8. Consumers and small business: at the heart of the Trade Practices Act^[1]

Thirty-four years ago when the Trade Practices Act was but a twinkle in the Parliament’s eye, the then Attorney-General Senator Lionel Murphy accurately summed up the state of the marketplace in his second reading speech introducing the Trade Practices Act:

‘Protecting the interests of Australians generally’ is the fundamental principle at the very heart of the ACCC and the Trade Practices Act. We’re here to promote the welfare of all Australian consumers, all 21 million of us in all our activities: when we buy things from a retailer, when we compete in a marketplace of goods and services, when we run a small business and deal with myriad suppliers.

Small business is an important and integral part of the economy. There are two million small firms in Australia today and they account for nearly half of our workforce and provide about one-third of our GDP. Small business is a vital part of vigorous competition and, for the most part, the interests of small business are consistent with those of consumers overall.

A fair and competitive marketplace is in all our interests; whether we are consumers or small businesspeople, it is paramount and, to achieve this, we must protect competition, not individual competitors.

The structure of the ACCC reflects the critical importance of these two areas, with deputy chairs each having a specific focus: Peter Kell in Consumer Protection and Michael Schaper in Small Business.

I started with the history of the Trade Practices Act from 1974. Let me take you back now to the 1600s. In Simon Schama’s A History of Britain, he recounts with great colour the period when James I opened up trade between his newly united kingdoms of Scotland and England:

Although these days we have different ways to deal with those wishing to restrict competition or inhibit trade, the benefits stemming from a highly competitive but fair marketplace are just as relevant in Australia today as they were to Scottish beer drinkers in the early 1600s.

The economic reforms of the past 25 years have seen the floating of the Australian dollar, the introduction of new players in previous monopoly industries and Australia’s strong participation in the global marketplace. As a result, the nation has become more efficient, more flexible, more productive and, above all, more competitive.

And while the opening up of the Australian economy to greater competition internally and from overseas has produced immense rewards, it has also provided great benefits to consumers.

Vigorous competition provides consumers with:

Business, too, is a beneficiary of competition policy. Competition—and this includes intense and, at times, incessant price competition—benefits those businesses that are able and motivated to take advantage of the powerful forces driving their particular market.

The corollary, of course, is that those businesses unable or unwilling to respond to the often-daunting challenge of competition will languish behind and might ultimately fail.

But this is the essence of an open market economy.

As the story about the Scottish beer drinkers demonstrates, free-enterprise economies have operated in one form or another for hundreds of years. It is just the intensity and speed of change that are different.

I have no doubt that when that duty-free English beer first crossed the border, the local beer makers appealed for some sort of protection. But ultimately what was regarded as unfair by those who benefited from the previously closed beer market was seen by the consumers who benefited from the end of that monopoly as vigorous and fair.

And they were right, because the purpose of competition policy must be to benefit consumers—not competitors. The question to be asked must always be what is in the long-term interest of consumers.

The principles of competition policy enshrined in the Trade Practices Act and the National Competition Policy emphasise the primary purposes of a vigorous competitive economy and the protection of the interests of consumers.

In this context, businesses that are motivated to take advantage of the competitive marketplace will thrive. And, for the most part, small business is able to respond to the rigours of competition more quickly and with more flexibility than many of its larger competitors. As stated previously, the corollary is that businesses that are unable or unwilling to respond to the challenge of competition will languish and might ultimately fail.

In short, an open competitive economy is the best environment for small business to flourish.

This message has greater significance against the backdrop of the current turmoil in global financial markets, where we are seeing governments take strong and often interventionist approaches in the interests of stability. It is important to consider the impact of that priority and how it relates to competition and policy development.

To a certain extent, government intervention in a particular industry can cushion it from some of the realities of the marketplace. Earlier this month, for example, the Australian Government committed to invest $6.2 billion over the next 13 years in the car industry under the New Car Plan for a Greener Future.

Whatever one’s view as to that commitment, one cannot but agree wholeheartedly with the comments of Prime Minister, Kevin Rudd, and the Minister for Innovation, Infrastructure, Science and Research, Senator Kim Carr, that the future of the car industry is dependant on research, innovation and global integration rather than protection, quotas and tariffs. If the car industry does not heed these calls, it simply won’t survive.

Similarly, the ACCC has been fielding calls in recent times from sectors of small business about ‘giving them a fair go’. However, if government did intervene to shield small business from some of the competitive rigours of the marketplace, the result would not in fact be giving small business ‘a fair go’; it would be artificially changing the dynamics of an open and competitive marketplace by giving one player added protection that others do not have.

As a result, consumers overall would be given an ‘unfair go’ as a less competitive marketplace invariably leads to higher prices and a poorer standard of goods and services, as Attorney-General Murphy pointed out back in 1974.

But such a solution also ignores the numerous and significant advantages that small business has in the marketplace. However, they involve a lot of hard work, perseverance and the ability to ‘think outside the square’.

Small business has the capacity to innovate—to adapt quickly to changing market needs, provide personalised service and develop niche markets.

These qualities must be harnessed by small business to remain competitive in the marketplace and benefit all Australian consumers. Governments and regulators have an ongoing challenge in striking a balance that promotes vigorous, lawful competitive behaviour that is likely to lead to significant and sustained benefits for consumers, while preventing unlawful anti-competitive behaviour that is likely to disadvantage us as consumers.

This is a task that needs to be undertaken independently, rigorously, transparently and objectively to ensure it remains focused on the interests of consumers. But this cannot result in the insulation of certain sectors of business from normal competitive disciplines.

Now that is theory and it has been endorsed by the Dawson Committee Review into the Competition Provisions of the Trade Practices Act and the Senate committee considering the effectiveness of the act in relation to small business.

The Dawson Committee Report summed up the issue as follows:

The Senate committee considering the effectiveness of the Trade Practices Act in relation to small business noted:

These findings are consistent with the purpose of the Trade Practices Act as outlined in Section 2: ‘The object of this Act is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection.’

But while the theory is easy to state, it is not so clear that the principles are either well understood or applied in practice. For while it is now widely accepted that the purpose of competition policy is to promote competition in the interests of consumers and not to protect competitors from the rigours of competition, in practice the distinction between these objectives is confused and sometimes leads to conclusions that are inherently anti-competitive in nature.

Competition policy regulators are required to deal with two issues. The first is to analyse whether in the context of any particular market there exists a course of behaviour that will have the effect or be likely to have the effect of substantially lessening competition in that market. This requires rigorous, economic analysis of the market and the likely impact of the behaviour of competitors in that market. Then if that analysis reveals a likely anti-competitive consequence, competition policy requires regulators to intervene to prevent it.

It might or might not be the case that to protect and nurture competition in a market it is necessary to take steps to protect competitors or a class of competitors in that market from substantial damage or indeed elimination as a result of a course of behaviour by another competitor. The provisions of Part IV of the Trade Practices Act are designed to permit that intervention by competition regulators to take place.

What is not clear, however, in the claims and counterclaims that are made by small and big business respectively in relation to these matters, is whether the primary case has been made for regulatory intervention. That is to say, it is not apparent that a course of behaviour by one or more competitors in those markets will lead to a substantially anti-competitive (and thus anti-consumer) impact.

If such an analysis leads to the conclusion that there is likely to be a substantial lessening of competition in the relevant market, then of course the competition regulator should intervene.

But if the analysis merely leads to the conclusion that some competitors in the market might suffer damage or indeed be eliminated, but that competition in the market will still be vigorous with consumer benefits, then there is a dubious case for intervention by the competition regulator.

The difficulty in this area is that so often those who seek regulatory intervention have failed to first demonstrate the case for it. Indeed, in some cases, they have been reluctant to have the relevant market, and the course of behaviour complained of, subjected to an independent rigorous analysis to determine whether there is justification for intervention.

The point is, if we intervene too soon and without transparent, open and independent analysis, we might be acting to protect competitors at the expense of vigorous, lawful competitive behaviour and, as a consequence, disadvantage the consumer.

Having spent 12, at times difficult, years undertaking an independent and robust process of examination and reform of anti-competitive regulations pursuant to National Competition Policy, I suggest policy makers need to be continually on the alert that they are not drawn back by private interests to protect specific sectors of business from the competitive environment.

No better example of this can be seen in the area of petrol. You might recall the recent campaign directed towards government by some independent small petrol retailers around Australia, calling for what they describe as a ‘fair go’. These small retailers want the same wholesale pricing as Coles and Woolworths and want the supermarkets’ shopper dockets petrol discount schemes outlawed.

Now I know that my response to this is not going to be popular with these small independent petrol retailers or with parts of the media, but the truth is that those small independent petrol retailers will find it very difficult to respond to the price-competitive pressure that Coles, Woolworths and the large independent chains such as United, Liberty, Gull and Matilda can provide.

What is being sought is not a levelling of a playing field. It is a request for protection against the rigours of the marketplace. In fact, the ACCC petrol inquiry reported that the emergence of shopper docket schemes had not had an anti-competitive effect but had delivered discounts to consumers and promoted competition among retailers. And despite all the media hype about petrol prices, consumers are voting with their wallets in support of any discount schemes that offer cheaper petrol.

In these circumstances, the interests of small business are at odds with the interests of Australia consumers. However, rather than lessening competition, a better approach would be finding ways to make the petrol sector, at the source of supply, more competitive, which of course is also in the interests of small business.

The situation as it stands in Australia is that there are four major players in the petrol market—BP, Shell, Mobil and Caltex—and they are responsible for refining and importing 98 per cent of our petrol. This is why the ACCC’s focus is on the wholesale petrol market, where we see an opportunity to expand competition. Petrol Commissioner, Joe Dimasi, is working hard to see whether new players can enter the Australian wholesale market and, if this happens, the new wholesalers will need petrol outlets, which is where the independents could come into their own.

Moving onto another contentious issue—groceries—it has long been claimed that if smaller retailers are not protected from competition from the major retailers, a market duopoly of Coles and Woolworths will result. This necessitates, it is claimed, policy and regulatory intervention, for example, to retain discriminatory shop trading hours, to limit the acquisition of additional market share by the major retailers and to prevent price discrimination by suppliers to, and price discounting—claimed to be predatory pricing—by, the major retailers.

In early 2008, the ACCC conducted an inquiry into the competitiveness of retail prices for standard groceries and, overall, it found supermarket retailing is ‘workably competitive’.

However, there are a number of factors that bear closer examination, including high barriers to entry for large-format supermarkets, a lack of incentives for Coles and Woolworths to compete strongly on price and limited price competition from the independent sector. It is our opinion that the appropriate response for policy makers is to lower barriers to entry and expansion in retailing and wholesaling to independent supermarkets and potential new entrants. As always, the ACCC will continue to examine the acquisitions of existing supermarkets as well as site acquisitions and leases for new supermarkets.

To that end, in May 2008 we issued a Statement of Issues concerning a proposed lease of a new supermarket site in Wallaroo, South Australia, by Woolworths. In that statement, the ACCC expressed its preliminary view that the proposed lease might constitute a substantial lessening of competition—on the basis that if the lease did not proceed, it was likely that another non-Woolworths operator would acquire the lease to operate a supermarket in competition with an existing Woolworths supermarket in an adjacent locality. The ACCC is seeking the views of interested parties to assist it in reaching a final decision on this matter.

The lack of incentives for Coles and Woolworths to compete strongly across the board on price reflects the high level of concentration in the industry and frequent monitoring of competitors’ prices. But despite this, Aldi has had a significant impact on grocery retailing. Where Aldi stores are present in an area, Coles and Woolworths have reduced prices. Aldi represents a new type of retailing, which has overcome some of the barriers in place, and this innovative approach is what small business needs to consider. Their strategy might well be summed up as: ‘If I can’t win the game under the current conditions, why not play a different type of game?’

Aldi has shown that a new player does not have to be a full-service supermarket to generate a significant competitive reaction from Coles and Woolworths. The entry of grocery retailers with differentiated business models poses a competitive threat to the major supermarkets and benefits Australian consumers. Without a doubt, retail groceries and petroleum have been experiencing, and will continue to undergo, rapid change. Now supermarkets are four to five times their previous size; service stations are fewer in number but significantly larger, located on major highways and directly linked with substantial convenience stores, car washes, fast-food outlets and even hotels.

These changes are driven by consumer preferences, and businesses operating in these markets will continue to undergo rapid change. But those which do adapt will survive, indeed thrive, while those unable to adapt or resting on the belief that governments or regulators will step in to protect them will languish and might ultimately fail.

I repeat, it is not the job of the Trade Practices Act or the ACCC to protect competitors; it is our job to protect competition and the welfare of Australian consumers. Let us not forget, however, that businesses are also consumers. Every opportunity to reduce costs and increase choice, service and availability of goods helps businesses as well, and allows them more options for innovation.