The government’s first step in reining in the power of Coles, Woolworths and their smaller supermarket rivals is likely to push consumer prices up, not down.
Former Labor minister Craig Emerson has concluded a review of the relationship between Coles, Woolworths and their suppliers, and recommended that the existing, voluntary, decidedly piss-weak code of conduct relating to that relationship be turned into a mandatory code, with stiff penalties for abuse of power.
Emerson is the real deal when it comes to competition: he passed the current Competition and Consumer Act when Labor was last in power and fought — in the case of books, unsuccessfully — Labor’s internal tendency to cloying protectionism. He might fairly be described as one of the last of the 1980s reformers still going around public life.
But his review has little to do with the consumers aspect of competition; instead, it focuses on the near-monopsony power of Coles and Woolworths and their ability to leverage that against suppliers to force down their costs — or, as suppliers know it, income. Consumer competition within supermarkets is currently being investigated separately by the Australian Competition and Consumer Commission.
Emerson rightly wants to tilt the balance back toward suppliers, so he proposes a much tougher regulatory framework for the big companies. No-one but them is likely to complain. Whether fact or fiction, stories of how poor suppliers get screwed by the rapacious supermarkets are accepted as truth. It’s unlikely in the extreme that the supermarkets don’t exploit their market power.
But if the new code is effective, it will likely lead to suppliers getting a better return from the supermarkets. Which means higher costs for the latter. Have a guess what they’ll do on pricing in response.
You can already see a form of this. In 2019, Coles and Woolies lifted the price of their own-brand milk by 10 cents, purportedly to give struggling farmers a break. Whether the dairy industry — which inflicts a massive toll in terms of both water consumption and animal abuse — really needed such largesse, or that it continues to need it despite big changes in production conditions since then, has never been demonstrated. But consumers are paying higher prices to look after suppliers nonetheless.
Emerson understands that improved outcomes for suppliers mean higher prices. He devotes much of his piece in the Financial Review yesterday to explaining how it won’t. Why not? Because with higher returns, suppliers can invest more, lifting productivity and innovation. “Smaller suppliers might be earning insufficient returns to warrant new investment in innovation and equipment that would enable them to offer better-quality products at lower prices,” he says.
It’s a long bow, though. The productivity of the dairy industry, like most forms of agriculture, is driven mainly by weather, not by the entrepreneurial genius of farmers. Moreover, regional communities and their representatives, like the Nationals, have a love-hate relationship with higher productivity — which usually means more output and more exports but with fewer workers, which means smaller regional communities (cue laments about the death of “family farming”).
And between farmers and the supermarkets, what proportion of innovation-led cost reductions will actually make its way through to consumers? Still, call us cynical, but farmers are already the beneficiaries of extensive public policy largesse, and the formalisation of Coles’ and Woolies’ “10 cents to help a struggling cockie” into a mandatory imposition is likely to become another one.
The emphasis of this inquiry , or at least the reportage of it, seems to have a disproportionate focus on the relationship between the supermarkets and their primary producer suppliers. In fact there are many other insidious ways that these Oligarchs maintain their hegemony.
Consider their approach to property, leases & involvement in new shopping centre developments as an example. In many new suburban developments there will be one or 2 shopping centres in the master plan. Developers sell off this land to landlords. They do deals with either of the big 2 to create a shopping mall with Woolies or Coles as the anchor tenant. This type of tenancy will be at a much lower rent than the rest of the centre. The rental discount is compensated for by charging the other tenants a lot more. It can be a multiple of 4 or 5 times the floor rate. Small business (such as butchers, delicatessens & green grocers) cannot be viable at these rental levels. Thus with this method the supermarkets are eliminating a whole sector from their competitive scope. Moreover a few years after the new development area is established the developers apply for rezoning of unsold land to create even more shopping centres which repeats the anchor tenant process over & over. It’s is possible to end up with 6-8 Coles or Woolies anchored centres serving a cluster of new suburbs when there should have only been 2 or 3. The sad reality is that within these complexes there are virtually no (profitable) small business owned butchers, greengrocers, fishmongeries, or delicatessens. The residents have minimal choice and the hegemonic supermarkets only have themselves to compete with. I disagree with Craig Emerson’s assertion that losing supermarkets is not a good thing. In many locations around Australia reducing the number of supermarkets could be part of the solution. Any realistic review of the supermarket sector needs to also to deeply consider their involvement in the property sector.
Shh! We can’t touch the property sector, doncha know?
Belatedly. The above applies especially to developments in new suburbs. Rentals will be set as far as possible to maximise the profits of property developers. Supermarkets thus come out best, and small traders are disadvantaged. It does not explain why independent butchers and greengrocers have all but disappeared in traditional suburban shopping strips, except in the most affluent neighbourhoods. The harsh fact is that modern supermarkets are convenient and economically efficient (lower cost) in several dimensions, most frustratingly by working out ways for customers to undertake more and more retailing functions. At least for urban dwellers, there are other shopping options. Local government produce markets are the last bastion of independent butchers and greengrocers where prudent shoppers can make their choice and take their chance. Sadly, increasingly gentrified.
There may be winners but consumers will not be among them. The supermarket margins will no doubt remain just as lucrative because governments are simply too timid to force any real changes upon corporate Australia. I smell another voluntary code of conduct in the wind.
Supermarket pricing of fresh milk was not as unreasonable as once painted. There is a world of difference between the dairy industries in different states. Some of the differences have to do with settlement history and climatic differences but most are related to the different ways that states once regulated the fresh milk industry, some with ‘milk zones’ (specialist producers of fresh milk), and others sharing the benefits more widely among dairy farmers more dependent on manufacturing milk (butter and cheese, often exported at very low prices). Once the dairy industry was eventually deregulated, at last recognising that Australia was one country and that refrigeration had been invented one hundred years ago, the rigid separation of the fresh milk and manufacturing industries, and of the states, came to an end. Low cost dairy farmers in southern states previously dependent on manufacturing milk were able to supply northern cities with fresh milk, indeed were queueing up to do so. Fresh milk was an obvious candidate as ‘loss leader’ for supermarkets. All a bit hard to understand for parochial journalists, and not very cheerful for the few fresh milk specialists in New South Wales and Queensland. Eventually, supermarkets took the easy way out and increased fresh milk prices. Bernard Keane is right. The ideas of Craig Emerson will likely lead to higher consumer prices.
Supermarkets operate under a socalled code they wrote, without penalties. Al Capone might have liked that. Regulation will cost us all money…
Only tinkering one the edges in one sector for political PR inspired by constant repetition of supposed RW MSM’s ‘cost of living crisis’, along with housing, immigration etc.
Cost of living is a permanent issue for many, temporary for some e.g. starting family & buying house, middle income others it’s simply whining about ‘wants’ of living, not ‘needs’; many it’s simply irrelevant.
More importantly, it conditions all to think ‘cost of living crisis’, which can then lead to attacks on the govt. and demands to lower taxes, budgets and service delivery’; ‘libertarian faux free market trap’; careful what you wish for….
The dairy industry “…which inflicts a massive toll in terms of both water consumption and animal abuse…” what about every other primary producer on the land. Get real Bernard!
If I didn’t eat vegans, I’d go vegan. Just a different flavour of hypocrisy.
Bernard’s in the solutions business…sorry critcising and not offering solutions business.
Lettuce is a classic case of wasted water on non-food.