The federal government’s 540-page Harper review into competition policy was released today and the part most observers were interested in was the supermarket battle between Coles and Woolworths.
The short answer?
Nothing to see here, move along.
The review takes a big swing at issues such as taxi licensing, calling for a shake up that will open the way for digital disruptors such as Uber and GoCatch, as well as deregulating retail trading hours (Christmas Day, Good Friday and ANZAC Day morning are the exceptions for closure) among its 56 recommendations.
The panel said competition in retail markets was “an important focus for the review, including competition in grocery and fuel retailing, regulations on planning, zoning and trading hours, and specific regulations such as those affecting pharmacy and liquor retailing”.
But most of the changes in recommends are bigger picture. As the review says when discussing acquisitions: “As a matter of concept, competition law should assess the overall effect of business conduct and not be narrowly focused on individual transactions”.
“Competition laws should only prohibit conduct that harms competition, not individual competitors,” the review argues.
The Council of Small Business of Australia’s (COSBOA) initial reaction is that they’re less than impressed.
#Harper. So far it appears the Duopoly have been listened to more than smbiz- hope this early impression is wrong… but when academics….
— COSBOA (@COSBOA) March 31, 2015
The Australian National Retailers Association, which represents Australia’s top online and store retailers, was broadly supportive of the review, however CEO Anna McPhee singled out the recommendation to introduce an effects test to Section 46 (misuse of market power) for criticism saying it will increase complexity and uncertainty.
“Australia’s major retailers are committed to ensuring consumers continue to benefit from Australia’s strong and thriving competitive landscape and believe the recommendations for Section 46 will dampen pro-competitive behaviour,” McPhee said.
“It is also worth reminding that previous reviews, including Hilmer, have rejected the introduction of an effects test because of the chilling effect on competition.
Professor Ian Harper’s four-member panel looked at all the complaints about the actions of the supermarket duopoly and their key point was that they were mainly concerned about the impact on consumers, rather than any impact on suppliers, which has been subject to a number of recent inquiries.
The panel considered competition healthy in the supermarket sector and its main recommendations are around changes to local planning laws and the removal of regulatory barriers to entry to allow more supermarkets to compete. It also takes the view that preventing restrictions preventing supermarkets from selling liquor impede competition.
The Panel’s view
Australia’s grocery market is concentrated, but not uniquely so. Competition appears to have intensified in recent years, with Wesfarmers’ acquisition of Coles and the expansion of ALDI and Costco; consequently, few concerns have been raised about prices.
Small supermarkets allege that the major supermarkets misuse their market power, including through “predatory capacity” and targeting particular retailers. Suppliers raise concerns about misuse of market power and unconscionable conduct by the major supermarket chains.
The panel cannot adjudicate whether a breach of the CCA [Competition and Consumer Act] has occurred in particular cases but reaffirms that the competition laws should only prohibit conduct that harms competition, not individual competitors. The panel recommends strengthening the misuse of market power provisions at Recommendation 30 of this Report.
The panel notes the recent Federal Court ruling that Coles engaged in unconscionable conduct in its dealings with certain suppliers in 2011. The Panel also notes that a code was prescribed on 26 February 2015 covering grocery suppliers and binding those retailers and wholesalers that agree to sign on to the Code.
Removing regulatory barriers to entry would strengthen competition in the supermarket sector.
Planning and zoning restrictions are limiting the growth of ALDI and, as the ACCC has identified, more broadly affect the ability of independent supermarkets to compete.
Trading hours’ restrictions and restrictions preventing supermarkets from selling liquor also impede competition.
Supermarket operation has undergone a number of structural changes, including: greater vertical integration and use of private labels; an increase in the range and categories of goods sold within supermarkets; and greater participation by supermarket operators in other sectors. Like all structural changes, these can result in dislocation and other costs that affect the wellbeing of others.
The move of larger supermarket chains into regional areas can also raise concerns about a loss of amenity and changes to the community. While the Panel is sensitive to these concerns, they do not of themselves raise competition policy or law issues.
Misuse of market power has been an issue smaller grocery suppliers have long complained about and even the ACCC and courts have recently been grappling with the issue.
The review wants Section 46 simplified and is worried that as it stands, the law could be counterproductive. It wants to scrap the rules on predatory pricing and anything introduced by Labor since 2007 repealed.
Here is recommendation 30 on the misuse of market power:
The primary prohibition in section 46 of the CCA should be re-framed to prohibit a corporation that has a substantial degree of power in a market from engaging in conduct if the proposed conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in that or any other market.
To mitigate concerns about inadvertently capturing pro-competitive conduct, the legislation should direct the court, when determining whether conduct has the purpose, effect or likely effect, of substantially lessening competition in a market, to have regard to:
• the extent to which the conduct has the purpose, effect or likely effect of increasing competition in the market, including by enhancing efficiency, innovation, product quality or price competitiveness; and
• the extent to which the conduct has the purpose, effect or likely effect of lessening competition in the market, including by preventing, restricting or deterring the potential for competitive conduct in the market or new entry into the market.
Such a re-framing would allow the provision to be simplified. Amendments introduced since 2007 would be unnecessary and could be repealed. These include specific provisions prohibiting predatory pricing, and amendments clarifying the meaning of ‘take advantage’ and how the causal link between the substantial degree of market power and anti-competitive purpose may be determined.
The other big issue involving the supermarkets that caught its attention was “creeping acquisitions” that reduce market competition.
A bunch of organisations flagged it as a problem, including the NRMA, the Retail Guild of Australia, COSBOA and Metcash.
“These calls are mainly in the context of concerns about the size and expansion of Woolworths and Coles in the supermarket and fuel retailing sectors,” the review said.
Wesfarmers (owners of Coles) and Woolworths argued no such change was needed.
The panel concluded that the expansion of Woolworths and Coles was mainly “organic growth” and grappled with the issue of “merger aggregation” – the cumulative effect of a number of acquisitions over time, but considered the idea to costly and complex to implement because market conditions change over time.
“On balance, in the absence of evidence of harmful acquisitions proceeding because of a gap in the law on creeping acquisitions, the Panel does not consider that a sufficiently strong case for change has been made,” the review concluded.
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