It’s not often that the topic of competition law grabs the attention of the public. Competition law is mainly the domain of specialist lawyers, economists, some politicians and the odd journalist. However, one aspect of competition law that does command broader attention is where it involves supermarkets, shopping and retail.
Woolworths Ltd is Australia’s largest grocery and liquor retailer. It operates over 800 supermarkets across Australia. Woolworths’ other operations include liquor, general merchandise stores, hardware and home improvement. Its brands include Woolworths, Safeway, Dan Murphy’s, BWS, Big W, Tandy and Masters (a joint venture with US company, Lowes).
Wesfarmers is Australia’s largest employer, with over 200,000 employees. It operates over 750 supermarkets in Australia, in addition to other operations including liquor, general merchandise stores, hardware and home improvement. Its brands include Coles, Liquorland, Vintage Cellars, Officeworks, Target, Kmart and Bunnings.
Metcash promotes itself as the “third force” in the Australian grocery retailing market. Operating on a different model to Wesfarmers and Woolworths, it supplies to independently owned stores operating brands including IGA, Franklins, Foodland (SA) and Lucky 7. With an overall revenue of $13.1bn, its food and grocery division accounts for $9.1bn. It wholesales through Australian Liquor Marketers (wholesalers) and supplies Cellarbrations stores. Metcash also operates Mitre 10 hardware stores.
Aldi commenced operations in Australia in 2001. It now operates over 300 stores across NSW, Victoria, Queensland and ACT. It intends to expand into SA and WA. Aldi supplies goods including food and groceries, liquor and general merchandise all under the Aldi brand.
Costco commenced operations in Australia in 2008. It now operates 3 stores across NSW, Victoria and ACT. Costco supplies goods including food and groceries, liquor and general merchandise all under the Costco brand. It intends to open further stores across Australia.
The media often reports, and politicians regularly comment, on the dominance of two particular players, namely, Wesfarmers and Woolworths. In the context of supermarkets they are sometimes referred to as MSCs (Major Supermarket Chains). The discussion though can sometimes be broader than the relationship between supermarkets, suppliers and consumers and can extend to liquor and hardware.
Primarily, commentary is given on the relationship between MSCs and their suppliers, and allegations that suppliers are taken advantage of by MSCs. An additional angle that is sometimes not emphasised relates to the choices available to consumers, both with respect to retailers and product lines.
What is the ACCC doing?
In February 2013, the ACCC released a statement of its enforcement priorities for 2013. Of particular significance, the ACCC is currently investigating allegations of cartel conduct, anti-competitive agreements and misuse of market power in the supermarket sector. In addition, the ACCC is also looking into the related areas of hardware and liquor.
The ACCC has stated that it is concerned about allegations of misuse of powers by MSCs and further whether MSCs have engaged in unconscionable conduct with respect to their dealings with suppliers. Anecdotally, the difficulty with such investigations is said to be the reluctance by suppliers to come forward for fear of being victimised and their contracts with MSCs terminated.
In his appearance before Senate Estimates on 13 February 2013, ACCC chairman Rod Sims indicated that there were investigations underway, which flow largely from an imbalance of bargaining power which have potentially considerable economic and financial impact on suppliers. This includes:
- Failure to pay suppliers in accordance with agreements.
- Unreasonable demands including additional payments from suppliers not otherwise chargeable or agreed.
- Seeking to impose penalties on suppliers not otherwise chargeable or agreed.
- Unreasonable demands and conditions being put on suppliers by threat of product removal.
- Favouring home-brand products to the detriment of suppliers.
It is anticipated that the ACCC will conclude its investigations in the next few months.
In terms of policy, the ACCC has announced that it is developing a super market code, which addresses supply chain issues and which contains enforceable provisions. It is due to release its proposal for the code shortly.
It is also taking a proactive approach and has announced that it aims to facilitate collective bargaining with primary producers. To some extent, this may assist counterbalance the power wielded by MSCs.
The ACCC will also express its views to MSCs in the context of mergers and acquisitions. Over the last 10 to 15 years, MSCs have been acquiring a number of smaller independent supermarket chains and individual stores and absorbing them into their operations. Further, the MSCs have also sought to acquire individual sites or enter into agreements with respect to future development sites in order to “stake” their position. As the population of Australia grows and likewise there is an urban sprawl in the outer suburbs of most capitals, the MSCs have sought to acquire and enter into agreements in key expansion areas. The ACCC reviews such proposals and recently did not provide clearance with respect to a particular proposal, as is discussed below.
M&A: ACCC tries to engage with MSCs
The ACCC sought to develop and agree, with Coles and Woolworths, an assessment protocol for single supermarket acquisitions. This protocol also related to new supermarket developments, for a limited trial period. Whilst Coles agreed, Woolworths did not.
Whilst the ACCC sought to extend the protocol to acquisitions to liquor and hardware, none of the relevant players would agree.
The proposed protocol was sold to the MSCs on the basis that it would provide benefits for both the ACCC and MSCs, to expedite pre-assessments and truncate timelines for the first stages of a merger review.
Despite the proposed protocol not being enforceable but merely a guide, some of the players said that they would voluntarily cooperate outside of the protocol. For example, Bunnings agreed to continue its practice of notifying the ACCC of any proposed store acquisitions on a voluntary basis. Related company, Coles, indicated that it would only notify liquor acquisitions at its discretion.
Woolworths indicated that it would continue to notify the ACCC of specific but limited types of acquisitions, as it has done in the past. That said, it said it may consider providing further information up front at its discretion.
It should be noted that the ACCC is currently reviewing its merger process guidelines generally.
Woolworths and Glenmore Ridge: ACCC says no
Woolworths currently intends to develop a supermarket at a site at Glenmore Ridge. This suburb is located on the outskirts of Sydney metro area. Adjacent to Glenmore Ridge is the suburb of Glenmore Park. Woolworths already has a store there.
At present, there are no other supermarkets in those two suburbs. Aldi intends to open a supermarket there in 2014.
Woolworths sought clearance from the ACCC regarding its proposal to establish a supermarket at Glenmore Ridge. The ACCC concluded that the proposed acquisition would be likely to result in a substantial lessening of local supermarket competition.
The ACCC determined that one of the issues relevant to its consideration was that there were no other supermarkets in the area. There are other supermarkets located in nearby in South Penrith operated by Coles and IGA. However, these were all on the other side of the busy M4 motorway and as such were considered by the ACCC not to be in an area convenient to residents.
By opposing the acquisition of the site by Woolworths, the ACCC perceives that “by having another MSC or player would stimulate local competition and provide greater choice to residents of the area. ACCC believes that loss of choice would be significantly detrimental to local consumers.”
Recently the topic of whether the ACCC has sufficient powers has also entered into the discussion; whether enough action is being undertaken in relation to discounting, predatory pricing, and regulation of the industry.
The Nationals, for example, have been pushing for a specialist regulator covering supermarkets. The idea comes from the UK, where a regime has been established with a Groceries Code Adjudicator. The Adjudicator has the power to fine supermarkets if they do not comply with a new code of conduct that has also been established.
To some extent this push has subsided given the ACCC’s indication of developing a Supermarket Code. Time will tell as to what aspects of the proposed Code will be enforceable. In any event, the ACCC does have quite significance range of tools and remedies available to it at present.
Bob Katter MP recently introduced the Reducing Supermarket Dominance Bill 2013. This Bill, as the title suggests, apparently aims to address Australia’s highly concentrated grocery market. Two key aspects of the Bill are:
- to reduce market share for supermarkets to 20% over six years through “enforced progressive divestiture” where necessary, and
- the introduction a Commissioner for Food Retailing to enforce the 20% market share limit and to promote the competition and fairness principles as outlined in the proposed laws.
Rob Oakeshott MP also recently introduced the Competition and Consumer Amendment (Strengthening Rules about Misuse of Market Power) Bill 2013. This Bill attempts to protect grocery food supply chains and suppliers. However, in contrast to the Katter proposal, the Oakeshott Bill involves extending the ACCC’s powers to look at how competition operates in the supermarket supply chain.
The Oakeshott Bill also creates a broader, less onerous “reasonably likely” threshold for misuse of market power. This would allow the ACCC to pursue corporations that it cannot under current laws, which apply a “substantial lessening of competition” test.
The above Bills are similar to one foreshadowed by Senator Nick Xenophon. Mr Xenophon also has indicated an intention to introduce divestiture laws. However, Mr Xenophon’s plan was to allow the ACCC to apply to the courts to break up companies engaged in anti-competitive conduct, including abuse of market power.
Whether it is the area of consumer protection, the “protection” of suppliers or competition law generally, the ACCC has demonstrated a commitment and indicated its intentions with respect to the multitude of challenges regarding supermarkets. The topic resonates with consumers – consumers want to ensure they are paying the right prices, have a genuine selection of goods and that it is not to the detriment of suppliers.
Competition in supermarkets is a complex issue. Sometimes what may be a short term benefit for consumers – say milk price discounting – may really be a long term loss which impacts on competitors from entering the market and which also results in alleged supplier problems. The ACCC is actively working at addressing these issues, and will report soon with respect to the development of a Supermarket Code.