Populist myths distort debate on food prices

Jerome Fahrer

Australian policy debates are often peculiar, but rarely more so than the recent one about food prices in supermarkets. This debate was sparked by the decision by supermarkets to lower the price of milk, and the recent announcement by Coles that it would reduce the prices of fresh fruit and vegetables. This is obviously good for consumers, yet many commentators want the Australian Competition and Consumer Commission to stop supermarkets from lowering their prices. Usually the pressure is on the ACCC to stop businesses from putting their prices up.

The debate has two themes: the bargaining power of supermarkets with suppliers, and the future of our food processing industry. Both are subject to a current Senate inquiry into food manufacturing. Many submissions to this inquiry claim the Coles-Woolworths duopoly has beaten down farmers and struggling food processors (including firms whose market shares are bigger than Coles and Woolworths combined).

This story appeals to populist politicians but it is a myth. As many inquiries have shown, Coles and Woolworths compete vigorously with each other and with smaller chains like Costco, Aldi and Metcash. This leads supermarkets to negotiate with upstream suppliers to receive lower wholesale prices, in turn creating lower retail prices. The process is pro-competitive, regardless of how it affects profits of farmers or food processors.

A good example was the decision by Coles in 2010 to reduce the price of its private-label milk to $1 a litre. The other supermarkets quickly followed. Consumers reacted in the expected way, by buying more private-label milk. Yet Coles was accused of pricing below cost in order to drive dairy farmers out of business. This makes no sense. Why would Coles want to drive dairy farmers, who make products that its customers want, out of business?

The food processing industry faces the same pressures as manufacturing generally. On the whole, the industry has been successful. However, businesses, such as food and vegetable processors, that make commodity-like products, have struggled as the mining boom has driven up both the exchange rate and labour costs.

Also, margins have been squeezed as people have switched their buys of commodity food products to private labels, which are cheaper and virtually identical to the corporate labelled products.

The Australian food industry is a microcosm of the non-resource economy, which is facing profound challenges. Some food producers will rise to the challenge while others will fail. The result, either way, will have little to do with supermarkets.

Jerome Fahrer is deputy chairman of Allen Consulting Group. He advises Coles on competition matters.

The Australian Financial Review