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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: admin@mga.asn.au Website: www.mga.asn.au
August, 2012
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 Australias 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 Australias resources, the same is not true of imperfect competition between Australias 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 Australias 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
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 & Youngs 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
August, 2012
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 Australias 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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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.
UK Competition Commission, The Supply of Groceries in the Uk Market Investigation, (30 Apr 2008)
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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).
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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 Deloittes 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.
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.
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.
Woolworths
Coles
Supa IGA
1 1 1 1 4 4
1 2 1 1 5 1 6 11
1 1 1
Coles Newstead
WOW Prospect
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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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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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.
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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.
18 Martin, J., Review of ACT Supermarket Competition Policy, (September 2009), p17
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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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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: BHPs 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 ACCCs 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.
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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 chains 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 analysts 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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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 communitys 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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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 Councils decision and refused the development proposal. The judge concluded that the proposed major supermarket is inconsistent with the councils 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 Councils 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.
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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.
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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.
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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.
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Market Impact The opening of the Woolworths supermarket and Woolworths Liquor increased the towns supermarket/liquor leased area by 79%. The independent stores 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 stores 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.
Macksville, NSW
August, 2012
Market Impact The opening of the Woolworths supermarket and Woolworths Liquor increased the towns 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.
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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.
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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; 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).
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: 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); 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: 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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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: 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); 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: 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 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.
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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: defining the desired activity centre hierarchy and giving greater emphasis to such hierarchies in planning permit and rezoning determinations; 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; amending land use tables to ensure major retail developments, including major supermarket developments, are subject to planning assessment, including retail sustainability assessment; introducing stricter controls to prevent out-of-centre developments, and preparing of assessment criteria which ensure that developments are consistent with a centres 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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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:
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.
Note 1
Total:
8,413
$699,711
Total:
5,931
$524,637
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:
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.
Note 1
Total:
7,252
$613,545
Total: 10,063
$858,146
Comments:
Comments:
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
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.
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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:
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.
Note 1
Total:
8,680
$626,431
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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.
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.
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