HOW WOOLWORTHS/COLES USE GEOGRAPHICAL PRICE DISCIMINATION TO DESTROY COMPETITION
“It has been demonstrated over a period of years, the practice of price cutting by larger corporations when they enter for them what is virgin territory. Their prices in the new opened territory are invariably lower than this prices which they maintain in areas in which they have become established. When local competition has been suppressed, prices go up to or above those maintained by locally-owned businesses before the entry of the large scale operator.
The lower prices in the new trading area are only possible by reason of the fact that the losses thus incurred can be absorbed in the higher prices obtained in established territories. It is therefore possible for the large scale operator to continue the cut price policy in new areas indefinitely or until the local competition has been destroyed.
Local competitors have no way to meet such unfair and economically unsound competition.”[1]
Wright Patman (US Congressman) 1936
Over 70 years ago America understood the harm to competition that Geographical Price Discrimination causes and they rightfully introduced laws to prohibit such conduct thereby protecting competition in remote country towns.
However 70 years later Australia has still not introduced these laws, and Woolworths and Coles are free to use Geographical Price Discrimination to destroy competition in Australia, exactly in the way described as above by US Congressman Patman over 70 years ago.
Evidence of Cutting Prices to Suppress Local Competition
The attached summary of evidence is taken directly from a Senate enquiry into the Australian grocery industry where the giant retailer Woolworths were caught red handed using Geographical Price Discrimination that had the effect destroying local competition.
The Senate Enquiry compared newspaper advertisements between Dubbo (the Dubbo Daily Liberal) and Sydney (The Daily Telegraph) for exactly the same days in July 1999, and clearly demonstrated that Woolworths were engaged in Geographical Price Discrimination.
During the same government inquiry, Mr. Roger Drake summed up for small business;
“I find it difficult when you have got a store that is alongside and wants to gain market share that it can sell a product for 89c when the rest of the chain is selling it for $1.69. If they are going to have a pricing it should be right across Australia and subject obviously to freight” [2]
But what Mr Drake suggests in not the law in Australia, and Woolworths have been able to use Geographic Price Discrimination making it impossible for independent local competitors to survive.
Evidence of increasing prices once the local competition is suppressed .
With the hundreds of stores around the nation, it’s impossible to monitor exactly what tricks Woolworths get up to with prices once the local competition disappears, however the magazine Choice recently stumbled across empirical evidence of what happens when local competition is suppressed
By accident, in 2003 Choice uncovered that in Leichhardt, after a nearby Franklins store disappeared, that the Woolworths store in Leichhardt increased prices by a massive 23 per cent when the CPI increase for food over the same period was just 13 per cent.
Woolworths told Choice its figures were wrong and the price increase at the Leichhardt outlet was closer to 18 per cent – still significantly above the increases in all other stores. Woolworths even admitted the extra price rise was;
"in line with the change in localized competition in the area", [3]
So what Woolworths are freely admitting - is that as soon as the local competition disappears - up go the prices to the consumer – the only issue in dispute is whether price increased 18% or 23% .
Lack of Competition in the Market Exposed
The ACCC tells Australian consumers that “all evidence points to vigorous competition grocery retailing” – but how is there ‘vigorous competition’ if Geographic Price Discrimination occurs ??
As the UK Office of Fair Trading outlined in a report in 2000, that where Geographic Price Discrimination (price flexing) exists -
“It also meant that grocery products were not fully exposed to competitive pressure…[and] was against the public interest”[4]
The fact that Woolworths/Coles regularly change their profit margins subject to “localized competition” – clearly indicates that there is lack of competition in the Australian market.
This is just another piece of evidence demonstrating that the ACCC have got it wrong yet again.
International Comparison
In Canada, with its similar geographical diversity to Australia, the exact type of Geographical Price Discrimination used by Woolworths as standard business practice, is illegal.
This type of business practice is considered so detrimental to competition, and potentially so harmful to remote communities that it’s considered and crime and the penalties in Canada for this type of activity include jail of up to 2 years.
Therefore the practices used by Woolworths executives in Australia, could see them arrested, handcuffed, and finger-printed in Canada – they be criminals.
But in Australia for over 70 years our governments both Liberal & Labor have sat of their hands and done nothing – watching from the sidelines as Woolworths destroyed independent businesses, wreck our country towns, and exploit elderly and less mobile Australians, especially those that live in remote locations.
A Fair Punishment ??
Canadian judges are just as liberal as the judges in Australia, and rarely jail any one but the worst of the worst – and Canada is currently considering de-criminalizing this offence – but what’s a fair penalty for this type of conduct ??
First think of the profits – Woolworths Leichhardtstore probably has sales of around $20 million annually. By increasing prices 10% higher in Leichhardt than other stores, they are making an extra $2 million annually in profits. That $2 million taken (stolen) directly from the elderly and less mobile local residents of Leichhardt that can’t easily travel elsewhere to shop.
Then think about the offence - someone uses their size and power as an economic weapon to crush a competitor, steal their market share and destroy their business, and then once the competition is suppressed, they rob the elderly and less mobile, with higher prices – is this not a form of economic terrorism that deserves jail ?
The Future
Unless we want our children, and grandchildren to grow up in a country where all necessities of life; from petrol, to pubs, to pharmacies and even the pokies, are controlled by two giant corporations, Australia urgently needs Geographical Price Discrimination Laws.
Every Australian should Benefit from Competition Regardless of Where they live.
Geographical Price Discrimination laws simply ensure that those that live in remote areas, and the elderly and less mobile, are not denied the benefits of competitive markets like other Australians. Geographical Price Discrimination laws also prevent localized predatory pricing by giant corporations seeking to increase their market share by running small business out of country towns.
When these laws are finally introduced in Australia we may be 70 years late, but at least we’ll finally catch up with the rest of world.
[1]Wright Patman, The Robinson Patman Act, p.35 The Ronald Collins Press Company (1938)
[2]Mr Roger Drake, owner of 21 stores in Sth Aust employer of around 1200 people to the Senate Enquiry 1999
[3]ChoiceSupermarket price survey 2003 http://www.choice.com.au/viewArticle.aspx?id=103841&catId=100406&tid=100008&p=2&title=Supermarket+price+survey+2003+(archived)
[4]RichardBulter International Law Firm, Briefing Note : OFT CONSULTS ON POSSIBLE REFERENCE OF GROCERY MARKET TO
THE COMPETITION COMMISSION
http://www.richardsbutler.com/pdf/060324_comp_and_eu_briefing.pdf#search=%22price%20flexing%20%22