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Appendix 9 - Legislative Assembly of the Northern Territory Select Committee on Territory Prices - Report: Price, Quality and Choice: Striking a Fair Balance, Vol. 1, August 1999 Terms of Reference, Summary of Findings and Summary of Recommendations
Establishment and Terms of Reference
On 18 February 1999, the Legislative Assembly established
the Select Committee on Territory Food Prices.
The Select Committee was to
inquire and report to the Legislative Assembly on or before 19 August 1999
on:
- whether
or not prices of food, groceries and household items are substantially
different to those in comparable locations elsewhere in Australia; and
- if
so, identify the reasons for the variations in prices.
Summary
of Findings
The
view of the Committee is that the findings of this inquiry are of equal
importance to the recommendations outlined in Chapter 3, Summary of
Recommendations.
In
response to its Terms of Reference the Committee found that:
- Prices charged in Darwin appear reasonable when compared to
Cairns and those charged in Alice Springs appear reasonable in comparison to Mt
Isa. The Committee did not find evidence to sufficiently justify the price
levels found in Katherine and Nhulunbuy.
- Food prices in the Northern Territory will only decrease, without
regulatory intervention, to a comparable level to that of capital cities and
other locations elsewhere in Australia when the Territory's population reaches
a level where substantial economies of scale and infrastructure would allow the
market to become more conducive to a higher level of competition.
The Committee also found that:
A Northern Territory 'basket
of goods' and comparable locations
1. Due to the Northern Territory's relatively small population and
economies of scale, it is not in a position to benefit from nationally
competitive pricing that is afforded to regions elsewhere in Australia.
Therefore care must be taken when comparing food prices in the Northern
Territory with capital cities and other locations elsewhere in Australia, as
they could be misleading.
2. Darwin
does not have many of the cost advantages of those capital cities elsewhere in
Australia, including:
(a) the economies of scale allowed by the population size of most other
capital cities when compared to Darwin;
(b)
proximity to the major distribution centres operated by the national
supermarket chains;
(c)
proximity to major fruit and vegetable producing areas; and
(d)
the cooler climates in other State or Territory capital cities allowing
cheaper storage and longer shelf lives for perishable goods.
3.
Given the differing economies of scale behind the grocery pricing
regimes in capital cities and other locations elsewhere in Australia, it is far
more appropriate to compare food prices in the Northern Territory with
comparable locations in Australia that have similar demographics and
infrastructure. The locations selected were:
(a)
Darwin with Cairns;
(b)
Alice Springs with Mt Isa;
(c)
Katherine with Broome;
(d)
Tennant Creek with Derby; and
(e)
Nhulunbuy with Wyndham.
4.
Conducting
the survey of prices based only on the information provided by the major
supermarket chains impacted on the inquiry in the following ways:
(a)
the Committee was unable to perform price comparisons for Tennant Creek,
as neither supermarket chain has a store in this location;
(b)
the Committee had to compare Nhulunbuy to a location other than Wyndham
because neither supermarket chain has a store in this location. The Committee
therefore compared Nhulunbuy prices to Darwin, and tried to explain identified
differences; and
(c)
the Committee had to rely on the information provided by both major
supermarket chains. Given the time constraints for this Committee to report by
19 August 1999 the survey was not independently checked, and much of it was
historical information.
5.
Price surveys conducted with
a limited range of items in a 'Basket of Goods' could be open to manipulation
and potentially mislead Territorians about the true nature of food prices. The
Committee notes that the risk of distortions and manipulation in small sample
size surveys could be largely overcome by increasing the sample size and that
the cost of undertaking a regular survey of this size could be expensive.
Prices in the Northern
Territory
6.
Prices charged in Darwin appear reasonable when compared to Cairns and
those charged in Alice Springs appear reasonable in comparison to Mt Isa. This
could be partly due to the local competition between Coles and Woolworths in
these centres. The Committee did not find evidence to sufficiently justify the
price levels found in Katherine and Nhulunbuy.
7.
Food prices in the Northern
Territory will only decrease, without regulatory intervention, to a comparable
level to that of capital cities and other locations elsewhere in Australia when
the Territory's population reaches a level where substantial economies of scale
and infrastructure would allow the market to become more conducive to a higher
level of competition.
8.
One feature of the stores in Katherine and Nhulunbuy is the comparative
lack of competition, where a 'non-competitive premium' appears to apply.
9.
Apart from fresh food, the 'gap' in food prices between Darwin and other
capital cities has decreased steadily since 1996. In the case of fresh food,
the gap has increased, with a peak in March 1998, and a downward trend since.
10.
Since December 1998, food prices generally have steadily dropped in all
of the major centres in the Northern Territory, including Nhulunbuy where food
prices have dropped marginally.
11.
The remote, small and decentralised population of the Northern Territory
(191,400) has the effect of increasing prices.
12.
The
nature of competitive pricing in the grocery industry is based upon the
movement of volumes and is subject to the principles of supply and demand.
Cost of doing business in the
Northern Territory
13.
In terms of the food distribution and purchasing policies of the two
national supermarket chains operating in the Northern Territory, the Northern
Territory is not regarded as a large enough region to justify a distribution
centre attracting 'free into store' (FIS) prices as occurs in capital cities
and other locations elsewhere in Australia.
14.
There have been instances where locally produced food has been
transported to 'southern distribution centres' and subsequently returned to the
Northern Territory for sale in the local supermarkets.
15.
Once groceries have left a distribution centre there is still a
significant range of costs to be recovered by the retailer, some of which
contribute to higher food prices in the Territory. These costs include:
(a)
Transport from warehouse to individual store;
(b)
Stock spoilage (particularly fresh produce);
(c)
Administration;
(d)
Wages, superannuation, payroll tax, workers compensation insurance;
(e)
Advertising;
(f)
Electricity (particularly refrigeration and air-conditioning);
(g)
Rent;
(h)
Depreciation;
(i)
Stock holding costs (stock/turnover ratio);
(j)
Trolley collection and cleaning contractors;
(k)
Security, money transportation;
(l)
Local government rates (for garbage collection and other services); and
(m)
Insurance, public liability cover and other occupancy expenses.
16.
As a percentage of the cost of good delivered in to Northern Territory
stores, freight accounts for 5.0% in Alice Springs, 7.2% in Darwin, 6.1% in
Katherine, 17.3% in Nhulunbuy and higher in remote centres and communities.
17.
The two national supermarket chains operating in the Northern Territory
benefit from advances in electronic technology.
18.
The two national supermarket chains operating in the Northern Territory
have a considerable advantage over small retailers through their ability to
purchase and install their own EFTPOS hardware and software.
19.
In response to the comment by the ACCC that the two national supermarket
chains operating in the Northern Territory are able to negotiate favourable
terms and conditions with the banks over EFTPOS facilities in the following
manner
(a)
the banks tend to charge small retailers 20 cents for every debit
transaction;
(b)
the chains receive around 15 cents per debit transaction from their
bank.
One chain responded that the income received from the banks
for EFTPOS transactions represents an offset to the sorts of incurred by the
chains in providing EFTPOS facilities.
20.
Territory taxes, such as Payroll Tax, were cited as a contributor to
higher food prices in the Northern Territory.
21.
Wholesale Sales Tax on the freight component of certain goods was a
factor that contributed to higher food prices. The Committee noted that with
the introduction of the Goods and Services Tax (GST), the Wholesale Sales Tax
(WST) would be phased out.
22.
Based on the 'Basket of Goods' developed by the Committee, the
implementation of the GST would have a minimal impact on food prices. The
total basket in Darwin pre-GST costs $141.35 and post-GST costs $139.32, which
represents a saving of $2.03 (-1.4%). It is still unclear how the GST may
impact on food prices in the remote centres and communities in the Northern
Territory and warrants further investigation.
23.
Electricity usage and price were cited as contributors to a higher food
price in the Northern Territory. For climatic reasons, the Northern Territory
requires more electricity compared with the rest of Australia for store
air-conditioning and refrigeration.
Local food producers
24.
Food producers in the Southern and Eastern seaboards have comparative
advantages of economies of scale, lower overheads, cheaper transport costs,
ready access to major markets and lower inventory costs.
25.
Opportunities are limited for local food producers to compete on a
'level playing field' nationally.
26.
Delivery of produce into 'Southern' stores is on a daily basis whilst
into Darwin Stores is on average three times a week.
27.
A number of local food producers are dependent for their livelihood upon
the two major national supermarket chains operating in the Northern Territory,
which results in exposure of the small local operations to the competitive
advantages of the scale of economies generated elsewhere in Australia,
particularly within the Southern States.
28.
The sale and supply of local produce directly to the two major national
supermarket chains operating in the Northern Territory is negotiated on an
ad-hoc basis, with limited guarantees of continuation from the chains to
receive that produce.
29.
Given high costs of production, local food producers have found it
difficult to compete at the national level. Produce elsewhere in Australia is
provided on a more continuous basis and usually at a more favourable price to
the consumer.
30.
There is considerable opportunity for growth in the Northern Territory's
horticulture industry, but it is fragmented in nature with a lack of
infrastructure that hinders continued development.
31.
Local markets are smaller and more disparate than those established in
the States and the Australian Capital Territory.
The national supermarket
chains in the Northern Territory
32.
The two national supermarket chains operating in the Northern Territory,
irrespective of the contribution they make to the local economy, are in
business to make a profit and provide a return to their shareholders.
33.
Only two national supermarket chains, namely Coles Myer Supermarkets
Australia Ltd and Woolworths Supermarkets (SA) Division operate in the Northern
Territory.
34.
Should a new major supermarket competitor wish to commence operations
within the Northern Territory, it would find it very difficult, principally due
to the infrastructure establishment costs. The establishment of a new major
supermarket competitor to the Northern Territory would be a commercial
decision, determined entirely by the demands of the market.
35.
The two national supermarket chains operating in the Northern Territory
have acquired a significant market share. This has come at the expense of the
local independent supermarkets.
36.
The competition between the two major national supermarket chains
operating in the Northern Territory benefits the consumer by providing
convenience through access to:
(a)
a wide variety of goods;
(b)
quality food, in particular meat, fruit and vegetables; and
(c)
a consolidation of complementary retail services, for example, butchery
and bakery services, newsagency and fast food outlets.
37.
There appears to be adequate safeguards in respect of monitoring trading
hours and market competition already in place under the authority of the
Australian Competition and Consumer Commission (ACCC). The Committee noted
that the ACCC would be closely monitoring the implementation of the GST.
38.
Consumers
want to have the services and convenience of shopping in either the major
national supermarkets or at a local independent supermarket.
39.
There
is a lack of educational and promotional awareness programs from the grocery
industry, which would assist the consumer in making an informed choice.
40.
There was strong support within the community for greater consumer
awareness of competitive food prices and variations in the Northern Territory,
through the re-introduction and regular publication of price comparisons.
Restricted trading hours
41.
The local independent supermarkets favoured restricted trading hours and
a cap on market share.
42.
There was strong consumer demand for retaining unrestricted trading
hours as it has become a way of life in the Northern Territory.
Remote centres and
communities
43.
Some of the major centres and all of the remote communities in the
Northern Territory are disadvantaged in terms of price, variety and quality of
food supplied, particularly perishable foodstuffs.
44.
Due to the absence of economies of scale in remote centres and
communities in the Northern Territory, higher costs tend to be incurred for the
transport of goods by sea, air and road to those centres and communities.
45.
There is no significant difference in terms of stock spoilage between
the major centres in the Northern Territory and stores in other comparable
locations elsewhere in Australia. However, stock spoilage (particularly fresh
food and meat) was a major contributor to higher prices in remote centres
(including Nhulunbuy) and communities.
46.
There were a number of models as to how remote Aboriginal Communities
establish and maintain the running of the 'Community Store'. These models
reflect the following:
(a)
Community Stores that are controlled and operated by the local community
government;
(b)
Community Stores that are established as incorporated bodies, separate
from the local community government;
(c)
Community Stores that are established as incorporated bodies, separate
from the local community government but return their profits to the community; and
(d)
Community Stores that are run as private organisations.
47.
The Community Store Manager plays an important role in regard to the
quality, quantity and availability of foods in remote communities, and
eventually the nutritional health of a community.
48.
In some remote Aboriginal communities the Community Store may not be
regarded as an economic enterprise, but rather a convenient source of funds for
other community interests. This may have a detrimental effect in regard to
providing reasonable food prices, namely that:
(a)
the store manager may refrain from making commercial decisions that
would preserve the viability of the store;
(b)
the threat of insolvency may result in an even higher mark-up on food
and other items; and
(c)
the wholesaler when dealing with a community store may see such a store
as high risk and therefore charge accordingly.
49.
Higher food prices in Community Stores in remote communities do affect
peoples’ buying patterns.
50.
The incidence of diet related ill health is higher in remote Aboriginal
communities. These concerns were raised by Territory Health Services in its
submission to the Committee which estimated:
approximately 95% of food eaten in Aboriginal communities is
food purchased in the store, with traditional foods now contributing only a
small amount to peoples' dietary intake. Poor diet is a major risk factor for
chronic diseases such as coronary heart disease, diabetes and renal disease,
all of which are of higher prevalence in the Aboriginal population, along with
low birth weight and undernutrition in early infancy.
51.
The introduction of local food enterprises such as the development of
market gardens in some of the remote centres and communities, has the potential
to reduce food costs and provide food of high quality and nutritional value.
Summary
of Recommendations
A Northern Territory Basket
of Goods and comparable locations
1.
The Committee recommends that the Government (in consultation with
industry and consumer representatives) develops guidelines necessary to monitor
grocery prices across the Northern Territory and that the results be published
on a regular basis.
Prices in the Northern
Territory
2.
The Committee recommends that retailers provide consumers with the unit
price of goods together with the price payable and that these be adequately
reflected on the shelf label.
Cost of doing business in the
Northern Territory
3.
The Committee encourages the Government to continue its present policy
of reducing commercial electricity tariffs, with further reductions being made
as soon as possible until commercial tariffs are in line with the 'all-States'
average. It further recommends that the Power and Water Authority continues to
publish in its annual report, the inter-city comparisons of electricity
tariffs.
Local food producers
4.
The Committee recommends that the Government develops a feasibility
study on the food supply system in the Northern Territory, and that in doing so
the study should take into account:
(a)
the identification of the factors influencing the distribution of food;
(b)
the strategies to address factors that impact upon food supply;
(c)
to identify how those strategies in item (b) above can be implemented;
and
(d)
the viability of establishing a wholesale market or food co-operative
that will serve the Northern Territory and South East Asia.
5.
The Committee recommends that local food producers within the Northern
Territory organise themselves into coherent and representative bodies that can
readily compete with major producers elsewhere, by establishing a competitive
regime to sell local produce to the major national supermarkets operating in
the Northern Territory and South East Asia.
Remote centres and
communities
6.
The Committee recommends that an inquiry be undertaken:
(a)
to review the operation and management practices of stores within remote
communities;
(b)
to identify ways to assist those stores to effectively meet community
aspirations; and
(c)
to assess the overall impact of the GST on food prices in remote
communities.
7.
The Committee recommends that the Government facilitates sponsored
trainee programs for remote community stores staff on all aspects of managing
and handling food and produce.
8.
The Committee supports the development of an award system for stores in
remote communities, to foster and promote best business and management
practices in meeting community aspirations.
9.
The Committee recommends that the Government facilitates programs that
will allow for the establishment and the development of local food enterprises
and ventures, such as market gardens in remote centres and communities, that
will reduce food costs and provide food of high quality and nutritional value.
Restricted trading hours
10.
The Committee does not support the call to regulate prices nor restrict
trading hours.
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