This article first appeared in Lexis Nexis Competition and Consumer Law News (2016) Vol 21, No 7, pp. 88-92
Introduction
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.[1] The ACCC is set to announce its decision in
relation to the proposed acquisition on 10 September 2015.[2]
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.[3]
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.[4]
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[5],
largely in response to Metcash’s submissions in that case.
Background[6]
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.[7]
Competition issues
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.[8]
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.[9]
In the
ACCC’s market enquiry letters it provided further detail about the issues it
will be focusing on, namely:[10]
· 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.[11]
Local markets
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:[12]
Table 1: details of the target stores and nearby Coles
supermarkets
supermarkets
Store location
|
Size (approx. sqm)
|
Nearby Coles
supermarkets
|
Canberra Centre –
ACT
|
2,950
|
Manuka – 4.7km
Dickson (proposed) – 3.2km
|
Kaleen – ACT
|
1,730
|
Belconnen – 4km
Jamison – 4.8km
Gungahlin – 4.8km
Dickson (proposed) – 4.7km
|
Wanniassa – ACT
|
1,924
|
Tuggeranong – 3.4km
|
Crace – ACT
|
1,302
|
Gungahlin – 3.1km
|
Five Dock – NSW
|
2,159
|
Burwood – 2.3km
Ashfield – 2.4km
Concord – 2.7km
|
Annandale – NSW
|
768
|
Leichhardt – 1.6km
Broadway – 1.8km
Pyrmont – 2.5km
World Square – 2.9km
|
Sutherland – NSW
|
1,531
|
Kareela – 2.8km
Miranda – 4.1km
Illawong – 4.2km
Kirrawee (proposed) – 1.4km
Miranda (proposed) – 4.1km
|
Sans Souci – NSW
|
2,086
|
Ramsgate – 1.5km
Sylvania – 3.3km
Hurstville Station – 3.8km
Hurstville – 3.9km
Brighton Le Sands – 4.2km
|
Casey – ACT
(under construction) |
2,960
|
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:[13]
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.
Wholesale markets
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:[14]
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.
Metcash case[15]
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.[16]
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.[17]
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.[18]
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.[19]
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,[20]
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.
Conclusion
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.
[1] 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
[2] ACCC,
Q&A: Coles proposed acquisition of
Sup barn supermarkets, 3 July
2015 at https://www.accc.gov.au/update/q-a-coles-proposed-acquisition-of-supabarn-supermarkets
[3] Australian
Broadcasting Corporation, 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
[5] ACCC v Metcash Trading Limited [2011] FCA 967.
[7] ACCC, ACCC to hold 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
[8] 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
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