Two weeks ago, the Australian Competition and Consumer Commission (ACCC) won a case against Woolworths but lost a case against Coles. Both cases involved undertakings given by Coles and Woolworths regarding so-called ‘shopper docket’ fuel discounts. Why have these discounts been targeted by the ACCC?
Since the early-2000s, both Woolworths and Coles have branched out from grocery retailing into petrol retailing. Woolworths, which started the trend in the late 1990s, operates a range of Caltex/Woolworths branded outlets. Coles has a similar arrangement with Shell.
The details of the arrangements differ. But by operating a chain of petrol retail outlets, both supermarkets have been able to link grocery sales and petrol sales. If a customer spends more than a specified amount (generally at least $30) on groceries, the customer receives a ‘voucher’ that allows him or her to receive a discount at the supermarket’s petrol outlets. The discount is usually 4 cents per litre but has been as high as 30 cents per litre or more during special promotions.
These discounts are valuable. A large car has a petrol tank that holds more than 50 litres, so a 30 cents per litre discount is worth $15 or more on a ‘fill up’. And given that the retail margin on petrol is probably around 8 cents per litre, even a 4 cent discount means a 50% drop in retail margin.
The ACCC was concerned about the effect of these discounts on petrol retailers who are not connected with the supermarkets: both independents like the United group, and chains like BP and 7-Eleven. So last year the ACCC acted. They negotiated agreements, called undertakings, from Coles and Woolworths that will limit the discounts for supermarket shoppers to 4 cents per litre. The court cases were about the interpretation of these undertakings.
So the ACCC has prevented high petrol discounts. Needless to say, some parties thought this was odd behaviour for a body that is the watchdog of consumers’ interests. So, what is the economics to back up the ACCC’s stance?
Economists have long been concerned about the potential for bundling to be used as an anti-competitive tool. Bundling makes competitive sense when there is a cost-saving due to joint production. For example, if a supermarket builds a petrol outlet in its carpark, it is likely to be pro-competitive if the supermarket provides a bundled discount between its supermarket and petrol sales. The petrol outlet is convenient for shoppers and the supermarket can make better use of its car parking space. Indeed, Woolworths original model followed this approach.
But the bundling of completely independent products, like groceries at one location and petrol at a completely difference disconnected location, can be used to lessen competition. To see this, suppose that consumers view all petrol as pretty much the same. Competition in retail petrol sales will be based purely on price. But if petrol retailers are able to divide groups of buyers and offer selective discounts, then they can effectively divide the market and reduce competition. It would clearly be undesirable if one petrol retailer just said to another retailer, “You take the north side of town and I will take the south side”. Similarly, it could be anti-competitive for one petrol retailer to say to another retailer, “You take the Coles grocery shoppers and I will take the Woolworths shoppers”.
With no obvious cost savings between most supermarket and petrol outlets, the ACCC was concerned that fuel discounts had become a way for Coles and Woolworths to divide the petrol market and reduce competition.
The problem for the ACCC is that bundling can help some consumers. Bundling can help retailers to price discriminate. If large grocery shoppers are also large buyers of petrol, then it makes sense for supermarkets to use the size of the grocery bill to try and attract these customers to their petrol outlets. Fuel discounts that increase with the amount spent on groceries is one way to do this. So fuel discounts may represent a real benefit for large families without harming competition.
So the ACCC had to make a call. It was concerned about the anti-competitive effects of the shopper dockets and gained the undertakings.
But now it is time for the ACCC to declare victory and move on. The court case involved Coles and Woolworths providing fuel discounts to customers who purchase groceries from a convenience store attached to a petrol station. Could these be anti-competitive? Possibly. But the economics is not clear. And there is a clear cost-saving and potential for price discrimination in linking petrol and grocery sales at the same location.
The ACCC has acted to prevent the fuel discounts that were most likely to be anti-competitive. But not all fuel discounts will be anti-competitive. Some will be pro-competitive and economics can only provide limited guidance. In such a situation, the ACCC can be happy with what it has achieved, but should not go further. Otherwise it may harm rather than help competition.
The ACCC media release on the Federal Court decision is available at:
Joshua Gans and I have some work on shopper dockets. A technical piece is available at:
A non-technical piece is in the Australian Economic Review, Vol. 37, No. 3, pp. 311-316, September 2004 .
For other articles by Stephen (and other economists) see the CoRE Economics Blog at www.economics.com.au and Stephen’s column at the Conversation, https://theconversation.com/profiles/stephen-king-1374/articles