Food retailing is big business. In small markets it can be very lucrative business. Most countries have established food enterprises that display a great deal of market power. There are 2 types or models that I have observed:
1. Developer-retailers: This model is particularly popular in Asia, with the likes or Robinsons and Shoe Mart (SM) in the Philippines, and Seibu in Japan. It is in the developing markets where they have captured the greatest market share. The strategy of this model is to develop large shopping malls built around your retail capacity, with the added attraction of integrating those retail-shopping experiences with rail transport and residential property developments. SM and Robinsons have been very successful with this approach. In such cases the companies tend to function as independent stockers of local and international food. The intent of such malls is to buy large areas of land in strategic locations and essentially build cities around them. This model works well in Asia because you need the support of government to get cheap land and for approval of any and all subsequent development. In Australia, these enterprises would have to follow local zoning rules, and they are less likely to be bent for the sake of a developer. Certainly not in a systematic way that would be evident to competitors. They would also have to win over residents, some who don't always value the almighty dollar.
2. Farmer-retailers: This model tends to be more prevalent in the Western countries because retailers don't have the same development power. The shopping mall developer is thus a more independent beast catering to all food retailers in the market. The shopping mall developer Westfield is a case in point. It offers floor area to the largest malls like Woolworths and Coles in Australia. Woolworths was previously advised by the former Wal-Mart CEO. Their approach is to develop shopping centres in key locations with the intent of dominating retail with integrated services. Of course if its 'competitive bidding' it must be good right? Well no. In Australia and NZ (Countdown) you will find 2 brands competing for the same markets - which means no competition at all, thus food prices are determined by your ability to pay (i.e. Average household incomes). This is because you can bid more if you can hold more regional market share, so customers don't have a choice. Their intent is to offer greater convenience so that you would not even bother to go to the competitors because you could not be bothered to waste time determining who is offering the cheapest cost item for the 50-odd $3 items you buy every 3-4 days.
Is this not just good old fashioned capitalism? Well, I don't think so. The problem is that the market is divided between two major players in most countries. This creates a huge incentive for price collusion. There are often more competitors in the bigger countries, but these tend to be merged into just a few. The largest companies are entrenched because no other competitor can hope to match the efficiency of their distribution system. That is an effective barrier to entry because only a silly idiot would try to match their low unit costs. Small players can only go after the smaller rural markets offering smaller returns. These areas are open to outsiders because they are in a position to source local product and there are larger profit margins for the majors elsewhere. The majors have another strategy. They invest in growing profit margins in the city so during the boom times so that their earnings are not overstated in the bull market, but stable in the recessions. This allows them to further entrench their monopoly in the recessions because other players don't get the same benefit. This problem occurs because of our history of government regulation and high barriers to entry. It’s partly due to property zoning laws, but other laws also play a part. When the government regulator is asked to investigate the 'monopoly powers' of the regulator as the Australian Competition and Consumer Commission (ACCC) was asked to do, they find that the food retailers earnings are normal, but they investigate the wrong period, and they don't consider the increase in margins, instead focusing on profits. Why? Because they can conceal retained earnings reinvested in future growth. You can understand the 'political power' of an organisation of Woolworths, and the desire of the government to help them so long as they don't look bad. And the support of the ACCC, which has in previous years been a valuable agent for consumers might not longer be considered in the same light. I would also suggest that the ACCC is under-resourced, and even if it wins a few battles, the war is tilted towards those false prophets of capitalism.
The major food retailers have another strategy. They have this powerful market position of knowing what customers are buying. They can look at their best selling items and then go out into the market and offer contractors a new opportunity. For example, let’s say Woolworths was buying cucumbers from ABC Farm Coop for $0.5/kg. It could go out into the market offering a new player a 10 year contract to supply cucumbers at $0.30/kg. The capital expenditures allow the contractor to amortise costs over a long time, in the process wiping out the competitor, and forcing other retailers to buy from them. The great aspect of this business model is that its highly efficient. The negative aspect is that it is causing a structural shift in the market from which local food producers might never recover. The problem of course is the lack of market disclosure or unequal market power. The large integrated retailers are changing the way business is done. For example, for years I have been buying processed fruit packs from Golden Circle. Golden Circle must have increased their margins or food prices have risen because I have been paying a lot more in recent years. Recently Woolworths started offering a similar product at a discounted price. No doubt it is hoping to steal market share away from one of its food suppliers. More interesting is that the food is supplied from Swaziland. This is of course a logical development. These countries should be producing fruit because they have cheap labour. The same company in Swaziland is likely supplying Wal-Mart. This could create a competition problem. The laws in Swaziland might allow the local subsidiary of Woolworths to refrain from competing with it. i.e. Coles in Australia might be unable to buy the same fruit from the same producer. Should this bother customers?
This actually looks like an unfair development but actually this is an inevitable development which is good for food consumers, good for poverty-stricken developing countries, excellent for shareholders, a bonanza for directors with company options since food is fairly recession proof. Probably the biggest problem is the fact that the rural farm sector which is dominated by family owners will just not be able to compete. They will not be able to conceive of shifting their operations to Africa. They would not even know where Swaziland is.
What is the significance of that? Australia or NZ have even lower currencies one suspects? Or Australia and NZ become nice places to live, but if you intend to run a business, it will need to be a non-food, service business because there is no longer any money in food. Of course if you live on the coast you can sell your farm for retirement living. The question is - what happens to all that land in high cost Western markets? It is well suited to pastoral uses as well as highly mechanised farming. Can we not then expect countries like Australia to retain its lead in wheat, cotton? We might expect the less thirsty crops to win the day given the scarcity of water. Expect also a great deal more farm consolidation on a global basis in order to ensure security of income and supply. We can expect these corporations to preserve large stockpiles as well, and to trade them accordingly.
-----------------------------------------------
Andrew Sheldon www.sheldonthinks.com
1. Developer-retailers: This model is particularly popular in Asia, with the likes or Robinsons and Shoe Mart (SM) in the Philippines, and Seibu in Japan. It is in the developing markets where they have captured the greatest market share. The strategy of this model is to develop large shopping malls built around your retail capacity, with the added attraction of integrating those retail-shopping experiences with rail transport and residential property developments. SM and Robinsons have been very successful with this approach. In such cases the companies tend to function as independent stockers of local and international food. The intent of such malls is to buy large areas of land in strategic locations and essentially build cities around them. This model works well in Asia because you need the support of government to get cheap land and for approval of any and all subsequent development. In Australia, these enterprises would have to follow local zoning rules, and they are less likely to be bent for the sake of a developer. Certainly not in a systematic way that would be evident to competitors. They would also have to win over residents, some who don't always value the almighty dollar.
2. Farmer-retailers: This model tends to be more prevalent in the Western countries because retailers don't have the same development power. The shopping mall developer is thus a more independent beast catering to all food retailers in the market. The shopping mall developer Westfield is a case in point. It offers floor area to the largest malls like Woolworths and Coles in Australia. Woolworths was previously advised by the former Wal-Mart CEO. Their approach is to develop shopping centres in key locations with the intent of dominating retail with integrated services. Of course if its 'competitive bidding' it must be good right? Well no. In Australia and NZ (Countdown) you will find 2 brands competing for the same markets - which means no competition at all, thus food prices are determined by your ability to pay (i.e. Average household incomes). This is because you can bid more if you can hold more regional market share, so customers don't have a choice. Their intent is to offer greater convenience so that you would not even bother to go to the competitors because you could not be bothered to waste time determining who is offering the cheapest cost item for the 50-odd $3 items you buy every 3-4 days.
Is this not just good old fashioned capitalism? Well, I don't think so. The problem is that the market is divided between two major players in most countries. This creates a huge incentive for price collusion. There are often more competitors in the bigger countries, but these tend to be merged into just a few. The largest companies are entrenched because no other competitor can hope to match the efficiency of their distribution system. That is an effective barrier to entry because only a silly idiot would try to match their low unit costs. Small players can only go after the smaller rural markets offering smaller returns. These areas are open to outsiders because they are in a position to source local product and there are larger profit margins for the majors elsewhere. The majors have another strategy. They invest in growing profit margins in the city so during the boom times so that their earnings are not overstated in the bull market, but stable in the recessions. This allows them to further entrench their monopoly in the recessions because other players don't get the same benefit. This problem occurs because of our history of government regulation and high barriers to entry. It’s partly due to property zoning laws, but other laws also play a part. When the government regulator is asked to investigate the 'monopoly powers' of the regulator as the Australian Competition and Consumer Commission (ACCC) was asked to do, they find that the food retailers earnings are normal, but they investigate the wrong period, and they don't consider the increase in margins, instead focusing on profits. Why? Because they can conceal retained earnings reinvested in future growth. You can understand the 'political power' of an organisation of Woolworths, and the desire of the government to help them so long as they don't look bad. And the support of the ACCC, which has in previous years been a valuable agent for consumers might not longer be considered in the same light. I would also suggest that the ACCC is under-resourced, and even if it wins a few battles, the war is tilted towards those false prophets of capitalism.
The major food retailers have another strategy. They have this powerful market position of knowing what customers are buying. They can look at their best selling items and then go out into the market and offer contractors a new opportunity. For example, let’s say Woolworths was buying cucumbers from ABC Farm Coop for $0.5/kg. It could go out into the market offering a new player a 10 year contract to supply cucumbers at $0.30/kg. The capital expenditures allow the contractor to amortise costs over a long time, in the process wiping out the competitor, and forcing other retailers to buy from them. The great aspect of this business model is that its highly efficient. The negative aspect is that it is causing a structural shift in the market from which local food producers might never recover. The problem of course is the lack of market disclosure or unequal market power. The large integrated retailers are changing the way business is done. For example, for years I have been buying processed fruit packs from Golden Circle. Golden Circle must have increased their margins or food prices have risen because I have been paying a lot more in recent years. Recently Woolworths started offering a similar product at a discounted price. No doubt it is hoping to steal market share away from one of its food suppliers. More interesting is that the food is supplied from Swaziland. This is of course a logical development. These countries should be producing fruit because they have cheap labour. The same company in Swaziland is likely supplying Wal-Mart. This could create a competition problem. The laws in Swaziland might allow the local subsidiary of Woolworths to refrain from competing with it. i.e. Coles in Australia might be unable to buy the same fruit from the same producer. Should this bother customers?
This actually looks like an unfair development but actually this is an inevitable development which is good for food consumers, good for poverty-stricken developing countries, excellent for shareholders, a bonanza for directors with company options since food is fairly recession proof. Probably the biggest problem is the fact that the rural farm sector which is dominated by family owners will just not be able to compete. They will not be able to conceive of shifting their operations to Africa. They would not even know where Swaziland is.
What is the significance of that? Australia or NZ have even lower currencies one suspects? Or Australia and NZ become nice places to live, but if you intend to run a business, it will need to be a non-food, service business because there is no longer any money in food. Of course if you live on the coast you can sell your farm for retirement living. The question is - what happens to all that land in high cost Western markets? It is well suited to pastoral uses as well as highly mechanised farming. Can we not then expect countries like Australia to retain its lead in wheat, cotton? We might expect the less thirsty crops to win the day given the scarcity of water. Expect also a great deal more farm consolidation on a global basis in order to ensure security of income and supply. We can expect these corporations to preserve large stockpiles as well, and to trade them accordingly.
-----------------------------------------------
Andrew Sheldon www.sheldonthinks.com
