Coles/Woolies’ 79% market share…Where’s the regulator?

July 3rd, 2007

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Back in April PWF wrote about a couple of young Melbourne entrepreneurs taking on the Coles/Woolies duopoly, while our leaders do not very much at all.

William Scott, 27, and Jordan Muir, 26, had seen an opportunity to cut out the middleman and provide fresh Australian produce to a market that wants to support Australian farmers and their communities, so they started Aussie Farmers Direct home delivery – milk, OJ, bread, eggs etc – cheaper than supermarkets. They won 6500 customers in 12 months, with 1000 signing up each month in Victoria.

Today The Age reports that Coles/Woolies have 79 per cent of our grocery market, up from 35 per cent in 1975 and Independent grocers are seeking stricter rules to limit big chains. Compare this level of market domination with Sainsbury’s and Tesco in the UK – 48 per cent of that market – and Wal-Mart and Kroger in the US who control 20 per cent.

The National Association of Retail Grocers of Australia (NARGA) Price Waterhouse Cooper report gives grounds for NARGA’s John Cummings to say independent stores are being acquired by ‘creeping acquisition’ and this is approved by the competition regulator because of inadequacies in the law, ie the Trade Practices Act needs strengthening to prevent further consolidation.

In April PWF argued:

“The ACCC’s Graeme Samuel says:

‘The Commission cannot interpret its responsibility to promote competition to mean the protection of individual companies and the outlawing of vigorous, legitimate competition – even where that competition causes difficulties for individual firms….the distinction between promoting competition and protecting consumers (is) confused and blurred by some sectors…’

So, because the independent grocers in IGA/Metcash and Australian growers – who can’t win shelf space from cheap imports – are ’simply competing’ the ACCC will not interfere…

BUT

you have to scratch your head if respected Harvard economist Professor Michael Porter holds that (Executive Summary):

’strong domestic rivalry between firms contributes to national prosperity in terms of GDP per capita’

AND

if American antitrust laws – those which make unfair trade practices illegal – have the power to intervene if something seems amiss (eg growers’ margins going down while consumer prices rise), why is the ACCC not looking at Competition Law in the same light as the American Antitrust Institute:

‘Antitrust laws speak in general terms, thereby leaving a lot of room for discretion on the part of administrators and judges. As something more akin to art than science, antitrust is subject to swings in political ideology and economic theory.’

Andrew Simms, in ‘Tescopoly – How one shop came out on top and why it matters’ (2007) quotes respected North American urban planner and social activist Jane Jacobs:

“The degree of diversity in either natural or economic systems determines whether or not benefits actually ’stick’ where they are needed…but, as a handful or brands capture ever more market share, diversity is being lost both in the US…in the UK. Where Wal-Mart leads in suffocating markets, Tesco follows.

Trends like this don’t just attack small businesses; they also threaten choice and diversity…

High Street homogenisation is just one manifestation of the march of cultural uniformity.” (Page 41).

Andrew Simms is Policy Director of the award winning UK think-and-do tank, New Economics Foundation. He says the UK Competition Commission found that Tesco in particular paid 4 per cent below the industry average and when it investigated supermarkets’ manipulation of prices and their treatment of suppliers, it found pricing practices that ‘gave rise to a complex monopoly situation’ that ‘operated against the public interest’ (Pages 130-131). For example:

Consistently selling some frequently purchased items below cost – undermining smaller stores that were often relied on by the ‘elderly and less mobile’.
Using ‘price flexing’ ie varying prices in different geographical locations in the light of local competitive conditions, with variations not being related to costs. ie supermarkets charge what they can get away with once the competition has been killed off.
Despite claiming to be hotly competitive, stores tempt people by offering a few popular products cheaply (the cost typically being met by the supplier) but once inside everything else is for sale at top prices. ‘Perfectly informed’ consumers are meant to switch between sellers item by item but of course in a supermarket, unlike a real market, this is impossible.

These sorts of practices are now being reported in Australia.

WHO is going to do WHAT, here?

2 Responses to “Coles/Woolies’ 79% market share…Where’s the regulator?”

ellen lang Says:
January 5th, 2008 at 11:03 am
I am a mother on my own and finding it extremly difficult to make ends meet on a weekly basis because of the cost of products in supermarkets. I live near a coles store but stopped shopping there because of their stale, limited (coles brand)and off produce that they still sell for only a dollar off the full price. I have had to go back to the store on at least 8 times because of off meat and wrong pricing on produce and have had no response from them at all. As for their fruit and veg it is always over priced and old,also the way they keep their milk, it may still have a week to go on the dueby date however it still has a funny taste because it is almost off. I now shop in small fruit and veg shops and do my supermarket shopping at foodland because it is South Australian with more of a range of products and produce. I have had enough of being ripped off and hope that anyone who feels the same please take the time and effort to complain or nothing will change except to get worse for all of us.
Ron Bradbury Says:
December 26th, 2009 at 7:08 am
These companies have established the most insidious market exploitation imaginable. Remarkably, they have not met with major market backlash either from consumer or watchdog as above.

This article is excellent and exposes the main elements of this situation – really it is a phenomenon.

1) They dictate to the grower what will be paid for the product, what terms of payment will apply and ultimately, how much (if any) product will be procured from “local” suppliers, which means to this huge dual purchaser, anywhere it chooses in Australia. Pork is a great example, because it cannot be imported with bone (for control of importation of diseases which are borne by the bone, but “not by the meat”!), the Duo need Australian farmers. However, they are forced to sell at prices which are held just high enough to “keep them interested” enough to continue to make it possible for pork on the bone to be retailed (Until it is wiped out because it is too expensive and we have come to accept that “pork doesn’t come on the bone anymore”). What does a grower do? Refuse to sell to one or other of the 79% market share duo – when the other is well aware of their buyer competitor, and offer no more – leaving the grower the choice of selling to the suppliers of the remaining 21% (of course these share figures are only indicative as pork sales may not be shared at these levels yet!) but control of the growers is never-the-less, so achieved.

2) Buyer has the choice of local butcher, IGA and some others who can hardly pay enough to sustain the grower in these circumstances (the growers preferred “fair” price) and what will it matter anyway if the grower could get the price he NEEDS for just 21% of his product? And how does he justify his price in the face of the 79% of retail price, dictated by the duo monopoly? Try the arithmetic on this one!

3) Buyer choice? – no it is reality that while the duo monopoly goes about eliminating competition, it keeps those who cannot afford better products or the same products from the 21% retailers, by sucking them into their stores to buy up the specials (normally reduced priced products which are going out of code) – and in this manner – dumped to manage loss and wastage. I would love to see inside the computer programs that manage this. Buyer choice is left to those who can afford to choose.

The strong surviving retailers (high price and great quality) more and more, will be found only in locations convenient to wealthy socioeconomic groups.

4) New competition? Not really such a big deal as they cannot buy any better either from offshore suppliers or Australian suppliers (who simply cannot take less for their produce as above).

So competition will be on the basis of cost management and margin reduction. However, the Duo are in a position of maximum strength in both of these areas simply because they have the market, and to cut cost you need the volume and, when taking into account wastage and at cost or below cost sell off’s, the margin can be demonstrated to be low, and with the huge volumes involved doesn’t need to be “excessive”.

However, if one NEEDED to demonstrate a single digit margin (to keep angry dogs (watchdogs?)at bay, then one would set up one’s own separate company to do the buying and wholesaleing to your retail company. Not an unreasonable thing to do – I don’t know if it is done and wonder if the watch dog can see that far or even wants to.

5) Finally you need to spend a lot of energy (or whatever) ensuring that you get your own way with those authorities who can make it easy or difficult to achieve your objectives.

Why would any scientifically orientated public servant ever risk opening the gates to a product which was a relatively high risk to our pristine industries like food producers? Nice to be the scientist who was predominantly responsible for the clearance of a product(say pork) for importation to know that it brought about introduction of hitherto quarantined disease and decimated not only an industry, but every living animal on the continent. Why would you do that? Why did we ever need to do that? How have we benefited. It is surely easier and prudent to leave things as they are (in this case were).

Not saying that corruption is rampant or even happening, but monopolist situations like this are VERY HIGH RISK.

6) Finally, such domination gives rise to being able to dictate the rent you pay in major shopping centers (now under scrutiny and change because it has been unfairly practiced), influencing the trading hours (how many extra employees does it take to open the doors to their stores when you need people there 24/7 – just a few extra at checkouts – and even fewer in the future with the extension of CURRENT automatic self serve checkouts!

And the truth is, as recently published, prices for food have increased in Australia at approximately double the rate of other countries, none sorry I mean there is NO country in the free world) with anything like the duo-monopoly we have here in Australia.

How naive are we!

Why do we continue to allow the social devastation caused by the above (and in many other ways as well) to all facets of our society for the benefit of a few shareholders, the only people the duo really care about beyond their need to keep dogs like me at bay!

Watch dog? It’s a multi-cross-bread to put it politely!