Power without glory?
Competition and Australian
supermarkets
Presentation by Graeme Samuel and Stephen P. King
Monash Business Policy Forum
Monash University
Overview
 Is there power (and if so where are the excessive
profits)?
 The 2008 ACCC grocery report (with some
updates)
 Issues for the Competition laws
2
Are we concentrated? (Yes we are!)
2004/5 approximate grocery market share of three
largest retailers (various countries)
Australia 94%
Canada 65%
Sweden 65%
Switzerland 62%
Norway 51%
UK 50%
Austria 50%
Germany 38%
Source: ACCC 2008 Grocery inquiry, OFT 2006 grocery inquiry
3
Are we concentrated? (Yes we are!)
2004/5 approximate grocery market share of three
largest retailers (various countries)
Australia 94%
Canada 65%
Sweden 65%
Switzerland 62%
Norway 51%
UK 50%
Austria 50%
Germany 38%
But be wary of local
market shares as
these can be higher
Source: ACCC 2008 Grocery inquiry, OFT 2006 grocery inquiry
4
The vertical chains – Coles and Woolworths
 In packaged groceries, have about 80%
of all sales in Australia
 But about 55-60% in terms of grocery
items
5
The independent wholesaler
 Around 15% of market for packaged groceries
as at 2008
 Operates through IGA, Foodland, Foodworks
and other retail outlets
 Has expanded retail operations over past
decade (e.g. acquisition of Franklins in NSW)
 ACCC 2008 report had concerns about Metcash
supplied retailers ability to compete on price
6
The entrants
But where are the specialists? (e.g. Whole Foods)
7
EBIT margins 2006/07
 Tesco (UK) approximately 6%
 Sainsbury (UK) approximately 2.5%
 Walmart (USA) approximately 7%
 Kroger (USA) approximately 3.5%
 Carrefours (France) approximately 4%
 Woolworths approximately 6%
 Coles approximately 3.5%
 Metcash 2007/08 EBITA margin approximately 4.5%
8
EBIT margins 2006/07
 Tesco (UK) approximately 6%
 Sainsbury (UK) approximately 2.5%
 Walmart (USA) approximately 7%
 Kroger (USA) approximately 3.5%
 Carrefours (France) approximately 4%
Not out of line
with less
concentrated
markets.
 Woolworths approximately 6%
 Coles approximately 3.5%
 Metcash 2007/08 EBITA margin approximately 4.5%
9
EBIT margins 2006/07
10
The 2008 ACCC grocery inquiry
 Grocery retailing is ‘workably competitive’ but:
– Barriers to entry
– Limited incentives for Coles and Woolworths to compete
aggressively on price
– Little price competition from independent sector
 Aldi’s entry has had a dynamic impact
 Nothing ‘fundamentally wrong’ with the grocery supply chain
 But significant buyer power for Coles, Woolworths and Metcash
11
The 2008 ACCC grocery inquiry
 Grocery retailing is ‘workably competitive’ but:
– Barriers to entry
– Limited incentives for Coles and Woolworths to compete
aggressively on price
– Little price competition from independent sector
 Aldi’s entry has had a dynamic impact
 Nothing ‘fundamentally wrong’ with the grocery supply chain
 But significant buyer power for Coles, Woolworths and Metcash
12
The 2008 ACCC grocery inquiry
 Grocery retailing is ‘workably competitive’ but:
– Barriers to entry
– Limited incentives for Coles and Woolworths to compete
aggressively on price
– Little price competition from independent sector
 Aldi’s entry has had a dynamic impact
 Nothing ‘fundamentally wrong’ with the grocery supply chain
 But significant buyer power for Coles, Woolworths and Metcash
13
The 2008 ACCC grocery inquiry
 Grocery retailing is ‘workably competitive’ but:
– Barriers to entry
– Limited incentives for Coles and Woolworths to compete
aggressively on price
– Little price competition from independent sector
 Aldi’s entry has had a dynamic impact
 Nothing ‘fundamentally wrong’ with the grocery supply chain
 But significant buyer power for Coles, Woolworths and Metcash
14
Issues for the Competition laws
“Part IV (of the Competition and
Consumer Act 2010) seeks to
prevent conduct that may lessen
competition, not to protect less
competitive businesses. The
distinction is an important one.”
Dawson inquiry p.29.
15
Issues for the Competition laws
 Mergers
– Are creeping acquisitions a problem?
 Abuse of market power
– Should we have an effects test?
 Buyer power and unconscionable conduct
– Do we need the law clarified?
16
Takeaways
 Given market structure, our supermarket
sector is surprisingly ‘workably’ competitive
 The key findings of the 2008 ACCC inquiry
still hold
 Key legal issues is clarifying unconscionable
conduct
17