Grocery inquiry

I'm late off the mark in writing about the outcome of the federal government/ACCC grocery inquiry but I've been so entertained by the ensuing knee-jerk reactions that I've held off writing anything (some links below for your reference).

In my opinion the inquiry was never going to find anything of much consequence from the outset. The Issues Paper released to guide public submissions ensured the inquiry would deal with only the bright glossy sheen of the fluorescent supermarket signage, perhaps giving it a dust and polish on the way.

My submission was prefaced as follows.
I actually think the ACCC is barking up the wrong tree. Grocery prices will continue to increase. For some time I suspect they will increase (in Australia at least) at a greater rate than CPI as other consumer goods have become cheaper through technology and production advancements in developing countries and because we have a low cost high standard of living for a very long time and as the marketplace continues along the pathway of globalisation, our economy will continue to align with those we aspire to compare to.

The ACCC was asked to look into the competitiveness of retail prices for standard groceries.

Matters to be taken into consideration by the inquiry shall include, but not be restricted to:
  • the current structure of the grocery industry at the supply, wholesale and retail levels including mergers and acquisitions by the national retailers
  • the nature of competition at the supply, wholesale and retail levels of the grocery industry
  • the competitive position of small and independent retailers
  • the pricing practices of the national grocery retailers and the representation of grocery prices to consumers
  • factors influencing the pricing on inputs along the supply chain for standard grocery lines
  • any impediments to efficient pricing of inputs along the supply chain, and
  • the effectiveness of the Horticulture Code of Conduct, and whether the inclusion of other major buyers such as retailers would improve the effectiveness of the code.
Unfortunately when it comes to competition, the horse has bolted. The rationalisation of supermarket chains that occurred during the 1990s virtually resulted in a grocery duopoly. Certainly there are some exceptions, Franklins still exists in some limited form (albeit after Woolworths plucked the meat off the bones), there are the IGA "independents" and it turns out that 50%* of fresh produce goes to the independent and alternate retailers (as opposed to the 70%* stranglehold the major supermarket chains have on the rest).
*These figures don't add up if you look at the ABS domestic spend in this category, the turnover of the major players and the profit margins they achieve.

The supply chain issues were addressed by looking at the "horizontal markets" along the "vertical market" to ensure there was competition there. Anybody that has spent 2 days in supply chain management will tell you that this silo approach was deemed ineffective over a decade ago; instead of looking at how a supermarket could influence throughout a web of ancillary markets, the ACCC looked at each market (agriculture, manufacture, transport, etc.) in isolation.

The result of the inquiry? A 302 page document plus table of contents, appendices, transcript and excerpts from "confidential hearings". The outcome, steered by the issues list, is predictable.

The report addresses farm gate conspiracy theories and examines external influences over the price of groceries over the past 7 years, finding the latter has more to do with grocery prices. The findings of the report are summarised (without theatrics) in At last, the truth about the great grocery myths.

Ironically the report deemed that small independent grocers, perform a role akin to the now defunct Democrats (keep the bastards honest) however are less competitive as they are largely restricted to sourcing from Metcash (wholesaler) who in turn, was limited in purchasing power as it competes directly with the major supermarket chains (*ahem*).

Planning and development regulations and restrictive retail leases preclude competition launching in the marketplace (*ahem* horse? bolted? gate? anyone? Bueller?).

In regard to leases, developers are required to offer exclusivity to the major supermarket chains in order for them to commit to taking up residency in a developer's complex, and a major player is required to get shopping traffic.

The irony in regard to the findings on planning and development is that the major supermarket chains have enough money to make the laws suit them. Planning, ostensibly controlled at a local government level, is frequently (in New South Wales at least) hijacked by the state government, notably Frank Sartor, Minister for Planning and the Environment and ensuring the NSW Labor Party's coffers are suitably lined with developer dollars.

And finally, it's agreed that unit pricing is the way ahead.

The expertise of the ACCC, in its own words, "lies in consumer protection, competition, regulation and industry analysis," yet the scope of the inquiry was limited to the competitiveness of retail grocery prices. It seems to me the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs has missed an opportunity to look at the influence the major supermarket chains have over consumers and consumer behaviour, and instead has focused on academic market economics.

Sadly, focusing attention on horizontal competition in a vertical marketplace, and tracing the product to market of 8 specific products (of the thousands of unique category items (SKU) carried), is nothing more than an academic exercise. But then, what is the government to do when they are given the kitty for a two horse race?

Readers of this blog know I hold the two major Australian supermarket chains in contempt. Perhaps you think that it's my vested interest to put them down? The truth however is, that my interest in grocery retailing has developed from (a) a love of food, (b) ongoing discontent with the supermarket offerings in Australia (particularly after returning from living in the UK at the start of this decade) and (c) professional experience within the walls of these establishments.

Supermarkets have an undeniable role in our society. We live in clustered communities, we don't all grow vegetables (heck, my thumbs are as brown as they come!) and we don't all want to knit our own toilet paper.

I do however object to them exercising power above the law that applies to regular people and I am mesmerised by the mismatch between the messages they convey to the public and the cold hard reality of what they do in practice. ow do they get away with calling themselves "fresh food people" when even an apple can be 8 months old and an egg 5 weeks old?

Sadly we live in a society that is fat, self-indulgent and oblivious to what we are eating. Supermarkets aren't solely responsible for this, but they play an important role. The promotion of products (in partnership with manufacturers), the wasted food, the standardisation of "fresh" produce, and the complete waste of resources in air conditioning, refrigeration and transport are cause for concern as they are in the public interest such is there impact on our health system and our environment.

At the end of the day, we will all pay for this perceived convenience.

A few of the many articles written about the inquiry over the past few days:

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