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Australia should increase competition to fight ‘excessive pricing’ by supermarkets, Rod Sims says

The former competition watchdog head Rod Sims says Australia’s big supermarkets have likely used their market power to increase prices higher than necessary during a cost-of-living crisis and that the government should consider reforming merger laws to limit their dominance.

Sims, who retired as the chair of the Australian Competition and Consumer Commission (ACCC) last year, said Coles and Woolworths have little to worry about when making pricing decisions because they control two-thirds of the market.

“That does mean at a time of general concern about rising prices, they can increase prices a little bit more,” Sims told Guardian Australia.

“They’ve only got to watch each other rather than anybody else because the two are so dominant.”

The comments follow analysis by Guardian Australia that shows that Coles and Woolworths increased their profit margins during the pandemic and subsequent inflationary period where prices for everything from food to rents and energy bills surged.

Any larger-than-necessary supermarket price rises would be inflationary, and work against Reserve Bank measures to ease prices by raising rates and cooling demand.

Sims said Australia needed to look at mechanisms to increase competition because it was not illegal to profiteer.

“Nothing that they’re doing breaks the law; there’s no law against excessive pricing,” said Sims.

Coles and Woolworths have cited improvements to their business practices for increasing profit margins and say they have protected shoppers by locking in or dropping prices on many essential or popular items.

“There are many factors that influence our gross margin which are not related to the prices customers pay, including product and business mix of sales and changes in stock loss,” a Woolworths spokesperson said.

The two chains control a combined two-thirds of the supermarket sector in Australia while Aldi has a share of just over 10%. A Senate committee into cost of living heard that in some areas of Australia the two major supermarkets control 90% of the market, leaving consumers few options on where to buy their groceries.

Supermarket prices have risen by about 10% over the past year at the same time as world commodity markets, which track prices received by farmers, have been falling.

While there are many costs that go into food prices paid by shoppers, like processing and transport, there is a growing global view that widening profit margins have not been properly addressed.

Fabio Panetta, an executive board member of the European Central Bank, said in March that policymakers need to pay attention to “opportunistic behaviour” that could delay a fall in inflation.

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“We should monitor the risk that a profit-price spiral could make core inflation stickier,” he said in a speech in the German city of Frankfurt.

Food prices are a major contributor to inflation calculations and cost to households. The Reserve Bank has previously dismissed any role that corporate profits might be having on inflation. The ACCC declined to comment on supermarket pricing.

Sims, who headed the competition regulator for more than a decade, said there were various approaches the government could take to examine supermarket price decisions such as ordering an ACCC-led inquiry that would unleash strong information-gathering powers.

There is also the potential to develop provisions around how those with market power deal with suppliers.

Sims said merger reforms would also help big supermarket chains from buying more stores to increase their already dominant market share.

“What we’ve got to do in Australia is just make sure that we’ve got more competition,” said Sims. “It’s another reason why I think we need stronger merger laws in Australia so that the strong don’t get stronger and that they can’t keep buying up other companies to maintain their strengths.”

The proposal would make the competition regulator the “first instance decision maker” whereby it would need to clear a merger before it proceeds. This differs from the current system where the court largely takes on that role.

He said there should also be a provision that if a company already has market power, then the test for being able to increase market share is much tougher.

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