43 thoughts on “Monday Message Board

  1. Did anyone see Four Corners tonight regarding the market power of Woolworths and Coles? I was a bit surprised by Graeme Samuels reaction to some evidence of supermarket leases that have clauses excluding any other competitor within 100 metres or for ten years or more (!!). Is that legal? Its not my fiedl but I thought that would be clear restraint of trade under the Trade Practices Act? Does anyone know? If my suspicion is correct, why did Samuels merely say he was “very concerned”? What does concern have to do with it? If it is legal, his view is irrelevant. If it is illegal, then it is Samuel’s job to prosecute and prevent it. Surely it must be one or the other? Concern shouldn’t enter into it. Can someone advise on this please?

  2. Deleted – please observa, no more lengthy slabs of stuff from the MSM, or links with snarky asides. If you want to comment please take the time to formulate your own thoughts as in your next comment

  3. “I was a bit surprised by Graeme Samuels reaction to some evidence of supermarket leases that have clauses excluding any other competitor within 100 metres or for ten years or more (!!). Is that legal?”
    As far as I know it is legal for a couple of reasons Soc. Firstly the distance restriction is not unreasonable(very minor in fact) and secondly neither is the time covenant. These sorts of restrictions are quite common in business sales where the vendor agrees to such terms with the buyer in order to secure the goodwill paid. Basically if you’re the buyer you don’t want the vendor opening up next week across the road after you’ve bought him out. Such covenants are usually much greater than 100 metres (ie 10km or more) although the time period doesn’t usually exceed a decade. They often include a similar covenant regarding the seller working as a principal for another direct competitor. It’s a matter of fair and reasonable restrictions cf harsh and unconscionable (say whole of State for life for example), although the latter can only be tested in the courts ultimately, which is why lawyers draft the terms based on legal perception.

  4. Socrates, a few thoughts off the top of my head.

    observa is mostly right. It is not an unreasonable restraint of trade at common law if (a) it does no more than is necessary to protect the goodwill being acquired from the vendor (ie. it is reasonable as between the parties) and (b) is not contrary to the public interest. That is for your typical sale of business scenario. Restrictive covenants of the kind we are talking about raise other issues (they are generally about anchor tenancies that underpin development). This has not much to do with the TPA (although for obvious reasons the restrictive trade practices (i.e. the competition-related prohibitions) part of the TPA is subject to an exception for provisions of contracts that are solely for the protection of the purchaser in respect of the goodwill of the business).

    Now covenants are covered by the TPA in the sense that they are subject to a competition test. They are unenforceable if they have the purpose or effect of substantially lessening competition in a relevant market. So market definition is critical. In our example the restraint is limited to 100 metres. In reality, the arrangement is exclusivity within a shopping centre. You are really pushing sh*t uphill to convince a court that a 100-metre exclusion zone or shopping centre corresponds to a market, so you’re probably going to have to say that it substantially lessens competition in a broader geographic area. This would require careful study of the surrounding area and the opportunities that customers have to shop elsewhere (keeping in mind their preference for shopping centres). Clearly a lot of the time there will be no issue, not least because the lessor has little to no control over the presence of its tenant’s competitors on land that it does not own (eg. the other shopping centre or stand-alone supermarket down the road). It is a case-by-case thing.

    Finally, you are absolutely right that concern should not enter into it. I suspect Samuel is trying to have it both ways. He knows that in very few circumstances will there be a competition issue, but at the same time he wants to be seen to be on top of the little things that people don’t seem to like. A more charitable interpretation is simply that he hasn’t figured out how far he will take the issue and at the moment can only express ‘concern’. Enforcement action may be just around the corner…

    Cheers
    BBB

  5. you have to admit, legalities or not,

    the amount of groups in soceity which were adversly affected by the actions of the big two were huge, i dont think a business model that generates such widespread resentment through so many different parts of soceity can survive in the long run,

    glad to say i no longer frequent either of them,
    i go to a great little growers market on a sunday morning in fremantle,
    grow most of my own herbs and salad stuff (although the caterpillars are a real pain in the arse),
    get my wine from a great little wine shop and would rather pay a few dollars more to support the nice bloke who runs it,
    and get the few other things from a small italian supermarket/deli

    so it gave me great pleasure to know that i wasnt supporting that turd from woolies and their incredibly grand headquarters

  6. At worst Graeme Samuels has been bought.
    At best Graeme Samuls has no balls.

    The CEO greasballing his way through a clearly very familiar cue card apologist session for Woolworths, was stumbling for an excuse when it came to defending their treatment of truckies wanting to unload.

    No way that could be spun as a positive for ordinary working stiff consumers.

  7. “you have to admit, legalities or not, the amount of groups in soceity which were adversly affected by the actions of the big two were huge, i dont think a business model that generates such widespread resentment through so many different parts of soceity can survive in the long run”

    It’s really a question of whether those grumpy groups have a reasonable gripe or are just being grumpy for the sake of it. They can grump all they like, but the acid test is consumer patronage and that’s a lay down misere. C&W don’t pretend to be all things to all people smiths, just mighty amenable to the mainstream but there’s always room for the specialists, boutiques or particular ambience providers for the likes of yourself. Like the banks with interest rates, C&W are the major messengers on grocery prices we and our politicians all like to shoot so regularly. At the other end of the supply chain are farmers and manufacturers facing rising costs, international competition and the bad news on their selling price from C&W buyers. Again, naturally they want to shoot the big messengers.

    The vast majority of grocery consumers shop at C&W because they largely offer the best value for money, mainly due to economies of scale with their integrated supply and logistics networks. That’s essentially the bitch for other entrants free to enter the marketplace, albeit the IGAs and Aldis, etc are always nipping at their heels. Samuels and Co know that and furthermore, that there’s nothing they can do about it other than implement measures that would raise prices for consumers generally. Still, when the consumers are paying you to look important it always pays to suck up to your ignorant constituency and their political masters with equally ignorant platitudes.

    I’m pleased you can choose not to support turds from woolies and their incredibly grand headquarters smiths. I feel the same everytime I drive through Canberra, but unfortunately I don’t get a choice like you do. Perhaps we disenfranchised could get 4 Corners interested in a grump therapy session for us to feel a bit better about all that.

  8. WOW is doing what is normal and legal for a company with about 45% of its target markets. That’s capitalism; why is anyone surprised? We’d be criticising WES (Coles + Bunnings + coal + insurance…) just as much if it had got its Coles act together.
    The thing that struck me in the programme was that WalMart has only 16% of its target markets. How did we let WOW and WES get so big in theirs?

  9. As both a consumer and supplier, I view the big 2 as pure evil. This article by Paul Sheehan says it best for me and also outlines some more of the shenanigans they get up to.

    In my town, BWS bought out the two Karanas and the largest pub which are the only significant bottle o’s in a town of 14,000. How the hell is that competition?

    The company which buys my dried fruit has to pay large sums for shelf space. How the hell is it competition when the true cost of a product is distorted by that sort of practice?

  10. “In my town, BWS bought out the two Karanas and the largest pub which are the only significant bottle o’s in a town of 14,000. How the hell is that competition?”

    It is sufficient SG that any other supplier is free to set up in town and compete on price. The fact that don’t should tell you something ie noone can supply you any cheaper.

    “The company which buys my dried fruit has to pay large sums for shelf space. How the hell is it competition when the true cost of a product is distorted by that sort of practice?”

    It’s competition because any other company supplying dried fruit has to do the same. Whether the supplier or C&W are ‘paying’ for the shelf space, inevitably the consumer will. How the costs are split for accounting purposes is strictly academic. Get over it!

  11. Observa and Bingo Bango Boingo

    Thanks for the explanation. Regarding this comment:
    “In reality, the arrangement is exclusivity within a shopping centre. You are really pushing sh*t uphill to convince a court that a 100-metre exclusion zone or shopping centre corresponds to a market, so you’re probably going to have to say that it substantially lessens competition in a broader geographic area. This would require careful study of the surrounding area and the opportunities that customers have to shop elsewhere”

    That sort of question DOES get studied on almost every major retail zoning decision. It DOES affect a much larger zone, known as the primary catchment of the shopping centre. Councils (and courts) preclude rivals establishing retail sites within that zone, unless it can be shown that the retail floor space within it is insufficient. This is because there is plenty of evidence (I have done some surveys and modelling myself) that peopel do most of their shopping (especially basic groceries) within a fairly close geographic zone. Hence if there is an exclusion of rivals within the centre, there is effectively no competition for the supermarket. Samuels might say such cases are anecdotal, but almost EVERY Woolworths would be such an anecdote. I would also repeat my general point: if the practice is anti-competitive (and it is) then the law should prevent it, or the law needs to be changed.

  12. On the last point about suppliers accounting for ‘shelf space’, notice that C&W are really outsourcing product advertising to those who know best. ie specific suppliers. In other words, C&W faced with the massive informational problems of such a diverse array of merchandise are opting for the overall benefits of specialisation here. The ‘best’ suppliers get to market via this route, albeit C&W place some unbranded products alongside them. That leaves it up to suppliers how they ultimately want to access consumers with their products.

  13. “It DOES affect a much larger zone, known as the primary catchment of the shopping centre.”

    You need to be careful about centering the analysis exclusively on the shopping centre. It is of course the starting point for any market definition exercise, but its catchment area does not necessarily circumscribe the market. For example, there may be many consumers or potential consumers on the margins of the catchment area (established for zoning purposes) who are as close or closer to a rival shopping centre and/or stand-alone supermarket. You could probably track down some ACCC discussion of overlapping markets.

    “I would also repeat my general point: if the practice is anti-competitive (and it is) then the law should prevent it, or the law needs to be changed.”

    Well not really. All sorts of vertical and horizontal arrangements are anti-competitive, in the sense that they diminish (mostly very slightly and inconsequentially) competition. It’s the ones that actually make a real difference to the customer’s options that ought to be prohibited. But you are right about zoning laws. Yet another government-created and enforced restriction on competition. Hopefully the most recent ACCC review will spur some genuine reform in this area.

    BBB

  14. “I would also repeat my general point: if the practice is anti-competitive (and it is) then the law should prevent it, or the law needs to be changed.”
    Yes BBB lays out the case for anti-competitive intervention and you get the gist of it. What you have to appreciate here is again the benefits of specialistaion for all the parties. Developers do what they do best(think Westfields and Centros perhaps?)and the supermarts do what they do best. It suits the developer raising capital to have the big anchor tenant locked in re cost of capital and spillover effects for the specialties. Every trader benefits from being part of a diverse choice package to attract the punters. Forcing developers to take tenants on a first come first serve basis can be counterproductive in that sense, albeit you might have some competition concerns. The latter are ameliorated by lots of shopping centres, although developers often complain of planning restraints and red tape. Basically we all want our shopping centres close by, just not next door to us and that NIMBY problem.

    Notice Samuael and Co could step in(armed with appropriate legislation) and tear up any perceived restrictive tenancy covenants. However what would that really achieve? C&W could simply vertically integrate and own their own shopping centres at what cost to the consumer? The lack of developer specialisation benefits of course. That’s the tradeoff for the well meaning grumps. Using a sledgehammer to crack walnuts.

  15. yeah, consumer patronage,
    cos the consumer drvies the market, and the big cuddly companies just respond, and advirtising is just helpful information to help us choose even better,
    cos we, the consumer are kings in the market…

    and when we woke up, it was all a dream

  16. I’m not sure if everyone commenting here did see four corners last night? The real issue the program raised was not so much who can put what where but the rebates and discounts WOW and Coles extract from producers through school yard bully tactics which gets offset and passed on as a rise in the cost price for the independents. If it weren’t for the supermarket giant’s influence the local guy could buy at a reasonable price and consumers could afford to shop there. Supermarkets could do anything they wanted with the leases then since most consumers wouldn’t be bothered driving there.

  17. “I’m not sure if everyone commenting here did see four corners last night?”
    Well to be honest Shane I didn’t but I just did and it conformed exactly to what I expected. Essentially a whole lot of people being forced to change by inexorable economic forces driven ultimately by consumers and their quest for lower prices. C&W are the messengers and agents of that change as they hone the supply and logistics chain and deliver economies of scale to the consumer. My take is the overall driver of that is ultimately the increasing use of fossil fuels, coupled with the informational power of computing to extend the reach and breadth of integrated supply. Increasingly the world is the consumers’ oyster, much to the dismay of the odd Mullimbimby Luddites. To reverse that process might require some serious fossil fuel taxing to increase the tyranny of distance again. The rollback pipedream of decentralisation and regionalism or simply shorter supply lines. Now as pointed out above re the EU and fossil fuel price concerns, you can’t seriously raise those prices without reducing other tax burdens(ie to get a large substitution effect without politically prickly income effects) That’s why I’m all for total reliance on resource taxing including heavy carbon taxing. Tinkering about the margins with cap and trade meets special interest pleading, just doesn’t cut it for mine. The village greeny, simpler lifestyle folk need to understand that notion intuitively.

  18. Notice that the CEO of Woollies, Fels and Samuels all tell it like it is, to the background glimpse of that massive fossil fuel driven supply and logistics chain, yet all the little guys being squeezed by it all, haven’t got a clue about the constitution of the marketplace that’s being read to them. All they know is something doesn’t feel right. That’s the constitution of the marketplace stoopids!

  19. Shane, if Coles and Woolworths stopped extracting low prices from primary producers, what incentive would primary producers have to lower their prices to the independents? Their innate sense of fairness and desire to advantage the little guys (who would of course be in the process of getting bigger as the differential between their prices and those of Coles and Woolworths melted away)?

    BBB

  20. Bingo Bango Boingo, when have primary producers EVER had the option of raising or lowering their price?

    They are price takers. They either take what is offered to them, or else they tip it out.

  21. Basically my message to all the pumpkin growers out there is just this. If you don’t like 25-40c/kg for your pumpkin, then quarter it and wrap it and make it available 7 days a week at a convenient spot with easy car parking in my burb and I’ll happily pay you $2.50/kg for it, providing I can pick up any other vegetable, fruit, meat or grocery item I want at exactly the same time and place. It’s that simple really.

  22. SATP, and yet Four Corners apparently asserts that primary producers are able to get better prices from the independents than from Coles and Woolworths. I’d say that particular water-bed has some pretty catastrophic holes in it.

    BBB

  23. No matter where we shop we’ll have to pay globalised prices BBB and ultimately C&W don’t set those-
    http://www.news.com.au/adelaidenow/story/0,22606,24285670-2682,00.html
    http://www.news.com.au/adelaidenow/story/0,22606,24285952-2682,00.html
    Different strokes for different folks all round while our retailers are simply the front line message-bearers. Is it just that we don’t like tall poppy messengers, that we’re so grumpy with C&W? Ditto the banks and oilcos. We never seemed to get as grumpy with the two airlines but is that just because they’re in the discretionary expenditure field?

  24. Please can we do away with the crazy myth that fruit and veg (or anything primarily produced) are cheaper at C&W than at any other supermarket? IGA – prices very similar. Fruit and veg shops or butchers – cheaper. Producers’ markets – much cheaper.

    What you get is convenience and discounted processed food and drink, NOT cheap raw foods.

  25. FDB says “Fruit and veg shops or butchers – cheaper. Producers’ markets – much cheaper.”

    And the suppliers get a fair price which they often don’t at C&W. Most people are fair minded and know or can relate to suppliers who are being poorly treated by C&W, which partly answers observa at #25.

    C&W are offending our sense of fairness.

  26. Bingo Bango Bongo, Which water bed? That independant supermarkets have to pay more for F&V than the majors? No, I believe it. Independants lack the muscle & legal clout to inflict post-contract price reductions upon farmers.

    I stand by my statement that farmers are price takers. They put their product on the block, and have to take whatever is offered.

    The two choices of farmers are to either accept the price offered at the time the product is ripe, or tip their produce out.

  27. “The two choices of farmers are to either accept the price offered at the time the product is ripe, or tip their produce out.”
    Well not quite SATP. Many large growers can hedge against such fluctuations by contract growing for the majors and that’s win win. Many of them do that quite successfully and what happens is the most efficient growers in terms of reliability and regular quality ace that high volume supply chain. Now C&W can pick the eyes out of the rest if they choose but they don’t need one season wonders or put at risk long term contracts for short term gain. As you say that leaves the rest to sell spot or dump it and that’s a roller coaster many will find tough. Also they suffer from lack of economies of scale(and often less suitable environments) of their contract growing competitors. That’s usually why they couldn’t compete in such tenders in the first place and are thus exposed to the vagaries of spot prices. Grow for niche markets(organics) or differentiate on quality (add some stickers) are some of their options, but they’re inevitably higher cost producers. C&W are in the volume mainstream business anyway and are not interested in the niche markets. That’s why most of us choose to shop largely with the majors, but when it comes to say fruit&veg or meat, we may look elsewhere. While C&W are middle of the road on that, in my middle class burb there’s largely upmarket specialty alternatives(dearer quality) while in struggletown burbs they’ve got the cheap stuff. C&W can’t gear their supply chains for that difference, whereas the independents and specialties can. Nevertheless they kick butt for the majority of our purchases, witness their market shares.

  28. Mind you, planned contracts can have a bucket tipped on them by sudden inflation and that may be the cause of the massive outbreak of the grumps now. We Austrian fans would point to the monoply of the printing press there but that’s another story, albeit an overarching one by our reckoning.

  29. Observa: I agree with you.

    Personal anecdote: I prefer to not shop at the majors due to the time taken to get out of the place. 3/4 to 7/8 of my shopping time at C&W (especially W) is spent standing in a checkout queue.
    At an independant supermarket (say IGA) I grab what I want then am whisked through the checkout. This would be the “service of the independants” Graeme Samuels was massaging the viewers with as a sop for his inaction.

    Back to the growers: I could be grabbing the wrong end of the stick, but the impression in the 4corners article was that suppliers of C&W can find themselves facing massive post-contract price reductions. ie, the major has decided to whack your product on special, and you have to take a hit to give the major the same dollar margin (that MUST hurt a grower/supplier) have to take a hit if you wish to be paid on time, take another hit if the major is unable to sell your product fast enough, and so on.

    Having dealt with corporations, I am prepared to believe of them the worst, unless (ha-ha) it is able to be proved otherwise.

    The stuff from the CEO about how they negotiate price with the objective of keeping the supplier in business… that is one of the more straigh-faced leg pulls perpetuated in that 4corners piece.

  30. “Essentially a whole lot of people being forced to change by inexorable economic forces driven ultimately by consumers and their quest for lower prices. C&W are the messengers and agents of that change as they hone the supply and logistics chain and deliver economies of scale to the consumer.”

    I couldn’t agree less. There aren’t any ‘inexorable’ economic forces but rather institutional environments which promote the concentration of market power.

    You’ll get the point quickly, observa, once your income falls faster than the prices you say are falling due to ‘supply chain management’.

    Supply chain management, like Enterprise Agreements, give power to corporate managers and undo the coordination functon which market prices are supposed to achieve. Scrap the Austrians, I’d say, their shelf life has expired.

    Casual market observation: The select items I have been buying from Aldi haven’t changed in price during the past year (no ‘inflation’). By contrast, one of these items has increased in price by 100% at Woollies during the same period.

  31. Aldi in fact have an interesting policy. if they can’t get it cheaper than C&W they simply don’t stock it. That – along with keeping variety down to manage inventory costs – is the reason they sell a more limited range of products than C&W. Such a policy means they are cherrypicking those products where there is scope to put more pressure on suppliers.

    When a retailer screws their suppliers, either the input cost reduction gets passed on or it doesn’t. If it doesn’t then this will be reflected in retail markups. But a fair number of studies have shown Australian retail markups are not large by international standards, so its more likely that it’s us – the customers – who are screwing the farmers. And buying from Aldi will be the hardest screwing of all.

    All that’s as it should be – welfare is best maximised by consumer, not producer, surplus.

  32. derrida derider, I haven’t studied Aldi’s business model (hence casual market observation). However, the item I mentioned, which had a 100 per cent price increase at Woolies, is mineral water – an Aussie brand bought up by Coca Cola a few years ago.

    As for limited range – true Aldi has a much more limited range than Woollies. But then, this gives room for ‘niche suppliers’ (previously known as delicatessen, speciality shops). There are other obvious differences. For example, Aldi makes no attempt to generate a ‘shopping-pleasure’ environment, little or no corporate marketing, few if any ‘specials’, no home delivery service and no shelf-space selling.

    I don’t think the notion of ‘consumer surplus’ is adequate to deal with the issues raised in the 4-Corners program. The notion of ‘consumer surplus’ is well defined for 1 commodity (1 location, 1 good). It cannot deal with the case of ‘loss-leader’, shelf-space selling and other marketing ‘tools’. IMO, the focus on the notion of ‘consumer surplus’ in the ‘micro-economic reform’ program is part of the problem.

  33. “You’ll get the point quickly, observa, once your income falls faster than the prices you say are falling due to ’supply chain management’.”

    What is this ****? The Coles and Woolworths ‘duopoly’ has been around for a while now. The things that Coles and Woolworths sell got cheaper relative to average incomes for the vast majority of the time. Global forces have kicked in to end the party. If Coles and Woolworths aren’t competing to pass on their economies of scale, why are they shown to be the cheapest alternative for the ACCC’s typical basket measures on GroceryWatch? Why aren’t they pricing like the independents?

    BBB

    Coarse language sets off automoderation and causes more work for me. Please avoid it JQ

  34. It’s all about economies of scale Ernestine and suppliers can reach that nirvana. I know of one large supplier that holds around 60% of its market segment and as a result can play the majors at their own game. They spend over a million bucks a year on overall supermarket sales and segment data as well as hefty computing planogram software. Whilst they have their own brand name they also hold a number of other brands side by side that most punters wouldn’t know of. If Coles buyers reckon they want to reduce a product line or shift or reduce some shelf space they’ll immediately crunch the numbers and show them how they’ll lose X thousands of dollars of profit to Woollies if they do and vise versa. Faced with that evidence the buyers roll over since they are answerable for segment profitability. However you can bet your boots the supplier also plays equal hardball with farmers for their main ingredients, or rather that they get to accumulate the most efficient large scale ones. Any prospective supplier/competitor doesn’t stand a chance against their economies of scale, from sourcing raw materials to manufacturing right through to advertising, display analysis and marketing skills. Not all suppliers are bottom of the food chain with the majors. Getting off the bottom where you’re feeding in the dark is what it’s all about, albeit they compete with the world’s suppliers.

  35. As for those central bank monopolists and their profligate ways, they should be stringently controlled- http://www.atimes.com/atimes/Global_Economy/JH29Dj02.html

    Or as the Guru puts it-
    “The item that sent my heart soaring was in an update from the annual Jackson Hole economic confab, where central bankers, various lickspittles and similarly clueless academic weenies all gather around, sniff each other’s butts and talk economic-talk, like they had a freaking clue what in the hell they were doing, which they obviously don’t, as evidenced by the inflation and its attendant suffering and misery that is growing like a malignant cancer around the world as a result of their glaring monetary incompetence and despicable intellectual and criminal corruptions.

    The article is titled “Bankers Debate Asset Pool And Arbitrage” by Krishna Guha, and it starts out dryly reporting the same old Federal Reserve grab for power blah blah blah and that “banks might have to pool their troubled mortgage assets into giant special resolution vehicles” that are blah, blah blah the government will pay for everything blah, blah, blah, and a Fed spokesman says that everything will be wonderful again very soon blah, blah, blah.

    You know; typical Fed crap. But then, suddenly, towards the end, entirely out of nowhere, Mr Guha writes that these laughable lowlife central banking morons might be getting a little smart as regards the Austrian school of economics! My heart leaps for joy to read that, incredibly, “Central bankers agreed that they would have to pay more attention to measures of credit extension in future.” Wow! Fabulous! Wonderful!

    The Fed and the other central banks say they are finally, after all these years, going to restrict credit and keep the money supply from growing, to keep inflation from growing, like as with gold-backed money?”

    Yeah that’ll be the day. Their massive cumalative problem now is how to curb monetary expansion without sending us back to the 1930s. What a choice! 1930s Depression or 1970s stagflation. Keep your eye on Wall Street in October for the answer folks.

  36. Re # 37. Yes, the games described are quite well known – they would not be as easy to play if there are ‘many’ agents (both suppliers and buyers in the marketing structure). No, ‘economies of scale’ is not quite enough here. I found the definitions on the following web-site quite good in introducing relevant notions’.

    http://www.bellevuelinux.org/economies_of_scale.html

  37. “I found the definitions on the following web-site quite good in introducing relevant notions.”

    Yes it does, but it may overlook the complexity of amortising fixed costs. ie that there are different levels at which fixed costs are attained(swallowed?) and subsequently amortised to lower marginal costs even further than a competitor. Take the 60% market segment supplier I mentioned. Now they may have been in a supply situation with a number of like competitors, each with a plethora of independent reps spread across the country trying to push their barrow with each store. At some stage our eventual market leader bites the bullet for that sales data and planogram software and wears the expense of training and implementation. This is a very lumpy fixed cost to swallow, well up the production curve, but eventually it will pay dividends. Firstly in understanding what sells best and eventually in head office command and control, rather than all those independent reps running about in the dark like their competitors. As they quickly grow market share they accumulate the most efficient large growers behind them, because increasingly they offer the best hedging facility in the marketplace. The squeeze is on for their competitors and as they are crowded out there’s less chance of them ever making that first adopter, quantum leap. Eventually they reach that mature 60% share where their new marginal costs are equal to their lesser competitors. Should any of them threaten that position by loss leading they know instantly and can respond accordingly.

    This sort of process is what drives the thinking behind single desk grower marketing, although inevitably there are the big agribusiness producers that have a vested interest in breaking ranks, or if you like falling in behind our dominant market supplier above. That’s win/win for both. Essentially economies of scale can be lumpy processes, which pumpkin growers rueing that $2.50/kg final sale price in my burb can well appreciate.

  38. Re 40. Yes, economies of scale may be ‘lumpy’ (ie apply only for a fixed range). But this notion does not describe the power of some (retail) corporations to change relative prices in the input and output markets.

    Surely, you would agree that as soon as one moves ‘sufficiently’ far away from price taking behaviour (due to either administratively fixed prices or ‘large numbers’ of ‘small agents’ in suitably defined geographical areas) then generalisations become impossible (strategic management texts contain business history cases couched in the language of game theory but without requiring prior (and ‘independent’) study of game theory; none of these cases may be reproducible). For example, I would suggest that the huge market share of Coles and Woollies in their segment of the retail sector in Australia, relative to other countries, is partly due to the unique development path of the Australian economy(population growth at a time when transport and communications technology were advanced, relative to say the UK during its high population growth era and multinational corporations were no longer ‘niche players’). One of the question arising from the program is: Is this state of affairs ‘sustainable’ and ‘desirable’ (climate, water, independent food producers, income distribution, …, sufficient ‘competition’ ….)

    Anyway, your 60% market share case may be quite interesting when one looks at it in detail.

  39. masterofforexpips, I was kinda worrying why you’re not sunning yourself in the Maldives with your feet in a bucket of champers, instead of lowering your odds and slowing the flow of Moet, by entreating us all to follow you. Alas, you are preaching to one with a splash of the dismal science and hence an awareness of the fallacy of composition at the very least. However, I’m not a greedy fellow, so if you’ll kindly advance me my grubstake and place it all on your sure thing for me, I’ll gladly go halves with you in our assured profit. Please, please don’t embarrass me with your overwhelming gratitude here but understand it’s just the warm fuzzy kinda fellow I really am. I’ll look forward to our meeting personally partner.

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