Knocking out the competition
Supermarkets can offer cheap prices by marketing “loss leaders” – products they sell below wholesale cost – and by benefiting from wholesale discounts and rebates that aren’t available to smaller competitors. “We might pay $22 wholesale for a bottle of scotch and see it retailing at Dan Murphy’s for $20,” says Franc Gionta, who runs Amotos, a family-owned bottle shop in Leichhardt, NSW. “I don’t know how they fund it – wholesalers tell me we get the same trade price. The majors must be covering the difference themselves.” Phillip Connolly, who owns two outlets in Sydney, tells a similar story. “We recently bought Crown Lager direct from Carlton Brewery for a wholesale price of $51 per carton, and put it on sale in the shops for $55. At the same time, Dan Murphy’s had Crown on special at $75 for two cartons.”
When below-cost selling occurs in a fairly concentrated market, the typical fear is that once the competition is reduced or squeezed out, major players will recoup lost revenue through higher prices. So if loss leaders are being sold, shouldn’t the regulators take action?
“If a business is engaged in predatory pricing – that is, below-cost pricing designed to damage or drive competitors from the market – then the Australian Competition and Consumer Commission (ACCC) can act under our competition laws,” says Dr Craig Emerson, Minister for Competition Policy and Consumer Affairs. “A court dealing with a predatory pricing case does not have to be satisfied that the accused business can recover its losses after it sees its rival out of the market. At the same time, however, we need to be careful about stopping businesses offering consumers lower prices. Sometimes complaints are made in the name of protecting existing businesses from competition.”
The ACCC told CHOICE it will take seriously any information showing that below-cost pricing is being used to damage other competitors. “Where there is information to suggest this is occurring, the ACCC will investigate,” a spokesperson says.
The ACCC has had good cause for concern around the misuse of market power in liquor retailing, as both Coles and Woolworths have previously been found guilty of illegal conduct. While not related to predatory pricing, in 2005 and 2006, the ACCC completed successful legal proceedings against Coles (Liquorland) and Woolworths for anti-competitive liquor deals. Both had opposed competitors’ applications for new liquor licenses, but agreed to withdraw their objections if the independents signed restrictive agreements. Conditions in the agreements prevented independents from selling packaged takeaway liquor (as opposed to drinks to be consumed on the premises), licence applicants from opening new shops and drive-throughs, competitors from increasing shop sizes, and competitors from advertising and promoting takeaway liquor to consumers. Liquorland was fined $4.75 million.
The Federal Court found Woolworths had contravened competition law in four agreements that had “the purpose of substantially lessening competition in local packaged takeaway markets”. In two examples, exclusionary provisions aimed to prevent independent businesses from supplying liquor to actual and potential Woolworths customers. The judgment found the agreements intended to stop independent competitors entering local retail markets, to protect Woolworths’ business. The retailer was fined $7 million.