May 19th 2001

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Canberra Observed - Private opinions politicise High Court

AFA intervenes in IVF test case in High Court

True competition only way to keep banks honest

Franklins' sale shows supermarkets' power

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Straws in the Wind

Straws in the Wind - Straws II


Victoria abandons marriage

Will CEOs rule the world better than governments?

Why the domestic market is so important.

The next American Century begins,

Europe's ticking time bomb

COVER STORY: Gene manipulation: time to call a halt

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Franklins' sale shows supermarkets' power

by Victor Sirl

News Weekly, May 19, 2001
Victor Sirl analyses recent developments in the retail grocery sector, and their implications for employees and stores alike.

When Hong-Kong-based company Dairy Farm decided to sell off its Australian supermarket chain, Franklins, it may have seemed like a simple enough commercial decision. Dairy Farm no longer wanted to pour good money after bad, in an effort to boost the competitiveness and profitability of Franklins.

However, a simple decision has generated a number of complexities, due to the pressure of the Australian Competition and Consumer Cornmission (ACCC) and the Trade Practices Act.

In January, the ACCC rejected a plan to sell 135 stores to Woolworths and another 135 to independents. Woolworths' wholesale division, Australian Independent Wholesalers (AIW), was to co-ordinate the purchase of stores by independents, and would itself be separated from its parent via a sale or float.

However, the proposed jettisoning of Woolworths' wholesale division did not satisfy ACCC's concerns of a growing market concentration in the retail grocery sector, where the two giants Woolworths and Coles Myer claim at least 70 per cent of the market.

When the door closed on the Woolworths/AIW deal, the door opened on Metcash - the South African-owned wholesale distributor. In a Dairy Farm/Franklins/Metcash alliance, a new proposal for a sell-off has emerged.

Under the new plan, independents would get 120 stores, Woolworths 80 stores. The remaining 87 stores would be made available for sale to other operators.

There is a possibility that Foodlands may purchase as many as 50 stores in Queensland, but nationally some of those stores are expected to close.

Unfortunately, the new proposal would still give Woolworths around 42 per cent of the grocery market, lifting Woolworths and Coles/BiLo to approximately 75 per cent of the market. This would be the highest level of market concentration by any stores in the developed world, a circumstance not appealing to the ACCC. If that body rejects this proposal over concerns about market concentration and competition, a greater number of stores may be available for independents and, perhaps, for Coles too.

Alan McKenzie, the national spokesman for the National Association of Retail Grocers of Australia (NARGA), feels independents should be allowed to purchase another 40 stores. But Andrew Reitzer, the CEO of Metcash, is concerned that a rejection of the deal could place a sell-off of Franklins in jeopardy, with Dairy Farm opting to liquidate its operations.

Such a move would place the jobs of 25,000 employees at risk. So there is the question of how far the envelope can be pushed; it is possible that Woolworths' money may be needed to buy numerous large stores and give a bottom-line sale price acceptable to Dairy Farm.

Metcash is pivotal to the success of the new proposal. It will facilitate the bids for stores by the independents, and will make recommendations to Franklins on the best bid for each of the 120 stores in question.

Capital for the purchases will come from four sources: the individual independents, loans from Metcash, loans from Dairy Farm, and loans from banks.

Certainly, the saga in all its complexities is generating a number of winners and losers. At this point, the winners appear to be the independents, Metcash and to some degree Woolworths. But will the public benefit from greater competition and the transfer of Franklins stores to Australian ownership? The losers are Dairy Farm, Coles Myer and - most severely of all - some workers.

Franklins will close its distribution centres, with the possible exception of one in Queensland, and approximately 10 stores are expected to close. For employees in these workplaces, and their families, Franklins' corporate failure means personal tragedy. However, the carve-up is not all bad in terms of job security. Small business - in this case, in the form of the independent stores - is a labour-intensive employer. Furthermore, small businesses do not buy stores in order to close them. In other words, employees are not faced with the threat of "rationalisation". Woolworths will obtain mostly large stores.

No doubt many families will be waiting anxiously for a decision by the ACCC on the latest sell-off plan. If it is accepted, they will have a great sense of relief from a more certain future.

But the final word rests with the ACCC. When the whole issue is looked at from the perspective of the national interest, Alan McKenzie gives a good summation.

"Australia's best interest will be served by more rather than fewer competitors in major and important industries such as the retail sector.

"Globalisation and critical mass to compete on the world stage are all very well, but they must be balanced against Australia's overall public interest, which includes the governments' social and community obligations, and the very existence of small business and consumer choice."

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