Duelling duopolies

A compulsory reduction in the market share of supermarkets raises all sorts of issues...

DUOPOLIES are pretty common in Australia: think Qantas and Virgin, Telstra and Optus, David Jones and Myer, Ford and Holden, Fairfax and News, even Liberal and Labor. And of course there are Woolworths and Coles.

Some people believe Australia’s small population and remoteness tend to promote duopolies. Others claim our business culture gives too much emphasis to crushing competitors rather than attracting more customers.

Either way, the Coles and Woolworths duopoly is currently attracting a lot of attention. If some politicians (current or aspiring) have their way, a bill called something like “screw Coles and Woolies” will be introduced as soon as parliament returns after the election.

In some respects it is understandable why this should be so. While being a supplier to big supermarkets can be very good business, it is always challenging, rarely fun and occasionally ruinous. There are some dreadful stories about their cutthroat and occasionally unethical behaviour.

But from the consumer’s perspective, it is mostly pretty good. The supermarkets compete with each other at a ferocious level, which in the last couple of years has led to grocery price deflation. Apart from the loss of choices arising from the growth in house brands, consumers have little to complain about. It is only suppliers who are unhappy.

So what might a ‘screw Coles and Woolies’ bill look like? How might it redress the evils, real or imagined, of these two?

Some argue for a forced reduction in the market share of the two companies, on the assumption that they are simply too dominant. There are lots of views about how much lower it should be. Others believe the prices paid by supermarkets should be regulated, at least for fresh produce purchased from farmers.

Some insist that small supermarkets should be given a boost, perhaps through taxpayer subsidies, to help them compete with the big guys.

And there are proposals for a code of conduct to govern relationships between supermarkets and suppliers, with debate revolving around whether to make it voluntary or mandatory. A standard form contract has also been suggested as part of this. These are common with utility suppliers like phones and electricity, but there is no precedent for them in a business relationship of this kind.

Significant challenges would arise if any of these was implemented. Subsidising small supermarkets, for example, would result in a queue stretching from Sydney to Perth and require a major increase in taxes. And just imagine the arguments about who qualifies and who doesn’t; what would be done about Aldi, Costo and IGA?

If prices paid to farmers were regulated, consumers would inevitably pay more and incentives for farmers to improve would decline. That would lead to loss of public support, the government would lose votes and there would be political parties offering to lower prices by abolishing the subsidies. Forcing up the price of food is never going to win friends.

A compulsory (ie legislated) reduction in the market share of supermarkets raises all sorts of issues about private property. The constitution requires the Commonwealth government to pay compensation if it confiscates property, but it can get away with devaluing it (as it has in the case of bans on land clearing and the plain packaging of cigarettes).

But there is also the political issue to consider. Woolworths and Wesfarmers, which owns Coles, are listed public companies. Forcing them to divest stores or sell less from existing stores would cause substantial financial harm and devalue their shares, reducing the value of hundreds of thousands of superannuation accounts.

Probably the only proposal with any chance of being implemented is a code of conduct. But even here there are plenty of issues and potential for unintended consequences.

What supermarkets offer is access to their shelves. This is expensive real estate and they are entitled to maximise their return on it. Replacing some products with others that generate a higher return, such as a house brand, is part of that process. If the code intruded into that, it would adversely affect their business performance.

A code might be useful at preventing unexpected demands for additional levies or reductions in prices. Not that supermarkets should be unable to seek levies or lower prices from suppliers, but suppliers do not want them to undermine their plans and budgets without reasonable notice.

A code might also cover issues that cause conflict such as responsibility for spoiled stock, who has the final say whether stock meets specifications, returning unsold stock, delivery expectations and matching changes in market prices.

And yet, the supermarkets and most suppliers will say there is no need for a code to address these. In the end, supermarkets need their suppliers just as much as suppliers need supermarkets. And it is not compulsory for either to sell to or buy from each other.

For those who think duopolies are bad, there are also options. None of the duopolies is total; alternatives can be found in every case. Indeed, in the case of supermarkets there are plenty.

All that’s needed is to convince consumers to stop buying from them. Best of luck with that though.

  • David Leyonhjelm has been an agribusiness consultant for 25 years. He may be contacted at reclaimfreedom@gmail.com
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    FarmOnline
    David Leyonhjelm

    David Leyonhjelm

    has worked in agribusiness for 30 years and is a Senator for NSW representing the Liberal Democrats.
    Date: Newest first | Oldest first

    READER COMMENTS

    PeterT
    2/09/2013 5:05:02 AM

    In David's article he states "This is expensive real estate and they are entitled to maximise their return on it." In relation to Colesworth shelf space. When will the world wake up to the fact that farmers own expensive real estate also, and are entitled to a fair return on that ?!
    John Niven
    2/09/2013 5:29:35 AM

    Another pathetic attempt to isolate and solve a far more complex social situation. For a start there is no mention of foreign goods competing with local product produced under different conditions.
    Bushie Bill
    2/09/2013 6:31:55 AM

    They have to earn it, Peter T, exactly the same way Colesworth and everyone else have to earn it. No-one is going to hand it to them. If you want a better return on your capital, it is up to you to figure out how to achieve it. No-one owes you a living, as you apparently believe. That is the difference between real business operators, like Colesworth, and whingeing farmers.
    Bushie Bill
    2/09/2013 6:42:57 AM

    Another breath of intelligence and objective analysis from David Leyonhjelm. More power to his pen! It is unfortunate that the level of ability to objectively analyse in Redneck RARA is virtually non-existent.
    John Newton
    2/09/2013 6:55:11 AM

    Ask the farmers who've dealt with them how wonderful they are
    Dickytiger
    2/09/2013 7:26:40 AM

    And ask the consumers who buy from them, John Newton. They don't seem to have a problem.
    Lincoln
    2/09/2013 7:42:21 AM

    David, if I did not know you better I would say you have had a visit. Please address the inequities of supply chain abuse ie Price takers and price makers. Secondly why shouldn't the Duopoly commit to a code of conduct\supplier accreditation, everybody else must. (HACCP etc) You can't do business with the duopoly if you don't. Nobody denies any business the right to make a profit and deliver returns on Investment to shareholders but if ColesWorth insist on double digit growth perhaps it is time the public payed more for their fresh food in line with the ever increasing costs of production.
    torobrook
    2/09/2013 7:46:23 AM

    And so what would you propose as an alternative John Newton - a meeting of the seller and buyer scrambling around in the dust or mud of an idyllic farmers market whilst being serenaded by a dreadlocked guitar strumming busker. Give me the sparkling sweeping fresh floor of the supermarkets with their great diversity of proucts any time.
    seethelight
    2/09/2013 12:17:20 PM

    The Ruddster got into power the first time with a promise to reduce prices with his Grocery Watch initiative.That was so successful He's going to smack the duopoly because their prices are too low.This time between he and the coalition they are going to get the prices 'just right'.And I thought Goldilocks was a fairy tale.
    Bosco
    2/09/2013 3:32:16 PM

    I'm confused. Australia is going to become wealthy by becoming a food bowl for countries whose imported food is lining our supermarkets shelves. What the? Let's stop importing other people's food and start eating our own food. The countries we say need Australia to be their food bowl can stop exporting their food and start eating it themselves. Everyone fed. Everyone happy.
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    Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com

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