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Groceries, power & fuel: crunch time for competition review

The Federal Government’s flagged a review of competition laws, the first in two decades. It will need to look at how duopoly grocery retailers push regulators to limit competition. AAP/Dean Lewins

The Government’s push to reform competition laws will continue next year with a review focusing on the key groceries, utilities and automotive fuel sectors.

These are the sectors that most regularly affect the consumers hip pocket, and there are a myriad of “competition choke points”. The Coles and Woolworths duopoly presides over the grocery sector; they could move to undermine the business models of new entrants. And a private price exchange operating in the petrol industry is a cause for serious concern.

Colesworths could block competitors

The major supermarket chains, Coles and Woolworths, dominate the grocery sector. But despite their dominance, they appear to compete tooth-and-nail with each other.

Over the past decade, and particularly since 2007 when Wesfarmers bought Coles, the supermarket giants have played a game of competitive “follow the leader”. Where one goes, the other follows.

This Tweedle-Dum and Tweedle-Dee competition means that customers have little loyalty to the chains. They look the same, sell the same and many consumers have both “loyalty” cards. That’s great for consumers, but bad for Coles and Woolworths.

The competitive risk in groceries is not the current degree of competition. Despite high concentration, competition is vigorous.

The risk is that Coles and Woolworths will use regulators and politicians to try to moderate their competition and to prevent rivals using different business models from expanding.

Because Coles and Woolworths are mirror images of each other, there is an opportunity for different types of supermarkets to enter and compete effectively for customers who do not fit the “Colesworths” mould.

A heavy discounted, home brand oriented competitor could enter and succeed with small stores and smaller prices. And Aldi has done just that, successfully stealing the most price-conscious customers.

Or a big-box supermarket could enter, appealing to large families with bulk discounts and one-store convenience for everything from groceries to diamond rings. That’s Costco’s business model.

This competition is a problem for Coles and Woolworths. Neither can unilaterally change its strategy to fight the entrant. To do so would leave the middle ground open to its duopoly competitor. But neither will be happy to see the fringes of the market being eaten away by the new entrants.

One response by the big two would be to change the law and undermine the Aldi or Costco models.

Aldi stores have less than a tenth of the number of product lines stocked by Coles and Woolworths. The big two are pressuring their low-cost competitor to sign up to a code of conduct that could limit their ability to compete under their model. AAP/Julian Smith

Woolworths is calling for Aldi to sign up to the grocery Code of Conduct. The Code fits the “Colesworths” model where name-brand and own-label products compete side-by-side.

But the Aldi model is almost exclusively own-label. If it signed up, parts of the code dealing with “retailer own brand products” would be difficult and confusing to apply.

At worst, Aldi would find itself burdened with increased costs or would have to alter its business model in a way that raised prices, hurt its suppliers and customers, but benefited its competitors.

Alternatively, Coles and Woolworths may try and get the regulator to help reduce competition. The recent petrol-dockets deal is a case in point.

Are petrol discount vouchers likely to harm competition between petrol stations? As my research with Joshua Gans showed about a decade ago, the answer is yes.

Do these vouchers raise profits for Coles and Woolworths? As our research also showed, the answer is no. As each supermarket copied the other, fuel dockets became a competitive burden to them both. Both chains will be happy to jointly limit their petrol discounts because this will reduce competition and raise profits.

This means that the Australian Competition and Consumer Commission needs to tread very carefully when signing undertakings to solve competition issues. In the case of shopper dockets, the ACCC has solved a competitive problem in petrol. It has also helped the major supermarket chains limit competition in groceries.

Bowser wars

Petrol is another key area of consumer concern. But Australian petrol prices are closely linked to the Singapore benchmark price of oil. As Rod Sims, the ACCC’s Chairman, noted when releasing the Commission’s 2013 petrol report:

The report shows that international prices and domestic fuel taxes are the key drivers of petrol prices. Domestic petrol prices remained high in 2012-13 on the back of persistently high international prices.

Don’t like high petrol prices? Just be glad of the strong Australian dollar, otherwise the price could have broken the A$2 per litre barrier in 2013.

The competitive issues revolve around the way major petrol retailers exchange information.

Using a third party, the retailers exchange price information in real time. This computerised information is explicitly unavailable to normal customers. The ACCC signalled its concerns about price exchange back in its 2007 petrol inquiry. But the practice continues.

This private price exchange would be illegal in the banking industry. It would probably be illegal in the USA or Europe. As a recent Monash Business Policy Forum paper noted, the Federal Government’s review of competition laws needs to consider Australia’s price disclosure laws, and decide whether to extend them or scrap them.

If extended, they would eliminate the ability of petrol retailers to privately exchange prices.

The electricity death spiral

Before Christmas, both the Australian Energy Regulatory and the Economic Regulation Authority of WA plan to release new guidelines on the “rate of return” for utilities. These guidelines will be carefully read by industry insiders and will impact prices in the next few years.

The bigger competitive issue, however, relates to electricity demand and the structure of electricity network regulation. This is the so-called electricity death-spiral. I have discussed this before.

The Grattan Institute recently released a paper covering similar issues.

If network use declines then the regulatory model used for utilities in Australia will come under significant pressure. And that will require a response by our political leaders.

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