How to fuel competition confusion

The shopper docket controversy has put the supermarket chains on notice and thrown the petrol retailing sector a curveball, not to mention consumers.

The Australian Competition and Consumer Commission’s Rod Sims created a bit of a stir on Monday when he criticised the shopper docket schemes used by the big supermarket chains and warned about their impact on competition within the petrol retailing sector. With a long-running inquiry into the schemes, should the chains have cause for concern?

The issue of the shopper docket schemes is a complex one and the capacity of the ACCC to actually do anything to abolish or limit them is equally thorny.

As Sims said on Monday, he now has power to ban them. He’d have to take the chains to court, presumably alleging anti-competitive conduct and/or predatory pricing if he wanted to get rid of them.

Under the schemes shoppers at Woolworths or Coles get discounts on their fuel at aligned Caltex and Shell outlets if they buy a minimum dollar amount of groceries.

In the past the discounts have generally ranged from about 4c a litre to 8c a litre but recently, for high-value baskets (above about $200), the discount has been as much as 45c a litre and Sims is concerned that if there is a combination of big discounts over an extended period it could drive other petrol retailers out of the market, leaving Woolworths and Coles dominant.

The concept of the dockets is that they drive bigger basket sizes at the supermarkets and bigger volumes through their petrol stations, with the higher-margin supermarkets funding the discounts rather than the very low-margin fuel outlets. In both their businesses the higher volumes validate the strategy.

As Woolworths' Grant O’Brien indicated today, the chains’ customers aren’t complaining. The supermarket sector is intensely competitive, with the resurgence of Coles and the growth of Aldi and more recently Costco driving price deflation, and shoppers also get access to cheaper petrol.

As he also says, it isn’t as if the discount dockets have only recently come into the market.

"Customers are benefiting from this and have done for a decade-and-a-half and will continue to benefit going forward," he said.

In fact Woolworths’ customers, thanks largely to the ACCC, have been benefiting since 1996.

In 1995 Caltex acquired Ampol. As a condition (and a very controversial one at the time) for approving the merger and giving Caltex access to $500 million of synergies the ACCC, under Allan Fels, insisted the companies divest terminals and elements of their distribution system to facilitate the entrant of a new player or players to the sector.

It also insisted Ampol release entrepreneurs David Goldberger and David Wieland from the non-compete agreement they struck when they sold their Solo chain to Ampol in 1989. The ACCC’s actions were seen as an attempt to restructure the sector to a blueprint of its own.

The two Davids bought the assets, as Fels had hoped, launched the Liberty brand and (also encouraged by the ACCC, which had always been cynical about 'Big Oil') struck a deal with Woolworths. In 2001 Woolworths bought the Liberty network. Coles responded by buying the Shell retail network in 2003 and Woolworths responded by creating an alliance with Caltex.

The flow-on effects of the dockets on the sector saw ExxonMobil sell 295 of its retail outlets to the 7-Eleven convenience store group last year.  Metcash has deals with independent retailers and BP. The two big chains aren’t necessarily the only retailers with the capacity to offer discounted fuel nor the only petrol retailers aligned with a supermarket operator.

The two big grocery chains have been accused of pushing up prices in their supermarkets to fund the discounts but there is no objective evidence of that, despite numerous inquiries into the sector.

The large-scale presence of the aggressive Aldi chain and gradual expansion of Costco – of which both have offshore supply chains and significantly lower cost structures than Coles or Woolworths – means that even if they weren’t battling each other fiercely there would be competitive disciplines on their prices.

Even as the ACCC is investigating the shopper dockets it is also, once again, looking at potentially collusive behaviour in the petrol sector. The two inquiries are peculiarly contradictory – it is looking at whether prices in the sector are too low because of the discounting and at whether they are too high because of collusion.

It faces similar confusion in its inquiries into the supermarkets, with some critics alleging collusion and inflated pricing and suppliers claiming abuses of market power as the supermarkets have increased their home branded product ranges, waged their milk wars and forced retail prices down.

Again, numerous inquiries over a long period into that sector have, at worst, concluded that the sector is "workably competitive".

The commission looked at the shopper dockets in the context of the approval process for the Woolworths deal with Caltex in 2003, when Graeme Samuel was chairman, and in particular focused on their long-term implications for competition within the petrol retailing sector. It cleared that deal.

Despite the obvious consumer benefit being generated by the battles between Woolworths and Coles in the supermarket and petrol industries there is no doubt that their wars have spillover effects for the independent supermarket and independent petrol retailer sectors, as well as the supermarkets’ supply chains.

Given that the discount docket strategy has been around for 17 years and the big expansions in their availability occurred a decade ago, however, one would have thought that if their impacts were so pernicious, competitors in both those sectors would have been wiped out by now.

If the chains were to maintain 40c a litre or more discounts for a protracted period, or lowered the thresholds for the bigger discounts, the ACCC might have reason to be concerned.

Attempting to take those discounts away from consumers would, however, be extremely unpopular and could, perversely, result in reduced competition and consumer benefit in both the supermarket and petrol sectors.

It would also provoke a potentially protracted and fierce legal war with the chains, which have invested heavily in building their petrol retailing networks – and the docket schemes.

Competition policy, it seems, wasn’t meant to be easy.