Power without glory? Supermarket competition in Australia
Coles and Woolworths, account for around 75 per cent of Australia’s sales of packaged groceries.
by Graeme Samuel and Stephen King
Is the Australian retail grocery sector concentrated? Yes!
Coles and Woolworths, account for around 75 per cent of Australia’s sales of packaged groceries with Metcash-supplied stores accounting for another 20 per cent. These market shares fall if we include fresh grocery items, such as meat, fruit and bread. However, they are still high by world standards.
Australia’s ‘big three’ account for 95 per cent of grocery sales. Equivalent ‘big three’ shares in other countries range from around 65 per cent in Canada and Sweden, to 50 per cent in the UK and Austria, down to about 40 per cent in Germany.
High concentration often signals a lack of competition. But that doesn’t seem to be the case for supermarkets in Australia. According to the ACCC’s 2008 grocery report, Coles’ and Woolworths’ grocery profits are not high compared, for example, to Tesco in the UK or Walmart in the US. And rather than complaining about excessive pricing, the supermarket debate in Australia often focuses on prices that are deemed too low, whether for milk, home brand products or petrol.
So are our supermarkets in the worst of all possible worlds, with high concentration and poor press, but without the profits that go with market power? And, if so, why?
Coles and Woolworths face competition at the periphery. Aldi was identified as a competitive force by the ACCC in 2008 and it has continued to grow. But its market share is still small. Costco has expanded, but is also a minor player. According to the ACCC, Metcash supplied stores had little ability to compete on price with Coles and Woolworths in 2008. This does not appear to have changed. And innovative competitors, like the specialist organic supermarkets and ‘high end’ gourmet outlets that have opened in the US, are almost non-existent in Australia.
The real competitive problem for Coles and Woolworths is – well – Woolworths and Coles.
Normally, in a concentrated market with high barriers to entry and expansion, major competitors seek to differentiate themselves. Competitors appeal to different customer segments, increasing prices and profits while avoiding a head-to-head fight.
In contrast, Coles and Woolworths have played a decade long game of copycat. From ‘everyday low prices’ to ‘fresh food’; from ‘home brands’ to ‘discount petrol’; where one has gone the other has rapidly followed.
This copycat strategy has significant consequences. It limits supermarket profits. From the consumers’ perspective the major supermarkets look similar so there is limited customer loyalty. The strategy benefits consumers through lower prices but restricts the degree of choice. It means that suppliers can come under intense pressure from both major supermarket chains at the same time. And it makes the supermarkets an easy target for political vested interests.
So can our competition laws deal with the supermarket sector or is change needed?
The supermarket chains grow organically and by takeovers. But as recent ACCC decisions show, out merger laws are able to handle both of these types of acquisition. The ACCC has successfully argued that the relevant markets are local and they can stop ‘creeping’ acquisitions of independent grocers if there is a significant competition concern. Its 2008 Karabar decision is an example. The ACCC’s recent decision on a development site in Western Sydney shows that they can also prevent organic growth where it reduces supermarket competition.
The major supermarkets clearly have market power. Concerns have been raised about the ability of our competition laws to deal with abuse of this power. However, as the ACCC’s ‘bread case’ against Woolworths showed in the 1990s, where the evidence exists, the ACCC can act.
The law makes it illegal for a firm with substantial market power to take advantage of that power for an anticompetitive purpose. It is sometimes argued that ‘purpose’ should be changed to ‘effect’. This would broaden the law. It could also harm consumers.
The aim of competition law is to protect competition, not competitors. Competition, by its very nature, harms competitors. When one business innovates, sells better products or reduces its prices, competitors suffer but consumers gain. The Courts have successfully distinguished between harm to competition and harm to competitors under the ‘purpose’ test. Adding an ‘effects’ test to the law makes this distinction more difficult and may deter pro-competitive behaviour.
The major supermarkets have buyer power. In theory competition laws limit the unconscionable exercise of such power. The distinction between ‘tough but fair’ bargaining and ‘unconscionable conduct’, however, is unclear. There have been relatively few cases to clarify the law and judgements invariably depend on specific facts. Clarifying the boundaries of legal and illegal bargaining would help both the major supermarkets and their suppliers.
Neither Australia’s grocery industry nor our competition laws are broken. Our supermarkets have significant market power but their copycat strategy limits their ability to use this power to raise prices and profits. And, with the exception of ‘unconscionable conduct’, our existing competition laws are well able to deal with the supermarkets.
Professors Graeme Samuel AC and Stephen King are co-directors of the Monash Business Policy Forum, and leading a research project on Australia’s national Competition Policy.
A version of this article has appeared in the Australian Financial Review.