COMMONWEALTH OF AUSTRALIA TRADE PRACTICES ACT 1974 TRADE PRACTICES TRIBUNAL No V1 of 1995 QIW LIMITED Applicant RE APPLICATION FOR REVIEW OF A DETERMINATION OF THE TRADE PRACTICES COMMISSION DATED 29 MAY 1995 TO GRANT AN AUTHORIZATION TO DAVIDS LIMITED IN RELATION TO THE PROPOSED ACQUISITION OF COMPOSITE BUYERS LIMITED Lockhart J. (President), Dr M Brunt, Dr B Aldrich 17 October 1995 REASONS FOR DECISION THE TRIBUNAL CONTENTS Page 1. THE MATTER BEFORE THE TRIBUNAL 1.1 Introduction and the Commission's authorization 3 1.2 What was before the Commission for authorization; what did the Commission authorize and what is before the Tribunal? 7 2. THE PROCEEDING BEFORE THE TRIBUNAL 2.1 Participants 9 2.2 Conduct of the proceeding 10 3. THE RELEVANT LAW 3.1 The statutory provisions generally 15 3.2 Undertakings 26 10. 11. 12. COMPANTES 4.1 Davids 4.2 CBL 4.3 QIw 4.4 Recent developments LIQUOR DISTRIBUTION THE GROCERY DISTRIBUTION INDUSTRY 6.1 The Australian industry 6.2 A history of structural change 39 6.3 Diversity in store size and character 6.4 Market share trends STRATEGIC RESPONSES OF INDEPENDENT WHOLESALERS General Strategies to improve sales volume Strategies to secure retail sites Financial strategies 73 Industry rationalization strategies 76 NINN N OPWNE WHOLESALE - RETAILER RELATIONSHIPS 8.1 The banner groups 8.2 Pricing 8.3 Wholesaler services to retailers 8.4 Banner management THE IDENTIFICATION OF RELEVANT MARKETS The Tribunal's task 9.1 9.2 Market definition PRESENT COMPETITION AND MARKET POWER 10.1 Approach 10.2 Market structure 10.3 Market behaviour and performance LIKELY BENEFITS AND DETRIMENTS TO THE PUBLIC 11.1 Test to be applied 11.2 Alternatives to be considered 11.3 Detriments 131 11.4 Benefits CONCLUSION 144 THE MATTER BEFORE THE TRIBUNAL 3134 54 648187 92 103126 -3- 1.1 Introduction and the Commission's authorization This review concerns the proposed acquisition by Davids Limited ('Davids') of the issued shares and other securities of Composite Buyers Limited ('CBL'). The principal activities of Davids and CBL are _ the wholesale distribution of groceries, refrigerated foods, general merchandise and liquor. Davids is the largest independent grocery wholesaler in Australia (i.e. independent of the large integrated retail chains) . It conducts its business in New South Wales, the Australian Capital Territory, Victoria, Queensland, South Australia and the Northern Territory. CBL conducts its business in Victoria and to a more limited extent in New South Wales and Tasmania. The other independent grocery wholesalers in Australia are Foodland Associated Limited ('FAL') which supplies independent retailers in Western Australia; Queensland Independent Wholesalers Limited ('QIW') which carries on business in Queensland; and Australian Independent Wholesalers Pty Limited ('AIW') which conducts its business in the Australian Capital Territory and some parts of New South Wales. The parties to the proposed acquisition also have direct interests in grocery retailing and in the sale by wholesale of liquor including beer, spirits and wines. The independent grocery wholesalers supply independent retailers, but not the national retail chains (Woolworths, Coles -4- and Franklins), each of which operates its own vertically integrated grocery distribution business. Davids sought authorization from the Trade Practices Commission ('the Commission') for its proposed acquisition of all the issued shares and other securities of CBL. On 29 May 1995, the Commission, pursuant to s. 88(9) of the Trade Practices Act 1974 ('the Act'), granted authorization for the proposed acquisition by Davids for a period of 15 months, commencing on the day on which the authorization comes into force. The Commission's determination stated that, if an application for review is made to the Tribunal, the determination will come into force:- '(a) on the day on which the Tribunal makes a determination on the review and grants authorisation; or (b) where the application for review is withdrawn - on the day on which the application is withdrawn. ' An application for review of the Commission's determination was lodged by QIW with the Tribunal on 19 June 1995, within the time stipulated in reg. 20(1). It has not been withdrawn, so the Commission's determination has not yet come into force. The Tribunal is satisfied, pursuant to s. 101(1) of the Act, that QIW has a sufficient interest to entitle it to make the application. conditions .1): (see the determination of the Commission, '8.1 For the reasons contained herein, the Commission grants authorisation to application A30165 made under section 88(9) of the Act. Authorisation is granted for a period of fifteen months, commencing on the day on which the authorisation granted by this determination comes into force, and is subject to conditions that: (a) Davids shall acquire any additional shares, convertible notes, debentures or other securities in CBL only by way of, in conjunction with or immediately followed by a takeover scheme, provided that this condition will not prevent the conversion in accordance with their terms of any convertible securities in CBL to which Davids is presently entitled; and (b) Davids will not acquire a share or shares issued by CBL which is not an ordinary share or ordinary shares unless by the acquisition Davids controls CBL within the meaning of that expression in the undertakings given by Davids to the Commission pursuant to s.87B of the Trade Practices Act, dated 29 May 1995; and (c) any takeover scheme announced by Davids is to The Commission's authorization was subject to the following paragraph -6- contain a minimum acceptance condition to ensure that Davids will become entitled at the conclusion of the takeover scheme, or of any period of compulsory acquisition, to such number of shares in CBL as will entitle it to cast more than 50 per cent of the votes which may be cast at any general meeting of CBL. In calculating the number of votes which may be so cast, Davids shall treat all convertible notes and other convertible securities as if they had already been converted and Davids shall not waive its minimum acceptance condition unless it is or will become entitled to more than 50 per cent of the votes which may be cast at any general meeting of CBL.' Certain written undertakings were given by Davids to the Commission, pursuant to s. 87B of the Act, in relation to the application for authorization, to which reference shall be made later. 1.2 What was before the Commission for authorization, what did the Commission authorize and what is before the Tribunal? The application by Davids to the Commission for authorization describes the subject matter in these terms: 'Application is hereby made under sub-s. 88(9) of the Trade Practices Act 1974 for an authorization under that sub- section to acquire shares in the capital, or to acquire assets, of the body corporate named in item 2 [Composite Buyers Limited].' Paragraph 2(e) describes in sub-paragraph (e) under the sub-heading: "(e) Number of Shares or Description of Assets to be Acquired All the issued shares and other securities in CBL (currently 16,045,998 ordinary shares, 692,000 converting preference shares and $20,000,000 of convertible notes) to which Davids has no entitlement.' It will be remembered from our earlier recitation of the terms of the Commission's determination that they included condition (c) to the effect that any takeover scheme announced by Davids must contain a minimum acceptance condition to ensure that Davids will become entitled to such number of shares in CBL as will entitle it to cast more than 50% of the votes which may be cast at any general meeting of CBL and that Davids shall not waive its minimum acceptance condition unless it is or will become entitled to more than 50% of the votes which may be cast at any general meeting of CBL. Thus, Davids' application to the Commission was for - 8 - authorization for it to acquire all the issued shares and other securities in CBL other than those to which Davids had a present entitlement (Davids owns 32.1% of the issued ordinary shares in the capital of CBL). The Commission took the view that the greater (all) included the less, but not fewer than the number of shares in CBL as will entitle Davids to cast more than 50% of the votes which may be cast at general meetings of CBL. The case for Davids was conducted before the Tribunal on the basis that Davids sought from the Tribunal authorization of the same kind as that for which it had applied to the Commission and which was granted by the Commission, namely, authorization for Davids to acquire all the issued shares in CBL (other than those to which it has a present entitlement), but no fewer than the number of shares in CBL as will enable Davids to cast more than 50% of the votes which may be cast at general meetings of CBL. However, on the second last day of the hearing counsel for Davids said that authorization was sought for the acquisition by Davids of all or any of the issued shares and other securities in CBL to which Davids has no entitlement. Counsel for QIW submitted that Davids should not be allowed authorization for the acquisition of any of the shares in CBL (i.e. Davids should not be authorized to acquire fewer shares than the number required (together with the shares presently owned by it) to enable it to cast more than 50% of the votes at general meeting) unless QIW is allowed to adduce further evidence as to public benefit and to further cross-examine Mr -9- Patten, the principal witness called by Davids. In our opinion Davids should be confined to the approach which it adopted before us until the closing stages of addresses. That accords with justice and the need to hear and determine merger cases of this kind expeditiously. 2. THE PROCEEDING BEFORE THE TRIBUNAL 2.1 Participants QIW, Davids and the Commission participated in the review before the Tribunal: QIW as the applicant for review, pursuant to s. 101(1) of the Act, and Davids as the person to whom authorization was granted by the Commission (s. 109(1) of the Act). The Commission appeared. The Commission and all parties were represented by counsel and solicitors. 2.2 Conduct of the proceeding The application by QIW for review of the Commission's determination was lodged with the Tribunal on 19 June 1995. Directions were given by the Tribunal on 4 July and 1 August 1995 to prepare the matter for hearing. The hearing commenced on 8 August 1995 and took ten hearing days to complete. The matter was conducted in the context of s. 102(1A) of the Act which provides that, where the review before the Tribunal is of a determination of the Commission relating to the grant of an authorization under s. 88(9), the Tribunal must make its determination on the review within 60 days after receiving the application for review. Section 102(1B) provides that this 60 - 10 - day time limit does not apply if the Tribunal considers that the matter cannot be dealt with properly within that period of 60 days, either because of its complexity or because of other special circumstances. Section 102(1C) provides that if subsection (1B) applies, the Tribunal must notify the applicant for review before the end of the 60 day period that the matter cannot be dealt with properly within that period. The Tribunal considered before the end of the 60 day period in this matter that it could not be dealt with properly within the period of 60 days both because of its complexity and other special circumstances. Accordingly, the Tribunal informed the parties before the end of that period that the matter could not be dealt with properly within that period. Nevertheless, this determination of the Tribunal has been made expeditiously. Many documents are in evidence. Statements and affidavits of witnesses were filed, and 20 witnesses were examined orally. The statements of those who were not called to give oral evidence were by consent admitted into evidence by the Tribunal and accorded the same weight and evidentiary value as if the witnesses had been called and verified their written statements by oath or affirmation (s. 107 of the Act). A list of the persons who furnished statements and were called to give oral evidence and a list of persons who furnished written statements but were not called to give oral evidence is annexure 'A' to these reasons. -11- It is a large and complex matter which has been disposed of in a short time. This was due partly to the great deal of work that was done by all the parties, the Commission and their legal advisers in a co-operative fashion, and partly to the procedures adopted by the Tribunal which it is helpful to mention as a guide to participants before the Tribunal in future applications for review. At the first directions hearing (4 July) the Tribunal arranged for the parties and the Commission to receive a list of the topics which the Tribunal then considered were central to the review. This list proved to be a helpful statement of the issues in the matter and basically shaped the conduct of the hearing as the participants accepted those issues, subject to certain additions. The directions of the Tribunal included the following: The Commission shall assemble and file by 14 July copies of the reports and other source documents referred to in the body of or footnotes to the Commission's determination, suitably updated where possible, and shall serve on each party and the Tribunal by 14 July an index of those documents. The Commission shall assemble and provide to the Tribunal and all parties by 14 July industry-wide facts and statistics readily available to it relating to five subject matters; Davids and the Commission shall file and serve on all parties and the Commission by 14 July certain documents that will inform the MTribunal briefly of relevant background facts; All parties and the Commission shall file and serve by 14 July a brief outline of their respective cases, containing a statement of any topics additional to those mentioned by the Tribunal, an outline of the principal submissions to be made, a list of witnesses to be called including experts, and a list of documents intended to be tendered or otherwise relied on at the hearing; All parties shall file and serve by 24 July statements of all witnesses proposed to be called, including persons able to speak about strategic planning in the relevant corporations and copies of all documents proposed to be tendered at the hearing; All parties shall file and serve by 1 August any amendments to their outlines, lists of witnesses, lists of documents and statements of witnesses; Statements of experts shall be filed and served at the same time as the documents mentioned in the immediately preceding paragraph are filed and served unless any party - 13 - wishes to do so earlier, in which case they may be filed and served earlier; The hearing of the matter shall commence on Tuesday, 8 August 1995. If any party defaults in complying with any of the earlier directions it must not be assumed that the Tribunal will permit that party to rely on the documents, including statements, the subject of the default. The Tribunal will allow the defaulting party to rely on such documents only if in all the circumstances the Tribunal is of the opinion that it is in the interests of justice (taking into account amongst other things the interests of parties adversely affected by the default) that the default be excused. Four expert witnesses in the field of economics furnished statements and were examined orally before the Tribunal at the hearing. The Tribunal adopted the following procedure with respect to expert witnesses, for the purpose of obtaining the maximum benefit from their evidence and removing them from the adversary process so far as possible:- At the conclusion of all the evidence (other than the evidence of the experts) and before the commencement of addresses, each expert was sworn immediately after the other and in turn gave an oral exposition of his or her expert opinion with respect to the relevant issues arising from the evidence. Each expert then in turn expressed his or her opinion about the opinions expressed by the other experts. Counsel then cross-examined the experts, being at liberty to cross-examine on the basis (a) that questions could be put to each expert in the customary fashion (i.e. one after the other, completing the cross-examination of one before proceeding to the next), or (b) that questions could be put to all or any of the experts, one after the other, in respect of a particular subject, then proceeding to the next subject. Re-examination was conducted on the same basis. In the result we gained assistance from the evidence of the experts. Their oral expositions and examinations occupied only three and one-half hours. The proceeding was conducted before us by counsel and solicitors, the parties and the Commission with considerable expedition and efficiency, and we wish to record our gratitude to them. 3. (s. THE RELEVANT LAW 3.1 The statutory provisions generally Section 50(1) prohibits, in the absence of authorization 88(9)), the acquisition by a corporation of any shares in - 15 - the capital of a body corporate or any assets of a person in circumstances where the acquisition would have the effect or be likely to have the effect' of substantially lessening competition. Section 50(3) specifies certain matters which must be taken into account, for the purposes of s. 50(1), in determining whether the acquisition would have the effect or be likely to have the effect of substantially lessening competition. Some observations about s. 50 are relevant. Until 21 January 1993, s. 50 prohibited mergers and acquisitions which were likely to result in dominance of a market. Mergers effected from that date are subject to the test of substantial lessening of competition in a market. In addition to the application of a new merger test, s. 50(1) extends to acquisition of assets from natural persons as well as corporations. Section 50(6) provides that in s. 50 the term 'market' means a substantial market for goods or services in Australia, in a State or in a Territory, a provision which in essence restates the previous s. 50(3) (a). The test of substantial lessening of competition in a market now adopted in Australia has moved us closer to the approach adopted in the United States and Canada where the test for regulating mergers is effect on competition. The - 16 - prohibition against the acquisition of shares or assets imposed by s. 50(1) includes direct and indirect acquisitions. A direct acquisition is one in which the corporation makes' the acquisition itself. An indirect acquisition is one in which the corporation makes the acquisition through an agent, nominee or trustee: Trade Practices Commission v Australian Iron and Steel Pty Limited (1990) 22 FCR 305; (1990) ATPR 41-991. The phrase in s. 50(1) 'would have the effect, or be likely to have the effect,' involves two different concepts. The words 'would have the effect' suggest that the question must be tested against the evidence or established facts; whereas the words 'would ... be likely to have the effect' suggest that there are various shades of meaning including 'probable' in the sense of 'more probable than not,'. It may mean (though with respect to s. 45D of the Act), to use the words of Bowen CJ in Tillmanns Butcheries Pty Limited v Australasian Meat Industry Employees' Union (1979) 42 FLR 331 at 339: ' "Some possibility" - more than a remote or rare chance. Or, it may mean that the conduct engaged in is inherently of such a character that it would ordinarily cause the effect specified.' Deane J. said in Tillmanns Butcheries at 346: 'The word "likely" can, in some context, mean "probably", in the sense in which that word is commonly used by MJlawyers = and - 17 - laymen, that is to say, more likely than not or more than a 50 per cent chance ... It can also, in an appropriate context, refer to a real or not remote chance or possibility regardless of whether it is less or more than fifty per cent. When used with the latter meaning in a phrase which is descriptive of conduct, the word is equivalent to "prone", "with a propensity" or "liable". When so used, it is sometimes equated with the concept of foreseeability in the law of negligence ...' Northrop J. said in Trade Practices Commission v Ansett Transport Industries (Operations) Pty Limited (1978) 32 FLR 305; (1978) ATPR 40-071 that the words 'is likely to' meant that something was more probable than not to happen in the future. See also Trade Practices Commission v TNT Management Pty Limited (1985) 6 FCR 1; (1985) ATPR 40-412 per Franki J. at 50 and 46,117. The use of the word 'substantially' in s. 50 with reference to the effect or likely effect of the relevant conduct on the lessening of competition in a market connotes an effect on competition which is real or of substance, not necessarily one which must be large or weighty: see the explanatory memorandum to the Trade Practices Legislation (Amendment) Act 1992 (No 222 of 1992), which introduced the new merger test. In Tillmanns Butcheries Bowen C.J. said at 338: - 18 - 'The word "substantial" would certainly seem to require loss or damage that is more than trivial or minimal. According to one meaning of the word the loss or damage would have to be considerable wae However, the word is quantitatively imprecise No doubt in the context in which it appears the word imports a notion of relativity.' Deane J. said at 348: 'The word "substantial" is not only susceptible to ambiguity; it is a word calculated to conceal a lack of precision. In the phrase "substantial loss or damage", it can, in an appropriate context, mean real or of substance as distinct from ephemeral or nominal. It can also mean large, weighty or big. It can be used in a relative sense or can indicate an absolute significance, quantity or size.' See also Re Queensland Co-Operative Milling Association Limited; Re Defiance Holdings Limited ('QCMA') (1976) 25 FLR 169; (1976) ATPR 40-012; Re Howard Smith Industries Pty Limited (1977) 28 FLR 385; (1977) ATPR 40-023; Dandy Power Equipment Pty Limited v Mercury Marine Pty Limited (1982) 64 FLR 238 at 276; (1982) ATPR 40-315 at 43,898-9; Radio 2UE Sydney Pty Limited v Stereo FM Pty Limited (1982) 62 FLR 437 at 444; (1982) ATPR 40- 318 at 43,918; Dowling v Dalgety Australia Limited (1992) 34 FCR 109; (1992) ATPR 41-165; Eastern Express Pty Limited v General Newspapers Pty Limited (1991) 30 FCR 385; (1991) ATPR 41-128. It should be noted also that the word 'lessening' in the context of lessening of competition is to be read as including - 19 - references to preventing or hindering competition: s. 4G. With this background, we examine the role of the Commission and the Tribunal under ss. 88(9) and 90(9). Section 102(1) of the Act provides, inter alia, that upon a review of a determination of the Commission, and, for the purposes of the review, the Tribunal may perform all the functions and exercise all the powers of the Commission. The reasoning process of the Commission is not itself the subject of the inquiry: Re 7-Eleven Stores Pty Ltd (Victorian Newsagency) (1994) ATPR 41-357; and Re Media Council of Australia (No 2) (1987) 88 FLR 1 at 11; (1987) ATPR 40-774 at 48,419. It is also useful to note that s. 91(3) provides that an authorization may be expressed to be subject to such conditions as are specified in the authorization. Plainly, the Tribunal's powers on a review such as the present include the power to attach conditions to any authorization which the Tribunal might grant: see Re Rural Traders Co-Operative (WA) Limited (1979) 37 FLR 244 at 261. Section 88(9) of the Act empowers the Commission, upon application by a person, to grant an authorization to the person to acquire shares in the capital of a body corporate or to acquire assets of a person. Section 90(9) prohibits the Commission from granting - 20 - authorization of that kind unless it is satisfied in all the circumstances that the proposed acquisition would result, or be likely to result, in such a benefit to the public that the acquisition should be allowed to take place. This is the critical test for the Commission and for the Tribunal. Section 90(9) of the Act (like s. 90(8)), in contrast to s. 90(6) and (7), is silent on the question of public or any other detriment, including anti-competitive detriment. Nevertheless, for the Tribunal to fulfil the statutory duty imposed on it by s. 90(9), in order to grant authorization it must be satisfied 'in all the circumstances' that the proposed acquisition would result or be likely to result in such a benefit to the public that the acquisition should be allowed to take place. The examination of 'all the circumstances' must in our view involve the Tribunal in an examination of matters of detriment, including anti-competitive detriment, in order to conclude whether in all the circumstances there is such a degree of benefit to the public that the acquisition should be allowed to proceed: see QCMA; and Rural Traders. Notwithstanding the absence of express reference to detriment in s. 90(9), the resulting benefit to the public to which s. 90(9) refers is the net or overall benefit to the public after any detriment to the public resulting or likely to result from the proposed acquisition has been taken into account: Rural Traders at 261. - 21 - As was observed in QCMA at 184 and 17,243 (and we agree), given the policy of the Act and the nature of the application for authorization, under s. 88(9) the most important of potential detriments will normally be the anti-competitive effects or negative effects on competition. It is apt to quote the words of the Tribunal in QCMA at 187 and 17,245: 'However, "competition" is such a very rich concept (containing within it numbers of ideas) that we should not wish to attempt any final definition which might, in some market settings, prove misleading or which might, in respect of some future application, be unduly restrictive. Instead we explore some of the connotations of the term. ' Competition may be valued for many reasons as serving economic, social and political goals. But in identifying the existence of competition in particular industries or markets, we must focus upon its economic role as a device for controlling the disposition of society's resources.' And at 188 and 17,246: 'Competition expresses itself as rivalrous market behaviour. In our view effective competition requires both that prices should be flexible, reflecting the forces of demand and supply, and that there should be independent - 22 - rivalry in all dimensions of the price-product-service packages offered to consumers and customers. Competition is a process rather than a situation. Nevertheless, whether firms compete is very much a matter of the structure of the markets in which they operate. ...' It is also important to remember that a merger may positively enhance the competitive process and thus give rise to a substantial benefit (QCMA at 185 and 17,244) and that a claimed benefit may in fact be judged to be a detriment when viewed in terms of its contribution to a socially useful competitive process (QCMA at 187 and 17,245). It was pointed out by the Tribunal in Rural Traders at 262 that, for a benefit or detriment to be regarded as a benefit or detriment to the public for the purposes of the assessment of public benefit required by s. 90(9), it must be seen as a benefit or detriment to the community generally; but it does not follow that private benefit or private detriment are necessarily irrelevant. This is because benefit and detriment are to be determined in accordance with the values of the community generally: QCMA at 182-3 and 17,242; Rural Traders at 262 and 278; and Victorian Newsagency at 42,677. The Tribunal observed in QCMA at 180 and 17,241, in the context of its consideration of the relationship between s. 50 and s. 88(7) that the task of the Tribunal is not first to - 23 - inquire whether the acquisition is 'likely to have the effect of substantially lessening competition' (the language of s. 50) because the 'issues for determination by the Court in the event of prosecution are different from those for determination by the Tribunal when authorization is sought'. The question before us is whether any net or overall public benefit which we find would result or be likely to result from the proposed acquisition, warrants authorizing or allowing the acquisition to take place, notwithstanding that it is or may be within the class of acquisition to which the general prohibition imposed by s. 50(1) applies. This question can properly be answered in the affirmative if the net or overall benefit which we find would result from the proposed acquisition, or be likely to result from it, is seen by us to be of substance as distinct from ephemeral or illusory: Rural Traders at 262-3. Whether or not the net benefits are 'of substance' must depend in large measure upon whether the positive benefits are of sufficient public importance to outweigh any detriments, including anti- competitive effects flowing from the merger taking place in the relevant markets: QCMA at 184 and 17,243. In some cases rationalization may be a public benefit: Re A C Hatrick Chemicals Pty Limited (No 2) (1978) 18 ALR 129; (1978) ATPR 40- O57. In identifying relevant public benefit it is necessary to compare the position which would exist in the future if the proposed acquisition did not take place, with the position in - 24 - the future that would arise if the acquisition did take place: Media Council (No. 2) at 11 and 48,419; QCMA at 186 and 17,244; G & M Stephens Cartage Contractors Pty Limited (Application on behalf of the Concrete Carters Association (Victoria)) (1977) 31 FLR 193 at 216; (1977) ATPR 40-042 at 17,459-60; Re John Dee (Export) Pty Limited (1989) 95 FLR 250 at 267; (1989) ATPR 40- 938 at 50,206. In determining what amounts to a public benefit for the purposes of s. 90(9) the Tribunal (as well as the Commission) must regard as benefits to the public, in addition to any other benefits to the public that may exist apart from s. 90(9A) (a), a significant increase in the real value of exports and a significant substitution of domestic products for imported goods (s. 90(9A) (a)). It must be noted also that, in determining what amounts to a benefit for the purposes of s. 90(9), the Tribunal must take into account, without limiting the matters that may be taken into account, all other relevant matters that relate to the international competitiveness of any Australian industry (s. 90 (9A) (b)). Finally, we note the judgments of the Federal Court, both at first instance and on appeal, of QIW Retailers Limited v Davids Holdings Pty Limited (1993) 42 FCR 255; (1993) ATPR 41-226 - a case that turned on its own facts and issues, which are different from those in the present matter. 3.2 Undertakings We mentioned earlier that Davids gave written undertakings to the Commission pursuant to s. 87B of the Act. Those undertakings are dated 29 May 1995, the same date as the date of the determination of the Commission. The undertakings were drafted substantially by Davids and their legal advisers, and obviously were proffered to the Commission for the purpose of obtaining the Commission's authorization to the proposed acquisition. The undertakings are extensive. They occupy 14 pages. It is unnecessary to recite them save to say that, under the heading 'Purpose of Undertakings' appearing on the first page of the undertakings, the following appears: 'If Davids controls CBL, (our emphasis) these undertakings are intended to ensure the following outcomes and are given for the following purposes and shall be interpreted accordingly: ' The status of the undertakings was the subject of argument before us. Counsel for the Commission contended that the undertakings were unlimited in their operation; and that, once given by Davids and accepted by the Commission, they are in force and will remain in force independently of the findings and orders made by the Tribunal, unless and until Davids seeks the Commission's consent to withdraw or vary them, which can be done only with the consent of the Commission (s. 87B(2)). Section 87B reads as follows: '87B(1) The Commission may accept a - 26 - written undertaking given by a person for the purposes of this section in connection with a matter in relation to which the Commission has a power or function under this Act (other than Part X). (2) The person may withdraw or vary the undertaking at any time, but only with the consent of the Commission. (3) If the Commission considers that the person who gave the undertaking has breached any of its terms, the Commission may apply to the Court for an order under subsection (4). (4) If the Court is satisfied that the person has breached a term of the undertaking, the Court may make all or any of the following orders: (a) an order directing the person to comply with that term of the undertaking; (b) an order directing the person to pay to the Commonwealth an amount up to the amount of any financial benefit that the person has obtained directly or indirectly and that is reasonably attributable to the breach; (c) any order that the Court considers appropriate directing the person to compensate any other person who has' suffered loss or damage as a result of the breach; (d) any other order that the Court considers appropriate. ' The argument is unsound. Plainly the undertakings were given by Davids to the Commission in association with and as part of its application for authorization, notwithstanding that the determination of the Commission does not state in terms that the authorization was granted by the Commission on the basis of the undertakings having been given. There is a reference in paragraph 8.1 (p 81) of the determination to the undertakings, - 27 - but that is an ambulatory reference for the purpose only of describing the undertakings, and not for the purpose of incorporating them into the conditions imposed by the Commission upon the grant of authorization. Also, the form of the Commission's determination mentioned earlier is such that the determination has not yet come into force and will not do so until the Tribunal makes a determination on the review (paragraph 8.3(a)). If the Tribunal makes a determination on the review granting authorization, that determination will supplant the Commission's determination and the Tribunal's determination is then deemed, by the operation of s. 102(2), to be a determination by the Commission. The undertakings have no existence independently of the application to the Commission for authorization and of the authorization subsequently granted by the Commission. If the Tribunal decides to affirm the Commission's determination, it may say whether all or any of the undertakings are henceforth appropriate. It is only those undertakings, if any, which the Tribunal regards as being appropriate that spring to life after the Tribunal's determination as part of the affirmation by the Tribunal of the Commission's determination. The undertakings not regarded by the Tribunal as appropriate would not have life because they would not be part of the subject matter of the Tribunal's affirmation of the Commission's determination. There was some argument before us directed to the question whether the Tribunal could exercise the powers conferred on the Commission under s. 87B to accept written undertakings as part of the powers of the Tribunal conferred by s. 102(1), namely, that it may perform all the functions and exercise all the powers of the Commission. It was argued that the powers conferred on the Commission by s. 87B are peculiar to the Commission. We do not find it necessary to consider this question; nor do we express any view on whether s. 87B is a valid exercise of the power of the Parliament. 4. COMPANIES 4.1 Davids Davids Limited is a publicly listed company incorporated in New South Wales. Its principal activities are the wholesale distribution of groceries, refrigerated foods, liquor and general merchandise. Grocery wholesaling is conducted by the Davids group through Davids Distribution Pty Limited in respect of operations in New South Wales and Queensland, through Davids Distribution (Victoria) Pty Limited in Victoria, and in South Australia and the Northern Territory through Davids (SA) Limited, formerly Independent Holdings Limited ('IHL'). IHL was acquired by Davids in September 1994, following Davids' conversion to a public company and listing on the Australian Stock Exchange earlier that year. Davids is the largest grocery wholesaler in Australia, and it distributes some 15% of the branded packaged groceries sold in Australia according to the statistics compiled by the trade journal 'Retail World' - the conventional measure of market share in the grocery distribution industry. The latest trade statistics published by the market research company A C Nielsen show that the Davids wholesaling companies supply some 1750 stores trading under numerous 'banner groups', including Jewel, Rainbow, Festival IGA, Foodtown, Clancy's, and Welcome Mart, along with convenience stores such as 7 Eleven, Food Plus, Shell Select, Quix, Quick Stop and Road Pantry. Also, a large number of small businesses which cannot meet the minimum order requirements for wholesale delivery are supplied by Davids through 42 cash-and-carry warehouses operated by the Davids' subsidiary, Campbell's Cash and Carry Pty Limited. Davids purchased the cash-and-carry business of CBL in August 1994, closing three of the eight warehouses. and integrating the other five into Campbell's operations. Davids and FAL share a 50-50 joint venture in Australian Liquor Marketers Pty Limited ('ALM'), which operates in all States except South Australia and is the largest Australian distributor of wines and spirits. Since its acquisition of IHL in 1994, Davids is also a substantial distributor of wines and spirits in South Australia. 4.2 CBL CBL is an unlisted public company incorporated in Victoria, conducting a similar range of activities to Davids, except for the cash-and-carry warehouse, which CBL sold to Davids in 1994. From two warehouses in Sydney and Melbourne, CBL supplies some 520 stores in Victoria, New South Wales and Tasmania, trading as a number of banner groups, including Tuckerbag, Goodfellows, Payless and Rite-way. CBL also distributes liquor in Victoria, New South Wales and Tasmania. Because CBL was not a party before the Tribunal in this matter, evidence received regarding CBL has been limited, and on occasion dated, being in most part assembled by the Commission from material in the Commission's hands on the occasion of the original determination of Davids! application, and from earlier Commission investigations bearing on grocery distribution to which CBL was a party. Much of the information concerning CBL submitted by the Commission was confidential. CBL's share register reflects a complex recent history. In early 1991, IHL acquired shares and convertible notes in CBL to the value of $16 million. These securities with their attendant rights passed to Davids on their acquisition of IHL. In the upshot, Davids holds more than 30% of CBL's' shares. More recently Coles Myer took up convertible notes in CBL to the value of $20 million, which on conversion in 1997 or earlier - 31 - could give Coles Myer a holding of up to 30% of CBL's shares, depending on the conversion price. Coles also holds a special share that gives it 19.99% of the voting rights, pending conversion. Neither Davids nor Coles is represented on the Board of CBL. In June 1995, both QIW and Resources and Industries Limited (RAI) announced their separate intentions to seek to acquire CBL, and both hold some shares in CBL. RAI subsequently elected not to proceed with its offer. QIW lodged its Part A Statement in relation to CBL with the Australian Securities Commission on 24 July 1995. After reporting a loss of $32.2 million in 1993-94, CBL announced an operating profit in the six months to December 1994, which the Chief Executive Officer described as marking 'the beginning of a sustained period of profitability for the company'. It seems that CBL is expected to report a profit for the full 1994-95 year. However, the recent QIW Part A Statement notes that this result will include some major non-recurring items. During 1994, CBL commissioned KPMG Peat Marwick to examine and report on CBL's wholesaling business in New South Wales. The executive summary of their report dated August 1994 includes the following: 'CBL does not have the financial resources or existing strategy to compete in the market to either maintain or increase its market share. ... There are a number of factors which ... combine to present a risk profile for the CBL NSW grocery operation - 32 - which would be unacceptable to the Board and shareholders. ... In the circumstances our recommendation is that CBL attempt to sell the NSW grocery operation ...' 4.3 QIw QIW is a-publicly listed company incorporated in Queensland. Davids holds about 23% of the shares in QIW, but has no representative on the Board of the company. The company distributes wholesale groceries and refrigerated items, tobacco, confectionery and general merchandise from its central warehouse in Brisbane, and also operates 12 cash-and-carry outlets, from Lismore New South Wales to Cairns. With some 14% of the market for branded packaged groceries distributed from Queensland warehouses, QIW is the larger of the two independent grocery wholesalers operating in Queensland, Davids being the other. Until very recently, QIW has owned and operated 16 retail outlets, comprising 14 supermarkets in Central Queensland operated by its subsidiary Denman Bros Ltd, and two Q Super Store supermarkets near Brisbane. Having decided to vacate retail operations, as part of the restructuring and redirection of the company, QIW has sold in 1995 four large supermarkets to Coles, and plans also to sell, franchise or license the remainder. 4.4 Recent developments Concurrently with the hearing of this matter, QIW has - 33 - proceeded with its offer to acquire all the ordinary shares of CBL, conditional on acceptance by 90% of CBL shareholders. Its intention to make the offer was announced on 15 June 1995. During the hearing before the Tribunal, it filed a Part A Statement on 24 July 1995, and a revised Part A Statement dated 29 August 1995. The original QIW offer was varied in a notification to the Australian Securities Commission ('ASC') on 15 September 1995, with the effect of reducing the minimum acceptance condition to 50.1% of CBL shares. In the result, QIW holds some 7% of CBL shares, but the voting of this holding is constrained by a deed of settlement that QIW has entered into with the ASC, after the ASC questioned the standing of the relevant shares. A parallel offer for CBL shares by Resources and Industry Limited (RAI), which was associated with a proposal for RAI to enter the grocery distribution industry by merging with Jewel Food Stores Limited ('Jewels'), was withdrawn on 31 July 1995. RAI's activity in the stock market in conjunction with this aborted offer left RAI holding around 19% of CBL shares. Press reports at the time suggested that the standing of these shares was also questioned by the ASC, but the Tribunal has no evidence on the point. On 8 September 1995 Davids and Jewels announced agreement for Davids to acquire Jewels. A subsequent announcement stated that settlement of the acquisition had been set for 17 October 1995. On 15 September 1995, CBL issued its Part B Statement in response to the Part A Statement of QIW as varied, with CBL's directors unanimously recommending that CBL's shareholders accept the proposed amended QIW offer in the absence of a higher bid. They noted that the offer, unless extended, remained open until 16 October 1995. On 22 September 1995, Davids advised the Australian Stock Exchange of its intention to accept the QIW offer in respect of Davids' shares in CBL, noting that Davids holds 32.1% of CBL's issued share capital, and also approximately 23% of QIW. 5. LIQUOR DISTRIBUTION Both CBL and Davids (SA) distribute beer, wine and spirits (which taken together we describe as liquor), and Davids owns half of the shares in Australian Liquor Marketers Pty Limited ('ALM' ) - the largest Australian liquor distributor which distributes beer, wine and spirits in all States and Territories except South Australia. AIM's largest customer is Campbell's Cash & Carry Pty Limited, a subsidiary of Davids. The combined market shares of Davids and ALM are such that a merger between CBL and Davids might be considered to have the potential to affect competition detrimentally. ALM and Davids Combined Liquor Market Share % Liquor Wine & Spirits NSW 19 Al Victoria 31 67 Tasmania 33 83 Australia 24 57 In its determination, the Commission adopted the view that a merger of CBL and Davids would not significantly affect competition regarding liquor distribution, because of the structure of liquor distribution in Australia and the relatively low barriers to entry. Issues related to competition in liquor markets were not in contention at the hearing, and QIW offered no evidence or argument in relation to the topic. ALM operates eleven distribution warehouses across Australia (except in South Australia), from which beer, wine and spirits are delivered to hotels, liquor stores, supermarkets, other retail outlets, and other licensed premises. Independent liquor retailers supplied by ALM include licensed supermarkets supplied by Davids with groceries and operating under banners owned by Davids. Woolworths' Macs stores are also supplied by ALM. In New South Wales, Victoria and Western Australia, Coles has contracted with Brambles Limited, the transport company, for liquor distribution to its MLiquorland chain of _ stores. Liquorland is Australia's largest liquor retailer. The channels for liquor distribution include, in addition to the wholesalers, direct supply by national brewing companies, cash-and-carry warehouses, specialist distributors servicing specific markets such as restaurants, and contract distribution - 36 - by transport companies and others. Almost all packaged beer produced by the national brewing companies is said to be distributed directly to the retail outlet, so that ALM and other liquor wholesalers handle little of this business. About 30% of wine and spirit supplies are delivered directly. Evidence from Mr A A Thompson, Managing Director of ALM, was that consumers! purchasing behaviour regarding liquor is highly sensitive to price, presumably because the unit price of liquor is relatively high compared with that of most other edible and potable products. Liquor retailers are obliged to price keenly, and therefore seek the cheapest source for supplies, and change readily between suppliers. Wholesale liquor licences are relatively easy to obtain. 6. THE GROCERY DISTRIBUTION INDUSTRY 6.1 The Australian industry The grocery distribution industry is taken to comprise those enterprises and operators that are concerned directly with the purchase, warehousing, sale and delivery of grocery and related products to relevant retail outlets, and their retail sale to final consumers. It includes two related industries defined under the official ANZSIC system, viz. ANZSIC 4719, Grocery Wholesaling n.e.c, and ANZSIC 5110, Supermarket and Grocery Stores. The industry is a significant one, as the following - 37 - tabulation demonstrates. The figures come from the latest retail census by the Australian Bureau of Statistics. Supermarkets and grocery stores 1991/92 Number of locations 9,476 Persons employed 179,619 Wages and salaries $ 2,065 million Retail sales $ 25,018 million 6.2 A history of structural change In Australia, the history of grocery distribution as it emerged in evidence to the Tribunal exhibits a theme of constant structural change over a long period. As late as the 1950s, the predominant grocery retailer was still the traditional corner store, each store a quite independent small business. Several competing grocery wholesalers were normally interposed between the grocery supplier (who might be an importer or a manufacturer) and the grocery retailer. The wholesaler purchased products in quantity from suppliers according to negotiated terms, received them into the warehouse, and offered them for sale to retailers. The retailer ordered smaller suitable quantities of a variety of products from a wholesaler, according to agreed terms of trade, accepted their delivery into the retail shop, and offered them for sale to consumers. Only a few major grocery wholesalers remain in business today. The history of Davids typifies the growth strategies of the surviving wholesalers, involving the aggregation of smaller - 38 - competitors. Having entered grocery wholesaling in Sydney as a family business in 1935, Davids organised two voluntary groups among its retailing customers in 1963, and provided them with some retail services. Davids acquired the liquor wholesaler Harbottle Brown & Co Pty Limited in 1968, and A.G.Campbell, the major New South Wales cash-and-carry wholesaler, in 1979. Around 1980, Davids introduced the Black & Gold brand of generic groceries, and expanded the support services offered to retailers. Three wholesale houses were acquired in Victoria in 1984/85. In 1986, Davids sought to acquire QIW; but failing to do so, it opened a warehouse in Brisbane in competition with QIW. The Clancy's chain of supermarkets was acquired from Woolworths in 1988, and the 100 Clancy's retail stores were on- sold to independent franchise operators. Victorian Grocery Distributors Pty Limited (VGD) was acquired in 1992, followed by rationalization of the retail banner groups supplied by Davids in Victoria, New South Wales, Australian Capital Territory and Queensland. Davids became a listed public company in 1994, and shortly thereafter moved to acquire 100% of IHL, a _ public company that had grown similarly from its original form as a grocery cooperative to become the only major grocery wholesaler operating in South Australia. Just previously, IHL had failed in an attempt to acquire FAL, the major Western Australian wholesaler. As a consequence of these acquisitions, Davids operates in New South Wales, Victoria, Queensland, South Australia and the Northern Territory. In Victoria CBL grew, also largely by the aggregation of - 39 - smaller competitors, to become the other major grocery wholesaler in that State. It also operates a warehouse in Sydney in competition with Davids, while CBL customers in Tasmania are supplied from CBL's Melbourne warehouse. In Queensland QIW was the only surviving independent grocery wholesaler until Davids opened its warehouse in Brisbane. FAL remains the only surviving independent grocery wholesaler operating in Western Australia. It has avoided competition with other Australian wholesalers and has expanded into New Zealand. In 1992 AIW was established by the Cannon Food Barn Retail Group, with a warehouse in Canberra. This small regional wholesaler supplies retailers in the Australian Capital Territory and in neighbouring areas of New South Wales, and offers a third choice of wholesale supplier (after Davids and CBL) to retailers in its area of activity. Australia/Asia Pacific Wholesalers Pty Limited (AAW) is owned jointly by the major independent wholesalers, Davids, CBL, FAL and QIW. The AAW structure allows them to pool their buying power in purchasing from grocery suppliers, where that is advantageous. AAW also holds the trademark for the 'Black & Gold' range of generic grocery products, and negotiates with various manufacturers to supply products packaged under the 'Black & Gold' brand. Davids, QIW and FAL have access to this range of products, sharing rebates negotiated with suppliers in proportion to the volume each sells, and sharing AAW's operating costs. CBL separately offers the 'Payless' generic product - 40 - range to its retail customers. Because generic grocery products (known also as 'house brand products') are purchased and sold at reduced prices, they are an important competitive device for independent and chain retailers alike. Each independent wholesaler, including Davids, CBL and QIW, has instituted structures linking them with 'banner groups' of independent retailers that adopt a common public face and some uniformity in their marketing approach, and to whom the wholesaler supplies both goods and retail services. The aim of these affiliations is to improve the organisation of the independent distribution chain, and to achieve greater competitive strength for both the wholesaler and the retailer. The above changes in concentration and in structural associations within the independent sector have occurred primarily in response to the rise of an alternative commercial structure for grocery distribution, viz. the vertically integrated chain supermarket. The Tribunal notes that these changes have in turn changed grocery industry usage as to the meaning of the word 'independent! . Today, to speak of 'independent! grocery wholesaling and retailing refers primarily to a_- shared independence from the competing integrated chains, rather than to independence of wholesalers and retailers in the 'independent' sector from each other, as was once the case. The - 41 - Tribunal did hear numerous references to the 'fierce independence' of the small grocery-shopkeeper, but plainly that sense of independence, where it exists, now obtains within a much narrower ambit than before. In the parallel system of grocery distribution that has emerged and come to dominate the Australian food retailing industry, a large number of stores are owned and operated by a company as a chain of retail supermarkets. The scale of operations allows direct purchase from suppliers at good prices, and the operation of an integrated warehousing and delivery system to service the chain of retail stores. The major retail supermarket chains in Australia are national in the scope of their operations. They are Woolworths (trading in Victoria as Safeway), Coles and Franklins. Major Grocery distributors in Australia No of stores supplied * Retail chains Woolworths 490 Coles 500 Franklins 240 Wholesalers Davids (inc IHL) 1,750 CBL 520 FAL 380 QIW 670 * approx store numbers, bannered stores only While the vertically integrated chain supermarket and the wholesaler/ banner group systems predominate, other grocery distribution arrangements also exist in Australia. These include the hybrid system that applies in Tasmania, where Woolworths has joined with local business interests to conduct a traditional wholesale distribution system, supplying grocery retailers (most of them associated in banner groups) who are otherwise independent of the chain stores. Other chains of retail supermarkets have a common ownership, notably Jewels which operates 96 supermarkets in New South Wales, Victoria, the Australian Capital Territory and Queensland. It has not considered it economic to operate its own integrated company warehouse. Jewels arranges its own purchasing, but has Davids perform the warehouse handling and delivery on its behalf for a fee. Cannon Food Barns adopted the alternative course by setting up AIW in Canberra in 1992. AIW supplies the thirteen Cannon stores and about thirty other retailers in its district, but is much smaller than either Davids or CBL, having penetrated only 1.2% of the total New South Wales/Australian Capital Territory market for branded packaged groceries Further to the conventional general wholesaling channels, other channels of distribution to retailers are available. In - 43 - all States, some suppliers of high volume branded products (cigarettes, soft drinks, snack foods, bread, biscuits and milk are the most common) prefer, or are willing, to by-pass the warehouses! function and to deliver products to retail stores direct, subject to minimum purchasing requirements. This distribution channel is known in the industry as the 'route trade'. For 'convenience stores' with a narrow product range comprised largely of popular items (typified by the stores associated with petrol outlets), a significant proportion of store stock may be delivered direct by product suppliers, with the less popular items being purchased through an independent wholesaler. Davids also supplies such stores through distinct warehouse arrangements pitched to their special requirements. Other small traders with a level of grocery purchases that falls short of minimum delivery requirements are encouraged to purchase their supplies from a cash-and-carry warehouse. A retail buying group might also, as is not uncommon in liquor retailing, arrange for their joint purchases to be handled and delivered to the individual stores by a contractor. The Tribunal heard evidence of current efforts to introduce such a system in Queensland, and potentially in other States. Overall, the Tribunal finds it to be characteristic of the grocery distribution industry in Australia that it has evolved structurally and continues to evolve, in response to competition among the companies and businesses that comprise it. The underlying imperative for this competition has been the need for - 44 - retailers to respond to major shifts in Australian lifestyles and in the preferences of Australian consumers. The straightforward and traditional pattern of many decades ago has been largely supplanted. Where grocery wholesalers and counter- service grocery retailers once competed among themselves, and traded to supply the consumer with groceries through a system with two distinct functional levels, new ways to distribute groceries have developed and have come to operate in parallel to the wholesaler-grocery store channel. The dominant model for grocery retailing is now the self- service store, increasingly a large supermarket with a widening range of goods on offer. Also, the integrated retail chain has appeared to exploit its opportunities. The successors to the traditional wholesale and retail members of the industry have sought and are seeking ways to counter this commercial challenge. Today, fully independent retail grocers who have no affiliation with a buying group or a particular wholesaler, and who do not belong to a 'banner group' of retailers, appear to transact less than 1% of retail sales of groceries. 6.3 Diversity in store size and character Just as grocery distribution in Australia is conducted within a variety of changing business structures, so Australian grocery retail outlets, whether they are members of an integrated chain , or are independent stores purchasing through wholesalers, exhibit wide and shifting variety in size, style, product range and level of service. Chain-store groups brand their self-service supermarkets with the trading name of the chain, adopt a common appearance and style, and stock a similar product range, so that the stores can be seen by consumers to have a common, predictable and familiar character for consumers, pitched to suit their needs and buying preferences comprehensively. The scale of operations of the chains allows them to buy well, to attract custom by offering 'specials' on popular items, and to advertise through the media across a district or region. Among independent stores, similar distinctions in style and selling practice have emerged. These are reflected in the use of a common 'banner' (covering name and appearance) by stores of similar size and character which are supplied by the same wholesaler. All major independent wholesalers will supply a wide variety of independent retail outlets, and organise into a number of voluntary 'banner groups' those of its customer stores that wish to participate in such a group. Each banner group adopts a common public' brand (its 'banner'), which is represented in the painting of store fronts and interiors. Members buy from their wholesale supplier according to common trading terms. They are offered a range of retail services by the wholesaler, are encouraged to follow common stocking and discounting policies, and have access to shared promotional funds that can be applied to the pricing of 'specials' or otherwise employed to common advantage. This approach to - 46 - grocery retailing obviously follows and to a degree simulates the pattern of business employed successfully by the chain retailers, while retaining some independence of action for the retailer, notably in pricing policies. The major wholesalers also own and operate some stores on their own account, and often manage them as distinct banner groups. For example, FAL owns and operates the 'Action' chain of supermarkets in Western Australia. Other groups of retail stores are organised into 'banner groups' independently of the wholesaler from which they draw supplies, and may have common ownership. Other stores may be operated under a banner franchise from a common franchisor who seeks to exploit a defined market niche with a chain of similarly branded outlets. The small 24-hour convenience stores associated with petrol outlets are of this last type. The wide differences in store size are illustrated in the following table assembled from evidence presented to _ the Tribunal. The table lists the number of stores and the approximate average floor area in the stores of the three supermarket chains, and of four of Davids' banner groups. Store trading areas Chains and Davids Banner Groups Average No. of stores Trading area m Woolworths 495 1,980 Coles 500 1,800 Franklins 245 1,540 Davids: Rainbow 4 4,480 Festival 145 1,050 Foodtown 279 440 Welcome Mart 356 300 Stores of 1000 sq m or more are commonly characterized in the trade as supermarkets, and some supermarkets are very large indeed. The Rainbow supermarkets have been built to match in size the largest of those operated by the chains. However, many self-service stores smaller than 1000 sq m call themselves supermarkets, although they are necessarily restricted in the product range they can offer. Trade parlance often characterizes such stores as 'top-up stores', on the basis of a reputed reliance on trade from consumers using them for supplementary purchases rather than for their full weekly shopping. The so-called convenience stores, which are usually located in association with a petrol retailer, sell a narrow range of popular items on a trading area of less than 150 sq m. The capacity of a supermarket or grocery store to sell a wide variety of items depends on its trading area. Grocery retailers of all sizes sell a range of dry groceries and some other foods (such as eggs and packaged milk), and increase and diversify their product range according to the size of the store. It is now usual for the largest grocery supermarkets to supplement their shelves of dry groceries and their refrigerated chests of dairy products with displays of fresh fruit and vegetables, and counters for delicatessen items, fresh meat, chicken products, perhaps fresh fish, fresh bakery items and a - 48 - variety of partly prepared foods. Stores of intermediate size stock only some of these supplementary products, most commonly produce and meat. This retailing formula, where a large supermarket offers a comprehensive range of 'fresh foods' around a core-product range of conventional dry groceries, is described as the 'food emporium' concept, and has proven very popular in recent years. The trend to this design of supermarket has been led by Woolworths Ltd., and is accepted in the industry as the likely future pattern of commercially successful food retailing. Its effect has been to challenge the markets of traditional greengrocers, butchers and so on, as well as the traditional grocer, so that the full range of retail foods are potentially offered for sale in the one large retail outlet. The Franklins chain, which has grown hitherto by stressing a low-price, 'no- frills' image, has responded by introducing two new styles of stores, 'Franklins Fresh' and 'Big Fresh', which reflect the trend to extend product range to cover fresh meat and produce. It is also common for the bigger supermarkets to offer a range of popular 'variety' items, such as hardware, stationery, toiletries, and simple items of clothing. Some also sell liquor. Smaller retail grocery stores that do not have the space to offer a large or diverse product range have learnt that they must counter the large supermarkets by offering personal services directed to the convenience, and so greater satisfaction, of their customers, i.e. by offering a perception of distinctive '''value' against the attractions of one-stop shopping and low prices. Supermarkets and Grocery Stores % Turnover by Commodity Group, 1881/92 Source: ABS statistics Commodity Group % Food groceries 42.7 Non-food groceries 12.6 Confectionery 6.6 Fresh meat and poultry 6.3 Fresh fruit and vegetables 6.2 Cigarettes and tobacco 4.9 Bread, cakes and pastries 4.2 Cosmetics, perfumes and toiletries 2.9 Beer, wine and spirits 2.6 Takeaway food 2.5 Other goods 7.5 Total retail sales 99.0 Other revenue 1.0 Total turnover 100.0 The significance of the 'food emporium' concept for total trading volumes is apparent here, and evidence to the Tribunal indicated strongly that the trend has continued and accelerated since these figures were collected, in the last retail census that ABS conducted in 1992 The Tribunal notes further that because the smaller grocery outlets do not have the trading space to pursue this 'food emporium' model comprehensively, sales for commodity groups other than food groceries must be - 50 - assumed to pass largely through the larger supermarkets, which in turn are predominantly operated by the chains. Another aspect of the changing patterns in the sale of food to the public emerges from the statistics which demonstrate that the public can now choose to buy food and prepare it at home, or to buy prepared food from a food service outlet, i.e. by eating at a restaurant or buying from a take-away outlet. A comparison between two sets of ABS retail census figures of 1968/69 and those of 1991/92 is useful in demonstrating market shifts of clear commercial significance to grocery distribution and retailing. The following table is drawn from a report by IBIS Business Information, submitted in evidence by Davids. Food and Food Service Retailing % of total sales by outlet type 1968/69 1991/92 Groceries and supermarket 57.2 60.9 Butchers 17.2 5.3 Fruit & vegetable stores 5.7 4.1 Liquor stores 1.8 4.6 Bread & cake stores 2.5 1.1 Confectionery & soft drink stores 6.9 0.8 Sub-total retail 91.3 76.8 Food Service 8.7 23.2 Total 100.0 100.0 These figures illustrate movements in life-style in - 51 - Australia over more than 20 years that in turn are reflected in changing patterns of consumer demand, in changing grocery distribution industry structures and in shifting retail formats. 6.4 Market share trends The market shares of organisations engaged in the Australian grocery distribution industry are conventionally described and compared in terms of the sales of branded groceries (excluding generic products, house brands and fresh foods), as collated and reported by the trade journal 'Retail World'. 'Retail World' market share figures are accepted in the industry as meeting their practical needs for information on relative market strength and on market share trends, and as a sound basis for consideration of strategic directions. The 'Retail World' methodology necessarily adopts some simplifications in order to collect useful statistics for such an intricate trading network. Notably, the statistics that purport to quantify retail sales are in practice collected at the wholesale level, on the basis of deliveries into warehouse from grocery suppliers of a limited sample of the thousands of grocery products' sold. Each grocery supplier is asked to represent sales in each State at 'approximate retail prices' based on their knowledge of the allowances and margins that apply. Further, the ownership and location by State of the warehouse into which each product its delivered is assumed to identify sufficiently the location by State of its final retail - 52 - sale. For the Tribunal, this last assumption of the methodology introduced some difficulty to interpreting evidence of the market shares of chain supermarkets and banner groups in particular States, because warehouses quite commonly supply retailers outside the State where they are located. For example QIW's Brisbane warehouse routinely delivers deep into northern New South Wales, and the Melbourne grocery warehouses supply stores in the Riverina. The Tribunal has also noted that the expression of industry market shares on the basis of shares of the market for branded packaged groceries will, to an unknown extent, understate the share of total industry sales that passes through the supermarket chains, because of their disproportionate share of sales through grocery stores of some other food commodity groups, notably the 'fresh food' categories. Despite these difficulties, the Tribunal has with appropriate caution accepted the 'Retail World' statistics as providing an adequate indication of the realities and the trends in market shares of the independent wholesalers and the independent chains, for the purposes of this determination. The latest complete figures that are available pertain to the year 1993/94. The Tribunal also has been given later figures that are broadly consistent with them. - 53 - Market shares (%), 1993/4 Source: 'Retail World' NSW Vic Qld SA WA Tas Aust Woolworths 30.5 34.2 34.1 25.3 24.0 53.0 31.5 Coles 19.3 25.9 27.0 31.0 22.5 23.3 24.1 Franklins 27.0 8.5 16.0 5.2 14.2 Total 76.8 68.6 77.1 61.5 46.5 76.3 69.8 Chains Davids/IHL 18.0 16.7 8.3 38.5 15.4 CBL 4.0 14.7 4.9 QIW 14.6 2.9 FAL 53.5 5.9 Other 1.2 23.7 1.1 Total 23.2 31.4 22.9 38.5 53.5 23.7 30.2 Independent Notes: NSW includes ACT, and SA includes NT; Woolworths trades as Safeway in Victoria; in Tasmania, Woolworths and the independents share warehouse facilities. The annual 'Retail World' statistics for the past twenty years, as consolidated in evidence to the Tribunal, show a steady and continuing shift in the structure of the market, leading to the present situation where the three major supermarket chains - Woolworths, Coles and Franklins - together account for about 70% of national sales of branded groceries. The following table, drawn from this evidence, summarises the trend. The table also serves to demonstrate the concentration of ownership that occurred among independent wholesalers during the period. Market shares (%) National trends 1975-1994 (YE June) Woolworths Coles Franklins Total chains Davids CBL FAL IHL QIW Other Total independents 17. 17. 40. 39. 60. 21. 19. 45. 30. 54. 29. 23. 61. 14. 38. 28. 21. 14. 64. 12. 35. 31. 24. 14. 69. 15. 30. The growth in the market share of the integrated retail chains has not been without some fluctuation over short periods: Woolworths lost share for a time in the years after 1985; and Coles' supermarket sales fell away from 1991 to 1993. However, the clear long-term trend is for a decline in the market share - 55 - of stores supplied by the independent wholesalers, and a rise in the market share of the vertically integrated retail chains. Submissions to the Tribunal were consistent in forecasting that the trend is likely to continue, in the absence of a more effective defence by the independent wholesale and retail sector of their diminishing market. Apart from "Retail World' statistics, market share information that is more recent than the 1991/92 ABS figures is limited. However, Woolworths Limited appears confident that its market share growth will continue. Its news release of 23 August 1995, associated with the announcement to the Stock Exchange of its 1994/95 annual results, claimed a 'Retail World' market share of 32.1%, and forecast continuing sales growth to achieve a market share of 35% in five years. The same Woolworths statement also displayed statistics that support other evidence of recent market growth of the integrated chains at the expense of other groups in the grocery distribution market. It stated that in the three years from 1992 to 1995, annual sales of the Woolworths' Supermarkets Group rose from $7.81 billion to $10.96 billion, an increase of 40%. According to a commissioned report by IBIS Business Information Ltd that was submitted in evidence, growth in turnover for the whole of the national grocery store and supermarket industry over the same period is estimated at 17%, from $26.1 billion to $30.5 billion. Trends in the total market shares of independent - 56 - wholesalers differ markedly between the States (i.e. according to the State where the warehouses are located), as shown in the following table, assembled from 'Retail World' statistics submitted in evidence: All independent wholesalers Market share (%) by State, 1975-1994 1975 19801985 19901994 Queensland 60.042.727.025.022.9 NSW/ACT 50.043.633.531.023.2 Victoria 53.550.743.038.531.4 South Aust 64.061.658.057.538.5 Western Aust67.053.347.053.653.5 Three observations can be made on this table, taken together with other evidence to the Tribunal: first, that the three States where independent wholesalers compete with each other (Queensland, New South Wales and Victoria) are the States where loss of market share by independent wholesalers has been the most severe; secondly, that the loss of market share in South Australia has occurred particularly since 1990, coincident with the emergence there of fierce competition between the chains following the entry of Franklins into the South Australian market; and thirdly, that FAL as the sole Western Australian wholesaler has succeeded in holding its market share at the levels of 1980. 7. STRATEGIC RESPONSES OF INDEPENDENT WHOLESALERS 7.1 General The steady decline in the national market share of independent wholesalers and their associated retailers, the particular decline in New South Wales and Victoria, and the prospect that - 57 - the trends could continue have placed businesses operating in the independent grocery distribution sector in something of a strategic predicament. As IBIS Business Information summed up the strategic problem in its advice to Davids: "Over the past two decades, the supermarket and grocery store industry has grown at a faster rate than the retail sector by winning market share from speciality retailers. However with 80% of all food retail sales now in the hands of the supermarket and grocery store industry, growth by additional market share gains will become increasingly difficult. At the same time the food retailing industries are facing increased competition for the household food dollar from food service outlets. ...The battle for market share will therefore intensify in the second half of the nineties. The independents have been unable to hold their market share in a growing industry. In a no growth environment competition from the chains will intensify. If the independents do not . . . respond to the chains, the decline in their market position is forecast to accelerate.' Written submissions and oral evidence from witnesses for Davids make it plain that this assessment is accepted as valid within that company, and demands urgent attention so that suitable strategic responses are identified and implemented. For Davids, the problem is compounded by a further perception that, despite their position as the largest independent wholesaler, they can exercise little influence on their commercial environment. Davids see the thrust for change relevant to their market as being led by the vertically integrated retail chains with which they consider they compete. As the Managing Director of Davids' operations in Victoria put it in his submission: '..the independent retailers compete in a market where - 58 - the parameters are set by the chains. It is the advertising of the chains that sets the general price expectations in the market place, and the standards that consumers expect in things like fresh foods.' The Tribunal is satisfied on the QIW and FAL evidence, and from documents submitted by the Commission in respect of CBL, that the same broad propositions are also perceived and accepted by the other major wholesalers and have led all of them to consider and adopt a variety of business strategies directed to defending their market, and to improving their competitiveness, commercial viability, and future prospects. In late 1994, the Chairman of QIW, at the company's Annual General Meeting, said that a large decline in final profit was explained: '.,perhaps most importantly, [by] greatly increased competition from chain operators, including new store openings and resulting major price wars, impacting on our customers' businesses. This level of competition is rapidly changing the whole competitive dynamics of our industry. Your Board has the situation constantly under review to assess the likely impact ...and to develop strategies for protecting shareholder returns through time.' Predictably, all the major wholesalers appear to have pursued strategies directed to improving internal efficiencies: for example, by seeking to reduce overheads and finance costs, and to raise productivity in all aspects of operations and administration. Indeed, at the meeting of shareholders already mentioned, QIW's Chairman spoke of 'a radical overhaul of our operations'. Other strategies have been directed to defending or increasing - 59 - corporate size and commercial strength - strategies for acquisition or merger, strategies to improve the wholesaler's capital base, and strategies to expand operating volume in order to achieve the consequent warehouse efficiency and improved purchasing strength. A third group of strategies has been directed to improving the quality and commercial effectiveness of the arrangements linking the independent wholesaler with its independent' retail customers, so that groceries and related products can be offered for sale on the most competitive basis for mutual advantage. These strategies have been centrally concerned to foster the various banner groups of independent retailers in order to develop a favourable market identity and attract custom. Stores in each banner group are encouraged to offer a mix of price, product range and quality, and standards of appearance and hygiene, that is recognisable, distinctive and attractive to the consumer. The 'total offer' of a banner group is in some instances pitched towards a market niche that is seen to be of sufficient substance to warrant attempting to fill it. It was consistently put in evidence by several witnesses' that wholesalers and retailers are interdependent, with the retailers serving in practical terms as the wholesalers' sales force, and that the two functional levels need to cooperate to ensure that an efficient, cost-effective distribution system is coupled adequately with a vigorous and up-to-date consumer' sales capability, directed to serving the current demands of consumers. Evidence from Mr J. M. Patten, the Joint Managing Director of Davids, and from other witnesses for Davids, was that their strategies in regard to banner groups are directed to achieving a degree of integration of policy, practice and purpose between wholesaler and retailers, the better to simulate the vertical integration that is perceived as being a significant advantage for the major retail supermarket chains, Woolworths, Coles and Franklins, and thereby better to compete with them in the market place. Of the numerous strategies described briefly above, and variously adopted by independent wholesalers in response to the trends of their market share, certain strategies warrant further description and discussion here. Strategies adopted by wholesalers in regard to banner groups are described later. 7.2 Strategies to improve sales volume Because a wholesaler's unit handling costs and operating overheads are dependent largely on the scale and technical sophistication of warehouse and delivery operations, higher sales volume is advantageous. Mr Patten of Davids made the point in oral evidence, and spoke also of a 'critical mass' for an efficient wholesale grocery warehouse in Australia, mooting an annual sales volume of the order of $200 million as the minimum required for economic viability of the warehouse. For many grocery items, buying at a good price from the supplier - 61 - requires the capacity to receive a full truck-load of goods into the warehouse, which in turn demands both warehouse floor space and sales volume to be at sufficient levels. Efficient and cost-effective procedures for the physical handling of goods, and for the computerised documentation of the assembly of orders for delivery, require that operational volumes' should _ be sufficient, if costs are to minimised and an adequate return on assets realised. Warehousing costs are also affected by the size of the store being supplied. The elements of a retailer's order are assembled ('picked') from numerous warehouse product stacks. The travel of fork-lift trucks around a warehouse is relatively insensitive to the number of cases of product picked from this or that location. Hence the picking of a small retailer's order costs proportionately more than does the picking for a large supermarket. Although the Tribunal had no direct evidence from CBL, the evidence available suggests strongly that one directly relevant illustration of these effects exists in CBL's operations in New South Wales, which have so struggled commercially in recent times that their divestment has been recommended to CBL by an independent consultant. CBL's New South Wales sales volume is somewhat less than $200 million, the typical store supplied is said to be small, and the warehouse operations are criticised for their lack of efficiencies. - 62 - A buyer of larger volumes of goods is in a_= stronger negotiating position in dealing with suppliers. Mr Patten of Davids suggested that a 'critical mass' exists here also, and that around $2 billion in total annual purchases is required for a retail buying group in Australia to exact the best purchase price and terms. He noted that both Franklins and Davids have achieved this threshold, and that Woolworths and Coles substantially exceed it. Other evidence also pointed to the need for grocery buying groups to have sufficient negotiating strength when dealing with major suppliers, if the retail stores supplied are to be competitive. The size and commercial strength of the major food manufacturers in Australia, following the concentration of ownership in the food industry in recent years, is seen as requiring that an independent wholesaler must be able to negotiate prices and terms with suppliers on the basis of some corresponding significance in the market. Mr Patten pointed to the existence of AAW's a capability to act as joint buyer for its member companies (Davids, CBL, FAL and QIW), and to AAW's role as buyer for products bearing the 'Black & Gold' label, which is the shared brand for the range of generic grocery products that are stocked by Davids, FAL and QIW. It is not possible for independents to stock generic grocery products at attractive prices unless the volume for each item to be supplied is sufficient to warrant the distinct packaging. - 63 - Davids led evidence that a merger of two wholesalers can lead to the identification of numerous instances where one party to the merger had access to better trading terms for a product than the other. The merger of Davids and IHL in 1994 led to usefully improved settlement discounts for over 60 items. Where retailers have a credible choice of more than one wholesaler supplier, as occurs in Victoria, New South Wales and Queensland, wholesalers seek higher sales volume by seeking to win retail store customers from a competitor. In seeking to induce Victorian retailers supplied by CBL to change their supplier, Davids largely relies on an independent survey in early 1995 which was commissioned by the Tuckerbag Supermarkets banner group - CBL's largest banner. Mr Patten of Davids in oral evidence said that Davids is constrained in offering incentives to retailers to change their supplier by considerations of fairness to its other customers: '...you cannot go offering sweets to the new boy. ...there may be some short term incentive given, or some funding or financial assistance, but we ...avoid a position where we are disadvantaging our traditional client base... It's very ad hoc, a marketplace action. ' The perceived need to attain the greatest possible sales volume has in some situations led Davids to subordinate other considerations to this imperative. Independent wholesalers customarily hold a wider range of items in stock than do the chain stores. Davids in New South - 64 - Wales and Queensland stocks 19,000 items, including 11,000 national brand, private label and generic grocery items. This reflects the diversity of the customers that they supply in general and grocery retailing, convenience stores and food service industry. On the other hand, the major retail chains, with their closer control of retail stores and more standardised approach to retailing, are said customarily to stock around 9,000 grocery items in a full-range supermarket. For the independent wholesaler, the stocking of such a broad product range introduces warehouse and financial holding costs that significantly exceed the corresponding costs for the retail chains. Mr Patten told the Tribunal that Davids chooses not to reduce product range to gain warehouse economies. Rather, a product will be carried, irrespective of the stocking practices of competitors, if Davids can make a profit on it. Considerations of sales volume also constrain Davids in its pricing policies according to Mr Patten and other witnesses for Davids. They asserted that while, in relation to certain retailer customers, there might notionally and on occasion be some discretion for Davids to increase prices to retailers selectively for short-term advantage, the perspective within Davids that the business is volume-driven requires such options to be rejected because 'it would not make commercial sense in the medium to longer term to charge prices to an independent retailer that threatened its viability'. In pursuit of secure sales volume, all independent wholesalers - 65 - have adopted strategies that focus on the development of sales through large full-range supermarkets that offer fresh food items and other specialties as well as the core dry grocery lines, where sales growth at the expense of smaller independent stores is presently concentrated. In doing so they are again following the successful formula of the retail chains, and are again reflecting their awareness that smaller stores cannot attain the turnover that permits them to offer prices closely matching the prices offered by competing chain supermarkets. All the wholesalers have attempted to develop banner groups of large supermarkets, and have taken initiatives to set up large new supermarkets that directly compete with the chains in the style and scope of what they offer to consumers. In 1993, CBL opened a Maxi Foods store in a Melbourne outer suburb. Davids serves 4 very large supermarkets (4,000 sq m trading area) under the Rainbow banner. Three years ago, QIW began to commission a prospective chain of Q Super Stores, also with 4,000 sq m of trading area, but lately have sold them to Coles. FAL acquired the Action chain of large supermarkets in Western Australia, and has explored the feasibility of developing 'hypermarkets' in Perth with around 10,000 sq m trading area. However the independent wholesalers have not confined their pursuit of sales volume to the fostering of high-volume retail outlets. They have also taken advantage of the diversity of their customer base by encouraging banner groupings that attempt to exploit specific niches in the market, and thus seeking to - 66 - meet strands of customer demand as to service and style that the retail chains cannot satisfy. Wholesalers have sought to widen their business reach by offering supplies to customers in the food service industry, as a rapidly growing food industry sector that requires supplies of groceries, meat and produce. QIW, Davids and CBL have all introduced specialised supply arrangements directed to the food service sector. 7.3 Strategies to secure retail sites It was common ground in evidence that the development of grocery retailing in Australia has been much affected by the scarcity of large, well-located sites for full-range supermarkets. The large retail shopping centre, commonly with other community facilities and services attached, has become the usual format for retail development and growth, but municipal councils have exercised such close control over these developments as to limit the opportunities available for new large supermarkets to be opened. A new development of a large full-range supermarket will typically cost $4 million for fit- out and stock. Successful developers have favoured chain retailers over potential independent store owners as lessees, for two reasons. First, the national identity and the strong market performance of chain stores are seen as likely to attract customers to the shopping centre; and secondly, the financial strength and stability of a large public company makes it a more attractive lessee than an independent store operator. Even so, the shortage of retail sites has proved such an impediment to growth for Woolworths that it has adopted a strategy of purchasing areas of well-located land that is not zoned for commercial use, and has negotiated with the local council for rezoning and for shopping centre development, often against strong resistance from local retailers and ratepayers. In 1994-95 Woolworths opened 15 new supermarkets nationally, and has announced that it will open a further 15 in 1995-96. Davids' witnesses complained of a tactic said to be adopted by the retail chains oof purchasing successful independent retailers. In his submission, Mr Patten said: "Part of the history of growth of the chains has been their relentless acquisition of successful independent discount formats as a means of removing them as competitors. This has become known as _ 'cheque-book' competition. Examples include Jack the Slasher, Tom the Cheap, Franklins, BI-LO, Shoeys, Giant and in the past few days Q Super Stores.' Related to this, the Tribunal notes evidence that in 1994 a New Zealand company named Rank Commercial Limited attempted the acquisition of FAL, with financial backing from Coles Myer Limited, and with Coles Myer having an option to purchase the Australian assets of FAL subsequent to the takeover. The proposal failed after legal action. All the independent wholesalers have attempted to counter chain initiatives that would limit their market size and growth by variously adopting similar tactics - by buying out retailers - 68 - that are in difficulty and re-selling the business to another independent, by taking head leases in such shopping developments as they can win access to, by buying and operating their own retail outlets, or by forming tied franchise groups of retailers. Mr B. J. Alty of FAL told the Tribunal that during the 1980s, FAL was able to secure retail sites in shopping centres and hence to expand and secure their market share in Western Australia because the retail chains were apparently not very interested at the time in expanding their business in that State. Mr Patten, who was chief executive of IHL prior to its acquisition by Davids, described how IHL did the same in South Australia. CBL purchased the Payless chain of 131 retail stores in 1986, and to facilitate their sale to independent operators accepted the burden of guaranteeing the store leases. Davids purchased the Clancy's chain in 1988 and on-sold 100 stores to independent franchised operators. Evidence submitted since the conclusion of the main hearing of this matter states that Davids is to purchase the Jewel chain of retail supermarkets for a price exceeding $100 million. In all cases, the success and scale of such initiatives have been governed not only by the availability of retail sites, but also by the availability to the independent wholesaler of adequate capital funds. Modern food retailing is capital intensive. 7.4 Financial strategies - 69 - Woolworths Limited has a sharemarket value exceeding $3 billion, about eight times the sharemarket value of Davids Holdings Limited, the largest of the Australian independent wholesalers. Coles-Myer has a sharemarket value significantly larger than Woolworths. Patently, the capacity to source and apply funds to retail development differs correspondingly between the major supermarket chains and the independent wholesalers. In recent years, both QIW and CBL have announced actions directed to improving their financial position. According to recent press reports, QIW's shareholders have agreed to the sale of four major supermarkets to Coles for $15 million. This sale was foreshadowed in evidence to the Tribunal, as an element in the financial restructuring of QIW. The figure for the net tangible assets of CBL is arguable and depends on the accounting treatment of substantial holdings of CBL convertible notes by Davids and by Coles-Myer, but it is plain that CBL's capital base is frail. Confidential and other material before the Tribunal described actions CBL has taken, directed to improving that position. These have included borrowings of substantial sums from both IHL and Coles-Myer, as consideration for the issue of convertible notes. The need of the independent wholesaler to have access to funds to secure sites for large retail outlets has already been referred to. A further demand on the independent wholesaler's funds arises from the need to provide financial support for retailers in the expansion and refurbishment of stores. Full- range supermarkets that offer a core of dry goods, together with - 70 - specialty departments carrying mainly fresh product currently account for an estimated 65% of all supermarket and grocery store sales, and are forecast to command 80% of sales in the next decade. A major refurbishment of a supermarket costs at least $1 million, and refurbishment is said to be required at least every 10 years. Development of an older supermarket into a larger, full-range outlet with facilities of high quality, offering fresh food and containing other specialty departments can cost $3 million. Such costs clearly would tax the financial capacity of most independent retailers, and borrowed funds are usually difficult for them to find. Mr R. B. Thomas, Managing Director of County NatWest Securities Australia Limited, submitted as follows: 'As a general rule, independent retailers are incapable of funding this level of expenditure... Banks are willing to lend to retailers provided they receive comfort from a substantial or viable third party. In the wholesale sector, FAL and Davids are the only two entities that can offer genuine comfort to bankers.' Davids offers its retailers the total cost of an agreed refurbishment, subject in every case to the provision by a finance company of an irrevocable undertaking to lend the retailer the necessary funds within three months of completion, and thereby to release Davids from their bridging financial commitment . This approach allows Davids to support retail refurbishment an expansion, while husbanding limited capital funds. - 71- Further evidence from County NatWest Securities Australia Limited stated that the availability and cost of equity and debt capital to an independent grocery wholesaler is crucially dependent on financial market perceptions, which are at present are unfavourable. County NatWest submitted that grocery wholesalers are perceived in the financial markets as victims of their declining market share, and that independent retailers are seen not have the capital base to compete. CBL and QIW are seen to be financially weak, with a doubtful future. FAL, with wholesale operations confined to Western Australia and with three-quarters of its assets in New Zealand retailing, is said to be perceived by financial markets as a retailer. On the other hand a consolidation of independent grocery wholesaling around Davids would lead to a sharemarket re-rating and the availability of necessary capital, provided that the independent sector was better integrated and more closely controlled, and provided that capital was applied to support of the independent retailers as well as to the development of growth businesses. In such circumstances, Davids could attain a market valuation of $500 million as against the $370 million obtaining at the time of the submission. 7.5 Industry rationalization strategies Over the last five years, Australia has seen _ several initiatives by major independent wholesalers directed towards substantial rationalization of the independent sector of grocery distribution by merger and acquisition among their own number. The subject of this review - the current application - 72 - for authorization of acquisition of outstanding shares and securities in CBL by Davids - refers to one of these. The bid by Davids for acquisition of QIW in 1992, which was opposed by QIW and later litigated and unsuccessfully appealed by Davids in the Federal Court, was another. Subsequently IHL in South Australia sought to acquire CBL in 1994, before itself merging with Davids. The most ambitious proposal was in 1993, when FAL on behalf of itself, Davids, IHL and CBL, applied to the Commission for authorization for the four wholesalers to merge. This became known as the 'mega-merger proposal. In the event, FAL's application was withdrawn before the Commission had reached a determination. In its submissions to the Tribunal, and earlier to the Commission, Davids has pointed to the rationalizing benefits that it claimed would follow a merger of Davids operations with those of CBL, and labelled its strategic concept as being directed to the formation of a 'fourth force' in Australian supermarket retailing, i.e. a substantial competitor for Woolworths, Coles and Franklins that would comprehend the numerous variety of independent grocery retailers in a form that could for the longer term be competitive with the vertically integrated retail chains. They have thus stressed the strategic character of their application, and its relation to future competition. Attempts at acquisition, and the defensive tactics of wholesalers under sharemarket or financial pressure, have - 73 - brought about complex patterns in the shareholdings and securities of CBL, where Davids and Coles in particular hold interests and present or prospective rights. Davids, as successor to IHL, has a direct shareholding in CBL exceeding 30%. QIW and Resources and Industries Limited also have significant holdings in ordinary shares of CBL. QIW has made a current offer to acquire the outstanding shares in CBL. Another offer by Resources and Industries was withdrawn. 8. WHOLESALER-RETAILER RELATIONSHIPS We have already referred to evidence that the nature and quality of the relationships between the independent wholesalers and the retailers that they supply are seen - both within the industry and in the financial markets - as critical to the commercial health of both. The sequence of large-scale wholesale buying and warehousing, and the pricing and distribution of smaller orders of mixed grocery and related products to the retail outlet where they are offered for sale, runs parallel to the vertically integrated operations of the large retail chains. Independent wholesaler and retailer alike believe that the major retail chains are competing with them for public custom, and are setting the benchmarks of consumer expectation as to price and service, and more broadly as to the character of an attractive retail environment. The existence of banner groups, tied to the wholesaler in the sense that wholesaler controls the banner name and that members using the banner have some obligation to - 74 - conform to certain styles and standards, is therefore central to the wholesaler's commercial performance and prospects. Wholesalers are obliged to nurture the banner groups and to support their member retailers with a variety of services. The character and governance of the banner groups has been refined according to conscious strategies adopted by wholesalers and implemented in conjunction with retailers. It follows that the relationship between independent wholesaler and independent retailer has two large elements that must exist in tension: the pricing and terms of trade under which product is sold by wholesaler to retailer, and the co- operative arrangements under which the two stand together and compete as a business system against the chain supermarkets that they consider to be the common commercial enemy. 8.1 The banner groups The major banner groups presently served by the independent wholesalers are as follows: Davids, including IHL QIW Welcome Mart Foodstore Foodtown Four Square Festival IGA Denhams Rainbow Clancy's (NSW only) Foodland (SA only) FAL CBL Foodland Payless Super Valu Rite-way Cheap Foods Budget -Rite/Four Square Bi-Lo Tuckerbag Supermarkets Action Food Barns Goodfellows Farmer Jacks MFC Stores (NSW only) Advantage Tiger Superbarns (Tas) Newmart - 75 - Island Food Marts (Tas) Mac's Food Centres The above lists are not comprehensive; numerous other small groupings of independent retailers also exist. Each wholesaler has established legal right to several banner group names and particularly encourages the use of perhaps four of them, with each pitched to a distinctive class of retailer. For example FAL owns and franchises use of the first four banner names for them listed above, and also owns and operates the stores operating under the Action banner. The other banners shown as being supplied by FAL operate independently. Davids has rationalized the numerous banner groups they once supplied into a shorter list as above, and they envisage further rationalization should they achieve control of CBL. In adopting a strategy of banner group rationalization, Davids say that they are seeking to reduce the costs of servicing the groups, and are seeking to build a stronger market identity for stores in the remaining banner groups. While the banner group of independent retailers closely linked with one wholesaler is the predominant form in the independent sector of the grocery distribution industry, alternative arrangements exist. Some banner groups share common ownership but have an established supply arrangement with one wholesaler. For example the chain of 96 separately owned Jewel Stores has hitherto conducted its own purchasing from suppliers, and paying Davids a handling fee to warehouse purchased supplies and deliver to their stores. The arm of Woolworths that trades as - 76 - Big W also contracts with Davids to warehouse and supply certain items. Many small stores carry no group banner at all, and either individually buy from a wholesaler at arm's length, or they may elect to use some retail services offered by the wholesaler. Some retailers adopt a common banner but do not have a common loyalty to one wholesaler - for example it appears from published information that Queensland stores selling under the 7-2-7, Cut Price and Thrifty-T banners might be supplied by either Davids or QIW. The convenience stores associated with petrol outlets - FoodPlus, Shell Select, Road Pantry and the like - are franchised to independent operators by the relevant petrol company, and are supplied by Davids with such items as are not supplied through the route trade. Confidential evidence on sales patterns showed that, despite the availability of such alternatives, Davids delivers the overwhelming proportion of its grocery volume either to retailers who are members of banner groups that Davids has itself organised, or to Jewel. The stores in each banner group are likely to be of a similar character and size, and the wholesalers foster membership criteria for the banner groups whose names they control. Davids' banner criteria are broadly as follows: Banner Min sizeMin weeklyDepartments sq metresales $ Rainbow 2,230 300,000 All specialty Festival 740 80,000 Produce, meat, deli Foodtown/ 300 20,000 2 of Product, Clancy's meat, deli Welcome Mart 140 7,000 Produce 8.2 Pricing Each wholesaler adopts a somewhat different approach to the calculation of its pricing. The basic price for an item supplied by Davids as invoiced to any retailer customer is termed the 'stripped net cost'. This is the supplier's list price, minus certain allowances that Davids has negotiated with the supplier, and that are reflected in the net stripped cost and are thus passed on to the retailer. 'Warehouse allowances' reputedly reflect the benefit to the supplier from the simplicity of delivering substantial orders into warehouse. 'Distribution allowances' are similar in nature. "Settlement discounts' are conditional on the wholesaler paying within agreed terms. 'Ullage allowances' represent a fee for the disposal of unsaleable or damaged stock, and are paid irrespective of whether damage actually occurs. (But part of the ullage allowance is retained by both Davids and QIW as a provision for damage during their own handling.) 'Quantity buy discounts! are available from some suppliers. The sum of these, however rationalized in negotiations between supplier and wholesaler, represents a discount on the supplier's list price, which in the general case is reflected in the invoiced price to retailers. According to Mr A. S. McNeil, Group Manager Sales and Marketing for Davids, the levels of these negotiated allowances do not differ significantly between independent wholesalers and the chain retailers. - 78 - In setting their prices to retailers, wholesalers add a percentage margin in some form. In striking its invoiced prices, QIW budgets for a warehouse margin, which is set according to the handling costs for different classes of product, and also according to sales volume for the item. Davids charges retailers a service fee at a published percentage rate, supplementary to the net stripped cost of the retailer's order. The service fee applies at a rate that varies between banner groups but is uniform for retailers in each banner group. Unbannered stores pay a service fee according to sales volume. A further percentage loading is added for certain classes of product that involve additional handling cost, such as refrigerated items. FAL adds a mark-up to the cost price plus a service fee based on the individual retailer's purchase volume. In addition, various rebates and deals are negotiated from time to time by the wholesaler with suppliers, which do not affect the net stripped cost, but which are (at least in part) rebated to retailers, commonly as part of a promotional arrangement for a product, or in return for some advantage that can be offered to the supplier, for example in the manner of in-store display. The control of the application of promotional rebates is managed by banner group committees, as described later in these reasons. Despite the evident complexities and variations, it seems that prices charged to retailers by wholesalers can be considered as - 79 - being made up of cost as received into warehouse net of various suppliers' allowances, plus a wholesale margin or service fee, less such specific rebates as are applicable. For banner groups supplied by Davids, service charges and rebates are summarised in the following table, which has been simplified (but not in substance) from the full evidence presented by Davids. Victoria Rainbow CheapaFestival Foodtown Welcome Mart % Service fee 2.95 2.95 2.95 2.95 3.50 Refrig fee 2.00 2.00 2.00 2.00 2.00 Rebate (3.00) (3.00) (2.00) (1.25) (1.25) NSW/ACT Rainbow CheapaFestival Foodtown Welcome Mart % Service fee 2.95 2.95 2.95 2.95 3.50 Refrig fee 2.00 2.00 2.00 2.00 2.00 Rebate (3.00) (3.00) (2.00) (1.25) (1.25) Franchise fee 2.50 Advert fee 0.50 The higher service fee for Welcome Mart stores is stated to follow the higher warehouse picking costs associated with stores in this low-turnover banner group. Variations in rebates between groups and between States are said to reflect the varying amounts required effectively to promote the banner in the market. The franchise and advertising charges shown for Clancy's relate to obligations of Clancy's operators under their franchise agreement with Davids. Most unbannered stores supplied by Davids have a weekly turnover that is less than the $7,000 required to join the - 80 - Welcome Mart banner. Unbannered stores have access to the same retail services as Welcome Mart stores, and the same terms of trade and promotional programs, except that point-of-sale material for items sold at special prices does not bear the Welcome-Mart name. The service fee applicable to unbannered stores in New South Wales and Victoria is dependent on the level of monthly purchases, and is higher than for the Davids banners, being between 4% and 6% in most cases. They are also charged the usual 2% refrigeration fee for frozen and chilled goods. They do not receive any rebates. Where a store's wholesale purchases are very small, they are encouraged to purchase their stock from one of the cash and carry warehouses of Davids' subsidiary A G Campell. 8.3 Wholesaler services to retailers All the major wholesalers provide a range of services in support of their retail customers, and thereby give their retailers access to capabilities and efficient practices that would not be available to them, were they obliged to rely on their own resources and competences. The wholesalers see these services fostering greater efficiency in the retail operations of their customers and encouraging greater uniformity of store practice, higher operating standards, and generally a closer simulation of the retail practices that the vertically integrated chains have introduced and made familiar to the public. Support for the participating retailer's pricing and point- - 81 - of-sale scanning systems is offered as a service by all wholesalers. These arrangements are known as host' support services, and entail the wholesaler maintaining the price files for the computer system that drives the store's point-of-sale terminals. Conventionally the retailer will choose a standard pricing regime from several alternative standard regimes that the wholesaler maintains (or a mix of the standard regimes for different commodity groups) , and will rely on the wholesaler's host support system to supply shelf tickets that reflect any price changes, and to ensure that current and promotional prices are passed on to the consumer in the operation of the scanning terminal at the retail check-out Other retailers elect to maintain their own computer price files. Wholesalers also offer to perform accounting functions for retailers and many of those who employ a wholesaler's host support systems take advantage of this facility. Mr Patten of Davids described the significance of these information systems for the independent retailer: 'Obviously it is a fine-margin business with a product mix that shifts daily based = on promotional activity. One needs to be able to measure gross profit ...and to do that you need good computer support. Pretty well all the big stores now have front-end systems, computer systems, scanning systems that talk to the warehouse ...to pull down the cost' price ...which they can match against all the goods that were sold ...so that they can calculate a gross profit on a daily or weekly basis... I stress that if a store is carrying 10,000 items and selling them at various gross margins, the measure of gross profit is ...a very important task.' - 82 - Retailers' perceptions of the relative quality of alternative host support systems are relevant to competition between wholesalers. Mr Patten said: 'I think the retail services Composite are providing compare ...favourably with the retail services that Davids have provided. They have ...because of their financial difficulties ...cut back on their level of support. JI think it is fair to say that the host support systems provided by both Composite and Davids SA ...were better than the Davids Limited host support system. This is now being remedied...' The wholesalers also offer a number of advisory and training services. Davids offers advice on electronic systems, and runs training courses and seminars on matters such as retail management, fresh foods handling, and specific industry issues. Davids employs more than 160 staff who assist retailers with operational advice and in the detail of product display and merchandising. Counselling in the preparation of business and strategic plans for stores, and advice in store design and layout are also offered. Davids also conducts feasibility studies on the development of new stores and the upgrading of existing stores. Evidence from FAL described a similar range of retail services offered by that company. 8.4 Banner management As already described, wholesalers focus much of their strategic activity on the encouragement and development of their associated banner groups. The wholesaler attempts to foster a partnership with organised groups of retailers, directed to - 83 - their competing more effectively in the retail market against the vertically integrated chains, by achieving some of the benefits of an integrated business system. Success in this regard is seen to require that the retailer accepts a degree of subordination of his own commercial independence to a larger commercial strategy,under which the wholesaler and banner groups of similar retailers present a common face to the market, and adopt similar stocking policies, similar pricing and common promotional initiatives. In discussing banner groups, their value and the way they are managed, witnesses for Davids and Mr Alty of FAL spoke of the importance of discipline, and obversely of the loss of competitiveness that occurs if discipline is poor. Mr Alty argued on this ground for there being only one independent wholesaler in any State: 'The independent retailers were competitive in the 1960s and 1970s, then the chains gained market strength, the independents didn't reinvest and their stores overall didn't get larger... The wholesalers were unable to take a role in redressing that trend. When there is a duopoly, there is a tendency for the warehouse to have less control... in terms of tying up promotions and in terms of general store house- keeping and disciplinary standards. For example ...1£ QIW endeavoured to chastise a retailer for failing to maintain hygiene standards, presentation standards or promotional tie-ups, the retailer would ...say... "Don't tell me what to do or I'm off to Davids." ... [The] chains are a well disciplined, very cohesive force, and very few independents could match the discipline displayed by the chains. The independents need to respond in a_e similar fashion ...' - 84 - Mr McGregor of Davids described banner management arrangements in Victoria. Each of Davids' banner groups of retailers elects a committee that meets every two weeks with the banner manager for their group (a Davids' employee), and with other members of warehouse management. Minutes of a number of banner group committee meetings were submitted in evidence. The banner group committee plans, budgets and reviews' the application of promotional funds, makes decisions in regard to forthcoming promotions, and reviews the effectiveness of recent promotions. The committee meetings also provide a forum for discussion of specific operational problems. Presumably also, the workings of each banner committee can serve to institutionalize cooperative association between the wholesaler and the retailers in the banner group. Several examples of the agreements between wholesalers and retailers that underpin the banner groups were put in evidence to the Tribunal, and they served to demonstrate the varying extents to which independent retailers agree to subject themselves to a common discipline for a perceived mutual advantage. The agreements signed by Foodtown and Welcome Mart retailers with Davids are of quite limited substance and force, doing little more than agree on the broad obligations of each party to the others in pursuit of a common cause. Davids' Clancy's banner members are franchised under a legal agreement. The draft agreement for the Festival banner group that Davids put in evidence is comprehensive and legal in form, granting to the retailer a licence to use the Festival name and mark, - 85 - subject to detailed operating and performance requirements. FAL submitted the franchise agreement for retailers in their Foodland banner group. It also is of the nature of a comprehensive legal agreement that binds the franchisee to detailed operating and performance standards. 9. THE IDENTIFICATION OF RELEVANT MARKETS 9.1 The Tribunal's task We turn now to the analysis of the benefits and detriments that would result, or be likely to result, from the proposed acquisition. The first task is the identification of relevant markets. This is 'the essential first step' (QCMA at 189 and 17,246). In approaching this task, we are mindful of what has been said on the choice of market definition in judgments under Part IV of the Act. In Dowling v Dalgety at 132 and 40,268 it was said 'it is the identification of a market that best enables the Court to evaluate the issues'. In Singapore Airlines Limited v Taprobane Tours WA Pty Limited (1991) 33 FCR 158 at 174-179; (1992) ATPR 41-159 at 40,169-40,174, it was stressed that a 'purposive! approach is necessary: 'In its statutory setting the market designation imposes on the activities which it encompasses limits set by the law for the protection of competition. It involves a choice of the relevant range of activity by reference to economic and commercial realities and the policy of the statute. To the extent that it must serve statutory policy, the identification will be evaluative and purposive as well as descriptive.' (at 174 and 40,170) Also: 'It is a focusing process and the Court must select what emerges as the clearest picture of the relevant competitive process in the light of commercial reality and the purposes of the law.' (at 178 and 40,172) Generally, the market is the network of actual and potential transactions between buyers and sellers of goods or services that are, or could be, in close competition. However, for the Tribunal's purposes, we seek to identify the area or areas of close competition relevant to authorization. As has been stressed repeatedly in Tribunal determinations, 'the specification and analysis of the market has significance not just for the identification of detriment but also for the establishment of benefit.' (In re Tooth & Co Limited; In re Tooheys Limited (1979) ATPR 40-113 at 18,194) 'The positive side of this weighing process, namely the appraisal of claimed benefits, will commonly depend upon an appreciation of the competitive functioning of relevant markets, with and without the conduct in respect of which authorisation is sought.' (G. & M. Stephens Cartage Contractors at 216 and 17,459) It is a requirement that benefits and detriments are the likely result of the proposed merger. 'TO]ur appraisal of all the listed claims must depend upon our appreciation of the competitive functioning of the industry, with and without merger.' (QCMA at 186 and 17,244) While there is no requirement that the benefit to the public be 'substantial', we nevertheless are concerned with issues of - 87 - substance as distinct from ephemeral or illusory (above, Section 3.1). Market definition is thus a tool of analysis in identifying the fundamental factors at work. The application relates to a proposal to merge the businesses of two leading members of the grocery distribution industry. We approach the task conscious that there may be more than one relevant market, indeed that the delineation of relevant markets (and sub-markets) entails a mapping of competitive forces playing about the functioning of the industry. 9.2 Market definition The parties were in fundamental disagreement on market definition. Their points of agreement can be quickly noted. First, all agreed that the central market for our consideration concerns the distribution of grocery products, including dry groceries (food and non-food), frozen foods, dairy products and fresh foods. All agreed, and the Tribunal accepts, that the distribution of liquor raises no issues of anti-competitive detriment or benefit, and can be put aside. Lastly, there was mention of various other markets that do have some relevance to our appreciation of competition within the industry: the market for retail sites, the market for managerial personnel, the market for capital, and national and regional markets for the purchase of merchandise. Counsel for Davids submitted: 'There is a product market for the supply of grocery products (including both dry groceries and fresh foods) to the public via _ fully integrated retail chains and independent wholesalers supplying independent outlets including retail chains. ... The geographic market in question is either a national market or a market in Australia east of the Nullarbor.' On the other hand, counsel for QIW submitted: 'the relevant market is the market for the wholesale supply of groceries from independent wholesalers to independent retailers in the southern part of New South Wales, Victoria and Tasmania. ' 'There is a separate wholesale market.' 'The areas within which Davids and CBL presently supply groceries to independent retailers are essentially a function of transportation costs.' Counsel for the Commission was largely in agreement with QIW's characterization of the market. This was in accordance with the Commission's determination, though counsel also had regard to the evidence before the Tribunal. Evidence and argument before the Tribunal, including the opinions of the four economic experts, threw up various relevant considerations. It has not been altogether easy to resolve the considerations into a workable framework for analysis. We discuss the various considerations in turn. At the centre of our evaluation is our conclusion that the - 89 - evidence before us points to close competition between the national integrated chains and the independent sector. It would be repetitious to undertake a full discussion at this stage; but we note here a few significant points. First, as the foregoing makes plain, it is the independents' own perception that their competition is driven by the chains. Secondly, the older classification of retail stores into supermarkets, top-up stores and convenience stores, with the chains dominating the first category, is becoming outmoded by reason of extended trading hours and increased customer mobility: a supermarket may be used for all categories of purchases. Thirdly, the evidence revealed that, when account is taken of the travelling habits of customers, very few independent retailers are not subject to competition from the chains, at least so far as the weekly or biweekly shopping excursion is concerned. For instance, Jebb Holland Dimasi, in a study commissioned by the Commission, estimated that 98.6% and 98.7% respectively of the populations of New South Wales and Victoria are within an acceptable travelling distance of a chain supermarket for their weekly shopping needs. In rural Victoria and New South Wales, the catchment areas of retail stores may be very wide, extending up to 150 kilometres, depending upon the features of a town that will attract a journey. Fourthly, this competition at retail drives competition at wholesale. As Professor Parry expressed the point in oral evidence: 'Davids are in business to move volume of grocery product through retail outlets. The survival and the strength of those retail outlets is what the wholesalers business is all about .' We turn next to the geographic or spatial dimension of the market. We have concluded that the market is national, i.e. Australia-wide, in scope. There are two considerations favouring this approach. First, there is the evidence that the important strategic business decisions are made at the national level. There is no question that the integrated chains adopt national strategies, are run from head office, negotiate with suppliers on a national basis, and present a national product image or images (where there is more than one category of store). Likewise, the summary of evidence in the preceding sections makes it plain that the strategic decisions of Davids are made at the enterprise level or, as Davids itself would put it, the 'national level'. This is the level at which decisions are made with respect to investment in warehousing, information technology, retail sites and stores, and refurbishment of stores. This is the level at which decisions are made on banner concept, banner organisation and the provision of retail services. Mr McNeil (Group Manager - Sales and Marketing for Davids Limited) stated that 'Davids banner requirements are uniform across the States = and Territories in which Davids operates.' He further said that while Davids has merchandise managers and buyers for each State, they operate within a framework provided by Davids 'national trading terms' and must submit all trading terms to Davids' national office in Sydney for approval. The joint enterprise AAW, and its development and management of the 'Black & Gold' - 91 - generic products, is a national initiative. Davids must approach a capital market for funds that knows no geographic boundaries. As Professor Parry pointed out, this is the relevant field of substitution in appraising competition in this case: 'One would ask the way in which, for example, a Woolworths chain sets its prices and other quantity and service dimensions in relation to possible changes in, for example, Coles or Davids across the board, or in individual parts of the market. Yet another consideration favours the drawing of a wide geographic boundary about the market. Various of Davids' contentions regarding the benefits that would flow from the merger require appraisal from the stance of the competition that occurs in national markets, most obviously the 'fourth force! contention, namely that the merger would contribute to the formation of a fourth force in the grocery distribution industry to counter the competitive strength of the national chains. There are also Davids' contentions that access to various efficiencies, improvements in buying power, and access to capital would be enhanced from operating on a more national scale. On the other hand, QIW's contentions regarding detriment relate to the functioning of a much narrower market area than this. QIW is concerned that the merger would reduce the number of significant independent wholesalers operating in New South - 92 - Wales and Victoria from two to one. While we have rejected QIW's contention that the independents and integrated chains operate in different markets, we do see some merit in giving some explicit attention to the play of competitive forces within New South Wales and Victoria. For the most part in Australia there are regional wholesale distribution areas roughly reflecting State boundaries and, as earlier explained, wholesalers adopt these areas as the basis for the decentralisation of various of their functions. For the most part, warehouses throughout Australia are located in the State capital cities; and the geographic reach of these warehouses reflects the trade-off between warehousing costs and transportation costs. We have concluded that in order to understand the pattern of competition in Australian grocery distribution, and to evaluate QIW's, contentions with respect to detriment, it is useful to identify a series of geographic sub-markets. For the purposes of this application, the two sub-markets mainly of interest are the so-called 'New South Wales' and 'Victorian' sub-markets, two partially overlapping regional areas which are roughly in accordance with State boundaries but extend beyond them. Finally, we consider the functional dimension of the market. Again, it was the QIW approach to take a confined view. It submitted that there is 'a separate wholesale market' in New - 93 - South Wales and Victoria which would be monopolised by Davids were the acquisition of CBL to take place. It was Davids' contention, on the other hand, that any transactions at the wholesale level were without competitive significance: as their experts, Professor Parry and Mrs Smith put it, there is 'de facto integration' between the independent wholesaler and independent retailers which is driven by the strength of competition at retail. It was not possible to argue that the independent wholesalers and independent retailers are tightly bound by legal means, i.e. ownership or contract. The evidence is that this kind of integration is limited. Some direct shareholdings by retailers in wholesalers do occur, e.g. in CBL and QIW. Some of the wholesalers own some stores, e.g. FAL, QIW, CBL and Davids. There are various contracts in place, the more inclusive relating to franchise agreements (e.g. SPAR and Clancys) and to FAL. For the most part, however, the evidence is that the current vertical ''links' are largely a matter of commercial practices in operation between the independent wholesalers and the individual banner groups. We do not accept the contention regarding de facto integration. It is our view that wherever there are market transactions of significance there is a need to distinguish a separate functional level. In this case there is, in fact, significant market activity at the wholesale level. The wholesalers seek to attract retailers to their allegiance by - 94 - offering various inducements. There is the danger of a banner breakaway from a wholesale stable. While there is, as earlier explained, a high degree of uniformity in terms and conditions relating to transactions with members of the one Davids' banner, these terms and conditions are subject to negotiation and contain a discretionary element. Likewise the pricing, stocking and service decisions of the retailers are not totally constrained by their wholesale supplier. Considerations such as these would point to a functional split between wholesalers and retailers. But there is a difficulty, in that it is only the independent sector which is not vertically integrated; some 70% of turnover at wholesale in Australia passes through the hands of the vertically integrated chains. We propose, therefore, to distinguish a functional sub- market encompassing transactions between the independent wholesalers and retailers. Further, we consider that it is appropriate to consider two functional levels if we are to understand the workings of competition within grocery distribution in Australia, not only wholesaling but also retailing. While the geographic scope of the wholesale sub-markets is the State region, the geographic scope of the retail sub-markets is narrower than this, ranging from a few kilometres in metropolitan areas up to 150 kilometres in rural areas, as will be examined further below. In summary, there is an Australia-wide or national market - 95 - for the distribution of grocery products to the consuming public via integrated retail chains and independent wholesalers supplying independent retailers. We distinguish two wholesale sub-markets of relevance to this application, namely, transactions between independent wholesalers and independent retailers in (1) the New South Wales region and (2) the Victorian region. We use the term 'sub-market' to refer to a field of rivalry that is 'especially close or especially immediate' reflecting 'some discontinuity in substitution possibilities! (Tooth & Tooheys at 18,197; QCMA at 190 and 17,247). In specifying these wholesale sub-markets we have, in effect, made two 'cuts' in the pattern of substitution within the market as a whole: a functional cut to separate certain wholesale transactions between independent wholesalers and independent retailers; and a geographic cut to separate certain transactions within the independent sector that centre upon the geographic pattern of physical distribution. There are also retail sub-markets whose functioning has significance for this application. We do not regard the various sub-markets as separable markets however; for the activities concerned are subject to the ultimate discipline of pervasive competition with the national integrated chains. 10. PRESENT COMPETITION AND MARKET POWER 10.1Approach In approaching this topic we have regard both to the indicia of competition contained in s. 50 of the Act and to the authorization test for merger contained in ss. 90(9) and (9A). - 96 - Plainly we require our approach in applying the authorization test to be consistent with the indicia of s. 50, in furtherance of the policy of the Act and in accordance with its overall structure. At the same time, the application of the authorization test requires us to pursue the analysis of competition in relevant markets in somewhat greater depth than would likely be the case under s. 50 in order that we may identify, and weigh, the elements of public benefit and detriment . We will follow the methodology first proposed in QCMA (at 179-189 and 17,240-17,246). We find it useful to distinguish three elements of that approach. There is first the overall perspective that 'the antithesis of competition is undue market power', the 'power to give less and charge more'. C.f. s. 50(e): 'the likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins.' Compare also Media Council (No. 2) at 32 and 48,436: 'we adopt as our general concept of anti- competitive conduct any system (contract, arrangement or understanding) which gives its participants power to achieve market conduct and performance different from that which a competitive market would enforce, or which results in the achievement of such different market conduct and performance. ' Secondly, there is the isolation of leading elements of - 97 - market structure, especially the condition of entry, as determinants of competitive behaviour, what are sometimes referred to as 'the QCMA factors'. Compare s. 50 of the Act: '(a) the actual and potential level of import competition in the market; (b) the height of barriers to entry to the market; (c) the level of concentration in the market; (d) the degree of countervailing power in the market; (£) the extent to which substitutes are available in the market or are likely to be available in the market; (i) the nature and extent of vertical integration in the market.' Thirdly, there is the emphasis in QCMA upon competition as a 'dynamic process', expressing itself as 'rivalrous market behaviour' with 'independent rivalry in all dimensions of the price-product-service packages offered to consumers and customers'. Compare s. 50: '(g) the dynamic characteristics of the market, including growth, innovation and product differentiation; (h) the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor.' This directs attention to market behaviour and performance viewed as a dynamic process. 10.2 Market Structure Market concentration There is a high degree of market concentration in the grocery distribution market. In 1993-94 the three major integrated chains, Woolworths, Coles and Franklins, had 70% of the market for branded groceries; the three chains plus Davids had 85%. The overall market concentration has been rather steadily increasing over the last 20 years from 40% for the three chains in 1974-75 and from 46% for the chains plus Davids. At the same time, and we regard this as very significant, within the broad trends there has been significant variability - changing market shares and fortunes of the participants. See the accompanying table. In particular, Coles and Woolworths have vied for market leadership. Now Woolworths is riding high but it has not always been thus. Now Coles is on the defensive. Now, too, Franklins is broadening and strengthening its market presence -acquiring more stores; spreading from its initial State of New South Wales to Queensland (1984), Victoria (1987) and South Australia (1991); and developing, alongside its traditional stores specialising in dry groceries at low prices, its Franklins Fresh and Big Fresh concepts. Over the last 20 years Davids also has markedly increased its national market share. Some of these shifts in market share reflect acquisitions and re-grouping of retail outlets; some reflect innovations, product development and more effective management . We also note that the grocery distribution market as defined is not insulated from some extra-market competitive pressures. As the Tribunal said in Tooth & Tooheys at 18,196, 'all competition or substitution does not cease at the outer boundaries of the market; ... competition is a matter of - 100 - degree.' Activities within the market compete with specialist food suppliers (e.g. fruiterers, butchers, delicatessens, bakeries and gourmet stores) and with food service retailers (restaurants and take-aways) as earlier described. Concentration in sub-markets Over the last 20 years there has been a concentration of the wholesaling function in the independent sector of the market to one or two wholesalers in each State. In the New South Wales region in 1993-94, independent wholesaling had 23% of the business. Within that sub-market, Davids had 78%, CBL 17% and AIW 5%. In the Victorian region, independent wholesaling had 31% of the business. In that sub-market the wholesalers are more evenly matched, with Davids having 53% and CBL 47%. As earlier mentioned, the scope of retail markets can be quite wide. The Tribunal had the benefit of two systematic studies of the spatial extent of markets. There was, first, the study of Jebb Holland Dimasi prepared for the Commission in August 1995 which mapped the locations of all chain supermarkets operated by Woolworths, Coles and Franklins throughout New South Wales, Victoria and Queensland. The data enabled the analysts to calculate for each State the proportions of the total State population served directly by each of the chains, or any of the chains; and the further percentage of the State population that is 'quite effectively served, although not directly served, by one or more chain supermarkets' in the sense that 'given the distances which could normally be expected to be travelled by - 101 - residents of these regions (all of them being quite remote rural regions with minimal population) for their normal shopping purposes, they are able to access a chain supermarket within an acceptable distance or driving time', namely a distance of 50 kilometres or less and a travelling time of 30 minutes or less. On this basis they calculated that only around 1.4% of the total population of New South Wales is not effectively served by a chain supermarket. The implication is that the catchment areas of the chains would overlap virtually all the catchment areas of the independents. Similarly for Victoria, only around 1.3% of the total population would lie outside a chain catchment area. (For Queensland the figure is 2.1%.) The second piece of systematic evidence was presented by the Managing Director of Davids' Distribution Vic Pty Limited. This was an investigation of the catchment areas of towns, with radii of 50, 75, 100 or 150 kilometres based upon his 'assessment of the area within which the grocery prices charged by the chains (and their grocery advertising) in those towns affect or are likely to affect pricing decisions of other supermarkets operating anywhere in the area'. The criteria are of considerable interest. They are as follows: '(a)with a 50 km radius for a town which has a chain supermarket in it (e.g. Ararat); (b) with a 75 km radius for a town which has two chain supermarkets or one chain supermarket plus a discount department store in it (e.g. Benalla); (c) with a 100 km radius for a town that has two chains and one discount department store in it (e.g. Horsham) ; - 102 - (d) with a 150 km radius where the town has three or more chain supermarkets and three or more discount department or Myer stores (e.g. Ballarat, Bendigo, Geelong, Shepparton, Albury/Wodonga) '. On this basis it was established that the catchment areas of the chain stores cover all of country Victoria apart from a small part of the Eildon State Park, the Wimmera, a small strip along the South Australian border and the far eastern end of Victoria from Bellbird Creek to Mallacoota. The essential point is that in country areas, where people do not live close to shops, they will undertake substantial grocery shopping in the course of a multi-purpose journey. There was also much anecdotal evidence before us to similar effect. The most vivid was Mr Patten's comment that even the Foodland store in Jabiru in Arnhem Land, adjoining the Kakadu National Park, is subject to competition from Darwin: to charge more in remote areas, he said, 'does not make commercial sense we would lose volume, even in a place like Jabiru, because people will wait until they drive to Darwin to do their purchasing; they will do a big purchase every month etcetera.' Product differentiation and sales promotion As earlier described, there is considerable diversity in the retailing 'product' that is offered to consumers. There is competition in location, merchandise range, store lay-out and presentation, check-out facilities, hours of trading, personal - 103 - service and price. The national chains are extremely disciplined and endeavour to standardise their offering (either overall or within categories of stores) at any one time: e.g. a traditional Franklins is recognisably different from a Safeway. At the same time these offerings are not static but shift as the chains explore market opportunities and develop new strategies. The retail product offered by the independent' stores exhibits greater diversity than that of the chains, e.g. in size and location. The independent may choose or be forced to rely upon service rather than price, but that in itself can have value for some customers. Mr McGregor said in his statement: 'An independent may be able to charge say 2% more if it offers some other advantage, i.e. it is more friendly or more conveniently located etc. An independent may also be able to customise its range of products to its local micro market more effectively than do _ the chains.' We do not see these differences as indicative of competitive disadvantage, but rather as a contribution to valued diversity. The banner groups, themselves, offer a vehicle for systematic product differentiation and product development. Within the Victorian and New South Wales sub-markets the Festival and Tuckerbag banners are the most coherent and successful so far. There is much informative advertising by both chains and independents. The chains enjoy significant advertising economies. - 104 - Vertical relationships and countervailing power The chains are fully integrated and are characterized by tight managerial control. They have buying power vis-a-vis the strong suppliers of national grocery brands, such as Coca Cola, Arnotts, Kelloggs, Cadbury Schweppes, Nestle, Unifoods, the cigarette companies. They can get the best terms, not only because of the size of their orders but also because they can guarantee retail implementation of suppliers' sales campaigns (stocking, display, presentation, promotional pricing). The independent wholesalers have endeavoured to gain some retail buying power through AAW, especially in the development of generic brands, but are clearly at a disadvantage in both respects. There is a second way in which the independent wholesalers are at a bargaining disadvantage. This is in respect of their own banner retailers. Counsel for Davids referred to Davids as being subject to 'very real countervailing power from both sides of the sandwich as it were'. The retailers are not tightly controlled by ownership or contract, and there is therefore the possibility of individual stores or banner groups breaking away. It is a possibility that is stronger where there is more than one wholesaler in a State distribution region. Even where there is no alternative wholesaler, the evidence is that it could be possible for a large banner group, such as Festival or Tuckerbag, to create their own independent wholesaler. The possibilities are considered below under the heading of Barriers to entry. - 105 - Restrictive arrangements between firms The firms in this industry operate almost entirely as independent entities. There is no evidence that the co-operative AAW undertaking restricts the independents' ability to compete. As to the cross-shareholdings in place, again there is no evidence before us of constraints upon day-to-day competitive behaviour. On the evidence we are unable to say what role Coles' forays into the independent sector have played in the past or are likely to play in the future. Barriers to entry The concept of barriers to entry refers to the advantages of incumbents vis-a-vis entrants to the market or relevant sub- markets. Here the relevant barriers to entry turn upon advantages of scale in relation to the size of the market (or sub-market) . A distinction was drawn by the industry witnesses between the scale required to compete on a national basis against the integrated chains and the scale required to establish a new warehouse of efficient scale within a State sub-market. We consider each in turn. It was Mr Patten's view, uncontradicted by other evidence, that for a new firm to enter the national market would be 'almost impossible'. He developed the concept of 'critical mass', a matter of relative size: - 106 - 'it means that you are a significant player in the sector in which you are competing, that you have certain size that makes you competitive.' He said that there would be a need to match the market leaders in access to capital, in buying power, in merchandise handling, in advertising effectiveness, in use of information technology, in development of retail brand profile, in attracting the requisite scarce managerial talent. The key requirement would be access to the retail sales volume that would sustain the distribution system. The business is 'volume driven'. It became clear to the Tribunal that this massing of retail sales volume is the key 'sunk cost' that would make new entry on a national scale almost impossible. Mr Patten said in oral evidence: 'it's almost impossible to imagine another party coming into our industry, an outsider now coming into the industry....The market simply isn't big enough. It is only a market of 18 million people. ...to suddenly expect Sainsbury's, for instance, to come to Australia and see it is an opportunity to compete against Woolworths and Coles and Franklins and the independents, in my view - almost impossible.' At the same time, in response to questioning by the Tribunal, Mr Patten agreed that there could be 'the possibility of re-grouping' of existing players, what might be called the - 107 - formation of 'fifth' and 'sixth' forces. He said that while critical mass in the market as a whole would require the achievement of a scale in sales volume of $2 billion (to match the scale of Franklins, the smallest integrated chain), it could be possible to sustain a warehousing facility for supply to independent retailers in a State market with a scale of $200 million, the minimum scale required for operational efficiency. The significance of figures such as these depends upon the size of the market, or sub-market, and its rate of growth. The overall market is characterized by a relatively low rate of growth. The IBIS Report commissioned by Davids estimated the value of wholesale grocery sales for Australia for 1994-95 as $15.2 billion (excluding food service wholesaling). Applying the 'Retail World' State shares for the year ending September 1994, we calculate a wholesale sales volume for New South Wales of approximately $4.7 billion and for Victoria of $3.8 billion. Applying figures such as these, it becomes clear that a retail chain of Jewel's size, or banner groups like Festival and Tuckerbag, could supply sufficient sales volume for a viable warehousing facility. The industry witnesses confirmed this would be the case. But of course this is but one aspect of the business. In addition, such a re-formed entity would require access to a well-accepted generic brand and prospects for growth. The creation and continuance of the small AIW is intriguing. - 108 - Mr Alty, the Chief Executive Officer of FAL, painted a vivid picture of the modest requirements for FAL to enter the East, namely the 'establishment of a large tin shed', at a cost of less than $25 million: 'You must bear in mind that we do have a very, very significant operating base in Western Australia and we have considerable financial strength. For us to effectively make an entry over here would merely require the establishment of a large tin shed. We have a _ computing operation in WA which we can downstream to a warehouse anywhere in Australia if we wish to. We have a management infrastructure in Western Australia and a financial infrastructure that we don't entirely need to replicate...But at the moment I don't believe there would be _ the opportunity to establish on the east coast on a viable basis.' He said that there would be a need for a sufficient volume of disaffected retailer customers. But if a 'monopoly wholesaler alienated a_ significant proportion of its customer base' it would give 'companies such as FAL the opportunity to secure retail volume on an almost guaranteed basis'. In his written statement he said: 'That is the ultimate market constraint on the monopolist. One might be able to charge a little more and offer a little less, but if one charges too much more and offers too much less, a competitor could well emerge and this is the regulatory force of the market.' He confirmed the figure of $200 million in wholesale sales volume as the minimum efficient warehousing scale, the scale that would enable an independent wholesaler to gain access to - 109 - the economies associated with the logistics of movement and organisation of stock, and the scale of computing facilities necessary to support it. For a warehouse operated by an integrated chain, on the other hand, he suggested a volume of $150 million could suffice, in that the chains operate large stores, control the merchandise range and impose disciplines in order patterns. 10.3 Market behaviour and performance In QCMA it was said that 'whether firms compete is very much a matter of the structure of the markets in which they operate' (at 189 and 17,246). With such a market structure as we have described it would be surprising if the direct evidence on market behaviour and performance were of an outcome that is other than effectively competitive. To summarize, while there is high concentration and high barriers to entry for the market as a whole, there is nevertheless a changing internal structure - not just in market shares of the participants but also in the very shape of the industry. It is an industry that is full of movement. Associated with this, there is an absence of cartelization anda valuable and shifting diversity of retailing "product! . Industry members, both integrated chains and independents, are challenged to counter the strong suppliers of national brands. In short, the outstanding feature of market structure is its dynamism. - 110 - New stores are opened, new shopping centres are developed. Old stores close, are refurbished, are taken over. New banners are formed; independent stores re-group. There is movement of managerial personnel. The integrated chains acquire small regional chains and independent stores. Changes in the internal structure of the industry take place not only within each of the chain and independent sectors but also across the chain/independent boundary. While it is plain that the industry's structural change is driven by the integrated chains, the independents have responded to a degree, e.g. by aggregating smaller competitors and by developing closer links between wholesaler and retailers. Davids and FAL have been the most successful in this regard. At a more fundamental level, it is the market opportunities created by the industry's external environment that is the driving force: changing life styles, changing consumer preferences, changing technology, especially information technology. Market behaviour intersects with market structure in a complex and ongoing way to reinforce and extend the competitive pressures upon participants in the market. The independents have been forced to respond to the chains' initiatives as best they can, since the evidence is not of an independent sector that is insulated from the chains' competition but one that is subject to chain competition from overlapping catchment areas. It is also vulnerable to chain acquisitions. But market behaviour has a number of dimensions. One - 111 - submission before us was to the effect that large independent supermarkets compete directly with the grocery chains, i.e. (it was submitted) they compete on price. We think that the thrust of the evidence demonstrates a rather different competitive process. It is of competition between stores that offer a variety of 'price-product-service packages' (in the language of QCMA) . The market is well-informed. Different customers have different requirements; the same customer will have different requirements at different times. Mrs Smith's expert opinion rings true: 'If for any reason the service offered changes (e.g. the chains are able/willing to offer additional services) or the price relativity alters (e.g. because one group has become more efficient relative to the other possibly through some form of technical change) then consumers will reassess which store (or type of store) they will use to acquire some or all of their requirements. To whom the retailer will lose business depends in part on the reason for the change in relative prices. If it results from a change in trading hours, the loss may be mainly to the chains but some large independents may also gain business at the expense of the smaller. stores. If it is because the wholesale supplies to the independent retailers become more expensive relative to the chains, then there may be a ripple effect. The smallest independent retailers may lose custom to the lIlarger independent retailers who may themselves lose custom to the chains.' In her oral testimony Mrs Smith developed the mechanism of 'ripple effects' as serving to generalize the impact of some initial shift in price-product-service relativities to quite wide geographic areas. - 112 - We consider that there is a rather pervasive substitution process at work in retail markets, not confined to price competition but rather reflecting customers' search for value for money. We do not say that there are close substitutes available for every transaction in the retail marketplace. What the evidence, and our own experience, points to is a substitution process at the margins of choice, e.g. the decision by a consumer as to what proportion of household supplies should be obtained in large weekly or biweekly shopping excursions (perhaps even monthly in rural areas) and what proportion can be left to supplementary purchasing. For the independent retailer, it will be the purchases at the margins of the business, rather than from the ''loyal' customers, that will determine whether the business can generate sufficient profit to survive. And the alternative is not just to close down but to sell out, whether to another independent or to a chain that might be anxious to secure the site. That this substitution process is present and important is confirmed by the evidence on the independents! overall declining market share. The industry overall shows great strength in dynamic performance. Over recent decades there has been an enormous transformation in grocery distribution in Australia. The changes have been described in Sections 6-8 above and we will not repeat the detail. Here we highlight the two outstanding achievements. One is the development of the supermarket, - 113 - evolving and improving over the decades. A second achievement complements this, indeed is integrated with it. It is a change that lies below the visible surface of the 'retail offer', namely great improvements in the physical distribution function, now computer managed. The integrated chains' organizational structure, scale and financial resources have enabled them to lead the way in innovation and product development, e.g. in developing and implementing the food emporium concept, in introducing scanning and EFTPOS, in more effective store design and merchandise placement. Examples of recent innovation strategies of individual firms are Woolworths! 'Fresh Food! innovation, Coles' 24 hour stores, Franklins! stratification of its stores into Discount (or traditional), Fresh and Big Fresh. Within the independent wholesalers' sub-markets there is evidence of direct competition between Davids and _ CBL, competition that is particularly intense in Victoria. In her written statement Dr Walker, the Commission's expert, stressed the: 'number of dimensions to this competition, involving both price and service dimensions, e.g. service fees, rebates, out-of-stocks, delivery schedules, minimum order requirements, host support systems, training and retail advice services. In addition, wholesalers will generally cover the switching costs of retailers, such as the costs of re-bannering stores.' - 114 - For each wholesaler there is an immediate competitive pressure coming from its wholesale rival; for each must endeavour to retain and develop its retail outlets with a view to increasing, or at least maintaining, its sales volume. Yet we have concluded that much of this competition within the independent wholesalers! sub-markets is counter-productive. This is for two reasons. First, it is competition at the expense of scale. As is plain from the earlier discussion, CBL lacks the critical mass to compete effectively against the chains. Davids is better placed, having a similar scale and market share as Franklins, but with some weakness in market capitalization. Davids' position will be discussed further below. Second, it is competition at the expense of 'banner discipline'. This point requires elaboration. Both Mr Alty and Mr McGregor developed the point. Mr Alty is the Chief Executive Officer of FAL, the only independent operator in Western Australia, enjoying some 53% of the Western Australian market. The remaining 47% is shared between Woolworths and Coles. He said in his written statement that a significant reason for the firm's success in Western Australia has been that as 'the only wholesale distributor' it has been 'able to impose and maintain high levels of store discipline' in terms of store hygiene, store presentation and promotional tie- up, 'without the risk of losing the customer's business to a competing warehouse'. He commented that: - 115 - 'the existence of the duopoly situation has failed to really sustain the independents in those states where it exists.' In his oral testimony he added that with increased discipline, there is the prospect of being able to promise suppliers 'delivery in stores, guaranteed stocking, guaranteed ranging, guaranteed pricing, guaranteed promotional activity and it is actually delivered': this is the limitation of AAW so far. Mr McGregor, as Managing Director of Davids Distribution Victoria, made the point in the course of his discussion of the factors that have led to loss of market share by the independents in Victoria. He wrote: 'One of the difficulties which the independent retailers face within the banner groups is the inability of the banner committees and of Davids Vic to impose minimum standards upon some retailers .... The independent wholesaler and the committees would be in a much stronger position to insist upon minimum standards if there was only one supplier.' Under cross-examination he said that the banner committees have wanted to lift standards and that it's Davids that's frightened of losing stores to CBL: 'we can't afford to lose the volume.' Mr Patten, also, stressed the need to mobilize the independent retailers: 'the dilemma we have in our industry is it's one that evolves.' - 116 - The Tribunal has concluded that within the overall grocery distribution market there is strong and effective competition that clearly benefits consumers. There is an absence of significant market power. The wholesaling sub-markets we have distinguished are subject to strong competition from the market as a whole. Nevertheless there is evidence of some structural weakness in the industry which limits the market performance of the independent sector and its capacity to arrest the dramatic decline in its overall market share. On one view, this is simply a reflection of competition at work. The chains, it might be thought, are simply more efficient in meeting the demands of consumers. But, according to the view we have formed, the decline in market shares is, to a significant degree, a reflection of structural weakness within the independent sector that may be capable of remedy. We refer to the continuing existence of independent wholesalers that are too small to gain access to important advantages of enterprise scale; and problems of vertical co-ordination and discipline. In the view we have formed, the independent sector is not performing to its full potential. What that potential might be is for market forces to determine. But we are clear that the independent sector has a distinctive and valuable role to play in Australian grocery distribution. This is because' the independents can use a device not easily available to the chains: they can diversify their character; they can achieve variety in the 'retail offer' by using a number of banner - 117 - groups; they can more readily permit or encourage the individual retailer to give attention to niche or 'micro' markets. It may be a delicate balance between 'discipline' and independence. Mr Patten was asked what level of vertical integration he would consider desirable. 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