Supermarket self-regulation is a joke

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Chris Johnston's cartoon 'Supermarket Self-regulation' shows a happy customer leaving a store run by a smiling man in a 'Coles/Woolworths' apron. In the store behind him we can glimpse the exploitative circumstances that led to her happy shopping experience.It is hard not to smile over Woolworths' and Coles' 'voluntary' adoption of a code of conduct. Wasting no time in gaining a public relations advantage, Woolworths chief executive Grant O'Brien joined Wesfarmers managing director Richard Goyder in urging Aldi, Costco and IGA to sign the landmark grocery code of conduct with suppliers. The code was the result of 14 months of negotiations with the Australian Food and Grocery Council. Now that the duopoly has decided to mend its ways, it seems it can occupy the moral high ground and preach to everyone else.

There is little reason for confidence. The practice of self-regulation arose because it was widely agreed that whenever governments interfere in markets it is bad for efficiency and probably counter productive. In the financial markets such a 'hands off' approach was the default position of regulators like Alan Greenspan, the former head of the US Federal Reserve, who assumed that if everyone acts in their own enlightened self interest then everything would be fine. It was not, as the GFC showed.

To see why codes of conduct do not address the problem, it is worth looking a little closer at what O'Brien said: 'All stakeholders should be well minded to keep what's best for customers at the forefront of their minds.' According to this, the ethical imperative is to serve customers' best interests. Everything else comes second.

At best, this is superficial, at worst misleading. There are many players involved in markets, not just customers. These include suppliers, employees of the companies (including O'Brien), shareholders and the general community (to the extent that it is affected by the behaviour of corporations). For the system to be robust and sustainable, which is the point of having a regulator, these different interests must be balanced.

By arguing that the only interest that matters is that of the customers, O'Brien is showing why companies are incapable of overseeing the health of a whole system. Neither will customers be able to do that. Stand in a supermarket queue and you will quickly see how much customers care about the interests of other customers, let alone anyone else in the production chain, or the wider community.

Even if self-regulation is effective (and there are many instances when it has been a sop to cover up business as usual) it is invariably too simplistic. It can be roughly characterised as: 'Customers come first so that the company can be profitable, shareholders are looked after and I meet performance hurdles and do well in my career. Everyone else we can worry about later and let the public affairs department or human resources look after it.'

It is reasonable enough that executives of corporations behave this way. The Corporations Act stipulates that boards must act in the interests of the 'company'. This is usually interpreted to mean acting in the interests of shareholders. For executives, it is largely about achieving growth in revenue, market share and profitability.

Nowhere is there anything about the interests of suppliers, who are being most disadvantaged by allowing such a dominant supermarket duopoly. Worse, it is arguably in the interests of customers to treat suppliers appallingly. By O'Brien's definition, putting the squeeze on suppliers is ethically correct. Especially when neither Coles nor Woolworths, despite their market dominance, can find greater profitability from efficiencies.

Whenever the duopoly is put under the microscope, it is concluded that their market is 'competitive' because they have tight profit margins. It never seems to occur to anyone that another possibility is that they are poorly run.

There cannot be anything in a code of conduct about the overall health of the market, especially its diversity. Unsurprisingly, corporations want to have as few competitors as possible. No code will ever include stipulations like restricting one's own excessive market dominance, which is the only change that would make any difference. An actor from outside the market has to do it, and that invariably means government.

The Western world has been subject to a quarter of a century of propaganda about the virtues of deregulation and the evils of government. The very idea of governments governing is now regarded as inherently suspicious. A barrage of think tanks, mostly funded by corporations or free market lobbyists, have spewed circular arguments demonstrating why no other views can be countenanced. Critics are subjected to insults about 'socialism' (my personal favourite was when critics of 'economic rationalism' were accused of being 'irrational', a neat circularity).

In consumer markets there is at least an argument to be had for self-regulation (in the finance sector it is contradictory nonsense). A balance needs to be struck between business freedom and regulation.

That balance needs to go much further than Adam Smith's so called 'invisible hand', the idiotic proposition that if everyone is allowed to be selfish, there will be a collective altruism (which is of course a misrepresentation of Smith). According to such kindergarten thinking, just as governments governing is inherently counter productive, so any thinking about the interests of others is a self defeating delusion. Sigh.

Finding the right balance is difficult, so governments have often shirked the issue, especially when the big corporations are involved. Instead of undertaking the difficult task of identifying and monitoring the balance of interests in markets and taking measures to ensure the system is robust, they have all too often been willing to hand it over to the participants. They have accepted that there are only two choices: bad government or no government. Good government is off the table.

Thus we are left with a code and a promise to do the right thing: self-regulation. No doubt Santa Claus will visit us, too, this year.


David James headshotDavid James has been a business journalist for 25 years and is the author of Managing for the Twenty First Century and The Business Devil's Dictionary. He has a PhD in English Literature from Monash University.

Original artwork by Chris Johnston

Topic tags: David James, Woolworths, Coles, self-regulation

 

 

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Existing comments

In our smallish district (population wise), the supermarket scene consists of the two big players, Aldi and three smaller supermarkets. So, there's quite a choice for customers. Many say Aldi is cheapest but doesn't offer the variety of brands of the big two. The smaller supermarkets offer friendly, local service with delivery. All these businesses need to make a profit - but how big a profit? Sometimes a friendly face and customer service is more important (to customers).
Pam | 10 December 2013


Australians should be very proud that we have two large successful Australian owned companies competing for our business , and it is this ruthless competitive environment that has bought down food inflation in recent years .They are facing new competition from the overseas owned companies with significantly more overseas sourcing which is good and healthy but should the competitors win then Australians will be worse off like they will be with the demise of Qantas and the car industry. Of course people like David would rather see these Australian companies fail, it suits their view on capitalism. By suppliers I assume David means farmers , not other companies. Farmers need to modernise and get more efficient just like every one else to survive. Most will and those that don't will want government and media support . Lets all hope that strong Australian companies with great customer service survive.
John Crew | 10 December 2013


This "customer" approaches this problem by making her role with the Duopoly as small as possible. I have found alterntive ways to buy almost everything I need/want and visit supermarkets as seldom as possible. I know that is not possible for everyone, but if customers drift elsewhere in big numbers, something might change.
Janet | 10 December 2013


Excellent! I discovered, oh, about 40 years ago (about the time I started my boycott of Nestle and Nike) that the supermarket duopoly was evil and have hardly ever visited one of their shops since. You can get everything in smaller shops, probably of better quality, certainly much better food, and more likely supporting local producers. When it comes to the big chains "just say no" is the best policy.
Russell | 10 December 2013


This page has an add for Dan Murphy's liquor stores (Woolworths?). Surely Eureka Street doesn't need to sell it's soul for this kind of advertising?
Russell | 10 December 2013


John Crew, I wonder if you are a farmer or have any contact with farmers. From what I hear from farmers they are pushed to the wall by these ruthless retailers and no amount of "efficiency" and "modernising" will solve that problem. When the wholesaler/retailer pays you below cost, what do you do?Produce inferior products?
Janet | 10 December 2013


John Crew wrote "Farmers need to modernise and get more efficient just like every one else to survive". Australian farmers are already among the world's most efficient. Among the OECD countries Australia and New Zealand provide the lowest government subsidies to agriculture. It isn't a level playing field out there.
Russell | 10 December 2013


I suspect that John Crew's solution to the problems of suppliers is for small farmers to go broke and sell out to the big corporations.
Gavan | 10 December 2013


I always find it interesting that the customers' needs must only be defined as economic. Surely we are moving beyond the idea that cheapest is best? Maybe even moving towards the idea that a company could sell us something for a reasonable price, that makes a reasonable profit while also accounting for the actual costs - environmental, social, etc etc. That would be an Australian achievement worth celebrating!
Liz | 10 December 2013


I'm glad people such as Russell and Pam here are pointing out what seems obvious, but Mr James misses: the alleged "duopoly" is a myth. On a free market, if you don't like what a business is doing, you're free to shop around, or start up your own rival business. That's what is happening, though if there were less government red tape, the state-created barriers to entry would be even lower and the competition fiercer. Neoclassical monopoly theory has been in tatters for a few decades now, even though the law, legislators and regulators have yet to catch up. Mr James also makes a contestable opposition between business freedom and regulation. Businesses are regulated by the natural law obligations (reflected in legislation, albeit inadequately) to honour contracts and agreements and respect property rights, just like anyone else. They are obliged to pay their suppliers what they agreed to pay, just as their suppliers are obliged to supply the goods they promised. Businesses are not obliged in justice to look out for the welfare of their suppliers, any more than their suppliers are obliged in justice to look out for the welfare of their client businesses. In the same vein, if my local Thai restaurant is failing, I'm not obliged to pay it more than the price on the menu for my meal. Of course, if the proprietors are starving, then yes, I'm obliged to help out if I can. But so is everyone else around, even if they have never been customers and hate Thai food. It's arbitrary to single out businesses as if they have some special obligation over all other individuals and organizations to care for "the community". Unless of course you're someone who thinks that making a business profit can't be done without some degree of vice.
HH | 10 December 2013


Almost all Australians benefit from Coles and Woolworth. These are Australian companies employing hundreds of thousands of people across the country. These companies distribute dividends to shareholders. Most of the shares are held by superannuation funds, which means most Australians are actually shareholders of Coles or Woolworth. Most of the money is spent to buy products from local producers and manufacturers and to pay taxes, salaries and dividends. On the other hand, foreign companies may be owned by a few Billionaires living in the USA, South Africa or Germany and the profits are often repatriated overseas. We need large successful companies like Coles and Woolworth to prevent a potential takeover of our retail industry by foreign companies.
Beat Odermatt | 10 December 2013


HH - I suspect you're not a Guardian reader, but what do you make of the article at: http://www.theguardian.com/world/2013/dec/08/david-simon-capitalism-marx-two-americas-wire
Russell | 10 December 2013


We have actually 5 large players in the retail game. Cosco and Aldi are far larger companies than Woolworth and Coles combined and even IGA is a very large company. If our do-gooders manage to destroy Australian companies like Coles and Woolworth, I am sure these large overseas companies would be ready to take over, as they have done in many other countries. Two large Australian companies are still better than none. Please name me two Australian car makers or local makers of TV sets? Where are our Australian makers of mobile phones, computers, motor bikes, bicycles, tires, buses, trucks or basic products such as razor blades? We still have our banks and retail stores in local hands, but how long will it take it for well meaning narrow minded people to destroy the last areas where we still Australian companies?
Beat Odermatt | 11 December 2013


Thanks, Russell for the link. It's a long and interesting piece! I'll respond in a few days. Cheers. HH.
HH | 11 December 2013


One worthy action for the Australian government to contemplate to improve our economy is Japan’s monetary easing policy.
Since the YEN is much cheaper now than before, Japan’s export and tourism businesses now become much more active again. This is exactly what we need for Australia.

The Australian government ought to consider adopting similar monetary easing policy to drive the AUD downwards appropriately. So, our Export competitiveness can be strengthened again, our economy can be improved and our people can keep their jobs.

The lower AUD currency can also help improving our Car Exports to other countries and save our car manufacturing industry like Holden.

Another thought is a linked currency policy for constantly linking AUD:USD at e.g. A$1.00 : US$0.80. The well-known success case is the linked currency between HKD:USD in the past 25 years or more. This link has more detailed discussion: http://en.wikipedia.org/wiki/Linked_exchange_rate .

Some other success cases of linked currencies in Europe can be found on this link: http://ec.europa.eu/economy_finance/euro/world/other_currencies/index_en.htm

Dulong Ttil | 30 December 2013


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