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In addition, the Minister announced that the Government has agreed to shortly publish new legislative proposals to strengthen the provisions of the Competition Act, 2002 to specifically prohibit the fixing of minimum retail prices by suppliers (resale price maintenance), unfair discrimination, and the payment of advertising allowances and “hello money.” The Minister has also asked the Competition Authority, in cooperation with the Director of Consumer Affairs, to review and monitor the structure and operation of the grocery trade for the foreseeable future to see how it responds to the new legislative environment. The Minister has also published his Department’s Report of their Review of the Operation of the Order, which is a comprehensive analysis of the issue. “Very simply, the Groceries Order has acted against the interests of consumers for the past 18 years and it is now time for consumer interests to prevail. There really was no option available to the Government other than a decision to revoke the Order.” Martin went to say that the Order was an extremely complex piece of legislation that was hugely contrary to all the principles of better regulation. “It has been difficult to enforce, and compliance with key provisions was only token in some respects. It was flawed in a whole host of ways that are clearly identified in the report,” he said. He continued: “One of the key aims of the current Order which was introduced in 1987 was to prevent below cost selling by larger retailers in a manner that that would damage their smaller competitors. Unfortunately, key provisions and terminology in the Order designed to achieve that objective has been identified in the Report as no more than an “administrative convenience.” It is simply no longer acceptable that State intervention in a key sector of our economy should be based on an administrative convenience with no economic rationale to support it whatsoever.” (See Note for Editors) “Predatory pricing is an anti competitive practice and is outlawed by the provisions of the Competition Act. The Groceries Order, on the other hand is incapable of addressing the threat of predatory pricing in any sort of proportionate way”. And he continued, “The Order was introduced to do other things as well. It was designed to protect the position of the independent retail grocer. Instead, we lost nearly 2,500 grocery stores in the first 15 years of the Order’s operation.” “It was designed to prevent the market becoming more and more concentrated in the hands of fewer, bigger retailers. But instead, our market is now more concentrated than it was in 1987 and is actually more concentrated that the British market where no ban on below cost selling exists.” “Since first introduced in 1956, the Order was designed to ensure fair trading conditions in the grocery trade. Yet as far back as 1987, it was acknowledged that key provisions of the Order, which are still in force today, were being applied in a secretive, arbitrary and discriminatory manner.” It is abundantly clear that the Order has achieved none of its objectives. Indeed, it has been spectacularly unsuccessful by failing dismally to do what it says on the tin.” Referring to other findings in the Report, Minister Martin said: “Although the case for getting rid of the Order does not hinge on the inflation analysis contained in the Report, it is startling to note that since the mid-nineties, Irish food inflation has been three times that of the rate in the UK. “ “Furthermore, the eight countries in the EU who can be considered to have a ban on below cost selling of one form or another have the eight highest rates of food inflation in the same period,” the Minister added.
Statement of Micheál Martin TD Minister for Since it was introduced in 1987 the Groceries Order has been the subject of ongoing controversy. Across almost two decades it has become an emotional touchstone used by different sides in a heated debate which has brought confusion rather than clarity to the issues at hand. Anecdote rather evidence has tended to dominate. Having considered the range of reports, which had been produced over the years, and the recommendations of the Consumer Strategy Group, I announced earlier this year that the time had come to reach a definitive conclusion on the impact and future of the Order. I put in place a process to bring together all of the best evidence available, both domestically and internationally, to provide all interested parties with a full opportunity to make their views known and, finally to bring the conclusions to Government. This process has now been completed. Having considered a detailed and comprehensive report prepared by my Department, which I am now publishing, the Government has today approved my proposal for the repeal the Restrictive Practices (Groceries) Order, 1987 in its entirety. In addition, in response to various concerns about the possibility that unfair trading practices might develop, the Government has also agreed to the introduction of amending legislation to strengthen provisions of the Competition Act in relation to the grocery trade. Such practices include resale price maintenance, unfair discrimination and the payment and receipt of advertising allowances and “hello money”. It is not possible in a short statement to go into every issue in detail, but I would like to outline the principal reasons why we have reached this decision. To summarise very quickly: There is no evidence that the Order has protected fair competition in the grocery sector and there is substantial evidence that consumers are paying higher prices because of the Order. Why Was the Order Introduced? If you look back at the decision in 1987 to introduce the Groceries Order the justification was that it would reduce pressure on independent retailers and stabilise the market. The facts show that it has not done this. Instead, over a 15 year period to 2002, almost 2,500 grocery outlets closed, representing more than 20% of all of grocery stores. Just as the Order has failed to stop grocery stores from closing, it has also failed to prevent concentration of the sector. Today the top four retailers control 78% of the marker. In comparison, in In relation to predatory pricing, the terms and operation of the Groceries Order show that it is simply incapable of having the claimed impact. In 1987, it was expected that the Order would introduce greater price transparency into the grocery trade. In particular, the then Restrictive Practices Commission recommended to the grocery trade that, from that point forward, all discounts and rebates paid to retailers should be placed on the invoice provided by the supplier. That hasn’t happened either. If anything, in the years that followed, the practice of off-invoice discounting has become more prevalent than before. When first introduced, it was expected that the Groceries Order would level the playing pitch and ensure that all retailers would be treated fairly in regards to the terms of trade offered by their suppliers. Again, that hasn’t happened. The Restrictive Practices Commission found that there was only token compliance with the terms of the Order in this respect and they said, and I quote: “We are satisfied that suppliers are continuing to discriminate unfairly between their customers at the present time. The objectives of the Order have, therefore, not been achieved.” The Report published today finds that this remains the case today. The Report goes into great detail on these and other points to do with the history and operations of the Order. The bottom line is, the Groceries Order has not achieved its stated objectives and it is not working in the manner envisaged when it was first introduced. Many of the claims promoted to defend its continuance do not stand up to serious scrutiny. Impact on Consumers The Order represents a clear and significant distortion of the groceries trade which the evidence suggests has had its most significant impact in forcing consumers to pay higher prices. Since 1987, the price of the average weekly shopping basket has been maintained at an artificially high level – directly as a result of the Groceries Order. This is because the Order has allowed suppliers to the grocery trade to set minimum prices below which retailers can not sell products to the consumer. It follows that the lowest possible selling price for groceries in Irish supermarkets has not been the result of normal economic principles and competitive forces as are at work in other sectors of the economy. Instead, in the grocery trade, the suppliers have set such prices, perhaps unwittingly in some instances, but set them they have, by the simple act of providing the retailer with an invoice. Once a supplier puts a price on an invoice, that price immediately becomes the minimum price at which that product can be sold to the consumer. If retailers wants to sell at a lower price – even if it is simply to match the price being charged by competitors next door– they can not do so without breaking the law. That is what is known as resale price maintenance – the fixing of resale prices by suppliers. It is anti-competitive and it is anti-consumer. It is not anti-competitive or anti-consumer just because I think so or just because my Department thinks so. It is a practice that is regarded as anti-competitive and anti-consumer in most developed economies around the globe. Let me give you some facts from the Report. In the period since 1996, the rate of food inflation in Some might argue that that is the result of higher input costs in the Irish retail sector. But that cannot be the explanation because in the same period, the rate of inflation in the clothing sector in The Report doesn’t claim that the higher food inflation in There are eight countries in the EU with legislative provisions in regard to below cost selling. Many of those provisions are different in scope and application to the provisions of our Groceries Order and no direct comparisons can be made. However, those eight countries have had the eight highest rates of food inflation in the EU in the period since 1996. It is reasonable to conclude, that measures which set a minimum price for goods lead to consumers paying higher prices than they would if the measures did not exist. Independent Outlets I fully accept that the consumer is interested in availability as well as price, and that independent outlets are a key part of this. We have been told that if we get rid of the Order we will destroy the independent grocery trade and end up like the A closer examination of the evidence suggests that this is just not true. The statistic is wrong and a serious misrepresentation of the real facts. The Report does not claim that the use of the statistic has been mischievous, but it does say that its use has generated unwarranted concerns about what might happen if the Order is removed. I urge you to read Chapter 10 of the Report carefully. 79% of rural households in We have been told that the majority of UK High Streets have lost their local shopping facilities as a result of below cost selling. This is what is called Ghost Town The Ghost Town argument has nothing to do with below cost selling. In fact, the second Ghost Town Britain Report published in 2003 by the New Economics Foundation actually argues that the prices of fresh meat and vegetables in multiple outlets are often higher than in local independently owned retail outlets. The convenience sector of the grocery trade in the In Consumers are attracted to convenience stores simply because they are convenient. All the evidence points to the fact that they operate in a different market and are not competing directly with the multiple outlets. The statistics presented in the Report show that the multiples are less likely to be attracted to rural areas and so, once again, direct competition often does not arise. If the multiples did decide to expand into rural locations, there is no reason to believe that a similar convenience niche would not evolve in the same way as it has in our bigger towns. Much concern has been expressed about the plight of the independent retailer if the Groceries Order is removed. I want to say something about that in a moment. Predatory Pricing/Competition Act It is argued by those who wish to see the Order maintained – and in some cases strengthened – that once we remove it, the largest retailers will immediately use their financial muscle to engage in predatory pricing. They will do this, it is argued, simply to get rid of the small guys and corner the market for themselves. I have considered in great detail the arguments put to me on this. I agree that we must act against predatory pricing, especially where it distorts a market and undermines fair competition. However, I have no doubt that the most effective way of dealing with this is through competition legislation, not an Order which itself distorts the market by banning many low pricing strategies. I cannot accept the assumption that all low or below cost pricing is predatory. And simply repeating the argument over and over again will not make it so. Most low pricing strategies are the result of legitimate competition in the market place. They threaten consumers with nothing more than better value. Genuine predatory pricing – tactics aimed at ultimately distorting the market and unfairly increasing the power of individual retailers – is without question anti-competitive and works against the interests of consumers. However, the right response is to make sure that the Competition Acts are working effectively. Indeed, we extensively reviewed our Competition laws in the past 5 years with a significant input from the business community. As a result, our competition laws are based on best international practice and are modelled in large part on the laws of the European Union. Indeed, the Competition & Mergers Review Group in 2000 acknowledged that consistency with European law formed a fundamental backdrop to national competition law. Consequently, Ireland has one of the most modern Competition Acts in the world. I am confident that the strengthened competition legislation will continue to provide an effective mechanism for addressing genuine cases of predatory pricing as well as guaranteeing fair competition in the grocery trade. In addition, I am asking the Competition Authority to review and monitor the structure of the grocery trade on a regular basis and for the foreseeable future to ensure that fair competition is maintained within the sector. Off-Invoice Discounts This leads me neatly to the issue of off-invoice discounts about which there has been much public debate also. These are discounts offered to the retailer that are not put on the invoice and therefore the consumer cannot benefit from them. My Department’s Report deals in some detail with the technical aspects of how such discounts work in a secret, arbitrary and discriminatory way and how they have the potential to seriously distort competition in the grocery trade. Suggestions have been made that we should now prohibit such discounts or that we should legislate to ensure that all discounts are reflected on the invoice. In that way, it is argued, they can be passed on to the consumer. I don’t believe that it is possible to design a suitable legislative provision – one that could be easily enforced – to give effect to either of these ideas. I am not sure either that the trade wants us to prohibit the fair and transparent incentivisation of valued customers. And even if we got over those hurdles, we would still be left with the hugely anti-competitive and anti-consumer practice whereby the supplier sets the minimum resale price by the simple act of providing his retail customer with an invoice. Abuse of Buying Power Suppliers, manufacturers and producers have argued that that the Groceries Order is critical to ensuring that they are protected from the buying power of the largest retailers. It is suggested that if the Order is removed, prices will be forced ever downwards and that the supply chain will be seriously threatened by the uneconomic return that will result. I will say two things about that. Firstly, there is nothing in the Groceries Order that prevents a retailer with buying power from demanding a lower invoice price from his supplier. Nothing at all. As things stand, with the Order in place, a retailer can thump the table, rant and rave, threaten to stop doing business with the supplier, or all of those things if he wishes in order to secure a lower price. Or, alternatively, a retailer can demand a higher off-invoice discount. In fact, he much more likely to demand the discount because word of it is less likely to get out to his competitors. He, and he alone, will benefit from his buying power. From the supplier’s point of view, his margin is squeezed regardless of whether he offers a lower price or a higher discount. This is the situation faced by suppliers at the moment and taking away the Groceries Order will not change a thing. From the consumer’s point of view, however, the difference is more critical. Consumers can benefit from a lower invoice price – but the Groceries Order makes it illegal for them to benefit from a higher discount because. This is absurd and unjustifiable. Independent Retailers I would like to make a few more detailed comments about the position of independent retailers. First let me be clear what I mean when I refer to “independent retailer”. I do not mean a retailer who is a member of a large franchise operation - we sometimes call them the symbol groups - with all the buying power such status affords. When I refer to independent retailers, I mean the small family owned corner shop that existed in towns and villages and suburbs when we were all growing up. For some time these independent retailers have been a declining breed. It is likely that they make up the bulk of the almost 2,500 grocery stores that we have lost in Ireland over the last 18 years. Indeed, I we may actually have lost many more than that number. The available evidence suggests that large numbers of truly independent retailers have joined forces with one of the large franchise operations, something they probably did in order to survive. But for those truly independents that are left I say this. Don’t be fooled into thinking that the Groceries Order is protecting you from your competitor, there is absolutely no evidence that it is. In fact, when you make the next trip to the cash and carry, ask yourself whether or not you might in fact be buying from your competitor. And don’t ask your wholesaler what price he is charging other retailers for the same goods that make up your shopping list. Ask him instead what off-invoice discount he is paying. The Report published today concludes that such discounts are paid in a secretive, arbitrary and discriminatory manner. By removing the Groceries Order we will remove the legislative authority for such practices. Conclusion Over the last seven months we have carried out an exhaustive process of consultation and analysis of the different aspects of the Groceries Order. The evidence is overwhelming that the Order has not had the impact which it was designed to achieve or which is claimed for it. It has not brought fairer competition, it has not helped independent retailers and it has not prevented the concentration of the groceries trade. However, it has helped ensure that Irish consumers pay higher prices for their groceries. The proper was to deal with anti-competitive practices is through competition law – not through distorting the market and forcing consumers to pay higher prices. Therefore the Groceries Order will be repealed and the Competition Act strengthened. This is a balanced and reasonable decision, which promotes both the interests of the Irish consumer and fair competition. © Copyright 2007 by Finfacts.com |
