US-style divestiture laws are needed to break up the concentration of Australia's supermarket sector, according to a former competition watchdog.
The first head of the Australian Competition and Consumer Commission Allan Fels told a parliamentary inquiry into supermarket prices companies such as grocery stores who breach competition laws should be forced to divest.
He said similar powers exist in the US and could be used in Australia.
"It's only occasionally used (in the US) but with very powerful effect and I think it would be sensible for Australia to," he told the inquiry on Monday.
"It's a structure of concentration that creates a capacity to do harm to consumers and to other businesses, and on occasions, the right answer is to break up the firm."
Australia has one of the most concentrated food retail sectors in the world, with Coles and Woolworths accounting for an estimated two-thirds of the market.
There have been growing calls to enact divestiture laws due to the size of the duopoly.
Prof Fels, who led the consumer watchdog from 1995 to 2003, said such powers should form part of competition legislation.
"If (companies) faced the possibility of divestiture, you get a lot more compliance with a key part of the competition law," he said.
The inquiry comes after a review of the relationship between supermarkets and their suppliers called for the food and grocery code to be made mandatory.
Led by former Labor minister Craig Emerson, it found divestiture powers were not needed, warning it would lead to job losses and impact regional communities.
But while Prof Fels said he backed the calls to make the code mandatory, he argued warnings on divestiture leading to people losing jobs was overstated.
Monday's inquiry hearing will include evidence from the Australian Food and Grocery Council, which represents the food, beverage and grocery manufacturing sector.
Though the entry of global giants Costco and Aldi have improved prices for some consumers, its submission says, Coles and Woolworths have delivered competitive prices to consumers by stringently managing their purchasing costs from suppliers.
"Despite the gradual increase in competition ... the Australian market has yet to hit the 'tipping point' at which the full benefits of competition can be realised," their submission says.
"Increasing competition within the supermarket retail sector would remove the foundation upon which the most problematic pricing practices are built and promote a fair distribution of benefits for consumers, suppliers and retailers."
The consumer watchdog will also make an appearance before the committee and is expected to discuss ways to improve customer outcomes.
The watchdog's 2008 inquiry into grocery retailing concluded that the sector was "workably competitive".
However it found high barriers to entry and expansion for independent grocers, and a lack of incentive for the big two to compete aggressively on price limited competition.
Australian Associated Press
