Playing favourites should not be the business of government

There's a theory that Woolworths' very expensive rollout of the Masters chain really isn't about hardware stores - it's about hurting Wesfarmers. And, in the process, Sunshine Coast Council is providing a master class in dumb government - playing favourites, limiting competition, disadvantaging consumers.

There's a bit of attention being paid to how much Woolworths is losing on its Masters investment and why Woolies is being less than totally open about it. The market knows more about Masters from the accounts of its American 15 per cent shareholder, Lowes, than from its Australian 85 per cent parent that declines to break out its performance.

That 15 per cent stake lost Lowes $US15 million ($16.5 million) in the May quarter, up from $US10 million in the preceding quarter and the same as the May quarter last year. Divide by 15, multiply by 100 and translate into real money and, at $110 million a quarter, it looks as if Masters is an expensive business.

Just how expensive, Woolworths isn't saying other than to disagree with such simple maths and with that of a couple of analysts who reckon it's far from cheap with losses forecast in the hundreds of millions of dollars for the next few years.

A theory retailed to me by a retailer is that Masters making a profit or not is not the point for Woolworths, that there is a bigger game afoot. With Wesfarmers' Coles hurting Woolworths' fabulously profitable supermarkets by getting its act together and becoming more aggressive, Woolworths wants to hurt Wesfarmers' fabulously profitable Bunnings with the very attractive (to consumers) Masters offering. It's a theory that helps explain the relative luxury of Masters. I've only visited one for a sticky beak but found it impressive. The place made Bunnings look like the cold sheds they are. The Masters store felt more expensive yet had the same prices.

And Masters is showing a desire to get right into Bunnings' face, not dividing up the geography as a comfortable duopoly should, but going head-to-head in a way that consumers enjoy but should also ensure low margins - or none.

Which is where Queensland's Sunshine Coast Council comes in as an example of government folly. On the eve of Noosa de-amalgamating, the worthy councillors of the Sunshine Coast unanimously voted in March to play favourites, protecting Bunnings and Mitre 10 from the threat of a Masters store in Noosa and deciding where their constituents would be allowed to shop.

"There is a massive war between Coles and Woolies and I don't want Noosa to be collateral damage in this crazy war," Noosa hinterland councillor Tony Wellington recently told Brisbane's Courier-Mail.

A number of councillors spoke against the Masters-Bunnings rivalry including Caloundra councillor Tim Dwyer, who warned small business was being picked off as the Woolworths-Coles duopoly sought to control the market. Woolworths' application was rejected despite recommendation by council officers to approve it because it was in keeping with council plans for the area.

In the same story, the Courier-Mail recorded the irony that council voted to allow a $350 million mall expansion in Maroochydore to enable a David Jones store to open.

It's easy to dismiss such stuff as typical of wacky local government, but it applies to the higher levels as well. Federal, state and local are all guilty of ignoring the Productivity Commission's guidance that it is not the role of government to prevent competition, but to free up businesses so they can compete.

If Wesfarmers and Woolworths want to compete hard, even to the point of Woolworths effectively subsidising Masters' customers, it is not the proper business of government to protect whoever the incumbents might be. At the state level, big rezoning decisions and trading hours policies routinely favour the incumbents over competition, with consumers paying for it.

Federally, there's an argument that what Canberra is doing with the car industry is a bit like the Sunshine Coast Council. Instead of Bunnings and Mitre 10, the government has been playing favourites with Toyota, Holden and Ford - or perhaps the AWU - by transferring the odd billion from taxpayers to the multinationals instead of letting market forces take their course and allowing consumers to benefit from the big subsidies other governments pay car companies.