Speech by Páll Gunnar Pálsson, Director General of the Competition Authority, at the ASÍ breakfast seminar on food prices
Dear guests,
I have the privilege of speaking after five keynote speakers, who have shed clear light on many issues that are important in the discussion about food prices in Iceland. With this in mind, it is most appropriate for me to provide an overview of the main topics of the Competition Authority in recent years, which are relevant to the discussion of these matters. In conclusion, I will then seek to answer the question of how we can improve the position of consumers.
The Competition Authority devotes approximately 15-25% of its time each year to the food or grocery market, and on its website, you can find nearly 100 decisions concerning the grocery market. Looking back, the following main themes can be read from these decisions:
[Compression and fusion]
Firstly The Competition Authority has been monitoring the growing concentration in the grocery market. It is clear that concentration has been high for a long time, which can be attributed in part to the mergers of Bonus and Hagkaup, and 10-11 towards the end of the last century. These mergers went ahead before the merger provisions of the Competition Act were in their current form, i.e. with clearer and better intervention powers.
With the aim of reducing concentration, the Competition Authority recommended that Arion Bank, when it acquired control of Haga in 2009, sell the company in more than one part. The bank subsequently responded by separating 10-11 from the group, thereby selling its stake in Högur in two parts.
The Authority has also intervened in mergers when there has been cause to do so. In 2017, Haga's acquisition of Lyfju was annulled, partly because the merger would have strengthened Haga's dominant market position in the grocery market, but also because the two companies would have gained a significant advantage in the sale of cleaning, toiletries and health-related products.
Last summer and autumn, the Competition Authority then intervened in two mergers in the grocery and fuel markets, namely, on the one hand, the merger of Haga and Olís and, on the other hand, the merger of N1 and Festi. The Competition Authority assessed that the merger of Haga and Olís would, without change, strengthen Haga's dominant market position in the grocery market, lead to a local distortion of competition in certain geographical areas, have detrimental effects on the wholesale and supply level of the fuel market, and increase detrimental ownership links between competitors.
Ultimately, Hagar committed to substantial remedies to address the competition distortion that the merger would otherwise have caused. Among other things, Hagar has sold certain grocery stores and petrol stations, with the sale creating opportunities for new and smaller players to compete in the market and thereby strengthening competition.
In the case of the merger between N1 and Festi, the acquiring company also committed to extensive measures, such as the sale of a grocery store in the South of Iceland, due to the merger's local effects there. However, the anti-competitive effects of that merger were confined to the fuel market, rather than the grocery market.
[Dominant market position]
Secondly The Competition Authority has extensively examined the dominant market position and conduct of the largest grocery chain, Hagur. In 2010, the case concluded with the competition authority fining Haga for abusing its dominant market position through the practice of unlawful below-cost pricing of dairy products. The Competition Authority considered that the company's pricing and pricing policy was designed to maintain and strengthen Haga's position in an undue manner and cause harm to the public.
In merger cases in recent semesters, Hagar has argued that their position has changed significantly with the arrival of Costco on the market. There is no doubt that Costco has shaken up the competition and thus had a positive effect for consumers. However, investigations by the Competition Authority do not suggest that the opening of Costco has led to any major changes in Haga's strength or position in the grocery market. On the contrary, all indications are that Haga has maintained its strong position.
[Interplay between suppliers and retailers]
In the third place The Competition Authority has paid considerable attention to the interaction between suppliers and retailers. It is inherent in the nature of the business that a grocery retailer must be able to source products from suppliers at a competitive price. An extensive study, published in a 2012 report, revealed a very large price difference between smaller shops and the largest retail chain, Hagah. On average, the price difference was around 15%. In some product categories, the purchase price of smaller shops was higher than the lowest retail price of discount supermarkets. It is obvious that it can be difficult for new and smaller shops to compete in such circumstances. The Competition Authority has followed up on these findings, both generally and with regard to individual suppliers.
The interaction between suppliers and retailers was also examined when the Competition Authority stopped price-fixing by Haga and meat processing companies. This related to so-called pre-labelling of meat packaging, where the meat processing companies labelled prices for the retailers. The Competition Authority concluded that the interactions between eight meat processing companies and Haga regarding these price labels and the associated pricing constituted an illegal cartel, and the companies were fined. This case led to significant changes in business practices in this sector and opened up competition in the pricing of these products, which had previously been limited.
[Agriculture]
In the fourth place The Competition Authority has repeatedly addressed the competitive conditions in agriculture in opinions to ministers, reports, and comments on draft bills. The authority has thus urged that import restrictions on agricultural products be eased in order to increase competition in domestic agriculture and food production, thereby improving consumer welfare.
For the same reasons, the Competition Authority has opposed any exemptions from competition law for agricultural processors. I am primarily referring here to the provisions of the Agriculture Act that allow dairy processors to merge and consult with each other in a way that would be illegal for any other company.
Likewise, the Competition Authority has sought to protect the prospects of smaller, independent producers in agriculture. Thus, the authority has on more than one occasion stopped the conduct of the Dairy Cooperative and its predecessor, the Cheese and Butter Cooperative, which made it impossible for smaller players to compete.
Furthermore, it must be borne in mind that conditions in various other markets can have a significant impact on the price of everyday goods. Examples include the payment card and freight transport sectors, both of which have been regulated by the supervisory authority.
Dear attendees,
I will therefore finally turn to the question of how we can improve consumer welfare in the grocery market. The simple answer to that is that everyone needs to play their part. All too often, the temptation is to point out that the problem lies elsewhere. The retail industry points to agriculture, agricultural interests point to retail, and everyone points to the Competition Authority.
When I say that everyone needs to play their part, I mean the following above all else:
Firstly The Competition Authority needs to continue to enforce competition law in the grocery market. I have outlined some of the Authority's main areas of focus in recent years. Those projects, on their own, have obviously not achieved the result of bringing grocery prices in line with those of our neighbours. However, it is equally obvious that the position of consumers would be much worse if the competition law and its enforcement did not exist. In that case, barriers to competition would be more common, concentration much greater, and it would be even more difficult for new or smaller players to compete in the market.
We intend to shortly seek the views of consumers and market participants on the priorities the supervisory authority should set for its ongoing market activities. The supervisory authority will also use these views when prioritising its tasks.
Secondly It is of the utmost importance that the government reduces any barriers within its power, whether these are tariffs, other public charges, or legislation that is designed to hinder competition. Such improvements could lead to lower food prices and better services for consumers. The removal of barriers, for example, is designed to attract both new companies and experienced foreign competitors. This forces the management of established companies to run their businesses better, streamline, innovate and offer better products, services and prices, to the benefit of consumers.
The importance of opening up competition applies particularly to agriculture. [In this regard, the positive development in Icelandic vegetable cultivation is often cited, when the government followed the recommendations of the competition authorities and abolished tariffs on certain types of vegetables, following the exposure of illegal price-fixing in the production and distribution of vegetables at the beginning of this century. Alongside the change in tariffs, support for vegetable producers was changed from being market-distorting to supporting domestic producers in facing increased competition. In the long term, the measures led to an increase in domestic vegetable production, a fall in retail prices and an increase in consumption. Well-designed measures of this kind in other areas of agriculture are likely to benefit both consumers and farmers in the long term.
In the third place It is important that trade associations connected to the grocery market row their boats together to strengthen competition like never before. In this work, the primary objective must be to advance, rather than to defend a vested interest. For example, it would have a significant impact if business associations were to declare that breaches of competition law are not tolerated within their ranks.
And in the fourth and final part It is very urgent to strengthen consumer protection in the grocery market. This can be done by the government providing better support for consumer advocacy. For example, lessons can be learned from what is being done well in the other Nordic countries. Consumer interest groups could also better coordinate their work. This is very important, as active consumers can have a significant impact on the behaviour of companies.
Furthermore, the authorities responsible for consumer protection need to co-ordinate their efforts more effectively and create a clearer channel for consumers to take up their cases. For example, the Competition Authority is working to strengthen communication and cooperation with the many institutions in various sectors of business with which it frequently interacts.
[Final words]
Competition is not an end in itself. It is a tool to improve the public interest and promote a dynamic business sector for the benefit of all. If the right conditions are created, competition can be a very powerful tool and significantly improve living standards in this country. This is a shared task for all of us, but the Competition Authority will not stand idly by.
