Rising Grocery Prices and Australia's anti-trust law

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Rising Grocery Prices and Australia's anti-trust
law
ABA Section of International Law Committee on
International Antitrust Law

• Wolfgang Hellmann

21 May 2008
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AUSTRALIA - Grocery Industry Antitrust Law

• Structure of Australia's Grocery Industry
• Merger Review in the Grocery Industry
• Charter to promote independent sales of
  supermarkets (2005)
• Grocery Inquiry

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1. Structure of Australia's Grocery Industry

• Suppliers
• National and regional producers
• Overseas suppliers and importers
• Wholesale
• Woolworths (vertically integrated)
• Coles (vertically integrated)
• Metcash ("independent")

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1. Structure of Australia's Grocery Industry

• Retail
• Woolworths (750 supermarkets / 44 market
  share)
• Coles (500 / 34)
• Independent Retailers/Banner Groups (4,000 /
  18)
• Typically medium-sized retailers with smaller
  range of products (eg. IGA)
• New entry in 2000 Germany's Aldi (300 / 4)
• Mainly private label and less recognised
  "cheaper" brands
• Specialist retailers with single product
  category not part of the supermarket market
• NOTE market data only indicative

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2. Merger Review in the Grocery Industry

• Section 50 of the TPA prohibits any acquisition
  of shares or assets that would result in a
  "substantial lessening of competition" in a
  "substantial" market in Australia.
• No mandatory pre-merger notification requirement
  in Australia (unlike in the US EU, similar to
  UK regime)
• Standard practice of seeking "informal clearance"
  from the regulator if competition concerns
• The regulator, the Australian Competition
  Consumer Commission (ACCC), has the power to seek
  injunction from the Court to stop a merger from
  proceeding

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2. Merger Review in the Grocery Industry

• Since 2005, the ACCC has reviewed
• 13 acquisitions in the grocery industry
• Metcash / Foodland 2005 82 stores
• Woolworths / Action Stores 19 stores (1
  divestiture)
• others only one supermarket ("creeping
  acquisitions")
• further acquisitions in the liquor industry
• Expansion strategy of the two national retailers
  was to acquire independent stores in locations
  where they are not yet present
• no geographic overlap no SLC
• effect of "creeping acquisitions" on wholesale
  level and demand side?

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2. Merger Review in the Grocery Industry

• Definition of the relevant grocery markets
• Supermarket retailing - local
• Provision of a bundle of grocery products to
  consumers within a local geographic area
• Delimitation of the relevant geographic area
  depends on local circumstances (particularly,
  consumers' purchasing pattern)
• Supermarket wholesaling national or State-based
• Market in which supermarket wholesalers supply
  products to supermarkets for retail sale, either
  nationally or State-based
• Supermarket procurement markets national or
  regional
• National or regional (eg. perishable products)
  markets for the procurement of the various
  products sold by supermarkets

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2. Merger Review in the Grocery Industry

• Horizontal Acquisitions
• ACCC clearance if no geographic overlap or if
  sufficient competition in relevant geographic
  area
• Note Convenience stores constrain supermarkets
  only to a limited extent service - but not
  price
• If geographic overlap divestiture may be
  available to address competition concerns (eg.
  Woolworths / Action Stores in 2005)
• Barriers to entry
• Access to suitable sites
• Economies of scale

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2. Merger Review in the Grocery Industry

• Creeping acquisitions
• Definition several acquisitions of independent
  retailers, each resulting only in a small
  increase in concentration with little effect on
  competition
• Issue While each single acquisition (assessed
  individually) is unlikely to result in a
  substantial lessening of competition (absent
  local competition issues), a series of
  acquisitions may have a significant cumulative
  effect on competition.

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2. Merger Review in the Grocery Industry

• Creeping acquisitions 3 main ACCC concerns
• Loss of sales volumes and loss of scale economies
  of the independent wholesalers vis-à-vis
  Woolworths and Coles
• Loss of the independent wholesalers' bargaining
  power with suppliers vis-à-vis Woolworths and
  Coles
• Increase of the buying power of Woolworths and
  Coles with the suppliers

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2. Merger Review in the Grocery Industry

• Theories of competitive harm ("vicious circle")
• Higher cost of independent wholesalers
• If absorbed by independent wholesalers, this will
  result in less retail support and customer
  service in the short run
• In the long run, independent wholesalers will
  pass on higher cost to independent retailers,
  which will become less price competitive
• Consumers will switch from independent retailers
  to Woolworths or Coles
• Further Increasing risk of oligopsony power by
  Woolworths or Coles on the demand side

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3. Charter to promote competitive sales of
independent supermarkets

• Charter took effect on 1 July 2005
• Good-faith commitments by the "Big Three"
  wholesalers (Woolworths, Coles Metcash)
• Objective
• promote fair competition between potential buyers
  of independent supermarkets, particularly by
  ensuring competitive bidding process
• benefit consumers by promoting competition in the
  supermarket sector, particularly by helping to
  address concerns about creeping acquisitions

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3. Charter to promote competitive sales of
independent supermarkets

• Party must not in connection with the acquisition
  of a supermarket prior to entering into a Sale
  Agreement
• seek to secure from the Independent Retailer the
  right to exclusively negotiate or to otherwise
  prevent or inhibit the owner of the supermarket
  from dealing with other parties to secure the
  best price for the supermarket or
• otherwise act to limit the right or ability of
  the Independent Retailer to seek other potential
  purchasers for the supermarket or frustrate the
  attempts of the Independent Retailer to do so,
  including by imposing unnecessarily broad
  confidentiality obligations.

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3. Charter to promote competitive sales of
independent supermarkets

• If a Party considers that another Party has
  breached the Charter, these Parties will, in good
  faith, seek to agree on whether a breach has
  occurred and, if so, negotiate an appropriate
  outcome.

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4. Grocery Inquiry

• Background
• Recent OECD data suggests that food price
  inflation has been much higher in Australia than
  in other OECD countries
• Australia's new Labour Government includes (for
  the first time) a "Minister for Competition
  Policy Consumer Affairs" (Chris Bowen)
• On 22 January 2008, Mr Bowen directed the ACCC to
  commence a formal inquiry into grocery prices

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4. Grocery Inquiry

• The "heart" of the grocery inquiry is a public
  consultation process, including public hearings
  in all major cities in Australia
• The ACCC has used its compulsory information
  gathering powers (section 155 TPA)
• The final ACCC report is due by 31 July 2008

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4. Grocery Inquiry

• The inquiry covers the following matters
• structure of the grocery industry at supply,
  wholesale and retail level ("farm gate to cash
  register")
• mergers and acquisitions by national retailers
• nature of competition
• competitive position of small and independent
  retailers
• pricing practices
• factors influencing the pricing of inputs and any
  impediments to efficient pricing of inputs