ADAM SMITH WAS RIGHT !!!!!

Over 230 years ago back in 1776, Adam Smith the father of free market capitalism wrote in The Wealth of Nations;

“To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition the public must always be against

it, as it can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax

upon the rest of their fellow-citizens”

In Australia, our current Trade Practices Act has allowed such a ‘narrowing of the competition’ – that Woolworths/Coles now control an unprecedented 80% of the grocery market. This is greatest “narrowing or the competition” in grocery/supermarket retailing that has ever occurred in history of the modern world.

If Adam Smith was correct, this would result in Woolworths/Coles; a) Raising their profits above what they would naturally be.

b) Levying an absurd tax upon the rest of their fellow citizens

So what is the evidence……..

1 Raise Profits above what they would naturally be.

What would profits for grocery/supermarket retailing naturally be ???

To answer this, we researched data from the Washington D.C based Food & Marketing and Institute.

As advised on their website;

“The Food Marketing Institute (FMI) conducts programs in research, education, industry relations and public affairs on behalf of its 1,500 member companies — food retailers and wholesalers — in the United States and around the world. FMI’s U.S. members operate approximately 26,000 retail food stores with a combined annual sales volume of $340 billion — three-quarters of all food retail store sales in the United States. FMI’s retail membership is composed of large multi-store chains, regional firms and independent supermarkets. Its international membership includes 200 companies

from 50 countries.”

The FMI holds the world’s single most comprehensive collection of information on food retailing in the world. Therefore what the FMI have to say about “natural profits” in grocery/supermarkets ??

“ The intense competition among food retailers for the consumer dollar is best demonstrated by profit margins that continue to be about 1 cent on each dollar of sales………For fiscal year 2004-05, the industry’s after-tax net profit was 1.16 percent, according to FMI’s Annual Financial Review, 2005………. Low markup to

To try and value the inefficiencies of Woolworths/Coles we purchased 27 everyday fruit and vegetables from Woolworths and then purchased the same items from one of the few independent retailers left, that has not been destroyed by; predatory pricing in retail rents, price discrimination, or price flexing.

Our survey showed consumers were paying on average 44% higher prices 1from Woolworths.

Despite Woolworths having price 44% higher prices – they have a 5% EBIT – so where have the rest of the profits gone ?? The only conclusion is that they have been absorbed by a hopelessly inefficient organisation.

Then inefficiencies of Woolworths main ‘competitor’ ColesMyer are legendary – so much that they are the target of corporate raiders.

A total of over $45 Billion annually goes through the tills of Woolworths/Cole - and their inefficiencies must be costing the Australian consumer billions – based on our survey of Woolworths prices for fruit & vegetables, and the recent situation exposed by Aldi with the inflated prices of coffee charge by Woolworths/Coles – the value of the “absurd tax” levied upon Australians by Woolworths/Coles could be as high as $5 Billion annually.

Then if we look at costs of higher interest rates caused by high food inflation resulting from Woolworths/Coles increasing profits and prices - this could also be costing Australian consumers with a mortgage up to $5 billion annually.

Therefore the total value of the “absurd tax” levied on Australians by allowing Woolworths/Coles to narrow the market like they have could be in excess of $10 billion annually.

Then we have the immeasurable costs of lack of innovation, and the social costs country towns, farmers and small family business of Woolworths/Coles buyer power. All evidence points to the Woolworths/Coles duopoly being one of the most economical and socially destructive forces in the nation’s history

Conclusion

The father of free market capitalism, Adam Smith has yet again been proved correct. Unless our Trade Practices Act is urgently amended to prevent narrowing of the competition, and to is able to restore the level playing to independent retailers in the grocery/supermarket sector the cost to the nation of this “absurd tax” over the next decade could be as high as $100 billion dollars.

1 The findings of our study were repeated by a study undertaken by Today Tonight see http://www.seven.com.au/todaytonight/story/?id=30102