Independent grocers can run more successful businesses when they lower prices to compete with industry heavyweights Coles and Woolworths, an inquiry into supermarkets has been told.
Representatives from Metcash, which licenses the IGA brand, appeared before the Australian Competition and Consumer Commission's inquiry into supermarkets on Thursday.
The commission is considering the company's role as a major supplier to independent supermarkets and whether this could limit price competition because many had no cost-effective alternative.
Metcash told the inquiry it did not set retail prices, which a recent Choice analysis found were significantly higher at IGA stores than at major chains.
But chief executive Grant Ramage said IGA shelf-prices were consistently declining because retailers realised it was bringing more customers into their shops.
"It's not so much because we've set goals and said 'you must do it', but we've actually used data to prove ... being more competitive is good for business," he said.
"The proof of that is as more stores do it, they talk to other retailers and that retailer-to-retailer advocacy is very powerful to say 'actually ... it's good for shoppers, but it's actually very good for my business."
IGA branches in three states have endorsed maximum pricing standards, meaning head office could intervene if they consistently priced goods above a recommended mark.
Independent grocers competing with Coles and Woolies would only be possible with the backing of a larger network such as Metcash, the inquiry was told.
The company's support ranged from providing a reliable supply chain, finding sites and operating three stores it owned, Mr Ramage said.
Independent grocers are expected to buy from Metcash as long as prices are "competitive" and some retailers, provided with additional support beyond the standard terms, have agreements to buy specific products.
The company supplies about 70 per cent of groceries at IGA stores and helps plan promotions.
"Once that has been agreed, all stores are expected to implement those activities," Mr Ramage said.
Stores are required to carry a "base range" everywhere but in NSW, where it is only "highly recommended".
The company helped independent grocers take advantage of economies of scale and distribution networks and fostered competition by providing shoppers with choice.
This occasionally extended to helping retailers secure sites by assisting negotiations or through sub-leasing arrangements.
Finding the right sites was the key to competing with Coles and Woolworths, who could sustain lower returns for longer while opening new stores.
Landlords and developers were particularly attracted to getting one or both of the market-dominating supermarkets in their shopping centres, the inquiry was told.
Metcash-supplied retailers account for about seven per cent of supermarket sales, compared to Coles and Woolworths' combined two-thirds market share.
The consumer watchdog's interim report found sales have been shrinking at Metcash-supplied independent grocers, while Aldi, Coles and Woolworths increased their footprints.
Woolworths, Coles and Aldi have introduced smaller-format stores similar to IGAs in recent years and the commission is investigating whether that creates other barriers to independent entry.
Aldi representatives faced public hearings earlier in the week, while those from Woolworths and Coles will appear from Monday.
The ACCC's final report is due in February.
The federal government has proposed changes to merger laws and a mandatory food and grocery code of conduct, carrying multimillion dollar penalties for serious breaches.
