Government trying to entice more supermarket competition

Posted by Daniel Palmer on 24th April 2008

The Federal Government has announced they will be reducing restrictions on foreign supermarkets entering the Australian marketplace. The changes will provide supermarkets with five years to develop vacant commercial land as opposed to the current one-year allowance.

The new legislation is designed to entice multinational companies like Wal-Mart, Costco and Tesco into Australia; with assistant treasurer Chris Bowen indicating that old legislation stifled competition in the sector.

“We believe that competition is the way to put pressure on prices, and there are artificial barriers to entry for companies who have to develop their land within 12 months, which is not really a realistic requirement of them,” he said.

“So this is really levelling the playing field and giving those companies a chance to compete.”

The changes in legislation come in the wake of the ACCC’s investigation into grocery prices and growing concern about the state of competition within the industry. Coles and Woolworths now share almost 80% of the entire market, making it the most concentrated supermarket industry in the developed world.

International supermarkets, Aldi and Franklins, have tried with limited success to penetrate the market and have often complained of legislation that ensures their competitiveness is restricted. Both Aldi and Franklins welcomed the changes but believe more still needs to be done. “It’s not going to provide a short-term fix, because it’s a longer-term structural issue,” Franklins finance director, Roni Perlov, was quoting as saying in the Sydney Morning Herald.

Ironically, Franklins have just announced their first full-year profit in Australia since their entry in 2001.

Changes to the legislation are likely to assist American retailer Costco whose entry into the Australian marketplace has, to-date, been thwarted by red-tape.

The Australian Retail Association (ARA) have also welcomed the changes but questioned their ability to decrease prices. “The ARA will look to ACCC for more detail into the drivers of grocery pricing, but for now we can safely say that new competitors into the market will not drive down prices especially if these new players are sourcing goods from local suppliers. If goods are sourced locally, demand will increase and prices will go up.”

Woolworths and Coles, meanwhile, did not appear concerned by the announcement. “While we believe Australia’s grocery industry is already fiercely competitive, we have no issue with new players entering the market,” a spokesman for Coles claimed.

Federal Opposition Leader Brendan Nelson was skeptical about the announcement. “While measures to help reduce cost-of-living pressures on Australians must be encouraged, you’d have to question why the Government chose the same day as the latest inflation figures to float this idea,” Dr Nelson said.

Inflation rose to 4.2% for the year to the March quarter with food prices, up 5.7% for the year, a major contributor.