Additional Comments by Senator Nick Xenophon and other Senators to the 2011
Economics References Committee Report on The impacts of supermarket price
decisions on the dairy industry
Additional Comments by Independent Senator Nick Xenophon,
Nationals Senator John Williams,
Liberal Senator the Hon. Bill Heffernan,
Democratic Labor Party Senator John Madigan, and Australian Greens Senator
Going 'Down Down': The long-term viability
of Australia's dairy industry
Fresh drinking milk is a daily household staple, but the discounting of
generic-brand milk to a level that even Woolworths deems 'unsustainable for the
Australian dairy industry',
has created a situation of looming market failure in the fresh milk market.
While there may be short-term gain for consumers being able to purchase
fresh milk for only $1 per litre, the move to discount generic milk has serious
long‑term implications. It will damage the sustainability of dairy
farmers, milk vendors, processors and ultimately supply of fresh milk to
Evidence from the United Kingdom has shown that this aggressive
discounting ultimately leads to less choice for consumers, higher prices on
products that are not staples and unsustainable pressure on farmers and others
in the supply chain.
This unsustainable pressure severely impacts the supply chain by causing
higher prices several years after the discounting, due to farmers leaving the
industry and a loss of production for supply. The discounting cycle ultimately
benefits no one except the retailer.
It should be noted that Coles was given an opportunity to provide
additional evidence to the inquiry for its final report, but declined to appear
at further hearings.
Given its pivotal role in commencing the milk price wars, and the
consequences it has had on dairy farmers, milk vendors and processors, it seems
extraordinary that Coles did not avail itself of this opportunity.
Since the deregulation of Australia's dairy industry in 1999, the number
of dairy farmers has steadily decreased and the volume of milk production has
decreased from 11.3 billion litres in 2001/2002
to just over 9 billion litres in 2009/2010.
The supermarket milk price war will have an even deeper impact.
In its submission to the inquiry, Woolworths admitted that, while
it would absorb the losses in the short term, contracts with dairy farmers and
processors would ultimately have to be renegotiated:
These prices set a new benchmark, and can be expected to flow
back to processors and farmers as new supply and pricing agreements are negotiated
over the coming months and years.
Comments by Wesfarmers' CEO Richard Goyder do not appear to support
either the claim of 'staying down' or of absorbing the cost:
Obviously if any product range has substantiated and
necessary cost increases, we will look to see if we can absorb that and if we
can’t, we will pass those on. In the long run milk will be no different.
Irrespective of how Coles' and Woolworths' discount milk campaign is
funded, the above statements make it clear that ultimately it will be the
farmers, the processors and the consumers who will pay.
There is no question that the enormous market power of Coles and
Woolworths, which, combined, control approximately 80 per cent of Australia's
dry packaged grocery market, has allowed them to engage in pricing, procurement
and marketing behaviour that significantly disadvantages smaller retailers and,
in particular, farmers and processors.
Such massive market power has been allowed to occur due to a combination
of factors, including state planning laws and competition laws that are weak,
unclear or where remedies are available, they are not vigorously enforced.
The Role of the ACCC
The Australian Competition and Consumer Commission's (ACCC) 22
July 2011 response to the milk price war firmly cements this notion. The then-Chairman
of the ACCC, Mr Graeme Samuel, indicated that the milk wars were potentially
good for consumers and competition within the market:
It is important to note that anti-competitive purpose is the
key factor here. Price cutting, or underselling competitors, does not
necessarily constitute predatory pricing. Businesses often legitimately reduce
their prices, and this is good for consumers and for competition in markets.
The ACCC also indicated at the time that it would continue to monitor
conduct within the dairy industry and grocery sector for signs of
The approach of the-then Chairman appears to have been narrow and blinkered.
As predicted, this 'wait and see' response has been shown to be
inadequate in supplementary evidence provided to the committee.
Mr Brian Cassidy, Chief Executive Officer of the ACCC, told the committee
during the ACCC's first appearance before the committee for this inquiry that
the ACCC would wait for the impacts of the heavy price discounting to be fully
realised before taking any action.
According to the wording in the act, we have to have a reason
to believe not necessarily that there has been a breach but a reason to believe
that there may have been a breach of the law or predation. We cannot just do it
off the top of our hats; we do need to have some basis to form our suspicion.
We have been challenged on this in court on occasions over a period of time. It
is a fairly large threshold but we do need to have something.
Our frame of reference, if you
like, is to enforce the law. We need to have conduct which, at least on the
face of it, may constitute a breach of the act. We cannot look at a situation,
and this goes a bit perhaps to some of Senator Heffernan’s questions earlier,
and say, ‘We do not like that, so we’re going to do something about it.’ It has
to be in the context of a potential breach of the law.
It is concerning that the ACCC does not see that it is within its
capacity to investigate potential negative impacts across the supermarket
supply chain and to intervene before irreversible damage to the dairy industry
is done, particularly given that it has already been indicated to the committee
that dairy farmers are being affected
Indeed, at the committee hearing on 6
October 2011, Mr Terry Toohey, Director of the
Australian Dairy Farmers, indicated that the impacts of the milk wars were
We randomly surveyed 60 of our
dairy farmer members across all of New South Wales recently. The survey showed
that, from the 2010-11 season to the 2011-12 season, the milk price for New
South Wales dairy farmers decreased by 1.4c a litre, taking the average milk
price from 47.7c down to 46.3c a litre. In 2010 New South Wales milk production
was approximately one billion litres, according to Dairy Australia's
statistics. Taking 1.4c a litre from our milk price equates to decreasing
earnings in the New South Wales dairy industry by $15 million or $18,000 per
farm on average.
Mr Chris Griffin, President of the
Australian Dairy Farmers, suggested that the Association's primary concerns
with the milk price war still remained the same, despite the conclusion of
investigations by the ACCC:
Back in March in my opening
statement I made it clear that the core issue in this debate is that price cuts
are unsustainable. That statement is becoming clearer by the day. As I said in
March, milk priced at $1 per litre simply is not sustainable; there is not enough
money to support all of the supply chain at that price.
Mr Griffin further indicated that based
on economic modelling, the consumer shift to generic milk as a result of the
price wars could cost the value chain $44 million annually.
However, Mr Griffin has also indicated
that, should the current year-to-date shift to generic milk be
annualised, and as a result branded products discounted to remain competitive,
an annual loss of $227 million could be likely.
Milk processor Parmalat Australia Ltd also
indicated to the committee that milk price discounting is 'placing enormous
pressure on processor margins through loss of branded sales', and has the 'potential
to destroy the Queensland and Northern NSW dairy industries'.
Further, a number of submitters suggested
that uncertainty in the industry is undermining investment confidence. The
Australian Dairy Farmers suggested that the milk price war and the long-term
industry outlook are key reasons for producers limiting their investment or
leaving the dairy industry altogether.
It is clear from the evidence that the
heavy discounting of generic milk products is having a dramatic financial
impact on dairy farmers and processors.
Furthermore, if experiences in the United
Kingdom are anything to go by, independent retailers will also suffer a
considerable loss of sales as consumers opt for discounted milk.
In its submission to the committee,
National Foods (now Lion Dairy & Drinks) elaborated on the experience in
While the price reduction did not increase the demand for
grocery fresh white milk, the big 4 retailers were able to increase their share
of grocery fresh white milk (from 55% to 59%) in just 3 months...
Further, after the big 4 retailers in the United Kingdom
reduced the price of house brand milk, herds declined and more milk imports
increased to the United Kingdom.
While industry level data is not yet available, National
Foods anticipates that this price reduction will also result in a further shift
in milk sales from independent grocery stores (e.g. IGA, Ritchies, Foodland,
Franklins) and the non-grocery channel.
The Lion Dairy & Drinks (formerly National Foods) supplementary
submission also indicated that following the $1 per litre generic milk pricing,
sales at petrol stations and convenience stores declined by 2.7 per cent while
grocery volumes gained 8.4 per cent over the same period.
Meanwhile, milk sales in the 'unstructured convenience channel', which includes
takeaway food shops, corner stores, coffee shops and newsagents, have decreased
by 15.1 per cent on the previous year.
The above impact is substantial and will only get worse. It shows that
part of Coles’ strategy is to take market share from the non-grocery channel,
which means there will be fewer corner stores and independent petrol stations
to compete with.
Given this impact, the ACCC’s statements that it believes Coles'
competitors consist of solely other supermarket retailers, are surprising.
It is worth noting that the unparalleled market power of Coles and
Woolworths in Australia is not replicated anywhere else in the world.
However, Lion Dairy & Drinks (formerly National Foods) actually
suggests that the impacts could be much more severe in Australia, given our
high concentration of grocery retailers.
Mr Duncan Makeig of Lion Dairy & Drinks suggested in his appearance
before the committee that in the long-term, providing fresh milk to non-grocery
outlets may not be viable:
...the longer term impacts of this pricing on the diversity and choice available
in the industry today have to be weighed up against the short-term benefits for
customers that shop at the large retail chains. In the longer run it may become
uneconomic to provide fresh white milk to non-grocery outlets in Australia. It
is clear that, unless something is done to address this, the dairy industry
will undergo some serious structural change. There will be a lot of losers in
that change—distributors, franchisees, small retail outlets, milk vendors,
farmers and the Australian consumer.
What we are trying to explain to the Senate is that if the
political will and the population of Australia is comfortable with that
accelerating from the position currently where 100,000 outlets sell milk to,
say, 1,000 outlets and it is just an acceptable evolution of the commercial
retail markets in Australia then we think that will happen.
It should be noted that National Foods has expressed concerns that it is
looking at a negative return on their investments, a process which is clearly
not sustainable either.
Therefore, the ACCC's assertion that the
major impact of the reduction in milk prices has been on the
supermarkets is simply not justified by the evidence received by the committee.
It is also surprising that the ACCC feels able to make such a statement
given the limited nature of their inquiries. When questioned about Coles
absorbing the cost of the discounting they admitted that there had been no
monitoring of the 12,000–18,000 other items in the average Coles stores.
Throughout this inquiry, it has become
apparent that the ACCC feels it is difficult to prove instances of predatory
pricing and anti-competitive behaviour. This is due to a lack of transparency
regarding the pricing behaviour of the major supermarket chains, as well as between
producers and processors.
Furthermore, from a consumer perspective,
the dominance of the major supermarkets means that while they may be able to
selectively reduce prices, smaller milk vendors are not able to and therefore
there is a lack of effective competition in the dairy sector. This lack of
effective competition disadvantages consumers and can lead to higher retail
prices over time.
It is clear that the relevant legislation
must be amended as a matter of priority to ensure that anti-competitive
effects are monitored and dealt with comprehensively and effectively.
The fact that Woolworths and Coles
(through its parent company Wesfarmers) hold the lion's share of the
supermarket industry, and are increasing their share of the home improvement,
liquor and petrol industries, should surely be of considerable concern to our
consumer and competition watchdog.
Unlike the United Kingdom and the United States, Australia does not have
an express legislative prohibition against anti-competitive price discrimination.
Similarly, Australia does not have a general divestiture power. Such a power
also exists in the United Kingdom and the United States.
Divestiture powers effectively deal with
market power by forcing businesses to 'break up' their companies once they
become so large they become anti-competitive. This in turn helps maintain a
level playing field and fosters more effective competition.
Associate Professor Frank Zumbo, School
of Business Law and Taxation at the University of New South Wales, suggests that Australia is 'out of step' with
international practice when it comes to competition legislation:
There are two areas that need
to be remedied in our competition laws. The first is we need an effective
prohibition against any competitive price discrimination. Australia is out of
line, out of step, with international practice in this area. Other
jurisdictions have express prohibitions against anti-competitive price
discrimination. We do not. Any hope that section 46 would deal with that issue,
I have to say, with all due respect, is somewhat misplaced if not delusional.
We therefore do need an express prohibition against anti-competitive price
The other one that I do not
mention here but is one of my old favourites is that we need a general
divestiture power, as per the United Kingdom and the United States. Once again,
Australia is out of step with international best practice in not having a
general divestiture power. To the extent that those two provisions are not in
our competition laws we are out of step with international best practice and
those two areas need to be remedied.
Amend section 46 of the Competition and Consumer Act 2010 to
effectively prohibit anti-competitive price discrimination. Consideration should
be given to relevant legislation in place in the United States and United
Kingdom, and the reintroduction of an 'effects test' as per section 49 of the Trade
Practices Act 1974.
Amend the Competition and Consumer Act 2010 to provide for a
general divestiture power whereby the ACCC could, in appropriate cases, apply
to the Courts for the breakup of monopolies or dominant companies that engage
in conduct that undermines competition.
Another key issue raised with the ACCC during the inquiry was whether it
has investigated if Coles has cross-subsidised the lower prices on home brand
milk with higher prices on other goods. The question remains as to whether
prices and profit margins on other products are increased to make up the loss
of profit on product lines that have been reduced.
The answers provided by the ACCC to a series of Questions on Notice
related to this issue are concerning:
Would it be misleading if a supermarket advertised heavily that it had reduced
the price of 6,000 products, but in reality it had also increased the price on
the other 15,000 products or more in the supermarket?
In addition to considering the accuracy of the representations the Courts will
also consider the overall impression of the representations. The ACCC when
assessing such matters needs to consider all the relevant circumstances as to
whether the representations are misleading and deceptive.
Does the ACCC agree that misleading conduct under the Australian Consumer Law
can occur through silence or half truths, so isn't it potentially misleading if
Coles is heavily advertising the discounting of 6,000 products, but Coles is
silent on increases on the other 15,000 products or more?
The Courts have found that conduct by silence can be misleading and deceptive.
Whether silence is misleading or deceptive is dependent upon all the relevant
circumstances being taken into account including any specific representations made.
The above answers suggest that the ACCC has not appropriately and
thoroughly investigated this issue.
The question of whether Coles' 'staying down' signage was misleading was
also asked of the ACCC:
Isn't the "staying
down" slogan, especially when the signage is seen across the supermarket,
creating the impression of a discount across the supermarket product range?
It is not possible for the ACCC to form a view that the use of this slogan in
itself is likely to mislead and deceive. Consistent with previous answers we
are required to consider all the circumstances including the context in which
the slogan is made.
The ACCC's answer to this question was less than satisfactory. The
inference can be drawn from these answers that the ACCC has yet to undertake a
wide-ranging investigation into this issue.
It is also questionable whether Coles' public claims in its milk
discount promotion campaign that its discounting would not affect processors or
dairy farmers are now misleading given the evidence presented to the inquiry
that the discounting is harming processors and dairy farmers.
That the ACCC undertake a full investigation into whether Coles has
engaged in misleading or deceptive conduct as a result of an advertising
campaign that may have created the impression that prices are coming down
across the supermarket when only a percentage of products have in fact been
That the Federal Government give a direction to the ACCC under the Competition
and Consumer Act 2010 to formally monitor pricing behaviour by the
supermarket chains and along the supermarket supply chain.
Another issue raised throughout the inquiry was the lack of transparency
in contract negotiations throughout the supply chain. This lack of transparency
extends to pricing behaviour by the major supermarket chains and along the
supermarket supply chain.
For consumers, this means a lack of full transparency in relation to the
prices of products sold in a particular supermarket. Apart from the prices in
relation to weekly specials, consumers are generally not given online access to
all the in-store prices of products sold in a supermarket.
In its submission to the inquiry, Queensland Dairy Farmers argued
that there was a need for 'greater transparency'
when it comes to the contracts offered to farmers by processors.
As discussed in the Second Interim Report, the discrepancy between the
prices paid to the processor and the producer as compared to the retailers and
processors was a key concern of the Australian Dairy Farmers:
Senator COLBECK—...I wanted to make sure it was on the record
that some of the arguments that are being used by Coles in this whole debate
are pretty spurious. In their letter they talk about transparency in pricing.
You gave some evidence that farm gate prices are on your website, so it is
pretty easy to get information on farm gate prices. The real place where prices
are hidden is, in fact, between the wholesaler and the retailer. That is where
we have trouble getting a real understanding of what the numbers are. So where
costs are really hidden is not at the farm gate; they are, in fact, hidden
because of commercial-in-confidence reasons between the wholesaler and the
retailer. Would that be correct?
Senator COLBECK—You do not have any sense of any of those
Mr Griffin—No, I am not aware of any. I have asked the
question: is it commercial in confidence? That is the answer we get.
Senator COLBECK—So for Coles to claim that the lack of
transparency is, in fact, at the farm gate is not necessarily the case.
Mr Griffin—That is right.
Indeed, the lack of communication within the supply chain; that is,
farmers are unable to talk to retailers and vice versa, means that, in many
ways, the 'middle men', the processors, act as a Chinese Wall.
Mr John Cummings, Chairman, National Association of Retail Grocers of
Australia (NARGA) supported the calls for greater transparency in the pricing
There is a total lack of transparency. Again, we go back to
the grocery inquiry. We asked for transparency, and I think farmers have every
right to expect to see transparency. If I am going to go broke, at least tell
me why I am going broke.
One method of addressing this lack of transparency is by
establishing a Small Business and Farming Commissioner or a Supermarket
Ombudsman, to assist dairy farmers in their dealings with milk processors, and
milk processors in their dealings with retailers.
Such a proposal is supported by consumer group CHOICE, who have
called for the establishment of a Supermarket Ombudsman to help foster a level playing field in what is becoming an
increasingly highly-concentrated retail and supermarket industry.
In his appearance before the committee,
CHOICE's Mr Christopher Zinn further elaborated on how the organisation
envisaged an ombudsman could operate:
The ombudsman would ensure that there is a constant focus on
reform and competition in the supermarket sector. The ombudsman could drive
greater transparency along the supply chain, helping provide consumers with the
confidence that they are paying fair prices. The ombudsman would also be able
to direct inquiries and make recommendations for change where regulations or
legislation is not working as it should.
Mr Zinn continued:
... If there is a reasonable belief that down the track the
supply of milk, the quality of milk, the types of milk or the brands of milk
that are being available or other people who retail it could suffer as a
result, then the setting up of an ombudsman is warranted.
This proposal is also supported by Associate Professor Frank Zumbo, who
suggested that the role of an Ombudsman or Commissioner could assist producers
in negotiating their contracts with processors:
The role of a commissioner is to assist, in this particular
situation, dairy farmers in their dealings with milk processors. In this
context the dairy farmers themselves could approach the commissioner and an
industry association on behalf of the dairy farmers could approach the
commissioner, so the commissioner is a vehicle.
While Associate Professor Zumbo has suggested that a dispute resolution
mechanism could be one of the Commissioner's roles, it could also address
issues relating to a lack of transparency in negotiations and assist in
developing industry codes.
There is considerable concern that the tactic of using milk as a
cut-price marketing agent will devalue the supply chain to an unsustainable
level, and therefore it is critical that suppliers and farmers have access to effective
dispute resolution processes.
Further, given the concern that supply, quality and choice of milk
available to consumers could suffer as a result of price discounting, the
establishment of an ombudsman is warranted.
That the Federal Government establish an Office of the Australian Small
Business and Farming Commissioner.
The committee heard evidence about conduct issues along the supermarket
supply chain. The behaviour of industry participants can be dealt with
effectively through a new mandatory industry code of conduct under the Competition
and Consumer Act 2010.
Given the ongoing relationship between milk processors and
dairy farmers it is important that there is full transparency between the two groups
regarding the immediate and future challenges in their business relationship.
It is also important that dairy farmers and milk processor have access to
timely and cost effective dispute resolution processes.
A framework for full transparency and timely and cost
effective dispute resolution could be usefully provided by a mandatory dairy
industry code of conduct under the Competition and Consumer Act.
Such a mandatory code could extend across the supermarket supply chain
and include the major supermarket chains. An Australian mandatory code of
conduct could usefully draw on the work done in the United Kingdom in
developing a Supermarket Code of Practice.
A mandatory code would need to be backed up by financial penalties for
breaches of the code.
Concerns have also been expressed regarding possible abuses of
contractual power along the supermarket supply chain, including by the major
supermarket chains. In this regard, it would be appropriate to extend the
Australian Consumer Law to deal with unfair contract terms in business to
business agreement involving small businesses and farmers.
Ensuring proper judicial scrutiny of unfair terms in business
to business agreements involving small businesses and farmers would go a long
way to promoting better business relationships within the Australian dairy
industry. Such judicial scrutiny of unfair contract terms is currently lacking
and unfortunately can act as a green light to, for example, milk processors
that are intent on including contract terms that go beyond what is reasonably
necessary to protecting their legitimate interests. In such circumstances, the
new national legislative framework against unfair terms in consumer contracts
could quite easily be extended to deal with unfair terms within business to
It is worthwhile looking at actions taken in the United Kingdom, where
similar discounting strategies already played out with their harmful
consequences on farmers and processors.
In the United Kingdom, the Competition Commission (CC) found that one of
the features that adversely affected competition in the market was the exercise
of buyer power by certain grocery retailers with respect to their suppliers of
groceries, through the adoption of supply chain practices that transfer
excessive risks and unexpected costs to those suppliers.
The CC found that there was a detrimental effect on customers resulting
from the adverse affect on competition.
In its April 2008 report titled 'The supply of groceries in the UK
market investigation', the CC considered that a package of remedies consisting
of the following key elements would be effective and proportionate in dealing
with the various features of the market identified as having an adverse effect
- the establishment of a Groceries Supply Code of Practice (GSCOP); and
the establishment of a GSCOP Ombudsman to monitor and enforce compliance
with the GSCOP.
The new UK Code of Practice (the Groceries Code) was designed to improve
the relationship between big retailers and their suppliers by preventing
certain practices from occurring.
The Groceries Code came into force on 4 February 2010 and applies to all
retailers with an annual turnover of more than £1 billion in groceries in
the UK (there are ten such retailers in the UK) and it must be incorporated
into contracts with suppliers.
That the Federal Government develop a mandatory industry code of conduct
under the Competition and Consumer Act 2010 dealing with relationships
between industry participants along the supermarket supply chain. Such a code
should also include the major supermarket chains.
That the Federal Government extend the Australian Consumer Law framework
dealing with unfair contract terms to business to business agreements involving
small businesses and farmers.
Senator Nick Xenophon
Independent Senator for South Australia
Senator John Williams
Nationals Senator for New South Wales
Senator the Hon. Bill
Liberal Senator for New South Wales
Senator John Madigan
Democratic Labor Party Senator for Victoria
Australian Greens Senator for Tasmania
Navigation: Previous Page | Contents | Next Page