What's the worst kind of competition?

Here Jason Prowd reveals the answer.

Capitalism breeds competition. It’s what drives innovation and progress. It’s also what drives profits down and why companies go broke. It comes in many forms. Here let's look at one of the worst: a competitor that doesn't directly need to make money.

Let me explain with a couple of examples.

Fuel retailing has always been a tough business. And it got a whole lot tougher when Woolworths and Coles decided they wanted in. Neither needed to make money from fuel retailing, they had a supermarket duopoly to take care of that. Instead, they wanted a smart way to increase customer loyalty. Offering a fuel discount was a near perfect solution. We all buy fuel, and we all hate paying for it. Any saving is worth it. It’s no surprise a 4-cent-litre discount got us so excited. The trouble is that 4 cents a litre is about equal to the retail profit margin on fuel. No wonder there are few independent petrol stations left. They couldn’t all survive selling $5 sausage rolls and smokes.

The airline industry also fits the bill. Qantas's sole role, for example, is to make money for its shareholders (well, at least try). Singapore Airlines on the other hand is controlled by the Singaporean Government (via Temasek) – its goals and purposes aren’t just for Singapore Airlines to make money but to make Singapore an attractive and easy place to visit. Little surprise then that Mr Joyce has been having so much trouble with Qantas's international division.

That’s the past, what of the future?

Flight booking website Webjet appears particularly vulnerable. Google, for example, could easily launch a similar service. It wouldn’t matter if it makes any money directly, because Google is more interested in growing the reach of its network helping it collect more data and sell more ads. Google maps demonstrates how effective a Google solution could be.

I'm sure there’s plenty more in the firing line, capitalism demands it.

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