I again welcome Ms Ann Fitzgerald, Director of Consumer Affairs and interim Chairman of the National Consumer Agency.
Grocery Prices: Discussion with Director of Consumer Affairs.
Acting Chairman
I thank the Chairman and members of the committee for inviting us here today. With the Chairman's agreement, I will make a short statement and I will then be very happy to take any questions.
The Consumer Strategy Group, in its report Make Consumers Count, argued that the groceries order was not a ban on below cost selling as was widely supposed. Rather it was a ban on the sale, below the invoice price, of those goods that were covered by the order. This meant that retailers could not pass on directly to consumers the off-invoice discounts they had received from suppliers and that were an inherent part of the trade. The CSG concluded that the order kept the prices of groceries higher than they should be and that it should be abolished. That, as we are aware, was subsequently done by the Minister.
The statistics produced by the Central Statistics Office are the barometer by which we in the National Consumer Agency judge the impact of the abolition of the order. On the basis of those statistics the price of goods that were covered by the order has fallen by just over 1.5% over the period from April to December 2006; the price of goods not covered by the order — primarily fresh meat, fish, fruit and vegetables — increased by just over 2.3% in that period; and if we aggregate both grocery order and non-grocery order products for the same period, prices as a whole fell by 0.6%. These statistics should be seen in the context of an increase in the CPI as a whole of 2.8% for the same period.
I refer briefly to recent comments relating to the potential impact of price increases in raw materials on grocery prices. It is inevitable that shortages of commodities, crop failures, etc. will have some impact on grocery prices. However, we believe that impact should be proportional and should not become embedded into prices on a permanent basis. For example, a poor orange crop in Florida or California may lead to increases in the international price of orange juice, but whether these increases should remain for the long term is very questionable as other sources come on line. Furthermore, a price increase for a particular ingredient, wheat for example, should not be passed on disproportionately. The price of a loaf of bread is made up of many factors, of which that raw material is only one.
We in the National Consumer Agency hoped consumers would have obtained even deeper reductions in the price of their shopping baskets after the abolition of the groceries order. However, the trend is going in the right direction and that is very important to us. We regret, however, that we are not seeing more intense competition between retailers than has been evident to date. Yesterday I read a statement by the editor of the February 2007 edition of Retail News, “Life after the Groceries Order is, so far, not as bleak as was predicted... It was pretty much a case of ‘as you were’ for the sector, with multiples, symbol groups and independent retailers continuing to thrive.”
Competition is the lifeblood of a successful economy. It is good for consumers and good for producers and retailers. It promotes lower prices, promotes innovation and best business practices. We hope the Competition Authority's examination of the retail trade will bring some light to bear on the question of competition within this sector.
Acting Chairman
I will ask Mr. Prasifka to make his presentation before members may ask questions.
Mr. William Prasifka
As copies of my opening statement were circulated, I will not read it. The data the Competition Authority has been using to monitor grocery prices come from the Central Statistics Office. The CSO compiles the consumer price index which is based on a basket of more than 600 products. For some of these products it looks at more than one brand, so effectively it looks at more than 1,000 products. It compiles a grocery basket index and these products are weighted and analysed so that it compiles an accurate and typical basket of goods that can be monitored on a consistent basis over time. On foot of that analysis, the Competition Authority looks at four indices which are produced by the CSO, the consumer price index which is the best measure available of overall consumer price trends, a sub-index of the CPI that tracks grocery items formerly covered by the Restrictive Practices (Groceries) Order, a separate index that tracks price goods of items that were never covered by the groceries order and a basket of grocery goods.
As the Director of Consumer Affairs noted, the trends depicted in the annexes, and annex 1 in particular, indicate that consumer prices have increased by 2.8% since the abolition of the groceries order. The prices of items previously covered by the order have come down by 1.5%, whereas the prices of groceries that were never covered have risen by 2.3%, which is not a real increase because it is below the rate of the CPI. The combined prices of items previously covered or not covered by the order have decreased by 0.6% according to the data currently available to us. We will continue to monitor trends.
The Minister for Enterprise, Trade and Employment has asked us to undertake a groceries monitoring project. I was unable to give a full briefing to the committee on my last appearance before it, so I would like to outline more clearly what we are doing in that regard. We have effectively approved a grocery monitoring project that would describe in some detail the structure of the retail and wholesale segments of the grocery sector, report on business practices in the sector, especially pricing behaviour, and consider barriers to entry and expansion with a particular focus on the planning system. The CSO data reveals the broad national trend of the movement of prices in the CPI and items covered and not covered by the groceries order. In the grocery monitoring project, we will study in detail the wholesale-retail relationships in the sector and the vertical relationships that exist in the market, as well as the issues of local and regional competition which are not revealed by the national CSO data. Pursuant to the monitoring project and our powers under the Act, the team has been busy compiling the information it will need to prepare its conclusions.
We have met CEOs and other senior executives of all the major players in the Irish retail and wholesale sectors. We have asked for their assistance and provided them with detailed questionnaires which will allow us to obtain information about this market which is not revealed by CSO studies. Thus far, everyone has agreed to fully co-operate in providing us with information. We have also continued to liaise with the Office of the Director of Consumer Affairs, the Department of Enterprise, Trade and Employment and the CSO. Following an analysis of the information received from retailers and wholesalers, as well as additional information which we will seek from other major suppliers, the CSO and market research firms, the Competition Authority expects to have a report drafted and published by the second half of this year.
The other leg of our continuing activities in the grocery sector is enforcing the Competition (Amendment) Act 2006, which gives us particular responsibilities in terms of looking at practices in the sector on foot of the abolition of the groceries order. The Competition Authority has been proactive on this task and our team has met the major players and explained our interpretation of the Act and willingness to bring enforcement proceedings where necessary. As of close of business yesterday, the Competition Authority had not received any complaints in respect of the grocery sector since the commencement of the Act.
Acting Chairman
One of the main concerns expressed earlier by this committee was that the abolition of the groceries order would allow the multiples to sell more cheaply, thereby putting pressure on corner shops and restricting competition. Is there any evidence to suggest that is happening?
Mr. Prasifka
The grocery monitoring project will focus in particular on issues pertaining to the structure of the market and the relationship between the wholesale and retail sectors of the market concentration. The Acting Chairman expressed the concern that by setting their prices too low, multiples could drive others out of the market. However, recent reports have expressed concerns that some people are setting prices too high and that prices have not decreased. The Competition Authority will draw its own conclusions after investigating these issues.
I thank Ms Fitzgerald and Mr. Prasifka. We will learn from the CSO data being published tomorrow whether the trend is continuing. I take it from Ms Fitzgerald's presentation that the warnings about embedded costs from certain employers groups should be taken with a grain of salt because, while commodity prices are volatile by definition, the globalised market offers a variety of sources of seasonal products. Is it the view of the Director of Consumer Affairs that the warning about new costs being built into the system was a pre-emptive strike by either sellers or producers of commodities in order to soften up the consumer market?
They seem to be softening up warnings and I understand this is the time of the year when negotiations are conducted. I recall that a major retailer approached me last year to suggest that we issue a press release announcing to consumers that the price of meat was about to increase significantly. We did not accede to that request because we regarded it as another instance of the softening up process. It is unfortunate that it was done because I do not believe business should be conducted in such a manner and do not like it.
I welcome the representatives from the Competition Authority and the Director of Consumer Affairs. With regard to the debate on the groceries order and competition in the food sector, consumers should get the benefit of any changes made to policies. Estimates of the impact of changes had a direct impact on the decisions made by the Government and we take seriously any assertions made by the Competition Authority and others on these matters.
On 13 September 2005, the former chairman of the Competition Authority stated that the removal of the groceries order could be expected to save the average household €481 per annum, corresponding to a total of €577 million for all consumers. In other words, he was saying that money was being robbed from consumers' pockets by bad people. The 2006 CPI for items covered by the groceries order has increased by 0.2%. Prices which were not covered by the order have decreased over the year by 0.7%. There has therefore been an overall increase of 0.3%, mostly since February 2006, the last month of operation of the groceries order. Mr. Prasifka will understand if members of the joint committee and the public have questions arising from the claim by his predecessor that €577 million could be saved by the consumer. We can only describe that as bingo economics because no research was carried out to stand it up. The inclusion of those figures in the debate on the issue has misled the public, because the statistics were wildly inaccurate. On 10 August 2005 the Competition Authority claimed that where competition was allowed, food prices fell but where it was prevented prices continued to rise. In view of the statistics to which I have just referred, that could be deemed a flawed analysis.
We have moved on from the debate on the groceries order to the Competition (Amendment) Act 2006. We were hoping that Act would ensure consumers received the benefit of the claims made about savings. The figures have remained static over the past 18 years, whether the groceries order was in existence. The only exception is items not covered by the groceries order, where multiples are trying to create the impression of doing something. It is frustrating for members of this committee not to see any evidence that consumers are getting the benefit of the squeeze put on suppliers, rather than retailers or multiples, which much anecdotal evidence points to.
I call on the Competition Authority to talk to suppliers as part of its survey. They will not make a complaint because they have a relationship with retailers. One cannot expect a supplier contracted to a market power such as Tesco to make complaints to the Competition Authority or anyone else because to do so would risk penalties or loss of their business. Can Mr. Prasifka carry out research into suppliers? Some 1,570 jobs were lost in the food sector in 2006.
Mr. Prasifka mentioned the clothing sector but we no longer have a textile business in this country as our clothing comes from foreign parts. We still have a food industry and would like to hold onto it.
Mr. Prasifka
On the last point, the most significant focus of our grocery monitoring project is the vertical relationships within the retail sector and that includes looking at suppliers.
Prior to taking up my position I read the debate that took place in this committee on the groceries order and the exchanges in which my predecessor was involved. It may have been my fatalistic personality or simply an inability to convince my wife that we should do something else which made me take this job.
As I mentioned the last time I came before the joint committee, I felt the one element missing from the debate was a focus on the reality of the groceries order. The order was put in place in a well intentioned way, but in a different economic environment, to preserve the margins of certain entities in the groceries sector. A few weeks ago the Competition Authority achieved a major success in bringing the first criminal prosecution under the 2004 Act for price fixing in the automobile sector, where participants were also protecting their margins.
It is important for the Competition Authority to focus on enforcement. In the record of the debates involving my predecessor at this committee, I read of concerns that the Competition Authority was not doing enough to bring enforcement proceedings. It is very difficult to ask the Competition Authority to enforce criminal law against price fixing if we have in place a regulatory regime which gives formal approval to price fixing to preserve margins in a sector. The retail grocery sector has had and will have certain challenges but I want the joint committee and the public to understand that those challenges cannot be met simply by ratifying a price fixing regime.
Many figures were bandied about during the debate on the groceries order and I understand that people may treat what I say with some scepticism. The Competition Authority, as can be seen in the presentations I have made to this committee, has focused on the transparent CSO data which indicate that since the abolition of the groceries order, overall prices have come down, albeit perhaps only slightly, and items formerly covered by the groceries order have stayed significantly below the rate of inflation. I do not draw sweeping conclusions from that, as embedded in the prices of products are a number of different factors, some of which are completely beyond our control.
However, the abolition has brought about downward pressure on prices and that is not simply my opinion. A press release of January 2007 from the CSO came to a similar conclusion. I agree with the Director of Consumer Affairs that we may not have seen as vigorous price competition as we would have liked. The groceries order was in place for 18 years and it may take a bit of time before competition fully develops. Competition has always been driven by innovation and that has possibly not come about yet.
I sincerely hope we live in a post-groceries order world and accept the order as being more analogous to a prices commission than to a policy expected of a modern economy.
I agree with Mr. Prasifka's call to move the debate forward. When one does so one must learn from past experience and, when a policy decision is made based on certain claims unsubstantiated by research, he should expect members of this committee to have something to say about it.
I am not surprised there have been no new entrants to the market because they would have difficulties. Mr. Prasifka did not issue any questionnaire to suppliers as part of the monitoring of the food industry. Suppliers have not been engaged with as part of the process but it would be worthwhile to do so. Much information would be forthcoming which the Competition Authority would not otherwise get. Suppliers will not make complaints because they live in fear but the Competition Authority should dig a little deeper for it. There is evidence of long-term agreements and promotional contracts which are completely anti-competitive and distort the market, contributing to higher prices for the consumer than should be the case.
The questionnaire should be extended to the widest possible market rather than just concentrated on retailers and wholesalers. I am glad Mr. Prasifka did not try to justify what his predecessor said about savings to the consumer because the evidence suggests the latter was engaged in bingo economics. That is fine but it is not a basis for a policy of this joint committee, which takes its business seriously and wants to see consumers benefit from savings, rather than retailers. We have made our point very well and we are moving on.
We have legislation that will establish the National Consumer Agency on a statutory basis in the near future. In my correspondence with the Commission for Energy Regulation, it has been indicated that if the price increases — some 21% for electricity and 34% for gas — had not been granted last September, the CER could have been accused of condoning below-cost selling on energy. That is absolute nonsense and I will pass that correspondence along.
Subsequently we discovered that a mistake was made on the level of increase granted for energy prices. There was much publicity about a 10% reduction in prices, but this was a reduction on the original 34% increase in the price of gas and 21% increase in the price of electricity.
The National Consumer Agency will have to play a role in exposing this type of nonsense evident with regulators. They are not doing their job properly, particularly in the energy area, and are driving small businesses to the wall. They are certainly engaging very seriously with companies that are reviewing their global operations here because of the high cost of doing business here.
May I comment on that?
Acting Chairman
I ask Deputy Quinn to ask some questions first.
I would like the witness to comment on that. I would like to hear about the synergy between the Competition Authority, on the one hand, and the champion of the consumer, on the other. Perhaps the witness might outline some of the actions in this area generally?
On the energy issue, last September we were the first body to publicly state to the energy regulator that the world had changed, international energy prices had peaked in July, that the agreement on the gas price increase should be withdrawn and the position should be totally reviewed on the electricity price increase. There was no justification for it and our view on the matter has clearly been upheld.
Deputy Quinn asked what we have been doing for the past year. We have been really busy. As a board we took the view that much could be done for consumers without waiting for legislation. We started with the fundamental idea that consumers did not know their basic rights when shopping. We put in place a large campaign on the issue and set up a call centre which had received approximately 25,000 calls by the end of December, on top of the approximately 35,000 calls received by the ODCA. This shows the significant existing demand which is not being met.
In November we launched a good website that we aim to update daily. If something new happens it is on the website. Although we are not really official yet, we were the only such body to devote part of the main page of our website to advice within 24 hours of BUPA leaving the health insurance market. The advice related to options and how people could shop around.
I am picking and choosing because we have done so much. We took a leading role in the important area of management companies of apartment blocks, managing agents and the related mess. That has an effect on 500,000 people. I am setting up a forum to see what we can do on a non-legislative basis because it will take two or three years for the legal problems relating to management companies to be sorted.
We have been out there and active and we are trying to do our best for consumers. That is what our job will be.
Acting Chairman
Does Mr. Prasifka wish to make a further comment?
Mr. Prasifka
Deputy Quinn asked about the synergies between the Competition Authority and the National Consumer Agency. I do not wish to pre-empt my colleague from the National Consumer Agency but there has been much co-operation. For example, the Competition Authority published its report on the legal profession, suggesting that there was perhaps not as much competition there as would be possible. In conversations with the National Consumer Agency, it may be appropriate for it to take a more proactive role, for example, in advising consumers of the rights they have vis-à-vis solicitors and barristers and what they can expect. It would be more appropriate for that body to do so than us.
I am on the board of the National Consumer Agency. There is very good co-operation and I would anticipate a very significant amount of synergy between the two organisations.
I have some questions on the groceries order. I listened very attentively to a programme recently on one of the regional radio stations where a lady came on the air comparing prices, the quality of a product on display and the quality of what she was buying. She reluctantly goes for a store's own brand because the quality is always at the minimum. To get a good product a person would have to pay for the brand.
Looking at brands being protected, the likes of Kellogg's Corn Flakes and 7-Up will never deviate from their quality of brand and give it away to a multiple. When the prices of products are being measured, are own brand products taken into account? Own brands do not mean anything as the one manufacturer might produce "own brands" for four multiples. How is that measured against a product that carries its own brand or name, be it Fitzgerald, O'Keeffe or whatever it would be? How is this taken into account when calculating a drop in price, for example?
As Deputy Hogan stated, we lost 1,500 jobs in the Irish food industry last year, with many of them in Munster.
Some 600.
We will lose all our food industry jobs, as well as textiles, if we go down the "own brand" route. The only way to get own brand products is to import them from far away foreign fields in South America or the Far East. That will leave Irish workers and producers out of jobs. The organisations before us have a role to play in protecting the native industry as much as protecting the foreign imports and multiple chains.
There is an article in the current issue of Shoptalk entitled “Under Siege”. The magazine would have another agenda but it is aimed at independent Irish retailers. I ask that there be more transparency in the measurement of pricing.
Wheat and bread have also been mentioned. A percentage of bread is made up of flour, with the rest being water and perhaps baking powder and some additives. We have seen a change in this area globally because of the rise of bio-fuels.
What role is played by the organisations before us in pricing a product on the shelf? I note an article in the magazine where there were prosecutions related to this, but that is the law of the land. We make legislation and support the law. I heard a complaint this morning where a baking product is on shelves without prices being shown. I got my information from a competitor. Who has the responsibility for pricing such a product? Does the manufacturer or retailer do it and what role is played by the National Consumer Agency in policing the issue in order to protect the consumer? Rather than dealing with a person on the till in the shop on price, who else would play a role?
If the Deputy passes the details of that complaint to me I will be happy to look at it.
It is the retailer's responsibility to ensure the price of goods in a shop are properly managed according to law. The manufacturer does not have the responsibility. We have a team of inspectors who will form part of our trading standards approach when we get new legislation. As part of their work they will examine shops and pubs to ensure they comply with the legislation.
When the legislation is passed, we will have the ability to impose on-the-spot fines on those retailers who do not comply with the legislation. It is important for it to be done correctly.
We are leaving the issue of own brands to the Competition Authority, which is carrying out a study of the groceries sector. There is no point in us all treading over the same ground as it is not a good use of resources. I will leave it to the experts.
It is a quality and safety issue. I do not see how the Competition Authority can investigate that as it does not have the expertise.
I am not sure if my office or the National Consumer Agency would have it either.
It is a very unfair assessment. An "own brand" would be of the lowest quality and meet the minimum standard, whereas a branded product is different. There is no point indicating that prices have dropped 1.5% if it is based on own brands. That brings down the average.
That would be an issue for the Central Statistics Office, CSO, relating to how it examines these products through shoppers.
Our argument over the past year and a half or so is totally at variance with the assessments.
Mr. Prasifka
The issue of own brand products comes under the banner of vertical relationships in the retail trade. We will look at the relationship between retailers and suppliers and the extent to which that landscape is changing. We have seen that large wholesale groups have risen and many small, independent retailers have joined such groups. We will examine situations where large retailers vertically integrate themselves and decide to supply own brand products. In the UK some own brand products have a more significant influence in the market than here and we will examine whether this will change over time.
Own brand pricing is a matter the CSO considers when compiling the consumer price index, CPI, and also when compiling various sub-indices within that. The CSO conducts a household budget survey that tries to determine the contents of a typical basket of goods that should be included in the CPI and various other indices. The CSO must also consider these trends over time.
Own brand goods are dominant in the UK and moving into Ireland and the companies and multiples with own brand products have the highest profitability and share prices. A wage agreement has recently been put in place by a multiple that is dominant in the own brand market here and it has the margin on such goods when compared to traditional brands that I would rather not name. It is obvious that own brand products are based on quality and that allows for high profits, good wages and good dividends for shareholders. The other companies are under pressure because they deal in traditional brands.
There was a recent issue relating the purchase of Erin Foods by Premier Foods. The Competition Authority had a hearing in this regard and came to a conclusion so Mr. Prasifka may wish to brief the committee on the matter as it may result in the closure of Erin Foods in Thurles with the loss of 300 jobs.
Mr. Prasifka
The Competition Authority has given a press release on this matter and, pursuant to its merger clearance function the authority determined that the acquisition of Rank Hovis McDougall, RHM, by Premier Foods may be put into effect. This merger was notified to the Competition Authority and during the first phase of its investigation the authority identified certain competition concerns resulting from the proposed acquisition. The parties to the transaction submitted proposals that alleviated these concerns. In accordance with the Competition Act 2002 the authority has taken these proposals into account and they form the basis of the determination. Within 60 days of the date of that determination we will publish a full, reasoned decision, pursuant to the procedures set out in the Competition Act 2002.
What are the issues involved?
My understanding is that the decision was made that there would be a case of dominance if Erin Foods stayed with the new purchaser and the recommendation is that a section of the company must be sold. When this kind of decision is made is the market assessed to determine if there will be a buyer? I have been informed, through the Services, Industrial, Professional and Technical Union, SIPTU, that there is probably no other buyer for it in the marketplace because on its own it is not a viable entity. The decision of the Competition Authority assumes that another employer purchaser will buy this section of the company, run it and maintain competition. However it is suggested that disappearance, rather than competition will result from the separation of this section of the company and that this is a counterproductive decision.
Campbell's was purchased by an international organisation prior to this and now there is a new takeover bid. The Competition Authority deals with competition in Ireland and Premier Foods and RHM are taking over Campbell's, so how can the authority legislate in a matter that does not involve competition in Ireland? Campbell's is not based in Ireland, Premier Foods is a UK based company with other activities. Where does the Competition Authority stand in the matter of a British company taking over an Irish company?
Mr. Prasifka
When I come to the committee I try to be as forthcoming as possible but the committee will have to understand that the Act places me under certain constraints. The Act provides that we issue our determination within 60 days and there is an entire process that must be followed. In terms of considering this transaction, the effect on competition and the need for divestment, every effort and consideration was given to devise a remedy that would result in a viable entity. In terms of competition, it does not make sense for a remedy to be seen as extinguishing competition. Every effort was made to fashion the proposals in such a way as to see that the divested entity would be viable.
When is the 60 day period up?
Mr. Prasifka
It is 60 days from 9 February, but I can check this for the Deputy to be certain.
This is probably the last time we will meet the Competition Authority this side of the election.
We hope to see the Competition Authority after the election.
Does the Competition Authority have a role in ensuring there is no abuse of a dominant position?
Will Campbell's in Thurles close if the Competition Authority decides against the company? The Ford case, and other recent cases, show there were difficulties in the courts. Will Campbell's be prosecuted because the Competition Authority has found against it or because of a takeover or merger?
Mr. Prasifka
The Competition Authority has not made a decision to close anything.
Acting Chairman
I thank Mr. Prasifka and his team and Ms Fitzgerald and her team for attending today at such short notice. There is no doubt they will be called before this committee on several more occasions including to give advice on the National Consumer Protection Bill that will come before the Dáil shortly.
The joint committee adjourned at 10.50 a.m. until 9.30 a.m. on Wednesday, 7 March 2007.