The Australian grocery sector : structurally irredeemable?

1. The Australian grocery sector: structurally irredeemable? Alexandra Merrett & Rhonda L Smith Supermarket power in Australia: a public symposium Melbourne, 1 August 2013

2. Scope of accompanying paper • Overview of grocery sector – conclusions from structural analysis • Specific focus of today’s presentation – the potential use of publicly available data • ‘Must have’ brands • Penetration of private label products • Questions to ponder • Conclusions Outline

3. Main sections of paper: • The structure of the Australian grocery sector • Economies of scale & scope • The impact of the independent sector • Expansion into non-grocery sectors(focus on petrol) • Brand power & the role of countervailing power • Identifying and assessing the value of ‘must have’ brands • Private labels – the theory & the data • The significance of countervailing power / market power on the part of suppliers • Is supplier rationalisation inevitable? Scope of accompanying paper

4. Key conclusions: • Substantial market power likely to subsist post-Safeway (market in fact more concentrated since Safeway) • Subject to the usual qualifications, both Woolworths and Coles likely to have SMP within the meaning of section 46 CCA • But any misuse of market power likely to be episodic, not systemic • The very substantial economies of scale and scope available to majors appear to support (generally) low prices for Australian consumers in grocery & non-grocery sectors • Prices kept low by various factors, including enhanced efficiency in the supply chain & some transfers from suppliers to retailers Structural analysis of grocery sector

5. Key conclusions (cont): • Nonetheless, market structure has adverse consequences for: • Independent sector • Suppliers, and • Consumers – generally in the form of reduced choice / innovation (impacting retail and myriad wholesale markets) • Hard to see how structural problems will (can) be remedied • Absent episodic s46 & minor s50 issues, current legislation has limited scope • Many law reform proposals try to fix one problem but create others – eg capping market share ensures diversity (improving choice) but also encourages inefficiency (raising costs) Structural analysis of grocery sector

6. Where there are market power concerns, debate usually proceeds on qualitative terms (or sometimes just assertion), eg: The ACCC understands that the brands supplied by Nestlé and Pfizer Nutrition are ‘must have’ brands for the major supermarket chains… • Independent quantitative assessments (unrelated to specific legal proceedings) rare /non-existent. General perception that key data closely held by private parties • The following analysis provides examples of how different types of publicly available information can be used to test propositions • A starting point only – much more could be done Use of publicly available data

7. The catalogue exercise Rationale: one way to assess importance of brands is to consider frequency of their promotion The exercise: head count of all photographed brands used on packaged groceries in catalogues of Coles, Woolworths, (Supa-)IGA & ALDI in June 2013 Notes & qualifications • This exercise bounded by time (winter) and location (Melbourne) • ALDI’s very different business model means its promotional activities less relevant to this exercise • Judgement exercise when multiple brands appear on a product (eg Kellogg’s Coco Pops) – most ‘prominent’ brand selected • Private labels / house brands excluded (to the extent recognised) • No weight given to multiple appearances in a single catalogue • Promotions tend to be funded by suppliers, not retailers ‘Must have’ brands

8. The findings • 465 distinct brands identified in 16 catalogues. Excluding ALDI, 431 brands in 12 catalogues • Only Kellogg’s and Heinz appeared in at least 1 catalogue published by every retailer, but many appeared in all but ALDI • Brands averaged ~3 catalogue appearances each during survey period ‘Must have’ brands

9. Brands promoted by Coles & Woolworths In 8 catalogues, 346 brands overall • 64% appear just once or twice • 12% appeared 6 or more times • 6% appeared 7 or more times • 3.5% appeared in every catalogue reviewed Brands appearing in all Coles & Woolworths catalogues: Arnott’s*, Cadbury*, Coca-Cola*, Colgate, Huggies, M&Ms, McCain, Nestlé*, San Remo, Sara Lee, Tip Top * also appeared in all IGA catalogues ‘Must have’ brands

10. ‘Must have’ brands

11. Ownership of ‘must have’ brands • Ownership quite concentrated with many manufacturers/suppliers holding substantial brand portfolios • Manufacturers/suppliers of top 41 brands accounted for (at least) 29% of all brands appearing in non-ALDI catalogues • Ownership a moving feast and sometimes difficult to discern but: • 4 companies (Coca-Cola Amatil, Nestlé, Mars & Unilever) account for 56 distinct brands (or 13% of non-ALDI brands) • Nestlé owns 5 of the top brands (Maggi, Nestlé, Nescafe, Uncle Toby’s, Fancy Feast) • 3 top brands each for Simplot and Colgate ‘Must have’ brands

12. Review of Retail World Grocery Report Publication has been around for many years, albeit with various titles Records value and volume of sales, broken down into product categories Notes & qualifications • Reviewed data published in 2012 & relates to 2011. As such, penetration of private labels may be understated • Retail World data does not distinguish between retailers – sales by ALDI may distort numbers a little • Product definitions can change over time, making straight comparisons tricky (eg muesli bars once were a separate category, but no longer) Private label penetration

13. Review of data • Perception: private label products increasing in importance and their growth is accelerating • Reality: a little more varied. Private labels account for ~20% of sales through grocery retail outlets (as against, eg, 40% for Tesco in the UK) • As expected, product categories most susceptible to private labels are relatively homogenous. Highest rating categories (based on 2012 data) for private label sales: Note how share of volume exceeds share of value, reflecting the value proposition underpinning private labels Private label penetration

14. Review of data (cont) • While significance of private labels has increased in many categories (2009 vs 2012), for some it has decreased: Private label penetration

15. Further issues that could be analysed using publicly available data • ‘Must have’ brands: • Has the number reduced over time? • Has the significance of specific ‘must have’ brands reduced over time? • What is the impact of seasonal / regional variations? • What are the patterns of promotion and pricing as between respective retailers? • How does the promotion of private labels compare to branded products? • Independent sector vs majors? • What is happening on the supply-side: • Are supplier numbers rationalising (eg Murray-Goulburn deal)? • Has the ownership of ‘must have’ brands become more concentrated? • Australian vs overseas ownership? Questions to ponder

16. Once consumers accustomed to benefits of economies of scale & scope, can you put the genie back in the bottle? Perhaps Australia is too small to support more than 2 players and access such economies • Our best case scenario may be a duopoly somewhat constrained by a ‘maverick’ independent sector • This market structure could give rise to (episodic) competition problems but the main impact is likely to be on choice & innovation, not price • While Australian consumers appear to value choice, how much are they willing to pay for it? We value – to a degree – Australian-made products but overwhelmingly have chosen to buy cheap imports • Majority rules: even if individuals wish to maintain a vibrant independent sector and retain choice in upstream markets, the decisions of the majority affect the rest – not dissimilar to politics! Conclusions

17. Please feel free to contact Alexandra* with any further questions or comments you may have: alexandramerrett@bigpond.com www.thestateofcompetition.com.au *Rhonda is currently away, but can be emailed on rhondals@unimelb.edu.au Questions?