Harper Review: Big retailers discouraging competition law changes while small players are missing an opportunity

The window for submissions to the Competition Policy Review Panel is set to close on 17 November 2014, meaning interested parties in the Australian consumer electronics and appliances industry have less than a week to have their say when it comes to framework that guides competition law in Australia.

One of the most significant reviews of Australian business practices since the Trade Practices Act 1974, the Draft Report reviewing Australian competition policy, chaired by Professor Ian Harper, and referred to as ‘The Harper Review’, has recommended significant changes to competition policy and laws, including issues such as resale price maintenance, mergers, trading hours, parallel importing and price discrimination between regions.

Despite the breadth and depth of the Harper Review, one particular issue has been the most prominent in media coverage and in many of the 300-plus submissions already received in response, and that is proposed changes to Section 46 of the Competition and Consumer Act (CCA) 2010. These changes refer to how much leeway large industry players should have to use their size to affect competiveness.

The Harper review states that Section 46 should be changed to:

…prohibit a corporation that has a substantial degree of power in a market from engaging in conduct if the proposed conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in that or any other market.

This recommendation has come to be known as an ‘effects test’ and it could have wide-ranging impacts across the Australian retail landscape, should it be introduced, including the appliance and consumer electronics industries.

How these changes would be realised and what sorts of behaviour would be deemed illegal is somewhat unclear. The most common outcome that has been suggested to Appliance Retailer is that the wholesale pricing advantages enjoyed by the large retail chains, realised both in face value dollar terms and rebates, could be considered anti-competitive and therefore illegal. This would mean that a supplier would be compelled to offer its products to all retailers at the same wholesale price and could no longer offer different rebates to different groups, depending on their size.

The retail consumer electronics and appliance industry can broadly be classified into four groups:

  • The very large chains, namely Harvey Norman, Dick Smith and The Good Guys.
  • The Narta buying group, which comprises retail brands ranging from the very large JB Hi-Fi to the specialist Winning Group and E&S Trading family companies, to the regionally focused Betta Home Living franchise system, all the way down to the one-store independents like Whitfords of Five Dock.
  • The relatively young Leading Appliances, which brought together the orphans from Retravision’s several collapses and is now made up of approximately 60 family-owned, mostly regional small businesses.
  • Independent retailers that are not organised into buying groups, of which very few have survived the post-GFC downturn.

Appliance Retailer has been told that since the release of the Harper Review in September 2014, representatives of major suppliers have met with the leading retail groups to convey the view that an implementation of the Report’s recommendations would mean an end to the firmly ingrained rebate system, which is also under attack in the Federal Court in a case between the ACCC and Coles.

Suppliers pay rebates to retailers as a way of showing favouritism while retaining identical prima facie wholesale prices. These rebates are often described as for marketing support, such as catalogue and TV advertising, or in return for preferred floorspace inside the store. The more volume a retailer is channelling between suppliers and customers, the more powerful its ability to induce rebates out of suppliers. A document seen by Appliance Retailer shows that one of the leading appliance brands in Australia is paying a 23 per cent rebate to one of the major national retailers, in addition to whatever margin is achieved between the wholesale price and the retail price.

There are suggestions that this rebate system, along with other differential wholesaling systems that enable larger retailers to make greater profits compared to smaller retailers, is tantamount to predatory pricing practices. Supporters of the proposed effects tests say that by giving larger retailers a better deal, the smaller, independent stores are being squeezed out of the market, which will eventually leave only the big players. If this were to happen, consumers would ultimately be disadvantaged because a lack of retail competition could lead to higher prices.

Opponents of changes to Section 46 say that competition policy should be about what is in the best interest of consumers, not rival retailers, and that an effects test would artificially inhibit strong retailers to benefit inefficient competitors, regardless of company size. One such opponent is former Australian treasurer Peter Costello, who said the proposals are, “designed to protect competitors who are less efficient from a competitive challenge”.

Submissions so far in response to the effects test proposal fall clearly into two camps: big companies with large market share are strongly opposed to the plan, while smaller organisations are in favour of it.

Due to the inherent nature of large companies being better resourced to compose compelling arguments supporting their position — such as Harvey Norman joining with Woolworths, Coles, David Jones, Bunnings, Super Retail Group, Costco and several others within the Australian National Retailers Association to contract Pegasus Economics to prepare a bespoke brief — as opposed to independents having to write out their own thoughts, often after a long day working in a store, the submissions so far published by at the Competition Policy Review website are predominantly from industry groups.

Some proponents of change have tried to make their voices heard among the cacophony of verbose industry submissions. One of the medium sized retail franchisors in the industry has called on its members to write to their federal MP, encouraging them to enact changes restricting predatory pricing practices at the wholesale level.

This template letter states:

The issues that we face in Australia are very unique as we are one of the few countries in the world where there is such a large variance in price offered to independents against major corporations such as Woolworths and Coles in the supermarket industry or Harvey Norman and The Good Guys in our industry.

Over the last few years, we have seen our business struggle with profitability and turnover dropping. We have scaled down our business to adapt, as well as looking towards other opportunities to keep our doors open. Because, at the end of the day, my business, whatever I sell, is what keeps food on the table. I am disappointed to say, but a major reason towards my profitability and turnover dropping is due to the substantial price advantage that my competitors have over me, in a lot of cases, 15-to-30 per cent.

The general manager of this franchisor confirmed the veracity of this letter but asked for anonymity for fear of reprisals. I asked this experienced industry professional why none of the small or medium sized retailers in the Australian appliance industry had submitted responses to the Harper Review. The GM expressed frustration that many were not aware of the report or of its significance, which is in stark contrast to the major retailers who have organised their opposition with alacrity.

Inside the industry, suspicions have been raised that while changes to Section 46 might benefit the retailer, it would have a deleterious effect on buying groups or franchisors that represent them. For example, if all retailers started receiving the same wholesale terms from all suppliers, the role of the buying group would suddenly become unclear.

Consider this hypothetical: a fridge has a wholesale cost of $200 and an RRP of $300. The supplier charges an independent retailer the full $200 at wholesale, so they can make profit of $100. That same supplier charges a powerful buying group only $150 for the same fridge and the buying group subsequently charges its member retailers $175 — the buying group makes $25 for its negotiation skills and the retailer makes $125 for selling the fridge to a consumer.

Now, imagine that the law states that this supplier must wholesale its fridges at the same price to all retailers, and it can’t add in any rebates after the fact to sweeten the deal. It chooses to wholesale the fridge to everyone for $150. This means that if the buying group continues to charge $25, its members are making less margin than independent non-members.

This is a very simple example and it ignores vagaries like overheads and logistics, as well as the many positives buying groups and franchisors provide for their members, such as business advice, marketing assistance and economies of scale. What it attempts to highlight, however, is why larger and more powerful retailers are opposed to the effects test and why smaller retailers would most likely be in favour of it (though this is hard to assess, since none have submitted). It also attempts to elucidate the enigmatic position buying groups and franchisors find themselves; in which the best thing for their members is in opposition to their own self-interest.

Interested parties are encouraged to read the full Harper Review, the submissions in response to it, and to make their own submission, before the 17 November 2014 deadline. If you would like to have your say on this matter, please leave comments in the box below or contact me in confidence.

This author is on Twitter: @Patrickavenell

Tags: , , , , , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *