Big gap on big discounts: ACCC and the independents

The views of the Australian Competition and Consumer Commission and those of independent fuel resellers on the recent 40-cpl supermarket fuel discounts could not be further apart.

The offer

When Coles announced shopper docket discounts of up to 40 cpl on 13 July, and Woolworths followed the next day, alarm bells went off in the fuel industry. The offer lasted only three days and applied to shoppers spending $300 or more (with lesser discounts for lower spends – 25 cpl for $200; 10 cpl for $100); however, independent reseller organisations expressed grave concern that this was just the beginning of many such offers that could threaten the very survival of the independent fuel sector in Australia.

The reaction (1)

"The casualties in this price war will be the independent service station owners and consumers," said David Purchase, Executive Director, VACC (Victorian Automotive Chamber of Commerce).

"While shoppers take advantage of the scheme, independent service station and convenience store operators are feeling the knock-on effects. They cannot match a Coles or Woolworths offer as they do not have the thousands of items on their shelves to absorb the cost.

"Independent retailers, who are already battling to exist, are losing customers in droves. If the promotion is repeated as expected, then independent service station operators will go out of business. At this rate, it is a matter of when, not if, Coles and Woolworths control all checkouts and bowsers. Then they could increase prices to another level."

The VACC called for Coles and Woolworths to be made accountable for their actions and prove that their motives are in the best interests of all Australian consumers.

The Australasian Convenience and Petroleum Marketers Association (ACAPMA), which represents mostly small-to-medium sized fuel distributors and resellers operating in regional Australia, called on the ACCC to act to "… stop Coles and Woolworths from destroying the fuel market".

"Some ACAPMA members already support their customers by honouring supermarket dockets with the 4-cent discount," said ACAPMA General Manager, Nic Moulis. "There is no way they can redeem 40 cents: they would not just be giving away their margin, they would be paying customers to buy their fuel.

"If the ACCC lets Coles and Woolworths away with it this time, what is to stop them doing do it again, and again, and so on until there are no independents left? ACAPMA members are worried for their businesses and their communities. Independents tend to support local suppliers and contractors - something the big retailers are doing less and less."

A 40-cpl discount is equivalent to selling well below cost: Refiners, wholesalers and retailers together share only about 15 cents for every litre sold at service stations. The Service Station Association (SSA) noted that the average retail margin on a litre of petrol is around three cents, and argued that fuel retailer Coles Express could not afford the 40-cpl discount.

"It has to be coming out of the supermarkets' grocery sales," said SSA CEO, Ron Bowden. "That means everybody who shops at Coles and Woolworths, whether they drive a car or not, are paying for it."

The VACC also questioned the purpose in selling petrol at well below cost. "What benefits will the promotions bring to non-motorists?" said Mr Purchase.

It appeared to the fuel industry that the real target of these offers is the independent fuel retailer. "If the ACCC does not regard this blatant act of below-cost pricing as predatory, then what is?" asked Mr Moulis.

Although ACAPMA, SSA and VACC welcomed a review by ACCC Petrol Commissioner, Joe Dimasi, no-one was hopeful when ACCC Chairman, Graeme Samuel, was reported to have responded to the concerns of independents by suggesting they match the offer with a 40-cpl discount of their own!

The review

The ACCC reported on 23 July, having assessed whether the fuel discount promotions fell foul of the Trade Practices Act 1974. The review concluded that these offers were one-off promotions for a short period of time and therefore did not breach the Act. The ACCC concluded that the offers were "competition operating in the interests of Australian consumers," citing as evidence that fact that Metcash, the major wholesale distributor to independent supermarkets, offered equivalent discounts to consumers through its grocery retailers.

"This shows us that other players in the market have the ability to match the short-term competitive pressures of companies such as Coles and Woolworths," said Mr Dimasi.

The reaction (2)

Given their initial reaction, it was no surprise that independent fuel resellers were not happy with the ACCC's conclusions. Their concerns go right back to the ACCC's acceptance of the shopper docket schemes in the first place. C&I asked ACCC Petrol Commissioner, Joe Dimasi, to respond to these concerns.

In its initial response, the VACC called on the ACCC to review its decision to all the major supermarkets to offer petrol discount dockets. The SSA agreed, stating that the ACCC's response was disappointing.

"The ACCC's stance on supermarket shopper docket discounts has been disappointing from day one," said Ron Bowden. "We don't have a problem with supermarkets rewarding loyal customers; we have a problem with them rewarding customers in one market with discounts in another market – discounts that competitors in that other market can't possibly match.

"An independent fuel retailer does not have the financial resources to subsidise its petrol sales out of shop sales. Only the major supermarkets have sufficient scale to subsidise. That has to be an abuse of market power."

It seemed to ACAPMA that the ACCC still does not understand the fuel industry. "The ACCC's response to the 40-cpl promotions by the big two supermarkets ignores the impact on the fuel market, and completely misses the point," said Nic Moulis. "The ACCC called last week's stunts 'one-off' promotions, but it was not the first time that the supermarkets have paid customers to buy fuel.

"Over and above the 4-cent discount that has been a constant feature of the fuel market for many years, there have been periods of much higher discounting – 10 cents, 12 cents, even 20 cents. The 40-cent fuel discount offer took it to a new high – creating a new 'low' for the fuel industry.

"Although Metcash – a major wholesale distributor to independent supermarkets – matched the fuel discounts to support its independent grocery retailers, no-one in the fuel industry followed."

According to Mr Dimasi, the 40-cpl discounts were clearly supermarket promotions. "There is little doubt in my mind that the offers were aimed at getting customers into their supermarket stores," he said. "They link the promotion to fuel because fuel is close to customers' hearts and wallets.

"However, it did have an effect on the fuel industry. This is inevitable. The issue for the ACCC was whether these promotions were legal. If we thought the schemes were predatory, we would respond under those provisions."

So, it came down to whether the 40-cpl discount was tantamount to predatory pricing.

"If this is not predatory, what is?" asked Nic Moulis. "If the ACCC lets these bouts of below-cost pricing be repeated again and again, eventually there will be no independent fuel retailers left. We would like to know – at what level of discount over what period of time will fuel discounts by Coles and/or Woolworths be considered a breach of the Act?"

Mr Dimasi pointed out that these would be issues for the courts. "If we believed that an entity was selling below cost for a sustained period of time with an anti-competitive intent, we would investigate. Whether it would go to court would depend on the evidence.

"With regard to intent, if someone was to target an individual business in a specific area over and over and over again, that would lead us to be suspicious. We have powers under the Act to enter premises and examine documents to see what these decisions are based on, but we have to have reason to believe the Act has been breached."

This begs the question, "Is the Trade Practices Act adequate?" Not according to the SSA.

"The ACCC has no power to stop these activities," said Ron Bowden. "But, it does have the capacity to advise governments to change the law. The behaviour of the supermarkets and what they get away with highlight the inadequacies of the Trade Practices Act. It is impossible to get a conviction for predatory pricing the way the law is currently written."

Mr Dimasi disagrees. "The Act is strong enough," he said. "It is not a question of the Act; it is more complex than that. We are trying to separate good discounts and lower prices which we want to encourage from bad intent. This can't be resolved by changing the Act or introducing additional provisions; it is the facts on the ground that matter."

C&I asked, "What if the effect is that competitors are being driven out of the market, even if that was not the intent? What if we lose a significant competitive force in the market?"

"Competitors leave markets all the time as businesses find new ways to compete," said Mr Dimasi. "We are not here to protect them. We are here to make sure that market participants abide by the rules of competition. We don't want to see competitive businesses driven out by predatory conduct, and we will act if the facts demonstrate this."

The rest

There are two other groups affected by these market activities – the major oil companies and consumers. The major oil companies are not keen to enter into this debate; however, they are not impressed by the supermarket promotions.

"Over the long-term, cross-subsidised fuel discounts do not support competition and lower prices," said a spokesperson for BP Australia. "These kinds of discounts are not sustainable long-term," said a Caltex Australia spokesperson. "We did not respond to the offer because our average retail margin on fuel is only a few cents per litre and we are not in a position to offer such discounts."

And, when MotorMouth (www.motormouth.com.au) asked 1,200 of its price-conscious website visitors the question, "Should large supermarket operators be allowed to offer 40-cpl discounts for spending large sums in their stores?" nearly 90% said "Yes!"

Should large supermarket operators be allowed to offer 40-cpl discounts for spending large sums in their stores?

Source: www.motormouth.com.au

Poll period: 1 August 2009 to 31 August 2009-09-04 Copyright © 2009 Informed Sources (Australia) Pty Ltd A.B.N 85 003 714 332

"From the ACCC's viewpoint we are interested in the consumer and we want lower prices for them," said Mr Dimasi. "We encourage competition, lower prices, specials and discounts – they are good things – they are what a competitive market provides for consumers, and we don't want to discourage them."