ACCC report on grocery prices

The Australian Competition and Consumer Commission (ACCC) released their Report into the Competitiveness of Retail Prices for Standard Prices on 5 August 2008. Most of the major players in the industry welcomed the report by the ACCC, which found no wrong doing by the supermarket chains in Australia.

The key findings of the ACCC inquiry into grocery prices are:

• Grocery retailing is workably competitive, but there are a number of factors that currently limit the level of price competition, including:

• high barriers to entry and expansion, particularly in relation to difficulties in finding new sites for development;

• the limited incentives for Coles and Woolworths to compete aggressively on price; and

• limited price competition that Coles and Woolworths face from the independent sector. Independent supermarkets tend to focus on convenience and service. A key factor inhibiting price competition from the independent retailers is the wholesale prices of packaged groceries supplied by Metcash.

• Price competition is strongest on promotions of key value items (which are products known by the supermarkets to be used by consumers to assess value). This is to be expected, given that the pricing of these products is most likely to encourage consumers to change where they buy groceries.

• ALDI has been a vigorous price competitor since its entry into Australia and has the incentive and ability to engage in sustained price competition. This has had a dynamic impact on the grocery sector and brought about competitive responses from Coles and Woolworths on many products.

• Any possible weakening in the level of competition in retailing is unlikely to have been a substantial contributor to food price inflation in Australian. The gross margins of Coles, Woolworths and Metcash have increased over the last five years. However, ACCC analysis indicates that these increases in gross margins could have only made a small contribution to overall food price inflation. In other words, the vast majority of grocery price increases in Australia are attributable to other factors, such as supply and demand changes in international and domestic markets, increases in the costs of production and domestic weather conditions.

• The ACCC has not identified anything that is fundamentally wrong with the grocery supply chain. Evidence provided to the inquiry does not support the proposition that retail prices have risen while farm-gate prices have stagnated or declined. While there may be some instances where this has occurred, generally movements in farm-gate pricing are set by supply and demand in competitive markets. Changes in the wholesale prices that Coles, Woolworths and Metcash pay suppliers are reflected in movements in shelf prices over time.

• Coles, Woolworths and Metcash have significant buyer power in relation to many packaged grocery products because many suppliers effectively have little option other than to deal with these buyers. Competition between retailers is, however, sufficient to ensure that Coles and Woolworths cannot simply retain all of the benefits of the lower wholesale prices they extract—at least some of the benefits flow to consumers in the form of lower retail prices.

A full copy of the Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries is available from the ACCC website.