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Fair Competition Release: Master Grocers Australia

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LET’S HAVE FAIR COMPETITION!
The risk of losing retail diversity, choice and true competition in the Australian supermarket industry

NATIONAL SUPPORT OFFICE Master Grocers Australia Suite 5, 1 Milton Parade Malvern Victoria 3144 Phone: +613 9824 4111 Fax: +613 9824 4022 Freecall: 1800 888 479 Email: [email protected] Website: www.mga.asn.au

Master Grocers Australia Who We Are
‘Master Grocers Australia (MGA) and Liquor Retailers Australia (LRA)’ is the peak national employer organisation representing the independent sector of the supermarket and liquor retailer industry. MGA/LRA represents independently owned and operated supermarkets and liquor stores throughout Australia. These stores operate under banners such as Supa IGA, IGA, IGA Xpress, Friendly Grocer, Foodland, FoodWorks, SPAR, Supabarn, Cellarbrations, Bottle-O, IGA Liquor, Local Liquor, Duncans and Bottlemart. MGA is a registered employer organisation and represents its members in relation to workplace relations, training and compliance, and government relations. Australia’s independent grocery retailers employ 115,000 people, generating annual sales of $13 billion and together, they constitute the major competition for the chains.

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Contents
Foreword ...................................................................................................................... 5 Executive Summary ...................................................................................................... 7 Introduction.................................................................................................................. 9 1. Market Power and Competition ........................................................................... 10 1.1 Market Power of Major Chains Continues to Increase ................................. 10 1.2 Effects of Market Dominance ....................................................................... 13 1.2.1 Impact on Grocery Shoppers ............................................................ 13 1.2.2 Impact on Business Costs .................................................................. 13 1.2.3 Impact on Local Business .................................................................. 14 1.3 Floor Space as an Instrument of Market Power ........................................... 15 1.3.1 The Over-Sized Store Strategy .......................................................... 15 1.3.2 The Saturation Strategy..................................................................... 16 1.4 Floor Space Strategies in Practice ................................................................. 19 1.4.1 Premium Prices For Sites .................................................................. 19 1.4.2 ‘Competition’ and Development Controls ........................................ 19 1.5 Additional Strategies for Market Dominance ............................................... 20 1.5.1 Shopper Docket Schemes ................................................................. 20 1.5.2 Anti-Competitive Price Discrimination ............................................ 21 1.6 Previous Efforts to Stop Anti-Competitive Behaviour ................................... 22 1.6.1 ACCC Intervenes to Prevent Lessening of Competition .................... 22 1.6.2 Amendments to the Competition and Consumer Act....................... 25 1.6.3 Proving Purpose ................................................................................ 25 1.7 Effective Regulation for Increasing Market Power ....................................... 27 2. The Role Of Local Government Planning Decisions .............................................. 28 2.1 Local Government Planning .......................................................................... 28 2.1.1 Local Market Saturation .................................................................... 28 2.1.2 Recommendations for the Assessment of Floor Space Needs ......... 30 2.1.3 Determining the Impact on the Welfare of Local Communities ....... 30 2.1.4 Ensuring Retail Space Is Commensurate With Demand .................... 32

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2.2 Impact of Over-Sized Stores on Regional Economies and Markets............... 35 2.2.1 Bermagui, New South Wales............................................................. 36 2.2.2 Bright, Victoria .................................................................................. 38 2.2.3 Churchill, Victoria .............................................................................. 39 2.2.4 Macksville, NSW ................................................................................ 40 2.2.5 Summary of Impacts of Over-Sized Stores ....................................... 41 3. Consequences for the overall economy ............................................................... 43 3.1 Key Sources Of Market Power - Economies Of Scale And Scope .................. 43 3.1.1 Exploitation of Economies of Scale ................................................... 43 3.1.2 Exploitation of Economies of Scope .................................................. 43 3.1.3 Adverse Effects of Market Concentration on Social Welfare............. 44 3.1.4 Adverse Effects on Economic Efficiency ............................................ 44 3.1.5 Adverse Effects on Distributional Equity ........................................... 47 4. Conclusion and Recommendations ...................................................................... 48 Appendix 1 - Calculations of Floor Space Supply .......................................................... i Appendix 2 - Methodology for Assessing Floor Space Requirements ........................... i
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by John Wallace1 There is little public awareness of the adverse effects that the “competition” between Australia’s major supermarket chains is having on the welfare of Australians. While “perfect” competition between a large number of small suppliers can result in an efficient allocation and use of Australia’s resources, the same is not true of “imperfect” competition between Australia’s small number of major supermarket chains. Rather, such “imperfect” competition inevitably imposes a cost on the community by reducing both economic efficiency (e.g. by distorting patterns of consumption, production, investment and resource use) and distributional equity (e.g. by reducing the extent to which local governments are able to achieve their equity objectives for the residents of their respective regions). This report, which has been prepared by Master Grocers Australia, raises the concern that the major supermarket chains are ‘misusing’ their market power by constructing and cross-subsidising the operation of ‘over-large’ supermarkets in small local markets. In particular, the report outlines how this practice can reduce the welfare of Australians by reducing economic efficiency and distributional equity and presents evidence of this practice and its adverse effects drawn from both ACCC inquiries and Master Grocers Australia’s own research. As concluded by Master Grocers Australia, this evidence is sufficient to warrant further investigation by the ACCC to determine whether the major supermarket chains are cross-subsidising the construction and operation of large supermarkets in small communities in order to deter new entrants and eliminate existing competitors. John Wallace Director The Economist Network Pty Ltd

Foreword

1

John Wallace is the director and founder of The Economist Network. He is an economist with over 30 years of experience with economic and regulatory reform both in Australia and overseas. This includes 10 years as an Executive Director of Ernst & Young’s Economics, Regulation and Policy group; 11 years working for the New Zealand government as a consultant to the Regulatory and Tax Policy Division of the New Zealand Treasury and as Chief Manager of Policy Development for the New Zealand Inland Revenue Department; and 10 years working for the Industries Assistance Commission (now the Productivity Commission).

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by Associate Professor Robin Goodman Why Planning Policy Should Care About Diversity In The Australian Grocery Market When urban planners are charged with responsibility for approving applications for new developments there is a large range of factors they must consider. They must assess the impact on the existing urban form and character, amongst other things, and the generation of traffic, noise and other issues which impact on local amenity. The economic competition that a new business might provide for existing businesses is not generally considered a valid planning issue and cannot be utilised as an argument to oppose development. This report demonstrates however, that the practices of the two corporations who overwhelming dominate the grocery market in Australia, are having a serious impact on existing town centres in ways which should worry planners. Local government planners should be concerned about nurturing and protecting the existing town centre as a whole. This is not the same as acting to protect individual businesses. The value of a thriving town centre, with a concentration of independent small businesses, goes beyond the sum of its parts and the value of the businesses themselves. Town centres are not only business and employment centres, they are the social hearts of local communities. Traditional main street retailing provides a reason for people to gather, a place to meet and socialise, and a chance to connect and maintain a sense of community. This is particularly so in small to medium size towns where alternative gathering places may be some distance away. The loss of a key shop in a local strip shopping centre may lead to a decline in pedestrian traffic and the eventual closure of many businesses, as this report indicates. The large supermarket surrounded by its sea of car parking does not invite pedestrian traffic. Customers drive in and drive out, making isolated single destination visits. Planners are increasingly seeing a role for themselves in creating places which encourage walking and decrease car dependence. Main street shopping does this in a way that a large supermarket does not. The threat to the viability of small town centres that the arrival of over-sized supermarkets poses should not be ignored by those in a position to give approval. While the arrival of a Coles or Woolworths might seem initially like an economic boon to a small town, clearly, as this report suggests, the ultimate consequences may in fact harm the local economy. The net community benefit in the longer term needs to be clearly assessed. This report provides some evidence, and raises some important questions, regarding the deleterious effects of behaviour of the supermarket duopoly in smaller town centres. Clearly this is an area where a reconsideration of the current policy frameworks is required. Associate Professor Robin Goodman School of Global Studies, Social Science and Planning, RMIT University
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Foreword

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Executive Summary
The market dominance that Woolworths and Coles has built over the last three decades (market share of about 80% and rising) is progressively crowding out all competition from the market and thus rapidly reducing the choices in shopping format, product brands, locally derived products and service levels that the shopper can choose. Similarly, this relentless expansion is denying an outlet for local suppliers and manufacturers as their products are replaced by overseas sourced ones retailed as store brands. The impacts on local communities and local economies are often abrupt and severe. Master Grocers Australia believes grocery shoppers should enjoy the benefits of genuine competition, which consists of a diversity of retail offers, cheaper grocery products, a greater range of branded products, supported by a supply chain that makes more efficient use of Australia’s resources and results in a more equitable distribution of the available profits. This report reveals a number of anti-competitive policies and practices that depend on enormous market power, including: anti-competitive price discrimination, shopper docket schemes, ‘store saturation’ strategies and over-sized store strategies. These practices assist the growth of the dominant players by unfairly handicapping smaller independent competitors. For example, the major chains have a strategy in which they develop over-large supermarkets in small local markets, even where there is little or no population growth projected. This has the effect of preventing future market entrants and it destroys existing smaller competitors (and many small and medium specialty retailers who are not direct competitors). Such anti-competitive strategies are possible only for the major chains because they require cross-subsidies over an extended period to sustain the over-sized store. The situation is exacerbated by local government approvals of such over-sized store developments, with insufficient regard for their impact on the viability of existing businesses, community amenity or commercial property values. The concept of ‘Net Community Benefit’ (NCB) needs to find a more explicit and accountable expression in planning deliberations. Considerations of available choice, demonstrated need, diversity, escape spending, employment and impacts on existing retail centres. Therefore, MGA recommends that the ACCC: i. determines whether the major chains are cross-subsidising a substantial number of loss-making supermarkets for anti-competitive purposes and determine whether this is misuse of market power, and ii. revokes the authorisations issued to Coles and Woolworths in relation to shopper docket schemes between related entities.

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MGA also recommends that the Australian Government: i. reintroduces a prohibition on anti-competitive price discrimination similar to laws in other OECD countries;
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ii. repeals the provision allowing cross-subsidies between related entities; iii. develops a Retail Sustainability Assessment to assist local government to determine whether major retail development proposals are of appropriate size; iv. recommends to COAG certain specific changes to planning legislation to encourage improved planning of activity centres and new estates, and v. ensures the ACCC has the legislative power to require prior notification by the major chains of any proposed acquisition of a site, lease or existing business. (Refer to comprehensive list of recommendations in Section 4.)

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Introduction
The Australian grocery market is the most concentrated such market in the developed world. It is dominated by two large, vertically integrated competitors that offer almost identical ranges of goods and services and compete vigorously against each other. They are owned by two massive conglomerates that operate general merchandise, hardware and office supplies retail chains, hotels, packaged liquor and gambling, as well as mining and insurance ventures. This effective duopoly has led to a steadily growing series of complaints from suppliers, manufacturers, smaller competitors, public interest groups and customers. The nature of the complaints covers a broad spectrum of intimidating behaviour, unfair influence on decision makers, loss of diversity and choice for customers and unconscionable terms imposed on suppliers. The complaints have progressively become more frequent, insistent and widespread, resulting in formal enquiries by the ACCC and the Australian Senate. Fear of retaliation from the dominant buyer of their goods and services, ensures only a tiny part of the complaints by Australian manufacturers and suppliers is made public. It masks a much wider and deeper level of dissatisfaction and alarm with the current market structure and the trading practices which naturally grow from near absolute market power, but are hurting local manufacturers and growers while boosting imports. Similarly, the customer is facing increasing market concentration and loss of diversity and true competition. They are increasingly being denied the choices in local brands and varieties they once enjoyed, as store branded generics displace them from supermarket shelves. Shoppers are finding it harder to access the alternative store offers, based on convenience and personal service, provided by independent supermarkets as these stores are being crowded out of the market. Many also resent being caught up in a spiralling web of cross-promotions involving fuel and other goods and services. This report does not seek to present a detailed analysis of the nature, extent and effects of these anti-competitive practices. Such a task is well beyond the scope of this report but could well be included in any future detailed inquiry. Rather it draws attention to evidence of a number of strategies by the supermarket duopoly which are essentially anti-competitive and damaging to the domestic economy. Master Grocers Australia urges action on a number of specific matters to prevent further market concentration damaging Australian manufacturing and true retail competition.

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1. Market Power and Competition
This part outlines the key features of the Australian supermarket industry and some of the issues which need to be addressed if genuine competition is to be sustained. It draws attention to the anti-competitive strategies and practices of the two dominant supermarket chains in achieving a virtual duopoly, the consequences of this market structure and some implications for federal competition law.
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1.1 Market Power of Major Chains Continues to Increase
The independent supermarket sector includes more than 4,000 independently owned and operated supermarket and grocery stores, of which 2,100 are branded and operate under the banners Foodland, FoodWorks, Supa IGA, IGA, IGA Xpress, SPAR, Supabarn and Friendly Grocer. Independent stores turn over an estimated $13 billion in retail sales and employ a total of more than 115,000 people (full time, part time and casual). They form the largest block of competitors against the two major chains, Woolworths and Coles. Woolworths and Coles account for about 80 per cent of the Australian grocery market. This is believed to be the most extreme example of grocery market domination in the developed world. By comparison, the largest two supermarket chains in the United States of America account for only 20 per cent of the national grocery market and in the United Kingdom, the top five chains account for about 83 per cent of the market. This situation arose over the past three to four decades. In 1975, Woolworths and Coles jointly held only about 34 per cent of the Australian grocery market. Their rapid growth since then has been due to various strategies, including the acquisition of green field sites, creeping acquisitions of independent supermarkets and the development of anti-competitive covenants. However, as evidenced in this report, store acquisitions and developments by Woolworths and Coles since 2009 together with a significant number of new store proposals, suggest their current combined share most probably exceeds 80 per cent. The following diagram illustrates the two major chains’ growth in market share from 1975 to 2009. More recent store openings and acquisition of sites by the two chains is likely to have translated into further sales increases and further market share growth, pushing the chains’ market share beyond 80 per cent, with the prospect of further growth in the coming years.

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Figure 1 - Source: Accenture2

Accenture Australia noted3: ‘Market share statistics and trends across the grocery channels and even within the key supermarket channel, are hard to stabilize, due to different methodologies and data coverage across different sources. As such, the focus is on range of market share as opposed to exact measures. Market share rankings in the supermarket sectors are quite consistent, with Woolworths, Coles and IGA being the order of the major players. Combined market share of Woolworths and Coles ranges between 77 and 80.4 per cent. Shares for IGA banners range from 11.3 per cent (various publication and estimates from Metcash) to 14.4 per cent (Euromonitor). The market share discussion in the supermarket sector gives rise to the muchdiscussed level of industry concentration in this sector. Indeed, Australia has the most concentrated supermarket sectors in the world - whether one takes the top two or top three or top five players into account in the analysis.’

2 3

Accenture Australia, The Challenge To Feed A Growing Nation, (November 2010), p27 Accenture, Op. Cit., p26

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During the 1990s, Woolworths in particular adopted a “whole of stomach” approach in expressing its market share. It redefined the market by including sales through restaurants, take away shops, hotels and clubs, delicatessens, greengrocers, butchers and such other food retailing. By enlarging the market size in this way, its market share would be made to appear smaller. In the supermarket channel, however, the data more commonly used internationally comprises sales of branded packaged groceries, which constitute by far the largest department in a supermarket and are therefore a proxy for total sales. On that measure, the combined market share of the major chains is about 80 per cent. While Aldi and Costco have a place in the Australian retail grocery market, neither is a direct competitor for full line supermarkets. Costco has only three sites (Melbourne, Sydney, Canberra) and Aldi, with about 260 stores in NSW, the ACT, Victoria and Queensland, sells a limited range of mainly private label packaged groceries. The 2008 UK Competition Commission grocery market inquiry4 classified Aldi, Lidl and Netto as “limited assortment discount stores” and did not consider them genuine competition for full line major supermarkets and disregarded them during the inquiry.

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4

UK Competition Commission, The Supply of Groceries in the Uk Market Investigation, (30 Apr 2008)

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1.2 Effects of Market Dominance
1.2.1 Impact on Grocery Shoppers
UBS Investment Research reported on 22 November 20115 that as a business, Woolworths achieved one of the highest profit margins in the world for FMCG retailers (EBIT %), coming second only to Walmart in the US. UBS noted that the high margins achieved by Coles and Woolworths were highly unusual and were the outcome of their significant market concentration. UBS also identified that this level of market concentration has resulted in: • Less competitive grocery prices (due to less need to reinvest in price). • Lower levels of innovation (including in marketing, loyalty and private label development compared to offshore peers). Woolworths and Coles supermarkets operate practically identical business models. As their combined market share continues to increase beyond 80 per cent, competition and diversity in the Australian grocery market continues to decrease towards a point where the market can no longer be deemed “workably competitive”. That situation will leave shoppers with little or no genuine choice and at the mercy of a duopoly with no effective real downward pressure on prices. In addition, upstream businesses, such as producers, suppliers and service providers will also face very limited buyers for their products and services (‘monopsony’). Once competitors have been driven out of a market or significantly weakened, the new entrant is then free to increase prices without the constraining influence of competition.

1.2.2 Impact on Business Costs
Market share growth has also contributed to the related vertical integration of other services, such as, but not limited to, freight, banking services including EFTPOS, IT and utilities. Woolworths is the biggest user of freight services in Australia. When Woolworths or Coles negotiate with any supplier of goods or services they demand and receive the best price due to their size. While suppliers of goods or services are able to use the chains’ volume to gain economies of scale within their own sectors, they then have to make their profits on the balance of goods and services sold to other customers at higher prices. Thus the gain to Woolworths and Coles is in fact borne by other businesses.

5

Ben Gilbert, UBS Investment Research, Australian FMCG Market, Exploring Treasure Island - Mach II, (1 Jun 2012)

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The UBS study (see above) also confirmed that the high level of market concentration resulted in pressure on suppliers (allowing the major chains to extract more advantageous trading terms from suppliers).

1.2.3 Impact on Local Business
The ACCC in the past has not been concerned with situations where one competitor effectively replaces another in a defined market. However, this behaviour has a cumulative effect on local business, similar to that of creeping acquisitions on independent grocers and other SME’s in local markets. This is particularly so now, as it is being used widely by the major chains as a means to eliminate competition and grow market share. There have been many examples around Australia which illustrate the adverse consequences of such developments. A most harmful consequence is often the loss of local jobs, not only in competing grocery businesses, but among unrelated retail businesses and suppliers of goods and services, because of significant changes to customer traffic flows. A new large supermarket can draw the majority of pedestrian traffic away from established retail outlets in the central business district. This is particularly so when the new development is located at some distance from the town centre. Occupancy levels, employment, commercial rents and commercial property values in such places are likely to fall significantly as a consequence. The demise of local independent supermarkets to the benefit of the major chains can also impact local business in other ways. Independent retailers provide the opportunity for emerging small suppliers to establish new products and services. Small suppliers do not initially have the ability to supply the major chains, as they cannot produce the necessary volumes or meet other supply requirements. Local service providers (e.g., accountants, community banks, cleaners, transport providers) and local producers and manufacturers also lose an important trading partner when an independent supermarket closes. Often the arrival of a new major supermarket forms part of a new retail centre. Typically these new centres are supported by national chain specialty shops. As a result towns risk losing their local and often unique independent retail offerings, reducing choice and diversity for local communities. Recently at Coolum, Queensland, Coles bought a shopping centre and refused to renew the lease of an independent competitor who had been trading there, effectively acquiring his market share and ‘good will’ without compensation of any kind.6
6 ‘Coolum Up In Arms As Coles Shuts Out IGA Store’, Courier Mail, (23 May 2010)

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1.3 Floor Space as an Instrument of Market Power
The nature of commodity retailing dictates that location and retail space are most important considerations in the success of retail business. During the late 1990s and as late as 2007, Woolworths and Coles engaged in significant programs of creeping acquisitions. Indeed, according to the ACCC, from 1993 to 2007, 39 per cent of all new store openings by the chains arose from creeping acquisitions.7 Currently, Coles and Woolworths combined have more than 160 confirmed new store proposals across Australia, totalling around 375,000 square metres of additional retail floor space over the short term.8 This excludes rumoured and undisclosed proposals, as well as store expansions. Should all of these known proposals reach fruition, their current combined floor space would increase by about ten per cent. A recent report by the Commonwealth Bank,9 points out that Woolworths is currently accumulating about $1 billion worth of property per annum. While the report raises concerns about the Woolworths strategy, it points out that Woolworths is aiming for an exceptionally high forecast space growth rate of 3.0 per cent per annum, of which 2.5 per cent will come from new stores. By comparison, Coles’ long term floor space growth target is two per cent per annum. The number of Woolworths supermarkets is estimated to grow from 878 now to 1148 by 2021. This compares to population growth of only 1.4 per cent per annum in Australia and the rise of on-line retailing, which will offset the need for some retail space. Yet retail floorspace continues to be built faster than population growth, according to a report of a BIS Shrapnel study: Retail Property Market Forecasts and Strategies, 2012-2022.10 The two big chains are using their copious acquisition of sites to enforce further growth in market share and market power.

1.3.1 The Over-Sized Store Strategy
The development by Woolworths and Coles of over-sized stores in numerous small local markets has become an established pattern from which it may be inferred that the conduct has purpose. Our case studies indicate that it brings about a substantial lessening of competition over time. The Commonwealth Bank report points to Woolworths’ investment in what it calls “marginal” locations and accords with MGA’s assertion that over-large stores in small local markets are unsustainable without cross-subsidy.

7 8 9

ACCC, report of the inquiry into the ‘Competitiveness of Retail Prices for Standard Groceries’, p428 MGA calculations based on various industry sources Commonwealth Bank, Global Markets Research - Equities, Woolworths Limited, ‘When Woolies Became an A-REIT’, (1 June 2012) 10 Z. Fielding, ‘Shop Space Grows Despite Slow Sales’, Australian Financial Review, (11 July 2012), p46

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While Woolworths and Coles dominate the Australian grocery market, their supermarket businesses are divisions within major retail conglomerates which, are rated by Deloitte’s 2012 Global Powers of Retailing11 study as the 18th and 21st largest retail enterprises in the world, and serve a population of less than 23 million. As such, they have the capacity to cross-subsidise their over-large, loss-making supermarkets indefinitely, or until smaller competitors are driven out of the market. These competitors are not only independent supermarkets, but butchers, greengrocers, delicatessens, patisseries, milk bars and any other specialty retailer of food and grocery products. The development of over-sized, cross-subsidised stores in small local markets is a similar form of conduct to creeping acquisitions, practised by both chains. As we have seen from the closure of independent supermarkets and other specialty food retailers following the entry of over-large chain stores, the result is both a substantial lessening of competition in those markets and a corresponding growth in market concentration for the major chains. It is within the power of the ACCC to determine whether the major chains are misusing their market power by building such oversized developments and driving out existing and future competitors. To facilitate such a process, the ACCC should also require mandatory notification by the major chains of any proposed acquisitions, including existing businesses, new leases or green field developments.

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1.3.2 The Saturation Strategy
There is a second complementary strategy in which the major chains saturate a local market with multiple supermarkets and liquor stores, for which no commercial purpose would seem to exist apart from keeping competitors out of the market. Some examples are shown in Figure 2.

11 Deloitte, ‘Global Powers of Retailing 2012’, Switching Channels Report, (January 2012), pG11

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Bathurst, New South Wales: Woolworths has two stores separated by a street and a pedestrian crossing.

Karingal, Victoria: Woolworths has two stores in one shopping centre.

Yarrawonga, Victoria: Woolworths stores 200 metres apart.

Hurstville, NSW: Coles store in the Westfield Shopping Centre and another in retail space above Hurstville railway station.

Figure 2

In Launceston, Tasmania, the combined market share of the chains exceeds 90 per cent and it is difficult to drive around the district without passing major chain supermarkets every few minutes. The population of Launceston is 65,000 and that of the Greater Launceston catchment is 100,000, yet it is serviced by four Woolworths supermarkets, five Coles supermarkets and one Supa IGA, all within a circle with a five kilometre radius (see Figure 3). A sixth Coles supermarket is pending (at Mowbray) and a potential seventh may be developed (at Prospect).

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The hyper-concentration of the retail supply of groceries in the Launceston market can be readily demonstrated quantitatively by evaluating a market concentration algorithm, such as the commonly used Herfindahl-Hirschman Index12 (HHI). Indeed, evaluation of the HHI in these markets confirms that the overall market for groceries is becoming further concentrated with the development of over-large stores in small local markets as a result of local government planning decisions.

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Woolworths

Coles

Supa IGA

Coles Mowbray WOW Mowbray WOW Riverside

Kings Meadows Prospect City
Coles Racecourse Crescent

1 1 1 1 4 4

1 2 1 1 5 1 6 11

1 1 1

Racecourse Newstead Mowbray Riverside

Coles Charles Street Coles Wellington Street

Coles Newstead

WOW Kings Meadows 5km Radius Coles Kings Meadows

Sub total Pending (Mowbray)

WOW Prospect

Sub total Greater Launceston Total

Figure 3

12 See, for example, Stephen A. Rhoades, ‘The Herfindahl-Hirschman Index’, Federal Reserve Bulletin, 79 Board of Governors of the Federal Reserve System, USA, (1993)

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1.4 Floor Space Strategies in Practice
1.4.1 Premium Prices For Sites
Woolworths and Coles can afford to pay significant premiums to acquire sites - either green field sites, existing leases, creeping acquisitions, or sites for redevelopment greater than can be afforded by an independent competitor. Their dominant positions in the market and their potential to cross-subsidise unviable large stores is supported by their extensive network of stores and/or revenue from related retail entities and gambling. The premium paid is then offset by their ability to lessen competition and consequently not have to compete on price in the medium term.

1.4.2 ‘Competition’ and Development Controls
The regulatory framework that has allowed this market share growth includes vesting the responsibility for controls of land use zoning and development at local and state government levels, while the over-arching Competition and Consumer Act at the federal level. It is inconsistent for governments to purport to foster genuinely competitive markets, and yet allow the hyper-concentration of the Australian grocery market to continue in the name of competition. This issue is central to the interpretation of ‘competition’. While National Competition Policy was introduced in the mid-1990s, ‘competition’ is not defined in Australian competition law. It is therefore difficult for stakeholders to engage in productive discussion because for each ‘competition’ is in the eye of the beholder. Some hold that unfettered development is sufficient to ensure competition, while others see that same conduct as leading to further market concentration, greater market power for the chains and a consequent lessening of competition. Furthermore, economists tend to interpret competition solely in terms of price competition. In their eyes there is fierce competition now because the two chains are engaged in price wars for some basic products. However, marketers and the general public have a more practical definition of competition that includes considerations of range, service and convenience. Viewed in this way, the current situation is not one of vigorous competition but rather one of decreasing competition with two centrally planned and practically identical retail offers being rolled out across the nation, stifling the opportunity for diversified offers to compete in the market.

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In this way, the pro-competition spirit of the Australian Competition and Consumer Act is being frustrated in many places by state, territory and local government planning decisions which, in general, take no account of competition issues, resulting in a net anti-competitive result. Detailed case studies demonstrating actual instances of the over-sized stores and the saturation strategies are presented in Part 2.

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1.5 Additional Strategies for Market Dominance
1.5.1 Shopper Docket Schemes
Among the other advantages handed to the major supermarket chains were authorisations by the ACCC to issue shopper dockets, by which grocery purchases earned discounts from specified outlets for motor fuel purchases. Such “bundling” schemes are designed to increase the willingness of consumers to purchase not only products from the major supermarket chains, but also to purchase fuel from those specified service stations where the credits can be claimed (i.e., these schemes allow for the ‘inter-temporal’ and ‘inter-regional’ bundling of products, which generates further economies of scope. See Part 3). That is, they are intended to alter patterns of consumption in favour of the major supermarket chains and their associated service stations, even though these outlets may not be the most efficient suppliers of those goods and services. By issuing the authorisations,13 the ACCC acknowledged that the practice was anticompetitive. But Section 90(5A) of the Competition and Consumer Act (formerly the Trade Practices Act) allows the ACCC to grant an authorisation on the condition that: ‘the provision would result, or be likely to result, in a benefit to the public’ and that ‘the benefit would outweigh the detriment to the public constituted by any lessening of competition that would result, or be likely to result’. The ACCC has never validated the supposed public benefit(s) which were said to be delivered by shopper dockets and probably could not, since it would be nearly impossible to identify whether the prices of some or all of a large supermarket’s 30,000 product lines might have been increased to cover the petrol discount.
13 ACCC, ‘Assessing Shopper Docket Petrol Discounts And Acquisitions In The Petrol And Grocery Sectors’, (Feb 2004)

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ACCC acknowledged economists Joshua Gans and Stephen King (later an ACCC commissioner) who argued that in the long run consumers would pay more for both petrol and groceries because of the anti-competitive effects of the shopper docket schemes.14 Perhaps in recognition of the anti-competitive contradictions entailed in the authorisations, the Act was later amended to specifically allow such arrangements between related entities. Nevertheless, the practice remains anti-competitive in effect and not in the public interest and MGA recommends the ACCC should revoke these authorisations.

1.5.2 Anti-Competitive Price Discrimination
Anti-competitive price discrimination occurs when a supplier sells to certain customers at one price and to other customers at higher prices, unrelated to economies of scale. Anti-competitive price discrimination is prohibited by competition laws in every OECD country except Australia and New Zealand. The Hilmer Report15 on National Competition Policy in 1993, recommended that the then section 49 of the Trade Practices Act, dealing with anti-competitive price discrimination, be repealed. It was repealed in 1995 without parliamentary debate on the merits of maintaining a prohibition on anti-competitive price discrimination. This delivered massive competitive advantages to Woolworths and Coles, strengthening further their market power and assisting them to grow their market shares. To this day, suppliers who refuse to deliver anti-competitive discriminatory (lower) prices to the big retailers are at risk of having a product line or their entire range deleted. Yet, as former WA Senator Dee Margetts has pointed out, food price inflation began to overtake the Consumer Price Index soon after and Franklins, previously a vigorous competitor, went into terminal decline around the same time.16 The predicted outcomes of National Competition Policy and the changes in the competition environment which derived from it have never been adequately reviewed or tested in the light of the evidence. In an attempt to redress this, the non-government senators of the Senate Economics References Committee recommended on November 2011:17 ‘Recommendation 1 1.45 Amend section 46 of the Competition and Consumer Act 2010 to effectively prohibit anti-competitive price discrimination. Consideration should be given to relevant legislation in place in the United States and United Kingdom, and the reintroduction of an ‘effects test’ as per section 49 of the Trade Practices Act 1974.’
14 Gans, J. S. and King, S. P., ‘Paying for Loyalty: Product Bundling in Oligopoly’, (12 October 2004) 15 Australian Government, Independent Committee of Inquiry report, ‘National Competition Policy Review’ (1993) 16 Margetts, D., ‘National Competition Policy and the Retail Sector’, Journal of Australian Political Economy, (No. 67), (Winter, 2011), pp83-5 17 Margetts D., op. cit.

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The price advantage flowing from anti-competitive price discrimination - say, eight per cent in better terms of trade - delivers a benefit at the beginning of the retail supply chain which can never be recovered by a competitor. For example, if an individual chain supermarket has inputs totalling $10 million in wholesale value, this equates to an extra $800,000 in better trading terms than is available to an independent store of similar size. Note also, that this anti-competitive advantage applies not only to goods purchased for resale. It applies also to all other associated costs of doing business, such as, but not limited to, transport, electricity, refrigeration and air-conditioning installation and maintenance, cleaning services, staff training, staff uniforms, store fit out, in-store consumables, and so on.

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1.6 Previous Efforts to Stop Anti-Competitive Behaviour
1.6.1 ACCC Intervenes to Prevent Lessening of Competition
In 2008, the ACCC used its powers under s50 of the (then) Trade Practices Act to block proposed Woolworths supermarkets at Wallaroo, South Australia, and Karabar, New South Wales. This was a change from earlier narrower interpretations of s50 and highlights broader adverse impacts on competition. As the Martin report18 observed: The ACCC decision in 2008 to oppose a proposed Woolworth’s acquisition of an independent store site at Karabar in Queanbeyan, NSW (just over the south east border of the ACT) demonstrated the extent of market and competition analysis applied to the ‘with and without’ testing of independent acquirer alternatives for the site. An implication for ACT region supermarket competition is that two earlier ACCC clearances are likely with the benefit of hindsight, to have been rejected under current intensive analyses. In these instances Woolworths acquired, firstly four group centre independent Cannons store sites in 1996 (three in Tuggeranong and one at Kippax) and, secondly an IGA store site at Charnwood group centre in 2004. This has created the situation where the ACT currently has only three independent full line supermarkets compared to 21 run by the two major chains. However, while the ACCC’s action here attempted to address the substantial lessening of competition (see discussion below on Wallaroo and Karabar) its actions did not set a new direction. It seems s50 has been successfully used only on a few rare occasions and that legislation needs strengthening to stop the anti-competitive behaviour of the major chains.

18 Martin, J., ‘Review of ACT Supermarket Competition Policy’, (September 2009), p17

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1.6.1.1 Wallaroo, South Australia
In 2008 the ACCC undertook a review of the proposed acquisition of a 3200 square metre supermarket lease in Wallaroo in South Australia by Woolworths.19 Wallaroo is a small regional town about 160 kilometres from Adelaide. An independent supermarket of 1400 square metres serviced the town. The incumbent supermarket operator had also declared an interest in acquiring the lease and planned to open a new 2,500 square metre supermarket. The ACCC expressed a number of concerns with respect to the proposed acquisition by Woolworths, in particular that: • in the absence of the proposed acquisition by Woolworths, it was likely that another supermarket operator would be willing and able to operate a supermarket on the site • it was likely the incumbent independent supermarket would exit the market if the proposed Woolworths acquisition proceeded; and • the catchment for local supermarkets was commonly taken as a three to five kilometre radius but consumers in regional areas had a greater willingness to travel for the purpose of grocery shopping as well as a greater need to travel between towns for other purposes. In this case the ACCC considered the relevant market included the neighbouring town of Kadina, about nine kilometres from Wallaroo. It expressed the view that, if the transaction proceeded, Woolworths would operate two large full line supermarkets at Wallaroo and Kadina and, since it was unlikely that another supermarket operator would open another new full line supermarket within two to three years, Woolworths would then operate the only two supermarkets in the district, resulting in a substantial lessening of competition. Woolworths subsequently decided not proceed with the proposed acquisition and the ACCC did not proceed to a final view on the proposed acquisition. The ACCC’s Statement of Issues was a departure from earlier decisions (such as the Woolworths acquisition of the Cannon’s business in the ACT and southern NSW) and indicated a new approach by the ACCC in reviewing local supermarket competition issues.
19 ACCC, Statement of Issues, Woolworths Limited - Proposed Acquisition of a Supermarket Lease in Wallaroo, South Australia (26 Nov 2008)

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1.6.1.2 Karabar, New South Wales
Also in 2008, the ACCC opposed the acquisition by Woolworths of the Karabar NSW Supabarn supermarket.20 The Karabar Supabarn was an independent supermarket and retail liquor outlet located about two kilometres from the town centre of Queanbeyan in New South Wales. Some of the key issues of relevance contained in the ACCC’s Public Competition Assessment included the following: • The Karabar supermarket was approximately 1,250 square metres and the ACCC did not consider that it provided a strong competitive constraint on the major supermarkets in neighbouring Queanbeyan and Jerrabomberra. • The ACCC considered there was strong evidence that in the absence of the proposed acquisition by Woolworths, the supermarket would be acquired by another independent operator and upgraded to a full line supermarket. The ACCC also considered that such an upgraded supermarket was also likely to draw customers from further away. • The ACCC also noted that many consumers shopped at more than one supermarket each week and there were consumer benefits in having access to a larger number of separately owned supermarkets in a local market. The ACCC also concluded that it was unlikely any other site would be available in time to prevent a substantial lessening of competition in the local market. The likely purchase and expansion of the Karabar supermarket by an independent group was deemed to “entail a higher level of competitive tension in the market” than if it had been purchased by Woolworths, which also owned the nearby Jerrabomberra supermarket. The ACCC found that if both supermarkets were operated by Woolworths “there would be no incentive for competition between them.”

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20 ACCC, Statement of Issues, Woolworths Limited - Proposed Acquisition of the Karabar Supabarn Supermarket, (4 June 2008)

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1.6.2 Amendments to the Competition and Consumer Act
In the period after 1975, when Woolworths and Coles grew their respective market shares to the current dominant position, there was little change in competition law, with the single major exception being the counterproductive repeal of the anticompetitive price discrimination provisions in 1995 (see section 1.5.2). In June 2011, the Australian Government introduced amendments to the Competition and Consumer Act 2011. The amendments passed both houses in November 2011 and included replacement of references to “a market” with references to “any market” in subsections 50(1) and 50(2).This amendment clarified the ability of the ACCC or a court to consider multiple markets when assessing mergers and acquisitions. It also ensured that businesses cannot challenge a decision to block an acquisition on the grounds that the substantial lessening of competition was in one or more markets other than the primary market relevant to the merger or acquisitions (subsection 50(6) was also amended to delete the word “substantial” in relation to the scope of a market). The amendments were intended to provide greater certainty in acquisitions in local markets and to remove the risk that a court might take the view that acquisitions in geographically confined (i.e. local) markets might not be considered substantial and therefore not fall within the scope of Section 50. These amendments apply to the independent grocery sector as they ensure that the ACCC or any court can continue to examine acquisitions in all markets including relatively small markets. The Chairman of the ACCC recently highlighted in a speech the intention of the ACCC to scrutinise mergers and acquisitions in local markets: “The ACCC will also increase its scrutiny of mergers in local markets. The ACCC has been particularly active in reviewing local grocery store and liquor license acquisitions in the past, but we will be considering whether local market acquisitions in other sectors may warrant more attention. We may, for example take a larger interest in the merger of two service stations in a local town, if that might adversely affect competition” Mr Rod Sims, Chairman of the ACCC, 27 August 2011

1.6.3 Proving Purpose
In examining the provisions of the Competition and Consumer Act 2011 to cases involving claims of anti-competitive behaviour and misuse of market power, it is sometimes claimed that the requirement to show that the actions were engaged in for an ‘illegal purpose’ (such as ‘eliminating or substantially damaging a competitor’) is too onerous.

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In his 2003 Review of the Competition Provisions of the Trade Practices Act 1974, the former High Court judge Sir Daryl Dawson wrote21 in relation to misuse of market power: ‘The difficulty in proving purpose may be doubted. Not only may purpose be inferred, but the proof that is required is on the civil standard of the balance of probabilities only, and not on the criminal standard of proof beyond reasonable doubt. The purpose does not have to be the sole or dominant purpose. An admission of purpose is not required, much less an admission in the documentary form of a ‘smoking gun’. Since the scope of the section was clarified in Queensland Wire,22 a number of cases have demonstrated that proof of purpose need not be an obstacle in the application of the section (see Box 3.1).
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Box 3.1: Is proving purpose a problem? Queensland Wire Industries P/L v. BHP: BHP’s purpose in refusing supply to Queensland Wire was found to be to prevent Queensland Wire competing as a manufacturer and wholesaler of star pickets. Melway Publishing P/L v. Robert Hicks P/L: the evidence of employees suggested that Melway had the requisite anti-competitive purpose. The action was unsuccessful because Melway was found to have not taken advantage of its market power. ACCC v. Boral Ltd: Boral was found to have used its market power against a competitor for each of the three proscribed purposes in section 46. The evidence on purpose was based on internal documentation. The decision is on appeal to the High Court. ACCC v. Universal Music Australia P/L: Hill J inferred that the refusal to supply had the purpose of preventing the entry into the wholesale market of potential competitors. The decision is on appeal, which will address the issue of whether Universal and Warner had substantial market power. ACCC v. Australian Safeway Stores P/L: Safeway was found to have not taken advantage of its market power. Although the trial judge concluded it was unnecessary to address the issue of purpose, he found a proscribed purpose could be inferred from the conduct concerned in two of the ten alleged breaches. Otherwise, it was found that there was substantial evidence that the purpose of Safeway was pro-competitive. The decision is on appeal. Rural Press Ltd v. ACCC: Rural Press and Bridge Printing were found to have the purpose of deterring or preventing Waikerie Printing from engaging in competitive conduct in the relevant market. The appeal to the full Federal Court turned on whether Rural Press and Bridge Printing had ‘taken advantage’ of their market power.

21 Dawson, D., et al., Review of the competition provisions of the Trade Practices Act, Ch. 3. 22 ‘Report of the Trade Practices Review Committee’ C of A. (Jan 2003), Ch. 3

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Finally, in relation to purpose, it should be observed that the ACCC has, under section 155 of the Act, extensive powers to compel the provision of information and the production of documents. These powers are not available to a private litigant but should, in the ACCC’s case, afford an invaluable tool in eliciting evidence to prove the necessary purpose where it exists. The Committee is not persuaded that proving purpose is an unnecessarily onerous hurdle for the ACCC. Whilst proving purpose may be more difficult for an individual litigant who does not have the investigative powers of the ACCC, section 83 of the Act enables an individual to rely upon the findings in an action brought by the ACCC under section 46.’ MGA suggests, in line with the above legal opinion, that proof of purpose need not be a prohibitive obstacle, especially where there is plentiful evidence of repeated occurrences in similar situations with similar protagonists and similar outcomes.

1.7 Effective Regulation for Increasing Market Power
In a free market it is natural that competitors take advantage of any strategy or tactic that advances their market position, usually within the bounds of regulation. As competitors grow their market share and assume greater market power, new strategies or tactics, as described above, become available to them that are not feasible for smaller competitors. It is then up to the regulators to ensure that this disparity does not stifle genuine competition to the detriment of the consumer and the broad economy. It is within the power of the ACCC to determine whether the major chains are misusing their market power by adopting anti-competitive strategies such as operating shopper docket schemes between related entities, cross-subsidising loss-making supermarkets and building oversized developments designed to drive out existing and keep out future competitors. To facilitate these determinations the ACCC should require mandatory notification by the major chains of any proposed acquisitions, including existing businesses, new leases or greenfield developments.

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2. The Role Of Local Government Planning Decisions
This part outlines the extent to which development of over-large stores and the saturation of markets with too many stores is occurring in practice. It discusses the adverse effects of these practices.
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2.1 Local Government Planning
2.1.1 Local Market Saturation
The major chain supermarkets are opening new supermarkets in locations unable to support the additional floor space. A snapshot of the extent of individual location oversupply is provided below showing seven examples in Table 1, followed by a summary of the implications, the testing methodology and the MGA‘s recommendation for a floor space needs assessment. The testing methodology is explained at Appendix 2.
Location
Churchill, Vic Gloucester, NSW Bright, Vic Macksville, NSW Tura Beach, NSW Wongaling Beach, Qld Pittsworth, Qld

Retail Space Over Supply
52% 38% 34% 14% 57% 31% 35%

Table 1 (For methodology and detailed calculations see Appendices 1 & 2)

The outcomes of this local market saturation by the major chains is clear: • These locations are flooded with supermarket floor space that can no longer be economically justified by the local population (now or in the foreseeable future). • As a result the once profitable existing supermarket(s) have been substantially impacted. • In some cases the impact has been so severe that it forced the immediate closure of the local independent supermarket (eg Tura Beach, NSW).

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• In other cases, sales reductions for the existing independent supermarkets of 50% have occurred. Impacts of this magnitude are not sustainable. • Not only does the major supermarket compete with the independent supermarkets, but due to its size and product offering, it also competes head to head with the local butcher, deli, pharmacy, baker and other small businesses. • Where once there was a thriving independent supermarket in town, in many cases it has been either replaced or severely impacted by a major chain supermarket, often in an out-of-centre location (eg Macksville, NSW). This has consequences for the specialty retailers, service providers and local manufactures and producers that rely on the either the direct trade with the independent store or the foot traffic that delivers the customers they need to survive. • The resultant over-supply of supermarket floor space also acts to prevent new competitors from entering the market because the barrier to entry becomes too high. • In these locations it cannot even be argued that there will be sufficient population growth over the foreseeable future to support this additional floor space. • However, even if there were to be strong population growth, sufficient to support the new supermarket in a few years time, the existing independent usually does not have the resources to survive the intervening unprofitable period. • These new major supermarkets are therefore trading at unsustainable levels. Their continued survival relies on cross-subsidisation from other profitable stores in the major chain’s network and from other related business streams (eg petrol, gambling). • The Australian consumer suffers from this strategy. In order to cross-subsidise these stores, profits must be redirected from other locations. This implies that prices (margins) need to be higher in those places to compensate for these loss-making stores. • The co-located (same town) independent supermarkets are subject to the largest impacts. Whilst the major chain supermarket may draw its trade from a relatively large region, the independent often relies on a smaller more localised catchment. The level of over-supply is therefore even more acute from the independent supermarket perspective. • It is noted in these examples that even where the local independent supermarket has been forced to close, the resultant supermarket floor space is still too great to be supported by the catchment population (eg Wongaling Beach, Qld). This growth strategy has also been strongly criticised by the Commonwealth Bank in a recent analyst’s report23 where it concluded that Woolworths, in particular, was developing marginal sites.

23 Commonwealth Bank, Global Markets Research - Equities, Woolworths Limited, ‘When Woolies Became an A-REIT’, (1 June 2012)

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2.1.2 Recommendations for the Assessment of Floor Space Needs
The issue of over-large stores being approved for development in small local markets can be resolved by requiring a developer who seeks to build a new shopping centre with space allocated for a major chain supermarket, to justify the proposed increase in floor space. A number of local governments have recognised the importance of creating sustainable communities and have begun to introduce the requirement for new major retail developments to undertake a ‘Retail Sustainability Assessment’ (RSA). The components of an RSA should follow, in principle, the methodology outlined at Appendix 2. The purpose of the RSA is to ensure: • The development is consistent with the centre’s position in the retail hierarchy. • That the level of new space is commensurate with the level of demand. • Impacts on existing centres are justified and within acceptable levels. In order to implement this approach it would be necessary for local governments: i. To better define their local retail hierarchy. ii. Define the circumstances when an RSA is required. This would include planning permit proposals that may exceed certain thresholds and/or as defined in the zoning tables. In addition it would include proposals associated with planning scheme amendments (eg land rezoning), local structure plans, and new or expanded activity centres. iii. Provide assessment guidelines to assist with the preparation and interpretation of RSAs.

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2.1.3 Determining the Impact on the Welfare of Local Communities
While it is generally accepted that it has not been the role of planning to regulate competition,24 it is a fact that the concept of ‘Net Community Benefit’ (NCB) has been central to considerations of planning proposals by practically all state and local government authorities.25 These two principles are quite distinct, the former applying to the purely commercial sphere, the latter being a duty of local government in safeguarding and furthering the interests of its constituency. The application of the NCB concept varies in form across Australia, but in substance it invariably includes weighing up the positive and the negative impacts on the local community of a planning proposal on: • choice in retail goods and services • diversity and breadth of retail competition • retention of a share of escape spending
24 Kentucky Fried Chicken Pty Ltd v Gantidis and Anor - High Court of Australia (1979) 25 See for example ‘Retailing Victoria Report’, Victorian Government 1996, ‘Davids v Maribyrnong CC (Appeal No. 1997/38010)’ VCAT.

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• employment (both potential increases and decreases in regional employment); • loss of sales at existing shops/centres; • traffic circulation and parking demand; • environmental effects on adjoining activities; and • local character and amenity impacts. These factors are readily quantifiable and are directly relevant to the local community’s economic and social welfare. Some local authorities are considering formal objective ‘tests’ of NCB.26 The Net Community Benefit test should include the RSA as explained in section 2.1.2. It is our recommendation that the NCB test should be expanded to include an assessment of competition. This would apply where a new development has the potential to result in a level of market dominance that could have detrimental impacts on the business community and/or the social environment. Planning outcomes such as those listed earlier in this paper, and some currently under consideration, would fail any NCB test on several or all of the above listed criteria. This means that local communities are disadvantaged by a reduction in retail diversity, damaged by a contraction of the local economy, employment and the loss of environmental amenity. With the current rate of urban and regional expansion due to population growth, the number of retail planning proposals involving supermarkets is ever increasing. The increasing incidence of resident action groups and the consistent high ranking of planning issues among voters’ concerns reaffirm expectations that developments should yield a net benefit to the community as well as developers. Objective NCB tests, similar to those under consideration by the NSW government, should be incorporated into urban and regional planning policies by state governments (with coordination through COAG) for application in the processing of planning proposals by relevant local authorities.

26 ‘Draft Centres Policy, Planning for Retail and Commercial Development’, Dept. of Planning, NSW (2009)

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2.1.4 Ensuring Retail Space Is Commensurate With Demand
In the grocery and liquor retailing sectors, all markets are local. Prices, range, service levels, convenience and customer loyalty are of no consequence outside the immediate local market. There are minor exceptions to this general observation. In rural and regional Australia, where people are used to travelling significant distances to buy goods and services, there is some opportunity for shoppers to transfer their purchases to a different market within limited driving range. Even so, as a generalisation, they do not because the advantages of greater range or slightly lower price are offset by the additional cost of fuel, wear and tear, time and inconvenience. Additionally, town planners and communities now value highly the concept of walkability: the idea that being able to walk to a shop is desirable because of reduced traffic flows, reduced pollution and the health benefits of physical exercise. This is of particular benefit to low income earners and the elderly and has particular relevance to new urban estates and growth corridors. It leads to the need for a hierarchy of retail centres, rather than allowing widely spaced large car based out-of-centre shopping centres. Planning regimes need to change so that decisions regarding retail developments take into account the broader network of activity centres and the identified role and function of individual centres. Two examples demonstrate the important role local government planners have in developing a sustainable hierarchy of activity centres: Tecoma, Vic. A new 1,977 sq m Coles was proposed in 2009. Council opposed the development, which was also rejected by VCAT on appeal by the developer. The VCAT decision included the following observation : ‘…we consider that it is important that development within Tecoma is responsive to not only its built form character but also its role within the activity centre hierarchy...It is intended that the local convenience role of Tecoma be maintained and that the centre not be elevated to a role which is more regionally focussed.’ VCAT No. P3747/2008. Sunshine Bay, NSW. A new 2,900 sq m Woolworths was proposed in 2006. Again the Council opposed the development, which was also rejected by the NSW Land and Environment Court. The Court concluded ‘…that a large supermarket flanked by four small shops at Sunshine Bay is antipathetic to the intended retail hierarchy.’ Jetset Properties v Eurobodalla Shire Council [2007] NSWLEC 198.

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The planning system, however, is also failing to prevent many inappropriately located major retail centres from being developed. The lure of additional rates and investment has seen numerous major supermarket-anchored centres being given permission to locate in out-of-centre locations. Local councils are turning a blind eye to the negative consequences of such developments. Examples are: Mittagong, NSW. Woolworths purchased the Mittagong Tuckerbag in 1999 and rebranded it Food For Less. In 2006 a new out-of-centre shopping centre was permitted to open including a Big W and a new Woolworths. Woolworths closed the Food For Less in the town centre, removing one of the key anchor tenants. This has had serious consequences on the vitality of the town centre and its retailers. Childers, Qld. Woolworths was given planning approval to open in an out-ofcentre location. The incumbent FoodWorks located in the town centre was impacted directly by over 35% as a result of the development, with consequential impacts on the surrounding specialty shops. Macksville, NSW. In this case the Council ignored its own independent economic advice that concluded: ‘SGS27 considers that development of a retail anchor on the subject site will effectively fragment the Macksville centre, resulting in adverse economic impacts on the existing CBD, and discouragement of identified positive opportunities for consolidation and redevelopment of the existing CBD.’ Tura Beach, NSW. In late 2010 a new 3,200 sq m Woolworths opened. This was despite the fact that the catchment could not support both the proposed development and the existing IGA supermarket, and that it was contrary to the retail hierarchy. In Merimbula Nominees Pty Ltd v Bega Valley Shire Council [2007] NSWLEC 107, the judge concluded that Tura Beach was “…clearly a lower order centre of a scale suitable to meet ‘neighbourhood’ as opposed to ‘district’ needs.” “…a larger ‘full line’ supermarket, such as that proposed by the applicant at Merimbula would be out of kilter, in my view, with the demands generated by a local neighbourhood. The provision of retail at a large scale here, would tend to fragment retail activity, when State Policy is to concentrate such activity in a fewer number of larger centres.” These predictions are now being realised with the Tura Beach IGA closing soon after the Woolworths opened. The old Tura Beach shopping area has been severely hit by the new Woolworths development28 and is in a significant state of decline with an unprecedented level of shop vacancies in the nearby town of Merimbula and a lack of interest from potential new retailers.

27 SGS Economics & Planning, Suite 12 50 Reservoir St Surry Hills NSW 2010 28 http://www.merimbulanewsonline.com.au/news/local/news/general/woolies-snaps-up-turabeach/1612127.aspx

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There are, however, some examples where local government planning decisions have taken into account issues of need. These examples demonstrate the positive role local government planners have to promote sustainable competition: Gordonvale, Qld. Here the local Council recently refused a 3,800 sq m Woolworths on the grounds that its out-of-centre location would detrimentally impact retailers in the town centre, the current catchment is not large enough to support two centres, and it would result in an increase in car-based travel, amongst others. Canungra, Qld. The local council issued a permit for a new 2,564 sq m supermarket on the basis that the use must not commence until the number of households in the catchment reached 1,800 dwellings. It was determined that until this population threshold was reached the town could not support both the existing independent supermarket and the proposed development. Pottsville, NSW. The local Council refused an application for a new 3,250 sq m supermarket in 2008. On appeal the NSW Land & Environment Court supported the Council’s decision and refused the development proposal. The judge concluded that the proposed major supermarket ‘…is inconsistent with the council’s planning controls and retail strategy and that such a development would severely impact on the existing Pottsville Centre.’ Metricon Qld v Tweed Shire Council [2008] NSWLEC 1453. In determining retail need, planners should consider not only the catchment population that will support the existing and proposed retail floor space, but must also allow for escape expenditure from lower order centres to higher order ones. This principle was supported in Fabcot Pty Ltd v Latrobe CC [2007] VCAT 354 where the judge agreed that ‘…in a networked city there is an expectation that centres are not self contained…’ and ‘…there is no imperative for each centre to fully cater for the retail needs of its residents…’ Local Council’s have also been known to inappropriately amend their local planning controls for the sole purpose of facilitating the needs of major supermarket developments, often ignoring the sound planning principles that underpinned these controls. A recent example occurred in Gloucester, NSW where a new Woolworths based centre has been approved. In order to permit this out-of-centre development the Council: • amended the zoning of the site, despite the planning scheme having been prepared in 2010; • replaced its 2006 Retail Planning Policy in 2010, because the former policy excluded the Woolworths site from the town centre boundary, and recommended that it retain its environmental protection zoning in order to protect the important visual
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corridor to the nearby mountain ranges. The report also identified that there was little if any demand for new supermarket floor space up to 2021; and • ignored its own independent economic advice that concluded that one of the existing independent supermarkets would likely close: ‘Given the size of the Gloucester market and its location, it is likely the Town/ Shire may only support two larger supermarkets on a longer term basis.’ Buchan Consulting, Nov 2010. The judgement in Metricon Qld v Tweed Shire Council [2008] NSWLEC 1453 considered this matter and concluded that ‘Moreover, a planning policy such as the protection of existing centres is not worth much if it is changed each time a plan is reviewed. People make investment decisions on the basis of such policies, and their investment horizon is usually beyond ten years.’ Whether local government authorities are competent to make decisions relating to complex development and/or competition matters is moot. However, MGA believes that the development of a Competition Test, to be applied by local government as part of its assessment of development applications, would be beneficial.

2.2 Impact of Over-Sized Stores on Regional Economies and Markets
Local government town planners need to consider the overall, long-term impact of approving development applications. Every planning decision which results in an over-large, cross-subsidised supermarkets being built in a small local market is likely to result in the closure of competing smaller businesses, leading to further market concentration and reduced competition. Four such examples are given below. The first at Bermagui is taken from a consultancy’s report. The remaining three were conducted on behalf of the MGA.

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2.2.1 Bermagui, New South Wales
Wakefield Planning, a Melbourne-based consultancy, was recently privately commissioned to review a proposed Woolworths supermarket development in Bermagui, New South Wales. The study was completed in June 2012. Like many other towns currently dealing with supermarket developments by the major chains, Bermagui has minimal population growth. Wakefield Planning conducted a public opinion survey in Bermagui and found that a majority of those surveyed objected to the proposed Woolworths development. More significantly, Wakefield Planning identified the major problem with such a development in a small local market with limited growth potential:29 ‘Key Point: What can be drawn from this report and the context it sets, is that any future commercial development within the town of Bermagui needs to be completely justifiable on the basis of current population levels. Given that levels of growth are below the levels predicted for the initial planning period, floor space needs to not “lead demand”. This is because there is highly limited ability for population growth to “take up” floor space demand provided in advance of such growth. As will be further outlined in this submission, the current business environment within Bermagui is highly fragile. In addition there are currently 3 vacancies in Bermagui, which is close to the “level of concern” of 10% vacancies. This again reinforces the importance of retail floor space trailing rather than leading population growth.’ Wakefield Planning also found:30 ‘However on the basis of the survey work conducted, it is clear that there will be a significant impact on the viability of commercial uses within the zone. In this regard, the viability of between 30% and 50% of existing businesses in Lamont Street, in particular, would be at threat. This is considered to be one of the major significant negative points associated with the proposal. In addition, and as indicated elsewhere in this submission, it is considered that the proposal is not complementary to existing commercial development. In
29 ‘Submission on DA 2012.0098: Proposed Woolworths Supermarket, Bermagui’, Wakefield Planning, (June 2012), p5. The full report is available at: www.wakefieldplanning.com.au/Bermagui/Bermagui_ submission.pdf 30 Wakefield, op. cit., p16

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particular, the proposal would replace a number of existing commercial providers, rather than complement them. These include the existing SPAR supermarket, 777 store, the butcher, the greengrocer, bakery and also (in part) pharmacy and newsagent lines. In part this is as a consequence of the nature of goods sold in supermarkets, and in part it is a consequence of the inability to integrate the site with the existing main street, so as to produce synergistic effects with specialty shopping. This is a significant and major shortcoming with the development. Key Point: The proposal would substantially impact on the viability of existing businesses within Bermagui. One of the local planning objectives in Bermagui is: ‘To enable other land uses that are complementary to and do not detract from the viability of commercial uses within the zone.’ Wakefield Planning found deficiencies in the consideration of impact on existing local businesses:31 ‘Competitive Environment The section of the report dealing with the competitive environment relies on an assumption. For example, there is an assumption that the role of the SPAR food store is purely for top up food and grocery shopping. This is not confirmed by the random phone survey undertaken of the primary trade area indicated in the EIA which shows that the SPAR and associated food and grocery retailers within Bermagui currently account for some one third of food and grocery shopping. It is submitted that this is substantially above the “top-up” level. Although acknowledging the existing SPAR food store and the presence of some 40 additional retailers within Bermagui, the report is flawed in that it fails to undertake a basic retail census of Bermagui and an analysis of the total quantum of floor space/number of businesses currently providing food and groceries within Bermagui. It therefore virtually ignores the commercial area that will most experience competitive impact. A retail census has been undertaken as part of the survey work conducted for this submission. The census also included Tura Beach and Bega. Food, grocery and liquor currently constitute approximately 13% of shop front premises within Bermagui although as a proportion of retailing, this figure would be closer to 20%. The figure is higher when considered on a floor space basis, and would be close to 30%. These figures indicate that a substantial number of existing premises would be in direct competition with a new supermarket and liquor outlet. Key Point: The economic impact assessment overlooks the existing business communities in Bermagui and does not assess the impact on them. Substantial business failures are likely.’

31 Wakefield, op. cit., pp28-29

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Bermagui is typical of many of the other towns referenced in this report. The choice for competition regulators and local government planners is between maintaining a diverse and genuinely competitive local commercial environment or allowing a dominant national player with practically unlimited resources to destroy smaller competitors and leave such markets with moribund commercial centres.

Independent Liquor Outlets

2.2.2 Bright, Victoria
Previous Situation Located 30km from the nearest town and over one hour’s drive from the regional centre. It serves a local community of about 2,100 residents and about 1,700 from surrounding districts. A strongly seasonal demand from tourists passing through also helps support the local traders, particularly with liquor sales. Two independent supermarkets operated in the town for many years, both selling packaged liquor, Bright, Victoria one of 1,000 square metres and the other of 250 square metres total leased area. The larger independent supermarket was refurbished and expanded to 1,500 square metres in 2006 with emphasis on an expanded liquor section and fresh produce sourced locally. The combined impacts of the global financial crisis, a severe downturn in the tourism industry upon which the local economy was reliant, and the announced entry of Woolworths to the Bright market resulted in the closure of the smaller independent. Chain Store Entry A proposal was made in 2007 to convert a local hotel with its off-street car park to a shopping development anchored by Coles supermarket of 2,382 square metres, an associated liquor store of 132m² and four other specialty retail stores. Following a protracted series of planning objections and a business review by its new owner Wesfarmers, Coles withdrew from the proposal. The developer proceeded with the same proposal but substituted Woolworths for Coles. The new Woolworths store began operations in early 2011. Market Impact The opening of the Woolworths supermarket and Woolworths Liquor increased the town’s supermarket/liquor retail area by 168%. Sales of the independent supermarket immediately fell by more than half, so severe reductions to operating costs were applied: staff numbers were cut by half and donations and community support were reduced heavily. Because Woolworths buys very little from local suppliers, the adverse impact extended to local suppliers: the local dairy which supplied the independent supermarket lost almost half its volume and local fresh produce suppliers lost much of their sales. These lost sales have not been able to be replaced. The independent supermarket continues to trade in very marginal conditions and is re-considering its business strategy, including possible closure. It is understood the Woolworths store has been trading below sustainable levels.

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Because the site of the new Woolworths store is on the edge of the town, pedestrian and vehicular traffic has declined in the Bright town centre and many local businesses have also experienced serious decreases in sales. As at May 2012, twenty-three local businesses were for sale or lease, some other retail businesses were operating only part time and other shops and offices have remained empty for considerable periods.

2.2.3 Churchill, Victoria
Previous Situation This town of 4,600 people, with a declining population, is a specific-industry township located a 15 minute drive from a major regional centre. It was served by two independent supermarkets, one of 1,800 square metres and the other of 700 square metres. The smaller of the independents closed down in 2007. In 2008 the larger of the two was expanded to 3000 square metres. Chain Store Entry Woolworths made an application in late 2006 for a supermarket of 2,382 square metres and some adjoining specialty shops at a nearby location within the town’s business zone. This was refused by the council as disproportionately large and incompatible with its local planning scheme. Woolworths appealed the refusal and lost. The VCAT determination reads in part: “We are not persuaded having regard to the policy frameworks and the evidence of … that from a retailing perspective there is any justification for additional floor space of 3200 square metres in Churchill.” Subsequently the planning scheme was amended and a permit for the Woolworths supermarket was granted and it opened in 2009.
Churchill, Victoria

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Market Impact The opening of the Woolworths supermarket and Woolworths Liquor increased the town’s supermarket/liquor leased area by 79%. The independent store’s sales were immediately cut by about 40%. Reductions to part time and some full time staff were made to cut the wages bill by one quarter. The range of fresh foods was reduced, impacting local fresh produce suppliers severely, but reductions in the grocery range were resisted initially. Sales have stabilised at a level that makes the store’s profitability questionable and vulnerable to aggressive discounting in staple lines. In recent weeks (May 2012) because of the decline in grocery sales, the independent allocated a substantial part of its floor space to the sale of hardware.

Independent Liquor Outlets

2.2.4 Macksville, NSW
Previous Situation This small rural town of 2,700 people is located 15 km from the nearest main town with a Woolworths and two other large independent supermarkets, and 60 km from the nearest regional centre. Population growth is projected to be about 1.0% p.a. The town has been served by a 1,350 m² independent co-operative supermarket for almost 100 years, together with a small convenience grocery store, plus specialist food stores (two bakeries, two butchers, one greengrocer). Chain Store Entry Woolworths opened a 3000 m² store outside the town centre in March 2010 in a new shopping centre, which also included five specialty shops and a 145 spaces off-street car park, on land previously zoned residential/tourism. The approval of the development by the Shire Council in June 2009 drew opposition from residents, objecting to the effect a large development, and local businesses, claiming the new out-of-centre complex would split the town’s commercial heart.

Macksville, NSW

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Market Impact The opening of the Woolworths supermarket and Woolworths Liquor increased the town’s supermarket/liquor leased area by 194%. Sales by the independent store have fallen by 40%, a result moderated by the loyalty of the store co-operative members. This necessitated a reduction of 70 staff even though it has actually increased its grocery range to further differentiate itself from Woolworths and its reduced number of national brands. It has introduced a ‘parcel pick-up’ service. However, trading remains difficult as Woolworths aggressively undercuts prices on the most frequently purchased items, with its staff price checking daily in the independent store. Local suppliers of bananas, lettuce, potatoes, citrus and dairy products have also lost a major outlet for their produce.

2.2.5 Summary of Impacts of Over-Sized Stores
The following findings were common to the three cases at Bright, Churchill and Macksville: 1. There was little or no population growth (in one case population loss) in the towns before the new supermarket entrants, and no prospect of significant change in that trend. 2. Using any conventional estimate, the grocery retail space needed to serve the populations was being provided before the new entrants by existing supermarkets. 3. The redevelopment of existing sites, or establishment of new ‘green field’ sites, was spruiked (often by local councils) as evidence of confidence in the local economy or as prospects of much needed future growth and job creation. 4. Communities were strongly divided about the new developments, some welcoming the new stores as needed price competition, others dismayed about the impact on the town’s existing businesses and local suppliers. 5. The new entrants generally doubled the retail grocery space, well beyond even optimistic requirements for the catchment. 6. The existing stores suffered a sudden and severe (~50%) drop in sales, and there is strong indirect evidence that the new entrants continue to trade well below independently viable levels. 7. Local suppliers (dairy, meat, fruit & vegetables, maintenance services) have suffered a substantial and permanent loss of trade. 8. Job creation by the new entrants has been largely cancelled out, or even outweighed, by job losses in the existing stores and local suppliers.

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9. The over supply of grocery retail space has produced fierce discounting by the new entrants to gain market share as quickly as possible, while the independents, who are less able to discount, have attempted to compete also by differentiating on range and service. 10. The resultant decline in pedestrian activity around the incumbent supermarket has impacted the nearby specialty shops that rely on the anchor tenant to attract customers. Clearly, the application of a Retail Sustainability Assessment by local government planning authorities would have helped to reduce such negative impacts on local business and community.

Independent Liquor Outlets

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3. Consequences for the overall economy32
This section addresses the key sources of market power of Australian major supermarket chains and the adverse effects that this market power has on the welfare of Australians.

3.1 Key Sources Of Market Power - Economies Of Scale And Scope
The major supermarket chains in Australia have been able to achieve a significant increase in their share of the market by exploiting economies of both scale and scope.

3.1.1 Exploitation of Economies of Scale
As outlined in the ACCC’s 2008 report into the retail market for groceries, the major supermarket chains have been able to significantly reduce their unit costs by exploiting ‘economies of scale’ in: • the purchasing of supermarket produce; • the warehousing and distribution of that produce to their outlets around Australia; and • the display and sale of those goods and services in large ‘one stop shop’ outlets, which has helped spread capital costs over a much larger volume and range of products.

3.1.2 Exploitation of Economies of Scope
In addition to reducing their costs by exploiting economies of scale, the major supermarket chains have also been increasing their profitability by exploiting ‘economies of scope’ in order to: • further reduce their costs by using their existing purchasing, distribution chains and sales outlets to source, distribute and sell a much wider range of goods and services (i.e. by exploiting economies of scope in ‘production’. Just as it is possible to reduce unit costs by purchasing, distributing and selling a much larger volume of products, it is also possible to achieve further unit cost reductions through the purchase, distribution and sale of much wider range of products); and • increase the willingness of consumers to pay for the goods and services they supply by offering their customers a wider range of goods and services from which they could choose their optimal ‘bundle’ (i.e. by exploiting economies of scope in ‘consumption’. Consumers are willing to pay more for the convenience of being able to purchase a wide range of related products from a single outlet that either has all of those products under the one roof, or at a discount from related outlets nearby, such as liquor outlets and petrol stations that accept discount vouchers). This has been achieved by offering their customers:

32 John Wallace, The Economist Network Pty Ltd

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ƒ a wider range of goods and services to choose from within the store including liquor (e.g. through the inclusion of liquor outlets either within the store, or in the immediate vicinity of the store), flowers, clothing, newspapers and magazines, office supplies, household goods and appliances (e.g. crockery, cutlery, small white good appliances) and rental of carpet cleaning equipment; ƒ credits that provide customers with a discount they can use to purchase other goods and services (e.g. shopper dockets to purchase fuel and loyalty points that can be used to purchase other goods and services. In effect, this offers customers a bundle of goods and services that do not have to be purchased at the same time or at the same place – that is, it enables ‘inter-temporal’ and ‘inter-regional’ bundling of goods and services).

Independent Liquor Outlets

3.1.3 Adverse Effects of Market Concentration on Social Welfare
It is widely recognised that by exploiting economies of scale and scope in the purchasing, distribution and sale of goods and services, the major supermarket chains have been able to deliver benefits to consumers in the form of a wider range of products at lower prices. Unfortunately, there is much less recognition that the exploitation of these economies of scale and scope by the major supermarket chains can also impose a cost on Australians (i.e. reduce ‘social welfare’) as a result of its • adverse effects on ‘economic efficiency’ (section 3.2.1) – that is, the adverse effects that is has on the overall efficiency with which Australia uses its scarce resources; and • adverse effects on ‘distributional equity’ (section 3.2.2) – that is, the adverse effects that is has on the overall ‘fairness’ with which the benefits arising from the use of Australia’s resources are distributed throughout the community.

3.1.4 Adverse Effects on Economic Efficiency
The overall welfare of Australians depends heavily on how well the nation’s resources are used – that is, the overall efficiency with which those resources are allocated and used throughout the economy (i.e. ‘economic efficiency’). In theory, it is possible to demonstrate that ‘perfect’ competition between a large number of very small firms that cannot influence the prices of their outputs or inputs will result in an efficient allocation and use of the nation’s resources. In practice, however, competition between firms is rarely ‘perfect’ and this ‘imperfect’ competition can impose a cost on the nation as a whole by encouraging a less than efficient allocation and use of the nation’s resources (i.e. ‘imperfect’ competition can result in ‘market failure’ which reduces social welfare by reducing ‘economic efficiency’). While the exploitation of economies of scale and scope has the potential to increase the welfare of Australians by improving economic efficiency, it also has the potential to reduce the welfare of Australians by reducing the extent of competition by firms in
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the markets for both the products they sell and the resources they buy to supply those products (e.g. land, labour, capital, and inputs of intermediate goods and services). In particular, such ‘imperfect competition’ reduces economic efficiency by: • Distorting patterns of consumption. The major supermarket chains can use the profits and market power they derive from exploiting economies of scale and scope to cross subsidise other goods and services (e.g. provision of ‘loss leaders’ such as heavily subsidised milk to attract customers into their stores, subsidised parking areas, subsidised fuel and other goods and services through the provision of ‘shopper docket’ and rewards points schemes that can be used to get a discount on goods and services purchased from other participating outlets). These schemes: ƒ are designed to increase the profitability of the major supermarket chains by ‘bundling’ the goods and services presented to customers in such a manner as to increase their willingness to pay for those goods and services (i.e. while the consumer might be still willing to pay for those goods and services, the major supermarket chains are seeking to ‘bundle’ their goods and services in such a manner as to extract more of their ‘consumer surplus’ – that is, the difference between what they were willing to pay for those goods and services and what they actually paid); ƒ distort patterns of consumption in the economy away from those that would exist in the absence of those cross subsidy schemes (e.g. the major supermarket chains cross subsidise certain products as a means of attracting customers to their stores). This distorts the relative prices of those products in relation to other related goods and services and encourages less efficient patterns of consumption. In particular, it encourages and overconsumption of the subsidised goods and an under consumption of other substitutable products. That is, these cross subsidies have much the same adverse effects as would the imposition of different rates of consumption tax on products that are substitutes in consumption – it distorts patterns of consumption and imposes a ‘deadweight cost’ on the community by encouraging a less efficient pattern of consumption; • Distorting patterns of production. For example, the profits and market power that the major supermarket chains derive from exploiting economies of scale can also: ƒ distort the types and quantities of goods and services supplied by the major supermarket chains (e.g. it enables them to produce, distribute and display their own ‘in house’ brands of products, even though they may not be the most efficient producers of those products);

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ƒ distort patterns of production in other sections of the economy (e.g. as noted below, it gives the major supermarket chains an unfair advantage in competing for the inputs they require, which include the land, labour, capital and enterprise they use. This enables them to attract those resources away from other industries that would have made a more efficient use of those resources. This, in turn, reduces the ability of those industries to provide the goods and services they supply); • Distorting patterns of investment. For example, the profits and market power of the major supermarket chains can: ƒ Distort patterns of investment by those major supermarket chains (e.g. they may choose to cross subsidise their construction of over-large supermarkets in regional areas to drive out competitors even though this is a relatively inefficient investment from the point of view of the welfare of the community); ƒ Distort patterns of investment in other areas of the economy (e.g. the market power exerted by the major supermarket chains has the potential to ‘crowd out’ investment by other businesses, for example, innovative specialty food growers and manufacturers); • Distorting patterns of resource use. For example, the profits and market power of the major supermarket chains can: ƒ Distort the pattern of resource use by those major supermarket chains (e.g. to the extent that they have sufficient market power to alter the prevailing relative market prices of their key inputs); and ƒ Distort the pattern of resource use in other areas of the economy (e.g. the market power of the major supermarket chains gives them the ability to compete resources away from other more efficient, but smaller and less competitive businesses, including independent grocers and other businesses competing for similar resource inputs). When assessing whether or not the competition within the supermarket sector is ‘workable’, the ACCC needs to determine whether or not the gains in economic efficiency arising from the exploitation of economies of scale and scope by the major supermarket chains are more than sufficient to offset the losses in economic efficiency arising from their ‘misuse’ of the significant market power the major supermarket chains have in the markets for both their outputs and their inputs.

Independent Liquor Outlets

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3.1.5 Adverse Effects on Distributional Equity
In addition to reducing economic efficiency, the high degree of concentration in the supermarket sector also has the potential to reduce the overall welfare of Australians by reducing ‘distributional equity’ – that is, the welfare of particular groups of Australians and residents of particular regional areas. In particular, it is important to recognise that while the exploitation of economies of scale and scope may have enabled the major supermarket chains to increase the range of goods and services they provide to their customers and reduce the prices of some goods and services, there is no guarantee that this will have improved ‘distributional equity’. On the contrary, the profits and market power of the major supermarket chains are more likely to have reduced distributional equity by: • improving the welfare of some of their consumers while reducing the welfare of others (e.g. by cross subsidising some goods and services and the construction of some regional supermarkets at the expense of the prices charged for consumers of other goods and service and in other regional areas of Australia); and • altering the welfare of Australians in a manner that is inconsistent with the equity objectives of the Australian, state and local governments (i.e. the objectives that governments have for the welfare of the residents of their specific regions of responsibility. This includes the objectives that local government councils have for the economic development of their respective regions). Indeed, there is no reason to expect that any redistribution of income and wealth within in the community that has arisen from the activities of the major supermarket chains are likely to be consistent with: • improving the welfare of all Australians. Rather, it is more likely that the major supermarket chains will engage in activities that redistribute income in a manner that is consistent with their own profit-making objectives, rather than in the best interests of the welfare of each and every Australian; and • improving the welfare of Australians in a manner that is consistent with the particular social welfare objectives of the Australian Government, and the state and local governments that are responsible for the welfare of the residents in the regions in which their supermarkets are located. Once again, it is highly unlikely that any redistribution of welfare between Australians and the residents of different regional areas of Australia, will necessarily be consistent with the equity objectives of Australian governments.

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4. Conclusion and Recommendations
The dominance of the grocery and packaged liquor markets by Woolworths and Coles has reached a point where the consequences for shoppers, suppliers, local communities, the market and the national economy are too serious and harmful to be ignored. This near duopoly is denying an increasing number of grocery shoppers the opportunity to choose a store that operates on a different model to that common to Woolworths and Coles. It denies them the choice of their favourite product brands and varieties that are deemed unprofitable to stock in a duopolist store. It closes off outlets for local suppliers of fresh produce with minimum food miles, local service suppliers, and reduces local employment to the detriment of local economies. It replaces locally grown and manufactured products with imports. It distorts markets by forcing others to bear the costs avoided by the duopolists. This market dominance has been built and is sustained through some practices that are against the spirit of free competition and rely on the unfair exploitation of market power. They include anti-competitive price discrimination, shopper docket schemes, predatory pricing, ‘store saturation’ strategies and over-sized store strategies. Such practices deserve the urgent attention of government at federal, state and local levels, and regulators such as the ACCC. MGA recommends the following specific actions with respect to anti-competitive practices in existing stores: The Australian Government should: i. reintroduce a prohibition on anti-competitive price discrimination similar to laws in other OECD countries; ii. repeal the provision in the Competition and Consumer Act that allows crosssubsidisation between related entities; and iii. ensure the ACCC has the legislative power to require prior notification by the major chains of any proposed acquisition of a site, lease or existing business. The ACCC should: i. revoke the authorisations issued to Coles and Woolworths in relation to anticompetitive shopper docket schemes between related entities; and ii. use its powers under s155 of the Competition and Consumer Act to determine whether the major chains are cross-subsidising a substantial number of loss-making supermarkets for the purpose of keeping new competitors out of local markets, eliminating existing smaller competitors and resulting in a substantial lessening of competition; further, that the ACCC determine whether such conduct by the chains is misuse of market power.
Independent Liquor Outlets

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With respect to local planning policies and provisions for land use, MGA recommends that the Australian Government should: i. recommend to the Council of Australian Governments (COAG) that a Retail Sustainability Assessment be developed to assist local government authorities to determine whether major retail development proposals are of a size commensurate with community need; ii. recommend to COAG changes to planning legislation for improved planning of activity centres and new estates by: ƒ defining the desired activity centre hierarchy and giving greater emphasis to such hierarchies in planning permit and rezoning determinations; ƒ strongly recommending that local government authorities develop communities in line with principles of ‘walkability’ and ‘healthy communities’ by creating a corresponding range of activity centres; ƒ amending land use tables to ensure major retail developments, including major supermarket developments, are subject to planning assessment, including retail sustainability assessment; ƒ introducing stricter controls to prevent out-of-centre developments, and ƒ preparing of assessment criteria which ensure that developments are consistent with a centre’s position in the retail hierarchy - the level of new space is commensurate with the level of demand, the impacts on existing centre are justified and within acceptable levels and where appropriate, the impact of the market dominance of any entrant is taken into account. MGA is ready to cooperate and assist governments, authorities and their advisors in the development of updated tools, such as a Retail Sustainability Assessment methodology, a Competition Test and a Floor Space test. These tools will improve local planning decisions and methodologies by objectively incorporating the needs and aspirations of local communities and promoting genuine competition.

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Appendix 1 - Calculations of Floor Space Supply
Pre Impact Supermarkets Post Impact Supermarkets Net additional Expenditure % Sales Impact % Over Supplied Supermarket Floor space Over-supply Pre Impact Smkt Floor space Sustainable Smkt Floor space (GLFA) Post Impact Smkt Floor space Total Smkt Expenditure Available to Catchment Supermarkets

Churchill, Vic
Supa IGA (C) IGA (C) 3,500 Woolworths (2009) 700 IGA (C) - closed 700 3,000 Supa IGA (C) 3,000

Comments:

Gloucester, NSW
-10% IGA (G) FoodWorks (G) 1200 500 $476,943 3,543 Total: 1,700 Total: IGA (G)

Comments:

(For methodology, refer Appendix 2) August, 2012

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Location
Note 2 Note 3

Churchill

Yinnar

Boolarra

Hazelwood Sth

Churchill is located only 11 kms from Morwell. As the major retail and employment centre of the region, a net outflow of supermarket expenditure is expected from Churchill to the major supermarkets in Morwell. With a static population, there is no prospect of the catchment growing to support the new level of supermarket floor space in the foreseeable future. The pre-impact level of supermarket floor space allowed the existing stores to trade at more profitable levels. 4,900 1,500 FoodWorks (G) Woolworths (Prop) 1,200 2,200 1,357 38% -

Gloucester

Barrington

Stratford

The existing IGA has planning approval to expand to 1,500 sq m. Currently there is some escape expenditure to surrounding towns, including the major regional centre of Taree 79 kms to the east. Whilst the new Woolworths will retain some of this, there will still remain some net escape expenditure to surrounding towns. With the population only expected to grow at a rate of 0.7% pa, there is no prospect of the catchment growing to a level sufficient to support the new level of supermarket floor space proposed in the foreseeable future.

Key Catchment Towns
-10% $636,101 4,725 Total: 3,700 Total: 7,200 2,475 52% -45% -100%

Catchment Population (est. 2012)

Catchment Supermarket Expenditure (est. $ pw)

Note 1

Total:

8,413

$699,711

Total:

5,931

$524,637

Appendix 1 - Calculations of Floor Space Supply
Pre Impact Supermarkets Post Impact Supermarkets Net additional Expenditure % Sales Impact % Over Supplied Supermarket Floor space Over-supply Pre Impact Smkt Floor space Sustainable Smkt Floor space (GLFA) Post Impact Smkt Floor space Total Smkt Expenditure Available to Catchment Supermarkets
Independent Liquor Outlets

Bright, Vic
IGA (B) FoodWorks (B) 250 1,100 956 2,903 FoodWorks (MB) Other Small Indpts 956 Woolworths (2010) Other Small Indpts 1100 FoodWorks (MB) 250 FoodWorks (B) closed 1,600 IGA (B) 1,600

Comments:

Macksville, NSW
-10% FoodWorks (M) Friendly IGA (M) IGA (B) Friendly IGA (B) Friendly IGA (SH) Friendly IGA (SP) 300 600 300 300 300 $780,133 5,795 Total:

Comments:

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Location
Note 2 Note 3

Bright

Porepunkah

Mt Beauty

Falls Creek

The Bright catchment benefits from a significant level of visitor population, thus requiring a net increase in available spending. However, despite this the catchment has a 30% over supply in supermarket floor space. The hardest hit is the Bright IGA who is now trading at a loss and is not expected to survive into the medium/long term. With the population to remain relatively static, there is no prospect of the catchment growing to a level sufficient to support this new level of supermarket floor space over the foreseeable future. 3,384 Total: 1,584 FoodWorks (M) Friendly IGA (M) IGA (B) Friendly IGA (B) Friendly IGA (SH) Friendly IGA (SP) Woolworths (2010) 6,582 1,584 300 600 300 300 300 3,198 787 14% -44%

Macksville

Bowraville

Scotts Head

Stuarts Point

Macksville is located only 13 kms from the larger town of Nambucca Heads. An allowance has been made for escape expenditure to Nambucca Heads and to a lesser extent Kempsey (regional centre located 52 kms to the south). Whilst the over-supply is relatively small at 14%, it is more than sufficient to jeopardise the long term viability of the existing FoodWorks. With the population to remain relatively static, there is no prospect of the catchment growing to a level sufficient to support this new level of supermarket floor space over the foreseeable future.

Key Catchment Towns
10% $681,717 5,064 Total: 3,906 Total: 6,809 1,745 34% -55% -100% -5%

Catchment Population (est. 2012)
August, 2012

Catchment Supermarket Expenditure (est. $ pw)

Note 1

Total:

7,252

$613,545

Total: 10,063

$858,146

Appendix 1 - Calculations of Floor Space Supply
Pre Impact Supermarkets Post Impact Supermarkets Net additional Expenditure % Sales Impact % Over Supplied Supermarket Floor space Over-supply Pre Impact Smkt Floor space Sustainable Smkt Floor space (GLFA) Post Impact Smkt Floor space Total Smkt Expenditure Available to Catchment Supermarkets

Tura Beach, NSW
IGA (TB) Woolworths (2010) 3,200 600 IGA (TB) - closed 600

Comments:

Wongaling Beach, Qld
FoodWorks (WB) Supa IGA (T) FoodWorks (T) 5 Star (T) Smkt (MB) Euramo Smkt 400 300 300 200 1980 300

Comments:

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Location
Note 2 Note 3

Tura Beach

Tura Beach is located less than 6 kms from Merimbula. Given the summer tourism / visitor traffic across this region a net increase in spending potential has been assumed. Despite this the catchment is not of a size to support both the IGA and the Woolworths. Consequently the IGA closed post the opening of Woolworths. Whilst the catchment is experiencing good population growth, there is no prospect of it growing to a level sufficient to support this new level of supermarket floor space over the foreseeable future. Whilst Woolworths argue that they are positioning the store for the future, it creates an environment within which the existing independent supermarket can not survive. -5% $767,679 5,703 Total: 3,480 Total: FoodWorks (WB) closed Supa IGA (T) FoodWorks (T) 5 Star (T) Smkt (MB) Euramo Smkt Woolworths (2008) 7,480 300 1,980 400 300 300 200 4,000 1,777 31% -100% -25% -5%

Wongaling Beach

Key Catchment Towns
5% $325,750 2,420 Total: 600 Total: 3,800 1,380 57% -100%

Catchment Population (est. 2012)

Catchment Supermarket Expenditure (est. $ pw)

Note 1

Total:

3,415

$309,462

Total: 10,665

$806,063

(Excludes Liquor)

Tully

Mission Beach

Silkwood

Wongaling Beach is located on the coast, 23 kms off the Bruce Highway. This region benefits from the seasonal trade generated from tourists / visitors. However, the peripheral location of the store, accessed via relatively local roads through a large expanse of forest, makes it difficult to attract its share of customers from the total catchment. For this reason an allowance needs to be made for greater expenditure to be retained with the Tully supermarkets, and for some spending to escape to Innisfail to the north. This catchment is not of a size to support both the new level of supermarket floorspace. Consequently the FoodWorks closed post the opening of Woolworths. Whilst the catchment is experiencing some population growth, there is no prospect of it growing to a level sufficient to support this new level of supermarket floorspace over the foreseeable future. Whilst Woolworths argue that they are positioning the store for the future, it created an environment within which the existing independent supermarket could not survive.

August, 2012

Appendix 1 - Calculations of Floor Space Supply
Pre Impact Supermarkets Post Impact Supermarkets Net additional Expenditure % Sales Impact % Over Supplied Supermarket Floor space Over-supply Pre Impact Smkt Floor space Sustainable Smkt Floor space (GLFA) Post Impact Smkt Floor space Total Smkt Expenditure Available to Catchment Supermarkets
Independent Liquor Outlets

Pittsworth, Qld
-10% Supa IGA (P) IGA (M) FoodWorks (M) Woolworths (2007) 500 FoodWorks (M) 500 2,500 300 IGA (M) 300 2,400 Supa IGA (P) 2,400 $569,482 4,230 Total: 3,200 Total: 5,700

Comments:

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Location
Note 2 Note 3

Pittsworth

Milmerran

Pittsworth is located less than 40 kms from the major regional centre of Toowoomba. An allowance has been made for some escape expenditure to Toowoomba recognising its important regional role (place of employment, higher order retailing, entertainment, alternative major supermarkets). Whilst the catchment is experiencing some population growth, there is no prospect of it growing to a level sufficient to support the new level of supermarket floor space over the foreseeable future.

Key Catchment Towns
1,470 35% -33%

Catchment Population (est. 2012)
August, 2012

Catchment Supermarket Expenditure (est. $ pw)

Note 1

Total:

8,680

$626,431

Appendix 2 - Methodology for Assessing Floor Space Requirements
The following methodology has been adopted in this report to assess the level of supermarket floor space in these locations: 1. A catchment has been defined for each location. For simplicity only a single main catchment has been used. This catchment represents the region in which the majority of customers for the supermarket(s) live. 2. The resident population is determined and their demographic characteristics assessed. The 2006 ABS Census is the primary data source. 3. The population is then forecast to 2012. This relies on modelled data from the ABS, including Population Projections and Building Approval data. 4. The grocery spending potential of this population is then predicted. This relies on modelled data from the ABS Household Expenditure Survey, Retail Trade and Retail Industry Commodity Sales. 5. An adjustment is required for the degree of remoteness of the location. The more remote the location, the greater the share of the available expenditure on food and groceries. In highly urbanised locations supermarkets are in greater competition with specialty shops and other retail outlets (butchers, bakers, convenience stores, discount department stores, etc). 6. An allowance for growth in the market is also assumed due to price inflation and real growth in retail expenditure. 7. For each location an allowance must be made for the trade generated from the non-residential catchment. This includes trade resulting from tourists, passing traffic and local employment. 8. An allowance is then made for trade to escape the catchment. In particular, retail locations of a lower order of hierarchy can expect to lose trade to higher order centres. Leakage occurs due to competition from supermarkets located outside the catchment, the failure of the store/centre to supply a full range of goods and services and the loss of trade when people travel outside the catchment for other reasons and combine such trips with grocery shopping (eg for employment, entertainment). 9. A net position is then determined, balancing the forecast level of escape expenditure and any additional non-residential expenditure. 10. The level of sustainable supermarket floor space can then be forecast by dividing the available supermarket expenditure by an estimate of the level of sales required per square metre for the supermarkets to be economically sustainable.

August, 2012

Let’s Have Fair Competition! | Appendix 2 | Page i

11. It has been assumed1 in this analysis that the average industry level of economic sustainability for supermarkets is $7,000 per annum per square metre (gross leasable floor area). It is noted that the average performance for Coles and Woolworth across their networks are $9,400 and $11,100 respectively (based on annual reports). 12. The level of sustainable supermarket floor space for the catchment is then compared to the current and proposed supply. Where the supply is less than the sustainable level it implies that the supermarkets are able to trade at a profitable level. Where the supply is greater it implies that the viability of this space is in doubt. 13. Impacts on the independent supermarkets have been included to further demonstrate the degree to which the region has become oversupplied.

Independent Liquor Outlets

1

There are different ways to calculate sales/square metre - e.g., by calculating sales based only on the retail selling space or by calculating sales based on total floor space, including storage, cold storage, offices, loading dock, etc. MGA calculations are based on total space, but other methods are also valid.

Page ii | Appendix 2 | Let’s Have Fair Competition!

August, 2012

LET’S HAVE FAIR COMPETITION!
Master Grocers Australia Suite 5, 1 Milton Parade MALVERN VIC 3144 Tel: 03 9824 4111 Fax: 03 9824 4022 Freecall: 1800 888 479 www.mga.asn.au

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