The supermarket duopsony

The concentration of market power between the two big supermarkets has been a concern for some time. Mostly consumers are concerned with the duopoly (two sellers) but prices and availability are also influenced by their duopsony (two buyers).

There have been many accounts over years about supermarkets taking unfair advantage of suppliers. Using store brands to freeze out the rest, the $1 milk fiasco, squeezing the margins of their suppliers to improve their own profits, punishing suppliers who speak out; the list goes on.

Until recently the only government move was to create a voluntary code of conduct. However this aspect of market power has been examined more this year and there is more action. In short, the code of conduct is to made mandatory and failure will attract fines. You can read more here (The Conversation) or here (the ABC).

We haven’t seen the Bill yet so exactly how it will work is not entirely clear. There is a dispute resolution process so hopefully problems can be sorted out with a neutral arbitrator watching rather than behind closed doors where the one with the most power wins if they are prepared to play hard-ball.

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A duopsony in conjuction with a duopoly, something that has been known about for many years and blindly accepted as being not a particular problem by the Gov.
Oh yes the ACCC has investigated, and said there are problems with the market power of the big two, but no ability to do anything about it.
So let’s see what comes of this new initiative by the Gov with some legislation, the primary purpose I suspect will be to deflect the pressure and blame from them to the colesworths.

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As a Woolies shareholder, it bothers me that they are always singled out for trying to maximise their profit. In a free market, this is to be expected. Many other essential services are unreasonably expensive, including internet, phone plans, phones, power, fuel, tradespeople, healthcare, insurance, and education.

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If not all those areas you have noted, then most of them have been pointed out many times on the Community. The trouble Australia has with the biggest 2 supermarket chains is the disproportionate share of the market they have and the influence they apply to maintain quite a large slice of the market, Woolies has not been singled out as Coles Group has also been chastised. While the Corporations Act basically states that a business has to maximise it’s profits for it’s shareholders, it is supposed to be constrained by doing so legally and ethically. If a business is exerting too much influence then it should be called out. Noting that in the latest surveys and inquiries, both Coles Group and the Woolworths Group have been equally given poor reports about their behaviours. Too much concentration is not good for consumers in many areas, some areas are in my opinion best left in the hands of Government, others need to be less concentrated than they are. Others will differ in regards to my opinion about who owns what, that doesn’t mean though that what we currently have is a good division of market share.

Should we go back to laissez faire in market operation or is there a requirement for intervention by Governments and their legislation. Child labour was acceptable under laissez faire until it was banned by Acts of Governments, we had slave labour (some people still try to use it), we had no meal breaks, no toilet breaks and/or facilities, we had work days that exceeded any fair work and relaxation breakup…each of these steps and many more were fought and some such as fair wages and wages growth are still fought, by businesses and corporations as it affects/affected their profits.

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For clarity Coles is owned by the Coles Group after a number of changes of ownership and corporate arrangements along the way.

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Pretty sure it doesn’t say that. It does say that the directors have to act in the best interests of the shareholders. Which means acting legally and ethically. It also means that it could be in the best interests of shareholders to forego any or all profit and use the money to pay off debt or invest in growing the business.

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4 posts were merged into an existing topic: Profit maximising, is it Law or just mythical

An interesting read regarding Woolworths ties to Walmart .

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Of course it is but unless you are in favour of completely untrammelled markets the tendency needs to be limited.

The problem comes from two directions, laws against excessive market concentration have not worked and the two main players both have a track record of treating their suppliers if not illegally, unethically.

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An inquiry about 15 years ago by the ACCC found that there was too much concentration of power in the market by the two main big players. Nothing really came of it, the same concerns are again echoed today. The only action seen is more inquiries and some small tinkering at the edges. No one in power seems willing to split the two market leaders to bring about a possibly more balanced sector. Here is some commentary from 2009 about the old inquiry and its outcomes.

I have posted here why there is barriers to entry into Australia based on the Lidl/Kaufland experience:

While there is a lower number of supermarkets in Australia than many other countries/regions (which have a significantly greater population and lower density than Australia), IBISWorld notes in its 2014-2019 analysis of trends that in Australia “The Supermarkets and Grocery Stores industry is one of the most fiercely competitive industries in Australia.” For a new entrant to enter the market is very challenging and expensive to gain market share, often for little return.

There is also a risk that new entrants could also reduce competition from the independent grocers/fruit and vege/butchers/bakers sector as any growth strategy to ensure profitability will be to maximise the gain of customers from existing retailers. Currently independents are struggling and reducing their existing customer base is the last thing they need. The later is often forgotten when discussing the sector in Australia and is a major concern to the independents.

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2 posts were merged into an existing topic: Price gouging and the possible effects of Corporate Behaviour and Government policy and law

[Moderator edit: Some postings have occurred that are outside the boundaries of this topic. They have where necessary have been moved to a more suitable topic. There are topics/ threads that are more suited to other goods such as school uniforms if that is what you wish to talk about, please search for them and post there. If needed/wanted, please create a new thread to cover the area of concern/debate.]

This thread is about how supermarkets treat their suppliers.

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When one looks at the store locations are the actions of the duopsony also adding to the retail costs?

It is common to find with equal convenience a Coles and Woolworths supermarket in most larger urban areas. The two may be located in the same shopping centre, adjacent, on opposite sides of a shopping hub, or within a few blocks of each other.

One could ask whether it’s efficient to have two retail outlets, both with a large footprint, and similar store overheads so close? Our modest shopping needs were once met with fewer store opening hours. It feels like there is now more choice and many more opening hours. Are the extended hours and choice of two supermarkets, both with increased trading hours and duplicated costs of doing business (overheads, retail footprint etc) actually increasing the cost of the goods we are purchasing?

Beyond keeping competition out have Coles and Woolworths delivered a solution that assures both of a guaranteed income, complete with the inefficiencies of duplicating each others sites? Aside from the cost of product, the cost to service and operate a supermarket is a mostly a fixed cost. Recovery is spread over the cost of each unit of sales. Double the turn over and one halves these costs per unit sold. Perhaps we have too many supermarkets and too much choice for the density of population in the major urban areas?

Let us not get into a digression about the general requirements of the role of director of a company. This is about the concentration of market forces and how that affects the suppliers to the supermarkets.

Every company is under pressure from shareholders to maximise profit, the law says the directors must not do that illegally but it does not say how to do it in detail. Some companies have other objectives written into their constitution. For example, ethical superannuation funds are supposed to avoid some investments even if that means making less profit.

It is quite easy for a company director to prioritise profit above all, it is not required by law but if they are under much pressure by the shareholders. They core problem here is what is the right balance, how hard should they go? Evidence over many years says the duopsony go very hard.

There are a few members here (I am one) who have run their own business. While doing that you will have to deal with buyers and suppliers of all kinds. If you find one that is unethical it produces huge problem for a small business. The reasons are that you stand to lose money directly, that you will waste a great deal of time trying to sort out problems and you may suffer personal aggravation and strain having to deal with it. The usual solution is, as soon as possible, to stop doing business with the person/organisation. So in a free market excesses of behaviour is to some extent self correcting. If you act like a turd nobody after a while nobody will do business with you.

But what if you cannot get away from the offending party because the market is so concentrated you have no choice but to deal with them?

That is where the suppliers to Colesworths find themselves and why a series of studies have recommended attempts to force the duopsony to be ethical. It is either that or break up the concentration, or do nothing.

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The Courts and Common (Tort) Law disagree that it isn’t law. All the Corporations are not only governed by the Corporations Act but by the interpretation by the Courts of what the responsibilities are. It has been found by the Courts, that profit maximising is the duty of directors, the social and moral requirements are secondary.

There are enough items of case law and enough papers that look at the case law to show that the need to maximise profit is the overbearing responsibility. I posted one such paper that looks at what the law requires in my post at The supermarket duopsony - #7 by grahroll.

What Woolworths and Coles do, is perhaps unethical to us. It may be predatory and may sit on the boundary of what is legal. It is obvious though that if we want change in our country regarding this behaviour, that we need new legislation that sets out a different direction and puts what is currently case law off to the side.

One such recent piece of law was making a Mandatory Code of Conduct for our Supermarket chains. Some businesses still escape this obligation.

and

“Although the Albanese government has affirmed its support for the review, conducted by former Labor minister Craig Emerson, the final report rejected calls to expand the reforms to non-supermarkets like Bunnings, Chemist Warehouse, and Dan Murphy’s.

“The review considers that the code should not be extended beyond supermarkets to cover other retailers,” the inquiry’s final report said.

“This is not to say that these markets are functioning well for all players in those markets.”

Similarly, Dr Emerson declined to alter the code to offer greater protections for wine makers from major liquor retailers, with the report arguing that alcoholic beverages did not fall under the definition of groceries.”

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Shall we say the Corporations Act does not require it and get back to the point. There is still much wiggle room to maximise profit while remaining ethical or not and it is there that the problem of market concentration has its consequences. Unless you can show a case where a director was in court for being too ethical.

7 posts were merged into an existing topic: Profit maximising, is it Law or just mythical

Coles and Woolworths are public companies. Within their shareholders one will find directly or indirectly through equity management most of Australia’s Superannuation funds. If there is abuse are we (a large portion of Australia’s consumers) at the same time the beneficiaries of and contributors to how they do business.

One of justifications by government to break up or sell off of public enterprise has been it has become complacent, bloated and inefficient. It has changed how governments see any monopoly. To consider how change has followed the PMG - Telstra, the Commonwealth bank, our electricity supplies etc. It makes for interesting comparisons that for each example one might point to - there is no one universal outcome. Consumers gave up one monopoly with the copper telephone network to be burdened with a not fibre to the home NBN. Still all in public hands, but now digging ever deeper into the customers pocket. With electricity supply a service part funded and the costs shared through the public purse is now supposedly a competitive sector with many enterprises taking a share of the profits. Has regulated competition ensured efficiency and kept prices down? It’s complex.

For Coles and Woolworths perhaps the priorities are wrong.
Has growth come from being more efficient, or has it come through opening more stores? IE maximising market share to the exclusion of other competitors? Hence they set the market price the customer must pay. It should be no surprise both are so close on price across a typical shop.

Will legislation and regulation make them any more competitive or their offerings less expensive? One could look to Aldi and Costco as alternative models of efficient supermarket retailing. Fewer choices, less shelf space required and a greater turn over per store. An unintended but to be expected consequence might be fewer and less commodious stores. Which way the government legislation leans, a close look at the annual shareholders reports from both supermarkets owners might hold the answer/s. If expecting change can one see the deck chairs and attendants at the ready?

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It means that for many investors, money would be better placed in the bank in a savings account - as it will earn more and be less risk that on the sharemarket.

Especially when one looks at the affordability of groceries. Australia affordability, which is a measure which balances differences in incomes, business costs etc, shows that Australia’s groceries are more affordable than or not overly dissimilar to many other comparable countries:

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