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April 7, 2008

Market share dispute at heart of ACCC inquiry

With the Australian Competition and Consumer Commission (ACCC) probing grocery pricing in the country, independent retailers last week reiterated claims that the dominance of Australia's two largest food chains is restricting competition and pushing up prices. At the centre of the debate is a wide divergence between the market share estimates of both sides, writes Ben Cooper, so the ACCC's own statistics will be eagerly awaited.

With the Australian Competition and Consumer Commission (ACCC) probing grocery pricing in the country, independent retailers last week reiterated claims that the dominance of Australia’s two largest food chains is restricting competition and pushing up prices. At the centre of the debate is a wide divergence between the market share estimates of both sides, writes Ben Cooper, so the ACCC’s own statistics will be eagerly awaited.

The war of words between the group representing Australia’s independent food retailers and the two major supermarket chains, Coles and Woolworths, looks set to rage until the Australian Competition and Consumer Commission (ACCC) publishes its report into grocery pricing at the end of July.

The battle was once again stoked last week when John Cummings, chairman of the National Association of Retail Grocers of Australia (NARGA), reiterated in a speech to the National Press Club in Canberra the group’s contention that the dominant position of Woolworths and Coles is to the detriment of Australian consumers who are paying too much for their groceries in comparison with other developed countries.

Importantly, Cummings restated what NARGA has said in its submission to the ACCC, that Woolworths and Coles have a combined market share of close to 80%. This is disputed by Woolworths, which claims to have a share of 30%, with Coles holding around 25%.

The ACCC has a range of issues to examine. In its brief, it states that it will look at the structure of the grocery industry at the supply, wholesale and retail levels including mergers and acquisitions by the national retailers; the nature of competition at the supply, wholesale, and retail levels of the grocery industry; the competitive position of small and independent retailers; the pricing practices of the national grocery retailers and the representation of grocery prices to consumers; factors influencing the pricing of inputs along the supply chain for standard grocery items; and any impediments to efficient pricing of inputs along the supply chain.

There are clearly principles of what constitutes fair or unfair competition to be addressed, along with the practical question of whether having only two major players competing with one another does result in higher prices at the checkout. Central to the review, however, will be an accurate assessment of market share. While it is not surprising that the two sides in such a fierce debate differ in their estimations of market shares, it is unusual for the divergence to be so wide.

In its submission, NARGA states that Woolworths and Coles had a combined share of what it defines as the grocery market in 2006 of 79%, with Woolworths controlling 44% and Coles 35%. This estimate is contained within a report it commissioned from Price Waterhouse Coopers prior to the announcement of the ACCC review, and is based on AC Nielsen data and figures from the Australian Bureau of Statistics (ABS).

Woolworths insists that this is an overestimate because the NARGA figures underestimate the size of the total market. NARGA, on the other hand, believes that taking a “whole of stomach” view of the market itself distorts the market share question.

“It is correct to say that figures we’re referring to are scanned data for branded packaged grocery goods,” says NARGA chief executive Ken Henrick. “The largest section in any supermarket is branded packaged goods so it is therefore a valid proxy for the supermarket sector.” NARGA alleges that Woolworths underestimates its share because it includes in the total market sectors which it does not operate in.

Woolworths, however, states that it has a 31% share of the “take-home food and groceries market”, with Coles holding around a 25% share on the same basis. Woolworths says its figure is derived from Australian Bureau of Statistics sources as well as data released by other food retailers.

Woolworths also states explicitly that the figure does not include sales of food from cafés, restaurants or takeaway outlets. “NARGA’s oft-quoted figure of 80% excludes any weighed produce, such as fruit and vegetables, and only includes other, mostly major, retailers who supply scanned data,” Benedict Brook of Woolworths explains. “It excludes many supermarkets and most independents.”

NARGA also contends that the level of competition has a direct bearing on local pricing, with consumers paying more in areas where the two majors dominate. This particular question was given some added piquancy by a timely intervention by the German discounter, Aldi, last week.

Aldi announced that it would be introducing national pricing for its operation in Australia. There is little doubt that Aldi’s decision to make this move at the current time is opportunistic. Meanwhile, both sides of the debate agree that Aldi is able to do this because it has a far more restricted product range – around 700 lines – and only operates in a limited geographical area.

As Brook points out: “Woolworths already has over 3,000 items priced on a national scale – far greater than Aldi’s entire number of products in-store. It should be noted that although Aldi may like to think it is introducing ‘national’ pricing, it only has stores in three states of Australia and none in remote areas, in stark contrast to Woolworths which as stores from coast to coast.” Aldi’s announcement is therefore something of a distraction but has served to focus yet more attention on the issue of variable pricing.

The central question for the ACCC to answer before it grapples with anything else, therefore, will be an accurate assessment of market share. Interestingly, on this both sides appear united.

“They must establish what the market share is,” says Henrick. “If they say Woolworths has only 30% of the market then why are we having a grocery pricing inquiry? If they establish the big two have 80% it is clear we have gone beyond competition theory into a state of hyper-competition where normal competition theory doesn’t apply anymore.”

Benedict Brook adds: “It’s a very complicated issue and I look forward to the ACCC getting to the bottom of it.”

However, as John Cummings suggested in his speech last week, NARGA is not hugely confident that the ACCC will come up with what it believes is the right solution. While Henrick pointed out that Cummings’ comments had been slightly misrepresented, NARGA suggests that the regulator has not had a record for taking a strong stance on these issues.

However, one additional factor to put into the equation is the changing political landscape. The incoming Labour administration has expressed far more concern about the possible lack of competition in the grocery sector than previous governments, and initiated the latest review soon after taking office. Just how much difference the change of government has actually made will become clear when the results of the review are published and the Government gives its reaction.

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