Becoming a small business collaborator

The recent victory of Liquor Stax, a group of family-owned hotels and bottle shops, in its bid to collectively bargain highlights how start-ups can collaborate with each other in order to take on established large businesses.

This opportunity isn’t immediately apparent because, as most smart entrepreneurs know, price fixing and collusion are illegal. Under the Trade Practices Act, corporations setting up cartels can be fined up to $10 million.

On the other hand, Australia’s competition laws have not been enough to see Australian consumers getting gouged on groceries, petrol and banking services because of the overwhelming dominance of the big players in those markets. A market the size of Australia is a perfect setting for oligopolies and monopolies.

The green light to collaboration

To address this problem and even out the playing field, some companies can get permission to collaborate.

The Australian Competition and Consumer Commission can relax competition rules and allow small companies to work together and get more bargaining power when they are up against monopoly or giant suppliers.

Hundreds of smaller companies competing against each other have applied for an authorisation from the ACCC to collectively bargain with suppliers on their behalf. Apart from the increased bargaining power, it delivers economies of scale.

It’s a lot cheaper to use one lawyer representing five companies than it is to have five lawyers each representing one. Without the protection of an authorisation, the competitors could be prosecuted for price fixing.

Liquor Stax

One of the more recent victories was secured by Liquor Stax, a big group of family owned and operated community based hotels and bottle shops. It got permission from the Australian Competition and Consumer Commission to collectively bargain with wholesalers on behalf of a group its 230 members, liquor merchants and hotels.

As part of the new arrangement, Liquor Stax will now be able deal with about 60 suppliers of alcohol, cigarettes, poker machines and confectionery, as well as providers of advertising, insurance and communications services and do it efficiently.

More importantly, it means that a company like Coca Cola Amatil will find it more difficult to say “Here is your contract, take it or leave it”. Some 200 liquor merchants combined would be in a stronger position to negotiate a better price.

Liquor Stax general manager Guy Bowen says the company needed to collectively negotiate on behalf of its members because that was the only way it could compete with the likes of Coles and Woolworths. At the same time, it needed to ensure everything was legal and watertight.

He said the company was negotiating with giant suppliers like Tyrells Wines, Fosters, Tooheys, Diageo and Pernod Ricard.

“We’ll be extending it from there and we will be talking to major insurance companies, we may be talking to cigarette companies and we may be talking to glass manufacturers,’’ Bowen says.

“We need to become more efficient because to compete with Woolworths and Coles if you don’t have economies of scale it’s an absolute nightmare. If you don’t have economies of scale behind you, you can’t do it on your own. You can’t compete with the big boys.”

“We need to be competitive, otherwise we are in trouble.”

Successful link-ups

Many companies and entities have received authorisations or collective bargaining notifications. The list includes Hertz, Avis Thrifty, Budget and Eurocar. They have applied to jointly negotiate for airport facilities.

Others include the Tasmanian Chicken Growers Association which lodged a notification on behalf of six members to collectively negotiate terms and conditions of grower contracts with Inghams, and the Australian Independent Records Label Association which won authorisation to talk on behalf of its 634 members, negotiating with the likes of Telstra, Optus, Foxtel, Austar and Bigpond.

How start-ups can take advantage

Lawyer Joanne Daniels, a partner at Middletons specialising in the Trade Practices Act, says it’s a strategy that start-ups could look at.

“The same principle would apply,’’ Daniels says. “A group of small start-up companies that wanted to negotiate with Telstra, for example, could go and get an authorisation from the ACCC, just like Liquor Stax has. If you have a bunch of start-ups that wanted to collectively bargain for stuff, they would be able to.”

She says the ACCC generally grants these authorisations. It’s always on public interest grounds because the companies are small.

“You would think the ACCC is not going to let BHP and Rio Tinto to collectively bargain with a small company because the public benefits are unlikely to be there,” she says.

It doesn’t give smaller companies more power but it does create a more level playing field. “I wouldn’t say in all my experience that you have the collective bargaining group having more power than the supplier, although that’s technically possible,’’ she says. “What it does tend to do is even up the bargaining power.”

The practicalities

Companies wanting to get this sort of protection have two choices. The cheaper and easier one is to get a collective bargaining notification.

The notification only allows the bargaining for up to a limited amount of $2-3 million. Under the process, companies can apply for a notification and if they do not hear from the ACCC within 14 days, they can proceed to collectively bargain.

Getting an authorisation takes longer, perhaps up to six months, and includes starting out with an interim authorisation. With an authorisation, there is no cap on the amount of money to be bargained. It’s also more expensive.

The cost

It costs $7,500 to lodge an application for an authorisation. Paying the lawyers would cost another $20,000. By way of contrast, a notification costs just $1,000 and lawyers’ fees would be considerably lower.

Companies can find each other in many ways. There are trade associations or just competitors getting together and talking about working in combination. The combination could come out of industry conferences.

Daniels says companies going down this direction need to follow certain rules.

First, they should not talk about pricing or terms and conditions, particularly with the new regime on competition outlawing bid rigging.

Another important condition is that the arrangement has to be completely voluntary. It should not be binding. If one of the parties finds that it’s not working for them, they should be allowed to leave at any stage. Daniels says that condition eliminates any possible disadvantage.

Finally, the participating companies cannot by law decide they want to boycott a certain company.

Don’t just stick to your sector

Daniels says authorisations and notifications are most often taken out by competitors. However, it is legally possible for non-competitors sharing certain infrastructure, like for example an IT platform, to secure these arrangements.

“You could have two companies. One, for example, would be in R&D for drugs and the other might be R&D in educational services,’’ she says. “You could invite anyone into your group. It could be anyone.”

When start-up companies are trying to get more bargaining power and economies of scale, the net might have to be cast as widely as possible. Ironically, a collective bargaining authorisation or notification might actually improve the level of competition by giving them more bargaining power.

Collective bargaining – what you need to know

• An authorisation or notification to collectively bargain can be secured by competitors, or even non-competitors sharing infrastructure.
• An application for an authorisation costs $7,500 plus legal fees which could be in order of $20,000. It would take several months. There is no cap on the amount to be bargained.
• Applications for notifications cost $1,000 with lower legal fees. It takes a fortnight to get up but there is a cap of $2-$3 million.
• Companies seeking to secure a notification or authorisation are not allowed to talk about pricing or terms and conditions.
• Any agreement should not be binding on the parties. It has to be completely voluntary.
• Parties are not allowed to use the ACCC’s permission to boycott companies.