Coalition’s half-baked supermarket policies will have you paying more

Last week the Coalition announced they would introduce “sector-specific divestiture powers as a last resort to manage supermarket behaviour and address supermarket price-gouging”.

They assert this policy will “address serious allegations of land banking, anti-competitive discounting, and unfairly passing costs onto suppliers”.

The Coalition claims that forcing the supermarket chains to sell stores will somehow increase the overall amount of competition in the sector.

In practice, the motivation for this policy seems to stem from settling grievances that farmers and suppliers have with the business practices of Coles and Woolworths.

Supermarket policy is one area where the major parties are competing to one-up each other’s harsh crackdowns.

Labor has already conducted multiple reviews and announced some punitive measures targeting supermarkets, while the Greens have publicly castigated Woolworths over allegedprice gouging.

While there are many aspects of the Coalition’s latest foray into retailer politics that are ill-conceived, the one thing that is almost certainly true is that this policy will not increase competition and cannot lower prices for consumers.

The first and most obvious point is that the ‘anti-competitive discounting’ the Coalition is concerned about is not a real problem. Or at least, it is not a problem if you understand howmarket-based competition works.

The idea that a business could lower its prices until its rivals have all gone bust, and then jack up the prices and make a fortune, is a trope as old as time. However, it has rarely — if ever — actually been proven to happen.

Moreover, in practical terms, there is no supermarket monopoly that can unilaterally set prices. Coles and Woolworths are separate companies. Nor are they in some cosy negotiated cartel. They are clearly in fierce competition with each other, as well as with Aldi, Costco, IGA and others.

Should any of the half-baked policies in this area diminish or prevent Coles and Woolworths from competing with each other on price, the end result must be higher prices overall.

Moreover, competition in the supermarket industry has clearly been growing in recent decades, not slowing down.

In fact, increasing global competition, particularly in the online shopping space, is probably why the profit margins of Woolworths and Coles are less than 3%.

It may be sad, but we need to come to terms with the reality that Coles and Woolworths have put scores of small stores out of business, just as their counterparts in the US, UK and across the world have done. The world has changed forever, government policy cannot change it back.

However, we must understand that it’s the scale of the supermarket giants that makes it impossible for small family stores to compete with them on price — not predatory business practices.

Crucially, this scale and competition has resulted in far greater choice, and lower prices, for consumers; as it has across scores of industries.

There are other issues too. It should be of serious concern that a government regulator would be trying to determine what distribution of costs and profits between seller and supplier is ‘fair’.

Governments are appalling at understanding the reality of business.

They are motivated by powerful political constituencies and by bureaucracy. The party that will get the highest profit is not the most efficient but rather the one that can yell the loudest.

Nor is the romantic ideal that these policies are protecting the sacred family farm borne out in reality.

Agriculture is an industry with large and small companies the same as any other. There has been massive consolidation in recent decades, with the number of farms more than halving since the 1980s.

This has actually been a good thing, economically speaking. Statistics from ABARES show that the value of agriculture production has soared in the past 20 years (50% real growth).

Along with this increase in production, farm incomes have increased significantly too; more than tripling for dairy farmers and more than a five-fold increase for crops.

It might be politically understandable that the National Party constituency bends towards farmers over grocers, but that is not how national economic policy should be determined.

Instead of beefing up regulators’ powers, we could cut the first ‘C’ from the ACCC — removing its jurisdiction over competition — and the country would be better for it. Competition would almost certainly be stronger.

The main reason for this is that regulator-sanitised competition is not about benefits to consumers: it is primarily about protecting uncompetitive smaller businesses from competitive larger ones (as is the case with these policies on supermarkets).

The second ‘C’ (consumers) are no longer winning from the first ‘C’ (competition). This is the exact opposite of what competition should bring.

You don’t have to like the major supermarket chains. You are free to shop wherever you like; and enterprising farming businesses are increasingly bypassing the retailers and delivering direct to customers. This is exactly the kind of innovation that is driven by competitive markets.

Part of the problem is the conceptual error that small businesses are metaphorically equal to vulnerable workers,who need protection and support from government lest they be exploited.

Workers get minimum wage and other employment protections and income support should they lose their jobs. Therefore, the argument goes, small businesses get government intervention and protection from the full weight of competition.

But this is a fundamentally mistaken view of business. Small businesses should be free to compete with large businesses and vice versa. The ones that can compete and thrive will grow into large businesses. The ones that can’t should be allowed to fail.

The failures are every bit as important as the successes. Creative destruction is the engine of progress and change.

However, an alternative driven by government intervention —with the crude carve-up of costs by government and distribution of greater profits to the suppliers — will inevitably result in prices going up.

There is simply no reason to believe that anything else will happen.

Simon Cowan is Research Director at the Centre for Independent Studies.