Wholesale change a way to sharpen grocery rivalries

CAN companies be forced to compete? Not really. That's the sad reality facing the ACCC after its inquiries into the lacklustre petrol and grocery sectors.

In groceries, for example, the Australian Competition and Consumer Commission found that the big supermarkets, Coles and Woolworths, and Metcash, the wholesale supplier to most of the independents, were "workably competitive". "Cosily competitive" is more like it.

Coles and Woolworths do not really compete. There is no incentive to do so. Rather, they match prices. And Metcash sets prices under the "umbrella" set by Coles and Woolworths.

There's no doubt Australia needs a third force in grocery retailing to spur competition for Coles and Woolworths, which, the ACCC says, have 55-60% of grocery sales. But there is already a third force -Metcash, which has about 17%. Aldi, the new player, has 3%.

The problem is not just that Metcash doesn't compete on prices, it discourages other wholesalers. Metcash, for which many held high hopes it would emerge as a genuine competitive force, is the whipping boy of the ACCC's report. This is odd. An inquiry aimed at nailing the anti-competitive practices of the big two finds, instead, they are just fat and complacent, and gets stuck into the third player.

A study of Coles' competitive collapse would have been more pertinent.

Metcash may have succeeded in creating a viable independent force but its business practices leave it vulnerable. The ACCC says Metcash is extracting "monopoly" profits because of the lack of alternative wholesalers. Metcash, taking advantage of the Coles/Woolworths pricing "umbrella", sets prices that do not allow independents to compete aggressively against the big two. Franklins started its own wholesaling operations in NSW, claiming Metcash pricing made it impossible to make a profit.

Metcash, with none of the costs of running stores, makes $3.59 out of every $100 consumers spend at Metcash-supplied stories. Coles makes $3.39 and Woolworths $5.76, but both have store running costs. The ACCC estimates that if a new wholesaler entered the market, wholesale prices to independents could by 2-3%. That could be pivotal, as the ACCC says 75% of larger independents are within three kilometres of one of the majors.

But Metcash is busily building barriers to switching. It is taking equity in some independent chains in a bid to lock them in. It is also curbing the ability of independents to go elsewhere with "contracts making it difficult for retailers to exit supply arrangements, withholding of rebates and lowering of service levels".

The ACCC says it will closely examine these practices.

Competition regulators always seem to struggle with wholesale markets. If competitors can't be forced to compete, they can be prodded. Between unit pricing, creeping acquisition laws and the widely panned GroceryChoice website pricing comparisons, the ACCC has ticked the easy boxes. Changes in urban planning laws might deliver real market zip by encouraging foreign competitors like Costco to join Aldi.

More could be done. If Metcash's practices are as sharp as the ACCC says, then action under section 47 of the Trade Practices Act on exclusive dealing might be appropriate. The ACCC could also revive the retail fair dealing code, and sharpen independents' collective bargaining with Metcash.

It's too extreme to contemplate forcing Coles and Woolworths to divest their wholesale operations to create new wholesale competition. But the idea should be to pressure Metcash while opening opportunities for a second wholesaler and new retailers.

Otherwise, grocery retailing - like petrol and the reluctance of Optus to challenge Telstra in communications - will be happy to relax in comfortably profitable "workable competition" to the pain of consumers.