We need more supermarkets, not regulation

Bookmark and Share Economics & Deregulation, Food & Environment, Deregulation Unit and Food | Tim Wilson
The Australian 29th January, 2013

To drive down prices at the supermarket checkout requires more supermarkets, not more regulation.

Competition tsar Rod Sims has indicated 2013 will be the year of supermarket regulation to make the sector more competitive.

Speaking to the ABC earlier this year, Sims argued "the supermarket sector, the liquor sector, the hardware sector are either very concentrated now or will become increasingly concentrated".

In response, he sees the ACCC's job as being to regulate and have the final say on the decisions of supermarkets and their acquisitions. Sims's solution is more regulation, not more supermarkets. It's an illogical way for a regulator to ensure competition.

Competition occurs when markets are open so business is free to meet consumer demand. That relationship breaks down when a bureaucrat uses regulation to dictate which businesses can meet consumer demand, when they can and how they can, especially when they don't all offer the same value proposition.

A time-poor professional living in Sydney's trendy Vaucluse may want to buy their branded groceries and organic fruit and vegetables at nearby boutique retailer, Thomas Dux, or have them delivered to their home from an online supermarket.

But that is not the typical Australian experience. In most suburbs, consumers are price sensitive and pay 10-20 per cent of their total income on food. To keep costs down, they buy their private-labelled groceries at Aldi, Coles, Woolworths or a Supa IGA. They scan home-delivered catalogues and listen and watch radio and television promotions to see where the best deal is this week.

But everyone runs out of milk at 9pm and pays a higher price at their local store for convenience.

In that context it's hardly surprising Australians are some of the least loyal supermarket customers in the world. Nearly 60 per cent of us are likely to change supermarkets for a mere 5 per cent discount.

According to market research, we have been "trained" to be disloyal, which is why our letterboxes are regularly flooded with catalogues to lure us in. As disloyal customers, the most important thing is to be offered choice.

There's no doubt the majority of sales are with two significant players. It is regularly argued that the Coles and Woolworths "duopoly" has up to 80 per cent market share combined of packaged groceries. Sims himself often argues it is 70 per cent.

According to the ACCC's 2008 inquiry into groceries, these claims "exaggerate the position of the retailers". Instead, the ACCC estimated that the two major supermarkets control between 55 per cent and 60 per cent.

Their market share is now likely to be lower since Aldi has rapidly increased its market share and Costco has entered the Australian market.

Analysing packaged groceries also only provides one measure of competition. Coles and Woolworths' dominance drops in fruit and vegetables, meat and poultry and bread and cakes because people like their local fruit shop, butchers and bakeries, which are often located in the same mall.

If there ever was a duopoly, it is almost certainly over. The job of the regulator should now be to bury it by making sure the market is open for new entrants.

Instead of trying to manipulate the market, the ACCC should be advocating for the end of local and state regulations that make it more expensive for new supermarket entrants.

The consequences are backed up by a 2007 federal government study that concluded that the absence of a major supermarket in a community reduced competitive pressure, leading to prices 17 per cent higher than in those communities that did have a major supermarket.

If that cost was passed on, households in those communities that lack a major supermarket, particularly in new and outer suburbs and rural and regional communities, would pay an extra $1800 a year.

It is unlikely Australians want to pay more for their food.

The only way to ensure they don't is to improve competition by removing barriers to entry, not increase regulation that hands over power to bureaucrats to decide what people want, when and where.