The Australian competition watchdog’s decision to block the sale of retailer Franklins to local distributor Metcash has highlighted the heavily concentrated nature of the grocery industry in the country.
With only two major players in the market, the deal would have given Metcash a leg-up in competing with the leaders of Australian retail, Coles and Woolworths Ltd.
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The Australian Competition and Consumer Commission argued the move would have led to a “substantial lessening of competition” in what is already a highly concentrated market. The top three grocery retailers, Woolworths, Coles and Metcash – through its distribution deals with independent IGA operators – hold more then 76% market share in the country, according to Planet Retail data.
Metcash, is the country’s largest wholesaler and distributor servicing independent grocery retailers, while Franklins is a discount focused supermarket chain, operating 80 corporate-owned and eight franchised outlets in New South Wales. Franklins, owned by South African retailer Pick n Pay, has been losing market share in recent years.
The ACCC blocked the deal on the grounds that it would effectively give “Metcash a monopoly on grocery wholesaling to independent supermarkets in NSW”.
ACCC chairman Graeme Samuel said: “Barriers to entry in this market are already high, making timely new entry of a competitor to Metcash unlikely if this transaction proceeds.”
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By GlobalDataThe regulator added that Franklins’ ability to offer the full range of services means Metcash faces competition in wholesaling services, terms, rebates and prices, to the advantage of independent retailers.
The acquisition was blocked due to issues in distribution rather than the retail channel.
However, Metcash only accounts for some 13% of Australia’s food retail market, so on the retail side, the deal would have gone some way to bridging the gap towards Woolworths and Coles. The acquisition would have also given Metcash a retail presence as well as an opportunity to operate larger stores. On the whole, the IGA stores Metcash supplies tend to be smaller supermarkets on high streets of around 600 square metres, where Coles and Woolworths tend to be anchor tenants in shopping centres, with stores of around 2,000 square metres.
In an announcement to the South African stock exchange, Franklins owner Pick n Pay said in early October that, if the ACCC blocked the sale to Metcash, it would put the stores up for sales either individually or in groups via a tender process.
Responding to the ACCC’s decision, Metcash CEO Andrew Reitzer said he was concerned the decision would lead to Coles and Woolworths acquiring a significant number of Franklins stores.
“Despite the ACCC’s proposed scrutiny of each acquisition, past experience has shown that the national chains will be able to acquire a number of the Franklins stores. This will simply entrench their dominant position by lifting their market share in NSW to the highest level of any state in Australia,” he said.
Rietzer has much to be concerned about in this regard, as Woolworths chief executive Michael Luscombe yesterday (18 November) expressed interest in acquiring the chain at the its AGM.
“On Franklins, we’ve already said publicly that under the criteria that we understand, and we have been party with the ACCC in evaluating acquisitions, a number of the Franklins stores that we believe we may be in the position to acquire,” Luscombe said.
While the proposed deal may be off, Metcash is unlikely to struggle as it pursues continued growth following its move into DIY with its acquisition of Mitre 10 last year. Where the failed deal may have some impact, will be if one of the larger two operators takes individual stores off the table, leading to fewer distribution opportunities.
However, all is not lost for Metcash, if the stores are sold off in a piecemeal fashion to independent operators, the possibility remains that Metcash will pick up some of their distribution agreements, allowing it to continue to focus its energies on its area of expertise – distribution.
While the influence and size of Australia’s leading grocery retailers has been steadily increasing, and retailers like Franklins have struggled, the country is not been percieved as a closed shop to foreign operators.
Recent years have seen opportunities for new formats in the country, with Costco entering in 2009 while Aldi entered in 2001 and has built up a network of more than 200 stores. Despite Costco’s complaints about its inability to find suitable sites, for retailers able to differentiate themselves from the competition there are still opportunities.
For example, there is no premium operator of the ilk of Marks and Spencer or Waitrose operating in the country, with most consumers still buying premium products from small delicatessens.
While Australia’s streets and shopping centres may be busy, there are still opportunities yet.
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