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!
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Tim!Wilson!
Director,!IP!and!Free!Trade!Unit!
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June!2013
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June!2013!
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Institute!of!Public!Affairs!
0!
1.0$ Executive$summary$
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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!!
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Business!models!drive!lower!prices!
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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.!!
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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.!!
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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.!
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ALDI!achieves!scale!to!deliver!lower!prices!by!leveraging!its!global!supply!chain!and!its!
expanding!negotiating!power.!
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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.!
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Smaller!IGA!stores!achieve!scale!to!deliver!competitive!prices!through!collaboration,!using!
Metcash!wholesaling.!
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Supermarkets!that!compete!on!convenience,!quality!or!location!have!a!lowerBvolume,!higherB
margin!business!model.!!
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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.!!
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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.!
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Higher!profits!would!require!fractionalising!increased!profits!across!their!highBvolume!of!sales!
which!would!make!them!less!competitive.!!!
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The!market!is!extremely!competitive!
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Arguably,!Australia!now!has!four!major!supermarket!chains!in!ALDI,!Coles,!IGA!and!Woolworths.!
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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.!
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June!2013!
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Institute!of!Public!Affairs!
1!
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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.!
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Woolworths!have!883!stores!and!a!new!store!growth!rate!nearly!half!of!ALDI,!with!market!share!
of!around!33!–!36!per!cent.!
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Metcash!has!the!most!retail!stores!at!more!than!2,000,!with!market!share!of!15!per!cent.!
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CostCo!is!a!modest!competitor!with!three!stores!with!an!expected!expansion!of!100!per!cent.!
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Supermarkets!compete!against!each!other,!as!well!as!fresh!food!markets,!internet!retailers!and!
speciality!stores.!
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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.!!
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Business!models!are!driven!by!consumer!demand!
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Supermarkets!primarily!compete!on!multiple!grounds!including!price,!range,!quality,!location,!
convenience,!experience!and!parking.!!
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Quality!and!price!are!the!most!important!drivers!of!consumption!behaviour.!Combined,!they!
reflect!a!consumer’s!value!proposition.!!!
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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.!!
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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.!!
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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.!
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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.!!
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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.!
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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.!
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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.!
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June!2013!
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Institute!of!Public!Affairs!
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Based!on!industry!research!data,!threeBquarters!of!a!supermarket’s!cost!structure!is!driven!by!
the!cost!of!wholesale!purchases.!!
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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.!!
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Based!on!Productivity!Commission!data,!Australian!wholesalers!secure!a!larger!margin!than!
those!in!the!United!States!and!Canada.!!
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Regulation!drives!risk!and!increases!prices!
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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.!
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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.!
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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.!
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Concerns!by!the!regulator!about!the!state!of!nonBmarket!barriers!to!entry!can!be!made!out.!!
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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.!!
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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.!!
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ACCC!assumptions!that!they!can!regulate!a!more!competitive!market!are!based!on!assumptions!
of!competition,!not!the!reality!of!market!competition.!!
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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.!!
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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.!
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June!2013!
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Institute!of!Public!Affairs!
3!
2.0$$ Table$of$contents!
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Section!
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7.0!
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7.1!
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7.2.2%
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10.0!
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11.0!
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12.0!
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13.0!
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Title!
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Executive!summary!
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Table!of!contents!
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Tables!and!charts!
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Abbreviations!
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Introduction!
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The!role!and!philosophy!of!the!ACCC!
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The!current!state!of!supermarket!competition!
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Retail!supermarket!players!
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The!state!of!competition!
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Liquor%competition%
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Increasing%harmonisation%with%fuel%retailers%&%convenience%stores%
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Main!drivers!of!competition!
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Competition!driving!business!models!
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Supermarket!business!models!
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Drivers!of!prices!and!competition!
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Recent!price!movements!
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Regulatory!cost!drivers!
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Barriers!to!entry!
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Indicative!competition!and!scale!dividend!
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Conclusions!and!recommendations!
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References!
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About!the!Institute!of!Public!Affairs!
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About!the!author,!Tim!Wilson!
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June!2013!
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Institute!of!Public!Affairs!
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3.0$ Charts,$figures$and$tables$
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Figure!!
Title!
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Chart!1!
Competition!for!retail!food!and!groceries!!!
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Chart!2!
Inter!and!Intra!brand!competition!in!the!liquor!sector!
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Chart!3!
Predominant!motivating!factors!from!supermarkets!meeting!consumer!demand!
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Chart!4!
Private!label!brands!
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Figure!1!
Food!and!alcohol!market!share!
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Figure!2!
Elements!of!the!retail!offer!respondents!rated!as!‘very!important’!
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Figure!3!
Average!household!share!of!food!toward!household!goods!and!services!
expenditure!(%)!
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Figure!4!
Average!weekly!household!expenditure!on!goods!and!services!
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Figure!5!
Good!and!services!expenditure!by!the!lowest!and!highest!equivalised!disposable!
household!income!quintiles!
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Australian!market!share!of!select!food!processors!
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Figure!7!
Earnings!before!interest!and!tax,!2001!–!2004,!%!of!sale!
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Figure!8!
2012!Supermarket!cost!breakdown!
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Moving!food!price!averages!in!select!OECD!countries,!2005!=!100!
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Figure!10!
Moving!Australian!price!averages,!2005!=!100!
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Figure!11!
Moving!Australian!food!prices!versus!average,!2005!=!100!
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Table!1!
Market!share!(by!National!brand!owner)!grocery!retailers,!2011!
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Table!2!
Major!retailers!and!the!number!of!their!physical!stores!!
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Table!3!
Market!share!by!industry!players,!2011!!
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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!
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Table!6!
Percentage!of!households!on!government!support!spent!on!food!and!nonB
alcoholic!beverages!
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Table!7!
Customers!likely!to!change!supermarkets!for!a!5!per!cent!price!decrease!
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Table!8!
PrivateBlabel!spending!by!Australians!
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Table!9!
Australian!privateBlabel!spending!by!product!category!
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Table!10!
International!comparisons!of!gross!margins,!2006!
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Table!11!
Supermarket!data,!2011B12!
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Table!12!
Gross!Margin!comparison!of!the!big!four!retailers!in!Australia,!2003B2004!
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Table!13!
Change!in!Key!aggregate!for!‘Down!Down’!products!(Jan!2011!–!midB2012)!
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Table!14!
Coles!Volume!of!Selected!Products,!2012!!!
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Figure!6!
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June!2013!
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Institute!of!Public!Affairs!
5!
4.0$ Abbreviations$
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ABS!
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ACCC!
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ACT!
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Alb!
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AUD$!
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Car!
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CML!
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COGS!
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IGA!
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IPA!
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Kr!
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MSC!
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OECD!
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PC!
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Wmart!
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Wmart!Intl!
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WW!
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Australian!Bureau!of!Statistics!
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Australian!Competition!and!Consumer!Commission!
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Australian!Capital!Territory!
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Albertsons!(United!States)!
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Australian!dollar!
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Carrefour!
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Coles!Myer!Limited!
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Cost!of!goods!sold!
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Independent!Grocers!of!Australia!
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Institute!of!Public!Affairs!
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Kroger!
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Major!supermarket!chain!
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Organisation!for!Economic!Cooperation!and!Development!
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Productivity!Commission!
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WalBmart!(United!States)!
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WalBmart!International!operations!outside!the!United!States!
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Woolworths!
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June!2013!
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Institute!of!Public!Affairs!
6!
5.0$ Introduction$$
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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.!!
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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.!!
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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.!!
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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.!!
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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.!!
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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.!
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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.!!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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!
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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.!!
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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.!
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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.!!
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June!2013!
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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.!
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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.!!
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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
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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!
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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!
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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
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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!
!
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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!
!
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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.!
!
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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!
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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!
!
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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!
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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!
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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!
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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!$31.8!billion!annually.35!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
32
!IBIS!World.!2012.!“Supermarkets!and!other!grocery!stores!in!Australia:!Competitive!Landscape”.!G5111!
!Productivity!Commission.!2011.!“Economic!Structure!and!Performance!of!the!Australian!Retail!Industry”.!
Commonwealth!of!Australia.!n56.!Available!at!
http://www.pc.gov.au/__data/assets/pdf_file/0019/113761/retailCindustry.pdf.!
34
!Productivity!Commission.!2011.!“Economic!structure!and!performance!of!the!Australian!retail!industry”.!
Productivity!Commission!Inquiry!Report.!V56.!04/11/0211.!
35
!Mitchell,!S.!2012.!“PrivateClabel!grocery!share!tipped!to!reach!33pc”.!Australian!Financial!Review.!
19/07/2012!
33
!
June!2013!
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26!
Table!8!|!Private\label!spending!by!Australians!
!
Year!
Share!of!total!supermarket!sales!(%)!
2007C08!
13.5!
2012C13!
25.2!
2017C18!
33.0!
Spend!on!private!labels!($!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!
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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!
!
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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.!
!
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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.!
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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!$35!billion,!but!EBIT!is!
relatively!modest!at!4!per!cent!for!Coles!and!8!per!cent!for!Woolworths.!The!EBIT!on!revenue!
highlights!a!clearer!image!of!the!profitability!of!the!business!model.!What’s!particularly!noticeable!
from!the!data!is!that!the!profitability!of!Metcash!as!a!share!of!market!capitalisation!is!substantially!
higher!than!Coles!and!Woolworths!and!is!likely!a!reflection!of!a!business!model!that!is!less!
dependent!on!volume!and!seeks!to!extract!higher!margins!from!individual!sales,!even!after!factoring!
in!the!additional!costs!associated!with!a!convenienceCbased!business!model.!!
!
!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
46
!Australian!Competition!and!Consumer!Commission.!2008.!“Report!of!the!ACCC!inquiry!into!the!
competitiveness!of!retail!prices!for!standard!groceries,!July!2008”.!Commonwealth!of!Australia.!At!
http://www.accc.gov.au/content/index.phtml?itemId=838251.!!!
47
!Stuart!Alexander.!2013.!“Channels”.!Cited!on!01/05/2013!at!
http://www.stuartalexander.com.au/aust_grocery_channels.php.!
48
!Independent!Grocers!of!Australia.!2013.!“About!IGA”.!Cited!on25/05/2013!at!
http://www.iga.com.au/igafresh/index.cfm?page_id=2298.!
49
!Stuart!Alexander.!2013.!“Channels”.!Cited!on!01/05/2013!at!
http://www.stuartalexander.com.au/aust_grocery_channels.php!.!
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Table!11!|!Supermarket!data,!2011\12!
!
Supermarket!
Coles!
Woolworths!(Food!&!liquor)!
Metcash!IGA!(Food!&!liquor)!
CostCo!!
(International!–!outside!North!America)!
ALDI!
Revenue!
($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!
$4,502!
3.94%!
N/A!
N/A!
N/A!
N/A!
!
Source:!Annual!reports!
!
Notably,!Australian!supermarket!margins!are!smaller!than!retailers!in!comparable!countries.!While!
dated,!a!2004!Department!of!Agriculture,!Fisheries!and!Forestry!report!found!that,!at!the!time,!
Australian!supermarket!EBIT!was!low!or!significantly!lower!than!comparable!competitors.!While!
profitability!now!varies!from!that!time,!the!variance!would!still!not!put!Australia’s!supermarkets!in!a!
substantially!different!position.!
!
Figure!7!|!Earnings!before!interest!and!tax,!2001!–!2004,!%!of!sale!
!
Note:!!
CML!
!
WW!
!
Wmart! !
Wmart!Int!!
Tesco!
!
Car!
!
Alb!
!
Kr!
!
Coles!Myer!Limited!(Ausralia)!
Woolworths!(Australia)!
WalCmart!(United!States)!
WalCmart!International!operations!outside!the!United!States!
Tesco!(United!Kingdom)!
Carrefour!(French)!
Albertsons!(United!States)!
Kroger!(United!States)!
!
Source:!Department!of!Agriculture,!Fisheries!and!Forestry.!2004.!“Price!determination!in!the!Australian!Food!Industry!2004”.!
Commonwealth!of!Australia.!Available!at!http://www.daff.gov.au/__data/assets/pdf_file/0004/182443/section5.pdf.!!
!
Historical!data!shows!this!is!not!a!recent!trend.!Data!from!the!Australian!Bureau!of!Agriculture!and!
Resource!Economics!from!2005,!and!provided!in!Table!12,!shows!margins!have!not!changed!
significantly!in!the!past!decade.!!
!
!
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Table!12!|!Gross!Margin!comparison!of!the!big!four!retailers!in!Australia,!2003\2004!
!
Retailer!
Sales!turnover!
Total!cost!of!sales!
EBIT!!
Margin!!
($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.!
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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.!!!
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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.!!
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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.!!
!
!
!
!
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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.!!
!
!
!
!
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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.!
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June!2013!
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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.!
!
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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.!
!
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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!
!
!
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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.!!
$
$
!
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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!
!
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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!
Australia.!Available!at!http://transition.accc.gov.au/content/index.phtml/itemId/838251.!
•
Australian!Competition!Law.!2011.!“ACCC!v!Metcash!Trading!Limited”.!Cited!on!01/05/2013!
at!http://www.australiancompetitionlaw.org/cases/2011metcash.html.!
•
Bartholomeusz,!S.!2013.!“A!Coles!coup!to!defuse!milk!intolerance”.!Business!Spectator.!
10/04/2013!
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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.!
!
Speedy,!B.!2013.”Woolies!in!Fresh!Food!Fight”.!The!Weekend!Australian.!Cited!on!
16/05/2013!at!http://www.theaustralian.com.au/business/companies/wooliesCinCfreshC
foodCfight/storyCfn91v9q3C1226664127976.!
!
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Chanticleer.!2013.!“FaceCoff:!Woolworth’s!O’Brien!v!Competition!chief!Sims”.!Australian!
Financial!Review.!07/06/2013.!!
•
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=2c66ee5bC485cC
4fc3Caa1aCdfd8de12fccf.!
•
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.!
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•
Deloitte!Access!Economics.!2012.!Analysis!of!grocery!industry”.!Available!at!
http://www.coles.com.au/Portals/0/content/pdf/Shareholders/Grocery%20Industry%20Rep
ort.pdf.!
•
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.!
•
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_POLICY_IMPLEMENTATION_PLAN_jan09_C_FINAL.pdf.!
•
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_3lv5LoqX2jnDl5ARE33
o1N.!
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Euromonitor!International.!2012.!“Grocery!Retailers!in!Australia”.!March!2012.!
•
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/groceryCchainsCputCheatConCsuppliersC
20130506C2j3hs.html.!
•
Fielding,!Z.!2012.!“Costco!to!expand!its!footprint”.!Australian!Financial!Review.!09/07/2012.!
•
IBIS!World.!2012.!“Bypassing!brands:!Spending!on!privateClabel!products!is!on!the!rise”.!
Special!Report.!
•
IBIS!World.!2013.!“Supermarkets!and!other!grocery!stores!in!Australia:!Competitive!
Landscape”.!G5111.!
•
IBIS!World.!2013.!“Supermarkets!and!other!grocery!stores!in!Australia:!Industry!at!a!glance”.!
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.!
!
!
!
!
!
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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.!
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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.!!
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June!2013!
!
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Institute!of!Public!Affairs!
50!
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