Unintended Consequences !

A few years back the giant grocery chains were notorious for stamping out competition and achieving a monopoly when they sited one of their stores as the head tenant in a new shopping complex.  It was done by stealth.  Whatever price the competing greengrocer, grocer or butcher offered was undercut by the supermarket and the chain store was prepared to sell at a loss to drive those little privately owned competitors out of business.

They were ruthless to the point that their employees would visit that competitor to garner price information and moments later their own prices would drop to whatever it takes to put the competitor at a disadvantage.  Once the competitor closed their doors, the prices at the grocery chain rose to normal levels.   The media delighted in price comparisons between stores lacking competition - and the price levels where individual were locked in battle for the consumer dollar.

The government competition watchdog began to bark - and the chain stores listened !   There was talk of draconian legislation and very quickly a "gentleman's agreement "came into practice and the duopoly adopted a new code of conduct that outlawed this practice - at least as blatantly as before.

There was another outcome that is still in force.   Coles decided that their prices would be held at uniform levels across their entire chain of stores, hence the customers would buy at the same price in a big city supermarket as in a smaller store in a remote and distant part of the country.  The big freight differential would be absorbed by Coles.

Now the Federal government is considering new legislation which they describe as an "effects test " which is designed to "prohibit big companies acting in a way that reduces competition ".   Coles management has sounded a warning that this could  have "unintended consequences. "    The very price stability that they maintain across their chain of outlets could be interpreted as competing unfairly with a smaller store that has no option than to include a freight margin because of their remote location.

We could see the situation arise where Coles was forced to raise prices to reflect the freight component in country areas because to maintain city prices was seen as  uncompetitive pricing. The fact that Coles are evening out the freight component across their entire network in setting prices does disadvantage a small competitor faced with a freight bill to a remote area.

No doubt someone will cite the price difference between petrol and Coca Cola in distant New South Wales.  Petrol is notoriously more expensive the further you travel from Sydney and the stated reason is always freight costs, yet should you want to buy a bottle of Coca Cola from that same petrol station it will also be hugely dearer than the price offering in a Coles supermarket in that same town.   Could not the petrol station claim that the Coles pricing policy disadvantages a small independent by absorbing that freight cost - to the benefit of attracting custom away from the small reseller ?

The lawmakers need to think long and hard when they consider this piece of legislation.   It s indeed a worthy objective that they have in mind, but they will get no plaudits if it brings the unintended consequences of a sharp rise in grocery prices across the country towns of Australia.