1. 204377409 Rising Grocery Prices and Australia's anti-trust law Wolfgang Hellmann 21 May 2008 ABA Section of International Law Committee on International Antitrust Law

2. 204385287 AUSTRALIA - Grocery Industry & Antitrust Law 1.Structure of Australia's Grocery Industry 2.Merger Review in the Grocery Industry 3.Charter to promote independent sales of supermarkets (2005) 4.Grocery Inquiry

3. 204385287 1. Structure of Australia's Grocery Industry Suppliers National and regional producers Overseas suppliers and importers Wholesale Woolworths (vertically integrated) Coles (vertically integrated) Metcash ("independent")

4. 204385287 1. Structure of Australia's Grocery Industry Retail Woolworths (750+ supermarkets / ~44% market share) Coles (500+ / ~34%) Independent Retailers/Banner Groups (4,000+ / ~18%) Typically: medium-sized retailers with smaller range of products (eg. IGA) New entry in 2000: Germany's Aldi (300+ / ~4%) Mainly private label and less recognised "cheaper" brands [Specialist retailers with single product category – not part of the supermarket market] NOTE: market data only indicative

5. 204385287 2. Merger Review in the Grocery Industry Section 50 of the TPA prohibits any acquisition of shares or assets that would result in a "substantial lessening of competition" in a "substantial" market in Australia. No mandatory pre-merger notification requirement in Australia (unlike in the US + EU, similar to UK regime) Standard practice of seeking "informal clearance" from the regulator if competition concerns The regulator, the Australian Competition & Consumer Commission (ACCC), has the power to seek injunction from the Court to stop a merger from proceeding

6. 204385287 2. Merger Review in the Grocery Industry Since 2005, the ACCC has reviewed 13 acquisitions in the grocery industry Metcash / Foodland 2005: 82 stores Woolworths / Action Stores: 19 stores (1 divestiture) others: only one supermarket ("creeping acquisitions") further acquisitions in the liquor industry Expansion strategy of the two national retailers was to acquire independent stores in locations where they are not yet present no geographic overlap – no SLC effect of "creeping acquisitions" on wholesale level and demand side?

7. 204385287 2. Merger Review in the Grocery Industry Definition of the relevant grocery markets Supermarket retailing - local Provision of a bundle of grocery products to consumers within a local geographic area Delimitation of the relevant geographic area depends on local circumstances (particularly, consumers' purchasing pattern) Supermarket wholesaling – national or State-based Market in which supermarket wholesalers supply products to supermarkets for retail sale, either nationally or State-based Supermarket procurement markets – national or regional National or regional (eg. perishable products) markets for the procurement of the various products sold by supermarkets

8. 204385287 2. Merger Review in the Grocery Industry Horizontal Acquisitions ACCC clearance if no geographic overlap or if sufficient competition in relevant geographic area Note: Convenience stores constrain supermarkets only to a limited extent: service - but not price If geographic overlap: divestiture may be available to address competition concerns (eg. Woolworths / Action Stores in 2005) Barriers to entry Access to suitable sites Economies of scale

9. 204385287 2. Merger Review in the Grocery Industry Creeping acquisitions Definition: several acquisitions of independent retailers, each resulting only in a small increase in concentration with little effect on competition Issue: While each single acquisition (assessed individually) is unlikely to result in a substantial lessening of competition (absent local competition issues), a series of acquisitions may have a significant cumulative effect on competition.

10. 204385287 2. Merger Review in the Grocery Industry Creeping acquisitions – 3 main ACCC concerns 1.Loss of sales volumes and loss of scale economies of the independent wholesalers vis-à-vis Woolworths and Coles 2.Loss of the independent wholesalers' bargaining power with suppliers vis-à-vis Woolworths and Coles 3.Increase of the buying power of Woolworths and Coles with the suppliers

11. 204385287 2. Merger Review in the Grocery Industry Theories of competitive harm ("vicious circle") Higher cost of independent wholesalers If absorbed by independent wholesalers, this will result in less retail support and customer service in the short run In the long run, independent wholesalers will pass on higher cost to independent retailers, which will become less price competitive Consumers will switch from independent retailers to Woolworths or Coles Further: Increasing risk of oligopsony power by Woolworths or Coles on the demand side

12. 204385287 3. Charter to promote competitive sales of independent supermarkets Charter took effect on 1 July 2005 Good-faith commitments by the "Big Three" wholesalers (Woolworths, Coles & Metcash) Objective promote fair competition between potential buyers of independent supermarkets, particularly by ensuring competitive bidding process benefit consumers by promoting competition in the supermarket sector, particularly by helping to address concerns about creeping acquisitions

13. 204385287 3. Charter to promote competitive sales of independent supermarkets Party must not in connection with the acquisition of a supermarket prior to entering into a Sale Agreement: seek to secure from the Independent Retailer the right to exclusively negotiate or to otherwise prevent or inhibit the owner of the supermarket from dealing with other parties to secure the best price for the supermarket; or otherwise act to limit the right or ability of the Independent Retailer to seek other potential purchasers for the supermarket or frustrate the attempts of the Independent Retailer to do so, including by imposing unnecessarily broad confidentiality obligations.

14. 204385287 3. Charter to promote competitive sales of independent supermarkets If a Party considers that another Party has breached the Charter, these Parties will, in good faith, seek to agree on whether a breach has occurred and, if so, negotiate an appropriate outcome.

15. 204385287 4. Grocery Inquiry Background Recent OECD data suggests that food price inflation has been much higher in Australia than in other OECD countries Australia's new Labour Government includes (for the first time) a "Minister for Competition Policy & Consumer Affairs" (Chris Bowen) On 22 January 2008, Mr Bowen directed the ACCC to commence a formal inquiry into grocery prices

16. 204385287 4. Grocery Inquiry The "heart" of the grocery inquiry is a public consultation process, including public hearings in all major cities in Australia The ACCC has used its compulsory information gathering powers (section 155 TPA) The final ACCC report is due by 31 July 2008

17. 204385287 4. Grocery Inquiry The inquiry covers the following matters structure of the grocery industry at supply, wholesale and retail level ("farm gate to cash register") mergers and acquisitions by national retailers nature of competition competitive position of small and independent retailers pricing practices factors influencing the pricing of inputs and any impediments to efficient pricing of inputs