This article first appeared in Lexis Nexis Competition and Consumer Law News (2016) Vol 21, No 7, pp. 88-92
In June 2015, Coles announced its intention to buy eight of Supabarn’s grocery stores in the ACT and NSW and one supermarket site in the ACT which is currently under development. The ACCC is set to announce its decision in relation to the proposed acquisition on 10 September 2015.
Coles and Supabarn competitors have made known their views about the proposed acquisition. The Master Grocers of Australia have been reported as saying that they are strongly against the sale, as the Canberra market is already dominated by Coles and Woolworths.
Jos de Bruin, the CEO of the Master Grocers Australia, has stated that:
Any acquisition of an independent supermarket group small, medium or large will have a detrimental effect on the independent supermarket industry, on its health and its future longevity.
The sale of most of Supabarn’s grocery assets to Coles is likely to create an uncomfortable situation for the Australian Competition and Consumer Commission (ACCC). While the ACCC may want to prevent Supabarn stores from getting into the hands of Coles, it will face an uphill battle to prevent the acquisition.
Ironically, the greatest obstacle to the ACCC blocking the Coles acquisition could very well be a number of the key findings made by Justice Emmett in the ACCC v Metcash case, largely in response to Metcash’s submissions in that case.
Coles has announced its intention to acquire the Supabarn stores in Civic, Wanniassa, Kaleen and Crace in the ACT and the stores in Five Dock, Sutherland, Sans Souci and Annandale in NSW. In addition, Coles is seeking to purchase the undeveloped Casey site in the ACT.
Supabarn’s Gymea store in NSW and a development site in Kingston in the ACT are not part of the sale to Coles.
Coles and Supabarn applied to the ACCC for informal clearance of the proposed acquisition in June 2015 and the ACCC commenced its market enquires shortly after.
The ACCC is expected to announce its initial decision on 10 September 2015. At that time the ACCC may decide to either clear the proposed acquisition or issue a Statement of Issues. The ACCC issues a Statement of Issues or SOI when it believes that a merger raises competition concerns which require further investigation.
Interestingly, the ACCC also decided to hold a consumer forum on the proposed acquisition in the ACT on 3 August 2015. The purpose of this forum was to hear directly from consumers about their views on the proposed acquisition and any effect it would have on competition.
The ACCC has signalled the main competition issues it will be focusing on in its consideration of this matter. As stated by ACCC Chairman, Rod Sims:
Given Supabarn’s position as a significant independent supermarket chain, an important focus of the ACCC’s review will be whether its removal as a competitor would substantially lessen competition between supermarket chains. The review will also examine each of the individual local markets in which the Supabarn stores operate, and any effect on grocery wholesaling and supply markets.
Sims also provided an insight into the factors which the ACCC will and will not be taking into consideration in its assessment of the proposed acquisition:
The main indicator of a substantial lessening of competition is whether the acquisition would enable firms in the market to raise or reduce product quality (including service and choice) or innovation following the acquisition. Section 50 does not allow the ACCC to consider factors other than those related to competition. In particular, the ACCC cannot oppose a proposed acquisition because of its potential to impact on the character of a local new area.
In the ACCC’s market enquiry letters it provided further detail about the issues it will be focusing on, namely:
· the proximity of competition between Coles, Supabarn and other supermarket operators;
· the potential impact of the proposed acquisition on factors such as prices, specials, product quality, service levels or range of products; and
· the potential impact of the proposed acquisition on wholesale procurement and supply markets.
In relation to final issue above, the ACCC has sought specific comment on the impact of the proposed acquisition on “Metcash’s scale” and whether the acquisition:
…would affect Metcash’s ability to supply goods to supermarket and/or liquor retailers at prices that allow those retailers to compete closely with supermarket chains.
The first issue that the ACCC will be considering is whether Coles’ acquisition of the eight Supabarn stores would be likely to substantially lessen competition in local markets for the supply of groceries to consumers.
The ACCC has previously defined local grocery markets as extending to an area of between 3km and 5km surrounding each relevant store. As pointed out by the ACCC, this is a general rule of thumb which may be deviated from depending on specific market conditions.
In its market enquiry letters, the ACCC included the following table to show the level of direct competition which currently exists between Coles and Supabarn in each of the relevant local markets:
Table 1: details of the target stores and nearby Coles supermarkets
Size (approx. sqm)
Canberra Centre –
Manuka – 4.7km
Dickson (proposed) – 3.2km
Kaleen – ACT
Belconnen – 4km
Jamison – 4.8km
Gungahlin – 4.8km
Dickson (proposed) – 4.7km
Wanniassa – ACT
Tuggeranong – 3.4km
Crace – ACT
Gungahlin – 3.1km
Five Dock – NSW
Burwood – 2.3km
Ashfield – 2.4km
Concord – 2.7km
Annandale – NSW
Leichhardt – 1.6km
Broadway – 1.8km
Pyrmont – 2.5km
World Square – 2.9km
Sutherland – NSW
Kareela – 2.8km
Miranda – 4.1km
Illawong – 4.2km
Kirrawee (proposed) – 1.4km
Miranda (proposed) – 4.1km
Sans Souci – NSW
Ramsgate – 1.5km
Sylvania – 3.3km
Hurstville Station – 3.8km
Hurstville – 3.9km
Brighton Le Sands – 4.2km
Casey – ACT
Gungahlin – 3.8km
Amaroo (proposed) – 3.4km
The above table shows quite clearly that Coles and Supabarn are direct competitors in all of the relevant local markets, with the exception of Casey, where Supabarn is in the process of building a grocery store. However, the important issue which the above table does not show is the existence and number of other competing Woolworths, ALDI, IGA and Costco grocery stores in each geographic location. Indeed, it is likely there will be multiple Woolworths, ALDI and IGA grocery stores in each of relevant local market.
Ultimately it is highly unlikely that the ACCC will identify any competition issues in any of the above local markets, given the competitive constraints which will be exerted on the merged entity by Woolworths, ALDI and IGA grocery stores in each of the local markets.
State or Territory markets?
The ACCC has also foreshadowed in its market enquiry letters that it will be looking at the effect of the proposed acquisition on competition in a broader geographic market. The ACCC asks market participants to comment on:
Whether the proposed acquisition would substantially lessen competition between supermarket chains (over broader geographic areas such as the ACT).
The approach seems quite controversial given the ACCC’s focus on local markets when assessing grocery store acquisitions. It is difficult to see how the ACCC could possibly define a broader geographic market in relation to the proposed acquisition, given its earlier insistence on local market definitions in the Metcash case as well as in numerous ACCC clearances.
The issue of more interest and complexity relates to the ACCC’s consideration of the impact of the proposed competition on wholesale markets. As stated above, the ACCC has specifically sought views from market participants about the potential impact of the proposed acquisition on Metcash’s scale and its ability to supply goods to supermarket and/or liquor retailers at prices that allow those retailers to compete closely with supermarket chains.
Often when one business proposes to acquire a competitor, the ACCC is concerned that the merged firm will gain a substantial degree of market power in terms of both the sale of goods or services to consumers and in the acquisition of goods and services from suppliers. This latter type of market power, which is called monopsony power, is a legitimate concern of competition regulators, as this could potentially result in the merged entity being able to force the prices of inputs below competitive levels.
However, monopsony power is unlikely to be a concern in relation to Coles’ proposed acquisition of Supabarn because Coles and Supabarn obtain their grocery products from different sources. Coles sources products from its own internal wholesale operations, whilst Supabarn sources a large proportion of its groceries from Metcash.
Therefore, if the proposed acquisition goes ahead the current grocery purchases made by Supabarn from Metcash will effectively be transferred from Metcash to Coles’ internal wholesale operations. In other words, Metcash will lose these wholesale grocery sales to Coles.
It appears that the ACCC is particularly concerned about the negative competitive effects that this loss of wholesale volume may have on Metcash. The potential concern is whether Metcash will lose economies of scale as a result of its loss of Supabarn stores.
The concept of economies of scale has been defined as follows:
The cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are shared over a larger number of goods. Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies.
While the above quote relates to economies of scale in manufacturing, similar principles apply in relation to the wholesaling of grocery products. Metcash is likely to derive significant cost advantages from higher levels of wholesale output. This is because Metcash would be able to spread its fixed costs over larger wholesale volumes of groceries which it supplies to independent grocers.
Therefore, one issue which the ACCC will be considering is whether the loss of Supabarn as a wholesale customer to Metcash is likely to adversely impact Metcash’s economies of scale to such an extent that the proposed acquisition could be said to result in a substantial lessening of competition. If Metcash loses significant scale, which in turn raises its per-unit fixed costs, this could result in a rise in its wholesale prices to independent grocers. Such a rise in wholesale prices will increase independent grocers’ operating costs, which may make their retail pricing to consumers less competitive as compared to vertically integrated grocery retailers.
Ultimately, the ACCC will be concerned if the proposed sale of the Supabarn business to Coles will result in a reduction in Metcash’s ability to compete at the wholesale level, which in turn will adversely impact the ability of independent IGAs to compete against Coles, Woolworths, ALDI and Costco stores. The ACCC will be keen to prevent IGA grocery stores from becoming uncompetitive and potentially going out of business if they are unable to compete with vertically integrated grocery retailers.
We cannot know with any certainty whether the proposed acquisition will significantly damage Metcash and IGA stores. Clearly a great deal would depend on the evidence which Metcash provides to the ACCC on a confidential basis about the impact of the proposed acquisition on their scale and pricing.
It is also arguable that any attempt by the ACCC to base its decision on a substantial lessening of competition in a wholesale grocery market may run counter to Justice Emmett’s decision on market definition in the Metcash case.
In early 2011, the ACCC took legal action against Metcash to prevent its proposed acquisition of the share capital of Franklins for $215 million. The ACCC took its action because it formed the view that the acquisition would lead to a substantial lessening of competition in the market for the wholesale supply of packaged groceries to independent supermarkets.
The ACCC argued for a narrow market definition – namely a market for the wholesale supply of packaged groceries to independent supermarkets in NSW and the ACT. Metcash on the other hand argued that there was a national market for the supply of packaged groceries, which included both retail and wholesale functional levels.
Justice Emmett, who handed down his decision in August 2011, agreed with Metcash’s market definition.
There is clearly vigorous competition at the retail level. It may be that there is a market for the supply of grocery products generally by retail. As I have said, Metcash and Pick n Pay contend for a national market for the supply of packaged groceries, fresh products, general merchandise and health, beauty and cosmetic products to the consuming public by way of integrated retail chains and independent wholesalers supplying independent grocery retailers. The participants in that market would include the major supermarket chains, Franklins in respect of the 80 Franklins Corporate Stores, the operators of the Franklins Franchise Stores, the semi-integrated arrangements involving Metcash and the IGA bannered stores and the semi-integrated arrangements involving SPAR and the SPAR and 5 Star bannered stores. However, the Commission has not suggested that the proposed acquisition of Franklins by Metcash would be likely to have the effect of lessening competition in such a market.
I am not persuaded that there is a separate market for the wholesale supply to independent supermarket retailers of packaged groceries, as the Commission defines those terms in the Statement of Claim. The Commission has based its case solely on there being a separate market for the wholesale supply to independent retailers of packaged groceries, as defined. The Commission’s pleaded case as to market definition has not been made out. It follows that the proceeding must fail.
In other words, Emmett J supported the view that the market for the supply of groceries was a national market which encompasses both retail and wholesale functional levels. As a consequence of this finding, which was not disturbed by the Full Federal Court on appeal, Coles’ acquisition of Supabarn would have to be assessed in terms of a national market for the supply of groceries, rather than:
· a NSW and ACT geographic market for the wholesale supply of packaged groceries ; or
· separate wholesale and retail functional markets for the wholesale supply of packaged groceries; or
· a separate wholesale market for the supply of packaged groceries to independent supermarket retailers, as argued by the ACCC in the Metcash case.
The broader market definition will clearly dilute the competitive impacts of the Supabarn acquisition both in geographic terms and also at the wholesale level. Furthermore, on the basis of Metcash there is also no legal basis for seeking to argue a separate wholesale market for the supply of packaged groceries to independent supermarket retailers.
While it is not possible to know at this time whether the ACCC will attempt to block the Coles proposed acquisition of Supabarn, there would appear to be some major obstacles to the ACCC pursuing this option. It is inevitable that the competitive impacts of the proposed acquisition at the wholesale level will be significantly diluted if the acquisition is considered in the context of a broader national grocery market that includes independent and integrated grocers and does not distinguish between the retail and wholesale supply of groceries. The main obstacle to the ACCC even contemplating action to protect Metcash from the potentially devastating loss of sales volume appears to be Emmett J’s conclusions regarding market definition from the Metcash case - ironically, conclusions which were based largely on submissions forcefully and successfully put to the Federal Court by Metcash itself.
 Australian Competition and Consumer Commission (ACCC), Public Register: Coles – proposed acquisition of 9 Supabarn supermarkets at http://registers.accc.gov.au/content/index.phtml/itemId/1187175
 ACCC, Q&A: Coles proposed acquisition of Sup barn supermarkets,
2015 at https://www.accc.gov.au/update/q-a-coles-proposed-acquisition-of-supabarn-supermarkets
 Australian Broadcasting Corporation,
of Supabarn to Coles should be blocked by
ACCC, Master Grocers Australia Say, Sale 15 July 2015 at http://www.abc.net.au/news/2015-07-15/sale-of-supabarn-to-coles-should-be-blocked-by-accc-mga-says/6621414
 Above, n 3.
 ACCC v Metcash Trading Limited  FCA 967.
 Above, n 2.
 ACCC, ACCC to hold
consumer forum on Coles’ proposed
acquisition of ACT Supabarn supermarkets, Canberra 17 July 2015 at https://www.accc.gov.au/update/accc-to-hold-canberra-consumer-forum-on-coles-proposed-acquisition-of-act-supabarn-supermarkets
 ACCC, ACCC will review Coles’ proposed acquisition of Supabarn supermarkets,
19 June 2015 at https://www.accc.gov.au/media-release/accc-will-review-coles%E2%80%99-proposed-acquisition-of-supabarn-supermarkets
 Above, n 8.
 Above, n 1.
 Investopedia, Economies of Scale at http://www.investopedia.com/terms/e/economiesofscale.aspn
 The author acted for a party who was involved as a witness for the ACCC in the Metcash case.
 Above, n 5, at [1-2].
 Above, n 5, at 
 Ibid at 
 ACCC v Metcash Trading Limited  FCAFC 151.