The grocery market duopoly is dangerous and oppressive – and the rules need to change

Master Grocers Australia (MGA) and Liquor Retailers Australia (LRA) is calling for once in a generation changes to competition laws to counter the extraordinary and dangerous 80% market domination of Coles and Woolworths.

Without change there will be no competition left to protect.

MGA/LRA speaks for the thousands of smaller independent grocery/liquor retailers that make up now just 15% of the market. It has now made its submission to the federal government’s “root and branch” competition review.

The competition laws which have been operating for the last two decades have made Australia unique in the world: we are the only country where two chains – Coles and Woolworths – control close to 80% of the market. In the UK the two major chains control 44%. In the USA it is 42%.

This means laws that have been designed to maximise competition in Australia have in fact led to competitors closing down and the extraordinary rise of just two major chains. It is proof that what may work in theory does not translate to on-the-ground reality when it comes to competition. 

Competition policy is often debated purely in terms of price to consumer. However, this is only one dimension of a much wider picture. 

An 80% market concentration is dangerous because ultimately it means consumers have little or no real choice. It kills the livelihoods of small business owners, with devastating consequences not just for owners and their families, but employees and also a local network of interrelated small businesses. It also means an unfair fight for suppliers and manufacturers who have no chance against the oppressive power of two huge chains. 

Ultimately this extreme concentration of power means the big get bigger while the small get smaller. It means wealth is transferred from small, family operators, who can ill afford it, to two huge chains.

It also means wealth is transferred from small towns/suburbs to the head offices of Coles and Woolworths, thereby destroying local economies. This has dramatic effects on smaller retailers and their communities. The status quo is not only fundamentally unfair. It is destroying the nature of local communities in Australia and turning them into support systems for Coles/Woolworths profit models.

Coles and Woolworths have consistently pushed the competition laws to the limit – and sometimes beyond – in the pursuit of market domination. The MGA/LRA submission to the Competition Policy Review Panel identifies several strategies which Coles and Woolworths have used.

These include: 

• Fuel shopper dockets with discounts of up to 45 cents a litre, which has killed business for independent petrol retailers and grocers alike (now capped at 4 cents per litre since the ACCC intervened to facilitate an enforceable undertaking).
• Crowding out a local market by building big new stores where they are not needed, which forces small, family businesses to close their doors (called “predatory capacity”)
• Pricing essential goods such as milk at such a low price that smaller operators can’t compete – and pushing farmers/suppliers to the wall at the same time (called “predatory pricing”)
• Buying up real estate which competitors may want and then leaving it vacant (called “landbanking”)

The ACCC has moved on several of Coles/Woolworths tactics. However, it is often too late: the damage is done before they can be stopped. In this way the big two chains have been gaming the system.

MGA/LRA believes the laws need to change in fundamental ways to stop this oppressive use of power. Specifically, we recommend changes to Section 46 of the Competition and Consumer Act. This covers “Misuse of Market Power” and has traditionally been at the heart of Australia’s competition law. 

The changes we call for are:

1. Add an “effects” test

Practically speaking, it has been difficult for authorities to prove that Coles/Woolworths intend to drive competitors out of business/damage them by their practices. An “effects” test is straightforward because it measures the impact – rather than forcing authorities to collect evidence on intention or somehow read the minds of Coles and Woolworths executives

2. Add a prohibition on “predatory capacity” (crowding out a market with new stores)

This would be inserted along with the existing prohibition on “predatory pricing”. It would cover the acquisition of an existing store, the building of a new store, or the acquisition of land (freehold or leasehold) which is far greater than would be required in a particular area, or where the corporation is already reasonably represented. This is a logical change and is being conducted overseas.

3. Reverse the onus of proof

This means that Coles or Woolworths would need to prove they did not intend for their actions to have certain consequences – as opposed to the status quo where authorities face the near impossible task of making a case.

MGA/LRA also call for changes to Section 50 of the CCA, covering creeping acquisitions and mergers. As its name suggests, this is a way of gaining market domination by stealth – but escapes the law. Currently the law does not effectively cover the consequences of an individual acquisition in terms of a larger pattern of acquisitions in the overall market and an overall move to market domination. We recommend measuring the cumulative effect of any acquisition. 

Finally, we are calling for a mandatory industry code embedded in the CCA to control and direct a number of activities which inhibit fair competition. The code would have a wide ambit, reflecting the fact that the current competition problems confronting the supermarket and liquor industry are now overwhelming.

It would cover a range of areas including:

• Overall scrutiny of market conduct
• Disclosure of Coles and Woolworths terms of trade with suppliers
• Advance notice to the ACCC of any planned acquisitions
• Scrutiny of the basis of new acquisitions
• Greater clarity on how the ACCC deals with fuel shopper dockets and other product bundling
• A procedure for divesting of stores/sites acquired in breach of the Code.

The measures we propose represent a challenge to legislators. They are certainly a challenge to the status quo. But they are necessary because the last 20 years have been devastating to smaller operators. The current system shuts out individuals who have the enterprise to build their own business. And it is destructive to local communities while enhancing the interests of just two major entities.

As we have stated, without any change there will no longer be any competition to protect.  And everyone will pay the price for that.

Jos de Bruin is the chief executive of Master Grocers Australia and Liquor Retailers Australia, 

Image credit: Flickr/djackmanson