Why unnaturally big is always bad in business

The biggest companies in Australia have gotten too big – and the nation’s productivity is suffering.

These companies have destroyed other businesses; they have made many good well-managed businesses less profitable; they have stopped other businesses from innovating and growing; they have placed unfair and unearned stress on honest hard working individuals; they have created mental health problems where there shouldn’t be any; they have placed themselves above the law.

But now with a strong leader, the Australian Competition and Consumer Commission is dragging these companies back to face the music.

How did this happen? How have our biggest employers been allowed to grow so large that they are unable to control what is happening down at the grass roots of their business activity?

The supermarket oligopoly

Wesfarmers has been an Australian success story growing from very small to become our largest business.

But now it has been disgraced after the ACCC took action in 2014 against its supermarket business for unconscionable behaviour.

The ACCC claimed more than 200 suppliers were mistreated by Coles, which is owned by Wesfarmers.

Coles has been penalised and is continuing to compensate those affected.

Separately, Coles also entered into an enforceable undertaking with the Fair Work Ombudsman in the relation to the treatment of contractors.

More recently, Woolworths has been called to court over allegations it pursued profit through unconscionable conduct towards more than 800 suppliers – claims the company denies.

Combined that’s more than 1000 manufacturers, producers and growers potentially affected by the actions of these big businesses.

These smaller businesses add value, they are creative and innovative, and the source of productivity. But all are being forced to stop what they do best to meet the money needs of two companies who are just too big. Two companies whose value-add is to sell what others create. Two companies that could drive manufacturers and producers to the wall and as a result Australia will become a net importer of food and basic goods, if we aren’t already. Is that a good outcome?

Why has this behaviour occurred?

I believe this behaviour has been allowed to happen for three reasons.

The first and most obvious reason potentially lies with the management and boards of Coles and Woolworths. The management and boards would of course never condone law breaking and they would never give instructions that were unconscionable. If they knew what was happening they would have stopped it. Does this mean they didn’t know what was happening out in their businesses?

The second reason rests with competition regulation.  Section 46 of the Competition and Consumer Act is weak, very weak. Section 46 has never been used for anything important as it is impossible to use – it seems it has only been used a handful of times.

As a result (and also as a result of the third reason below) a couple of companies have been able to grow unnaturally to achieve unnatural size for a market as small as Australia. It occurred without restraint, as the regulation was so soft.

The third reason is the ACCC, prior to Rod Sims chairmanship, was as soft as the regulation it administered. Thankfully the Sims-run ACCC recognised a problem – a big problem – existed. They knew Section 46 was a joke and a waste of time and so proceeded to attempt to prove unconscionable behaviour. This is also hard to prove but the re-born ACCC showed determination, gumption and intellect, pursued these companies and in the case of Coles, achieved success. Woolworths could be next.

Perhaps there is a fourth reason. That is the influence big businesses have on governments by lobbying politicians. Their lobbyists have secret meetings with politicians, threaten them where necessary and provide information to them that stays hidden so no one can challenge the veracity of what they write.

For the sake of productivity, Australian manufacturers and producers must have room to move; they must be responsible for their own businesses and must be allowed to reap the rewards of good management. Currently our manufacturers are under unnatural, improper stress. Stress created by activities that should not be taking place.

Let’s fix this by:

1. Extending Rod Sims term as the chairman of the ACCC for another 5 years;
2. Strengthen Section 46 of the Competition and Consumer Act; and
3. Increase fines on large companies to amounts that will hurt the corporate bottom line – the current fines are too low – and extend sanctions for unconscionable conduct to directors of boards of companies with substantial market power.

Let the innovators innovate. Let the manufacturers grow where they see fit. Let the producers produce more and more to satisfy the domestic market and then go into the international market to help maintain Australia’s high standard of living.

We need fairness and competition.

Peter Strong is executive director of the Council of Small Business of Australia.