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Ken Phillips is co-founder and Executive Director of Independent Contractors of Australia. He is a published authority on independent contractor issues and directs research on related commercial and trade practices issues. Through his numerous articles in newspapers and think-tank and academic journals, Ken is known for approaching issues from outside normal perspectives and is frequently sought out for media comment.

Why is Wesfarmers so opposed to the ‘effects test’?

Saturday, March 26, 2016

Wesfarmers’ chief executive Richard Goyder was a high profile player in the recent unsuccessful lobbying against changes to competition law which will see the introduction of an ‘effects test’. The Business Council of Australia, of which Goyder is a board member, likewise opposed the changes.

But big business opposition was not universal. The Australian Industry Group and the Shopping Centre Council of Australia for example did not oppose the changes. Although the AiGroup have expressed concerns on the detail, as have others.

However, some ‘big end of town’ lobbyists have said to me that they’ve been perplexed about the passion of the BCA’s opposition. They think that the unfair contract laws, for example, will have a far greater impact on big business than the effects test. I agree.

Wesfarmers’ strong opposition can potentially be partly explained by understanding the historical retail culture of Coles. Wesfarmers’ was a diversified industrial conglomerate before purchasing a run-down Coles in 2007. Along with its Kmart, Target, Officeworks, Bunnings and other retail brands, it’s now a dominant retail business in Australia. Its retail culture is founded in the Coles culture.

My grandfather was in the confectionary manufacturing business most of his working life. He established and managed the first LifeSavers plant in Australia in the 1930s. Pre and post-World War II confectionary manufacturing in Australia consisted of quite a significant number of medium-sized, independent businesses with their own products and brands. Many of those independent businesses would not supply Coles.

G.J Coles & Co Ltd opened their first store in Melbourne in the 1920s and just before WWII had some 80 stores Australia wide. By the 1970s store numbers were approaching 600. Part of their success can be explained by the ruthless way they purchased products for their stores.

Coles had a habit of ordering big from a domestic manufacturer. Once the manufacturing was in production Coles would announce a cancellation or cutting of the order unless the price was heavily discounted. There was nothing wrong or illegal about such a hard-nosed business practice and partly explained why Coles was able to offer cheap retail prices. However, many manufacturers, once burnt, refused to deal with Coles.

This behaviour of Coles created a culture of arrogance within the purchasing departments of the supermarket. I’ve known a number of buyers in Coles in more recent times. All nice people, but all suffered from overblown egos where they would announce “I’m from Coles!” and expect suppliers to bow and scrape.

This Coles purchasing culture has been long evident in the agricultural sector as well. Some farmers successfully supply Coles. Others are cautious even resentful and this in part explains much of the National Party’s suspicion of Coles.

It has to be recognised that Coles have been working on cultural change. But assuming that this broad overview of the Coles (now Wesfarmers) culture is still relevant today, much of Wesfarmers’ opposition to the ‘effects test’ can be understood.

I explained in an article in October last year that, in its simplest understanding, the ‘effects test’ compared to current competition law, is like comparing the burden of proof required for manslaughter to that required for murder. Murder requires proof of intent. Manslaughter requires no evidence of intent rather demonstration that the outcome of reckless or related action led to death. Further, that the person causing death should have known the effect of their actions could cause death.

So, it is with the proposed new ‘effects test’ for competition laws. The Australian Consumer & Competition Commission as the principal enforcer will not have to prove ‘intent’ to damage competition, just that competition was damaged. Presumably the details of the new laws will require demonstration that a large business should have known that their action would damage competition.

Here then, presumably, is the worry about the new laws expressed by Wesfarmers. Their retail business is built on a culture and historical practice of being aggressive business players. They push the market and competitors and competition hard. Nothing wrong with that! In fact strong competition makes for a strong economy.

But Coles/Wesfarmers have never really had to temper their decisions by considering the effect on competition. Under current competition rules it was virtually impossible for the ACCC to “climb inside the corporate head” of Coles/Wesfarmers to discover their motivations or intent. Did they intend to damage competition? No one would ever know.

But now, Wesfarmers will be required to think about the effect of their actions. This is arguably a direct assault against the observed culture of the company described above.

Assuming this thesis has relevance, it’s no wonder that Wesfarmers is so strongly against the competition changes.

[First published in Business Spectator, March 2016]

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