Tuesday, June 03, 2008

Tuesday Column: FuelWatch was just the beginning

We are about to be treated to something much bigger, far more useful, and potentially lethal to retailers who pad their prices.

Colloquially known as ‘FoodWatch’ it’ll measure the price of the same basket of groceries in every major supermarket in every region of every city and every reasonably-sized country town. Then it’ll put the results up on the web to help us plan our shopping.

Will it cut the profit margins charged on groceries? It should. Will it strike fear into the hearts of supermarket operators? It will if it’s done properly.

Long before Kevin Rudd publicly discovered FuelWatch he went into last year’s election promising to direct the Competition and Consumer Commission to create a national survey across supermarkets of the price of exactly the same bag of groceries “including family staples like biscuits, bread and baked beans”.

If you think the differences that it uncovers will be trivial, you haven’t been seriously shopping...

According to Choice magazine, the price of the same bag can vary from $55 to $108 depending on which suburb you are in the name that’s painted on the outside of the store.

Legend has it that when the retailer Paul Simons returned from Franklins to run Woolworths in the late 1980’s he plonked a bag of groceries on the boardroom table and asked each of the company’s directors in turn to guess how much cheaper the bag would have been at Franklins than Woolworths. None of the guesses came close.

The ACCC’s grocery prices inquiry has heard about the tricks the supermarkets use to make us think that there’s little difference between their prices when in fact those differences can be huge. One is to keenly price “high visibility items” and charge a fortune for the rest.

Another is to charge big prices per litre or kilo for big packages. That’s right, big prices for big packages. Most of us automatically assume that the big packages are cheaper per unit. After I wrote about this in Sunday’s Canberra Times I received an email from someone who had seen a six-pack of Toohey's stubbies selling for $11.99 alongside individual stubbies selling for $1.59. Which sounds okay until you do the maths.

And then there’s the identical milk selling for different prices depending what sticker Coles puts on the bottle. The chain sells a 3-litre bottle of You’ll Love Coles milk for 60 cents more than it sells a 3-litre bottle of Coles Smart Buy milk right next to it in the same display cabinet. Asked at the inquiry whether there was any difference between the two, Coles Chief Operating Officer Mick McMahon replied uncomfortably, “there is in the eyes of the customer”.

Coles has conceded that it deliberately prices its products cheaper at those of its supermarkets that are near Aldi stores – a powerful endorsement of the competition. But without “FoodWatch” the extent to which the majors are playing us for mugs is hard to see.

FoodWatch is a work in progress right now. The ACCC gets the money in July. Totalling $12.9 million over four years, it’ll be used to hire market researchers to go into every major town and group of suburbs in the country armed with data input devices to capture prices.

The trick is to design the survey so that it can’t be rorted. If for instance the ACCC published the exact makeup of the basket of goods it was pricing – the particular type of apples, the size of the can of baked beans and so on – the supermarket chains would keep those prices low and not others.

But if it gave out no information about what was in its virtual shopping basked the chains would deride its website as unrepresentative.

The ACCC’s approach is likely to be to publish quite a lot of detail on its website, but without the specifics. It might say that its virtual shopping basket includes “bread” but not specify that what it is actually pricing is a 650gram sliced white loaf plus two brown rolls. Or it might say that its basket includes “apples” but not specify that what it is pricing is 500g of loose Pink Lady apples plus 200 grams of Granny Smiths.

The chains are likely to put as much effort into deciphering the virtual FoodWatch basket as website developers put into deciphering the ranking rules used by the Google search engine.

It’s entirely likely that the ACCC will have to secretly adjust the basket to keep ahead of them.

That’s one of the reasons why the Australian Bureau of Statistics – an obvious candidate to conduct the survey – hasn’t been given the job.

It’s task when entering stores to calculate the Consumer Price Index is out work out changes in the prices of the same group of goods over time.

The ACCC’s task will be to compare the price of goods between stores at any one moment in time. It’s best if it doesn’t keep the basket exactly the same.

Also the Bureau is bound by a legal requirement not to identify the stores that it visits. The ACCC will be bound by no such requirement and will aim to name and shame.

It won’t do it for every store in the country. In towns where there is only one store there would be no point. And in the cities there thousands of stores it would be too expensive. But it will make sure it surveys every major chain - including Aldi, Franklins, Superbarn, Foodland and IGA – and every cluster of suburbs. If Woolworths has a policy of charging more in Civic than in Queanbeyan we will know about it.

Will the Coalition object to it? It says it won’t. But it has managed to object to FuelWatch and is threatening to block it in the Senate.

In both cases the government is planning to give us information that the people who sell to us already have and sometimes use against us.

If I were Woolies or Coles I would be lobbying the Coalition as hard as the petrol companies have and commissioning silly studies to demonstrate that the idea couldn’t work.

I might even claim that I couldn’t afford to cut my margins, which in Woolworth’s case wouldn’t be true. It told the inquiry it gets a 10 per cent return on “return on funds” from its New Zealand supermarkets, but 75 per cent in Australia.