Following an agreement with the Australian Competition and Consumer Commission (ACCC), the country’s two largest retailers, Coles and Woolworths Ltd, will no longer be permitted to include restrictive terms regarding letting space to competitors in lease agreements with shopping centres. Ben Cooper assesses reaction to the announcement.
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It would seem apt that the arrival of US retailer Costco in Australia has been followed by the Australian Competition and Consumer Commission (ACCC) putting an end to restrictive provisions in lease agreements under which Australia’s two largest retailers could effectively prevent competitors from opening in shopping centres where they had stores.
Woolworths Ltd and Coles have bossed the Australian grocery sector for years, and concerns that there is insufficient competition in the marketplace, adversely affecting consumer choice and retail prices, precipitated an inquiry into the grocery sector by the ACCC last year.
The degree to which the balance of power will be altered by the arrival of Costco, or the rapid expansion of German retailer Aldi, remains to be seen. But the latter for one is expecting to benefit from the ACCC announcement.
The ACCC’s intervention – though in fact a voluntary agreement has been reached with Woolworths and Coles – was welcomed by Competition Policy and Consumer Affairs Minister, Craig Emerson, who said that “barriers to entry in shopping centres that have had restricted competition for so long to the detriment of consumers are being torn down”.
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By GlobalDataShadow Minister for Competition Policy and Consumer Affairs Luke Hartsuyker also welcomed “any measure which encourages more competition in the marketplace”.
The rhetoric was much the same from ACCC chairman Graeme Samuel. He described the announcement as a “major breakthrough” for competition in the grocery sector. “Reducing the barriers to entry for new and expanding players opens the possibility for Australian consumers to have greater choices in where to shop, and potentially pay lower prices as a result,” he said.
Aubrey Zelinsky, managing director of Franklins, which is owned by South African retail group Pick ‘n Pay, also welcomed the announcement. However, he called for the Australian government to insist that all such leases are terminated immediately. Under the settlement, some 80% of the 750 affected leases would cease immediately, with the remaining 148 to be phased out over five years. No restrictions will be allowed for new stores openings.
Meanwhile, executive director of the Australian Retailers Association, Russell Zimmerman, said the announcement “allows new entrants to the supermarket and grocery sector, including Aldi, to take out leases in shopping centres where they have previously been excluded”.
For its part, Aldi clearly expects to benefit from the change. Following the ACCC announcement, Matthew Barnes, Aldi’s buying managing director, said the end of restrictive lease terms represented “a major step forward in removing a manifestly anti-competitive practice” from the Australian supermarket sector.
“Restrictive provisions in supermarket leases have been one of the most significant barriers to our ability to expand the Aldi network here in Australia,” Barnes said. “Our submission to the ACCC last year highlighted this issue and the subsequent effect of depriving Australian consumers of greater choice and lower prices for their groceries.”
Barnes said the retailer’s already prodigious rate of expansion would have been faster had it not been for the restrictive practices. “Over the last ten years Aldi’s expansion has been significantly impeded by an inability to access leased retail space in shopping centres along Australia’s eastern seaboard. Since the release of the ACCC findings into grocery competition in July last year, we have been in constructive discussions with the ACCC and the Government seeking a resolution.”
Prior to the ACCC announcement, Aldi was expecting to open at least 30 new stores a year. According to press reports, Aldi Australia booked a profit of A$72.6m (US$63.4m) in 2008, with sales thought to be between $2.1bn and $3bn.
Planning reform was one of the areas identified for attention by last year’s ACCC inquiry. But there is disagreement over the degree to which the settlement with Coles and Woolworths will increase competition and benefit consumers.
Ken Henrick, chief executive of the National Association of Retail Grocers of Australia (NARGA), which represents smaller grocers, believes the agreement will have “no impact whatsoever”. He told just-food it was a “fantasy” to suggest this measure would “change anything at all” given the reality of market power and market concentration. He said that shopping centre landlords would still have discretion in allowing other food retailers access to new sites, and larger tenants were in a position to “exert pressure”.
But Aldi’s managing director Michael Kloeters has said in the past that he believes shopping centres are “quite keen” to have an Aldi store because of the footfall it brings. Milton Cockburn, who heads up the Shopping Centre Council of Australia, said his members were delighted with the ACCC announcement.
However, Henrick said the change would have no benefit for the smaller retailers that make up NARGA’s membership, and it would not help to increase competition in local markets or address concerns over consumer prices.
During the ACCC inquiry, NARGA called for planning reform to address the issue of local competition, specifically advocating a competition test before approving new store openings. Henrick said reform needs to be coordinated nationally instead of measures being introduced piecemeal by state and territory governments.
Of primary concern to consumer groups is that the lack of competition in local markets distorts grocery pricing. With that in mind, the ACCC introduced a price check website last year. It was arguably the most high-profile initiative to come out of the ACCC inquiry. However, the GroceryChoice.com initiative appears to have been a total failure, roundly criticised from all quarters. The website has now been closed and the ACCC’s handling of the initiative is the subject of a Senate inquiry.
Intuitively, one would imagine that the removal of restrictive covenants, and in particular the possible acceleration of Aldi’s already rapid expansion, may begin to have some impact on the level of competition in the Australian grocery sector.
The advent of Costco must also be seen as positive in terms of giving consumers greater choice and increasing competition. However, reservations have been raised as to whether the Costco membership format, which works best in densely populated locations, is suited to the Australian market. Nevertheless, Costco plans to open a second store in Auburn to the west of Sydney next year.
