EDITORIAL: by Peter WestmoreNews Weekly
Competition policy destroys retail liquor competition
, May 8, 2004
At the end of next year, full deregulation of the retail liquor industry will be implemented across Australia under national competition policy.
Most retail liquor stores in Australia are small family-run concerns, according to a recent report by the business management firm, Ernst and Young, and most are located in the eastern states.
The challenge to the survival of small independent stores arises, in part, from the aggressive drive of the large supermarket chains, Woolworths and Coles Myer, to capture market share. Coles Myer, under brand names such as Liquorland, currently owns about 600 liquor stores nationally, and is estimated to have around 20 per cent of the market. Woolworths, with around the same number of outlets, holds another 20 per cent of the market.
They are in the middle of a major expansion of their operations, both directly, and through acquisition of some of the larger independent liquor groups.Expansion
The increasing concentration of ownership will be facilitated by national competition policy. With the advent of total deregulation, the major supermarket chains' share of sales is expected to increase substantially, rising to between 60 and 80 per cent of all liquor sales, according to Ernst and Young.
It also expects that between 30 and 50 per cent of the small independent stores will go out of business.
For many years, small retailers have pointed to the impact of supermarket chains, whose size gives them both marketing clout and buying power.
The Independent Liquor Group, in a submission to a Senate inquiry into the Trade Practices Act last year, said, "Predatory pricing is a major issue for independent liquor retailers and is a related component to the 'creeping acquisition' practice alive and well in our the liquor retail sector.
"One of the most distressing issues facing small business in Australia, and it is an area in which the Trade Practices Act presently provides no remedies, is in the area of discriminatory pricing. Repeatedly, small business finds itself in a position of being unable to acquire products even at the selling price being advertised by major retail chains."
It concluded, "The inevitable transfer of business is predictable".
Serious as these consequences are, an unintended consequence will undoubtedly be to threaten the future of many Australian winemakers, most of whom sell into the smaller liquor stores.
The wine industry has grown remarkably over recent years, despite the adverse effects of serious drought in some years and a glut in grape production in others.
Currently, some 40 per cent of total production is exported.
The Australian industry is segmented into two parts: 40 large established wineries around the country produce 94 per cent of wine sold here, and the balance is sold by some 1600 small wineries, many of whom have very limited access to retail outlets, because they are low volume producers.
The precarious nature of their existence is reinforced by their declining profitability. The Wine Federation of Australia says, "More than 30,000 Australians are now directly employed in grape growing and wine manufacturing. Thousands of additional indirect jobs are also generated.
"Wine is now the fourth largest farm export product, outstripping sugar and cotton with $2.4 billion in exports. But all of this success is threatened by declining profitability across the wine industry.
"Since 1997-98 winery profits have declined by 45% as a comparative return on assets, the greatest drop among established industry groupings. This impact is felt across the wine industry, especially among small wineries where the decline in profitability has been acute. In fact, wineries with annual turnover of less than $5 million suffer from average profitability of just one per cent or less."
For many of them, the impact of national competition policy will not be to enhance market access and sales, but the opposite.
To address this crisis, urgent action is needed. The further deregulation of the industry will merely increase the market share and financial power of the two major supermarket chains, and thereby destroy rather than increase competition. Caps on their market share are needed to protect both small retailers and small wineries.
Additionally, states which refuse to apply national competition policy are subject to multi-million dollar penalties. This scandal must be ended.
Separately, liquor licensing laws should be reformed, as they have been in Victoria, to encourage the entry of small retailers who will stock the produce from small wineries.
And finally, the 29% Wine Equalisation Tax - a punitive tax not applied elsewhere to primary industry - should be abolished for small producers, as recommended by the wine industry.
If these steps are taken, the industry has a bright future: if not, many thousands of jobs will be lost, and hundreds of wineries will disappear. Over to you, Mr Costello.
- Peter Westmore is President of the National Civic Council