4 Corner’s Grocery Beat-up

I guess Stephen Long on Four Corners was hoping for a more interesting grocery inquiry report from the ACCC. Last night’s program attempted to make the case for how terrible it was that the price consumers pay from Coles and Woolworths is many times more than the price they pay from suppliers. That is a fact but what of it? Suppliers were continuing to supply. And consumers were continuing to shop at Coles and Woolies. Graeme Samuel answered every challenge put to him and I was more, not less, convinced that the supermarket industry was workably competitive.

The report also appeared quite biased towards finding problems. For instance, it failed to consider at all MetCash which that ACCC found was imposing even higher margins on than the big two chains. It also claimed that concentration in Australia was unprecedented in the Western world. Hello? Anyone looked across the Tasman?

It also tried to exposit a theory called the ‘water-bed effect.’ This is a system whereby Coles and Woolworths supposedly insist on low prices from a manufacturer and the manufacturer then gouges other purchasers by more than they otherwise would to make up for the losses. Another hello? How can they make up for losses by charging other producers more than the price Coles and Woolworths actually charge their customers? There won’t be any sales to be gouged? Moreover, this is one area where the ACCC a decade ago successfully prosecuted a case to prevent this type of thing. In any case, it is not clear that by making retail groceries more competitive, the pressure on manufacturers will be eased. That isn’t the case in the US.

The ACCC report did identify areas for concern on site selection and rental contracts. It also identified unit pricing as an issue and the government has launched GroceryChoice; neither of which were mentioned in the Four Corners report at all — even if to say they won’t do anything. Indeed, it offered no solutions or policy prescriptions for all of these problems at all. This was a disappointingly empty story.

4 thoughts on “4 Corner’s Grocery Beat-up”

  1. “It also tried to exposit a theory called the ‘water-bed effect.’ This is a system whereby Coles and Woolworths supposedly insist on low prices from a manufacturer and the manufacturer then gouges other purchasers by more than they otherwise would to make up for the losses. Another hello? How can they make up for losses by charging other producers more than the price Coles and Woolworths actually charge their customers? There won’t be any sales to be gouged? ”

    Could you explain this a little more Joshua? I’m not sure I follow your rejection of the theory.

    Thanks
    ab

    Like

  2. I think Joshua is pointing out that no rational retailer would buy a product wholesale at a price that is higher than the retail price being charged by its competitor to customers. Doing so would be unprofitable for the rational retailer. In both instances of supposed “waterbedding” in the 4C report, that was what was alleged to be happening.

    The 4C depicition of the supposed waterbed effect was misleading because it pitched the effect as if it was small retailers subsidising the producer’s ability to charge a lower price to a large retailer. If that was indeed happening then it would be a very short-lived strategy for the producer: the large retailer would have a lower cost and therefore be able to price its small competitors out of the market. That would leave no small retailer to buy at higher prices, no buyer-competition for the large retailer and therefore the producer would just be selling at a low price to the large retailer.

    If there is a waterbed effect then perhaps it works like this: large retailer has large market share, therefore acquires large volumes of product and so commands significant buyer power; buyer power enables the large retailer to buy at a lower price than a small retailer that has less market share, requires less volume and therefore has less buyer power; by virtue of its lower cost, the large retailer can out-compete the small retailer and thereby increase its own market share and decrease the small retailer’s market share; increased market share for the large retailer means increased buying power while decreased market share for the small retailer means decreased buying power; hence, the discrepancy between the cost to the large retailer and the cost to the small retailer grows.

    If that is what’s happening, it’s not small retailers subsidising a lower price to the large retailier as suggested by 4C. The producer is charging the large retailer as much as it is able to in a (presumably) competitive market and likewise charging the small retailer as much as it is able to. In other words, there is no “little bonus to Woolworths” as suggested in the liquor example or the producer trying to “make up that loss” as suggested in the milk example.

    It’s just the market. Working as intended.

    Like

  3. “The report also appeared quite biased towards finding problems.”

    I am also shocked, shocked, that journalists who invest a lot of time in an investigative story might have a bias towards finding problems.

    Imagine if they had presented a story which said “nothin to see here – move along folks”. Even fewer people would watch the program. I think this is far more likely to be the motive for bias that Jacques’ presumption of ideological priors.

    Like

Comments are closed.