Labor’s supermarket code of conduct will likely inflate grocery prices

The government’s first step in reining in the power of Coles, Woolworths and their smaller supermarket rivals is likely to push consumer prices up, not down.

Former Labor minister Craig Emerson has concluded a review of the relationship between Coles, Woolworths and their suppliers, and recommended that the existing, voluntary, decidedly piss-weak code of conduct relating to that relationship be turned into a mandatory code, with stiff penalties for abuse of power.

Emerson is the real deal when it comes to competition: he passed the current Competition and Consumer Act when Labor was last in power and fought — in the case of books, unsuccessfully — Labor’s internal tendency to cloying protectionism. He might fairly be described as one of the last of the 1980s reformers still going around public life.

But his review has little to do with the consumers aspect of competition; instead, it focuses on the near-monopsony power of Coles and Woolworths and their ability to leverage that against suppliers to force down their costs — or, as suppliers know it, income. Consumer competition within supermarkets is currently being investigated separately by the Australian Competition and Consumer Commission.

Emerson rightly wants to tilt the balance back toward suppliers, so he proposes a much tougher regulatory framework for the big companies. No-one but them is likely to complain. Whether fact or fiction, stories of how poor suppliers get screwed by the rapacious supermarkets are accepted as truth. It’s unlikely in the extreme that the supermarkets don’t exploit their market power.

But if the new code is effective, it will likely lead to suppliers getting a better return from the supermarkets. Which means higher costs for the latter. Have a guess what they’ll do on pricing in response.

You can already see a form of this. In 2019, Coles and Woolies lifted the price of their own-brand milk by 10 cents, purportedly to give struggling farmers a break. Whether the dairy industry — which inflicts a massive toll in terms of both water consumption and animal abuse — really needed such largesse, or that it continues to need it despite big changes in production conditions since then, has never been demonstrated. But consumers are paying higher prices to look after suppliers nonetheless.

Emerson understands that improved outcomes for suppliers mean higher prices. He devotes much of his piece in the Financial Review yesterday to explaining how it won’t. Why not? Because with higher returns, suppliers can invest more, lifting productivity and innovation. “Smaller suppliers might be earning insufficient returns to warrant new investment in innovation and equipment that would enable them to offer better-quality products at lower prices,” he says.

It’s a long bow, though. The productivity of the dairy industry, like most forms of agriculture, is driven mainly by weather, not by the entrepreneurial genius of farmers. Moreover, regional communities and their representatives, like the Nationals, have a love-hate relationship with higher productivity — which usually means more output and more exports but with fewer workers, which means smaller regional communities (cue laments about the death of “family farming”).

And between farmers and the supermarkets, what proportion of innovation-led cost reductions will actually make its way through to consumers? Still, call us cynical, but farmers are already the beneficiaries of extensive public policy largesse, and the formalisation of Coles’ and Woolies’ “10 cents to help a struggling cockie” into a mandatory imposition is likely to become another one.