Additional Comments by Senator Scott Ryan

COMPETITION

1.1        Competition is a means to an end, not an end in itself, although it is a critical element in the operation of markets. It appears in multiple forms, the most visible of which is the retail component, and of which pricing is one part.

1.2        Competitive markets allocate resources as efficiently as possible – much more efficiently than when such decisions are made by regulators or politicians. This efficiency is most often expressed in terms of lower prices and/or higher quality goods for consumers at a given price level.

1.3        In dealing with a staple consumer product such as drinking milk, or any other that has the traits of a commodity good, competition will often be expressed through lower prices.

1.4        Finally, competition policy is not designed to protect particular players, institutions or firms. To do so at the expense of consumers would be a retrograde step, and represent a significant regression of the reform agenda of the last two decades.

THE DAIRY INDUSTRY AND DRINKING MILK

1.5        The cuts in retail milk prices that were announced by Coles earlier this year, and subsequently followed by other retailers, have caused a significant amount of concern in the dairying community.

1.6        Having experienced a substantial period of economic restructuring following deregulation, only to be followed by a record drought, the dairy industry is legitimately concerned about the potential for further negative impacts upon the operating environment.

1.7        This inquiry has provided an important opportunity for industry players to outline their particular perspectives on developments in the industry, in the context of the recent retail price competition. It should be noted, however, that such inquiries by their nature do not hear from the great mass of consumers. Consumer preferences are expressed and revealed through their spending.

1.8        Importantly, this industry is characterised by a different relationship structure with the large supermarket chains than others – the supermarkets do not source drinking milk directly from farmers, they go through processors.

1.9        It is the processors who have the contractual relationship with dairy farmers. This is an important point to keep in mind when considering the impact of changes in the retail price on producers.

PROCESSORS AND THE COST OF PRODUCTION

1.10      Some of the most concerned witnesses and submissions about the retail price cuts were the milk processors.

1.11      It is important to note that international experience (especially in the United Kingdom) points to processors as being the major losers from competitive pressure on retail prices.

1.12      Despite questioning on this very point, the largest supplier of generic brand milk to the supermarkets, National Foods, could not explain why it was complaining about Coles' pricing policy while simultaneously continuing to supply them with that very milk. If no-one was willing to supply milk to Coles at current prices, then Coles (and the other generic milk sellers) would not be able to undertake their current pricing policy.

1.13      As processors are the 'owners' of the relationship with the farmer, and they cannot buy milk for less than the cost of production for any sustained period of time, any retail price pressure is likely to squeeze processor margins.

1.14      The concern of processors is compounded by the fact that the 'value' of the brands owned by the processors is clearly in a period of decline.

1.15      Consumers are now purchasing generic brand milk rather than processor-owned branded milk that is sold at a higher processor margin. Both originate from the same factory and are in many cases the same product. This exercise of consumer preference is not something that should be discouraged by public policy.

1.16      Indeed, in other sectors of the economy, notably medicines, the government goes to substantial effort to encourage the use of generic medicines, even though this does not necessarily result in a saving to government.

1.17      No evidence was presented that explained how processors could purchase milk at below the cost of production over a sustained period of time. Indeed, if the supermarkets are making the price of fresh milk a marketing proposition, then their interest in maintaining access to that product is only increased.

1.18      This is not to say that there will not be future movements in milk prices – but whether this is a result of the export price, variation on the quantity of supply or the market power of processors or retailers is impossible to ascertain.

CONSUMER WELFARE

1.19      It was outlined in evidence to the inquiry that the current retail price competition in milk is saving consumers $1 million per week.[1] This was not contested or challenged in any other evidence before the committee.

1.20      The fact that consumers are saving over $1 million dollars a week on what is, for many, a basic staple is not a benefit that should be dismissed lightly, or be disregarded by those concerned with impacts upon producers.

1.21      Lower prices benefit consumers by improving their economic welfare, allowing them to buy more of that product, or to spend their savings elsewhere.

1.22      In an era of food price inflation, sadly exacerbated by recent natural tragedies and disasters, this represents a significant saving to individuals and consumers across Australia. This is particularly true for those on lower incomes, who spend a higher proportion of their incomes on food.

1.23      Consideration of this issue should begin with an acknowledgement that consumers are experiencing an improvement in their welfare through lower prices.

1.24      Of course, this particular price competition serve the interests of others, in this case supermarket chains seeking to increase volumes, shift consumer brand preferences and increase 'foot traffic'. But this is the basis on which the market operates – and in this case has resulted in a substantial benefit to consumers.

SUPERMARKET COMPETITION

1.25      Supermarket chains should not be forced to defend themselves in the first instance for behaviour that the market itself encourages and which we generally desire – in this case lowering prices.

1.26      Allegations of predatory behaviour or misleading conduct are serious and should be investigated – but they need to be proven.

1.27      It is true that Coles has cut the price of milk and launched substantial promotional activity to bring attention to it in order to sell a much higher volume of milk at the new price and attract greater 'foot traffic' through stores. This is clearly in Coles' interests as it has been in the interests of other retailers to match.

1.28      Importantly, the recent competition in the drinking milk market serves to illustrate the competitiveness of the supermarket retailing sector, at least at the moment and in this instance. When the price of milk was lowered by Coles in January, this was matched by Woolworths, Aldi and other chains.

1.29      This should be considered a positive outcome given the concerns previously expressed that the size of the two major players resulted in a limiting of competition and higher prices than necessary for consumers.

1.30      The market may not be "perfect" (most are not) but this is proof that competitive pressures do indeed drive lower prices and benefits for consumers.

1.31      Importantly, size and scale are not of themselves a problem for competition, nor for the consumer.

1.32      Increase in scale has driven economic restructuring for decades, and across all sectors of the economy – and specifically the dairy industry in the past decade.

1.33      Scale can provide benefits to consumers if efficiencies are passed on in the form of lower prices. There is substantial evidence of this occurring in the retail grocery sector over the past two decades.

1.34      A number of witnesses raised the fear of Coles using lower prices to push competition out of the retail market in order to raise prices at a future date. While this is a legitimate concern, any such claim needs to be supported by evidence to justify the intervention necessary to prevent it.

1.35      No evidence presented to the committee supported a specific claim of this having occurred. Indeed, the behaviour of the other major chains in matching the Coles' milk price indicates that such a strategy would not be achievable in the marketplace.

THE ROLE OF THE ACCC

1.36      A number of people raised concerns regarding Coles' market power, and the potential impact of this price cut upon other players. The inquiry heard from a number of these other players, including dairy farming organisations, processors and retail competitors as well as the ACCC.

1.37      The Parliament made a decision many years ago to create a body independent of politicians and politics to make determinations regarding the operation of markets, nowadays this is the ACCC. It is important to recall why this took place. Such a body is free from the pressures and interests of politics and politicians.

1.38      However, the inquiry did highlight some issues relating to the actions, or lack thereof, of the ACCC.

1.39      The evidence has highlighted a concern about the enforcement of the provisions of the Competition and Consumer Act in relation to both pricing and advertising as well as the investigation of potential predatory pricing and anti-competitive behaviour.

1.40      The main issue is that there is little public knowledge of the initiation and conduct of these investigations.

1.41      Consideration should be given to allowing greater public information about the activities of the ACCC in order to build both public confidence in the enforcement of the law as well as knowledge of current activities, which will serve to increase accountability.

Scott Ryan
Liberal Senator for Victoria

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