Woolworths the fresh booze people
So the ACCC has allowed another acquisition that over time will be detrimental to competition and consumers.
If you were not otherwise distracted by the upcoming extended long Easter/ANZAC day weekend, you would have noticed that last Thursday the ACCC put out a media release stating that it will not be opposing the Woolworths acquisition of the Cellarmasters Liquor Group.
Now apart from sending out the release just before a long weekend where for obvious reasons less media attention would be given to the ACCC failure to act, the ACCC’s decision not to oppose the Woolworths acquisition is not surprising. In fact, the ACCC only opposes a tiny number of mergers and acquisitions under our existing competition laws.
Naturally, the ACCC’s waving through all but a few mergers will be applauded by those having a vested financial interest in mergers proceeding. The big end of town and their well paid advisors will be quick to welcome the ACCC decision because these people do well out of mergers.
There will also be the so-called expert commentators who will jump to the ACCC’s defence. These commentators are typically disciples of free market theories that suggest markets, including mergers, should be allowed to run wild. These are the same free markets that gave us the global financial crisis.
What these free market disciples forget is that markets fail, and that where that failure adversely impacts on competition and consumers, the government of the day must act.
The supporters of the view that mergers are good and that more mergers are better are forgetting the lessons so capably demonstrated by George Orwell in such novels as 1984 and Animal Farm. The lesson is simple - concentration of power is bad and more concentration of power is even worse.
That lesson applies equally to markets and, of course, to mergers and acquisitions. Markets fail and mergers and acquisitions can cause or contribute to those market failures. Put simply, mergers and acquisitions if left unchecked will destroy competition, lead to more concentrated markets and lead to higher prices for consumers.
Before our free market disciples get too excited and think that the author is suggesting that we should stop all mergers and acquisitions, we need to be clear that mergers and acquisitions are fine only up to a point. Mergers and acquisitions can serve a valuable role in gaining “efficiencies”, but will be very dangerous to competition and consumers when those efficiencies are not passed onto consumers.
Mergers and acquisitions are especially dangerous to competition and consumers where they lead to concentrated markets dominated by a less than a handful of large and powerful players that act as a cosy club that keeps prices up.
So while there may be mergers and acquisitions which lead to lower prices because there is a sufficient amount of real and effective competition remaining in the market to keep down prices, it is clear that there comes a point where mergers and acquisitions have destroyed so much of the competition that prices will go up as the cosy club wants to increase profit margins at the expense of consumers.
Of course, an alternative scenario is that the merger or acquisition is a strategic one designed to remove a growing potential threat to an established player’s existing market position. That’s exactly the case with the Woolworths acquisition of Cellarmasters. There is no doubt that the acquisition of Cellarmasters is designed to both protect Woolworths’ position in the liquor market and to further extend the Woolworths tentacles throughout the wine supply chain.
That’s why the ACCC failure to stop Woolworths from acquiring Cellarmasters will come back to haunt the ACCC and consumers in the same way that the ACCC’s failure to stop Westpac from taking over St George continues to haunt the ACCC and consumers.
To understand the competition concerns with Woolworths acquiring Cellarmasters, it’s important to understand Cellarmasters’ strategic position in the liquor market, especially in relation to wine.
Cellarmasters operates an online and direct wine sales business, but does not have a so-called “bricks and mortar” retail presence. Significantly, Cellarmasters also operates a winemaking business known as “Dorrien Estate” and is involved in businesses that provide bottling and logistics services to other winemakers.
Online liquor retailing and direct sales operations by companies such as Cellarmasters will obviously be a growing threat to the bricks and mortar liquor stores operated by companies such as Woolworths. With consumers increasingly going online to buy products, it’s inevitable that consumers will buy more and more liquor online. Put simply, consumers will increasingly shift their buying preferences from retail outlets (or bricks and mortar operations) to online retailing websites.
Surprisingly, the ACCC found “that Woolworths and Cellarmasters were not particularly close retail competitors.” Ultimately, buying wine from a retail outlet and buying wine online are what economists call substitutes. Over time, the level of substitution will increase and that’s why Woolworths in keen to acquire Cellarmasters and that’s why the ACCC’s failure to stop the Woolworths acquisition will over time adversely affect competition and consumers.
From Woolworths’ perspective the acquisition takes out a growing competitive threat from a substantial online retailing and direct sales operation run by Cellarmasters and puts Woolworths in a position to use its usual pricing and other marketing strategies to stop other online liquor retailers in their tracks. Tying online liquor sales to petrol shopper docket schemes or plain old fashioned below cost selling to deter or drive out online competitors are likely to be in the usual bag of tricks.
Then, of course, let’s not forget that Cellarmasters operates a wine making business. Woolworths buying a wine making business sounds like what economists call vertical integration. That means that Woolworths will be retailing the wine that it produces and using that home brand wine to push established brands off the shelves thereby reducing product choice over time. Vertical integration allows Woolworths to extend its growing market power at the retail level back through the wine supply chain.
All in all, given that the ACCC continues to wave through mergers and acquisitions is it any wonder that we have some of the most highly concentrated markets in the developed world and some of the highest levels of food inflation? What we really need is stronger competition laws and a new broom at the ACCC.
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