Grocery Inquiry
After more than 250 submissions and public hearings held in 14 cities around Australia, on 5 August 2008, the ACCC delivered its report into the competitiveness of retail prices for standard groceries (Report).
As we all know, the ACCC found that while the price of groceries has increased significantly in recent years, this has not been as a result of anything being fundamentally wrong with the grocery supply chain. The ACCC found that the grocery retailing industry in Australia is “workably competitive”.
Following on from these findings, the ACCC delivered only 3 key recommendations, being:
that appropriate levels of government consider ways in which zoning and planning laws and decisions in respect of planning applications regarding retail space for operating supermarkets will impact on competition between supermarkets in the area;
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that various amendments to the Horticulture Code of Conduct be
considered; and
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that a mandatory, nationally consistent unit pricing regime be introduced for standard grocery items, both in-store and in print advertising.
But if we dig a little deeper, what else can we learn from the Report, both to predict the next steps of the regulator in this area and to understand what it might mean for the industry?
Competition from other retailers
While the Report found that the grocery retail industry is workably competitive, it recognised that there are various factors that limit price competition, including high barriers to entry and limited incentives for competition between the main retailers.
In this regard, the ACCC was very supportive of the role that is being played by ALDI in driving price competition with the larger supermarket chains.
On the other hand, the ACCC found that independent retailers do not present a significant amount of price competition to the larger supermarket chains, with the ACCC alleging that one of the key factors inhibiting such price competition from the independent retailers is the wholesale prices of packaged groceries supplied by Metcash.
The Report clearly states that Metcash sets its wholesale prices in such a way that independent retailers can only compete with the larger supermarket chains by earning low net margins on the goods supplied by Metcash. Further, the Report notes that many of the agreements that Metcash has in place with its customers restrict choice in dealing with wholesalers other than Metcash and may have the result of “protecting Metcash’s position”. The Report also notes that in the ACCC’s opinion, Metcash earns higher margins than it would if it faced direct competition from another wholesaler.
In response, Metcash’s Chief Executive, Andrew Reitzer, has been quoted in the Australian Financial Review as saying “If there’s a problem with our pricing, it starts with the manufacturer. Why blame Metcash?”
The ACCC has flagged the fact that it is going to investigate Metcash further though. Therefore, manufacturers would be well advised to run a health-check on their contractual arrangements with Metcash and the independent retailers to make sure all is in order and they do not get caught up as part of any collateral damage.
Commercial leases
One of the other areas reviewed by the ACCC in the Inquiry was access to sites for supermarkets. In this regard, the Inquiry heard evidence that the large supermarket chains often engaged in deliberate strategies to maintain exclusive access to shopping centres by the inclusion of terms in their leases with shopping centre owners which prevented competitors from being leased space in the same shopping centre.
The ACCC subsequently used its investigatory powers to obtain copies of various commercial leases to confirm that these types of restrictive provisions were in fact being commonly used.
As a result of its findings in the Inquiry, the ACCC has specifically indicated that this type of behaviour will become a focus for the ACCC’s investigation and enforcement activities under Part IV of the Trade Practices Act (TPA). It is therefore likely that we will see some enforcement activity in this area from the ACCC in the near future.
Private label products
The Report reviewed the rise of private label products being promoted by the larger supermarket chains.
The Inquiry heard evidence that private label products are leading to a reduction in consumer choice due to the supermarkets delisting branded products to increase sales of their own private label products. The ACCC was not convinced by this evidence though and said it was satisfied that the introduction of private label products is pro-competitive and that consumers as a whole are not worse off from the growth of private label products.
With respect to the view of some suppliers that branded products are being delisted to increase sales of private label products, the ACCC does not appear to be concerned about the impact of this practice on competition, finding that private label contracts between supermarkets and suppliers actually provide suppliers with many benefits.
Unit pricing
One of the recommendations in the Report was the introduction of a unit pricing scheme. Essentially, a unit pricing scheme would involve retailers being required to display unit prices on their shelves. The unit price is the price per specific unit of the product e.g. the price per kilogram or per litre or per item for products sold by count. A unit pricing scheme would also likely require the display of unit prices to be of a certain minimum size, so as to be easily read and understood by the consumer. In its response to the Report, the Government stated that it would consider the best way to introduce a mandatory nationally-consistent unit pricing regime as a matter of urgency.
Significantly before the release of the Report, on 15 May 2008, Family First Senator Stephen Fielding independently introduced a Bill to implement unit pricing, called the Unit Pricing (Easy Comparison of Grocery Prices) Bill 2008. Senator Fielding’s Bill was referred to the Senate Standing Committee on Economics, which recently recommended that the Bill not be passed.
The Senate Committee did, however, recommend the development of a nationally consistent mandatory unit pricing scheme in consultation with consumer groups, industry and State and Territory governments, and also recommended that a detailed cost benefit analysis be undertaken to assist in determining to which stores unit pricing should apply and that implementation of such any unit pricing scheme should be phased in a over a period of 12 months.
In these circumstances, there is little doubt that the large retailers at least, will soon be required to implement some form of unit pricing. While retailers are the parties who will be responsible for implementation of unit pricing, the ability of consumers to quickly and easily compare “like with like” at the supermarket shelf also has the potential to have a significant impact on the way in which groceries are packaged and marketed by suppliers.
Misuse of Market Power Update
“A bundle of trouble” is how the ACCC’s website refers to Baxter Healthcare Pty Limited after the full Federal Court recently found Baxter had breached the TPA. It seems the ACCC is right. After an epic Court battle spanning over more than 3 years and travelling to the High Court and back, the ACCC has finally achieved the outcome that it has been looking for.
On 11 August 2008, the full Federal Court found that Baxter, a manufacturer and supplier of therapeutic goods, had breached both section 46(1)(c) (misuse of market power) and section 47 (exclusive dealing) of the TPA.
The conduct in breach of these provisions involved Baxter tendering for the supply of sterile fluids and peritoneal dialysis (PD) fluids to State purchasing authorities for use in hospitals and other medical care facilities. At the time of the conduct, Baxter had an effective monopoly in the market for sterile fluids, but had several import competitors in the market for PD fluids.
Baxter had submitted tenders to various State purchasing authorities to supply sterile fluids as stand-alone products at one price, or alternatively to supply sterile fluids at another, significantly lower price if they were “bundled” with an exclusive or near-exclusive supply contract for PD fluids. Therefore, if the State purchasing authorities wanted the benefit of lower prices for sterile fluids, they were forced to also purchase PD fluids almost exclusively from Baxter as part of a bundle.
The disadvantage of taking advantage of market power
Just after the public release of an exposure draft Bill (Trade Practices Legislation Amendment Bill) on 1 May 2008 to reduce the uncertainty surrounding interpretation of the TPA in its current form and to improve the ability of the TPA to target anticompetitive conduct, the Baxter case has created a fresh perspective on the current legislation.
The ACCC alleged and the Federal Court agreed (with Dowsett J dissenting) that Baxter contravened section 46 of the TPA by taking advantage of its substantial market power in the sterile fluids market for the purpose of preventing competition in the PD fluids market by forcing the State purchasing authorities to take bundled products via the threat of prohibitive prices for the purchase of stand-alone sterile fluids that were not part of a bundle. Interestingly, the Court found that Baxter had not taken advantage of its market power for the purpose of damaging or eliminating its competitors in the PD fluids market.
The detailed analysis of the market power provisions in this case provides us with some fresh guidance on the various factors the Court will look at in determining whether market power exists, when a corporation has taken advantage of that market power and whether this has been done for a proscribed purpose.
Of particular interest is the fact that the Court found that Baxter had a substantial degree of market power, despite the presence of several constraints on that power, including the arguably high degree of countervailing power held by the State purchasing authorities. Also interesting, was the Court’s analysis of innovation in a market as an indicator of a lack of competitive pressures in that market, and the finding that Baxter had contravened section 46 of the TPA, despite the fact that the main competitors in that market remained competitors before, during and after the conduct in question.
Exclusive dealing thrown into the bargain
Based on the same facts as the misuse of market power findings, the full Federal Court found that Baxter had also engaged in exclusive dealing conduct by offering to supply PD fluids at a particular price on the condition that the relevant State purchasing authority would not, or would only to a limited extent, acquire PD fluids from a competitor of Baxter.
The majority of the Court also held that the exclusive dealing conduct was carried out with the purpose or effect or likely effect of substantially preventing, hindering or lessening competition in the Australia-wide market for PD fluids on the basis that Baxter’s structuring of its bids to customers who represented a substantial section of the PD fluids market was done in a way that prevented rivals from being able to put forward bids that were realistically competitive, so as to ensure, as far as possible, that the competitive tender process would fail.
In other words, competition was hindered by Baxter engaging in exclusive dealing conduct which deterred the State purchasing authorities from accepting competitive offers in the PD fluids market because of the financially adverse consequences to them in the sterile fluids market.
Implications for industry
This case has implications for all those companies which tender for the supply of goods or services, and particularly for those which bundle goods or services, using the advantages of a less competitive market in order to gain leverage into a competitive market.
Graeme Samuel, the Chairman of the ACCC, has said in relation to this case “While bundling of itself is not necessarily a problem, companies need to be careful when bundling the supply of their products, to seek an advantage over their competitors, that they do not fall foul of misuse of market power and exclusive dealing provisions of the Act. Baxter has said that it was only responding to tenders as sought by various governments, but let me be clear, it was Baxter’s purpose and its alone to deter or prevent competitors from being competitive by its bundling strategy and to lessen competition”.
But wait, there’s more
While Baxter has been found to have breached both sections 46(1)(c) and 47 of the TPA, the Court has not yet made orders as to the penalties to be imposed on Baxter for these contraventions. And even though these provisions carry high potential fines, historically, Courts have not imposed high penalties in this area.
What’s more, even though it might appear as though the ACCC has finally triumphed in this area, there is little doubt that Baxter will appeal this decision to the High Court. So, watch this space.
Carbon offset claims
There has been a lot of talk over the past 6 months about “green claims” - just what do you get for that extra $30 on top of your airline ticket? The ACCC is right in the middle of this issue and if it has its way, its trade practices concerns will stay on the top of the agenda.
In January this year, the ACCC released an issues paper regarding the regulation of carbon offset claims (January paper) in which it identified a number of examples of claims being made and the nature of the ACCC’s concerns. Then the ACCC released its publication Green Marketing and the Trade Practices Act providing some guidance for business about what to do. Again in June 2008, the ACCC followed up with an issues paper (June paper), which identified the trade practices issues and other key concerns, based on submissions received from consumer groups and business alike. Not surprisingly, the key trade practices issue is misleading and deceptive conduct.
Carbon offset claims are claims such as “carbon neutral”. Claims of carbon neutrality must be assessed against the requirements of the TPA and will be assessed by the overall impression created by using the term. Of course, there is a real problem where there is no standard definition of “carbon neutral”. So, how do businesses protect themselves against prosecution for misleading and deceptive claims about carbon neutrality?
To answer that, business should carefully think about the following:
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The term should not be used indiscriminately. Businesses need to consider the overall impression created in the minds of consumers by use of the claim.
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Businesses also need to accompany any claims of carbon neutrality with an explanation of the scope of the claim. “Scopes” originated from the Greenhouse Gas Protocol where emission types are categorised into 3 groups for reporting purposes. Claims should be explained in terms of their limits or scope.
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If businesses use “footprint calculators”, they need to be transparent with the methodology employed. To reduce the risk of misleading consumers, businesses should make available any assumptions behind the calculators and there should be an explanation as to what is and is not included in the calculation (for example, the assumed life cycle for the product).
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Claims of low carbon emissions should be put in a comparative context. Consumers could be misled into believing that a product or service is beneficial for the environment and the ACCC has stressed the importance of terms of reference for these types of claims.
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ll claims of carbon offset quality must be substantiated and measured, which will protect and distinguish conscientious businesses that make an effort to acquire high-quality, independently accredited offsets against businesses that purchase low quality offsets.
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The concept of “additionality” is central to evaluating whether an offset project leads to real greenhouse gas reductions. The ACCC defines “additionality” as demonstrating that the emissions reductions being used as carbon offsets are not simply business as usual, the business has to be doing something more.
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Remember not to double count your offsets. Offsets have to be “retired”. If they are not, there is potential for double counting. If the specific reduction in emissions being claimed has not in fact occurred, consumers will be misled.
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There will be challenges in the risk management area for businesses involved in offset projects. Offset projects have the potential to be damaged or destroyed, which of course means the effects will be negated. From the ACCC’s perspective, this of course means that claims based on projects that have been damaged or destroyed will be baseless and, therefore, misleading. Purchasers of offsets should obtain some form of guarantee that purchased offsets will be maintained and replaced if destroyed.
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Any claims that your business complies with a particular standard should be substantiated by adhering to the standard. Similarly, if your business represents that its offsets are accredited or it is applying for accreditation, make sure they are accredited or an application has in fact been made.
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Try to source good quality offsets and remember traps with forward credited offsets. Make sure you have a good contractual commitment from offset providers to deliver or otherwise guarantee to replace damaged or unrealised projects (for example, tree planting).
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The area of environmental marketing has been on the ACCC’s agenda now for some time. Clearly, businesses need to be aware of the trade practices risks associated with advertising and marketing in the “green” arena. To assist businesses address the risks, the government has committed to developing a mandatory national carbon offset standard by the end of 2008, including setting minimum standards for the generation, verification and retirement of offset credits.
If you would like more information, please contact a member of our Competition & Trade Practices listed on the right hand side of the screen.
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