Test case for competition definitions

While a lot of attention is being given to debate over the rights or wrongs of deep discounting of grocery products – with the case study on milk occupying a lot of resources and newsprint columns – a different grocery battle is playing out this week.

The tightness of competition in the grocery market over the past couple of years has gradually chipped away at the market share held by the independent grocer. Despite the strength of the convenience of smaller grocery outlets to shoppers, the intensity of the promotional campaigns of Coles and Woolworths have neutralised the growth in share of spending in smaller stores. Given the difficulties in gaining reliable data from independent outlets as a whole, the only place this effect shows up is in the results of Metcash, the wholesale supplier of products to most independent retailers including IGA stores.

In early March, the company downgraded its earnings outlook, saying its bottom line would only rise by 3 to 5%. It seems the bad news given by that company last year about “difficult trading conditions” has gotten a bit worse, as its earnings update suggested it had been forced to cut prices to keep pace with the price war being waged between the major chains. Metcash faces a deeper challenge when faced with aggressive price competition, as the wholesale margins associated its business model makes it difficult for its retail customers to compete with their bigger rivals.

One way Metcash could head off this spiral is to continue to grow volumes, buy gaining more customers. Metcash wants to buy the 80 stores, mostly in NSW, of the failed Franklin’s chain which were put on the market by its parent last year. That would have helped increase the scale of Metcash operations but the ACCC deemed the purchase would have reduced competition in NSW. Some interesting arguments arise from this view – the definition of “market” for one, as ACCC is concerned that this makes the wholesaler too dominant for its liking in NSW, while the bigger picture begs a different interpretation.

This has incensed the boss of Metcash (Trevor Reitzer) who already had taken ACCC chair Graeme Samuels off his Christmas card list since the 2008 grocery inquiry. They brawled bitterly when the ACCC shone a torch on arrangements between Metcash and its retail customers, which was an unintended consequence of the politically-inspired inquiry into, ironically, why consumers pay too much for groceries. That same issue about limitations of choice for retail customers seems to be at the core of the current dispute between Metcash and ACCC. Despite the competition regulator’s disapproval of the Franklins deal, Metcash said it will ignore the ruling, and now a lot of lawyers are feasting on the case.

There’s more than the Metcash CEO who didn’t like the assessment. A Senate economics references committee – the same group trawling through the milk business – ran its own investigation into the ACCC’s decision to block Metcash. This was the first time that a political review process had examined a decision by the independent competition regulator, but came after several years of noisy complaint from the usual suspects of outspoken senators and MPs about the effectiveness of the ACCC.

The ultimate court decision is eagerly awaited as an interesting test case for competition in the grocery market.