Coles v ACCC: finding the balance between fair trading and competition

We like competition that leads to low prices, but Australians also want fairness. Flickr/Theen Moy, CC BY

In the space of just six months, the Australian Competition and Consumer Commission has launched two major cases against supermarket giant Coles for alleged unconscionable conduct against its suppliers.

The cases involve allegations of various forms of unfair treatment of suppliers, including harsh and oppressive tactics directed at extracting supplier rebates for claimed supply chain savings, pursuit of payments to cover “profit gaps”, payments to cover “waste” beyond the supplier’s control and penalties for short or late deliveries.

The basis for the actions is essentially that such behaviour oversteps the mark in what would be regarded as legitimate or fair trading relations.

These actions are to be applauded. That is not intended as a comment on their likely success. Coles has said that it will vigorously defend the allegations and it goes without saying that the ultimate outcomes are highly uncertain. It should also be acknowledged that since the conduct alleged in these cases took place, Coles has been party to drafting of a code of conduct relating to retailer-supplier relations, and has developed its own supplier charter.

The ACCC’s cases do not involve allegations that Coles acted anti-competitively or, more specifically, that the conduct involved a misuse of market power. This is significant. Much of the debate surrounding the retail grocery sector in recent years has been focused on its competitiveness.

Competition at any cost?

Yet the “experts” keep telling us that the market is workably competitive and that consumers are benefiting – pointing to staples such as milk and bread prices. The ACCC reached this conclusion in its 2008 inquiry into the sector and the recently released Harper Review appears to share this view.

Essentially, the issue raised by the ACCC’s allegations is whether we want competition at any cost. Do we prize lower prices at the expense of other interests or values?

Social research indicates while we welcome productivity measures that increase competition and lower prices, we also feel uncertain about the extent to which free markets guarantee us an overall improvement in our quality of life.

We are concerned about the threat from competition to other interests that we value, like income equality, environmental sustainability and opportunities for domestic employment. Less tangibly, but as importantly, there is a sense that unbridled competition threatens our traditional attachment to the land, the iconic image of the ‘Aussie battler" and our cultural ethos of a “fair go”.

This general tension is played out vividly in the context of supermarkets. Consumer patronage of chains at the expense of smaller retail outlets has risen over the last decade, due to lower prices on a wider range of products, shopping convenience and flexible hours. But consumers have a “love/hate” relationship with Coles and Woolworths. They feel resentful and distrustful of the very shops that they patronise, often because they see the chains as undermining the character and amenity of their communities.

These sentiments are consistent with the evidence of general public mistrust of “big business”, a concern that large companies have excessive power and scepticism of the relationship between government and business.

In spite of demands by business to “cut red tape”, the public expects that economic activity will operate within a framework of rules, and strongly supports government intervention to protect consumers, communities, the environment and workers.

Competition is seen as being by its nature a brutal process, but we are not prepared to accept brutality and destruction in other spheres of social interaction. Nor should we in the context of market dynamics. In my opinion, there is a legitimate role for fairness in the way in which businesses deal with each other – as competitors, customers and suppliers.

It is worth remembering that despite its name, the Competition and Consumer Act is not just directed at providing for consumer protection and promoting competition. Section 2 makes it clear that it is intended to enhance the welfare of Australians, including through provision for fair trading. “Welfare” is not defined in the statute and while the contemporary pre-occupation of theorists in this field is with “consumer welfare”, there is not a compelling justification for defining it so narrowly.

Instead, “welfare” in this context could be associated instead with the more encompassing concept of “wellbeing”. After all, there is no shortage of evidence from the economic happiness literature that self interest and wealth maximisation (the premises of competition policy, narrowly conceived) are not necessarily a guarantee of greater happiness, or wellbeing in a holistic sense.

Fairness and competition

Outside of the purview of fairness for consumers, “fair trading” has been the sleeper in the last 40 years of development in our trade practices law. It has been largely missing from the policy debate and appears to have been a low enforcement priority. I am pleased to say that there are signs that this is changing.

The government has not just a productivity policy, where competition is the central tenet, but also a small business policy, which speaks of “the vital contribution that the [small business] sector makes to our economy and our communities”.

Small Business Minister Bruce Billson MP proposes to extend unfair contract protections to small business (explicitly acknowledging the need to recognise an “ethical norm of fairness” in business dealings). This sits along with the proposed code of conduct governing contractual relations between supermarkets and suppliers and includes a proposed requirement of “good faith”.

The ACCC’s recent enforcement actions reflect its annual statement of enforcement priorities and demonstrates commitment to exploring the bounds of the prohibition on “unconscionability” as it applies to business-to-businesss transactions in the legislation. In its media release accompanying the latest Coles action, ACCC Chairman, Rod Sims, said:

“The ACCC has commenced these proceedings because it considers the alleged conduct was contrary to the prevailing business and social values which underpin business standards that apply to dealings with suppliers.”

But clearly there is still much work to be done, including tackling the big questions - such as what is “fairness”? In interpreting the unconscionability laws, the courts speak of “conduct against conscience”; conduct assessed against “moral and normative standards, broadly cast”. But how are those standards defined? They need to be given more content, no matter how daunting that task may seem.

The ACCC cases against Coles will not address all of the concerns that surround supermarkets in this country. But in bringing this litigation the ACCC is making a substantial contribution to an informed debate about what value should imbue business dealings.

Is it possible to reconcile the potential conflict between the inherently unfair process of competition and fairness in business dealings? Can we realistically have both? And, if so, when is one to be prized above the other? For example, would consumers accept higher grocery prices if it meant that farmers and suppliers could be treated more “fairly”? When and how do policymakers and the ACCC strike the right balance between these two concerns?

Whose responsibility?

Should, for instance, government be responsible for fostering and protecting fairness in business dealings, or should we expect our business leaders to also take some responsibility? This expectation would recognise businesses not just as economic but as social and political actors in our society and place expectations on them accordingly.

It appears that some in the business sector recognise and embrace this. Despite the scathing criticism that it sometimes attracts and regardless of the outcome of the current cases, Coles deserves recognition for its commitment to regional communities through not-for-profit projects such as SecondBite (which it has donated $5 million in meals to disadvantaged families over the last four years).

These are questions actively being explored by our political leaders and those who are in the position to influence directly the nature of the policies, law and enforcement action that impact on our lives. We should support them in this endeavour - by continuing to engage in the discourse and ensure our voices are heard in a debate, the outcomes of which will have fundamental and long term implications for how we feel about being Australian.