A strange way to promote grocery competition
Chief Minister Jon Stanhope's new supermarkets policy won't cut Australian Capital Territory grocery prices and isn't supported by the Government's own data or how Canberrans vote with their wallets.
Last week, Stanhope announced that to promote competition in ACT supermarkets that at four separate developments the Government would dictate which supermarket chains are allowed to build new stores at the different locations. And which are not.
At some sites, the two majors Coles and Woolworths are being locked out in favour of minor players including Supabarn, IGA and Aldi.
And in attempting to foster downward pressure on prices the Government has mis-diagnosed the problem resulting in the wrong solution.
According to Stanhope's press release the objective is to offer more choices and "potentially cheaper prices".
Considering the ACT has some of the highest grocery prices in the nation it's unsurprising that the Government wants to cut the cost of living. However, there's a big difference between seeking "potentially cheaper prices" and actually delivering them.
According to the ACT Treasury's 2009 survey valuing a shopping basket of 29 consistent items at 30 different supermarkets the 20 cheapest baskets were all found at Coles and Woolworths.
By comparison the 10 most expensive were all at the Supabarns and IGAs that the Government's policy is now trying to push into the market.
The difference between stores is staggering. The cheapest basket at Gungahlin Coles was $30 cheaper than the most expensive at Lyneham IGA, amounting to an average saving of a dollar per item.
And Supabarn's cheapest store was only 8c less than the average price of the basket for all stores.
Stanhope's decision to introduce this new policy follows the Review of ACT Supermarket Competition policy by John Martin that was released in September last year.
The review concluded that "the two major chains are 50 to 10 per cent cheaper than the larger independents in the ACT", except for "Aldi ... [which is] almost 25 per cent less" than Coles and Woolworths.
But despite this conclusion the review's terms of reference didn't seek policy recommendations to make groceries cheaper.
Instead the Martin review was encouraged to investigate how the Territory government could introduce policy measures to increase the number of players in the ACT market.
In an opinion article published in The Canberra Times last Friday supporting his new policy announcement, Stanhope correctly identifies that "real competition is the life-blood of cheaper groceries for families".
But real competition to deliver cheaper prices isn't achieved by the Government seeking to rig the market in favour of an individual goods or services provider, especially when the Government is seeking to increase the supply of more expensive operators.
It's absurd to think that regulating in favour of a few extra non-major supermarkets will dramatically increase their efficiency to compete against the efficiency generated by major supermarket chains that operate across the entire nation.
Coles and Woolworths are able to share the costs of a smaller ratio of administration costs to the volume of groceries sold across the nation.
Similarly they are in a better negotiating position for bulk purchasing from suppliers.
In some cases their negotiating position is so strong that suppliers, like farmers, complain about the prices they are able to reduce food prices to.
And the logistics costs of national supermarket chains are also cheaper.
It's part of the reason that the IGA was formed to achieve higher purchasing power and lower logistics costs for small independent grocers.
Of course some consumer's concept of value goes beyond price.
As the Martin Review found, out of 40 indicators used in a survey to assess ACT consumers attitudes to different supermarkets included in the Martin review, IGA stores drew level pegging with the majors on only one category their proximity to people's homes.
In just about every other category from brands, to food quality to store cleanliness it was clear consumers preferred one of the majors.
Similarly, the 2008 ACCC inquiry into grocery prices found there was a lack of competitive pressure on the majors because the non-majors focused on "convenience and service", that has to be factored into price.
Instead of delivering cheaper prices, Stanhope's announcement increasingly appears designed to provide industry protection through planning regulations for the benefit of the group he likes to call the "locally-grown" Supabarn who have been granted access to half of the new developments.
But like all forms of protectionism it comes with a cost.
And in this case the pinch will be felt by less access for Canberra's families to cheaper groceries.