Consumer*driven!price!cuts!through!scale!!
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! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Consumer*driven!price!cuts!through!scale!! How!consumers!are!driving!business!models!to!deliver! lower!prices!and!improve!convenience!and!quality! ! ! ! Tim!Wilson! Director,!IP!and!Free!Trade!Unit! ! !!! !! ! ! ! ! ! ! June!2013 ! June!2013! ! ! Institute!of!Public!Affairs! 0! 1.0$ Executive$summary$ ! This!research!paper!extends!earlier!research!work!by!the!IPA!into!retail!supermarket!competition,! ConsumerBfirst!supermarket!reform:!Consumers,!not!government,!knows!how!to!best!meet! consumer!demand,!published!in!January!2013.1!! ! Business!models!drive!lower!prices! ! • The!vast!majority!of!supermarkets!compete!on!price!and!achieve!those!lower!prices!through! scale,!using!a!highBvolume,!lowBmargin!business!model!that!allows!the!fractionalisation!of!costs.!! ! • Indicatively,!competition!and!scale!delivers!price!reductions!of!at!least!5.03!per!cent!in! comparison!to!the!decadeBlong!trend!in!Australian!food!prices,!equating!to!an!average!saving! for!Australian!workers!of!nearly!$10!per!week!or!$500!annually.!! ! • While!modest,!60!per!cent!of!Australians!have!identified!that!they!are!sufficiently!priceB sensitive!to!change!their!supermarket!for!a!5!per!cent!discount.! ! • ALDI!achieves!scale!to!deliver!lower!prices!by!leveraging!its!global!supply!chain!and!its! expanding!negotiating!power.! ! • Coles!and!Woolworths!achieve!scale!to!deliver!lower!prices!through!having!large!market!shares! that!delivers!efficiencies!in!supply!chains!and!logistics!and!negotiating!power!with!suppliers.! ! • Smaller!IGA!stores!achieve!scale!to!deliver!competitive!prices!through!collaboration,!using! Metcash!wholesaling.! ! • Supermarkets!that!compete!on!convenience,!quality!or!location!have!a!lowerBvolume,!higherB margin!business!model.!! ! • Increasingly!supermarkets!that!can!achieve!lower!prices!because!of!their!scale!are!leveraging!it! to!provide!convenience!through!dedicated!stores!or!those!attached!to!fuel!retailers,!and!quality! through!dedicated!stores!and!premium!offers,!to!meet!a!diversification!of!consumer!demand.!! ! • The!highBvolume,!lowBmargin!business!model!of!supermarkets!is!highlighted!on!their!EBIT!to! market!capitalisation!and!revenue!which!varies!from!3!–!7!per!cent!for!the!majors,!lower!than! comparable!international!competitors!and!other!industries.! ! • Higher!profits!would!require!fractionalising!increased!profits!across!their!highBvolume!of!sales! which!would!make!them!less!competitive.!!! ! The!market!is!extremely!competitive! ! • Arguably,!Australia!now!has!four!major!supermarket!chains!in!ALDI,!Coles,!IGA!and!Woolworths.! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 !Wilson,!T.!2013.!“ConsumerBfirst!supermarket!reform:!The!market,!not!government,!knows!best!how!to!meet! consumer!demand.!Institute!of!Public!Affairs.!Available!at! http://www.ipa.org.au/library/publication/1359362671_document_130129_B_paperBconsumerB first_supermarket_reform.pdf.! ! June!2013! ! ! Institute!of!Public!Affairs! 1! • ! • • In!a!little!over!a!decade!ALDI!has!grown!its!stores!to!300!largerBformat!options!and!are! increasing!at!a!rate!of!around!10!per!cent!per!year!and!has!a!market!share!of!2!–!5!per!cent.!! Coles!has!749!stores!and!a!new!store!growth!rate!of!nearly!half!of!ALDI!with!a!market!share!of! less!than!30!per!cent.! ! Woolworths!have!883!stores!and!a!new!store!growth!rate!nearly!half!of!ALDI,!with!market!share! of!around!33!–!36!per!cent.! ! • Metcash!has!the!most!retail!stores!at!more!than!2,000,!with!market!share!of!15!per!cent.! ! • CostCo!is!a!modest!competitor!with!three!stores!with!an!expected!expansion!of!100!per!cent.! ! • Supermarkets!compete!against!each!other,!as!well!as!fresh!food!markets,!internet!retailers!and! speciality!stores.! ! • Market!concentration!is!part!of!a!longerBterm!trend!as!mergers!and!acquisitions!have!occurred! over!decades!so!supermarkets!can!achieve!the!scale!to!deliver!lower!prices.!! ! Business!models!are!driven!by!consumer!demand! ! • Supermarkets!primarily!compete!on!multiple!grounds!including!price,!range,!quality,!location,! convenience,!experience!and!parking.!! ! • Quality!and!price!are!the!most!important!drivers!of!consumption!behaviour.!Combined,!they! reflect!a!consumer’s!value!proposition.!!! ! • Quality!is!subjective,!but!price!clearly!impacts!consumption!behaviour!with!surveys!concluding! 60!per!cent!of!Australians!will!change!supermarkets!for!a!5!per!cent!discount!and!Australians! being!some!of!the!least!loyal!supermarket!customers!in!the!world.!! ! • The!expansion!of!ALDI!has!driven!innovation!and!responded!to!increasing!price!sensitivity! through!the!expansion!of!private!labelling,!that!other!supermarkets!have!been!able!to!follow.!! ! • Price!sensitivity!for!Australians!is!unsurprising!with!the!average!household!spending!between! 15!and!20!per!cent!of!their!income!on!food!and!nonBalcoholic!beverages.! ! • Price!disproportionately!impacts!on!lower!income!households!and!those!dependent!on!fixedB income!welfare!and!pension!benefits.!They!spend!around!20!per!cent!of!their!income!on!food! and!nonBalcoholic!beverages.!! ! • Further!lowering!prices!will!require!supermarkets!using!their!scale!to!continue!innovation!in! their!logistics!and!supply!chain!to!reduce!costs,!particularly!with!wholesalers!and!suppliers.! ! • Expansion!by!supermarkets!into!liquor,!convenience!stores!and!fuel!retailing!is!responding!to! consumer!demand!and!being!able!to!deliver!lower!prices!through!their!scale!with!convenience.! ! • Liquor!is!a!highly!competitive!business!with!Coles,!IGA!and!Woolworths!owning!a!number!of! subBbrands!to!compete!based!on!price,!convenience,!range!and!quality!to!compete!with!the! remaining!quarter!of!the!market!that!is!largely!independent.! ! June!2013! ! ! Institute!of!Public!Affairs! 2! • • • ! Based!on!industry!research!data,!threeBquarters!of!a!supermarket’s!cost!structure!is!driven!by! the!cost!of!wholesale!purchases.!! ! Wholesale!suppliers!are!in!a!competitive!position!to!strongly!negotiate!with!retail!supermarkets! on!price,!often!enjoying!a!much!higher!market!share!than!the!supermarkets!themselves.!! ! Based!on!Productivity!Commission!data,!Australian!wholesalers!secure!a!larger!margin!than! those!in!the!United!States!and!Canada.!! ! Regulation!drives!risk!and!increases!prices! ! • The!regulator!–!the!Australian!Competition!and!Consumer!Commission!–!is!increasingly!moving! toward!deciding!what!choices!consumers!have,!rather!than!allowing!the!market!to!meet! consumer!demand.! ! • The!ACCC!has!decided!that!competition!is!at!a!“critical!decision!point”,!in!practice!it!is!whether! market!players!are!allowed!to!meet!consumer!demand,!or!whether!the!regulator!will!interfere! to!achieve!nonBprice!objectives.! ! • Concerns!by!the!regulator!about!the!state!of!the!market,!market!concentration!and!market! power!against!suppliers!and!wholesalers,!and!marketBbased!barriers!to!entry!can’t!be!made!out.! o Competition!has!increased!following!the!entry!of!ALDI,!and!to!a!lesser!extent,!CostCo.! o No!supermarket!has!a!dominant!share!in!the!convenience!or!liquor!market!where! competition!is!healthy.! o Consumers!want!competition!to!drive!lower!prices.!Lower!prices!are!being!achieved! through!supermarket!business!models!that!harness!scale.!! o There’s!no!evidence!that!organic!evolution!of!supermarket!chains!and!sites!weaken! competition.!! o The!ACCC’s!requirement!that!competition!is!achieved!when!there!are!three!players!in! close!vicinity!is!an!essentially!unsupportable,!ambit!claim.!! o The!entry!of!ALDI,!and!to!a!lesser!extent,!CostCo,!show!market!barriers!to!entry!are!low.! ! • Concerns!by!the!regulator!about!the!state!of!nonBmarket!barriers!to!entry!can!be!made!out.!! ! • There!are!market!and!nonBmarket!barriers!to!entry.!NonBmarket!barriers!to!entry!through! regulation!create!the!biggest!obstacles!to!new!competitors!and!existing!competitors!meeting! market!demand,!including!lowering!prices.!! ! • Market!barriers!in!the!supermarket!sector!are!high!because!of!infrastructure,!stock!and!supply! chain!costs;!but!the!expansion!of!ALDI’s!300!stores!in!a!decade!shows!they!can!be!met.!! ! • ACCC!assumptions!that!they!can!regulate!a!more!competitive!market!are!based!on!assumptions! of!competition,!not!the!reality!of!market!competition.!! ! • NonBmarket!barriers,!such!as!high!wage!costs!and!planning!restrictions!for!new!sites,!carry! heavy!costs!for!the!sector!and!are!fractionalised!across!final!sale!prices!for!consumers.!! ! • Seeking!to!regulate!the!drivers!of!supermarket!business!models!will!increase!retail!prices!for! consumers!and!would!reduce!the!indicative!5!per!cent!competition!and!scale!dividend.! ! June!2013! ! ! Institute!of!Public!Affairs! 3! 2.0$$ Table$of$contents! ! Section! ! 1.0! ! 2.0! ! 3.0! ! 4.0! ! 5.0! ! 6.0! ! 7.0! ! 7.1! ! 7.2! ! 7.2.1% % 7.2.2% ! 7.3! ! 7.4! ! 8.0! ! 9.0! ! 9.1! ! 9.2! ! 9.3! ! 9.4! ! 10.0! ! 11.0! ! 12.0! ! 13.0! ! Title! ! Executive!summary! ! Table!of!contents! ! Tables!and!charts! ! Abbreviations! ! Introduction! ! The!role!and!philosophy!of!the!ACCC! ! The!current!state!of!supermarket!competition! ! Retail!supermarket!players! ! The!state!of!competition! ! Liquor%competition% % Increasing%harmonisation%with%fuel%retailers%&%convenience%stores% ! Main!drivers!of!competition! ! Competition!driving!business!models! ! Supermarket!business!models! ! Drivers!of!prices!and!competition! ! Recent!price!movements! ! Regulatory!cost!drivers! ! Barriers!to!entry! ! Indicative!competition!and!scale!dividend! ! Conclusions!and!recommendations! ! References! ! About!the!Institute!of!Public!Affairs! ! About!the!author,!Tim!Wilson! ! Page! ! 1! ! 4! ! 5! ! 6! ! 7! ! 9! ! 13! ! 13! ! 16! ! 17% % 20% ! 20! ! 26! ! 31! ! 36! ! 37! ! 39! ! 41! ! 42! ! 44! ! 46! ! 49! ! 50! ! ! June!2013! ! ! Institute!of!Public!Affairs! 4! 3.0$ Charts,$figures$and$tables$ ! Figure!! Title! ! ! Chart!1! Competition!for!retail!food!and!groceries!!! ! ! Chart!2! Inter!and!Intra!brand!competition!in!the!liquor!sector! ! ! Chart!3! Predominant!motivating!factors!from!supermarkets!meeting!consumer!demand! ! ! Chart!4! Private!label!brands! ! ! Figure!1! Food!and!alcohol!market!share! ! ! Figure!2! Elements!of!the!retail!offer!respondents!rated!as!‘very!important’! ! ! Figure!3! Average!household!share!of!food!toward!household!goods!and!services! expenditure!(%)! ! ! Figure!4! Average!weekly!household!expenditure!on!goods!and!services! ! ! Figure!5! Good!and!services!expenditure!by!the!lowest!and!highest!equivalised!disposable! household!income!quintiles! ! ! Page! ! 17! ! 18! ! 22! ! 27! ! 14! ! 21! ! 24! ! 24! ! 25! ! Australian!market!share!of!select!food!processors! 29! Figure!7! Earnings!before!interest!and!tax,!2001!–!2004,!%!of!sale! 33! Figure!8! 2012!Supermarket!cost!breakdown! 36! Moving!food!price!averages!in!select!OECD!countries,!2005!=!100! 37! Figure!10! Moving!Australian!price!averages,!2005!=!100! 38! ! ! Figure!11! Moving!Australian!food!prices!versus!average,!2005!=!100! ! ! Table!1! Market!share!(by!National!brand!owner)!grocery!retailers,!2011! ! ! Table!2! Major!retailers!and!the!number!of!their!physical!stores!! ! ! Table!3! Market!share!by!industry!players,!2011!! ! ! Table!4! Survey!among!store’s!own!shoppers!in!the!ACT,!2009! 23! Table!5! Percentage!of!household!income!spent!on!food!and!nonBalcoholic!beverages! 25! ! ! Table!6! Percentage!of!households!on!government!support!spent!on!food!and!nonB alcoholic!beverages! ! ! Table!7! Customers!likely!to!change!supermarkets!for!a!5!per!cent!price!decrease! ! ! Table!8! PrivateBlabel!spending!by!Australians! ! ! Table!9! Australian!privateBlabel!spending!by!product!category! ! ! Table!10! International!comparisons!of!gross!margins,!2006! ! ! Table!11! Supermarket!data,!2011B12! ! ! Table!12! Gross!Margin!comparison!of!the!big!four!retailers!in!Australia,!2003B2004! 34! Table!13! Change!in!Key!aggregate!for!‘Down!Down’!products!(Jan!2011!–!midB2012)! 34! ! ! Table!14! Coles!Volume!of!Selected!Products,!2012!!! ! ! Figure!6! ! ! ! Figure!9! ! ! ! ! ! ! ! ! ! ! ! ! 42! ! 13! ! 15! ! 19! ! ! ! ! 26! ! 26! ! 27! ! 27! ! 29! ! 33! ! ! ! ! 35! ! ! ! June!2013! ! ! Institute!of!Public!Affairs! 5! 4.0$ Abbreviations$ ! ABS! ! ACCC! ! ACT! ! Alb! ! AUD$! ! Car! ! CML! ! COGS! ! IGA! ! IPA! ! Kr! ! MSC! ! OECD! ! PC! ! Wmart! ! Wmart!Intl! ! WW! ! Australian!Bureau!of!Statistics! ! Australian!Competition!and!Consumer!Commission! ! Australian!Capital!Territory! ! Albertsons!(United!States)! ! Australian!dollar! ! Carrefour! ! Coles!Myer!Limited! ! Cost!of!goods!sold! ! Independent!Grocers!of!Australia! ! Institute!of!Public!Affairs! ! Kroger! ! Major!supermarket!chain! ! Organisation!for!Economic!Cooperation!and!Development! ! Productivity!Commission! ! WalBmart!(United!States)! ! WalBmart!International!operations!outside!the!United!States! ! Woolworths! ! June!2013! ! ! Institute!of!Public!Affairs! 6! 5.0$ Introduction$$ ! Politicians!and!regulators!are!increasingly!focused!on!the!competitiveness!of!the!retail!supermarket! sector.!Their!concerns!vacillate!between!perceptions!of!absent!competition!to!concerns!that!there!is! excessive!competition.!In!either!case,!there!is!a!victim.!In!absent!competition,!prices!rise!and! consumers!are!harmed.!In!excessive!competition,!prices!fall!and!producers!and!suppliers!are! harmed,!with!a!feedback!loop!that!when!producers!and!suppliers!are!harmed!consumers!are!also! harmed!through!lost!future!competition.!Both!provide!excuses!for!government!or!regulatory!action,! without!proper!assessment!of!its!unintended!consequences.!! ! The!policy!response!is!always!to!try!and!tax,!regulate!or!legislate!for!competition!equilibrium!where! producers!make!healthy!profits!and!consumers!pay!lower!prices.!This!equilibrium!can!exist,!but!as! the!IPA’s!earlier!research!work2!found,!it!requires!the!market!to!decide!outcomes,!not!government! and!regulators.!! ! The!stated!objectives!of!politicians!are!often!naked.!Rural!and!regional!politicians!want!to!reign!in! the!market!power!of!major!supermarket!chains!to!increase!negotiating!power!and!the!influence!of! producers.!Every!dollar!negotiated!down!by!the!supermarkets!is!one!less!dollar!in!the!pockets!of! their!constituents.!But!they!often!conveniently!ignore!that!lower!prices!for!producers!are!often!a! consequence!of!the!scale!of!purchasing!and!that,!like!in!all!industries,!lower!margins!tend!to!be! secured!off!higher!volumes.!!They!also!ignore!that!all!their!constituents!pay!those!higher!prices.!! ! Similarly,!the!objective!of!suburbanBbased!politicians,!and!often!government,!is!to!maximise! competition!to!decrease!prices!for!consumers.!They!seek!to!do!that!by!regulating!perfect! competition.!But!they!often!fail!to!understand!that!competition!is!built!off!the!decentralised!decision! making!of!millions!of!consumers!who!vote!with!their!wallet!for!the!goods!and!services!they!seek! every!day.!Trying!to!use!the!power!of!government!to!alter!that!balance!invariably!favours!one! market!player!over!another,!and!any!cost!increase!is!paid!for!by!the!consumer.!! ! In!either!case,!politicians!are!exposed!to!the!full!political!consequences!of!their!actions!and!are!held! accountable.!The!same!does!not!apply!to!regulators!who!seek!to!manage!markets!without! responsibility!for!the!consequences!of!their!decisions.!! ! The!underlying!attitude!of!the!Australian!Competition!and!Consumer!Commission!(ACCC)!exemplifies! absent!responsibility!for!their!decisions.!Throughout!this!year!the!ACCC!has!outlined!their!concerns! with!the!retail!supermarket!sector!and!the!current!state!of!competition,!but!concurrently!the! consumer!appears!to!be!missing!in!their!decisions.! ! This!research!paper!extends!the!IPA’s!earlier!research!work!into!retail!supermarket!competition!–! Consumer>first%supermarket%reform:%The%market,%not%government,%knows%how%to%best%meet%consumer% demand.!This!research!paper!was!released!in!January!2012!to!inform!public!debate!about!the!real! consequences!of!excessive!regulation!has!on!consumers!in!comparison!to!the!promised!competition! gains.!! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2 !Wilson,!T.!2013.!“ConsumerBfirst!supermarket!reform:!The!market,!not!government,!knows!how!to!best!meet! consumer!demand”.!Institute!of!Public!Affairs.!Available!at! http://ipa.org.au/library/publication/1359362671_document_130129_B_paperBconsumerB first_supermarket_reform.pdf.! ! June!2013! ! ! Institute!of!Public!Affairs! 7! Since!then,!regulators!have!continued!to!further!exercise!their!muscle!on!the!sector,!even!as!past! regulations!have!been!wound!back!by!governments!for!failing!to!deliver!their!promised!aims.!This! paper!will!extend!the!IPA’s!earlier!work!by!looking!at!what!is!at!stake,!should!greater!restrictions!by! politicians!and!regulators!influence!the!different!business!models!of!supermarkets!that!provide! different!product!offerings.!! ! The!concern!is!that!rather!than!regulating!to!provide!an!attractive!environment!for!investment,!the! ACCC,!with!the!support!of!politicians,!is!seeking!to!regulate!the!choices!consumers!have!in!the!hope! it!will!promote!competition.!By!doing!so!the!ACCC!isn’t!just!regulating!people’s!choices,!but!also!the! underlying!business!models!that!operate!in!the!sector!to!enable!supermarkets!to!meet!consumer! demand,!such!as!low!prices!and!convenience.! ! The!focus!of!this!research!paper!is!to!analyse!the!underlying!philosophy!behind!regulation!on!the! retail!supermarket!sector!and!what!the!likely!consequences!will!be.!In!particular!it!will!assess!the! business!models!of!supermarkets!and!how!they!influence!their!capacity!to!deliver!for!consumers! based!on!the!growing!diversity!of!consumer!expectations.!! ! ! ! June!2013! ! ! Institute!of!Public!Affairs! 8! 6.0$ The$role$and$philosophy$of$the$ACCC! ! The!Australian!Competition!and!Consumer!Commission!is!the!major!national!regulator!seeking!to! regulate!in!favour!of!competition!and!fair!trading.!It!achieves!this!objective!by!acting!as!the! enforcement!agency!of!the!Competition!and!Consumer!Act!2010,!whose!primary!objective!is!stated! as:! ! “enhanc[ing]!the!welfare!of!Australians!through!the!promotion!of!competition!and!fair! trading!and!provision!for!consumer!protection”.3!! ! According!to!the!ACCC!it!achieves!this!objective!by!promoting:! ! “competition!and!fair!trade!in!markets!to!benefit!consumers,!businesses,!and!the! community.!We!also!regulate!national!infrastructure!services”.4! ! It!seeks!to!achieve!these!objectives!through!four!key!goals:! ! 1. “Maintain!and!promote!competition!and!remedy!market!failure.!! 2. Protect!the!interests!and!safety!of!consumers!and!support!fair!trading!in!markets.! 3. Promote!the!economically!efficient!operations!of,!use!of!and!investment!in!monopoly! infrastructure.!! 4. Increase!our!engagement!with!the!broad!range!of!groups!affected!by!what!we!do”.5!! ! Even!within!these!four!goals!there!are!a!multitude!of!contradictions!and!subjective!tests!that!need! to!be!applied!by!the!ACCC!and!are!likely!reflected!in!the!individual!approach!of!its!Commissioners.!! ! Assessment!of!“market!failure”!is!a!deeply!subjective!test,!considering!the!contemporary!divide! between!“market!failure”!and!an!“undesirable!market!outcome”!is!increasingly!blurred.!Similarly!the! concept!of!“fair!trading”!can!be!directly!at!odds!with!the!“interests”!of!mainstream!consumers!who! are!heavily!motivated!by!price!and!will!pay!more!should!the!regulator!seek!to!manage!market! outcomes.!! ! The!attitude!and!influence!of!individual!Commissioners,!especially!the!Chair,!will!have!a!heavy! influence!on!how!these!different!objectives!are!weighted.!Recent!evidence!shows!the!subjectiveness! of!that!test!is!now!being!realised!in!the!retail!supermarket!sector.!! ! A!recent!decision!by!the!ACCC!to!prohibit!Woolworths!from!developing!a!new!site!in!suburban! Sydney!on!the!grounds!that!it!is!located!close!to!an!already!established!Woolworths!store!is!a!case!in! point.!The!ACCC!decided!it!was!preferable!for!Glenmore!Ridge!consumers!to!have!to!potentially! travel!further!to!another!store!within!the!suburb!of!Glenmore!Park!to!buy!their!groceries,!rather! than!allow!Woolworths!to!open!another!store.!According!to!reports!the!decision!was!based!on!the! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 3 !Parliament!of!Australia.!2010.!“Competition!and!Consumer!Act!2010”.!Cited!on!12/05/2013!at! http://www.austlii.edu.au/cgiBbin/download.cgi/cgiB bin/download.cgi/download/au/legis/cth/consol_act/caca2010265.rtf.!! 4 !Australian!Competition!and!Consumer!Commission.!2013.!“About!us”.!Commonwealth!of!Australia.!Cited!on! 01/06/2013!at!http://accc.gov.au/aboutBus.! 5 !Australian!Competition!and!Consumer!Commission.!2013.!“About!the!ACCC”.!Commonwealth!of!Australia.! Cited!on!01/06/2013!at!http://accc.gov.au/aboutBus/australianBcompetitionBconsumerBcommission/aboutBtheB accc.! ! June!2013! ! ! Institute!of!Public!Affairs! 9! ACCC!deciding!three!players!needed!to!be!present!in!the!market,!where!there!is!currently!one! dominant!player!with!another!intending!to!open!a!store!in!2014.6! ! The!decision!is!a!classic!example!of!the!subjectiveness!of!assessing!the!balance!between!competition! and!consumer!interest.!First,!there!is!no!basis!to!the!claim!that!three!market!players!will!deliver! greater!competition.!The!claim!is!essentially!ambit.!Second,!competition!cannot!be!planned!and! organic!growth,!with!few!barriers!to!entry,!allows!market!players!to!identify!opportunities.!!! ! The!market!responds!to!consumer!interest!by!providing!the!goods!and!services!they!demand.! Woolworths!sought!to!open!a!new!store!because!they!thought!consumers!would!shop!there.!More! importantly,!in!meeting!the!demands!of!consumers!they!decided!that!splitting!their!customer!base! between!two!stores!was!still!likely!to!be!beneficial,!even!though!there!was!a!higher!cost!lay!out!on! their!part.!If!it!did!not,!they!incurred!the!cost!of!doing!so.!! ! The!roll!out!of!a!new!store!did!not!limit!the!capacity!for!other!competitors!to!enter!the!market.!ALDI! is!already!developing!a!new!store!in!the!area.!Other!retailers!have!the!right!to!develop!a!new!store!if! they!see!a!market!opportunity,!including!originally!bidding!for!space!at!Glenmore!Ridge.!!! ! Instead,!the!regulator!has!decided!to!limit!the!capacity!of!a!chain!to!meet!consumer!demand.! According!to!the!ACCC:! ! “The!ACCC!concluded!that!the!proposed!acquisition!would!be!likely!to!result!in!a!substantial! lessening!of!local!supermarket!competition!…![and]!An!alternative!supermarket!at!the! Glenmore!Ridge!site!would!stimulate!local!competition!and!provide!greater!choice!to! residents!of!the!area.!Woolworths!buying!the!site!would!prevent!that!from!occurring.”7! ! By!removing!their!right!to!acquire!a!site!for!a!new!store!they’ve!effectively!reduced!competition!and! will!decrease!the!acquisition!price!for!the!site!for!a!nonBWoolworths!and!nonBALDI!competition,! leading!to!preferential!treatment,!in!all!likelihood,!for!Coles!or!Metcash.! ! Whether!it!will!lead!to!greater!competition!remains!unclear!considering!there!are!eleven!different! supermarkets!across!five!major!brands!in!the!surrounding!suburbs.!! ! The!decision!is!indicative!of!the!subjectiveness!of!the!ACCC’s!current!approach!to!retail!competition.! This!was!outlined!by!the!ACCC’s!head,!Rod!Sims,!in!a!June!2012!speech!to!the!Committee!for! Economic!Development!of!Australia,8!!where!he!outlined!that!the!ACCC!is!increasingly!moving!away! from!ensuring!competition!is!vibrant!for!consumer!choice,!towards!regulating!the!choices!consumers! have.!According!to!Sims:! ! “Looking!at!the!ACCC’s!mergers!register,!it!is!true!that!there!are!a!number!of!current!reviews! underway!that!involve!‘small!retail!acquisitions’!in!the!liquor,!grocery!and!home! improvement!sectors.!While!these!acquisitions!may!seem!small!relative!to!a!global!merger! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 6 !Chanticleer.!2013.!“FaceBoff:!Woolworth’s!O’Brien!v!Competition!chief!Sims”.!Australian!Financial!Review.! 07/06/2013.!! 7 !Australian!Competition!and!Consumer!Commission.!2013.!“ACCC!to!oppose!Woolworths’!proposed! acquisition!of!Glenmore!Ridge!site”.!Cited!on!08/06/2013!at!http://accc.gov.au/mediaBrelease/acccBtoBopposeB woolworthsBproposedBacquisitionBofBglenmoreBridgeBsite.! 8 !Sims,!R.!2012.!“Better!communicating!the!ACCC’s!role,!its!approach!to!reviewing!mergers!involving!small! retail!acquisitions!and!the!benefits!of!competition!in!electricity”.!Speech!to!CEDA.!Australian!Competition!and! Consumer!Commission.!Commonwealth!of!Australia.!14!June!2012.!! ! June!2013! ! ! Institute!of!Public!Affairs! 10! of,!say,!two!mining!companies,!they!are!important!at!both!the!local!and!at!the!national! level”.9! ! According!to!Sims,!the!nature!of!the!industry!is!changing!as!supermarkets!are!increasing!their! market!power!by!purchasing!existing!retail!outlets!and!bringing!them!into!their!brand!family:! ! “This!ownership!trend!benefits!from!substantial!economies!of!scale!and!scope!in,!for! example!distribution!logistics!centre!and!advertising!as!well!as!brand!promotion.! ! Barriers!to!entry!for!other!chains!or!buying!groups!to!replicate!the!strong!market!position!of! Wesfarmers!and!Woolworths,!are!becoming!increasingly!high.!Added!to!this!often!are!local! barriers!associated!with,!for!example,!access!to!sites.!! ! When!the!major!supermarket!chains!(MSC)!acquire!an!independent!player!the!remove!an! alternative!from!the!market,!with!potentially!a!different!product!range!and!service!offering.! This!reduces!consumer!choice!as!well!as,!for!example,!competition!generally!if!the!number! of!players!in!a!local!market!were!to!reduce!from,!say,!four!to!three!much!less!three!to!two.! That!competition!is!unlikely!to!be!replaced!by!either!a!chain!or!a!new!independent!given! local!and/or!national!entry!barriers”.10!! ! Sims’!approach!to!retail!competition!is!disappointing.!While!he!acknowledges!it!may!occur,!he! underBemphasises!the!role!that!the!removal!of!a!single!market!player!creates!for!new!market! entrants,!especially!when!that!store!meets!the!unique!needs!of!consumers.!His!response!is!to!be! defeatist!and!argue!that!it!is!“unlikely!to!be!replaced!by!either!a!chain!or!a!new!independent!given! local!and/or!national!entry!barriers”.!On!the!latter!point!he!may!be!right,!but!surely,!rather!than! focusing!on!regulating!the!choices!consumers!can!have,!the!role!of!the!ACCC!is!to!find!pathways!to! remove!those!barriers.!!! ! In!this!speech!Sims!highlighted!five!key!assumptions!that!underlie!his!approach:! ! 1. “We!can!be!seen!to!be!at!a!critical!decision!point”!in!the!nature!and!structure!of!the! supermarket!sector!and!the!role!of!market!players.! ! 2. [Coles]!“and!Woolworths!already!have!significant!market!power!in!groceries,!and!may!move! to!a!similar!position!in!liquor,!home!improvement!and!even!petrol!with!frequent!small! acquisitions!of!existing!outlets,!or!indeed,!greenfield!land!sites”.11.! ! 3. “The!ACCC!is!already!concerned!about!the!market!structures!in!the!supermarket!sector!and! the!continued!expansion!of!Coles!and!Woolworths!relative!to!the!other!retailers.!While!it! recognises!that!growth!by!the!major!supermarket!chains!has!bought!benefits!to!consumers! as!a!result!of!their!scale,!there!is!a!risk!that!with!only!two!major!national!chains,!competition! between!them!to!offer!lower!prices!and!better!service!will!be!‘softer’!than!it!might! otherwise!be.”! ! 4. Barriers!to!entry!for!other!chains!or!buying!groups!to!replicate!the!strong!market!position!of! [Coles]!and!Woolworths,!are!becoming!increasingly!high.!Added!to!this!often!are!local! barriers!associated!with,!for!example,!access!to!sites”.! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 9 !Ibid.! !Ibid.! 11 !Ibid.! 10 ! June!2013! ! ! Institute!of!Public!Affairs! 11! ! 5. With!a!number!of!markets!at!the!state/national!level!already!being!quite!concentrated!the! ACCC!is!concerned!to!ensure!that!further!acquisitions!in!local!markets!do!not!ultimately!lead! to!retail!of!indeed!wholesale!industry!structures!that!may!adversely!affect!the! competitiveness!of!these!markets!and!reduce!choice!for!consumers”.! ! But!underlying!each!one!of!these!arguments!are!assumptions!about!the!nature!and!desirable! structure!of!the!market!from!a!topBdown!perspective,!particularly!in!the!case!of!the!third!point! where!current!competition!is!weighted!against!what!“might!otherwise!be”.12!! ! Considering!the!weight!that!these!assumptions!have!on!the!direction!of!regulation,!these!arguments! deserve!to!be!tested.!! ! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 12 !Ibid.! ! June!2013! ! ! Institute!of!Public!Affairs! 12! 7.0$ The$current$state$of$supermarket$competition$ ! As!outlined!in!Consumer>first%supermarket%reform,!the!data!clearly!shows!that!supermarket!retailers! operate!in!a!highly!competitive!market!in!the!$81.8!billion!sector.13!However,!the!extent!of!that! competition!is!largely!dependent!on!how!the!beholder!seeks!to!view!it.!! ! 7.1! Retail!supermarket!players! ! Common!perceptions!of!retail!supermarket!competition!are!that!the!market!is!dominated!by!Coles! and!Woolworths!with!the!scraps!left!for!other!players.!There!is!no!single,!consistent!measure!for! supermarket!competition.!! ! It’s!regularly!argued!that!Coles!and!Woolworths!control!70!–!80!per!cent!of!market!share.!This! narrow!interpretation!is!also!repeated!by!the!regulator.!ACCC!Head!Rod!Sims,!has!been!quoted! arguing!“with!over!40!per!cent!of!the!supermarkets!in!the!country!in!the!case!of!Woolworths!and! over!30!per!cent!in!the!case!of!Coles!–!two!players!with!over!70!per!cent!of!the!market!–!people!can! make!their!own!view!of!whether!it’s!a!concentrated!market”.14!Sims’!position!stands!at!odds!with! past!inquiries!by!the!ACCC.!The!ACCC’s!2008!inquiry!into!groceries!argued:! ! “Based!on!the!information!available!to!it,!the!ACCC’s!view!is!that!the![major!supermarket! chains]!account!for!between!55!per!cent!and!60!per!cent!of!consumer!expenditure!on! grocery!items.!Woolworths!accounts!for!at!least!30!per!cent!and!Coles!around!25!per!cent.! Although!each!of!these!shares!of!retail!grocery!sales!are!large!for!a!single!company,!to!say! that!the!MSCs!enjoy!an!80!per!cent!share!of!grocery!sales!exaggerates!the!position!of!the! retailers.”15! ! Data!that!reinforces!the!ACCC’s!2008!inquiry!claims!has!been!reported!by!Euromonitor!International! in!2011!(Table!1).!This!data!shows!the!market!share!of!Woolworths!was!33.4!per!cent,!Wesfarmers! Coles!was!29!per!cent!and!Metcash!IGA!was!14.2!per!cent!and!ALDI!was!2.6!per!cent.16!But!even!the! share!of!smaller!players,!like!ALDI,!is!arguably!higher!than!reported.!! ! Table!1!|!Market!share!(by!National!brand!owner)!grocery!retailers,!2011! ! Supermarket! Market!share!(%)! Woolworths! 33.4%! Wesfarmers!(Coles)! 29%! Metcash!(IGA)! 14.2%! ALDI! 2.6%! Australian!United! 1.4%! 7BEleven! 1.1%! Caltex! 0.9%! Others! 17.5%! ! ! ! Source:!Euromonitor!International! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 13 !IBIS!World.!2013.!“Supermarkets!and!other!grocery!stores!in!Australia:!Industry!at!a!glance”.!G5111.! !Mitchell,!S.!2012.!“Woolies!pushes!its!trolley!too!fast”.!Australian!Financial!Review.!12/12/2012.! 15 !Australian!Competition!and!Consumer!Commission.!2008.!“Report!of!the!ACCC!inquiry!into!the! competitiveness!of!retail!prices!for!standard!groceries,!July!2008”.!Commonwealth!of!Australia.!Available!at! http://transition.accc.gov.au/content/index.phtml/itemId/838251.! 16 !Euromonitor!International.!2012.!“Grocery!Retailers!in!Australia”.!March!2012.! 14 ! June!2013! ! ! Institute!of!Public!Affairs! 13! ! Similar!retail!trend!data!has!been!reported!by!the!Australian!Bureau!of!Statistics,!as!presented!in! Figure!1,!which!provides!a!guide!for!the!relative!market!share!for!the!two!supermarket!majors!since! 2000.! ! Figure!1!|!Food!and!alcohol!market!share! ! !38%! Coles! ! !36%! Woolworths! ! !34%! ! !32%! ! ! !30%! ! !28%! ! !26%! ! !24%! ! ! !22%! ! !20%! FY00! FY01! FY02! FY03! FY04! FY05! FY06! FY07! FY08! FY09! FY10! FY11! FY12! R12!H1! ! ! Source:!Australian!Bureau!of!Statistics.!Catalogue!8501.0! FY13! ! The!difference!between!the!position!of!the!current!head!of!the!ACCC,!and!its!past!review!and!the! data!presented!above,!is!driven!by!an!assessment!of!the!breadth!of!the!market!that!supermarkets! are!measured!against.!Sims’!position!is!dependent!on!assessing!competition!based!on!their!primary! market!–!grocery!sales!–!the!2008!inquiry’s!position!is!dependent!on!a!more!holistic!assessment!of! the!business!environment!that!supermarkets!operate!in.!! ! The!full!breadth!of!competition!is!argued!in!Section!6.2.!However,!the!current!state!of!market!share! is!not!a!new!development.!As!argued!by!IBIS!World!“the!industry!has!been!subject!to!increasing! concentration!since!the!midB1970s!…![however]!the!entry!of!ALDI!into!the!Australian!market!in!2001! had!a!significant!effect!on!the!performance!of!operators!such!as!BiBLo,!which!catered!for!the!lower! end!of!the!market”.17!Similarly,!“ALDI’s!expansion!plans!are!on!par!with!those!of!major!players!such! as!Coles!and!Woolworths”.18! ! However,!what!is!clear!is!that!supermarket!competition!is!intensifying,!particularly!in!major!retailers.! Coles!and!Woolworths!clearly!dominate!market!share,!but!they!don’t!dominate!sites.!Based!on!the! data!provided!in!Table!2!the!share!of!physical!stores!isn’t!consistent!with!reported!market!share.! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 17 !IBIS!World.!2013.!“Supermarkets!and!other!grocery!stores!in!Australia:!Competitive!Landscape”.!G5111.! !Ibid.! 18 ! June!2013! ! ! Institute!of!Public!Affairs! 14! Supermarket!majors!have!around!20!per!cent!of!total!physical!sites!each,!and!ALDI!has!nearly!10!per! cent!of!physical!sites!despite!only!operating!in!Australia!for!a!little!over!a!decade.!! ! Table!2!|!Major!retailers!and!the!number!of!their!physical!stores!! ! Firm! Major!supermarkets! Share!of!total!stores!(%)! ALDI! 300! 7.5%! Costco! 3! 0.1%! Woolworths! 883! 22.1%! Coles! 749a! 18.7%! b Metcash! 2,065 ! 51.6%! Approximate!total! 4,000! 100%! ! a! Notes:!! Includes!BiBLo!banded!stores.! b! ! Includes!some!convenience!stores.! ! Source:!Productivity!Commission,!Coles,!Woolworths!and!ALDI.! ! Noting!that!the!data!does!include!some!convenience!stores,!the!largest!physical!player!is!Metcash! supplied!stores,!with!nearly!half!the!physical!market.!The!dominance!of!Metcash!is!largely!because! they!operate!smallerBscale!stores!and!convenience!stores!that!are!much!easier!to!roll!out!in!both! urban!and!rural!and!regional!environments,!in!comparison!to!largerBformat!stores!like!ALDI,!Coles! and!Woolworths.!The!key!point!of!comparison!between!the!number!of!physical!stores!is!market! share.!While!Coles!and!Woolworths!have!around!20!per!cent!of!physical!stores!each,!they!manage!to! leverage!their!market!share!well!above!their!physical!presence.!That!increased!market!share!in! comparison!to!share!of!physical!sites!is!a!clear!indication!that!they!are!attracting!consumers!based! on!their!product!offering.! ! The!other!significant!development!is!the!continued!and!clearly!aggressive!expansion!of!ALDI.!Since! the!IPA’s!last!research!paper!released!earlier!this!year!the!number!of!confirmed!ALDI!stores!has! jumped!from!260!to!300.!That’s!roughly!equivalent!to!the!number!of!new!stores!intended!to!be! rolled!out!by!Coles!and!Woolworths!by!2014.!Considering!they!are!operating!off!a!lower!market! share,!it!demonstrates!their!roll!out!is!on!par,!if!not!more!aggressive,!than!Coles!and!Woolworths,! especially!as!a!share!of!existing!physical!sites.! ! ALDI’s!strategy!is!to!compete!with!the!supermarket!majors!by!utilising!their!global!supply!chain!to! provide!local!and!imported!private!labelled!goods!at!competitive!prices!to!supermarket!majors.!The! influence!of!ALDI!has!been!significant!and!has!driven!key!components!of!supermarket!competition,! most!notably!the!expansion!of!private!labelling.19!The!growth!of!Costco!has!been!much!slower,!but!is! largely!indicative!of!its!alternate!format!as!a!bigBbox!store!that!opens!large!sites!that!attract! customers!looking!to!purchase!wellBknown!brands!in!bulk,!not!to!compete!on!convenience.!The! chain!is!expecting!to!double!its!presence!from!three!physical!stores!to!six,20!and!bring!with!it!“further! pressure!on!industry!retailers!to!ensure!their!products!are!competitively!priced!and!offer!value!for! money!to!budget!conscious!shoppers”.21!! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 19 !Commonwealth!Treasury.!2011.!“Australia’s!food!processing!sector:!Submission!by!the!Treasury!to!the! Senate!Select!Committee!on!Australia’s!Food!Processing!Sector”.!Submission!to!the!Senate!Select!Committee! on!Australia’s!Food!Processing!Sector.!Parliament!of!Australia.!2012.! https://senate.aph.gov.au/submissions/comittees/viewdocument.aspx?id=2c66ee5bB485cB4fc3Baa1aB dfd8de12fccf.!! 20 !Fielding,!Z.!2012.!“Costco!to!expand!its!footprint”.!Australian!Financial!Review.!09/07/2012.! 21 !IBIS!World.!2012.!“Supermarkets!and!other!grocery!stores!in!Australia:!Competitive!Landscape”.!G5111.! ! June!2013! ! ! Institute!of!Public!Affairs! 15! 7.2! The!state!of!competition! ! Numerous!industry!reports!conclude!that!competition!is!both!high!and!increasing!as!supermarkets! grow!their!existing!brands!to!primarily!compete!on!price,!as!well!as!diversifying!to!chase!narrower! market!segments!based!on!convenience!and!quality.!22!This!follows!years!of!complaint!from! politicians,!regulators!and!the!public!that!the!market!competition!was!stagnant.!As!argued!by!Justice! Emmett!in!response!to!consideration!of!an!ACCC!complaint!against!Metcash’s!acquisition!of! Franklins!that!“the!scale!and!intensity!of!retail!competition!is!extreme!and!increasing”.23! ! Discussion!surrounding!the!state!of!competition!in!the!supermarket!sector!is!largely!dominated!by! Coles!and!Woolworths!and!their!combined!market!share,!which!is!significant.!But,!as!outlined!in! Section!6.1,!any!analysis!is!dependent!on!how!their!market!share!is!assessed.!Critics!focus!solely!on! preBpackaged!groceries.!That!is!a!poor!analysis.!A!contemporary!supermarket!offers:! • PreBpackaged!groceries.! • Fresh!fruits!and!vegetables.! • Meats!and!fish.! • Cakes!and!baked!goods.! • Alcohol!(depending!on!the!individual!store!and!chain).! • Specialist!ranges,!including!organic!foods.! • NonBfood!general!merchandise!and!apparel.! ! While!there!is!no!single!agreed!formula!for!measuring!relative!market!share!of!supermarkets!based! on!assessing!the!full!product!offerings,!it!is!assessed!to!be!lower!because!supermarkets!do!not!just! compete!against!each!other,!they!also!compete!against!a!variety!of!other!stores.!As!industry! research!concludes,!supermarkets!“compete!with!other!purveyors!of!food!and!grocery!items!such!as! convenience!stores;!fresh!meat,!fish!and!poultry!retailers;!fruit!and!vegetable!retailers;!bread!and! cake!retailers;!and!takeaway!food!retailers”.24!! ! Chart!1!reflects!the!broad!competitive!reality!that!supermarkets!face.!The!chart!does!not!include!all! aspects!of!competition!B!some!wholesale!markets!sell!alcohol,!such!as!the!Swords!brand!of!refillable! wine!bottles,!and!some!preBpackaged!groceries!are!available!at!specialty!stores!–!but!it!does!include! their!primary!competitors.!The!great!unknown!is!the!increasing!influence!of!internet!competition!in! the!supermarket!retailing!space.!Companies,!such!as!Aussie!Farmers!Direct,!have!sought!to!meet! increasing!market!demand!for!delivered!groceries,!while!supermarkets!themselves!are!rolling!out! internet!retail!options,!delivery!options!and!new!grocery!collection!centres.25!! ! The!competitive!market!is!now!broadening.!Both!Coles!and!Woolworths!have!offered!readyBtoBeat! options!for!years,!such!as!readyBcooked!chickens,!and!Coles!has!expanded!options!such!as!their! ‘Jewel!of!India’!range.!Woolworths!recently!announced!that!it!will!produce!and!sell!readyBtoBeat! meals!in!direct!competition!with!takeBaway!food!restaurants.26! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 22 !Ibid.!&!Euromonitor!International.!2012.!“Grocery!Retailers!in!Australia.!March!2012.!!! !Australian!Competition!Law.!2011.!“ACCC!v!Metcash!Trading!Limited”.!Cited!on!01/05/2013!at! http://www.australiancompetitionlaw.org/cases/2011metcash.html.! 24 !IBIS!World.!2013.!“Supermarkets!and!other!grocery!stores!in!Australia:!Competitive!landscape”.!G5111.! 25 !Lui,!S.!“Woolworths!trials!grocery!collection!service!at!Melbourne!airport”.!ZDNet.!Cited!on!13/06/2013!at! http://www.zdnet.com/au/woolworthsBtrialsBgroceryBcollectionBserviceBatBmelbourneBairportB7000015395/.! 26 !Speedy,!B.!2013.”Woolies!in!Fresh!Food!Fight”.!The!Weekend!Australian.!Cited!on!16/05/2013!at! http://www.theaustralian.com.au/business/companies/wooliesBinBfreshBfoodBfight/storyBfn91v9q3B 1226664127976.! 23 ! June!2013! ! ! Institute!of!Public!Affairs! 16! Chart!1!|!Competition!for!retail!food!and!groceries!!! ! ! Supermarkets! Wholesale!Markets! Internet! Speciality!retailers! Pre*packaged! groceries! X! X! X! Fresh!fruit!&! vegetables! X! X! X! Fruit!&!vegetable! stores! Meat!&!fish! X! X! X! Butchers! Cakes!&!baked!goods! X! X! X! Bakeries!&! cake!stores! Alcohol! X! ! X! Bottle!shops! Specialist!ranges!&! organic!foods! X! X! X! Specialist!&! organic!retailers! ! ! Table!3!outlines!the!true!nature!of!competition!in!the!retail!market!across!supermarket!product! lines.!Based!on!IBIS!World!data,!the!closest!equivalent!market!share!to!preBpackaged!groceries!exists! in!fruit!and!vegetables!with!a!61!per!cent!market!share.!But!it!drops!quickly!in!meat,!fish!&!poultry! when!compared!to!other!market!players!to!only!38.1!per!cent,!and!where!more!than!half!of!the! competition!is!from!small!or!nonBchain!competitors.! ! While!not!identical,!the!Productivity!Commission’s!2011!inquiry!into!the!retail!sector!drew!similar! comparisons.!The!PC!concluded!that!the!two!majors!enjoyed!70!per!cent!market!share!for!preB packaged!groceries,!50B60!per!cent!for!diary!and!deli,!50!per!cent!for!fresh!meat!and!fruit!and! vegetables.27!! ! 7.2.1%% Liquor%competition% ! With!a!competitive!market!environment!for!groceries,!supermarkets!have!been!seeking!to!extend! their!capacity!to!use!their!business!model!into!allied!sectors,!notably!liquor.!Coles!and!Woolworths! have!an!equivalent!market!share!in!liquor!compared!to!preBpackaged!groceries,!but,!in!comparison! to!other!product!lines!also!has!a!clear!and!strong!competitor!in!Independent!Brands!Australia! (owned!by!Metcash)!that!holds!a!17!per!cent!share.!! ! As!Chart!2!outlines,!even!within!the!two!supermarket!majors,!unlike!their!supermarket!businesses,! liquor!businesses!are!shared!across!multiple!intraBbrand!competitors.!! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 27 !Productivity!Commission.!2011.!“Economic!Structure!and!Performance!of!the!Australian!Retail!Industry”.! Commonwealth!of!Australia.!n56.!Available!at! http://www.pc.gov.au/__data/assets/pdf_file/0019/113761/retailBindustry.pdf.! ! June!2013! ! ! Institute!of!Public!Affairs! 17! ! Chart!2!|!Inter!and!Intra!brand!competition!in!the!liquor!sector! ! Parent!company! Sub!brand! Core!competitive!position! Price! Range! Convenience! Quality! Liquorland! X! X! ! ! Vintage!Cellars! ! ! ! X! First!Choice!Liquor! X! ! ! ! Wine!drop! ! ! X! ! Cellarbrations! X! X! ! ! IGA!plus!liquor! ! ! X! ! The!BottleBO! X! ! ! ! The!BottleBO! Neighbourhoods! ! ! X! ! Dan!Murphy’s! X! X! ! ! BWS! ! X! X! ! Cellarmasters! ! ! X! ! Langtons! ! ! ! X! Coles! Independent! Brands!Australia! Woolworths! ! Note:!Based!on!primary!promotional!points!on!each!company’s!website! ! Coles!owns!Liquorland!which!competes!on!price!and!range,!Vintage!Cellars!on!quality,!First!Choice! Liquor!on!price!and!Wine!Drop!on!convenience.!Woolworths!owns!Dan!Murphy’s!which!competes! on!price!and!range,!BWS!on!range!and!convenience,!Cellarmasters!on!convenience!and!Langtons!on! quality.!Independent!Brands!has!similar!subBbrands!with!Cellabrations!that!competes!on!price!and! range,!IGA!plus!liquor!on!convenience,!The!BottleBO!on!price!and!The!BottleBO!Neighbourhood!on! convenience.!! ! But,!as!Table!3!outlines,!outside!of!the!market!share!of!the!majors,!around!a!quarter!of!the!market!is! still!controlled!by!smaller!players.!Those!smaller!players!include!small!chains!as!well!as!individual! stores!and!bottle!shops!attached!to!existing!hotels.!! ! ! June!2013! ! ! Institute!of!Public!Affairs! 18! Table&3&|&Market&share&by&industry&players,&2011&& ! Retail&outlet& Fruit&&& vegetables& 32.0%& Woolworths& 29.0%& Wesfarmers& 61.0%) Combined)majors) 2.5%! Independent!Grocers!of!Australia! 2.0%! ALDI! ?! Lenard's!Pty!Ltd! ?! De!Costi!Seafood! ?! Independent!Brands!Australia! ?! 7?Eleven! ?! Night!Owl! ?! Bakers!delight! ?! The!cheesecake!shop! ?! Michel's!Patisserie! ?! Don’t!King!Australia! ?! Brumby's!Bakery! ?! Muffin!Break! 34.5%! Other! 100.0%& Total& ! Meat,&fish&&& poultry& 21.2%& 16.9%& 38.1%) 3.7%! 2.1%! 1.4%! <1.0%! ?! ?! ?! ?! ?! ?! ?! ?! ?! 54.7%! 100.0%& Bread&&&cake& Liquor& 30.8%& 27.7%& 58.5%) ?! ?! ?! ?! ?! ?! ?! 8.2%! 4.5%! 4.0%! 4.0%! 3.8%! 2.5%! 14.5%! 100.0%& 37.0%& 21.3%& 58.3%) ?! ?! ?! ?! 17.0%! ?! ?! ?! ?! ?! ?! ?! ?! 24.7%! 100.0%& Tobacconists& &&specialised& N/A& N/A& N/A) N/A! N/A! N/A! N/A! N/A! N/A! N/A! N/A! N/A! N/A! N/A! N/A! N/A! N/A! 100.0%& Source:!IBIS!World! ! June!2013! ! ! Institute!of!Public!Affairs! 19! Convenience& stores& N/A& N/A& N/A) N/A! ?! ?! ?! ?! 25.0%! 1.5%! ?! ?! ?! ?! ?! ?! 73.5%! 100.0%& 7.2.2$ Increasing$harmonisation$with$fuel$retailers$&$convenience$stores$ ! The!integration!of!supermarkets!with!fuel!retailers!is!increasingly!linking!the!retail!market,!especially! as!they!act!as!an!outlet!for!convenience!stores!and!redeem!points!for!loyalty!programs.!In!recent! years!it!has!taken!the!form!of!a!coCbranding!alliance!between!Shell!that!supply!petrol!and!Coles!that! operate!the!convenience!stores,!and!Woolworths!with!Caltex.!The!high!volume,!low!margin!business! model!of!supermarkets!reinforces!the!business!model!of!petrol!stations!which!also!operate!on!high! volume!and!low!margin!on!petrol.!However,!they!operate!on!lowerCvolumes!and!higher!margins!on! sales!of!consumables!such!as!chocolates,!ice!cream!and!drinks.!! ! Convenience!stores!are!now!seeking!to!achieve!scale.!The!remaining!independent!retailers!are! increasingly!consolidating!to!respond!to!the!market!environment!and!achieve!the!scale!of!larger! retailers,!especially!those!backed!by!the!supermarket!majors.28!Though!the!key!players!remain!7C Eleven,!whose!market!share!has!grown!considerably,!and!Metcash!backed!stores!–!the!supermarket! majors!do!not!have!the!market!share!to!be!considered!dominant.! ! 7.3! Main!drivers!of!competition! !! A!key!misconception!about!competition!is!that!retailers!only!compete!on!price.!As!has!been! highlighted!in!past!reviews!of!the!sector,!price!is!the!primary!driver!of!competition!between! different!market!players,!but!it!is!not!the!sole!determinant.!Competition!occurs!based!on!a!series!of! relevant!factors!based!on!consumer!priorities!including!price,!convenience,!experience,!location,! quality,!parking!and!product!range.!There!are!also!other!factors!that!play!a!smaller!role.!! ! Different!supermarkets!meet!different!market!segments!based!on!the!motivating!factors!that! influence!consumer!behaviour.!These!factors!vary,!for!example,!the!primary!shopper!in!an!average! Australian!family!may:! 1. Shop!at!a!convenience!store!early!in!the!morning!when!they!have!run!out!of!orange!juice.! Their!choice!to!shop!at!a!convenience!stores!is!primarily!motivated!by!time!constrains,!not! cost!because!their!purchase!is!in!a!low!volume.!! 2. Shop!at!a!fresh!food!market!for!their!major!weekly,!or!biCweekly,!fresh!food!shop,!including! fruit,!vegetables,!meat!and!fish.!They!shop!at!a!market!because!their!primary!concern!is!cost! because!of!the!large!volume!purchased.! 3. Shop!at!a!major!supermarket!for!their!major!weekly,!or!biCweekly!shop!of!preCpackaged! groceries,!when!their!primary!concern!is!cost!because!of!the!large!volume!purchased.!! 4. Shop!on!a!monthly!or!quarterly!basis!at!CostCo!for!largeCvolume!preservable!goods,!like!rice,! toilet!paper!or!oils,!when!their!primary!concern!is!cost!because!of!the!large!volume! purchased.! 5. Shop!at!a!speciality!store!for!a!gift!or!quality!item!when!their!primary!motivation!is!taste,! quality!or!appearance.!! 6. Shop!at!a!convenience!store!late!at!night!for!sweets,!ice!cream!or!milk!when!they!are! primarily!motivated!by!time,!and!not!cost.!! ! Rather!than!being!a!hypothetical,!this!is!part!of!the!Australian!supermarket!experience.!! ! ! While!all!supermarkets,!to!varying!degrees,!seek!to!meet!all!aspects!of!consumer!demand,!they! cannot!do!so!completely!without!compromising!other!aspects.!For!example,!it!is!almost!impossible! for!a!supermarket!to!compete!on!price!which!requires!low!overheads,!while!also!competing! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 28 !IBIS!World.!2013.!“Supermarkets!and!other!grocery!stores!in!Australia:!Industry!at!a!glance".!G41112.! ! June!2013! ! ! Institute!of!Public!Affairs! 20! explicitly!on!convenience!and!range!which!requires!high!overheads!including!wellClocated!sites,! available!parking!and!extended!opening!hours!with!associated!staffing!and!energy!costs.!The!data! clearly!shows!the!divergence!in!capacity.!! ! For!example,!ALDI!is!the!most!aggressive!competitor!on!price.!It!competes!by!leveraging!its!global! supply!chain!to!cut!prices!for!consumers.!ALDI!also!limits!consumer!options!to!streamline!logistics! and!inCstore!requirements.!As!a!result,!ALDI!only!stocks!around!600!product!lines.!By!comparison! Coles!stocks!nearly!30,000.!Stocking!a!larger!range!from!multiplier!suppliers!carries!significant! additional!storage,!transport,!logistics!and!supply!chain!costs,!as!well!as!requiring!largerCformat! stores.29! ! As!data!(Figure!2)!from!the!ACCC’s!2008!grocery!inquiry!found!the!major!drivers!are!price,!brands,! convenience,!experience,!location,!quality,!parking!and!product!range.!The!two!most!important! ‘elements’!rates!as!‘very!important’!are!price!and!food!quality.!Combined,!they!represent!a! mainstream!assessment!of!consumer!value.! ! Figure!2!|!Elements!of!the!retail!offer!respondents!rated!as!‘very!important’! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Source:!Australian!Competition!and!Consumer!Commission.!2008.!“Report!of!the!ACCC!inquiry!into!the!competitiveness!of!retail!prices!for! standard!groceries,!July!2008”.!Commonwealth!of!Australia.!At!http://www.accc.gov.au/content/index.phtml?itemId=838251.!!! ! Within!the!different!desired!elements!there!is!significant!competition!to!meet!different!consumer’s! expectations.!Chart!3!outlines!the!comparative!strengths!of!the!different!store!options.!There!is!both! inter!and!intra!brand!competition!based!on!consumer!demand.!The!greatest!diversity!is!arguably! within!the!IGA!family.!IGA!seeks!to!compete!for!convenience!using!IGA!XCPress,!quality!through!IGA! Marketplace,!a!balance!of!convenience!and!location!through!standard!IGA!stores!and!low!prices! through!Supa!IGA.!But!they!also!compete!against!each!of!their!alternatives.!! ! Supermarkets!clearly!compete!based!on!different!value!propositions,!and!consumers!understand!the! different!product!options!being!offered.!Table!4!provides!data!from!the!Martin!Review!into!the! ACT’s!supermarket!competition!landscape.!While!most!stores!achieve!their!highest!ranks! (highlighted!in!pink)!in!roughly!the!same!categories,!the!outlying!results!for!ALDI!and!IGA!reflect! their!individual!points!of!market!differentiation!through!price!and!convenience.!! ! Consumer!identification!with!different!brand!strategies!clearly!influences!the!success!of! supermarkets.!! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 29 !IBIS!World.!2012.!“Supermarkets!and!other!grocery!stores!in!Australia:!Competitive!Landscape”.!G5111! ! June!2013! ! ! Institute!of!Public!Affairs! 21! Chart!3!|!Predominant!motivating!factors!from!supermarkets!meeting!consumer!demand! ! Supermarket! Price! Brands! Convenience! Experience! Location! Quality! Parking! Range! ALDI! X! ! ! ! X! ! X! ! Coles! X! X! ! X! X! X! X! X! Coles!Express! ! X! X! ! X! ! ! ! Costco! X! ! ! ! ! ! X! ! IGA! ! X! X! ! X! ! X! ! IGA!Marketplace! ! ! ! X! ! X! ! ! IGA!XCpress! ! ! X! ! X! ! ! ! Supa!IGA! X! X! ! X! X! ! X! X! Thomas!Dux! ! ! ! X! ! X! ! ! Woolworths! X! X! ! X! X! X! X! X! ! Note:!Based!on!data!from!the!2009!Martin!Review!and!2008!ACCC!Inquiry.! ! Coles!has!focused!its!energy!on!integrating!its!brand!with!convenience!through!smaller!stores!and! stores!located!with!petrol!stations,!such!as!Coles!Express.!Woolworths!has!acted!in!a!similar!fashion,! but!has!expanded!its!range!to!cover!the!growing!number!of!predominantly!wealthier,!innerCcity! consumers!that!are!motivated!by!quality!and!experience,!not!price,!through!Thomas!Dux.!! ! IGA!has!the!largest!diversity!of!intraCbrand!competition! offering!supermarket!options!for!consumers!influenced!by! price,!convenience,!locality!and!quality.!IGA’s!divergent!brands! may!have!made!it!difficult!to!associate!directly!with!a!key! brand!position.!In!the!past!their!focus!has!been!variances!of! being!a!convenient,!local,!communityCconnected!retailer.! Recent!advertising!is!broadening!IGA’s!market!position!as!a! store!that!stocks!a!consumer’s!favourite!brands. ! ! While!ALDI!and!CostCo!sit!alone,!they!have!introduced! significant!competition,!particularly!on!price.!ALDI!has! introduced!competition!through!a!large!rollout!of!retail!stores! that!directly!compete!on!a!dayCtoCday!basis!with!the!two!supermarket!majors.!CostCo!has!a!small! number!of!stores!that!compete!predominantly!through!preservable!grocery!items!and!large!volume! fresh!produce!targeting!large!families,!businesses!and!community!organisations.30!! ! But!despite!the!diversity!of!product!offering,!the!key!driver!remains!price.!! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 30 !IBIS!World.!2012.!“Supermarkets!and!other!grocery!stores!in!Australia:!Competitive!Landscape”.!G5111! ! June!2013! ! ! Institute!of!Public!Affairs! 22! ! Table!4!|!Survey!among!store’s!own!shoppers!in!the!ACT,!2009!! ! ! Sample!size! They!have!convenient!trading!hours! They!offer!discounts!on!petrol! They!are!close!to!home! They!have!easy!parking! They!are!located!where!I!do!other!shopping! They!have!a!good!range!of!brands! You!can!buy!everything!there! They!are!clean!and!tidy! They!have!a!good!range!of!homebrands! They!have!a!good!delicatessen! They!have!good!weekly!specials! They!have!the!brands!I!want! They!have!a!good!range!of!fruits!and!vegetables! They!are!well!laid!out! They!have!a!good!range!of!packaged!groceries! They!are!good!value! They!have!a!good!range!of!bread!and!bread!rolls! They!have!good!quality!fresh!bread!and!bread!rolls! They!have!good!quality!fresh!meat! They!have!good!quality!fresh!fruits!and!vegetables! They!have!internet!shopping!facilities! They!provide!good!service!at!the!delicatessen! The!brands!I!buy!are!always!in!stock! They!have!trolleys!that!are!clean!and!work!well! They!have!low!prices! They!have!high!standards!of!food!safety! They!have!friendly!and!helpful!staff! They!give!good!service!at!the!checkouts! They!offer!good!nutritional!food! They!have!hygienically!prepared!food! They!have!good!convenience!food! They!have!good!quality!seafood! They!have!a!good!range!of!already!prepared/semiCprepared!meals! They!are!handy!to!work! They!have!low!fruit!and!vegetable!prices! They!have!low!meat!prices! They!offer!discounts!to!their!shareholders! They!have!special!discounts!for!regular!shoppers! They!offer!a!good!range!of!financial!services! They!are!a!fun!and!entertaining!place!to!shop! ! Legend! ! Top!5!responses!for!each!outlet!(bolded)! ! Woolworths! 525! 75%! 72%! 68%! 64%! 62%! 55%! 55%! 51%! 48%! 47%! 47%! 47%! 45%! 44%! 41%! 39%! 38%! 36%! 36%! 35%! 34%! 32%! 30%! 30%! 29%! 29%! 29%! 28%! 27%! 26%! 24%! 23%! 22%! 21%! 20%! 20%! 9%! 9%! 6%! 3%! ALDI! 276! 31%! 0%! 48%! 55%! 45%! 9%! 6%! 47%! 27%! 2%! 45%! 15%! 18%! 31%! 25%! 70%! 13%! 21%! 30%! 30%! 0%! 2%! 12%! 52%! 76%! 20%! 26%! 38%! 25%! 18%! 16%! 6%! 11%! 13%! 47%! 42%! 1%! 4%! 1%! 6%! Coles! 418! 69%! 64%! 49%! 62%! 56%! 51%! 45%! 53%! 41%! 30%! 44%! 43%! 39%! 43%! 39%! 36%! 29%! 24%! 29%! 27%! 15%! 22%! 28%! 28%! 26%! 24%! 28%! 26%! 28%! 21%! 23%! 12%! 20%! 15%! 20%! 21%! 9%! 8%! 2%! 3%! IGA! 261! 44%! 3%! 68%! 45%! 13%! 18%! 10%! 38%! 6%! 9%! 19%! 15%! 12%! 23%! 14%! 17%! 10%! 12%! 16%! 15%! 0%! 7%! 10%! 13%! 9%! 15%! 31%! 34%! 17%! 13%! 12%! 3%! 5%! 15%! 5%! 4%! 1%! 2%! 1%! 5%! ! ! Source:!Martin,!J.!2009.!“Review!of!ACT!supermarket!competition!policy”.!Martin!Stone!Pty!Ltd.!At! http://www.business.act.gov.au/__data/assets/pdf_file/0003/167025/Supermarket_Competition_Policy.pdf.! ! June!2013! ! ! Institute!of!Public!Affairs! 23! Figure!3!|!Average!household!share!of!food!toward!household!goods!and!services!expenditure!(%)! ! ! 20.0! ! ! ! 19.0! ! ! 18.0! ! ! ! 17.0! ! ! ! 16.0! ! ! 15.0! ! ! ! 14.0! 1984! 1988C89! 1993C4! 1998C99! 2003C04! 2009C10! ! ! Source:!Australian!Bureau!of!Statistics,!Household!expenditure!Survey,!Summary!of!Results,!2009C10,!catalogue!no!6530.0.! ! ABS!data!provided!in!Figure!4!shows!that!since!the!midC1980s!the!average!household!spent!just!! under!20!per!cent!of!their!household!income!on!food!alone.!But!that!has!now!declined!to!just!over! 16!per!cent!with!a!clear!and!progressive!trend!during!the!intermittent!years.!! ! However,!that!decline!is!disproportionately!felt.!As!Figure!4!demonstrates,!ABS!data!also!shows!food! and!nonCalcoholic!beverages!are!the!second!highest!sources!of!expenditure!for!the!average!weekly! household.!Combined,!food,!alcoholic!and!nonCalcoholic!beverages!are!the!largest!single!source!of! average!weekly!household!expenditure,!and!exceeds!housing!costs.!! ! Figure!4!|!Average!weekly!household!expenditure!on!goods!and!services! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Source:!Australian!Bureau!of!Statistics,!Household!expenditure!Survey,!Summary!of!Results,!2009C10,!catalogue!no!6530.0.! ! ! June!2013! ! ! Institute!of!Public!Affairs! 24! Of!greater!importance,!and!impact!considering!its!overall!contribution!to!household!expenditure,!is! the!disparity!of!food!and!nonCalcoholic!beverages!between!higher!and!lower!income!households.! Lower!income!households!spend!nearly!20!per!cent!of!their!weekly!household!income!on!food!and! nonCalcoholic!beverages.!Higher!incomes!spend!less!than!15!per!cent,!ensuring!that!any!price!rises! disproportionately!impact!the!poor.!Table!5!illustrates!that!the!poorest!Australians!spend! substantially!more!on!food!and!nonCalcoholic!beverages!than!those!with!the!highest!incomes.!! ! Table!5!|!Percentage!of!household!income!spent!on!food!and!non\alcoholic!beverages! ! Lowest!income! Second!income! Third!income! Fourth!income! Highest!income! quintile! quintile! quintile! quintile! quintile! 18.3! 18.3! 16.8! 16.6! 15.2! ! Source:!Australian!Bureau!of!Statistics,!Household!expenditure!Survey,!2009C10,!number!6530.0.! ! The!ABS!data!has!been!reinforced!by!poll!data.!A!Galaxy!survey!commissioned!by!the!Institute!of! Public!Affairs!in!March!2012!found!that!22!per!cent!of!Australians!were!more!concerned!about!food! prices!than!all!the!other!major!household!expenses.31!The!respondents!most!concerned!about!food! prices!were!those!in!the!lower!income!brackets:!those!who!are!unemployed,!work!part!time,!or!selfC describe!as!“blue!collar”!workers.!Disturbingly,!that!poll!followed!declines!in!food!prices!since!2011,! as!outlined!in!Section!9.1.!!! ! Figure!5!|!Good!and!services!expenditure!by!the!lowest!and!highest!equivalised!disposable! household!income!quintiles! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Source:!Australian!Bureau!of!Statistics,!Household!expenditure!Survey,!Summary!of!Results,!2009C10,!catalogue!no!6530.0.! ! Unsurprisingly,!the!importance!of!food!prices!is!also!reflected!in!different!consumers’!primary!source! of!income.!Figure!5!clearly!shows!that!the!share!of!household!expenditure!on!food!and!nonCalcoholic! beverages!for!welfare!and!pensions!recipients!is!even!higher!for!almost!all!categories!in!comparison! to!the!lowest!quintile!of!income,!with!the!highest!share!of!expenditure!amongst!the!large,!and! growing!number,!of!fixedCincome!pensioners.!! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 31 !Wilson,!T.!2012.!“New!poll:!Households!concerned!about!energy!and!food!prices”.!Media!Release.!Institute! of!Public!Affairs.!20!March!2012.!At! http://ipa.org.au/library/publication/1332195413_document_140312_media_release_and_poll_C _households_concerned_about_energy_and_food_prices.doc.pdf.! ! June!2013! ! ! Institute!of!Public!Affairs! 25! Table!6!|!Percentage!of!households!on!government!support!spent!on!food!and!non\alcoholic! beverages! ! Receives!age! Receives! Receives! Receives!family! Receives!other! pensions! disability!and! unemployment!&! support! payments! carer!payments! study!payments! payments! 20.8! 18.1! 20.5! 19.5! 20.9! ! Source:!Australian!Bureau!of!Statistics,!Household!expenditure!Survey,!2009C10,!number!6530.0! ! Consumer!sensitivity!to!price!variations!is!reinforced!by!consumer!survey!data.!Data!in!Table!7!from! the!2008!ACCC!Inquiry!shows!that!59!per!cent!of!consumers!are!‘very!likely’!or!‘somewhat!likely’!to! change!supermarkets!for!a!5!per!cent!price!decrease.!For!many!consumers!a!5!per!cent!price! reduction!is!not!likely!to!be!significant.!The!fact!that!nearly!60!per!cent!of!consumers!will!allow!a! modest!price!reduction!to!direct!their!shopping!behaviour!reinforces!how!important!price!is!to! consumer!behaviour.!! ! Table!7!|!Customers!likely!to!change!supermarkets!for!a!5!per!cent!price!decrease! ! Very!likely! 26%! Somewhat!likely! 33%! Somewhat!unlikely! 15%! Definitely!unlikely! 24%! Don’t!know! 2%! ! Source:!Australian!Competition!and!Consumer!Commission.!2008.!“Report!of!the!ACCC!inquiry!into!the!competitiveness!of!retail!prices!for! standard!groceries,!July!2008”.!Commonwealth!of!Australia.!At!http://www.accc.gov.au/content/index.phtml?itemId=838251.!!! ! Considering!the!sensitivity!of!Australians!to!prices,!industry!data!unsurprisingly!concludes! Australians!are!some!of!the!least!loyal!supermarket!customers!in!the!world.!32!As!the!example!above! highlights,!the!prospect!of!customers!attending!multiple!stores!within!a!week!is!a!practical!reality.! That!reality!is!being!experienced!on!a!dayCtoCday!basis!by!the!major!supermarket!chains!who!are! continuing!to!invest!more!in!their!supply!chains!to!reduce!prices,!build!customer!loyalty!programs! and!expand!advertising!of!temporary!and!permanent!price!discounts.!! ! 7.4! Competition!driving!business!models! ! PriceCsensitivity!has!also!driven!innovation!in!the!sector.!The!quick!expansion!of!ALDI!is!largely!in! response!to!price!and!an!increasing!appetite!for!cheap,!privateClabelled!goods.!In!fact!ALDI!is! considered!“virtually!exclusively!a!private!label!retailer”.33!The!influence!of!ALDI!as!a!private!label! retailer!has!followed!through!to!all!retailers!with!private!labelled!goods!growing!from!$9.96!billion!in! 2008!to!$19.7!billion!in!2012.34!By!2018!private!label!goods!are!expected!to!account!for!a!third!of!all! supermarket!sales!and!be!valued!at!$31.8!billion!annually.35!! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 32 !IBIS!World.!2012.!“Supermarkets!and!other!grocery!stores!in!Australia:!Competitive!Landscape”.!G5111! !Productivity!Commission.!2011.!“Economic!Structure!and!Performance!of!the!Australian!Retail!Industry”.! Commonwealth!of!Australia.!n56.!Available!at! http://www.pc.gov.au/__data/assets/pdf_file/0019/113761/retailCindustry.pdf.! 34 !Productivity!Commission.!2011.!“Economic!structure!and!performance!of!the!Australian!retail!industry”.! Productivity!Commission!Inquiry!Report.!V56.!04/11/0211.! 35 !Mitchell,!S.!2012.!“PrivateClabel!grocery!share!tipped!to!reach!33pc”.!Australian!Financial!Review.! 19/07/2012! 33 ! June!2013! ! ! Institute!of!Public!Affairs! 26! Table!8!|!Private\label!spending!by!Australians! ! Year! Share!of!total!supermarket!sales!(%)! 2007C08! 13.5! 2012C13! 25.2! 2017C18! 33.0! Spend!on!private!labels!($!billions)! 9.96! 21.6! 31.8! ! Source:!IBIS!World.!2012.!“Bypassing!brands:!Spending!on!privateClabel!products!is!on!the!rise”.!Special!Report.!! ! Based!on!IBIS!World!data!presented!in!Table!9,!the!strongest!growth!has!been!in!private!labelled! liquor,!bread!and!butter,!although!butter!enjoys!the!highest!market!share!of!private!labelled!goods,! closely!followed!by!sugar.!Only!eggs!have!seen!a!decline!in!the!same!timeframe!which!has!largely! been!assumed!to!result!from!market!differentiation!branding!strategies!by!free!range!egg! companies.!According!to!the!report!“chocolate,!confectionary,!soft!drinks,!cosmetics!and!sanitary! products!appear!to!be!poor!performing!segments”!as!a!result!of!established,!identifiable!brands!that! attract!consumer!loyalty.36! ! Table!9!|!Australian!private\label!spending!by!product!category! ! Product! 2002\03!market!share!(%)! 2012\13!market!share!(%)! Increase!(%)! Butter! 24! 68! 183! Sugar! 56! 67! 20! Bread! 18! 56! 211! Fresh!milk! 51! 55! 8! Eggs! 61! 53! C13! Canned!fruit! 20! 34! 70! Liquor! 2! 8! 300! ! Source:!IBIS!World.!2012.!“Bypassing!brands:!Spending!on!privateClabel!products!is!on!the!rise”.!Special!Report.! ! Competition!within!the!privateClabel!sector!is!now!considerable.!Coles!has!rebranded!with!its! primary!advertising!product!offering!focusing!on!the!permanent!reduction!of!prices!pushing!that! prices!are!“down”.!Coles!also!launched!an!aggressive!competition!war!by!reducing!the!cost!of!key! staples,!notably!privateClabelled!milk.!Staples!have!clearly!become!the!battle!ground!in!the!private! label!market!because!of!the!capacity!for!supermarkets!to!buy!them!in!volume!from!producers!or! wholesalers!and!shave!off!margins.! ! Chart!4!|!Private!label!brands! ! Coles! Metcash! Woolworths! • Coles! • Black!&!Gold! • Woolworths! • Organic! • Coles!Finest! • IGA! • Homebrand! • Macro! • $martBuy! • Signature! • Select! • Naytura! • Simply!Less! • Way!of!Life! • Fresh! • Freeform! • Derma! • Purely!Organics! • Purr!&!Banquet!Pet!foods! • Body!Logic! ! Source:!Updated!from!Stuart!Alexander.!2013.!“Channels”.!Cited!on!01/05/2013!at! http://www.stuartalexander.com.au/aust_grocery_channels.php.! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 36 !IBIS!World.!2012.!“Bypassing!brands:!Spending!on!privateClabel!products!is!on!the!rise”.!Special!Report.! ! June!2013! ! ! Institute!of!Public!Affairs! 27! Woolworths!responded!to!Coles’!aggressive!price!reduction!through!cheap,!privateClabelled!staples! and!reciprocated!with!similar!reductions.!The!competition!war!between!the!two!majors!continues! and!has!now!prompted!a!backlash!from!suppliers!concerned!about!the!continued!decline!of!retail! prices!and!cost!reductions!being!pushed!down!the!supply!chain.!! ! In!response!both!Coles!and!Woolworths!are!negotiating!new!supply!arrangements!with!wholesalers,! in!the!case!of!bread,!or!removing!the!middleCman!processor!and!going!straight!to!primary!producers,! in!the!case!of!milk.!The!intention!of!these!arrangements!are!designed!to!achieve!a!reliable!quality!of! supply,!positive!relationships!and!diminished!perceived!and!actual!risk!to!farmers.!As!was!outlined! by!Business!Spectator:! ! “Under!the!arrangements!with!Coles,!Murray!Goulburn!will!supply!about!200!million!litres!of! milk!a!year!with!a!pricing!mechanism!that!locks!in!a!premium!to!the!farmCgate!price!that!will! be!protected!regardless!of!fluctuations!in!the!price”.37!! ! The!drive!to!reduce!costs!down!the!supply!chain!is!largely!a!reflection!of!the!evolution!of!their! business!models.!To!varying!degrees,!Coles!and!Woolworths!have!made!considerable!investments!in! past!decades!improving!their!own!logistical!capacity!to!reduce!their!overheads,!enabling!them!to! limit!flowCthrough!costs!to!customers!and!make!them!more!competitive.!Considerable!investment!in! logistics!over!the!last!few!decades!has!extracted!maximum!value!from!their!systems!and!limited!the! capacity!of!the!supermarkets!to!further!reduce!unnecessary!costs.38!As!was!noted!by!The! Australian’s!Blair!Speedy:! ! “While!the!two!supermarket!giants!are!spending!money!on!new!stores!and!fittings,!they! have!been!cutting!prices!–!down!an!average!of!1.3!per!cent!over!each!of!the!past!three! financial!years,!or!2.3!per!cent!when!excluding!the!more!volatile!fruit!and!vegetable! segment.!Not!only!are!they!saving!consumers!directly,!they’re!also!boosting!household! disposable!income.!It’s!arguable!that!without!the!influence!of!falling!supermarket!prices!on! inflation,!the!Reserve!Bank!may!have!stopped!cutting!interest!rates!a!lot!sooner”.39!! ! Faced!with!a!new!competition!war!against!each!other,!and!the!relatively!new!and!highly!competitive! ALDI!that!can!leverage!its!global!supply!chain,!supermarkets!have!had!to!push!competitive!pressure! down!supply!chains!and!onto!suppliers.!! ! The!increasing!backlash!from!suppliers!against!supermarkets!is!an!indication!of!how!much! competitive!pressure!is!now!starting!to!bite.!Recent!disputes!between!Coca!Cola!and!Woolworths! have!resulted!from!expectations!from!supermarkets!seeking!to!use!the!size!of!their!purchasing! arrangements!to!achieve!price!reductions!from!suppliers.40!Similar!disputes!have!emerged!between! retailers!and!alcohol!suppliers,!to!the!point!that!an!alcohol!company!temporarily!ceased!supply!to! Coles!and!Woolworths!subsidiaries!in!response!to!sustained!discounting.41! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 37 !Bartholomeusz,!S.!2013.!“A!Coles!coup!to!defuse!milk!intolerance”.!Business!Spectator.!10/04/2013.! !Speedy,!B.!2013.!“Size!matters!to!grocery!shoppers”.!The!Australian.!09/03/2013.!Cited!on!09/03/2013!at! http://www.theaustralian.com.au/business/companies/sizeCmattersCtoCgroceryCshoppers/storyCfn91v9q3C 1226593548812.! 39 !Ibid.! 40 !Ferguson,!A.!2013.!“Grocery!chains!put!heat!on!suppliers”.!The!Age.!07/05/2013.!Cited!on!07/05/2013!at! http://www.theage.com.au/business/groceryCchainsCputCheatConCsuppliersC20130506C2j3hs.html.! 41 !Zappone,!C.!2011.!“Competition!a!casualty!in!beer!wars:!Xenophon”.!Sydney!Morning!Herald.!23/03/2011.! Cited!on!01/04/2013!at!http://www.smh.com.au/business/competitionCaCcasualtyCinCbeerCwarsCxenophonC 20110323C1c5ry.html.! 38 ! June!2013! ! ! Institute!of!Public!Affairs! 28! ! Table!10!|!International!comparisons!of!gross!margins,!2006! ! Country! Wholesale! Australia! 20.3%! United!States! 19.1%! Canada! 15.0%! Retail! 25.7%! 27.8%! 25.0%! ! Source:!Australian,!Canadian!and!US!data!cited!in!Productivity!Commission.!2011.!“Economic!Structure!and!Performance!of!the!Australian! Retail!Industry”.!Commonwealth!of!Australia.!n56.!Available!at!http://www.pc.gov.au/__data/assets/pdf_file/0019/113761/retailC industry.pdf.! ! Neither!side!is!likely!to!relent!easily,!especially!with!suppliers!unlikely!to!reduce!their!margins.!The! challenge!for!supermarkets!already!is!the!extent!that!they!can!use!their!market!power!to!negotiate! lower!prices!without!disrupting!suppliers.!That!isn’t!clear.!! ! Figure!6!|!Australian!market!share!of!select!food!processors! ! Source:!Deloitte!Access!Economics.!2012.!Analysis!of!grocery!industry”.!Available!at! http://www.coles.com.au/Portals/0/content/pdf/Shareholders/Grocery%20Industry%20Report.pdf.! ! The!challenge!for!supplies!will!be!justifying!their!existing!cost!structures.!Productivity!Commission! data!does!suggest!competitive!pressure!may!be!able!to!drive!down!wholesale!margins.!Table!10! outlines!the!comparative!wholesale!and!retail!margins!in!the!retail!sector.!While!it!is!broad,! aggregate!data,!it!does!suggest!that!wholesale!margins!are!more!variable!between!Australia!and! retail!margins!in!comparable!countries.!But,!as!the!ACCC!identified:! ! “It!should!be!noted!that!while!the!percentage!margins!on!sales!are!similar,!the!absolute! dollar!margin!on!sales!in!Australia!in!many!cases!may!be!larger.!This!would!occur!if!the! landed!cost!or!cost!of!goods!that!Australian!wholesalers!and!retailers!source!from!overseas! ! June!2013! ! ! Institute!of!Public!Affairs! 29! is!high!compared!to!other!countries.!This!may!arise!from!the!transport!costs!incurred!in! shipping!products!to!and!within!Australia,!or!because!of!international!price!discrimination! practised!by!overseas!manufacturers!and!suppliers”.42!!! ! However,!that!does!not!discount!that!a!key!reason!both!wholesale!and!retail!costs!are!higher!results! from!significant!cost!drives!including!high!wage!and!labour!onCcosts!and!occupancy!and!rental!costs.!! ! The!response,!so!far,!has!been!for!suppliers!to!respond!that!supermarkets!are!abusing!their!market! power.!That!appears!to!be!a!classic!example!of!the!pot!calling!the!kettle!black.!As!Figure!6!sourced! from!a!Deloitte!Access!Economics!report!outlines,!many!suppliers!have!equivalent!or!higher!market! shares!than!the!two!supermarket!majors!share!combined.43!!! ! But!like!with!supermarkets,!having!a!high!market!share!is!not!a!sign!of!absent!competition.!Suppliers! have!strong!market!share!because!they!are!meeting!market!demand.!Both!supermarkets!and! suppliers!appear!to!be!evenly!matched!in!their!ongoing!battle.! ! ! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 42 !Productivity!Commission.!2011.!“Economic!Structure!and!Performance!of!the!Australian!Retail!Industry”.! Commonwealth!of!Australia.!n56.!Available!at! http://www.pc.gov.au/__data/assets/pdf_file/0019/113761/retailCindustry.pdf.! 43 !Deloitte!Access!Economics.!2012.!Analysis!of!grocery!industry”.!Available!at! http://www.coles.com.au/Portals/0/content/pdf/Shareholders/Grocery%20Industry%20Report.pdf.! ! June!2013! ! ! Institute!of!Public!Affairs! 30! 8.0$ Supermarket$business$models ! ! The!business!model!of!supermarkets!is!essentially!a!highCvolume,!lowCmargin!industry.!It’s!common! to!food!retailing!which!“as!a!generalization!…!in!Australia!may!be!described!as!a!high!volume,!low! margin!business”.44!! ! The!model!is!in!stark!contrast!with!traditional!retail!that!operates!as!a!lowCvolume,!highCmargin! business!model!because!consumers!only!buy!one!or!two!items!per!purchase,!supermarkets!sell! millions!of!items!daily!and!extract!very!small!margins!off!each!sale!which!cumulatively!achieve! profits!from!each!basket!or!trolley!from!each!consumer.!! ! However,!the!nature!of!each!business!model!is!dynamic!and!continually!evolving!in!response!to! market!conditions.!It!was!a!point!made!by!Justice!Emmett!in!response!to!consideration!of!an!ACCC! complaint!against!Metcash’s!acquisition!of!Franklins:!! ! “The!grocery!industry!in!Australia!is!a!highly!competitive!industry!characterised!by!high! volumes!and!low!margins.!The!operators!of!selfCsupplying!supermarket!chains!are!extremely! disciplined!and!endeavour!to!standardise!their!offerings!at!any!one!time.!Nevertheless,! those!offerings!are!not!static,!but!shift!as!the!chain!operators!explore!market!opportunities! and!develop!new!strategies.!On!the!other!hand,!the!products!offered!by!independent! retailers!exhibit!greater!diversity!than!those!of!the!chains!in!areas!such!as,!for!instance,!size! and!location.!Independent!retailers!may!choose,!or!be!forced,!to!rely!upon!factors!other! than!price!to!attract!customers”.45! ! For!many!years!Coles!lost!ground!against!Woolworths!leading!to!its!eventual!sale!from!the!Coles! Group!to!Wesfarmers.!A!primary!driver!for!Woolworths’!growth!was!investment!in!their!supply!chain! and!logistics!to!reduce!costs!in!transport!and!storage!which!can!add!significant!costs!to!retail! products!because!of!Australia’s!expensive!rents!at!both!distribution!points!and!retail!stores,!as!well! as!high!energy!costs!for!refrigerated!items,!and!high!transport!costs!because!of!the!long!distances!of! moving!goods.!! ! Investment!in!reducing!these!costs!provided!big!dividends!which!enabled!Woolworths!to!reduce! retail!prices!for!consumers.!Woolworths!also!identified!that!a!key!driver!in!consumer’s!purchasing! behaviour!was!driven!by!perceptions!of!the!quality!and!freshness!of!produce.!The!development!of! the!“Fresh!food!people”!as!a!recallable!slogan!for!Woolworths!ensured!they!built!their!market!share! from!around!35!per!cent!in!2000!to!41!per!cent!in!2010.!In!comparison,!Coles!slipped.!The!influence! of!freshness!to!consumers!is!clearly!outlined!in!Figure!2.! ! In!recent!years!Coles!have!made!equivalent!investments!and!developed!their!own!recallable!slogan! for!their!brand!–!“Down,!Down”!–!that!has!ensured!they!have!stabilised!from!earlier!drops!in!market! share!from!as!high!as!39!per!cent!in!2005!to!31!per!cent!in!2011.!! ! The!influence!of!improved!efficiency!and!supply!chains!to!improve!business!models!to!profitability! was!identified!in!the!ACCC’s!2008!review.!The!review!explicitly!concluded!that!only!a!small! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 44 !Delforce,!R.,!Dickson,!A.!&!Hogan,!J.!2005.!“Australia’s!Food!Industry:!recent!changes!and!challenges”.! Australian!Commodities.!http://adl.brs.gov.au/data/warehouse/pe_abarebrs99001197/PC13169.pdf.!!! 45 !Australian!Competition!Law.!2011.!“ACCC!v!Metcash!Trading!Limited”.!Cited!on!01/05/2013!at! http://www.australiancompetitionlaw.org/cases/2011metcash.html.! ! June!2013! ! ! Institute!of!Public!Affairs! 31! component!of!any!price!increases!in!the!previous!five!years!contributed!to!the!rise!in!profitability!of! supermarkets.46!! ! To!compete!against!the!increasing!efficiency!of!the!supermarket!majors!smaller,!independent! grocers!have!operated!under!the!IGA!brand!since!1988.!IGA!was!initially!formed!from!ten! independent!stores.!IGA!now!brings!together!thousands!of!stores!nationwide!under!four!major!subC brands:!!Supa!IGA,!IGA,!IGA!XCpress!and!IGA!Marketplace.!! ! The!driver!behind!stores!working!within!the!IGA!brand!surrounds!the!efficiency!gains!and! negotiating!power!from!cooperation!with!other!stores!and!the!power!of!Metcash.!! ! Metcash!now!supplies!around!60!per!cent!of!independent!retailers!and!95!per!cent!of!their!grocery! turnover.47!By!working!together,!IGA!stores!had!broadly!equivalent!negotiating!power!to!the!two! majors,!enabling!them!to!secure!lower!prices!and!efficiencies!in!logistics!and!supply!chains!to! compete!with!Coles!and!Woolworths48.!! ! But!Coles!and!Woolworths!have!not!vacated!the!market!segment!demanding!convenience.!Instead,! they!are!using!the!value!they!can!extract!from!scale!to!meet!consumer!demand!based!on! convenience!and!price.!As!marketing!firm,!Stuart!Alexander,!identified:! ! “In!the!quest!for!earning!growth!in!a!mature!market,!both!retails!choice!of!store!location!is! evolving.!Traditionally,!Woolworths!and!Coles!stores!are!found!in!high!rent,!high!capacity! metropolitan!shopping!malls!with!large!parking!lots!as!anchor!tenants!whose!pulling!power! brings!customers!to!the!other!speciality!shops.!However,!with!growing!consumer!demand! for!convenience!and!oneCstop!shopping,!both!chains!are!now!seen!to!be!moving!into!nonC traditional!store!locations!using!more!compact!‘express’!convenienceCstyle!formats!in!high! density!residential!and!business!areas”.49!! ! The!nature!and!competitiveness!of!the!supermarket!sector!is!outlined!in!their!profitability.!Table!11! outlines!the!current!state!of!profitability!of!supermarkets!based!on!their!revenue,!earnings!before! interest!and!tax!as!well!as!market!capitalisation.!! ! The!data!is!quite!stark.!Coles!and!Woolworths’!annual!revenue!is!both!around!$35!billion,!but!EBIT!is! relatively!modest!at!4!per!cent!for!Coles!and!8!per!cent!for!Woolworths.!The!EBIT!on!revenue! highlights!a!clearer!image!of!the!profitability!of!the!business!model.!What’s!particularly!noticeable! from!the!data!is!that!the!profitability!of!Metcash!as!a!share!of!market!capitalisation!is!substantially! higher!than!Coles!and!Woolworths!and!is!likely!a!reflection!of!a!business!model!that!is!less! dependent!on!volume!and!seeks!to!extract!higher!margins!from!individual!sales,!even!after!factoring! in!the!additional!costs!associated!with!a!convenienceCbased!business!model.!! ! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 46 !Australian!Competition!and!Consumer!Commission.!2008.!“Report!of!the!ACCC!inquiry!into!the! competitiveness!of!retail!prices!for!standard!groceries,!July!2008”.!Commonwealth!of!Australia.!At! http://www.accc.gov.au/content/index.phtml?itemId=838251.!!! 47 !Stuart!Alexander.!2013.!“Channels”.!Cited!on!01/05/2013!at! http://www.stuartalexander.com.au/aust_grocery_channels.php.! 48 !Independent!Grocers!of!Australia.!2013.!“About!IGA”.!Cited!on25/05/2013!at! http://www.iga.com.au/igafresh/index.cfm?page_id=2298.! 49 !Stuart!Alexander.!2013.!“Channels”.!Cited!on!01/05/2013!at! http://www.stuartalexander.com.au/aust_grocery_channels.php!.! ! June!2013! ! ! Institute!of!Public!Affairs! 32! Table!11!|!Supermarket!data,!2011\12! ! Supermarket! Coles! Woolworths!(Food!&!liquor)! Metcash!IGA!(Food!&!liquor)! CostCo!! (International!–!outside!North!America)! ALDI! Revenue! ($m)! $34,117! $37,549! $7,711.5! EBIT!! ($m)! $1,356! $2,944.3! $380.8! Market!cap! ($m)! $48,580! $42,210! $3,590! EBIT!of! Revenue!(%)! 3.98%! 7.84%! 4.94%! $11,644! $459! $4,502! 3.94%! N/A! N/A! N/A! N/A! ! Source:!Annual!reports! ! Notably,!Australian!supermarket!margins!are!smaller!than!retailers!in!comparable!countries.!While! dated,!a!2004!Department!of!Agriculture,!Fisheries!and!Forestry!report!found!that,!at!the!time,! Australian!supermarket!EBIT!was!low!or!significantly!lower!than!comparable!competitors.!While! profitability!now!varies!from!that!time,!the!variance!would!still!not!put!Australia’s!supermarkets!in!a! substantially!different!position.! ! Figure!7!|!Earnings!before!interest!and!tax,!2001!–!2004,!%!of!sale! ! Note:!! CML! ! WW! ! Wmart! ! Wmart!Int!! Tesco! ! Car! ! Alb! ! Kr! ! Coles!Myer!Limited!(Ausralia)! Woolworths!(Australia)! WalCmart!(United!States)! WalCmart!International!operations!outside!the!United!States! Tesco!(United!Kingdom)! Carrefour!(French)! Albertsons!(United!States)! Kroger!(United!States)! ! Source:!Department!of!Agriculture,!Fisheries!and!Forestry.!2004.!“Price!determination!in!the!Australian!Food!Industry!2004”.! Commonwealth!of!Australia.!Available!at!http://www.daff.gov.au/__data/assets/pdf_file/0004/182443/section5.pdf.!! ! Historical!data!shows!this!is!not!a!recent!trend.!Data!from!the!Australian!Bureau!of!Agriculture!and! Resource!Economics!from!2005,!and!provided!in!Table!12,!shows!margins!have!not!changed! significantly!in!the!past!decade.!! ! ! ! ! June!2013! ! ! Institute!of!Public!Affairs! 33! Table!12!|!Gross!Margin!comparison!of!the!big!four!retailers!in!Australia,!2003\2004! ! Retailer! Sales!turnover! Total!cost!of!sales! EBIT!! Margin!! ($m)! ($m)! ($m)! (%)! Woolworths! $21,998! $21,056! $942! 4.3! Coles! $17,969! $17,291! $678! 3.8! Foodland! $6,026! $5,769! $25! 4.3! Metcash!IGA! $7,174! $7,011! $163! 2.3! ! Source:!Delforce,!R.,!Dickson,!A.!&!Hogan,!J.!2005.!“Australia’s!Food!Industry:!recent!changes!and!challenges”.!Australian!Commodities.! http://adl.brs.gov.au/data/warehouse/pe_abarebrs99001197/PC13169.pdf.!!! !! As!Table!11!and!12!indicate,!supermarkets!run!on!very!small!margins!in!comparison!to!their!market! capitalisation!and!revenue,!and!have!had!to!find!aggressive!strategies!to!increase!profits!resulting!in! “significant!structural!and!operational!rationalization!has!occurred,!focused!on!reducing!costs!along! the!entire!food!supply!chain!as!a!means!of!increasing!profitability”.50!! ! The!reason!for!low!margins!follows!directly!from!the!data!provided!in!Section!7.3.!Despite!being!the! source!of!a!declining!share!of!average!household!income,!food!and!alcoholic!and!nonCalcoholic! beverages!represent!around!oneCfifth!of!average!household!expenditure,!and!a!higher!share!of!lowC income!earners!and!welfare!recipients,!notably!pensioners.!! ! As!a!consequence,!consumers!are!highly!likely!to!change!supermarkets!for!even!modest!discounts!of! expenditure!that!can!take!up!a!large!share!of!their!household!income.!! ! A!recent!report!commissioned!by!Coles!highlights,!in!practice,!how!little!margin!is!extracted!from! individual!sales.!The!Deloitte!Access!Economics!report!shows!in!the!previous!18!months!the!volume! of!sales!in!Coles!supermarkets!increased!by!nearly!50!per!cent,!but!the!increase!in!income!was!only! slightly!half!that!increase!at!a!time!prices!actually!fell!by!8!per!cent.!! Table!13!|!Change!in!Key!aggregate!for!‘Down!Down’!products!(Jan!2011!–!mid\2012)!! ! Volume!of!goods! Supplier!income! COGS!per!unit! COGS!per!unit! Retail!Price!($)! ($)! (unweighted)! (volume! weighted)! +49.63%! +30.45%! C17.02%! C2.00%! C8.00%! ! Source:!Deloitte!Access!Economics.!2012.!“Analysis!of!grocery!industry”.!Available!at! http://www.coles.com.au/Portals/0/content/pdf/Shareholders/Grocery%20Industry%20Report.pdf.! ! Such!strong!movements!in!prices!in!an!otherwise!struggling!retail!environment!demonstrates!the! importance!of!volume!necessary!to!achieve!lower!prices!for!consumers.!When!sales!volumes!are! disaggregated!for!individual!product!lines!the!rise!in!volumes!is!even!clearer.!! ! ! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 50 !Delforce,!R.,!Dickson,!A.!&!Hogan,!J.!2005.!“Australia’s!Food!Industry:!recent!changes!and!challenges”.! Australian!Commodities.!http://adl.brs.gov.au/data/warehouse/pe_abarebrs99001197/PC13169.pdf.! ! June!2013! ! ! Institute!of!Public!Affairs! 34! Table!14!|!Coles!Volume!of!Selected!Products,!2012!!! ! Product! Coles!Milk!Full!Cream!2L! Uncle!Toby’s!Plus!Cereal:!Fibre!430g! Coles!Eggs!Free!Range!12!pack:!700g! Farmpride!Eggs!Free!Range!12!Pack:!700g! Coles!Baiaga!Chicken!Roast!! Colgate!Toothpaste!110g!Regular! Coles!2!ply!Paper!Towel!White!2!Pack! Smart!Buy!Coles!White!Bread!650g!! %Change! 333.38! 172.97! 157.50! 97.22! 80.51! 72.98! 62.95! 50.08! Source:!Deloitte!Access!Economics.!2012.!“Analysis!of!grocery!industry”.!Available!at! http://www.coles.com.au/Portals/0/content/pdf/Shareholders/Grocery%20Industry%20Report.pdf.! As!Table!14!outlines,!sales!volumes!have!increased!considerably!to!continue!to!achieve!profitability.! Sales!volume!increases!were!clearly!easiest!to!achieve!amongst!private!labelled!goods!where! reducing!margins!are!more!easily!achieved!than!branded!goods.!However,!the!report!increase!in! sales!volumes!includes!both!branded!and!private!labelled!goods.!The!stunning!increase!in!sales!of! staples!–!milks,!cereal!and!eggs!–!demonstrates!their!capacity!to!act!as!products!that!can! successfully!change!consumer!behaviour!when!discounted.!!! ! June!2013! ! ! Institute!of!Public!Affairs! 35! 9.0$ Drivers$of$prices$and$competition$ Price!movements!are!a!determinant!of!multiple!factors!in!the!supermarket!sector.!As!a!highCvolume,! lowCmargin!business!model!any!increase!in!price!movement!leaves!both!the!business!and!consumer! exposed,!as!price!movements!are!passed!through!especially!in!a!highly!competitive!market.!The! alternative!is!that!the!business!can!take!higher!margins!and!protect!consumers!from!fluctuations.! Consumers!may!have!greater!certainty,!but!prices!would!be!higher!and!profits!from!supermarkets! are!likely!to!be!higher.! ! Cost!break!downs!in!the!supermarket!sector!are!predominantly!driven!by!wholesale!purchasing.! Based!on!IBIS!World!data!provided!in!Figure!8,!purchases!contribute!75!per!cent!to!the!total!cost! structure!of!supermarkets!the!capacity!to!reduce!wholesale!purchase!costs!to!overall!lower!prices.! The!other!main!drivers!are!wages!and!profit.! ! Figure!8!|!2012!Supermarket!cost!breakdown! Purchases,!75%! Other,!8.60%! Rent,!1.50%! Profit,!4%! Uuliues,!1%! Depreciauon,!0.70%! Wages,!9.20%! Source:!IBIS!World! ! The!challenge!with!having!high!fixed!costs!passed!on!from!suppliers!is!that!supermarkets!have!to! focus!their!capacity!to!reduce!their!expenses!in!a!narrow!area!of!specific!overheads.!Therefore!any! cost!increase!cannot!be!broadly!fractionalised!and!reduced.!! ! Increases!in!rents!and!property!costs,!utilities!and!energy!and!wage!costs!by!market!forces!or! government!regulation!will!directly!lead!to!increases!in!prices!that!are!passed!through,!especially!in! a!business!environment!with!low!profit!margins.!! ! June!2013! ! ! Institute!of!Public!Affairs! 36! 9.1! Recent!price!movements! The!consequence!of!a!highCvolume,!lowCmargin!business!is!that!retail!supermarket!prices!are!heavily! influenced!by!external!factors.!High!price!sensitivity!ensures!that!retailers!cannot!easily!absorb!any! price!increases!because!the!margins!are!too!tight.!! ! The!clearest!example!of!supermarket!price!sensitivity!occurred!in!recent!years.!Figure!9!outlines! food!price!movements!across!select!OECD!countries!over!the!past!decade.!The!data!shows!that! during!the!prolonged!drought!throughout!the!middle!of!the!2000s!food!prices!significantly!rose!in! comparison!to!comparable!countries,!but!has!since!declined!as!the!drought!ended.!! ! Figure!9!|!Moving!food!price!averages!in!select!OECD!countries,!2005!=!100! ! ! 145! ! Australia! ! 140! ! Canada! ! 135! ! New!Zealand! ! 130! ! United!Kingdom! ! 125! ! United!States! ! 120! ! 115! OECD!C!Total! ! ! 110! ! ! 105! ! ! 100! ! ! 95! ! ! ! ! Source:!Organisation!for!Economic!Cooperation!and!Development.!2012.!Main!Economic!Indicators:!Food!Prices.! ! The!Australian!drought!was!not!the!sole!influencer!of!price!rises.!International!factors,!including! supply!disruptions,!quarantine!restrictions!and!world!commodity!prices,!also!influenced!price! movements!resulting!in!sharper!price!rises!globally!around!2008.!But!the!unique!impact!of!the! Australian!drought!reflects!the!primary!influence!in!the!rise!of!prices!in!Australia!and!some! correlation!in!New!Zealand!price!rises.!! ! ! ! ! ! June!2013! ! ! Institute!of!Public!Affairs! 37! Figure!10!|!Moving!Australian!price!averages,!2005!=!100! ! ! 160! ! ! 155! All! ! Food! ! 150! Energy! ! ! 145! ! ! 140! ! ! 135! ! ! 130! ! 125! ! ! 120! ! ! 115! ! ! 110! ! ! ! ! Source:!Organisation!for!Economic!Cooperation!and!Development.!2012.!Main!Economic!Indicators:!Food!Prices.! The!decline!of!food!prices!since!the!middle!of!2011!has!been!a!notable!change!in!trend!from! comparative!countries!where!it!has!continued!to!rise,!with!Australian!food!prices!now!sitting!below! the!OECD!average!increase.!The!decline!in!prices!is!a!partial!reflection!of!the!high!degree!of! competition!in!the!marketplace.!By!themselves!price!declines!aren’t!necessarily!an!indication!of! competition,!however!it!does!reflect!that!any!potential!for!decreases!in!prices!are!delivered!to! consumers!because!there!is!competitive!pressure!and!a!risk!of!lost!market!share!to!competitors!if! they!are!not.!! ! The!moving!average!is!even!more!noticeable!when!it!is!compared!to!all!movements!for!consumer! items.!Figure!10!outlines!OECD!data!which!shows!the!clear!and!rising!influence!of!energy!prices!in! the!past!few!years!and,!despite!earlier!increases,!food!prices!are!increasingly!aligned!to!average! price!rises.!! ! ! ! ! June!2013! ! ! Institute!of!Public!Affairs! 38! 9.2! Regulatory!cost!drivers! Local!and!international!factors!in!food!prices!can!only!be!hedged,!they!cannot!be!avoided.!Another! key!driver!to!prices!has!been!the!rising!cost!of!regulation!which!directly!impacts!on!cover!overheads! of!supermarkets!that!have!to!be!passed!onto!consumers!through!the!price!of!final!goods.!! ! The!influence!of!regulatory!cost!drivers!was!recognised!by!ACCC!Head,!Rod!Sims,!in!an!interview! earlier!this!year!in!the!Australian!Financial!Review.!In!the!interview!Sims!conceded!that!any! additional!regulation!may!lead!to!price!increases.51!An!analysis!by!Deloitte!Access!Economics! submitted!to!the!Productivity!Commission’s!Review!into!the!retail!sector,!and!funded!by! Woolworths,!identified!that!additional!regulation!through!trading!hour!restrictions!that!lead!to!high! wage!rates,!and!transportation!restrictions!lead!to!higher!costs!that!are!then!passed!onto! consumers.52!! ! They!are!not!alone.!Industry!data!analysing!the!competitive!landscape!of!regulation!has!identified! that!planning!regulations!are!adding!considerable!costs!to!the!operation!of!supermarkets!and! creating!a!competitive!environment,!especially!in!the!case!of!largerCformat!stores.!Restricting!the! availability!and!use!of!land,!as!well!as!prolonged!planning!approval,!increases!cost!structures!for!the! establishment!of!new!supermarkets.!Similarly,!when!these!sites!are!not!owned!by!supermarkets!the! cost!structures!of!new!store!development!impacts!on!established!stores!because!“rent!expenses! have!risen!due!to!demand!for!prime!retail!locations”,53!and!the!absence!of!competing!sites!that!can! be!used!to!keep!prices!lower.!! ! The!real!price!impact!of!prolonged!planning!approvals!was!highlighted!by!the!Productivity! Commission!which!concluded!that!a!three!year!delay!to!planning!approval!can!add!52!per!cent!of!the! cost!of!the!initial!investment.!54!Sadly,!these!planning!delays!are!increasingly!commonCplace.!The! PC’s!review!broke!down!the!nature!of!these!planning!regulations!and!compliance!costs,!and! included:! • “Procedural!requirements!such!as!preparing,!submitting!and!providing!impact!assessments! and!other!material!to!support!an!application.!! • Meeting!specified!development!controls!such!as!location,!operating!hours,!business!format,! density,!amenity,!environmental!heritage!and!requirements.! • Fees!and!charges!such!as!application!or!other!administered!fees.! • Charges!to!verify!that!developments!accord!with!approved!drawings.! • Holding!costs!associated!with!the!time!taken!to!obtain!planning!approval”.55! ! Planning!regulation!is!also!being!abused!to!choose!competitors.!As!case!study!1!outlines,!the!ACT! government!introduced!an!active!policy!to!abuse!planning!regulations!to!limit!the!expansion!of! supermarkets!within!the!Territory.!The!result!was!that!consumers!had!less!access!to!major! supermarkets!which!may!have!driven!up!prices.!Despite!initial!support!for!the!policy,!after!three! years!it!was!abandoned!as!it!clearly!did!not!have!the!desired!effect!of!reducing!prices.!The!result!is! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 51 !Drummond,!M.!2013.!“Supermarket!prices!may!be!casualty!of!probe:!Sims”.!11/03/2013.!Australian! Financial!Review.!At!http://! afr.com.au/p/national/supermarket_prices_may_be_casualty_3lv5LoqX2jnDl5ARE33o1N.! 52 !Deloitte!Access!Economics.!2011.!“The!Structure!and!Performance!of!the!Australian!Retail!Industry”.!10!June! 2011.!Available!at!http://www.pc.gov.au/__data/assets/pdf_file/0018/110196/sub110Cattachment.pdf.! 53 !IBIS!World.!2013.!Supermarkets!and!other!grocery!stores!in!Australia:!“Competitive!Landscape”.!G5111.! 54 !Productivity!Commission.!2011.!“Economic!structure!and!Performance!of!the!Australian!Retail!Industry”.! Commonwealth!of!Australia.!!! 55 !Ibid.! ! June!2013! ! ! Institute!of!Public!Affairs! 39! hardly!surprising!because!the!policy!didn’t!promote!competition!or!choice;!it!used!regulation!to! decide!what!choices!customers!had.!! ! ! ! ! Case!study!1!|!The!ACT!government’s!abuse!of!planning!that!drove!up!prices! ! ! ! In!practice!regulation!can!directly!influence!prices.!Following!the!2009!Martin!Review,!the!ACT! government!used!planning!regulations!to!restrict!supermarkets!entering!into!certain!sites.!As! outlined!in!the!IPA’s!2010!paper,!Forcing!Prices!Up,56!the!ACT!Chief!Minister!Jon!Stanhope! commissioned!consultant!John!Martin!to!complete!a!review!of!the!ACT’s!supermarkets!policy! in!June!2009.57!Following!the!completion!of!the!Martin!Review!the!ACT!government!released! its!ACT!Supermarket!Competition!Policy!Implementation!Plan.!! ! According!to!the!Implementation!Plan,!the!ACT!government!developed!a!new!framework!to! support!supermarket!competition.!This!!included!supporting!new!entrants!and!larger!and! independent!full!line!supermarkets!to!operate,!supporting!more!wholesale!competition,! flexibility!in!zoning!provisions,!no!cap!on!the!market!share!of!participants,!interdepartmental! coordination!on!policy!and!regular!industry!consultation.!Importantly!the!implementation!plan! included!proposals!for!land!release!assessments!for!new!supermarkets!based!on!weighting! criteria!to!support!market!outcomes.58! ! The!IPA’s!earlier!report!outlined!the!specific!issues!that!arose!from!imposing!restrictions!and! favouring!some!market!entrants!against!others,!including!that!it!would!lead!to:! ! • the!price!of!groceries!at!these!news!supermarket!sites!to!increase!of!between!$6.52! and!$13.45!more!expensive!than!the!cheapest!ACT!supermarket!site.!! ! • the!price!of!the!mean!ACT!basket!of!groceries!to!increase!by!$8.02!compared!to!the! cheapest!basket!available!in!the!ACT!amounting!to!a!mean!price!nearly!ten!per!cent! higher!than!necessary.!!! ! • the!price!of!the!mean!basket!of!groceries!to!increase!in!the!ACT!by!$1.05!or!1.18!per! cent,!adding!an!additional!third!increase!on!top!of!inflation.!! ! The!policy!operated!for!nearly!three!years!before!the!ACT!government!eventually!aborted!the! policy!after!it!was!deemed!to!have!been!unsuccessful.!Instead,!the!ACT!government!has! decided!to!rely!on!the!ACCC!to!ensure!competition.59! ! ! ! ! ! ! ! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 56 !Wilson,!T.!2010.!“Forcing!Prices!Up:!The!impact!of!the!ACT!government’s!supermarkets!policy!and! implementation”.!Institute!of!Public!Affairs.!June.!At! http://www.ipa.org.au/library/publication/1276487152_document_paper_C_forcing_prices_up.pdf.! 57 !Martin,!J.!2009.!“Review!of!ACT!supermarket!competition!policy”.!Martin!Stone!Pty!Ltd.!At! http://www.business.act.gov.au/__data/assets/pdf_file/0003/167025/Supermarket_Competition_Policy.pdf.! 58 !Department!of!Land!and!Property!Sales,!2010,!“ACT!Supermarket!Competition!Policy!Implementation!Plan”,!! ACT!Government,!Canberra,!Australia,!at!! http://www.business.act.gov.au/__data/assets/pdf_file/0007/176749/ACT_SUPERMARKET_COMPETITION_PO LICY_IMPLEMENTATION_PLAN_jan09_C_FINAL.pdf.!!! 59 !Nicholson,!L.!2013.!“Supermarket!policy!fails!says!IGA!man”.!Canberra!Times.!Cited!on!09/05/2013!at! http://www.canberratimes.com.au/actCnews/supermarketCpolicyCfailsCsaysCigaCmanC20130508C2j8gp.html.! ! June!2013! ! ! Institute!of!Public!Affairs! 40! 9.3! Barriers!to!entry! ! There!are!two!key!concerns!about!regulatory!price!drivers.!First,!they!increase!prices!directly!for! consumers!with!debatable!benefits.!Second,!they!increase!barriers!to!entry!to!continue!promoting! competition.!There!are!barriers!to!entry!for!new!market!players.!But!there!are!essentially!two!types! of!barriers!–!market!and!nonCmarket!barriers.!The!nature!of!these!barriers!and!broken!down!in!Box! 1.!The!ACCC!should!be!focusing!on!nonCmarket!barriers!to!entry.!Market!barriers!to!entry!can!be! overcome!through!investment!and!meeting!consumer!demand.!NonCmarket!barriers!to!entry! increase!costs!and!can!make!it!impossible!for!new!players!to!enter!the!market!and!established! players!to!meet!consumer!demand.!! ! ! ! ! Box!1!|!Barriers!to!entry! ! ! ! Market!barriers! MarketCbased!barriers!include!significant!upfront!costs!that!make!it! ! to!entry! prohibitive!for!new!players!to!reasonably!enter!the!market.!Market!barriers! to!entry!can!include!the!necessity!of!economies!of!scale!to!be!competitive,! ownership!of!scarce!resources,!high!startCup!costs!and!high!research!and! development!costs.!In!the!case!of!supermarkets,!major!barriers!to!entry!can! include!largeCformat!sites!suitable!for!supermarkets,!capital!to!purchase! stock!and!the!logistics!necessary!to!achieve!scale!to!compete!on!price.!! ! ! Non\market! barriers!to! entry! NonCmarket!barriers!include!primarily!governmentCimposed!restrictions!and! ! regulations!that!limit!the!establishment!and!operation!of!new!players!into! the!market.!In!the!supermarket!sector!that!can!include!regulations!that! prohibitively!increase!the!costs!of!establishing!a!new!supermarket,!limit!the! number!of!supermarkets!operating!or!other!taxes!and!regulations!that! increase!the!cost!of!operations.!The!challenge!with!nonCmarket!barriers!to! entry!is!that!all!regulations!have!a!cost!profile!that!individually!may!have! limited!impact,!but!cumulatively!contribute!significantly!to!increasing!the! cost!of!a!new!market!entrant!and!favour!existing!competitors!who!can! spread!the!costs!across!their!existing!business!operations.!! ! ! ! ! There’s!no!dispute!that!the!size!of!a!supermarket!operation!creates!barriers!to!entry!because!of!the! cost!of!being!competitive!with!volume!purchasing,!supply!chains!and!retail!outlets.!But!they!are!not! insurmountable.!! ! Over!a!period!of!twelve!and!a!half!years,!ALDI!has!succeeded!in!establishing!300!news!stores!across! Australia!competing!against!the!establishment!supermarket!majors!and!driving!major!trends!and! behaviours!in!consumption.!As!stated,!ALDI!is!expected!to!continue!opening!30!new!stores! annually.60!ALDI!was!in!a!unique!position!to!compete!and!enter!the!market!and!immediately! compete!against!the!supermarket!majors!by!having!the!necessary!capital!to!acquire!major!largeC format!stores,!the!logistics!and!supply!chain!capacity!to!achieve!scale!and!compete!on!price.!! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 60 !Irish!Food!Board.!2009.!“Australian!grocery!market!dominated!by!“big!three””.!Cited!on!01/05/2013!at! http://www.bordbia.ie/industryservices/information/alerts/Pages/Australiangrocerymarketdominatedby%E2 %80%9Cbigthree%E2%80%9D.aspx?year=2009&wk=42.! ! June!2013! ! ! Institute!of!Public!Affairs! 41! Importantly,!ALDI’s!rapid!growth!disproved!one!of!the!major!assumed!barriers!to!entry!of!available! sites!to!host!supermarkets,!especially!in!established!and!builtCup!suburbs.!Almost!all!of!ALDIs!stores! have!been!established!in!the!capital!cities!of!Brisbane,!Canberra,!Melbourne!and!Sydney.!Even! though!ALDI’s!stores!are!around!oneCquarter!the!size!of!a!Coles!or!Woolworths,!they!still!require! substantially!more!space!than!the!average!retail!store.61!But!even!without!ALDI,!those!barriers!do! not!have!to!have!be!prohibitive.!Like!all!businesses,!competitors!can!develop!from!smaller! operations!providing!a!different!product!offering!to!meet!a!market!demand!and!grow!their! operations.! ! MarketCbased!barriers!to!entry!are!problematic,!but!only!addressable!to!the!extent!that! governmentCimposed!costs!increase!them,!such!as!wage!requirements!that!increase!labour!costs,! shop!trading!hours!that!also!increase!labour!costs!and!reduce!the!capacity!for!supermarkets!to! extract!maximum!value!from!their!infrastructure,!and!planning!restrictions!that!increase!site! purchases!and!rents.!!! ! 9.4! Indicative!competition!and!scale!dividend! ! The!diversity!of!factors!that!impact!on!supermarket!competition!make!it!difficult!to!assess!what! individual!factors!impact!supermarket!prices.!However,!based!on!OECD!data!provided!in!Figure!11! we!have!a!broad!guide!of!the!movement!of!Australian!food!prices!over!the!past!decade.!! ! Figure!11!|!Moving!Australian!food!prices!versus!average,!2005!=!100! 135! 130! 125! 120! 115! 110! 105! 95! Q1C2005! Q2C2005! Q3C2005! Q4C2005! Q1C2006! Q2C2006! Q3C2006! Q4C2006! Q1C2007! Q2C2007! Q3C2007! Q4C2007! Q1C2008! Q2C2008! Q3C2008! Q4C2008! Q1C2009! Q2C2009! Q3C2009! Q4C2009! Q1C2010! Q2C2010! Q3C2010! Q4C2010! Q1C2011! Q2C2011! Q3C2011! Q4C2011! Q1C2012! Q2C2012! Q3C2012! Q4C2012! Q1C2013! 100! ! Source:!Organisation!for!Economic!Cooperation!and!Development.!2012.!Main!Economic!Indicators:!Food!Prices!&!IPA!Calculations.! ! In!the!past!few!years,!there!has!been!a!decline!in!food!prices!against!the!average,!predominantly! based!on!increased!competition!and!the!benefits!of!scale!achieved!by!supermarkets.!However,!the! trend!is!likely!to!have!been!depressed!as!a!result!of!the!influence!of!scale!and!competition!already.! Used!as!an!indicative!measurement,!based!on!current!prices,!and!taken!as!a!broad!competition!and! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 61 !IBIS!World.!2013.!“Supermarkets!and!other!grocery!stores!in!Australia:!Competitive!Landscape”.!G5111.! ! June!2013! ! ! Institute!of!Public!Affairs! 42! scale!dividend,!these!factors!have!led!to!a!price!reduction!for!food!of!at!least!5.03!per!cent!against! the!trend.! ! While!a!5!per!cent!reduction!is!not!significant,!as!outlined!in!Section!7.3,!up!to!60!per!cent!of! consumers!have!identified!it!would!influence!their!supermarket!choice.!Based!on!ABS!data!of! average!weekly!Australian!earnings,!a!5!per!cent!reduction!results!in!food!and!nonCalcoholic! beverage!prices!delivers!a!$9.20!weekly!discount!or!$478.62!annually.!! $ $ ! June!2013! ! ! Institute!of!Public!Affairs! 43! 10.0! Conclusions!and!recommendations! ! Despite!the!concerns!around!the!state!of!competition,!there!is!clearly!a!competitive!landscape!for! retail!supermarkets!and!their!allied!interests!in!convenience!stores,!liquor!and!fuel!retailing.!! ! Consumers!are!clearly!motivated!by!price!and!quality!as!their!value!propositions.!Each!of!the!four! major!supermarket!chains!is!attempting!to!segment!the!market!to!meet!those!demands!while! offering!alternatives!to!compete!on!convenience!and!quality.!! ! Supermarkets!operate!on!a!highCvolume,!low!margin!business!model!to!achieve!lower!prices.!They! fractionalise!their!costs,!including!profit,!across!millions!of!products!sold!that!accumulate!in!baskets! and!trollies.!! ! Most!of!their!costs!come!from!wholesale!products!which!accounts!for!75!per!cent!of!their!costs.!To! deliver!them!cheaply!they!have!sophisticated!supply!chain!and!logistics!systems.!These!systems! allow!supermarkets!to!reduce!the!cost!impost!on!every!item!from!the!remaining!25!per!cent!of!their! costs.!Higher!costs!ultimately!lead!to!high!prices!at!the!checkout.!! ! While!Coles!and!Woolworths!achieve!these!efficiencies!through!their!size,!IGA!has!achieved!it! through!partnerships!with!Metcash!as!a!group!wholesale!purchaser.!ALDI!achieves!it!through!its! global!supply!chain!which!gives!it!both!negotiating!power!and!the!capacity!to!parallel!import!cheap! goods.! ! The!more!products!that!supermarkets!sell!the!less!each!fractionalised!cost!has!to!be!applied.! Therefore!scale!matters.!Smaller!supermarkets!have!higher!cost!structures!because! disproportionately!higher!costs!have!to!be!spread!across!fewer!items.!Large!supermarkets!have! lower!cost!structures!because!they!have!disproportionately!lower!costs!spread!across!more!items.!! ! ALDI’s!entry!into!the!Australian!marketplace!has!significantly!increased!competition,!especially!for! the!custom!of!priceCsensitive!consumers.!ALDI!has!successfully!grown!its!market!share!by!rolling!out! largerCformat!stores!selling!private!labelled!goods!at!cheap!prices.!! ! To!be!competitive,!Coles,!Woolworths,!and!to!a!lesser!extent!ALDI,!has!had!to!respond!and!increase! their!private!label!offerings.!Because!private!labelling!removes!some!costs,!it!can!bring!down!prices,! but!for!supermarkets!that!also!compete!on!convenience,!experience,!parking!and!range!the!high! cost!structures!of!a!largeCformat!supermarket!are!still!spread!across!private!labelled!goods.!! ! Supermarkets!are,!in!part,!now!using!their!scale!to!deliver!lower!prices!to!consumers!while!also! meeting!the!rising!demand!for!convenience.!They!are!doing!so!by!using!the!efficiencies!of!their! supply!to!offer!competitive!prices!in!convenience!stores!partnered!with!petrol!stations,!and!smallerC format!stores!in!convenient!locations.!!! Consumers!are!understandably!price!sensitive,!despite!recent!declines,!the!general!direction!of!retail! prices!over!the!past!decade!have!been!extremely!high.!Price!sensitivity!is!particularly!high!amongst! lowCincome!earners!and!those!on!fixed!incomes!and!welfare!and!pension!schemes.!Food!and!nonC alcoholic!beverages!can!account!for!more!than!20!per!cent!of!their!household!income.!! ! PriceCsensitivity!is!driving!the!business!model!of!supermarkets!to!increase!their!scale,!reduce!prices! and!fractionalise!their!overheads!further.!As!an!indicative!measure,!the!competition!and!scale! dividend!suggests!prices!are!at!least!5.03!per!cent!lower!than!they!otherwise!need!be.!While!only!a! ! June!2013! ! ! Institute!of!Public!Affairs! 44! modest!reduction,!it’s!equivalent!to!the!price!reduction!60!per!cent!of!Australians!have!identified! they!would!change!their!choice!of!supermarket!for.!! ! As!a!regulator,!the!challenge!for!the!ACCC!is!how!to!remove!barriers!to!entry!and!structures!that! increase!prices!for!consumers.!Instead!the!ACCC!appears!to!be!adopting!a!strategy!of!regulating!the! choices!consumers!have!in!the!hope!that!they!can!manufacture!a!competitive!landscape!more! perfectly!than!the!market.!! ! Concerns!by!the!regulator!about!the!state!of!the!market,!market!concentration!and!market!power! against!suppliers!and!wholesalers,!and!marketCbased!barriers!to!entry!cannot!be!made!out,! particularly:! ! • The!“critical!decision!point”!in!the!sector!is!whether!market!players!are!allowed!to!meet! consumer!demand,!or!whether!the!regulator!will!interfere!to!achieve!nonCprice!objectives.! ! • Competition!has!increased!following!the!entry!of!ALDI,!and!to!a!lesser!extent,!CostCo.! ! • No!supermarket!has!a!dominant!share!in!the!convenience!or!liquor!market!where! competition!is!healthy.! ! • Consumers!want!competition!to!drive!lower!prices.!Lower!prices!are!being!achieved!through! supermarket!business!models!that!harness!scale.!! ! • There’s!no!evidence!that!organic!evolution!of!supermarket!chains!and!sites!weaken! competition.!! ! • The!ACCC’s!requirement!that!competition!is!achieved!when!there!are!three!players!in!close! vicinity!is!an!essentially!unsupportable,!ambit!claim.!! ! • The!entry!of!ALDI,!and!to!a!lesser!extent,!CostCo,!show!market!barriers!to!entry!are!low.! ! By!comparison,!concerns!by!the!regulator!about!the!state!of!nonCmarket!barriers!to!entry!can!be! made!out.!Taking!into!account!the!business!models!of!supermarkets,!if!the!ACCC!wants!to!reduce! prices!for!consumers!in!a!competitive!market!they!should:! ! • Focus!on!nonCmarket!barriers!to!entry!that!unnecessarily!increase!costs!for!established! market!players!and!raise!hurdles!for!new!market!entrants.!! ! • Assess!the!impact!of!high!wage!structures!that!increase!costs!to!supermarkets!that!are! passed!onto!consumers.!! ! • Assess!the!impact!of!shop!trading!hours!that!can!lead!to!higher!wage!costs!and!an!underC fractionalisation!of!rent!costs!that!are!passed!onto!consumers.!! ! • Assess!the!impact!of!planning!regulations!at!both!a!local!and!State!and!Territory!level!that! reduce!the!number!of!available!sites!to!allow!for!supermarkets!to!be!established,!reduce!the! number!of!sites!where!supermarkets!can!compete!and!increase!the!costs!of!rents!that!are! passed!onto!consumers.!! ! ! ! June!2013! ! ! Institute!of!Public!Affairs! 45! 11.0$ References$$ ! • • Australian!Bureau!of!Statistics,!Household!expenditure!Survey,!Summary!of!Results,!2009C10,! catalogue!no!6530.0.! ! Australian!Competition!and!Consumer!Commission.!2013.!“About!us”.!Commonwealth!of! Australia.!Cited!on!01/06/2013!at!http://accc.gov.au/aboutCus.! ! • Australian!Competition!and!Consumer!Commission.!2013.!“About!the!ACCC”.! Commonwealth!of!Australia.!Cited!on!01/06/2013!at!http://accc.gov.au/aboutCus/australianC competitionCconsumerCcommission/aboutCtheCaccc.! • Australian!Competition!and!Consumer!Commission.!2013.!“ACCC!to!oppose!Woolworths’! proposed!acquisition!of!Glenmore!Ridge!site”.!Cited!on!08/06/2013!at! http://accc.gov.au/mediaCrelease/acccCtoCopposeCwoolworthsCproposedCacquisitionCofC glenmoreCridgeCsite.! • Australian!Competition!and!Consumer!Commission.!2008.!“Report!of!the!ACCC!inquiry!into! the!competitiveness!of!retail!prices!for!standard!groceries,!July!2008”.!Commonwealth!of! 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G5111.! • Independent!Grocers!of!Australia.!2013.!“About!IGA”.!Cited!on25/05/2013!at! http://www.iga.com.au/igafresh/index.cfm?page_id=2298.! • Irish!Food!Board.!2009.!“Australian!grocery!market!dominated!by!“big!three””.!Cited!on! 01/05/2013!at! http://www.bordbia.ie/industryservices/information/alerts/Pages/Australiangrocerymarket dominatedby%E2%80%9Cbigthree%E2%80%9D.aspx?year=2009&wk=42.! • Lui,!S.!“Woolworths!trials!grocery!collection!service!at!Melbourne!airport”.!ZDNet.!Cited!on! 13/06/2013!at!http://www.zdnet.com/au/woolworthsCtrialsCgroceryCcollectionCserviceCatC melbourneCairportC7000015395/.! • Martin,!J.!2009.!“Review!of!ACT!supermarket!competition!policy”.!Martin!Stone!Pty!Ltd.!At! http://www.business.act.gov.au/__data/assets/pdf_file/0003/167025/Supermarket_Compe tition_Policy.pdf.! ! ! ! ! ! ! ! ! ! ! ! ! ! ! June!2013! ! ! Institute!of!Public!Affairs! 47! ! • Mitchell,!S.!2012.!“PrivateClabel!grocery!share!tipped!to!reach!33pc”.!Australian!Financial! Review.!19/07/2012.! • Mitchell,!S.!2012.!“Woolies!pushes!its!trolley!too!fast”.!Australian!Financial!Review.! 12/12/2012.! • Nicholson,!L.!2013.!“Supermarket!policy!fails!says!IGA!man”.!Canberra!Times.!Cited!on! 09/05/2013!at!http://www.canberratimes.com.au/actCnews/supermarketCpolicyCfailsCsaysC igaCmanC20130508C2j8gp.html.! • Organisation!for!Economic!Cooperation!and!Development.!2012.!Main!Economic!Indicators:! Food!Prices.! ! Parliament!of!Australia.!2010.!“Competition!and!Consumer!Act!2010”.!Cited!on!12/05/2013! at!http://www.austlii.edu.au/cgiCbin/download.cgi/cgiC bin/download.cgi/download/au/legis/cth/consol_act/caca2010265.rtf.!! ! ! ! • ! • Productivity!Commission.!2011.!“Economic!Structure!and!Performance!of!the!Australian! Retail!Industry”.!Commonwealth!of!Australia.!n56.!Available!at! http://www.pc.gov.au/__data/assets/pdf_file/0019/113761/retailCindustry.pdf.! • Speedy,!B.!2013.!“Size!matters!to!grocery!shoppers”.!The!Australian.!09/03/2013.!Cited!on! 09/03/2013!at!http://www.theaustralian.com.au/business/companies/sizeCmattersCtoC groceryCshoppers/storyCfn91v9q3C1226593548812.! • Stuart!Alexander.!2013.!“Channels”.!Cited!on!01/05/2013!at! http://www.stuartalexander.com.au/aust_grocery_channels.php.! • Wilson,!T.!2012.!“New!poll:!Households!concerned!about!energy!and!food!prices”.!Media! Release.!Institute!of!Public!Affairs.!20!March!2012.!At! http://ipa.org.au/library/publication/1332195413_document_140312_media_release_and_ poll_C_households_concerned_about_energy_and_food_prices.doc.pdf.! • Wilson,!T.!2013.!“ConsumerCfirst!supermarket!reform:!The!market,!not!government,!knows! how!to!best!meet!consumer!demand”.!Institute!of!Public!Affairs.!Available!at! http://ipa.org.au/library/publication/1359362671_document_130129_C_paperCconsumerC first_supermarket_reform.pdf.! • Wilson,!T.!2010.!“Forcing!Prices!Up:!The!impact!of!the!ACT!government’s!supermarkets! policy!and!implementation”.!Institute!of!Public!Affairs.!June.!At! http://www.ipa.org.au/library/publication/1276487152_document_paper_C _forcing_prices_up.pdf.! ! Zappone,!C.!2011.!“Competition!a!casualty!in!beer!wars:!Xenophon”.!Sydney!Morning! Herald.!23/03/2011.!Cited!on!01/04/2013!at! http://www.smh.com.au/business/competitionCaCcasualtyCinCbeerCwarsCxenophonC 20110323C1c5ry.html.! ! ! ! ! ! • ! June!2013! ! ! Institute!of!Public!Affairs! 48! 12.0$ About$the$Institute$of$Public$Affairs$ ! The!Institute!of!Public!Affairs,!founded!in!1943,!is!the!world’s!oldest!free!market!think!tank.!The!IPA! is!a!notCforCprofit!research!institute!based!in!Melbourne,!Australia!with!staff!and!associates!based! around!Australia.!Think!tanks!act!as!public!policy!incubators!and!develop!public!policy!solutions.!! ! The!objective!of!the!IPA!is!to!promote!evidenceCbased!public!policy!solutions!rooted!in!a!liberal! tradition!of!free!markets!and!a!free!society.!The!IPA!achieves!these!objectives!by!undertaking!and! disseminating!research;!participating!in!national!and!international!policy!debate!through!the!media;! and!engaging!with!opinion!leaders,!stakeholders!and!public!policy!makers.!! ! All!work!completed!by!the!IPA!is!published!in!the!public!domain!for!the!consumption!of! governments,!politicians,!domestic!and!international!policy!makers!and!the!publicCatClarge.! ! The!IPA!has!a!demonstrated!track!record!of!contributing!to,!and!changing!the!terms!of!the!public! policy!debate!in!Australia!and!internationally.!In!particular,!in!recent!years!the!IPA!has!been!at!the! centre!of!public!discussion!in!Australia!and!in!appropriate!international!fora!on:!! • Regulation! • Water! • Industrial!relations! • Trade! • Energy! • Taxation! • Intellectual!property! • Housing! • Investment! ! ! June!2013! ! ! Institute!of!Public!Affairs! 49! 13.0$ About$the$author,$Tim$Wilson$$ ! Tim!is!Director!of!the!Intellectual!Property!and!Free!Trade!Unit!and!Climate!Change!Policy!at!the! Institute!of!Public!Affairs.!!Tim!also!serves!on!the!Australian!government’s!IP!industry!consultative!group! as!well!being!a!Senior!Fellow!at!New!York's!Center!for!Medicine!in!the!Public!Interest.!! ! Tim!has!written!extensively!in!defensive!of!individual!choice!and!responsibility,!including!on!gaming.! Among!many!research!projects!he!wrote!with!Julie!Novak!Gambling!away!perspective?!A!review!of! the!evidence!justifying!electronic!gaming!regulations!that!exposed!the!inaccurate!data!supporting! the!introductory!of!preCcommitment!for!electronic!gaming!machines!in!Australia.!! ! He!can!be!seen!and!heard!being!outspoken,!challenging!and!thought!provoking!on!radio!and!television.! He!has!regular!commitments!on!radio!stations!2CC,!3AW,!4BC!&!774!and!television!stations!Sky!News,! Channel!Ten!and!the!ABC.!He!is!also!a!regular!guest!on!New!York’s!nationally!syndicated!radio!program,! the!John!Batchelor!show,!with!John!Batchelor!and!US!editorial!board!member,!Mary!Kissel.!!He!also!pens! columns!in!many!newspapers,!particularly!The!Australian!and!Australian!Financial!Review.!Tim!has!also! contributed!chapters!to!numerous!books!and!regularly!gives!speaks!at!conferences.!! ! In!2009!The!Australian!newspaper!recognised!him!as!one!of!the!ten!emerging!leaders!of!Australian! society,!is!a!recipient!of!an!Australian!Leadership!Award!from!the!Australian!Davos!Connection,!and!was! selected!to!participate!in!the!inaugural!AustralianCASEAN!emerging!leaders!program.! ! Tim!is!currently!a!Director!of!Alfred!Health!and!a!Board!of!the!Australian!Health!Practitioner!Regulation! Agency.!He!formally!served!on!the!Board!of!Monash!University!as!well!as!a!number!of!service!companies! in!the!tertiary!education!sector.! ! He’s!worked!in!international!development!across!South!East!Asia,!consulting!and!politics,!including! delivering!Australia's!aid!program!for!the!Vietnamese!government!to!host!APEC!and!advising!State!and! Federal!politicians.!At!University!Tim!was!twice!elected!President!of!the!Student!Union.!! ! Tim’s!currently!completing!a!Graduate!Diploma!of!Energy!and!the!Environment!(Climate!Science!and! Global!Warming)!at!Perth’s!Murdoch!University.!He!has!a!Masters!of!Diplomacy!and!Trade!and!a! Bachelor!of!Arts!from!Monash!University,!a!Diploma!of!Business!and!has!completed!Asialink’s!Leaders! Program!at!the!University!of!Melbourne.!!! ! He!has!also!completed!specialist!executive!education!on!IP!at!the!World!Intellectual!Property! Organisation’s!Worldwide!Academy!and!international!trade,!intellectual!property,!diplomacy!and!global! health!at!the!Institut!de!Hautes!Études!Internationales!et!du!Développment,!Geneva!and!New!Jersey’s! Gibbons!Institute!of!Law,!Science!and!Technology!at!Seton!Law!School,!New!Jersey.!! ! ! ! ! June!2013! ! ! Institute!of!Public!Affairs! 50!
