Lower grocery prices, and measures to prevent predatory pricing, will ensure that consumers are the real winners, writes Micheál Martin
If a retailer buys a box of breakfast cereal from a supplier and is handed an invoice showing the cost of that cereal as €1, the law stipulates that the retailer cannot now sell that cereal on to the consumer for less than €1.
However, if next week, the supplier gives the retailer a discount or rebate of 20 cent on the box of cereal, then it follows that the box of cereal has only cost the retailer 80 cent. Such discounts or rebates are commonplace in the grocery trade.
However, under the law as it stands, that retailer is still not allowed to sell the box of cereal for less than €1.
That is the effect of the Groceries Order. And it applies not just to breakfast cereal but to about 75 per cent of the products in the average weekly shopping basket.
No one disputes the fact that removing the Groceries Order will lead to lower prices for groceries. Even the most fervent supporters of the order have argued that by getting rid of it, the Government will only encourage the larger retailers to sell at lower prices.
The only issue in dispute, therefore, is whether or not those lower prices will benefit consumers. That seems like a strange question because low prices are a natural consequence of greater competition in the market and surely they are a good thing for consumers.
The difficulty arises in determining when we have had too much of a good thing - in other words when does a low price become so low as to have no economic justification other than that of eliminating a competitor?
The answer is not as complex as some proponents of the order would have us believe. A price that is so low as to have no economic justification other than that of eliminating a competitor is what is known as a predatory price.
Predatory pricing is the act of a firm that is dominant in its market and involves selling below cost with the intention of raising prices again once competitors have exited the market. Chris Martin writing in this newspaper on Monday described predatory pricing as an abusive practice. I agree with him. Predatory pricing is anti-competitive and it is anti-consumer.
It is also prohibited by our competition laws.
Since 2002, we have had in Ireland one of the most modern Competition Acts in the world. The resources available to our Competition Authority to enforce the Act have more than doubled in the meantime.
The Competition Act prohibits predatory pricing. The Groceries Order does not. How can it prevent predatory pricing when it makes no effort to distinguish between low prices that are good for consumers and predatory prices that are bad for consumers?
In the case of groceries, we have a law that says it doesn't matter what the product is costing the retailer because selling to the customer at anything below the price on the invoice is illegal.
If you could gather all of the competition experts in the world in one room and ask them the question, the likelihood is that to a man and woman they would tell you that in the Irish grocery trade, selling at below the price on the invoice is not predatory.
Does the Groceries Order protect the small independent retailer? Judge for yourself. In the first 15 years after the order came into force, we lost almost 2,500 grocery stores in this country.
Does the Order protect suppliers from the buying power of the large retailers? No. There is nothing in the order that says a retailer cannot demand a better deal from his supplier. Nothing at all.
However, because of the way in which the Order operates, the retailer is more likely to demand a higher discount than he is to demand a lower invoice price. That makes no difference to the supplier. His margin is squeezed either way.
It makes a huge difference to the consumer, however. The consumer can benefit from a lower invoice price. The Order makes it illegal for him to benefit from a higher discount.
Does the Groceries Order offer fair competition and a level playing pitch for all participants in the trade? No. As far back as 1987, the Restrictive Practices Commission said that there was only token compliance with some provisions in the Order.
As a consequence, suppliers were applying terms of trade in a secretive, arbitrary and discriminatory way. There is no evidence that the situation has changed. Where is the level playing pitch?
Competition law in Ireland provides a level playing pitch. I intend to strengthen that law where I believe it is needed. In the meantime, consumers are the real winners.
Micheál Martin is Minister for Enterprise, Trade and Employment