Groceries Order protects competition

You come back from holidays or business elsewhere in Europe and you are fuming. You are reminded yet again that you live in a part of Europe with very high retail food prices.

A year ago, the Republic had the highest retail food inflation in Europe. It is some comfort that we now have the lowest retail food inflation. However, inflation in other areas of the economy must be reined in.

Retail food prices are high in the State primarily because the costs of doing business in the Republic are high and because the cost of food imports from Britain increased when sterling was strong. The argument that the ban on below-cost selling (Groceries Order 1987) is responsible is untrue.

In November 2003, a report on the food industry in Ireland by Tansey Webster Stewart examined profit levels of the three largest wholesalers to the independent sector between 1997 and 2002. It showed that net profit increased from 1.6 per cent to 1.7 per cent over the period, while business-operating costs increased by 116 per cent. The report also found that the gap between farm gate prices and food manufacturers' prices is not due to high levels of profitability in food manufacturing. The Census of Industrial Production in 2000 shows that operating margins in Irish food manufacturing at 12.7 per cent were the lowest of Ireland's 10 leading industrial sectors.

The second major factor pushing up domestic food prices in recent years has been the sterling exchange rate. Between 1999 and 2002, the euro depreciated by some 15 per cent against sterling. This raised the euro price of food imports from Britain. In 2002, Ireland imported almost €1.8 billion worth of food and grocery products from Britain and the North.

If we are concerned about reining in retail food price, we need to rein in the costs of doing business.

We cannot go on increasing pay rates by more than 5 per cent, as we did last year - this is almost twice the rate of pay increase in the euro area. We need more domestic competition. It is a disgrace we cannot speed up development of roads and other infrastructure.

Let us look at the myth that the ban on below-cost selling is the culprit. The most recent Central Statistic Office figures put the State's retail food inflation at 0.1 per cent, whereas the EU average is 2.9 per cent. When we look at what is sold at food service and restaurant outlets, Irish prices are rising by 5.2 per cent compared to an EU average of 3 per cent. There is no ban on below-cost selling of food in the food services sector.

Analysis by Forfás of euro prices in 2001 and 2003 shows that the lowest-priced countries for grocery goods in the euro zone are Spain, Portugal and Greece. These countries all have bans on below-cost selling on grocery goods.

Furthermore, the link between the existence of the Order and the development of a price gap over the past seven years ignores the fact that we have had a Groceries Order in place for 17 years.

Retailers can already sell at cost, but rarely do. The Order does not apply to products such as fresh meat, fruit and vegetables. Yet, since April 1994, inflation in this category of products is 20 per cent higher than the category of goods to which the Order does apply. Why is this so?

Is it because retailers will only engage in below-cost selling if they can reduce competition by forcing competitors out of business? The Order protects against this. It offers a level of protection to consumers because, without it, choice is reduced and prices would be higher.

Despite all the facts in favour of retention of the Groceries Order, those of us who support it are dismissed as vested interests. Even the the Competition Authority chairman, Dr John Fingleton, has shown lack of understanding of this issue as he engages in an increasingly hysterical rant against those who support retention of the Order: his arguments are ideological rather than fact-based.

In May 2003, Dr Fingleton called for abolition of the Order. He said the benefit that would accrue to the consumer through abolition of the Order and subsequent reduction in food prices to EU levels was equivalent to a 2 per cent increase in average wages or €550 to a couple living on a non-contributory old-age pension. The reality is that this €550 and more has accrued to the Irish consumer, because Irish food inflation has not only matched EU levels but has bettered them.

Thankfully the Groceries Order is still in place and was in place while this boon was being delivered to consumers. As for the vested interest jibe, the notion that we should organise our economy on the basis of excluding the expertise of those who actually operate in it is frankly absurd. It is time to move on.

Ciarán Fitzgerald is director of sectors and trade federations with IBEC