Breaking the duopoly

Coles and Woolworths boost their margins by compelling suppliers to pay fees of various kinds

IF YOU wanted to go into the supermarket business in opposition to Coles and Woolworths, you’d find it tough going.

Let’s assume you had enough money to lease premises, fit them out, buy stock and employ staff, then carry the losses until there were enough customers to make a profit. That would cost quite a lot, but we are not talking about financial barriers here.

The first obstacle would be finding premises to lease.

Obviously you can’t set up a supermarket just anywhere; ideally there should be customer parking, a loading bay for delivery trucks, disabled access and a convenient location.

You might think a good place would be in one of the big shopping complexes, but try getting in. Shopping centre operators love having Coles and Woolworths as anchor tenants and are extremely reluctant to upset them.

For their part, Coles and Woolworths let it be known they get upset if competitors are allowed in. Most likely you will be told the centre has a policy of not allowing any more supermarkets.

Perhaps you might find a shopping complex in which Coles and Woolworths are not present, or only one of them is there. In that case the problem is not that the two are present, but the reason they are not present.

Coles and Woolworths employ some very smart analysts who know whether a location can support a supermarket. If one or both of them is not there, there is a good chance the area doesn’t have enough customers.

Another option may be to find a more out-of-the-way location, such as one street back from the main shopping area. Sometimes these can change the character of an area, with other shops moving in around them and boosting customer traffic.

In that case your problem will be getting planning approval. It is amazing how many people can be induced to object to a supermarket in their area. There will be too much traffic. Parking will be impossible. Trucks will be noisy and dangerous. Children and dogs will be run over. And the old favourite, it will reduce house values.

The same people who were bitching about supermarket monopolies and their prices last week, will this week be up in arms at the suggestion of one setting up in their neighbourhood. And, quite possibly, ‘helpful’ people will show up offering to translate their concerns into expertly-written letters of objection to Councils and other authorities, pointing out that the area is already very well served by Coles and/or Woolworths.

And if you finally locate premises, negotiate a lease and gain planning approval, your next problem will be buying stock. You need to be able to offer a broad range of products, ideally including the brands that are familiar to customers. Aldi gets away with mainly offering its own brands, but it still stocks iconic brands such as Vegemite and Milo.

You will then discover you cannot buy products at prices that allow you to be competitive with Coles and Woolworths. Being cheaper is not essential, but you can’t afford to be significantly more expensive.

One reason is suppliers are under pressure not to sell to competitors like you. The trend to home brands has reduced that a bit, but suppliers of branded products risk losing their shelf space in Coles and Woolworths if they do business with those they disapprove of. That means you.

And even if they will sell to you, it is highly unlikely they will offer you the same prices as they charge Coles or Woolworths. They will argue that this is because you are not buying in the same quantities, and in some cases that is a factor, but unwillingness to annoy Coles and Woolworths is also a big concern.

On top of that, Coles and Woolworths boost their margins by compelling suppliers to pay fees of various kinds and taking their time to pay suppliers. If you try that you’ll probably find yourself with no stock.

So how might all that be fixed? Mainly by freeing things up so competitive forces can work their magic. Instead of trying to impose its view of what free range means, the ACCC could focus on anti-competitive clauses in leases and supply agreements, and check on anti-competitive verbal understandings.

State governments could make substantial improvements to planning laws so that supermarkets can be established in new areas without too much difficulty, even if parking and traffic flows are not ideal.

And there may be merit in reviewing unconscionable conduct in the Competition and Consumer Act to ensure it addresses the issue of fees charged by supermarkets.

Coles and Woolworths are actually quite competitive with each other within certain parameters, but barriers to new competitors mean few others get the chance to try a different approach. The solution is to remove those barriers.

  • David Leyonhjelm has been an agribusiness consultant for 25 years. He may be contacted at reclaimfreedom@gmail.com
  • Page:
    1
    FarmOnline
    Date: Newest first | Oldest first

    READER COMMENTS

    R See 1
    25/03/2013 7:58:21 AM

    Suggest that readers of this read the article and comment son the ABC web site regarding actiities of the ACCC in regard to the two major supermarkets. Interesting!
    Fred Haskins
    25/03/2013 11:39:11 AM

    What was not mentioned in this article was how the chain stores "acquire " product and sell it with out paying for the product until way after it has been sold, with the supplier taking full risk of theft, use by date etc.
    stockman
    27/03/2013 5:17:15 PM

    More Aldi stores could be the answer. Surprising how much market share they take off Coles & Woolworths.I live in a town where the three operate and it's amazing the amount that goes out of Aldi.
    Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com

    COMMENTS

    light grey arrow
    I'm one of the people who want marijuana to be legalized, some city have been approved it but
    light grey arrow
    #blueysmegacarshowandcruise2019 10 years on Daniels Ute will be apart of another massive cause.
    light grey arrow
    Australia's live animal trade is nothing but a blood stained industry that suits those who