Retail regulators out of touch

MMR, Sept 8, 2008 by David Pinto

One of the frustrations U.S. retailing routinely confronts in its ongoing tussle with our country's legislative and regulatory bodies is a citizenry that neither understands, cares much nor feels any particular empathy for retailing. As such, the agencies and offices that make our rules and laws often tend to take the easy path when legislating or regulating the retail industries, only to find out, too late, that a decision, rule or law that initially appeared sensibly obvious to them was obviously ill-considered. (See California's anti-drug chain tobacco law.)

The good news, or bad, is that this in not just an American phenomenon, that regulatory and legislative bodies in other countries are just as obtuse and ill-informed when the subject is retailing.

Take, for example, the Australian Competition and Consumer Commission (ACCC), that country's agency for keeping businesses honest while protecting the consumer against a slew of real or imagined inequities. The Commission, galvanized by a perceived unhealthy concentration of Australia's grocery business between two retailers--in fact, between them Woolworth's and Coles, the country's two largest grocery retailers, really do dominate the market--recently completed a six-month investigation to determine whether these two retailers were arbitrarily raising their prices simply to increase margins. Their finding: The supermarket sector is "workably competitive," with only 5% of the increases in food prices over the last five years attributable to the quest for higher margins on the part of Woolies or Coles.

Not content to leave well enough alone, however, the ACCC plans to implement some minimal changes to the market's structure. Foremost among them: the introduction of unit pricing and the creation of a web site where consumers can compare grocery prices.

However, the ACCC report went further than exonerating Woolies and Coles, determining that a major problem with Australian supermarket retailing is that independent and small chain grocers often have trouble finding a suitable location for a new supermarket and difficulty locating a wholesaler willing to sell them merchandise at a reasonable price. So saying, the ACCC put much of the blame for this inequity on Metcash, a wholesaler that supplies 2,500 independent grocery retailers in Australia, including that country's IGA grocers. Metcash retailers control some 19% of Australia's grocery market.

"The fact that most independents receive a substantial proportion of their packaged grocery stock from Metcash, on terms that make direct price competition difficult, limits the competitive effectiveness of many independents," the commission said in its 569-page report, ignoring in the bargain such basic retail operating tenets as economies of scale.

Surprisingly, or maybe not, the ACCC heaped praise on the pricing policy at Aldi, the German retailer that operates "hard discount" grocery/general merchandise stores in Australia, stores that offer consumers low prices--and little else, generally limiting selection to multi-packs of one brand and one size of each grocery staple it chooses to carry.

Though exonerated from the charge of raising prices to improve margins, both Woolworth's and Coles were nonetheless liberally criticized--in Australia's notoriously antibusiness press. Stories following the release of the ACCC report emphasized the fact that Woolworth's boasts one of the highest pretax profit margins among the world's international grocery retailers, as though that, in itself, was a situation that needed addressing. Additionally, press reports used such adjectives as "squeezed" when describing the margins they solicited from their suppliers.

Finally, as a result of the study, the ACCC will put in place a "creeping acquisition" law that presumably limits the land that major retailers can purchase or lease for future stores.

That ought to allay any current and future fears about untoward price increases--and it will certainly shield the consumer from having to shop two of the best supermarket retailers on the planet.

By David Pinto, Editor