products (up a cumulative 22.5 per cent), eggs (up a cumulative 19.7 per cent), and breakfast cereals (up a cumulative 19.2 per cent).

“The high ranking of price increases in staple groceries points to the extreme price pressures workers are currently facing,” Fels  said.

Between March 2021 and September 2023, non-discretionary prices have increased a total of 16.9 per cent, while wages have only increased by 8.4 per cent over the same period. The highest seven year-on-year growth rates for non-discretionary inflation in the available series were the seven most recent quarters.

Discretionary prices have increased in total by 11.7 per cent over the same period, with the highest year-on-year growth rates also occurring in the most recent quarters.

Fels said the impact of inflation on the cost of living is hard to overestimate. The “vast majority” of Australians had suffered real wages decline, and Wage Price Data from Food Bank and The Guardian showed 60 per cent of households facing food insecurity have at least one member in paid employment.

“This statistic highlights a troubling reality: employment does not necessarily protect against the risk of food insecurity.

Fels three main findings overall were:

  1. Corporate profits have added significantly to inflation and some businesses have too much power over their customers, their supply chain, and their workers;
  2. many businesses are resorting to dodgy price practices, including loyalty taxes, drip pricing,
  3. excuse-flation, ‘rockets and feathers’ strategies, and confusion pricing; and
  4. a range of sectors are insufficiently competitive or insufficiently regulated, leading to poor consumer outcomes and higher prices.

“Two policies are needed. First, the Australian government needs to act on high prices, to investigate their nature and causes and, where possible, their remedies. The remedies do not include price controls but there is much that governments could do.

Secondly, greatly strengthen competition policy to remove or weaken market power, which enables excessive prices to be charged,” Fels said.

Fels proposed an independent National Competition and Prices Commission, drawn from federal, state, and territory governments.

“It would implement the welcome decision by the government to revive the National Competition Policy, which attacks the many government restrictions on competition – and it would be combined with a standing Price Commission function.

“The former function is about removing restrictions on competition which cause high prices. The latter is about investigating high prices and the restrictions on competition which cause them,” Fels said.

A divestiture law was needed on how to break up big businesses when the courts have found that they have broken the law and think this would be the best remedy.

“If a court finds there has been a breach of competition law and if the court thinks that divestiture is the best remedy, then the law should permit this,” he said.

“And I would plead for a shorter competition Act. Our competition provisions are about 20,000 words. The American law is just a sentence or two and Europe keeps it down to half a page.”

 

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