Additional Comments by Senator Scott Ryan
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
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.
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.
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
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.
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.
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
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.
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
Some of the most concerned witnesses and submissions about the retail
price cuts were the milk processors.
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.
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.
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
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.
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
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
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.
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
It was outlined in evidence to the inquiry that the current retail price
competition in milk is saving consumers $1 million per week.
This was not contested or challenged in any other evidence before the
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.
Lower prices benefit consumers by improving their economic welfare,
allowing them to buy more of that product, or to spend their savings elsewhere.
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.
Consideration of this issue should begin with an acknowledgement that
consumers are experiencing an improvement in their welfare through lower
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 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.
Allegations of predatory behaviour or misleading conduct are serious and
should be investigated – but they need to be proven.
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.
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.
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.
The market may not be "perfect" (most are not) but this is
proof that competitive pressures do indeed drive lower prices and benefits for
Importantly, size and scale are not of themselves a problem for
competition, nor for the consumer.
Increase in scale has driven economic restructuring for decades, and
across all sectors of the economy – and specifically the dairy industry in the
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.
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.
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
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.
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.
However, the inquiry did highlight some issues relating to the actions,
or lack thereof, of the ACCC.
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
The main issue is that there is little public knowledge of the
initiation and conduct of these investigations.
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.
Liberal Senator for Victoria
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