Chapter 6Mergers, land banking and independent retailers: creating a competitive market
6.1Independent retailers are essential to ensuring a competitive grocery market, and therefore increasing competition through support for viable independent supermarkets would only be of benefit to consumers.
6.2However, the committee heard that the major retailers, including Coles and Woolworths, were engaging in practices which directly and negatively impacted on competition and did not allow smaller, independent retailers to establish themselves as sustainable competitors in the food and grocery sector.
6.3This chapter describes the views of the main independent retailers, and the unique issues faced in supply food and groceries to rural, regional and remote areas.
6.4It also details some of the practices which the major retailers are allegedly pursuing, such as land banking, creeping acquisitions, and increasing market dominance through mergers. It also presents the evidence put to the committee about the need to reform Australia’s merger laws.
Independent retailers
6.5Metcash advised that it was ‘Australia’s leading wholesale distribution, marketing, and independent retailer services company supporting over 4,000 retailers’ across food, hardware, and liquor. Metcash has over 1600 stores, including the IGA and Foodland brands. It was Metcash’s view that the domination of the market by Coles and Woolworths, at the expense of independent retailers, has pricing implications, with Metcash having less ‘buying power as compared to our larger competitors’.
6.6However, while pointing the finger at Coles and Woolworths and the impact of their larger market share on food and grocery pricing, SPAR Australia was of the view that Metcash, as ‘the primary supplier to approximately 4500 independent , was creating a situation where competition was severely lacking. SPAR Australia operates an independent retailer model and argued that in the rural and regional independent supermarket space where it operates, a ‘single dominant supplier may have the ability to exert control over pricing, potentially leading to higher costs for consumers’. SPAR concluded that:
The lack of competition in the grocery supply chain has far-reaching implications for consumers, small businesses, and the overall economic well-being of rural communities. It is imperative to address this issue comprehensively to ensure a fair and competitive marketplace.
6.7SPAR Australia recommended:
the development of policies and incentives to encourage new supplies to the rural and regional market;
enhancement of regulatory oversight of anti-competitive practices;
greater support for small business resilience;
a community-centric approach to ensure local communities have tailored approaches; and
efforts to diversify supplier relationships for independent retailers.
Remote Aboriginal and Torres Strait Islander stores
6.8The committee also received evidence about the unique challenges facing Australia’s regional, rural, and remote areas.
6.9For example, Community Enterprise Queensland (CEQ) discussed the unique pricing pressures it faced operating stores in remote Aboriginal and Torres Strait Islander communities, where food retailing ‘is the manifestation of an extremely complex supply chain, charged with delivering a broad range of products to widely distributed communities that are located on both the mainland and islands of North Queensland’.
6.10Due to the remoteness of many stores, ‘the CEQ network has a unique supply chain which is managed individually to ensure that fresh food is delivered on a weekly basis’. CEQ noted that as a not-for-profit, it ‘does not alter prices during significant events rather budgeting for such and smoothing costs over a financial year’.
6.11CEQ explained that ‘freight constitutes approximately 14.2% of cost of goods sold due to the supply chain length and associated costs’ and CEQ’s greatest barrier to lowering prices was the lack of competition in freight on the routes it uses, where there is often only a single provider. CEQ pointed to successful models elsewhere, including ‘Nutrition North Canada’, a ‘long term program is delivered by the Government of Canada to help make nutritious food and some essential items more affordable and more accessible to people living in remote areas’.
6.12To address these concerns and improve food access in rural and remote locations, CEQ recommended:
the Australian Government implement a freight equalisation scheme to reduce the cost of living pressures experienced more acutely in remote First Nations communities; and
the Australian Government establish more local distribution centres by wholesalers in major regional centres, closer to remote communities.
Land banking and creeping acquisitions
6.13As explained by The Treasury, serial or creeping acquisitions ‘generally refers to a series of acquisitions of smaller competitors over time which do not individually raise competition concerns, but which when taken together may have a significant impact on competition’.
6.14Creeping acquisitions have been on the radar of the Australian Competition and Consumer Commission (ACCC) for many years and was raised by many inquiry participants as a serious concern with direct impacts on pricing and competition.
6.15Land banking was similarly raised with the committee as an action taken by the major supermarkets to control and limit competition. Land banking occurs where large blocks of undeveloped land are purchased but not necessarily developed—in this case, land purchased by Coles and Woolworths for possible future development and stores.
Creeping acquisitions
6.16Allegations have been made that Woolworths and Coles are opening small format stores in sites that would have been suitable for smaller independent stores. As of early 2024, Woolworths reportedly had 103 Metro stores, and Coles 21 Local stores.
6.17Metcash raised concerns that the major supermarket chains are ‘continuing strategies involving the acquisition of independent stores, with a resulting increase in their market powers without constraint, to the long-term detriment of consumers’, via creeping acquisitions. Metcash noted that in the 1980’s Coles and Woolworths held less than 40 per cent of the market, but now it was over 70 per cent and in some geographic regions, it was over 90 per cent.
6.18Metcash concluded that the ‘failure of Australian competition law to address the issue of creeping acquisitions has had longer [term] implications for retail competition and, consequently, supermarket pricing’.
6.19Ritchies, an independent supermarket business in Victoria, observed that while supermarkets are governed by the Competition and Consumer Act 2010 (Competition Act) and the Food and Grocery Code of Conduct (Grocery Code), both of these instruments ignore the fact retail is intrinsically linked to property. Ritchies pointed out that the success or failure of a supermarket is largely determined by the quality of its property, and larger supermarket chains have enormous financial capacity which is used to outbid competitors for the best sites for new stores.
6.20Ritchies advised it had been outbid by the major chains on many new store sites over the years, and further noted that planning systems also ignore competition issues as a relevant consideration in the planning approvals process.
Case study – Milton IGA and Coles Coles purchased the Milton Village Shopping Centre three years ago, after which they lodged a development application to replace the IGA supermarket in the centre for a new larger Coles store. The IGA store closed last month because Coles would not offer the IGA owner a new lease. The customers of the IGA store have expressed outrage online at the closure of the IGA, as there are two Coles supermarkets less than a five-minute drive from the Milton Village Shopping Centre. The Milton IGA customers are losing their last non-chain supermarket, and they know this also means they will lose any chance of choice and competition into the future. As far as I am aware the ACCC was not advised of this acquisition by Coles nor their plan to close the last remaining competitor in the area. |
6.21Mr Fred Harrison of Ritchies recommended the competition test should be reformed to consider national market share. Ritchies contended that stronger merger laws were needed to ensure that the Milton case (above) does not occur again, as a ‘classic example of creeping acquisitions which Australian merger laws don't stop’:
Supermarket retailing is first and foremost a property business. If you don't get the right site, it doesn't matter how good a retailer you are; you will likely fail. That is why independent retailers believe competition laws need to be laser focused on mergers, which in my sector means opening new stores. Currently, the competition laws stop virtually nothing. That's why we see the chains roll out new stores essentially unchecked by the ACCC.
… IGA retailers believe that the Treasurer should have the power to designate who is dominant. Once designated, the onus of proof would fall on that company to prove their new store acquisitions don't breach the competition test, which it would be presumed to do. If you disrupt the chain's ability to saturate the market with new stores, you stop the chain's ability to maintain their dominance. I believe that is what Australian consumers want.
6.22Metcash recommended the merger reforms should consider including a ‘satisfaction test’ that the Treasurer could apply to large vertically integrated supermarkets, ‘whereby a transaction would not be cleared unless the ACCC is satisfied that the transaction is not likely to substantially lessen competition’.
6.23Metcash further recommended legislative change that would allow the ACCC when making these decisions, to consider the cumulative effect of multiple acquisitions within a particular period, and to consider national dominance, not just the local market, when considering mergers and acquisitions.
Land banking
6.24Woolworths stated that it does not engage in land banking in the ‘traditional sense’, where a greenfield site is bought with no intention of developing it, but is purchased to keep it out of the market. Mr Brad Banducci, Chief Executive Officer of Woolworths told the committee:
We do not do that. We do buy land in growth corridors, both for potential new developments that come up as the population of Australia grows and, very importantly, for our supply chain. Senator Sterle would know well the importance of getting the right places to have DCs, distribution centres, for the future. So we would be looking for opportunities in growth corridors for industrial and retail land and with an eye to developing those sites. The lead time on those developments can take between five, seven and perhaps 10years. There is a long lead time in doing that. We do not hold any site without a plan to develop it….
All the land that we acquire is with an eye to developing it as either a distribution centre or any form of other industrial support infrastructure we need to put in or into growth corridors where we hope that we'll see a new Australian community that we will have the privilege to serve.
6.25Coles outlined a similar strategy of purchasing greenfields sites well before new residential developments are built, with some differences.
6.26Coles purchases land which ‘could be bought a long time out from when the store opens because many of those pieces of land are in growth corridors’. Astore is then built ‘when there is sufficient infrastructure and population so that, when the store opens, it can be a success from day one’. Later, when the store is operating successfully ‘we would sell it—sell the land with the site with the store on it—and we would put in place a lease with the new landlord and then we would take the proceeds from the sale and we would repeat the process’.
6.27While stating these practices are not land banking, in fact, the descriptions given above could arguably describe land banking, which is ‘a real estate investment scheme that involves buying large blocks of undeveloped land’. Woolworths intends to use the land when it becomes valuable due to new residential areas being built around the greenfield site, rather than sell the land, while Coles undertakes what could be described as ‘rolling’ land banking.
6.28In 2012 the ACCC reached agreement with Coles, whereby Coles would notify the ACCC in advance when it planned to acquire new store sites, in return for a streamlined assessment process. This agreement expired in 2015 and has not been renewed. However, there was no such agreement with Woolworths, which maintained that the protocol should apply to all retailers, including Metcash, Costco and Aldi.
6.29The ACCC noted in its submission that in its 2008 inquiry into the competitiveness of retail prices for standard groceries, one of its recommendations was ‘that all appropriate levels of government consider ways in which zoning and planning laws should have specific regard to competition between supermarkets’. The ACCC also indicated at that time that ‘it would investigate restrictive provisions in supermarket leases in shopping centres, which lead to undertakings to phase out restrictive covenants announced in late 2009.
6.30Dr Craig Emerson, Independent Reviewer of the Food and Grocery Code, told the committee that supermarkets buying land in new residential developments can have the effect of ensuring rivals can’t set up, and stated that the Code Review will look at those issues ‘to make sure that the environment is as pro‑competitive as possible’.
Merger reforms
6.31There was strong support received by the committee for merger reform, and the committee notes the announcements of the Treasurer in early April 2024 about a proposed suite of changes to merger and acquisition law.
The need for reform
6.32In calling for merger reform, the ACCC said it was ‘urgently needed to bring Australia in line with other developed economies and ensure the merger laws are effective in preventing anti-competitive transactions’. The ACCC has stated that about 1000-1500 mergers occur in Australia each year, and about half of those are made by the largest one per cent of businesses—but about only 330 of these are notified to the ACCC under the existing voluntary merger regime. The head of the ACCC, in a media release, said that:
Australian consumers, farmers, and small businesses need to have confidence that potentially anti-competitive acquisitions will be scrutinised and if necessary prevented.
… Without effective merger control, we are all likely to face higher prices, lower quality, less innovation, less choice and lower productivity across the economy.
6.33Per Capita endorsed these views by the ACCC, observing that ‘an alarming number of mergers involving Australian companies are escaping the notice of the ACCC due to the voluntary notification system’ and supported merger law reforms proposed by Professor Fels (below).
6.34Speaking specifically of supermarkets, CHOICE argued that Australia’s ‘supermarket sector is highly concentrated and the major supermarkets have grown in size and power in a way that very likely harms consumers’. CHOICE noted the steady acquisition by Coles and Woolworths of smaller independent supermarkets, and while ‘individual acquisitions may not have contravened competition laws or triggered the merger control regime … taken together the impact of these “creeping acquisitions” is very likely to have harmed competition in the grocery market’.
6.35Mr Rod Sims, as chair of the ACCC, observed in 2021 that the Australian approach to merger control, which does not require companies to obtain ACCC clearance for mergers, was ‘out of step with most merger regimes internationally, under which mergers are required to be notified as part of a formal assessment regime, and must obtain clearance before they can proceed’.
6.36The February 2024 report by former ACCC Chair, Professor Allan Fels AO, Inquiry into price gouging and unfair pricing practices: final report (Fels Review) also observed that ‘Australia is one of the few OECD countries with no compulsory pre-merger notification law’ which results in ‘tactical behaviour by businesses in terms of non-notification, late or no provision of relevant information required by the ACCC and other forms of game playing’. Ultimately, this makes the merger oversight task of the ACCC much more difficult.
6.37The Fels Review also noted that ‘an anticompetitive merger can only be blocked by the ACCC if it can prove in a court of law that the merger would be likely to substantially lessen competition’ and that under the current system this is often difficult to do.
6.38The Fels Review recommended:
The Australian government should establish a pre-merger notification system along similar lines to most OECD countries.
That in merger matters the onus should be on applicants to satisfy the ACCC and on appeal the Australian Competition Tribunal that the merger is not anticompetitive and is in the public interest.
The merger test should be augmented to continue to prohibit mergers that give rise to substantial market power and/or which entrench, create, or add to market power.
6.39CHOICE supported the ACCC merger reform proposals but added that the reforms should require that ‘consumer advocates are notified of potential mergers that may harm consumers and are invited to provide evidence’.
6.40The Australia Institute supported the tightening of regulation around mergers and acquisitions, noting that ‘[f]urther concentration of ownership in the market will further reduce competition’. However, the Australian Institute noted that while this would ‘help slow the decline in competition, it does not help increase competition into a market that is already highly concentrated’ and recommended laws that would allow ‘the dominant players in highly concentrated markets, like food retail, to be broken up into a number of smaller firms, when the power of these large firms is clearly harmful’. These divestiture powers are discussed in Chapter 8.
Views of the ACCC
6.41The ACCC advised the committee that it can ‘face evidentiary challenges in preventing [creeping acquisitions], even where the net impact of these acquisitions over time may be a significant increase in broader market concentration’. The ACCC noted that the current mergers test and the approach by the courts using the current mergers test looks at the ‘incremental effect of the merger before it rather than the broader structural changes in markets and incremental increases in market power over time’.
6.42The ACCC advised that an important focus of its merger reform proposals as part of The Treasury Competition Review (discussed below) was to:
… ensure that serial acquisitions that may raise competition concerns, including in sectors prone to serial acquisitions, are able to be assessed by the ACCC and that the test for approval is capable of taking into account the particular competition effects raised by serial acquisitions.
6.43The ACCC submitted that Australia’s current merger regime should be made more fit-for-purpose and advised that it has made a detailed submission to the Competition Review with the below proposed changes to the merger regime:
Establish an administrative approval regime that is balanced and targeted:
non-contentious acquisitions (the vast majority) should be dealt with quickly with minimal regulatory burden, and
the small number of complex and contentious acquisitions which raise potential competition concerns can be carefully scrutinised via a structured, transparent, and timely process.
The merger regime should address serial acquisitions, of particular relevance to the supermarket sector.
The ACCC would be the first instance decision maker, with review by the Tribunal available to merger parties and third parties. Merger parties would be required:
(i)to notify the ACCC of mergers that meet clear, certain and objective thresholds for notification; and
(ii)not to complete the transaction without ACCC or Tribunal approval, or unless the ACCC grants a ‘fast-track waiver’ from the full notification and approval requirements.
Merger Reform: April 2024
6.44As one of its first priorities, the Competition Review considered potential changes to Australia's merger rules and processes. From late 2023 to early 2024 it sought input on whether existing rules and processes are effective, enabling beneficial mergers and addressing those that could be anti-competitive, and ways in which current provisions could be improved.
6.45The review released its report in April 2024, with the Government committing to making 'Australia's merger control system stronger, simpler, targeted, faster and transparent', as per Figure 2.2.
6.46Proposed reforms will apply from 1 January 2026 and include a mandatory merger reporting regime with a single merger control pathway; risk-based merger reviews by the ACCC within set timeframes and charged at cost recovery; and a public register of all merger reviews and decisions. Further details will be released after extended consultation with stakeholders.
Figure 6.1‘A faster, stronger and simpler merger system’
Source: The Treasury, Merger Reform: A Faster, Stronger and Simpler System for a More Competitive Economy, 10 April 2024, p. 14.