Supermarket monsters can be agents of change

Things are heating up in Australia’s supermarket sector. Woolworths is falling behind Coles. Aldi is taking business from Coles and Woolworths. Everyone is taking strips off Metcash and its independent IGAs. And an emerging band of brave online retailers (Grocery Butler, ShopWings and others) are nibbling at the edges of the lucrative retail grocery pie. Amid this are reports of suppliers clawing back on margins.

A crude and incomplete account? Possibly. But the fundamental point is that competition is seemingly at work.

Competition controversy

For years the retail grocery sector in Australia has been the subject of intense public scrutiny and debate. Much of the attention and critique has centred on the Coles-Woolworths duopoly. The combined market share of some 70-80% of these two retail mammoths has generated calls for drastic reform to our competition laws, predominantly by way of an overhaul of the prohibition on misuse of market power. And, for some (Senator Xenophon most prominent among them), only measures as draconian as market capping and divestiture will suffice.

Throughout, competition experts have stayed cool. Following its 2008 inquiry into retail grocery prices, the ACCC concluded that the sector was “workably competitive”. The 2015 report of the Competition Policy Review headed by Professor Ian Harper reached a similar conclusion. The sector is not unduly concentrated, the review panel concluded. Competition will work, it assured, as long as there are opportunities and incentives for entry.

While there is room for improvement in the regulation of planning, trading hours and liquor licensing, Aldi’s success suggests barriers to entry, and ultimately to growth, are not prohibitively high. Recent indications that another German discounter (Lidl) may be approaching our shores and South African-owned David Jones is considering launching upmarket food stores appear to strengthen such a case.

If the experts are right – competition is working and consumers are benefiting – what is the noise about? Perhaps it is not, or not just, about market power and its potential anti-competitive effects. Perhaps the disquiet is and should be, in essence, about bigness.

Power at large

Being big in a business sense does not necessarily translate into market power. Power in a market is not just a function of concentration – which may be transient – but ultimately is determined by the condition of entry. As a matter of economics, Harper cannot be contradicted on this.

Bigness does translate, however, into power and influence of other kinds.

In the context of fast moving consumer goods, and groceries in particular, the operations of big companies like our supermarket chains touch many aspects of our lives. And not just the cost of living as affected by the prices, range and quality of the goods in our grocery baskets (and increasingly, our petrol, hardware and even insurance).

The nature, size and reach of retail grocery mean that these mega-corporates affect aspects of our environment, working conditions and standards, and health. They impact on the welfare of our animals, the livelihood of our farmers, the amenity of our communities and perhaps even our cultural attachment to the sense of a “fair go”.

Big and bad?

Big does not have to mean “bad” in any or all of these respects. There is no denying that there has been some badness. Cases of supplier bullying, retail site manipulation, food wastage, worker exploitation, misleading consumers, to name a few, are testament to this, and are neatly recorded in Malcolm Knox’s recent pithy “Supermarket Monsters”.

Knox argues that the harms wrought by “Colesworths” are an inevitable consequence of their size. But don’t give up, he urges. We can take on the monsters as long as we think beyond our hip pockets, contemplate the “unforeseen consequences” of “a cheaper grocery basket” and, presumably, adjust our buying habits accordingly. Knox is in good company in making this argument (former ACCC Commissioner, Stephen King, for example, says that if we are worried about the chains, we should “look in the mirror”).

Badness should not go unpunished and the legislators, the ACCC and consumers all clearly have a role to play in applying “punitive” measures and, in the case of government, in regulating to prevent or minimise its occurrence. But is bad behaviour by big business inevitable? I don’t think so.

Big but good?

Big can also be good – good for business, and good for the rest of us.

Companies like Coles and Woolworths are strongly, perhaps uniquely, positioned to contribute positively to society. Their vice-like grip on supply chains empowers them to set standards and influence business behaviour – in relation to the treatment of chickens by egg producers and migrant workers by fruit growers, for example. And they are able to do this in ways far more immediate, cheaper and arguably more effective than any form of government regulation.

Through vertical integration and long-term supply contracts, the buying power of our major supermarket chains enables them to promote sustainability in our farming sector and innovation in manufacturing, making more of a difference than any government handout or support measure (witness the recent Northern Australia and small business packages), on their own, could ever hope to make.

Creating shared value

Cynics may scoff at this. But to those with long-term business strategies, economic value and social value are viewed as complements, not substitutes. Together, they represent and produce “shared value”.

According to corporate strategy adviser and academic Michael Porter, shared value encompasses:

corporate policies and practices that enhance the competitive advantage and profitability of the company while simultaneously advancing the economic and social conditions in the communities in which it sells and operates.

This is not about corporate social responsibility, philanthropy, or even sustainability, “but a new way to achieve economic success”.

Nor is shared value just an abstract idea or theoretical argument. Nestle’s work in nutrition, water scarcity and rural development, and the indigenous consulting services arm of PriceWaterhouseCoopers, exemplify the concept in action.

Do the leaders of the supermarket giants get this? If they don’t, individual businesses and their leaders will not be the only casualties of the competitive process. We will all lose.

Caron Beaton-Wells is running an Australian Research Council-funded project on regulation of the retail grocery sector.