Harper Review Report and supermarkets

The final report of the Competition Policy Review was delivered by the Harper Review Panel to the Minister for Small Business on 6 March 2015.

The report contains 56 recommendations.

Many of the submissions received by the Panel were submitted by participants in the grocery sector including suppliers and supermarket retailers.

The grocery sector has been a source of much controversy over recent years with allegations of market abuse and unconscionable conduct directed at Coles and Woolworths in particular.  There have been, and are continuing, investigations by the ACCC into the grocery sector.

In December 2014, two court actions initiated by the ACCC against Coles and alleging unconscionable conduct in dealing with suppliers were settled on terms that included an admission by Coles that it had engaged in conduct in breach of the Competition and Consumer Act (CCA).  Fines of $10 million were imposed and Coles was required to make financial recompense to suppliers.

Not surprisingly a number of the Report’s recommendations are relevant to the grocery sector.  The review also considered other options which would impact the sector but chose not to make any recommendation for change.

Misuse of market power

The Panel noted that claims of misuse of market power by Coles and Woolworths had been made in a number of submissions to the Panel.

The Panel considered whether section 46 (which deals with misuse of market power) remains fit for purpose in deterring anti-competitive conduct by firms with substantial market power.

The Panel concluded that it was not because:

• s.46 prohibits, as currently drafted, conduct directed at harming a competitor, not conduct that harms competition;

• the requirement to show that the purpose of the impugned conduct was the cause of the relevant harm is out of step with equivalent provisions in other jurisdictions and not consistent with the underlying policy of competition laws to protect competition (not competitors); and

• the requirement to prove subjective purpose makes enforcement difficult.

Accordingly, the Panel recommended that the prohibition in s.46 should be directed at conduct that has the purpose, effect or likely effect of harming competition.

Not surprisingly, Coles and Woolworths, amongst others, are opposed to an effects based test in s.46, suggesting it would reduce competition and lead to an increase in litigation.  Fears of increased litigation arising from changes to laws are often made but rarely eventuate.  In the grocery sector such concerns ignore the reality of the dominant positions of Coles and Woolworths in particular and the reluctance of suppliers and others to challenge the conduct of these dominant players.

Where a change to an effects test in s.46 may become relevant is in relation to the ongoing replacement of branded products on supermarket shelves with home brand label products.  Both Coles and Woolworths have expressed an intention to significantly increase the proportion of home brand label products sold in their supermarkets.

Divestiture

As has occurred with previous reviews of the competition laws of Australia, the Panel considered whether there should be a divestiture remedy available to the courts following a finding that a firm has engaged in misuse of market power in contravention of s.46.  As with previous reviews, the Panel concluded that a divestiture remedy was not necessary or appropriate.

In coming to this conclusion, the Panel noted that:

• the courts are not well positioned to make decisions on whether and how divestitures should occur;

• a divestiture may have a negative impact on competition (for example, creating separate firms which are unable to effectively compete);

• the last major use of a divestiture remedy in the United States was in 1982; and

• it is open to Parliament to legislate to bring about such divestiture should exceptional circumstances arise justifying such a course.

The question remains, however, as to whether the existence of such a remedy would have a modifying effect on corporate conduct.

Creeping acquisitions

A number of submissions urged the Panel to review the adequacy of provision in the CCA dealing with the creeping acquisitions.  The Panel noted that the concerns were mainly raised in the context of the dominant positions and expansion of Coles and Woolworths in the supermarket and fuel retailing sectors.

The Panel ultimately came to the conclusion that a change to the law was not appropriate including for the following reasons:

• that the expansion of Woolworths and Coles had in the main been via organic growth not acquisition;

• placing a limitation would depress the prices of possible acquisition business;

• assessing the aggregate effect on competition of mergers occurring over a period of time would be a difficult exercise; and

• any proposed amendment would impose additional costs and potentially increase time required for merger approvals.

Unconscionable Conduct

Having reviewed the provisions under the CCA dealing with unconscionable conduct, the Panel found that there was no reason for change.

The Panel made reference to the two court proceedings issued by the ACCC against Coles which settled in 2014 and otherwise concluded that the provisions appear to be working satisfactorily.

Other recommendations of the Panel will also impact the grocery sector.  The points noted above, however, have a more direct influence and relevance to the sector and are the areas which received most submissions from participants in the grocery sector.

While the recommendations have been made by the Panel, it is yet to be seen whether the recommendations will be accepted and implemented by Parliament.

Authors: Greg Blewitt & Michael Cossetto