INTRODUCTION

This paper seeks to account for the Australian Competition and Consumer Commissions
(ACCC) decision to withdraw its opposition to the proposed takeover of three Progressive
Supa IGA supermarkets (IGA/target stores) by Coles in Western Australia this year despite
its earlier reservations. In analysing the ACCCs decision, particular attention will be paid to
its definition of the market and consideration of Part IV of the Competition and Consumer
Act 2010 (Cth)1 (CCA), Section 50, and its prohibition of acquisitions that substantially
lessen competition2. This paper will analyse the calculus applied by the ACCC to conclude
that Coles purchase would not substantially lessen competition through the following three
sections. Section I will introduce the relevant statutory limitations on acquisitions under
Section 50 CCA. Section II will explore the ACCCs definition of the market and its
considerations in assessing the level of competition within. Lastly, Section III will elucidate
the reasoning behind ACCCs decision and examine its use of counterfactuals in the futurewith-and-without test to determine the effect of Coles proposed acquisition on competition in
the market. It will also examine any future implications of the ACCC decisions on the
broader socio-legal context.

I STATUTORY LIMITATIONS ON ACQUISITIONS

Statutory Limitations under S 50

Following Coles announcement of its decision to purchase three IGA stores in Dianella,
Halls Head and Bunbury, WA, the ACCC announced it would be reviewing the circumstances
of this proposal before permitting Coles to continue with its acquisition3. When considering
whether this acquisition was permissible, the ACCC had to examine the effect of the
acquisition in light of S 50 CCA.
S 50 states that an individual or corporation must not directly or indirectly acquire shares in
the capital of a body corporate if the acquisition would have the effect, or likely to have the
effect, of substantially lessening competition in any market4. As the following sections will
elucidate, in order to establish whether the proposed acquisition would have the effect of
substantially lessening competition, the ACCC had to firstly define the market and level of
competition within before it could assess the likely change in competition post-acquisition
using the future-with-and-without test.

II

DETERMINING THE MARKET AND ASSESSMENT OF COMPETITION

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4 See, e.g., ss 50, 50(3), 50(4) etc. [check these]

Defining the Market

In Queensland Wire, Mason and Wilson JJ stated that when identifying the relevant market,
the objective here is to discover the degree market power held by the respective parties5.
Once this has been determined, it is then possible to determine whether a partys actions will
have the effect of substantially lessening competition given its current level of power in the
market. In assessing the market, the ACCC examined the geographic and product dimensions
of each area. Within these dimensions, the ACCC also considered the level of concentration
of retail outlets and other suppliers, barriers of entry, and the availability of substitutes6.

1Geographic Dimension
The ACCC examined the local markets for supermarket retailing in the areas surrounding
each of the proposed target stores within a 3-5 kilometre radius in determining the geographic
area of the market7. For each target store, the ACCC assessed the level of competition
provided in the stores radius, considering both the number and size of other competing stores
and their distance to the target store. Within these areas, it was noted that the primary
competitors for Coles was Woolworths and IGA, with only one or two smaller independently
owned chains8.

Product Dimension

The ACCC considered the product within the market to be the provision of full-line
(weekly) retail services, as opposed to local limited assortment discounters and convenience
oriented supermarkets9 . In its assessment, the ACCC did not consider the possession of
liquor licenses by the Halls Head store to be of significance to the product market given the
relatively limited demand and presence of other dedicated suppliers in the form of five other
bottle shops10. It also did not consider specialist markets as being related enough to warrant
being a substitute. In its Statement of Issues, the ACCC concluded that Coles closest
substitute within this market would be other full-line retailers such as Woolworths.

5 Queensland Wire v Broken Hill Proprietary Co Ltd

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10 http://www.corrs.com.au/publications/competition-review/competition-review-october2014-1/

BCompetition and Market Power

In QCMA11, a market was considered to be an area of close competition between firms. The
ability to act in a way which was not constrained by competition is an indicator of a high
degree of market power. The ACCC cited two concerns relating to the lessening of
competition through Coles acquisition of the store. Firstly, a loss of competition resulting
from the removal of IGA from the market and a subsequent loss of alternative forms of
shopping for consumers. Secondly, the ACCC cited the presence of high barriers to entry as
another factor which might inhibit new competitors from challenging Coles dominance of
the market. Both these issues could potentially allow Coles to exploit its market power and
they will be discussed below. In its examination of the market, the ACCC considered the
following elements of Sections 50 CCA:

1S 50(3)(d): Removal of countervailing competition

Countervailing power can be thought of as the degree to which competitors can constrain an
attempted increase in market power by one party12. Finkelstein J in Boral stated that a firm
may have market power even when it cannot set its prices above competitors because it might
still have the ability to exclude competition13. The purchasing of the target stores in all three
cases would lead to the removal of a significant competitor for Coles within the market. The
ACCC expressed concerns that the removal of these stores would significantly reduce
product diversity because of IGAs use of competitive specials which differentiates it from
Coles and Woolworths promotions14. The elimination of the target stores would remove the
element of choice for consumers, potentially reducing the incentive to provide different
promotions to gain a competitive edge.

2S 50(3)(b): Barriers to entry

Bain in Barriers to New Competition defines a barrier to entry as any factor, real or
perceived that discourages entry15. The ACCC found that in all three target areas, there
were significant barriers to entry for new competitors such as the existing presence of several
supermarkets in the local area, no suitable potential building sites, existing brand loyalty16
and finally the considerable capital costs and strategic risks associated with entering the
11 Re Queensland Co-Operative Milling Association Ltd
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area17. Whilst the Court in Arnotts, accepted that significant capital costs are not a barrier in
itself, it held that they could be if there was a significant asymmetry between the amounts
spent by incumbents compared to that of new entrants18. In Safeway Heerey and Sackville JJ
held that the number of stores that constituted Safeways market power could be considered a
significant barrier to entry19. It is likely that the ACCC was influenced by this decision in
contending that there were high barriers to entry as any entrant would have to match the
market presence of Coles or Woolworths.

IIIACCC COMPETITION TEST

A

Substantially Lessening Competition

Following the ACCCs assessment of the market and the level of existing competition, it then
had to establish whether the purchase of the three stores would have the likely effect of
substantially lessen competition. In determining whether the conduct will have the likely
effect of substantially lessening competition, the ACCC employed the counterfactual test
established in Stirling20. Here, the ACCC compared the market with the conduct (factual),
against the future market without the conduct (counterfactual)21. In this case, the
counterfactual was a consideration of the market without the proposed acquisition, and the
effect this would have on creating a market with a higher level of competition than that of the
factual condition.
Significantly, as identified in Metcash, the likelihood of a substantial lessening has to be
established based on a balance of probabilities as opposed to a lower real chance standard22.
For a counterfactual to be considered relevant to the case, it must have a likelihood greater
than 51% vis a vis, a mere chance of occurring23. Furthermore in determining whether the
lessening of competition is substantial, the Courts interpret this term to equate to an event
which is real or of substance and not insubstantial or nominal24. Thus, if the ACCC wishes
17
18 Arnotts v Trade Practices Commission (1990) 24 FCR 313, 339.
19
20 Stirling Harbour v Bunbury
21 Outboard Marine Australia Pty Ltd v Hecar Investments (No 6) Pty Ltd (1982) 66 FCR
120, 123-4
22 Mertcash
23 http://www.minterellison.com/Pub/NL/201111_MAc/
24 Tillmanns Butcheries Pty Ltd v A/sian Meat Industry Employees Union (1979) 42 FLR
331, 382 (Deane J

to oppose Coles proposed merger, it must establish that the proposed counterfactual will
have a significantly greater level of competition, and also has a high probability of occurring.

BFuture-With-And-Without-Test
In this case, the ACCC ultimately chose to allow the acquisition of the target stores following
its assessment of the counterfactual. In their analysis, the ACCC noted that the IGA stores
had been experiencing declining scales, and also pointed out the willingness of Metcash (the
majority shareholder) to sell the target stores, even if it meant a loss of grocery sales at the
wholesale level25. Furthermore, the ACCC suggested that it was likely that given
Progressives declining sales, it was highly likely that they were going to exit the market in
the near future with the expiry of their leases in the target stores. Moreover, it was highly
unlikely that any other independent supermarkets were going to acquire the stores before the
expiry of the lease or establish themselves afterwards26. Although the ACCC did note that
Aldi was likely to expand into the area and provide more competition, it found the existing
presence of Woolworths and at least one other independent offer significant enough to
constrain Coles future growth and provide competitive alternatives for consumers27. Thus, it
was actually more likely in the counterfactual scenario that competition would decrease as
there would be no new stores to replace those that closed when the target stores leases
expired. Essentially, the ACCC allowed the acquisition because it could not prove that the
acquisition in the counterfactual would have a fundamentally different result to that which
would occur when the target stores leases expired. Ultimately, the ACCC concluded that
even if there was a lessening in competition, it would not be significantly increased by Coles
proposed acquisition.

CFuture Implications
The ACCCs decision has reaffirmed the Courts approach to determining the application of S
50 CCA with regards to defining what constitutes a likely substantial decrease in
competition. Although the ACCCs reasoning may be sound in these circumstances, it is
important to note the wider scope regarding Coles and Woolworths gradual increase in
market share across the country. The Australian United Retailers Limited (AURL) has
expressed concerns over the recent rapid increase in acquisitions by Coles and Woolworths
over recent years, noting that together the two constitute 73% of the Australian market28.
Although in the case examined above the ACCC correctly found that Coles acquisition might
not have substantially lessened competition within those specific geographic markets, the
broader trend is a slow but gradual increase in acquisitions across the country. Worryingly,
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there has been a substantial increase in the price differential between that paid by Coles to
suppliers and the price charged to consumers29. This can be considered a symptom of
decreasing competitiveness as Coles is no longer lowering prices to encourage customers and
is therefore not constrained by competition within the market30.

CONCLUSION
As this paper has demonstrated, the ACCCs decision to withdraw opposition to the proposed
acquisition of the target stores by Coles was the product of careful consideration of the
market and the levels of competition and market power within. In considering the
significance of S 50 CCA, the ACCC applied a counterfactual analysis to determine that there
would not be a significant increase in competition if it had attempted to oppose Coles
proposal. For this reason, it decided to permit the acquisition. As this paper has also
elucidated, whilst the ACCCs actions have reaffirmed the Courts definition of a likely and
substantial decrease in competition, this paper opines that further consideration is required
given the concerns raised by AURL and the increasingly anti-competitive behaviour exhibited
by both Coles and Woolworths.

29 http://competitionpolicyreview.gov.au/files/2014/06/AURL.pdf - citi research

30 boral