No comfort in ACCC ‘milk wars’ ruling

‘There is a need to look at some competition laws with real teeth,’ Senator Xenophon said, querying the ability of the Australian Consumer and Competition Commission (ACCC) to exert pressure on the two retailers.

‘Unfortunately, there are many businesses that cannot stand up to Coles and Woolworths, and the dairy industry is an example of that,’ he said referring to the ongoing milk price war between the two supermarkets.

‘It seems the ACCC is less effective than a toothless chihuahua.

‘At least a toothless chihuahua will yap a bit and make a bit of noise.’

Senator Xenophon said the two companies were selling popular goods below cost – known as loss leaders – to entice customers into stores, to the detriment of smaller operators.

‘The concern is that Coles and Woolworths are using loss leaders with a view of destroying small business, the corner stores, the independent grocery chains,’ he said.

– March 23 (AAP, News.com.au)

– And sure enough, in one of the ACC’s final significant rulings under retiring chairman Graeme Samuel (pictured right), it decided this month that Coles has no case to answer in its enquiry into the milk price war started by Coles and taken up by Woolworths.

Section 46(1) prohibits businesses that have substantial market power from taking advantage of that power for the purpose of (a) eliminating or substantially damaging a competitor, (b) preventing the entry of a person into a market and/or (c) deterring or preventing a person from engaging in competitive conduct in a market.

And section 46(1AA) prohibits businesses with a substantial share of a market, from selling goods or services for a sustained period at a price below the relevant cost of supply. As with s46(1), to breach this provision there must be evidence that a business acted with an anti-competitive purpose.

The ACCC said that Coles’ purpose in reducing the price of its house brand milk was to increase its market share by taking sales from its supermarket competitors, including Woolworths.

‘This is consistent with what the ACCC would expect to find in a competitive market.’

While this has only passing relevance to Photo Counter readers, (assuming there aren’t many hybrid convenience store/minilab operators among them), it tells smaller retailers who might see parallels in their own sector that – for good or for worse – they have scant protection from predatory pricing under competition laws in Australia.

While the main victims in the ‘milk wars’ were identified as dairy farmers (and it turned out they weren’t victims anyway, according to the ACCC, just sooks), there was no mention of channels other than the big supermarkets which compete in the retail milk market – convenience stores, corner shops and service stations for instance.

The ACCC’s take is that Coles made a price play, Woolworths and other supermarkets responded, they are all big and ugly enough to look after themselves, and what’s not to like about milk at $1/litre anyway!

The ACCC invariably identifies lower prices to consumers as an unequivocal virtue: ‘Price cutting, or underselling competitors, does not necessarily constitute predatory pricing. Businesses often legitimately reduce their prices, and this is good for consumers and for competition in markets”, Mr Samuel said.

That ugly military euphemism ‘collateral damage’ springs to mind: (Bang. ‘Damn – missed. Whoops there goes another neighbourhood shop!’) Nothing personal, nothing deliberate – the smaller shops just happened to be in the way when the fighting started. But of course!

To Coles and Woolworths it’s more like shared spoils of war. With both grocers pricing milk at $2 for two litres, their so-called war is a draw. But it would defy the fundamental laws of economics if Coles and Woolworths haven’t both ‘accidentallly’ appropriated market share from other channels in this gallant duel over milk.

All they have to do to be declared champions of the free world is to show they are engaged in fair but fierce competition with their equal, and they are in the clear as far as the ACCC is concerned.

The critical thing is that milk is, um, bread and butter to convenience stores.

‘The importance of white milk to the profitability of a convenience and impulse outlet can scarcely be overstated. It ranks right up there with bread and magazines as an absolutely essential product, one that draws in customers and drives sales.’ commenced a pre-milk wars article in convenience store website, C-Store.com.au.

And Coles and Woolworths aren’t just targetting the entire category, but the precise SKUs which the convenience channel depends on: ‘According to the Nielsen Convenience Report 2008, the majority of milk sales in convenience are in the two-litre (59 percent) and one-litre (20.6 percent) pack sizes.’ the article stated.

‘Convenience stores are really competing for the same top-up shopper as the major grocery stores,’ said a Parmalat spokesperson, Damian Madden, – which clearly runs counter to the ACCC’s perception of the marketplace.

Mr Madden goes on to say that, ‘The “Return On Inventory Investment” (ROII) from the milk category far exceeds that of other categories in store. Milk sales in-store can also generate a number of incremental sales with product lines such as bread, newspapers and magazines.’

A number of concerned specialist photo retailers over the past few years have complained to the ACCC about perceptions of unfair competition in print pricing, which has played a similarly critical role in their businesses as milk seems to play with convenience stores.

This ruling tells them not to bother.

– Keith Shipton


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