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Power without glory? Competition and Australian supermarkets. Presentation by Graeme Samuel and Stephen P. King Monash Business Policy Forum Monash University. O verview. Is there power (and if so where are the excessive profits)? T he 2008 ACCC grocery report (with some updates)

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power without glory competition and australian supermarkets

Power without glory? Competition and Australian supermarkets

Presentation by Graeme Samuel and Stephen P. King

Monash Business Policy Forum

Monash University

o verview
Overview
  • Is there power (and if so where are the excessive profits)?
  • The 2008 ACCC grocery report (with some updates)
  • Issues for the Competition laws
slide3

Are we concentrated? (Yes we are!)

2004/5 approximate grocery market share of three largest retailers (various countries)

Australia 94%

Canada 65%

Sweden 65%

Switzerland 62%

Norway 51%

UK 50%

Austria 50%

Germany 38%

Source: ACCC 2008 Grocery inquiry, OFT 2006 grocery inquiry

slide4

Are we concentrated? (Yes we are!)

2004/5 approximate grocery market share of three largest retailers (various countries)

Australia 94%

Canada 65%

Sweden 65%

Switzerland 62%

Norway 51%

UK 50%

Austria 50%

Germany 38%

But be wary of local market shares as these can be higher

Source: ACCC 2008 Grocery inquiry, OFT 2006 grocery inquiry

the vertical chains coles and woolworths
The vertical chains – Coles and Woolworths
  • In packaged groceries, have about 80% of all sales in Australia
  • But about 55-60% in terms of grocery items
the independent wholesaler
The independent wholesaler
  • Around 15% of market for packaged groceries as at 2008
  • Operates through IGA, Foodland, Foodworks and other retail outlets
  • Has expanded retail operations over past decade (e.g. acquisition of Franklins in NSW)
  • ACCC 2008 report had concerns about Metcash supplied retailers ability to compete on price
the entrants
The entrants

But where are the specialists? (e.g. Whole Foods)

ebit margins 2006 07
EBIT margins 2006/07
  • Tesco (UK) approximately 6%
  • Sainsbury (UK) approximately 2.5%
  • Walmart (USA) approximately 7%
  • Kroger (USA) approximately 3.5%
  • Carrefours (France) approximately 4%
  • Woolworths approximately 6%
  • Coles approximately 3.5%
  • Metcash 2007/08 EBITA margin approximately 4.5%
ebit margins 2006 071
EBIT margins 2006/07
  • Tesco (UK) approximately 6%
  • Sainsbury (UK) approximately 2.5%
  • Walmart (USA) approximately 7%
  • Kroger (USA) approximately 3.5%
  • Carrefours (France) approximately 4%
  • Woolworths approximately 6%
  • Coles approximately 3.5%
  • Metcash 2007/08 EBITA margin approximately 4.5%

Not out of line with less concentrated markets.

ebit margins 2006 072
EBIT margins 2006/07
  • Tesco (UK) approximately 6%
  • Sainsbury (UK) approximately 2.5%
  • Walmart (USA) approximately 7%
  • Kroger (USA) approximately 3.5%
  • Carrefours (France) approximately 4%
  • Woolworths approximately 6%
  • Coles approximately 3.5%
  • Metcash 2007/08 EBITA margin approximately 4.5%

Power without the (excessive) profits?

Why do Coles and Woolworths compete as hard as they do?

Not out of line with less concentrated markets.

the 2008 accc grocery inquiry
The 2008 ACCC grocery inquiry
  • Grocery retailing is ‘workably competitive’ but:
    • Barriers to entry
    • Limited incentives for Coles and Woolworths to compete aggressively on price
    • Little price competition from independent sector
  • Aldi’s entry has had a dynamic impact
  • Nothing ‘fundamentally wrong’ with the grocery supply chain
  • But significant buyer power for Coles, Woolworths and Metcash
the 2008 accc grocery inquiry1
The 2008 ACCC grocery inquiry
  • Grocery retailing is ‘workably competitive’ but:
    • Barriers to entry
    • Limited incentives for Coles and Woolworths to compete aggressively on price
    • Little price competition from independent sector
  • Aldi’s entry has had a dynamic impact
  • Nothing ‘fundamentally wrong’ with the grocery supply chain
  • But significant buyer power for Coles, Woolworths and Metcash
the 2008 accc grocery inquiry2
The 2008 ACCC grocery inquiry
  • Grocery retailing is ‘workably competitive’ but:
    • Barriers to entry
    • Limited incentives for Coles and Woolworths to compete aggressively on price
    • Little price competition from independent sector
  • Aldi’s entry has had a dynamic impact
  • Nothing ‘fundamentally wrong’ with the grocery supply chain
  • But significant buyer power for Coles, Woolworths and Metcash
the 2008 accc grocery inquiry3
The 2008 ACCC grocery inquiry
  • Grocery retailing is ‘workably competitive’ but:
    • Barriers to entry
    • Limited incentives for Coles and Woolworths to compete aggressively on price
    • Little price competition from independent sector
  • Aldi’s entry has had a dynamic impact
  • Nothing ‘fundamentally wrong’ with the grocery supply chain
  • But significant buyer power for Coles, Woolworths and Metcash
issues for the competition laws
Issues for the Competition laws

“Part IV (of the Competition and Consumer Act 2010) seeks to prevent conduct that may lessen competition, not to protect less competitive businesses. The distinction is an important one.”

Dawson inquiry p.29.

issues for the competition laws1
Issues for the Competition laws
  • Mergers
    • Are creeping acquisitions a problem?
  • Abuse of market power
    • Should we have an effects test?
  • Buyer power and unconscionable conduct
    • Do we need the law clarified?
takeaways
Takeaways
  • Given market structure, our supermarket sector is surprisingly ‘workably’ competitive
  • The key findings of the 2008 ACCC inquiry still hold
  • Key legal issues is clarifying unconscionable conduct