Family First Dissenting Report
Provisions of the Trade Practices Amendment (Predatory
Pricing) Bill 2007
FAMILY FIRST introduced its Trade Practices Amendment
(Predatory Pricing) Bill 2007 because of a concern that anti-competitive
conduct like predatory pricing can drive small businesses out of the market,
driving up prices for consumers, and that small businesses are particularly
vulnerable because of their limited resources.
When FAMILY FIRST introduced its bill, small business had
been waiting for a Government bill for more than three years since the Senate
Economics References Committee recommended action.
Predatory pricing is where powerful retailers use their
substantial market power or substantial financial power to drop their prices in
one area to drive out competitors.
Not only are small businesses affected, with some forced to
shut up shop because they can no longer compete, but Australian families suffer
as well from higher prices in the long term.
The Trade Practices Act states "the object of this
Act is to enhance the welfare of Australians through the promotion of
competition and fair trading and provision for consumer protection."[1]
The "welfare of Australians" is central, but to
achieve that we need a mechanism to protect consumer welfare, which is fair
trading and competition. There is a danger that without appropriate
regulation, unfair trading and distorted competition can lead to higher prices and
less choice for consumers as well as the loss of the benefit of small
businesses to local communities.
FAMILY FIRST shares the Business Council of Australia's
concern that "heavy handed responses risk stifling competition",[2]
but believes there needs to be a good balance struck and that a lack of
effective regulation to stop anti-competitive behaviour also stifles
competition.
FAMILY FIRST agrees with the assessment of Professor Frank Zumbo,
who states:
... competition is a ruthless process, but that proposition is not
in any way inconsistent with the proposition that there must be effective laws
against anti-competitive conduct. Just like excessive regulation may stifle
competition, so too may competition be stifled by ineffective prohibitions
against anti-competitive conduct. Accordingly, the central question to be
addressed in relation to s 46 (and indeed any section of the competition
provisions of the Trade Practices Act) is whether the section is
operating effectively to prohibit anti-competitive conduct; in this case,
abuses of market power by large and powerful corporations.[3]
Australian Competition and Consumer Commission Chair Graeme
Samuel said in July this year "small business has a fine tradition in this
country, thanks in no small part to our open, competitive market that provides
an opportunity for anyone to become their own boss and succeed. But in order
for those businesses to be able to realise their potential, they require the
same opportunities as every other competitor. In short, they deserve a fair
go."[4]
Small business concern about the Trade Practices Act
Small business groups such as the Fair Trading Coalition
have pointed to problems in the operation of the Trade Practices Act to stop
anti-competitive practices, arguing that:
... as markets become more concentrated (as is the case in many
sectors of the Australian economy) Australia needs to have strong and properly
administered laws which guard against the misuse of market power and in
particular, predatory behaviour by large businesses. Without significant laws
against such behaviour, the FTC believes that large businesses will continue to
take advantage of their market power, resulting in further concentration of
markets. That concentration will eventually lead to a loss of competitors and
thus competition in markets, a loss of choice for consumers and ultimately less
price competition, which further disadvantages consumers.[5]
There is a widespread concern that "... s 46 [of the Trade
Practices Act] is not operating effectively to prevent large and powerful
corporations from engaging in predatory conduct or other abuses of market
power."[6]
One submission made the flimsy and circular argument that
the fact there are few successful prosecutions under section 46 "should ...
be regarded as proof of the law working as it should to ensure the protection
of competition and not as a failure of those laws".[7]
Evidence of market failure
Coles argued "... there is no evidence of market failure
that would justify increased government regulation in retail"[8],
but that is not the case.
Concentrated supermarket industry
The supermarket industry is one that is frequently cited as an
area of concern. A report commissioned by the National Association of Retail
Grocers of Australia (NARGA) found that:
since the early 1990s, the supermarket industry has undergone
significant restructuring. Australia’s grocery market has become one of the
most concentrated in the world. Current ACNielsen estimates indicate that the
two major supermarket chains, Woolworths and Coles, have approximately 78-79%
of the market. The Australian market share growth of these two key MGRs [major
grocery retailers] over the past three decades has been significant – growing
from approximately 35% to around 79% ...[9]
NARGA is concerned this market concentration is not helping
consumers and the situation may get worse:
This dominance, whilst it is expected to offer consumers lower
prices due to the economies of scale and lower unit costs, is generating
growing concerns over the current high level of food price inflation and over
the long-term implications for competition. The adverse impact of any reductions
in the level of market share of SMEs would be likely to both further reduce the
bargaining power of small primary producers and endanger consumer welfare in
the form of reduced choice and less price competition.[10]
Dr Evan Jones argues that the major supermarkets raise their
prices where there is no nearby competition:
A mid 2003 price survey by Choice magazine exposed
that prices at Woolworths Leichhardt Market Town (suburban Sydney) after Franklins
had been taken out as a competitor had increased by 23%, compared to the CPI
increase for food of 13% over the same period. Another study of grocery retail
prices has confirmed the inverse relationship between prices and local access
to competing stores (especially those other than Coles or Woolworths).[11]
Another survey in suburban Sydney found that:
the residents of Moorebank, who purchased an everyday basket of
fruit and vegetables from Woolworths consisting of; a Capsicum, Tomatoes,
Potatoes, Avocado, Bananas, Apples, Grapes, Rockmelon, Pears, Beans, Cucumbers,
Broccoli and a Cauliflower - on the understanding that these were .Low Prices
you can count on everyday - were in fact being slugged with prices 81% higher
than what they would have paid for exactly the same items less than 5kms from
another Woolworths outlet at Liverpool The possible reason - at Liverpool a
new independent competitor had recently entered the market - at Moorebank there
was limited competition. [12]
The Southern Sydney Retailers Association argues that:
... the only thing that keeps firms from exploiting consumers is
competition from other firms - and a clear indication of lack of competition in
a market, (especially a mature market such as grocery retailing) is if the
majority of the firms in the market are making excessive profits well above
international averages of similar markets - and all continue to raise their
profit margins at the same time over a substantial period of time. [13]
The Australian National Retailers Association (ANRA), which
represents some of Australia's largest retailers, conceded that the major
supermarkets have a profit margin before interest and tax (EBIT) of up to 5 per
cent. While they claimed comparable margins in the United States were up to 7
per cent,[14]
other evidence given to the Committee disputes this.
The Southern Sydney Retailers Association points out that
the US Food Marketing Institute states "the intense competition among food
retailers for the consumer dollar is best demonstrated by profit margins that
continue to be less then 1.5 cents on each dollar of sales [1.5% EBIT%] ... This
measure has remained in the 1 percent range throughout the industry’s history ...".
This means that major Australian supermarkets are making big
profit margins by international standards.
Continuing growing food prices is evidence that competition
is not working effectively in the supermarket industry.
ANRA states that "in relative terms [food prices
compared to income, calculated as minutes worked for a basket of groceries],
food is cheaper now than it was 26 years ago."[15]
But this is an attempt to mask the increase in real prices over time.
Even ANRA admitted "Australia's food price growth is
higher than in many other countries".[16]
In fact, "... food prices have consistently grown at a
higher rate than the CPI [1982-2006] and in the most recent years food price
inflation has risen significantly."[17]
The Southern Sydney Retailers Association points out:
Australia has the developed world's highest food inflation since
1990 [to 2006] ... However the truly alarming situation of food price inflation
in Australia is even more apparent when we compare food inflation v CPI since
1990 [to 2006] - everywhere in the developed world consumers seem to be
benefiting from competitive retail markets, where food inflation, especially
supermarket prices, are lower than the CPI – well everywhere in the developed
world – except one remarkable stand-out exception [Australia].[18]
NARGA argues that "... the lower [food] prices in Perth
[compared to Sydney and Melbourne] [are] substantially a result of the higher
market share of the independent grocery sector [in Western Australia]."[19]
FAMILY FIRST also acknowledges the importance of small
locally owned businesses to keeping wealth in local communities and the impact
the decisions of large retailers have on the viability of Australian primary
producers and food manufacturers.[20]
FAMILY FIRST believes that on of the major reasons for high
food and grocery prices in Australia is that the market is not working. There
is not enough competition to keep prices as low as they should be and families
are suffering because of it. Families and small businesses are the victims of
the market power being wielded by some of Australia's retail giants who
dominate key sectors.
Unilateral changes in terms
There is other evidence that big businesses are taking
advantage of their market power.
The unilateral change in terms of payment to suppliers is
one way big businesses exert their market power over small businesses. One
small business owner contacted FAMILY FIRST with an example:
[Company Alpha] purchases $5Billion from 20,000 suppliers. If
they delay payment by 30 days (as they dictate in the attached letter) they are
generating a benefit to themselves of $33M of interest savings per annum. But
more importantly, they are generating an increase in the working capital
demands of their supplier businesses of over $400 Million. To the extent
to which that impacts on small businesses, chances are that small businesses
are having to go to second mortgage funding or cash flow finance in order to be
able to fund the extension in days receivable. That would be charged at
effective interest rates around 11.5% to 13% - a cost of around $50 Million, if
all of the $400M was small business. If small businesses can’t manage the
account, the inevitable result is that the business transfers to large
consolidators (like internationally-owned wholesale chains) who have adequate
capital resources and can maintain heavy cross-subsidization from one customer
category to another.
The small business was reluctant to put this information in
a submission to the Committee as the businessman explained: "if I was to
put in an official submission I risk damaging very important business
relationships. So how can I protest without damaging my own interests or
waiting until I get out of the business?"[21]
Other large companies also make unilateral changes to terms.
FAMILY FIRST has a copy of a letter from a large retailer informing suppliers,
not negotiating with them, that "... your settlement terms will change from
3.00%, 30 days to 3.00%, 60 days". This obliges suppliers to find finance
to cover their bills for another 30 days before payment.
Rebates and discounts
The Pharmacy Guild of Australia argued that supplier
discounts should be transparent so that small businesses can band together to
make large purchases for the same prices available to big businesses for the
same volume:
I think it is reasonable that we should at least have the
information in the marketplace so that when somebody wishes to buy something
they can say, ‘If you buy 500,000 of these, you get this price and, if you buy
two, you get this price and there are steps in the middle.’ Then you at least
know that, if you want to compete, you have to buy 500,000. But the market
sometimes does not allow people to have that information.[22]
Mr Scott commented on products he had bought in cooperation
with a group of others for a maximum volume discount, but found others retailing
the same product for less than he was able to buy it wholesale:
Either the company is not being honest about what the cost price
is or, alternatively, the other group is selling it for less than it purchased
it for. Either way, those things are commonly used to cause the opposition to
go out of business or to cause the opposition considerable trouble. I do not
believe they are reasonable ways for trade to take place.[23]
Shelf space
One submission refers to a statement on Dick Smith Foods
website, since modified, which refers to the difficulty the company was having
finding shelf space to sell products through Coles and Woolworths:
In recent weeks the problem has been compounded by Coles [a
major supermarket] suggesting to many of our manufacturers that unless they
receive large sums of money by way of an up-front payment, which in some cases
is up to $100,000, then they will no longer be prepared to carry our products.
Interestingly, none of the requests for money are being sought in writing.
As our own company and most of our manufacturers are small businesses, there is
simply no way we can afford to pay these amounts and remain financially viable.
If this policy continues, it will force the remaining small Australian
manufacturers out of business and open the door to even more products from
overseas.[24]
The Southern Sydney Retailers Associations comments that:
Although Dick Smith Foods may be technically free not to sell to
the large supermarket chain that made these coercive demands - the reality is,
that when just two buyers are the gatekeepers of 80% of the supermarket shelves
of the nation (up from 35% in 1975) - just how conceivable is it for Dick Smith
Foods or any other Australian food producer to walk away and say no? These food
producers have long term leases on plant & equipment, they have investments
in machinery, bank loans that require servicing, on-going commitments to their
skilled employees - to say no to any demand from one of the major supermarket
chains and to walk away, would simply be suicidal. The producer simply has no
way to replace the lost sales, or any practical alternate mechanisms to get his
products to the consumer, in such a highly concentrated market as has evolved
in Australia, under the Trade Practices Act. [25]
These practices demonstrate the market power exerted by big
businesses that mean fair competition is not always available to small
businesses. They also demonstrate that changes in the law are necessary to
ensure competition and fair trading.
Proposed changes to the Trade Practices Act
The Fair Trading Coalition has declared its support for FAMILY
FIRST's Trade Practices Amendment (Predatory Pricing) Bill 2007, noting
that it would support "the wider application" of the bill.[26]
Other small business groups like the Independent Liquor Group[27]
have also asked to have their markets included in the bill.
FAMILY FIRST's predatory pricing bill received support from
a significant number of small businesses and other submissions.[28]
FAMILY FIRST's bill introduces the concept of
"substantial financial power" as one of the requirements to prove
predatory pricing. This received support:
Substantial financial power is a useful concept because
financial strength is ultimately what allows the anticompetitive conduct to be
sustained for a period way beyond what it would have been in a context where
the firm had no market power or substantial power. So the ‘deep pockets’ aspect
is very important to fund the anticompetitive conduct—or the allegedly
anticompetitive conduct. The High Court has said that financial power is not a
factor that should be taken into account. I respectfully disagree because, if
we are trying to assess whether conduct is procompetitive or anticompetitive
and if what the firm actually does when it has substantial market power has an
adverse effect on competition, we should be looking very carefully as to how
that financial power has been used.[29]
FAMILY FIRST's bill also states that a company may be held
to have engaged in predatory pricing even where it has no intention to recoup
the funds it spends engaging in predatory pricing. This also received support:
... we do not need proof of recoupment, because recoupment is not
mentioned in section 46. You have substantial market power and you take the
advantage of that market power for an anticompetitive purpose. That is conduct
at a point in time. If at a point in time you have substantial market power and
substantial financial power and you use that power in an anticompetitive
way—that is, you behave at that point in time to destroy competition, to deter
competition or to prevent competitive conduct—then that should be the only issue
that is relevant under section 46, because that is how section 46 is worded. To
introduce new concepts is to add new hurdles by judicial law making ...
If you have a recoupment element, it becomes almost impossible
because you are asking for proof about the future. And if you are asking for a
dead body—that is, that the small business or the smaller player has been
driven out of business—as an element of proving a breach of section 46 then
section 46 is not working effectively to protect competition because the
competition is gone ...[30]
FAMILY FIRST is certainly not against price cutting, but
when you undercut for extended periods of time with the purpose or effect of
squeezing out a competitor that's not on. FAMILY FIRST rejects the argument
that it wants to protect small business by any other method than by ensuring
fair competition.
The Bill also adds an "effects test", which means
those corporations that do have "financial" or "market"
power need to be careful in how they use that power so they do not substantially
lessen competition or eliminate competitors.
A number of submissions were critical of FAMILY FIRST's
bill.[31]
FAMILY FIRST will consider whether it is necessary to amend the predatory
pricing bill to meet its objectives, mindful that most submissions criticising
the bill were from big businesses or organisations that represented big
businesses, which are doing well under the current laws.
Conclusion
FAMILY FIRST introduced the Trade
Practices Amendment (Predatory Pricing) Bill 2007 to give small businesses
much needed protection from predatory pricing, by ensuring competition and fair
trading. Fair competition will help to ensure the lowest
prices for families.
FAMILY FIRST is convinced that food and grocery prices are
soaring because the market is not working, especially in concentrated markets
like the grocery market where Coles and Woolworths control 80 per cent of
turnover. This is one of the most concentrated grocery markets in the world. Coles
and Woolworths also dominate the petrol market.
There needs to be a good balance in the Trade Practices
Act between too much regulation and not enough. FAMILY FIRST believes a
lack of effective regulation to stop anti-competitive behaviour is stifling
competition.
Senator Steve Fielding
FAMILY FIRST Leader
FAMILY FIRST Senator for Victoria
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