QIW Retailers Ltd v Davids Holdings P/L & Ors. Attorney-General of the Commonwealth v Davids Holdings P/L

Re: QIW RETAILERS LIMITED and ATTORNEY-GENERAL OF THE COMMONWEALTH
And: DAVIDS HOLDINGS PTY LIMITED and OTHERS
Nos. QG3012 and NG575 of 1992
FED No. 288
Number of pages - 125
Trade Practices
(1993) ATPR 41-227
(1993) 114 ALR 579
(1993) 42 FCR 255

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Spender J(1)

CATCHWORDS

Trade Practices - market dominance - 'market' definition - market dimensions - product, geographic and functional levels - whether there existed a market for the wholesale supply of grocery items to independent retailers in Queensland and northern New South Wales - whether the 'market' should include retailing - whether QIW and Davids were in competition, both with each other and with the chain stores - whether there was substitution between QIW and Davids as the source of supply to independent retailers - whether QIW and Davids were 'vertically integrated' suppliers - whether there was the potential for new entrants into the 'market' - whether there were any barriers to entry - whether, if Davids took over QIW, the merged entity would be in position to dominate the 'market'.

Trade Practices Act 1974; ss. 4, 4E, 50 and 80(1A)

Trade Practices Legislation Amendment Act 1992; s. 21

Application by BHP Co. Ltd for review of notice by the Commission re purchasing agreement with Koppers Pty Ltd (1981) ATPR 40-203

Applications of Southern Cross Beverages Pty Ltd, Cadbury Schweppes Pty Ltd and Amatil Ltd (1981) ATPR 40-200

Arnotts Ltd v Trade Practices Commission (1990) 24 FCR 313

Australia Meat Holdings Pty Ltd v Trade Practices Commission (1989) ATPR 40-932

Concha v Murrietta (1899) 40 ChD 543

Hoffmann-La Roche v Commission (1979) 1 ECR 461

J. Ah Toy Pty Ltd v Theiss Toyota Pty Ltd (1980) ATPR 40-155

Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd (1987) 75 ALR 581

O'Brien Glass Industries Ltd v Cool and Sons Pty Ltd (1983) ATPR 40-376

Outboard Marine Australia Pty Ltd v Hecar Investments No. 6 Pty Ltd (1982) 66 FLR 120

PQ v Australian Red Cross Society (1992) 1 VR 19

Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Company

Limited (1989-1990) 167 CLR 177

Re G. and M. Stephens Cartage Contractors Pty Ltd (1977) ATPR 40-042

Re Howard Smith Industries Pty Ltd and Adelaide Steamship Industries Pty Ltd (1977) ATPR 40-023

Re John Dee (Export) Pty Ltd (1989) ATPR 40-938

Re Queensland Co-operative Milling Association Ltd, Defiance Holdings Ltd (1976) ATPR 40-012

Re Tooth and Co. Ltd; In re Tooheys Ltd (1979) ATPR 40-113

Singapore Airlines Limited v Tapribane Tours (W.A.) Pty Ltd (1991) 33 FCR 158

Top Performance Motors Pty Ltd v Ira Berk (Queensland) Pty Ltd (1975) 24 FLR 286

Trade Practices Commission v Ansett Transport Industries (Operations) Pty Ltd (1978) ATPR 40-071

Trade Practices Commission v Australia Meat Holdings Pty Ltd (1988) 83 ALR 299

Trade Practices Commission v T.N.T. Management Pty Ltd (1984-1985) 6 FCR 1

Tru Tone Ltd v Festival Records Retail Marketing Ltd (1988) 2 NZLR 352

United Brands v Commission (1978) 1 ECR 207

E.S. Mason, "Price and Production Policies of Large Scale Enterprises" (1939) American Economic Review Supplement Professor Maureen Brunt, "'Market Definition' Issues in Australian and New Zealand Trade Practices Litigation" (1990) 18 ABLR 86 Professor Maureen Brunt, "The Use of Economic Evidence in Anti-trust Litigation" (1986) 14 ABLR 261

N.R. Norman and P.L. Williams, "The Analysis of Market and Competition under the Trade Practices Act: Towards the Resolution of Some Hitherto Unresolved Issues" (1983) 11 ABLR 396

Dr Geoffrey Walker, "Product Market Definition in Competition Law" (1980) 11 F L Rev 386

Dr Geoffrey Walker, "Casenote on 'Top Performance'" (1976) 50 ALJ 89

HEARING

BRISBANE

#DATE 30:4:1993

ORDER

THE COURT DECLARES THAT:

The acquisition by the first respondent, Davids Holdings Limited, as proposed in the purported Part A statement lodged with the Australian Securities Commission on June 17, 1992 of the issued shares in the applicant, QIW Retailers Limited, would be a contravention of s. 50 of the Trade Practices Act 1974 (Cth).

AND THE COURT ORDERS THAT:
1. Davids Holdings Pty Ltd is to pay the costs of QIW Retailers Limited in these proceedings (Proceedings No. QG 3012 of 1992) and in Proceedings No. NG 575 of 1992.

2. Davids Holdings Pty Ltd is to pay the costs of the applicant in Proceedings No. NG 575 of 1992.

THE COURT DIRECTS THAT:
The Registrar set the matter down for further directions after consulting with the parties.

THE COURT GRANTS:
Liberty to apply.

THE COURT ORDERS THAT:
The first respondent be restrained by itself, its servants or agents, or otherwise, from directly or indirectly acquiring a majority of the issued shares of the second respondent.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

SPENDER J These two proceedings arise out of attempts by Davids Holdings Pty Limited ('Davids') to take over QIW Retailers Limited ('QIW').

In Proceedings No. QG 3012 of 1992 Q.I.W. is the applicant and Davids is the first respondent. The second to tenth respondents are subsidiary companies of Davids. QIW seeks a declaration that a takeover of QIW by Davids would constitute a contravention of s. 50 of the Trade Practices Act 1974 (Cth) (the 'Act'). That application, which was filed on 29 June 1992, seeks other relief but this trial is concerned only with the s. 50 issue.
In Proceedings No. NG 575 of 1992 the Attorney- General of the Commonwealth is the applicant and Davids and QIW are the respondents. The Attorney-General is the minister responsible for the administration of the Trade Practices Act 1974 (other than Part X and ss. 150-153 inclusive). The Attorney-General seeks an injunction restraining Davids from acquiring or offering to acquire directly or indirectly any shares in or assets of QIW. The basis of the application is that such acquisition would contravene s. 50 of the Trade Practices Act. The claim by the Attorney-General on its face relates to any shares, but the application has to be read in the context of a Part A statement by Davids lodged under s. 644 of the Corporations Law by Beerworth and Partners Ltd with the Australian Securities Commission on 17 June 1992.
In Proceedings No. QG 3012 of 1992, QIW, as applicant, seeks a declaration that the acquisition by Davids, as proposed in the Part A statement, would be a contravention of s. 50 of the Trade Practices Act.
Davids currently holds and is entitled to approximately 20% of the issued share capital of QIW. The Part A statement lodged on 17 June 1992 followed an earlier Part A statement lodged on or about 27 May 1992 with the Australian Securities Commission.
In the statement of 17 June 1992 it is said that Davids' principal activity is that of a holding company for the operating subsidiaries in the Davids group. The principal activities of the Davids group are the wholesaling and distribution of groceries and liquor.
The maximum amount that Davids could be required to pay if every shareholder accepted the offers is approximately $120m. By cl. 11.1 of the Part A statement:

" Davids would prefer QIW to remain a listed public company and will be satisfied if it merely acquires its minimum acceptance level of 50.1%. "

By cl. 11.2, if its takeover scheme is successful, Davids proposes, following completion of the scheme, to dispose of QIW shares to which it becomes entitled in excess of approximately 55%, to institutional investors.
Clause 12.1 was in these terms:

" Following completion of the Takeover Scheme and subject to requisite shareholder approval, Davids proposes to procure the merger of QIW and Davids Group's existing Queensland grocery and liquor distribution and cash and carry operations ('Davids Queensland'). The merger would be effected by QIW purchasing the business operations of Davids Queensland. Davids does not propose to redeploy QIW's fixed assets.

Davids will thus continue QIW's business and will seek to enhance it capacity to service both QIW's existing customers and an expanded customer base. The merger of the business of Davids Queensland with the business of QIW is expected to result in improved service to QIW's general merchandise range and the inclusion of liquor in QIW's cash and carry range.

The offer was $6.75 cash per QIW share.
Section 21 of the Trade Practices Legislation Amendment Act 1992 (No. 222 of 1992) came into force on 21 January 1993. That Act amended s. 50 but s. 21(2) has the effect that if a proposed acquisition was the subject of any court proceedings under the Trade Practices Act in connection with the operation of s. 50, the principal Act continues to apply to that proposed acquisition as if the amendments had not been made. The amendments effected by that Act prescribe a "substantial lessening of competition in a market" test as the criterion by which acquisitions might be prohibited. However, the test presently relevant is that contained in s. 50(1) before the amendments of the 1992 Amendment Act. Section 50(1) read:

" A corporation shall not acquire, directly or indirectly, any shares in the capital, or any assets, of a body corporate if -

(a) as a result of the acquisition, the corporation would be, or be likely to be, in a position to dominate a market for goods or services..."

Section 50(3) provided:

" In this section -

(a) a reference to a market for goods or services shall be construed as a reference to a substantial market for goods or services in Australia in a State in a Territory; and

(b) a reference to dominating a market for goods or services shall be construed as a reference to dominating such a market either as a supplier or as an acquirer of goods or services in that market. "

Section 50(3) therefore contemplated dominance in one of two alternative ways, i.e., either dominating a market as a supplier of goods or services, or dominating a market as an acquirer of goods or services in that market. Section 50 is contained in Part IV of the Act.
By s. 80(1A) of the Act a person, other than the Minister or the Trade Practices Commission, is not entitled to make an application for an injunction under s. 80(1) by reason of the fact that a person is proposing to contravene, or is proposing to be involved in a contravention of, inter alia, s. 50.
In Queensland Wire Industries Pty Ltd v. Broken Hill Proprietary Company Limited (1989-1990) 167 CLR 177 ('Queensland Wire'), Mason CJ and Wilson J said at 191:

"...the object of s. 46 is to protect the interests of consumers, the operation of the section being predicated

on the assumption that competition is a means to that end."
16. Mr R. Gotterson QC, senior counsel for the Attorney-General, submitted that the 'consumers' relevantly in this case were the consumers of the wholesale facilities and services provided by those who wholesale to them and that it would be wrong to regard consumers as being necessarily confined to the public at large.
17. Queensland Wire was not concerned with s. 50 but with s. 46 of the Trade Practices Act which section is concerned with misuse of market power. B.H.P. was the sole producer of Y-bar, used for rural fencing. Its refusal to supply third-party producers with Y-bar was found to contravene s. 46. Pincus J at first instance found that B.H.P. had a substantial degree of market power in the market for steel and steel products. The geographical definition of the market did not loom large. Noting the factual and legal differences, the case nonetheless provides valuable guidance on the questions of market identification and the associated issue of dominance.
18. In Arnotts Ltd v. Trade Practices Commission ('Arnotts') (1990) 24 FCR 313, a Full Court of the Federal Court said at 328: " The role of s. 50 is to maintain competitive markets by restraining monopolisation and prohibiting mergers that will produce a non-competitive market. "

The term 'market' is defined in s. 4E of the Act, which was inserted in 1977, subsequent to Top Performance Motors Pty Ltd v. Ira Berk (Queensland) Pty Ltd ('Top Performance') (1975) 24 FLR 286. It provides as follows:

" For the purposes of this Act, unless the contrary intention appears, 'market' means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the firstmentioned goods or services. "

This definition of "market" was intended to give legislative effect to the recommendations of the Trade Practices Review Committee ('the Swanson Committee'). In Singapore Airlines Limited v. Tapribane Tours (W.A.) Pty Ltd (1991) 33 FCR 158 ('Singapore Airlines'), French J, with whom O'Loughlin J and I agreed, delivered the leading judgment. French J said at 167-8:

" ...the Swanson Committee (recommended)...that the Act require that in the determination of a market for particular purposes, regard should be had to substitute products which is defined as: 'products which have a reasonable interchangeability of use and which have high cross-elasticity of demand, that is where a small decrease in the price of a particular product would cause a significant quantum of demand for a similar product to switch to the product in question': para. 4.22

It is that recommendation which was embodied in s. 4E as introduced in 1977 and is reflected in that section following the 1986 amendments. "

Section 50(3)(a) requires that for the purposes of s. 50, a market for goods or services has to be a substantial market.
The central questions in each of these proceedings, in relation to s. 50, are those of market definition and dominance.

The Pleadings 23. In the application by the Attorney-General it is admitted that QIW carries on business, inter alia, in Queensland and in northern New South Wales as a supplier by wholesale of a range of groceries of the kinds enumerated in a schedule to the Attorney-General's statement of claim ('the grocery range') to independent retailers. Davids admits that a subsidiary company or companies of it carries or carry on business, inter alia, in Queensland and northern New South Wales, as a supplier by wholesale of the grocery range.

The term 'independent retailers' is a reference to retailers of groceries who are not major national chains of stores, namely, the Woolworths, Coles and Franklins chains of stores. The Attorney-General asserts, and Davids denies, that Davids is a supplier by wholesale of the grocery range to retail grocery stores operated by independent retailers. Also in issue is the Attorney-General's claim that, in supplying the grocery range by wholesale to independent retailers, Davids and QIW are not in close competition with the three major national chains. He further asserts that, in purchasing groceries by wholesale from the grocery range supplied by Davids and QIW in Queensland and northern New South Wales, the independent retailers are not in close competition with the retail stores operated by the three major national chains. The Attorney-General further asserts, and it is denied by Davids, that in that supply, Davids and QIW are not constrained, or are not constrained to any significant degree, by the prices at which major national chains sell groceries by retail.
It is admitted that the demand by independent retailers for wholesale groceries is derived from the demand on the part of customers at the retail grocery stores operated by independent retailers.
There are other issues asserted by the Attorney-General and either denied or not admitted by Davids in the pleadings. They include the assertion that the retail market served by the independent retailers is distinct from that served by the three major national chains, that those independent retailers are not in close competition with the major national chains on price, but offer greater convenience in terms of number of stores, location, opening hours and product lines, for all of which they charge a premium. The Attorney-General says that the major national chains do not supply the grocery range by wholesale to independent retailers in Queensland or northern New South Wales and they are unlikely to do so; it would be extremely difficult to supply the grocery range by wholesale into Queensland and northern New South Wales from distribution centres outside Queensland; and it would be extremely difficult for independent retailers to obtain groceries within the grocery range directly from the manufacturer, producer or importer to any significant degree.
The Attorney-General further says that the wholesale supply of groceries within the grocery range to independent retailers in Queensland and northern New South Wales from distribution centres outside Queensland is insignificant and is likely to remain insignificant because the costs involved render it unattractive for the operators of such distribution centres and the independent retailers.
The Attorney-General says that there is a substantial market in Australia, in Queensland, or in Queensland and northern New South Wales for the supply by wholesale of the grocery range to independent retailers ('the Queensland market' or 'the Queensland and New South Wales market'). The Attorney-General says that there are high barriers to entry to the Queensland market or to the Queensland and northern New South Wales market.
It is admitted by Davids that the combined financial strength of Davids and QIW would give rise "to an ability to supply groceries to independent retailers in Queensland and northern New South Wales below cost for a sustained period".
The Attorney-General asserts that by reason of the matters pleaded, were Davids to acquire further shares in the capital of QIW or, in the alternative, a majority of the shares in QIW, it would be, or be likely to be, in a position to dominate the Queensland market or the Queensland and northern New South Wales market, in contravention of s. 50(1) of the Act.
There are no issues between the Attorney-General and QIW on the pleadings in the Attorney-General's application.
In the proceedings by QIW, the issues are substantially similar, although there are a number of other matters in addition to the s. 50 issue. QIW propounds either the 'Queensland' or 'Queensland and northern New South Wales' market pleaded by the Attorney-General. QIW alleges that it and Davids compete with each other for the supply of a range of groceries by wholesale to independent retailers in Queensland or, alternatively, in Queensland and northern New South Wales, and QIW alleges that if Davids acquires all or a majority of the shares in QIW, it will be, or would be likely to be, in a position to dominate the market, in that it would control the only competitor in the market, namely, QIW and the second to tenth respondents and any other members of the Davids group whose assets are comprised in Davids Queensland.
QIW says that the entry of a new participant into the market would be prevented or discouraged by:

(i) the high capital costs associated with the establishment of a new wholesale warehouse and wholesale distribution network;

(ii) the low yield that a new participant could expect, having regard to the dominance of the market by the merged entity;

(iii) the difficulty of obtaining sufficient market share to make available economies of scale through large volume buying;

(iv) the freight costs involved in conducting business in the market from a centre outside Queensland;

(v) the logistics of managing wholesale stock distribution in Queensland from a centre outside Queensland;

(vi) the combined financial strength of QIW and Davids giving rise to an ability to supply groceries to independent retailers below cost for a sustained period.

QIW alleges that the major national chains, Woolworths, Coles and Franklins, do not participate in the market and are not likely to do so.
Davids, in its defence, admits that unless restrained it intends to make offers to all of the members of QIW to acquire all of their shares in QIW on the terms set out in the Part A statement filed with the Australian Securities Commission on 17 June 1992.
The market or markets for which Davids contends was ultimately identified by Mr C.A. Sweeney QC, senior counsel for Davids, as:

" The market for the supply and distribution of grocery products to consumers. "

Mr Sweeney QC indicated that:

" By that description we mean to include both the wholesale and the retail level of activities. We submit that the appropriate geographic definition of the market is Australia wide, or alternatively, the geographic area consisting of the eastern mainland states. "

At the commencement of the hearing, Mr Sweeney QC had said that in relation to the geographic ambit of the market:

" Because (a) number of the participants organise their affairs on a national basis, or at least on a basis of the eastern seaboard, the geographic market is either Australia wide or consist of the eastern (mainland) states. "

He said in relation to the functional level of the market:

" The market is either the market for the distribution of groceries from supplier to consumer or, alternatively, it is the market for supply by wholesale of grocery products. If it is the latter, the expression 'supply by wholesale' needs to be given the following extended meaning: it needs to encompass not only the mechanical acts necessary to effect supply, but also the extensive retailer support, services, and infrastructure which every wholesale supplier provides. In the case of the retail chains, those support services form part of their fully integrated operations, and in the case of the independent wholesalers and focussing in Queensland on QIW and Davids, each of those firms supplies a wide range of retailer support services.

Furthermore, the expression needs to encompass the phenomenon, especially in QIW's case, of the firm actually establishing and operating its own retail outlets for the purpose of appropriating to itself retail market share so that, by satisfying that retail market share, it may enhance its share of total wholesale sales. "

While the issues for decision are few in number, a very large body of evidence was led in each proceeding. I will set out my findings on that evidence, then consider the authorities touching the questions for decision, and then look in some detail at the evidence of experts called in relation to the resolution of those questions.

Factual Background
39. QIW is a public company incorporated in Queensland and listed on the Australian Stock Exchange (Brisbane) Limited. It is the ultimate holding company of a group of companies. The main operating company within that group is Queensland Independent Wholesalers Limited. QIW has co-operative attributes in that approximately 25% of its shares are held by employees of QIW and the independent retailers with whom it trades. The Chief Executive Officer of QIW and of each of the companies in the QIW group is Dr Graeme Bullock, who was appointed to that position on 27 April 1992. He has a Bachelor of Science with First Class Honours in Chemistry and a Doctor of Philosophy in Chemistry.

The corporate structure of the QIW group is as follows:

QIW Retailers Limited is the ultimate holding company of the group and derives its income by providing management services to group companies and receiving dividends. It is the employer of senior executive staff.

Queensland Independent Wholesalers Limited is one of three subsidiary companies of QIW Retailers Limited and is the main operating company within the group. Its major activity is wholesaling groceries to independent retailers in Queensland and northern New South Wales, but it has not insignificant retailing activities. Queensland Independent Wholesalers Limited has three wholly owned subsidiaries: (i) Wholesale Liquor Distributors Pty Limited, formerly Cheap Foods Supermarkets Limited, which owns wholesale liquor licences not currently in use: (ii) Moucharo Pty Ltd, which owns the Q-Superstore retail property at Woodridge: and (iii) Tickle Properties Pty Ltd, which owns the Cash and Carry warehouse property at Kedron. Tickle Nominees Pty Ltd (a wholly owned subsidiary of Tickle Properties Pty Ltd) is the trustee of staff superannuation schemes and the employees' share incentive scheme.
The principal business activity of the QIW group is wholesaling to independent retailers in Queensland and northern New South Wales. That business was founded by the Tickle family in 1888. The Tickle family disposed of their interests in the business in about 1983 and their shares were acquired by a group of approximately 1200 independent retailers. QIW Retailers Limited was formed as the holding company of the group in 1986 and was then listed on the second board in December 1987 and on the main board of the Australian Stock Exchange (Brisbane) Limited in November 1990. According to Dr Bullock, employees of QIW hold 3.6% of the shares in QIW Retailers Limited.
The second of the subsidiary companies of QIW Retailers Limited is Denham Brothers Limited ('Denham Bros'). Denham Bros was formerly a retail trading company. That company now owns the fixed assets acquired on QIW's takeover of the Denham Bros retail chain, which consists mainly of property and fixtures relating to Denham Bros' retailing operations and includes a fresh produce wholesaling operation in Rockhampton.
The company has four wholly owned subsidiaries, all of which are dormant.
Retail Stores Development Finance Limited is the third subsidiary of QIW Retailers Limited and is an investment company, the principal function of which is to invest surplus operating funds in the short term money market. It has a wholly owned subsidiary which is dormant.
QIW is principally concerned with the purchase, warehousing and supply by wholesale of an extensive range of household and domestic stores and merchandise which, for convenience are referred to as 'groceries'. The products supplied by QIW are staple items and are not different in kind from, and for the most part are identical to, the groceries and other items supplied by Davids and with the groceries and other items sold by the major national chains to retail customers.
QIW also provides independent retailers with a range of services and support intended to assist in developing the businesses, business skills, market share and profitability of those independent retailers. Davids provides similar services.
For the most part, QIW's customers are independent retailers who own and operate their own retail businesses, although QIW also supplies to other categories of customers, to which I will shortly refer.
QIW carries on its operations through seven operating divisions: the Central Distribution Warehouse Division; a Variety Division; a Food Services Division; a Cash and Carry Division; a Refrigerated Food Division; a Fruit and Vegetable Division; and a Retail Operations Division. Each of these divisions operates as a separate profit centre, and over all its divisions QIW employs approximately 1600 people. The head office is located at Rocklea and housed within QIW's Central Distribution Warehouse complex. Head Office undertakes various administrative and service functions which are operated as separate cost centres. The financial controller of the group is Mr Robert Krohn and the marketing manager of QIW is Mr I. McCellan.
The Central Distribution Warehouse at Rocklea consists of two adjoining buildings with floor areas aggregating approximately 395,000 sq.ft., the main building being 320,000 sq.ft. The operations manager of the Central Distribution Warehouse, Mr William Window, indicated that the warehouse received "free into store" bulk deliveries of a range of products (other than perishable, frozen and chilled and food service goods) from manufacturers, warehouses those products, assembles on to pallets orders received from those QIW customers who are supplied from the warehouse, and delivers the order into the possession of a carrier. The carrier is either arranged by the customer or arranged by QIW at the customer's cost.
There are approximately 12,120 product lines, including 6,284 dry grocery lines and 4,805 variety lines. Variety products include some hardware lines.
As at 6 October, 1992, an inventory value of approximately $19.5m was maintained at the warehouse, being somewhere between 850,000 and 900,000 cartons. The stock is turned over between 18 and 20 times annually. Stock is received into the warehouse at an average rate of 1000 pallets a day and unloading is carried out by a fleet of 25 forklifts, which are also used to transport stock to and from the two warehouse buildings and between racks within the main warehouse for stock rotation and dispatch. The warehouse is operated on a first in, first out basis, and operates on two shifts between 6.30 a.m. and 10.30 p.m. There are, according to Mr Window, approximately 800 customers who are independent retailers who comply, generally, with the warehouse minimum quantity order requirements. The warehouse also supplies QIW Cash and Carry warehouses and QIW operated retail outlets; that is to say, Denham Bros, Q-Superstore and Grafton.
There are five product category departments within the warehouse and orders are assembled by a department and consolidated on to pallets for dispatch. The average order size is 3 to 4 pallets. There are usually about 70 cartons to a pallet and palleted orders have an average wholesale value of approximately $1,000 per pallet.
About 95% of the orders from independent retailers are received via T.E.O.S. (Tickle's Electronic Ordering System). This system receives orders electronically 24 hours a day by means of a coded telephone message. The computer produces an order form, a customer invoice and sheets of adhesive product labels. The order is "picked" from these labels. The computer sorts the labels into a warehouse location sequence to assist "pickers" and invoices are sorted into product category groupings to assist independent retailers in checking their orders on delivery. Each "picker", being the employee who selects ordered cartons and manually stacks them on to a pallet, moves along the aisles between the racking, and working from the labels selects the ordered number of cartons of each product, stacking those cartons onto a pallet which is moved on an electric pallet jack. The sequence in which goods are picked is largely predetermined by the computer, having regard to the most efficient method of packing the particular order, when it prints the sheets of labels. There are minimum quantity restrictions. After the order is picked the pallets are taken to the dispatch area to await collection by a carrier. Deliveries from the warehouse to QIW Cash and Carry outlets, Denham Bros retail stores and Q-Superstore, are picked and assembled in the same manner as orders from independent retailers, although the system of ordering and invoicing differs for Cash and Carry.
Approximately 200 carriers are loaded each day at the Rocklea warehouse. In approximate percentage terms by volume, orders to the Queensland metropolitan area, being Brisbane, the Gold Coast and the North Coast, are 25%; country Queensland 60%; northern New South Wales 10-12% and Northern Territory, Thursday Island 2-3%.
In addition to the Central Warehouse Division, there is a Refrigerated Foods Division at Murrarie in Brisbane. QIW has contracted warehousing, assembly and packaging of chiller and frozen products to Frigmobile Pty Limited. The contract rate is based on a fixed weekly remuneration and a variable carton picking rate. The capacity of the warehouse at Murrarie is approximately 3,000 pallets. There are two freezers and just over 700 separate freezer lines are carried with a similar number of chiller lines. Orders in respect of stock from the Refrigerated Foods Division are received at Rocklea by T.E.O.S. and sent by landline to the Refrigerated Foods Division warehouse.
The Rocklea warehouse receives deliveries of products from approximately 900 suppliers, comprising manufacturers, importers and brokers. Generally these products are palletised with one product per pallet. Mr John Tapp, the merchandise manager for QIW, is responsible for stock management, for negotiating terms of supply with manufacturers and suppliers in relation to the acquisition of stock and for pricing stock supplied by QIW, apart from food service division stock, and the pricing of stock supplied to cash and carry warehouses. Most products are purchased and delivered weekly. He says that almost all products are delivered F.I.S., that is, free into QIW's Rocklea and Frozen Foods Division warehouses. The transport charges are paid by the manufacturer as part of the cost of stock.
While I have difficulty in seeing the economic basis for this practice, the evidence establishes that manufacturers supply Free Into Store to all capital cities Australia wide, for the national chains and for independent wholesalers.
In the acquisition by QIW from major manufacturers, national rebates are negotiated by Australian Amalgamated Wholesalers Limited ('AAW'), about which more will be said. QIW then negotiates specific terms of trade with all manufacturers which supply it. These negotiations cover settlement terms or discounts, warehouse allowance, quantity buy allowances, and ullage (which is an allowance given by manufacturers for shrinkage and damage). QIW allows .1% discount on dry grocery lines and .2% discount on all chiller and frozen products to independent retailers, independently of whether it receives a manufacturer's ullage allowance on particular products. In addition, co-operative moneys, case deals, delivery terms and various kinds of rebates are negotiated and generally paid for by manufacturers. Case deals are contributions paid by a manufacturer to support a particular product promotion. Special product promotions involving price reductions are funded in whole or part by the manufacturers. Mr Tapp says that between 15-20% of the manufacturers' sales go towards promotion of its products under these various arrangements.
As to pricing products wholesaled by QIW, Mr Tapp works on a budgeted warehouse average margin of 3.5% as a gross mark up, but the various divisions have different efficiency levels and this is reflected in the pricing of products which QIW wholesales to independent retailers. The price independent retailers supplied by QIW pay, is made up of the cost of goods from the manufacturers, less settlement discounts, to which is added the QIW product margin and sales tax if applicable. As part of his function, Mr Tapp monitors the terms of manufacturers' supply to Davids and monitors the pricing of products wholesaled by Davids to independent retailers.
There are a number of manufacturers supplying specific products direct to retailers by what is known as the 'route trade'. Davids is the only other wholesale supplier to independent retailers in Queensland and northern New South Wales of a range of products comparable to the range supplied by QIW. I accept that this supply is price sensitive. Mr Tapp expressed the position in this way:

" If the price is too high, independent retailers will generally let you know that Davids is more competitive on that product."

A difference between QIW's pricing policy and that of Davids, is that QIW varies the product margin depending on warehouse efficiency levels, whereas Davids charges a flat service fee across all lines. Davids wholesale price to retailers is the cost of the product to Davids (stripped net cost) plus a service fee of 3.75%. Both QIW and Davids allow an additional rebate to 'banner store' retailers, about which more must be said.
Davids and QIW have competed for the business of supplying the Pick-and-Pay Hypermarket retail outlet at Aspley, which is one of Australia's largest single retailing stores, with a floor area of more than 21,000 sq.m. Until about February 1991, the Pick-and-Pay Hypermarket was supplied by wholesale from QIW. Since then it has been supplied by Davids. Because of the size of this retailer, the terms offered by the bidders for its custom are very competitive.
There are significant differences in the purchasing, wharehousing and pricing practices between the independent wholesalers and the major retail chains, Coles, Woolworths and Franklins. The chains have a restricted product range, determined by the head or state office. The product range of the independent wholesalers is much wider, being dictated by the much more diverse customer base. The chains supply company owned stores only and the chains can derive their profitability from retail operations. The independent wholesalers service a diverse customer base, and both the warehouse and retail stores make separate profits. The area serviced by the chains is limited to the larger population centres, while the wholesalers are much more diversified. The average store order for retail chains involves larger warehouse picking runs resulting in economies. The average store order from an independent wholesaler is mainly small to medium and, as a consequence, is more expensive in terms of picking and processing. Because the range is more tightly controlled and demand can be more accurately forecast, stock levels can be minimised in the operations of a retail chain and stock turns maximised. Independent wholesalers need to carry a wider range and more low volume lines and therefore more buffer stock to ensure adequate service levels and, as a consequence, average stock levels tend to be higher and stock turns are lower compared with the chains. The fluctuations in demand for the independent wholesalers are much more variable than for the chains.
So far as credit and cash flow is concerned, deliveries to retail stores in a chain are an internal transfer. The retail stores sell for cash, resulting in the chain having access to daily cash flows and the chains are not subjected to bad debts. The independent wholesalers, on the other hand, provide a minimum of seven days' credit to retail customers, and carry the debt risk for many hundreds of retailers they supply, with a considerable amount of bad debts annually. Mr Tapp says that there are reduced opportunities for "investment buys" from manufacturers and suppliers compared with the investment buying opportunities of the chains.
So far as promotional funds are concerned, the discount chains, particularly Franklins, spend little or no moneys on advertising, the savings being put into discount prices. The independent wholesalers require funds for the marketing of promotional groups and, as a consequence, there is less available for price subsidy to permit lower prices. Settlement terms on acquisitions generally are the same for both independent wholesalers and chains; there is, therefore, no recognition of the credit risks the independent wholesalers are obliged to carry and the higher stock levels needed to service the wholesale business.
Sales tax has a differential effect. The retail chains buy sales tax paid and the supplier pays the sales tax. The independent wholesalers buy pre-tax and pays tax on the value which includes the value added warehousing component. As a consequence the independent wholesaler pay tax on a higher value than the retail chains, and also a wholesaler forwarding stock to a Cash-and-Carry outlet pays sales tax on the value which includes freight, affecting the price and profit from a Cash-and-Carry outlet compared with a retail chain. Sales tax also has a greater effect on the trading terms between the retail chains and the independent wholesalers, in that rebates and other allowances are paid by suppliers on a pre-tax value.

All of these features are common to QIW and Davids, vis-a-vis the chains. A checklist summarising most of these differences was prepared by AAW and "was intended to highlight the major differences between the operations of AAW member companies and the major retail distributors, that is, Coles, Woolworths and Franklins". The statement is made:

" From the attached it can be seen that broadbased wholesaling is a more complex task when compared with chain d.c. operations. The comparative advantages enjoyed by a chain are further enhanced by the impact of sales tax. "

The gross sales for the Central Distribution Warehouse Division of QIW for the year ended June 1992 totalled $221m to independent retailers and a further $65m. was transferred to Cash and Carry warehouses and QIW's retail operations, being Denham Bros stores and the Q-Superstore. The Refrigerated Foods Division had annual sales of $52m. for that year and the value of stock transfers from Murrarie to QIW Cash and Carry warehouses and QIW operated retail outlets aggregated $16.3m. Cash-and-Carry Division wholesales to smaller independent grocery retailers generally not associated with banner marketing groups, the catering trade, that is, hotels, clubs, restaurants, fast food retailers, milk bars, service stations, schools, government and similar institutions. There are twelve Cash-and-Carry warehouses in Bundaberg, Townsville, Mackay, Maryborough, Toowoomba, Cairns, Nerang, Rockhampton, Salisbury, Kedron, Lismore and Maroochydore. Most Cash-and-Carry customers purchase on a cash basis, and Dr Bullock estimates that it has approximately 19,000 active Cash and Carry customers, of which approximately 70% are independent retailers of varying sizes.
In the year ending 30 June 1992 the Cash-and-Carry Division had a turnover of $148.5m. Cash-and-Carry customers are able to obtain wholesale supplies in smaller quantities than are available from a central distribution warehouse at Rocklea because of the absence of minimum order requirements.
The Food Services Division purchases, warehouses and wholesales bulk packaged food and general merchandise to customers who do not generally retail those products or do not retail them in the form in which they are acquired. These customers typically include the catering trade, canteens, hotels, restaurants and QIW trading divisions and other food outlets such as Kentucky Fried Chicken and Sizzler through the Collins food group. This division operates from a distribution centre in Shoebury Street, Rocklea.
The Fruit and Vegetable Division supplies over 50 independent retailers and the Q-Superstore with fruit and vegetables. It operates from leased premises at the Brisbane markets and in the year ended June 1992 had a turnover of $8.2m., of which $4.6m. came from wholesale supplies to independent retailers.
The Retail Operations Division is concerned with the management operation of retail outlets owned and operated by the QIW group which comprises Denham Bros, Q-Superstore and a food store at Grafton, and in addition it provides retail development expertise and services to independent retailers.
QIW acquired Denham Bros in 1989. Denham Bros then owned and operated seventeen supermarkets, a soft drink plant, and a fruit and vegetable wholesale business. The soft drink bottling plant was sold. The Denham Bros supermarkets are located in 14 Central Queensland Towns. The Denham Bros group of retailers currently employs approximately 600 staff and, according to Dr Bullock, there are proposals to dispose of at least some of the stores to independent retailers by way of sale, franchise or lease.
The Q-Superstore is a retail store owned and operated by QIW which opened in November 1991. It is located at Woodridge in Brisbane, has a floor area of approximately 3,900 sq.m., and employs 180 staff. It is comparable in terms of floor area, layout, and range of products to the largest of the Coles and Woolworths supermarkets. It is supplied with stock from the Rocklea warehouse, the Refrigerated Foods Division warehouse at Murrarie, and the Fruit and Vegetable Division.
QIW operates a banner group called Food Store, which was developed in 1988 by amalgamating smaller banner groups, including Supa-Value, Foodland, Super-7, Foodmaster, I.G. Supermarkets and Man in the Moon. The object of a banner group is to permit a more united and aggressive marketing approach and to improve the market image of independent retailers. There are approximately 260 full members and 193 associate members trading under the Food Store banner.
Amalgamated Australian Wholesalers Pty Ltd ('AAW') was incorporated in Victoria in 1966 under its former name, Foodland Australia Pty Limited. One of its purposes was to facilitate the use of collective purchasing power of independent wholesalers in negotiations with manufacturers.
It acts as a national purchasing body on behalf of independent wholesalers, its principal function being to negotiate rebates on a national basis from suppliers. In doing so, it represents approximately 90% of independent wholesalers nationally in price negotiations with suppliers. It represents its members in relation to matters such as sales tax and negotiates arrangements for the supply of generic products under the "Black and Gold" label.
There are six shareholders of AAW: Davids Holdings Victoria, Davids, QIW, Independent Holdings Limited ('IHL'), Foodland Associated Limited ('FAL') and Composite Buyers Limited ('CBL'). Davids Holdings Victoria can appoint and remove two nominated directors. The remaining shareholders can each appoint and remove one director. The Board of AAW is made up of the chief executives of each of its shareholders and board meetings are usually held four times each year and, in addition, AAW conducts meetings between the merchandising managers of its members about every eight weeks.
I.H.L. operates in South Australia, F.A.L. in Western Australia and New Zealand and CBL. in Tasmania, Victoria and New South Wales.
Each member has a right to seek any new applicant for membership.
AAW operates as procuring agent for its members in respect of a range of generic products under the name "Black and Gold". Generic brands are intended to provide value for money products of reasonable quality which are packaged in less expensive packaging and sold at lower prices. Approximately 10% of QIW's Rocklea warehouse and Refrigerated Food Division sales are of "Black and Gold" generic products.
"Black and Gold" is the generic brand of the six shareholders of AAW; Coles has the "Savings" brand, Woolworths the "Home" brand and Franklins the "No frills" brand. Generic products are typically lower priced than proprietary brands, being high volume, low margin lines.
Sales of "Black and Gold" branded products by QIW have grown. QIW "Black and Gold" sales in the year ended 30 June 1988 were $15.8m; in the following year $18.7m; in the year ending 30 June 1990 $25.3m and in the year ending 30 June 1991 $27.3m. I accept that any supplier to independent retailers in Queensland and northern New South Wales, including any new supplier, would need to have an established range of generic lines similar to the "Black and Gold" range of products.
QIW wholesales to twelve independent retailers in the Northern Territory. Davids does not supply the independent retailers in the Northern Territory. QIW supplies twelve Cash-and-Carry branches from Cairns to Lismore and Davids has three Cash-and-Carry outlets at Toowoomba, Nerang and Brisbane. Davids and QIW supply independent retailers throughout Queensland. QIW outlets include those independent retailers who are under the banner groups Food Store and Four Square, and Davids' independent retailers include the banner groups Foodtown and Dundees. Members of the Food Link banner group are supplied either by QIW or by Davids. Davids also at the time of the hearing of these proceedings supplied Bi-Lo and Big W stores. The Bi-Lo chain is owned by Coles and the 'Big-W' variety chain by Woolworths.
So far as New South Wales is concerned, the evidence shows that QIW supplies from its Brisbane warehouses, stores predominantly north of a line through Port Macquarie, although there are some stores south of that line supplied ex Brisbane by QIW, and as far west as Bourke. Davids supplies stores in northern New South Wales, although there are fewer stores supplied and the geographic spread is not as extensive as the spread of those independent retailers supplied by QIW.
I accept that both QIW and Davids supply groceries by wholesale in Queensland and northern New South Wales and to that end carry on the functions of warehousing and distribution. I am satisfied there is competition between QIW at Rocklea and Davids at Loganlea for the business of the independent retailers within the geographic area of Queensland and northern New South Wales and that there is substitution by independent retailers between Davids and QIW for their supplies.
The retail chains do not wholesale groceries. From the time the products are purchased by retail chains from the manufacturers until they are sold at retail level to the consumer, the products remain in the possession and ownership of the chains. This has important implications in relation to sales tax. While the core proprietary brand products carried by retail chains are similar to the range carried by QIW in its Rocklea warehouse and Refrigerated Foods Division, QIW carries specialised categories which the chains do not carry. An example is what is termed "count lines", which are confectionary products which are unwrapped and sold at checkouts or service counters as loose items. The retail chains carry different generic brands and also carry their own premium label house brands. Franklins and Woolworths carry a larger genetic range than QIW. Coles carries a similar number of generic lines to QIW.
I accept that the administrative accounting and reporting systems of the retail chains in relation to buying, warehousing and distribution are geared to moving large quantities of products to supermarkets, averaging around 70 pallets from distribution warehouse to supermarket compared with the order of an independent retailer which averages 3 or 4 pallets with each order, being different in product mix and often including lines not carried by retail chains.
As at June 1992 there were 796 independent retailers supplied by the QIW warehouse at Rocklea as follows:

Foodstore 274 Foodstore Assoc. 195 Foodlink 172

Four Square 107

Non-Affiliated 48

An analysis of the independent retailers comprised in the Foodstore banner group shows a large variation in the size of the store. The analysis indicates that 52% of the stores are under 300 sq.m. and account for 29% of sales; 72% of stores are under 400 sq.m., accounting for 49% of sales; 84% of stores are under 500 sq.m. accounting for 61% of sales; and 4% of stores are over 800 sq.m. and account for 17% of sales.
The QIW wholesale customer base profile is an analysis that Mr McLellan caused to be prepared and is instructive. I set it out below:

No. of Ave Purchase Annual % Stores per Store per Banner Group of Week Sales 1991/92 Purchases Foodlink 172 $ 2,795 25,564,395 8 Four Square

(inc Assoc) 107 $ 6,964 37,818,394 12 Foodstore 274 $14,303 203,806,430 65 Foodstore

Assoc. 195 $ 3,940 39,081,296 13 Non-

Affiliates 48 $ 2,230 5,562,984 2 Total 796 $30,232 $311,833,499 100

As a supplement to this material, Mr Peter Shafron, a solicitor employed by the solicitors for Davids, has extracted from the evidence of surveys tendered by QIW or contained in their material, the average dollar purchase and has plotted that figure against the size of the store. My assessment of this material is that there is almost a linear correlation between the size of the store and the dollar volume of the purchase made on a visit to that store. That is to say, the smaller the store, the lower is the likely dollar value of the purchase; and the larger the store, the larger is the dollar amount spent.
Four Square stores tend to be under 300 sq.m. in size; 95 of 110 stores are under 300 sq.m. and those stores account for 88% of the sales to Four Square stores.
The non-affiliated independent retailers supplied by QIW are generally smaller stores with floor areas under 150 sq.m. A consequence of non-affiliation with a banner group is that the retailer is unable to participate in group funding advertising and marketing arrangements nor does the retailer participate in those promotional funding arrangements which manufacturers provide for specific banner groups.
While any breakdown into categories is necessarily imprecise, I think it reasonable to adopt Mr McClellan's breakdown into three broad categories. The first of those, called "Convenience Stores", have a floor area up to approximately 400 sq.m. They have the convenience of location and access which facilitates the purchase of food items and non-food items, including bread, milk, soft drinks, tobacco products, or to obtain single grocery items as well as other "convenience" products like confectionary and snack foods. They are not an alternative for most consumer's weekly supermarket shopping. They do offer convenience and location and a sufficient product range for the likely customer and offer an advantage of extended trading hours. The question of extended trading hours and whether such stores compete with the retail chains on price will be considered later.
The second category which might be called 'Top up' stores, generally have floor areas up to about 800 sq.m. These have some of the features of the smaller convenience stores and the larger supermarkets, but their function primarily is to supplement the main weekly supermarket shopping. The question of whether these stores compete on price with the retail chains also will be considered later.
The third category is the supermarket, comprising stores with floor areas generally in excess of 1,000 sq.m. Depending on the size of the supermarket, product lines carried might range from 7,000 to 13,000.
QIW produces for the independent retailers supplied from Rocklea and Murrarie, a pricing guide, which sets out price columns designed to enable an independent retailer to obtain a desired margin over a mix of grocery products. Mr McClellan says, and I accept, that the margins provided for in the pricing columns were established from discussions with independent retailers' banner group committee members. The retailer selects the price column appropriate to that retailer's wishes as to a desired margin, and when the retailer orders groceries, the computer system at Rocklea produces pricing stickers which are placed on the ordered cartons before delivery, the labels providing pricing information appropriate to the particular pricing column which that retailer has chosen.
I set out a schedule showing the QIW pricing zones, the percentage retail margin appropriate to that pricing zone, and the proportion of Foodstore, Cut Price and non-affiliated Four Square stores' customers who use that pricing zone.

QIW Pricing Zones % Retail Margin Proportion of Foodstore/Cut Price/non affiliated Four Square Stores Customers who use the various pricing zones 3 18.9 0.4 4 22.1 14.1 5 25.5 0.2 6 10.9 2.2 7 12.5 13 8 15.2 3.5 9 19.7 19.6 10 25.6 46.8

QIW, in a document headed "The Introduction of Foodstore", speaks of pricing slot 7:

" This pricing slot is designed to throw a gross profit of 13% and is measured against the standard Coles Supermarket. " Comments are made of other pricing slot levels. Of pricing slot 4, the statement is made:

"This pricing slot is designed to throw a gross profit of 21% and is usually suitable in non-competitive country areas."

There is a variation in the percentage figures in the document and in the table, but the substance of this aspect of the evidence has an important bearing on the issues in these proceedings.
Mr McClellan indicated that on an analysis of a cross-section of the 453 independent retailers supplied by Rocklea and Murrarie, 46.8% operated on the pricing column which produced a retail margin of 25.6%. Approximately 12 independent retailers supplied from Rocklea carry a range similar to a major supermarket and, of those 12, 6 price on pricing zone 6.
The terms of supply with most manufacturers include "quantity buy allowances" which is the minimum product quantity which a particular manufacturer will supply or order. Most trading terms of manufacturers also include "quantity buy incentives" which are rebates allowed by the manufacturer for large orders. Even if an independent retailer were able to obtain supply direct from a particular manufacturer, it is unlikely that it could order sufficient to obtain the advantage of quantity rebates.
Independent retailers receive some of their supplies direct from manufacturers by what is known as the "route trade". The products supplied in this way are in general confined to products such as soft drinks, snack foods, biscuits, tobacco products, confectionery, smallgoods, dairy products and bakery products. Manufacturers who supply by the route trade, operate fleets of delivery trucks from which they supply independent retailers on either a regular or irregular basis. In addition to the route trade, there are small specialty wholesalers, particular in relation to products such as smallgoods, which operate in much the same way as the manufacturers' route trade. Some manufacturers supply direct to independent retailers but under a charge back arrangement by which the manufacturer delivers direct to the retailer and then bulk bills QIW for charge back deliveries. QIW then oncharges the independent retailer and charges an administration fee for the service. Approximately 70% of the manufacturers of products stocked by QIW do not supply to independent retailers by the route trade.
The companies comprising the Davids group are private companies. Their principal activities are the wholesaling of groceries and liquor. Mr John Deuchars is the managing director of Davids Distribution Pty Ltd, which company carries on the business of warehousing, wholesaling and distributing grocery products and general merchandise to retailers in Victoria, New South Wales and Queensland. Mr Deuchars joined Davids in 1984 and became managing director of Davids in 1987.
Mr Deuchars, and other senior executives of both QIW and Davids, as well as others concerned with the wholesaling and retailing of groceries, have regard to analyses as the result of surveys of various features of the acquisition, warehousing and retail sale of groceries published six-monthly in a magazine "Retail World".
In the half-yearly report to June 1992, the national grocery mark-up was split up by state, showing Queensland having 18.3% of the "national grocery mark-up", New South Wales 34.1%, Victoria 26.9% and the balance distributed amongst the other states.

There is a column of figures headed "The Top National Grocery Accounts" measured on national brand groceries into warehouse. This lists Woolworths N.S.W., Franklins N.S.W., and the other players in respect of warehousing. Number 15 of that list is QIW Retailers, indicating 13.5% of the Queensland state share and Number 19 on the list is Davids Holdings with 9.8% of the Queensland share. There is a total of columns headed "National Market Warehouse Shares" which for Queensland shows:

Queensland AAW Woolworths Coles Franklins 4.28 5.67 5.05 3.31

In a column headed "State Market Percentage Shares for Queensland at June 92" shows:

Woolworths 31.0

Coles 27.6

Franklins 18.0

QIW 13.5

Davids 9.8

Bi-Lo 2.4

In a review headed "Supermarket News - Nelson Report" the Queensland retail shares for the 1990 year show figures for Woolworths, Coles, QIW, Davids and Franklins. The comment against a bar chart indicating the various shares has the comment:

" Franklins gain of 1.6 share points appears to have been at the expense of Coles and to a degree, Woolworths and Davids. QIW's acquisition of the Denhams group of stores has lifted market share marginally. "

A similar bar chart labelled "National Retail Market Shares" shows the bar columns for Woolworths, Coles, Franklins, AAW, VGD and others for the years 1988, 1989 and 1990.
Mr Deuchars says he checks the surveys to see whether Davids' share has improved, decreased, or stayed the same in comparison to the other grocery distributors in that particular state. He says that in Queensland he compares Davids share with QIW, Coles, Franklins and Woolworths. In New South Wales, the comparison is between Davids and Franklins, Woolworths, Coles, Composite Buyers and GNL. In Victoria, the comparison is between Davids and Woolworths, Coles, Composite Buyers, and Franklins.
The analyses have been directed at groceries and appear not to cover fresh produce.
The evidence of Mr Deuchars confirms that the position of Davids is similar to that of QIW in terms of less ability than a retail chain to control the demand for particular products, with the consequence that Davids, like QIW, must satisfy its retail customers by having a wider range of product. He agrees that in large measure AAW has now been successful in obtaining for its constituent independent wholesalers the same terms as the retail chains from the suppliers or manufacturers. Davids compares its terms of acquisition from major suppliers with the terms of acquisition by the major chains and the other members of AAW. Like QIW, Davids also has a charge-back facility where a manufacturer supplies direct to an independent retailer.
The evidence of Mr Deuchars confirms my view that, as a matter of practicalities, it is not possible for a retailer to obtain its grocery requirements directly from suppliers. While there was a suggestion by Dr. Williams, an economic expert called by Davids, to the contrary, I am satisfied that it would be impossible for independent retailers to source supply of stock exclusively from the route trade and small specialty wholesalers. This is because of the restricted range covered by the route trade, the impossibility of an independent retailer administratively organising the numerous negotiations necessary, and the inability to coordinate deliveries. There would be multiple invoices and payment regimes. As well, the independent retailer would miss out on the retail services provided by both QIW and Davids to independent retailers concerning store operation, including store layout, shelving, range, and pricing.
Mr Deuchars also accepts that the introduction of the "Black and Gold" generic range by AAW was in response to the introduction of generic brands, initially by Franklins, who introduced its "No Frills" generic brand. I accept that price comparisons between a number of "Black and Gold" products and "No Frills" products is made for the benefit of the members of AAW by AAW.
In a speech given by Mr Deuchars to a seminar organised by Nestle, he referred to the actual sales history of the various members of AAW. He said:

" If we look at the year ended December 1991, the scenario for AAW is as follows.

Independent Holdings (S.A.) Sales of $965 million with close to 55% of the S. Aust. Market. All but 15% of these sales through Independents.

Foodland WA, Sales of $810 million. 54% of the Western Australian Market. All independent volume. Composite Buyers. Sales of $860 million with shares of 15.0% in Victoria and 4.2% in NSW. Again this is all Independent volume.

Queensland Independent Wholesalers. Sales of $558 mill. and a share of 14.2% of the Qld market. All Independent volume. And then their is Davids Holdings with group sales of $3.4 billion Dollars at wholesale and shares of 23.2% in NSW, 21.4% in Victoria and 9.5% in Queensland. Of these group sales 60% are generated by independent operators. In total the AAW group had sales in 1991 of around $6,500 Million Dollars (A majority of which was independent volume). AAW in 1991 represented approximately 34% of the national grocery market with Woolworths around 28.4%, Coles approx 20.6% and Franklins around 15.8%. "

This material was directed at showing that the perception that the independent retailer was threatened was incorrect. The figures quoted by Mr Deuchars reinforce the conclusion that whatever the relevant market be, there are state by state markets.

The comments by Mr Deuchars illustrate that executives from QIW and Davids and the other independents speak of a percentage of the state market as being the share by the independent wholesaler. This in fact is a reference to the percentage of retail sales supplied through outlets who in turn are supplied by independent wholesalers. It is true that the health of the independent wholesalers depends on the health of the independent retailers he services, and it is true also that QIW and Davids are concerned as to whether the share of the retail market which the independent retailers service should not be lost to the national chains.
That there is a confusion as to what market QIW is contending for appears from the evidence of Mr Krohn. When he was asked what his market share was at the moment, he said "Around 16.5%". When he was asked "16.5% of what?" he said "16.5% of the total market". "Which is?" he was asked, and he replied "67% of the wholesale market". Later it was put to him by Mr Sweeney QC:

" Mr Krohn, QIW habitually identifies its market share in terms of a figure around 16%, doesn't it? " to which he said:

" 16.5% was the figure. "

Davids carries on business in Victoria, New South Wales and Queensland. Mr Deuchars said:

" Markets in each of these states, and also Australia wide, are retail driven. "

While this has a relevance to the question of price competition, it also has a relevance to the geographic nature of the relevant market.

Prior to 1986, Davids carried on the business of wholesaling groceries to independent retailers in New South Wales. It commenced its business in Queensland early in 1986.
Mr Te Whiu, now General Manager of warehousing, wholesaling and distribution for Davids in Queensland, in December 1985 was given the task of establishing and heading the wholesale operation for Davids' distribution in Queensland. Davids acquired the "Jack the Slasher" warehouse at Loganlea, a purpose built grocery warehouse which was then owned and operated by Woolworths. The building was already fitted out with an office from which operations could be managed and with racking, shelving and other equipment to move and receive stock. The acquisition was on a walk in, walk out basis and Davids re-employed most of the former staff of Woolworths located at that warehouse. Davids still occupies those premises. Mr Te Whiu says that Davids' operations in Queensland ran at a loss for a period of 18 months and thereafter was profitable. Prior to 1986, Davids had operated a warehouse at Coffs Harbour in northern New South Wales and from that warehouse had supplied independent retailers in northern New South Wales as far north as the Queensland border.
Davids was encouraged to come to Queensland by a number of retailers, who provided a "strong footing or bridgehead" into Queensland, according to Mr Deuchars. One of the group of independent retailers who approached Davids was the Denham Bros group, then comprising 12 or 15 stores of substantial size. Mr Te Whiu says that Davids operations became consistently profitable in August 1987. At this time its sales were $133m per year, which figure includes grocery, general merchandise, and perishable lines. That figure has to be treated with some care in that it is in 1987 dollars and does not include head office costs, an allowance for the costs on borrowings to set up in Queensland, and that "profitable" meant simply "not making a loss".
The actual experience of Davids' entry into Queensland is a highly relevant consideration in determining the question of access by a further entrant should there be a merger of Davids and QIW. In my opinion the operation of any new entrant would require annual sales well in excess of $150m. to be viable, particularly in the light of the admission that the merged Davids/QIW would have the capacity for a protracted price war.
Davids operations in Queensland now consist of the grocery warehouse at Loganlea, a perishables warehouse at Morningside in Brisbane, which is leased, and a general merchandise warehouse at West End. The Loganlea warehouse has a floor area of 250,000 sq.ft.; the West End warehouse has a floor area of 50,000 sq.ft.
Davids is in the business of supplying groceries for onsale by retailers to consumers and of providing all manner of retail support services to those retailers. It has three cash and carry branches at Nerang, Toowoomba and Brisbane. It does not service any stores in the Northern Territory. Davids provides franchisor services to its own banner groups, namely, Foodtown, Foodtown Discount and Dundee stores. Davids also provides promotional support for these banner groups, consisting of handbills, as well as newspaper, radio and television advertising.
The evidence of Mr Stanley Tysoe, the marketing manager of the Queensland division of Davids, mirrors in a large measure the evidence of Mr McClellan. Mr Tysoe says that generic products probably represent about 10% of all grocery sales and represent a much higher percentage of sales of product lines in which generics are to be found and in some categories are the dominant product. He says:

" Davids has a series of recommended prices from which different retailers may choose depending on their circumstances, in particular, the size of their store and proximity to major supermarkets. It also has a range of recommended promotional prices which are determined at weekly intervals. "

He says that each promotion is limited to 12 leaders and 30 major selling lines because of the limited amount of space available on handbills and newspaper advertisements. The various recommended retail prices are known as "price points" and, if Davids are unable to obtain a price point which is necessary to meet the promotional advertisements for the chains as well as the Cut Price Food and Foodtown stores, Davids contacts the supplier to improve the deal "so that we can match the price of the chains".

I think the reality was expressed by a Foodstore retailer, Mr R.W. Hawkes, who said that promotions were important to his business. When it was suggested that the promotion projected the message that he was price competitive, he said:

" For our specials we are price competitive, yes."

Mr Vincent, Davids Queensland Advertising Manager, said:

" (t)hese promotions enable the independent retailers to offer prices competitive with the retail chains and to develop and maintain an image with the consumer of price competitiveness."

Mr Tysoe gave evidence that Davids has a number of price fields which perform a similar function to the pricing zones of QIW. His evidence was that the bulk of David's membership would be in the "first four fields from 0 through to 7". The fields to which he was referring are:

Field 00 Average gross profit 17.5% Field 01 Average gross profit 20%

Field 02 Average gross profit 23%

Field 07 Average gross profit 25%

The effect of Mr Tysoe's evidence is that the majority of Davids' members are on price fields which reflect an average gross profit of between 17.5% and 25%.
Over the years, Davids has supplied a number of retail outlets owned by the chain stores and Davids supplies the Bi-Lo chain of grocery stores owned by Coles, although on 27 January 1993 Coles Myers Ltd announced that its supermarket group had established a new company to provide grocery wholesaling services for Coles supermarket and the discount food business, Bi-Lo. The new company, Grocery Holdings Pty Ltd, it is said will utilise existing Coles distribution centres for the delivery of grocery products to more than 500 stores across both supermarket chains and would commence operations from late April. As part of that chain, Bi-Lo will no longer draw grocery products from its existing wholesale suppliers, Davids Holdings and Independent Holdings Ltd.
Davids supplies the Jewel chain of grocery stores which operates in three states, and currently supplies some 33 Big W discount stores in Victoria, New South Wales and Queensland with confectionery, grocery and other products. "Big W" is a division of Woolworths Ltd. Davids supplies to banner groups in Victoria; in New South Wales it supplies to the banner groups Foodtown, Foodmaster, Clancy's, Cut Price and Scoop; and in Queensland to Foodtown, Dundees and Cut Price foods. Davids has recently established a new banner group in Victoria under the name "Festival". These stores are greater than 800 sq.m. with turnovers of greater than $80,000 per week and have an emphasis on fresh food. The object, according to Mr Deuchars, is to "assist Independent Festival Retailers to compete against retail chains such as Woolworths".
Mr Deuchars agreed that grocery products reached the shelves of Australian retail stores in three main ways: the first is by direct delivery by the manufacturer or processor; the second by delivery by the manufacturer or processor to the distribution centre of a major retail chain which then delivers the goods to its own stores; and the third delivery by the manufacturer or processor to the warehouse of a grocery wholesaler who then sells and delivers the goods to retail outlets which are predominantly independently owned. He agreed that Davids and QIW are involved in the third category and compete against each other in that category and they compete in Queensland fiercely.
He also agreed that the future of the independent retailer depended on the viability and success or failure of the broad based wholesaler who supplies him; the wholesalers insulate the manufacturers to a great degree from credit risks and bad debt; that wholesalers give access to the product of manufacturers to remote areas and to other areas not serviced by the chains; and through their Cash-and-Carry operations, which in Davids' case is Campbells Cash-n-Carry, wholesalers make manufacturers' products available to smaller retailers and convenience stores. Both QIW and Davids provide similar support services to independent retailers intended to assist in developing their business skills and profitability and the range of products supplied by Davids and QIW are substantially similar.
While the promotional activities of the independent retailers or by those on their behalf are intended to create an image of price competition with the chains, I regard the view expressed by Mr James Drew, the Retail Sales and Services Manager of Davids, as a fair summary of the retail grocery market. He said:

" Independent retailers seek to position themselves so as to offer more personalised services, greater convenience, longer trading hours, commitment to local community involvement than the chains, which strive to project the image of having greater range of product, larger and more numerous departments, somewhat cheaper prices, location in centres which provide other services and other retailers, and better car parking facilities. "

The question of trading hours is a matter of concern to the independent retailers supplied by both QIW and Davids. The Retailers' Association of Queensland Ltd in its report for 1991-92 indicated that:

" trading hours continues to be a difficult issue for the Association....It is clear with RAQ's membership profile extending over a wide range of types and sizes of shops operating in varying locations across the state that differing attitudes to trading hours exist."

The position emerging from the evidence is that independent retailers are almost unanimously opposed to any extension of trading hours by the major retail chains and many individual retailers who gave evidence indicated that their availability over extended hours was feature of the services that differentiated their retail opportunities from the major chains. I think it likely that this competitive advantage that independent retailers currently have will shrink over the years in the future as more liberal trading hours become able to be enjoyed by the chains.
The question of trading hours is an advantage to the independent retailer. I agree with the prognosis offered by Mr Te Whiu when he said:

" Independent retailers fear that the extension of trading hours would allow large retail chains to trade at times otherwise open only to a smaller retailer with less than six employees and hence take sales from the independents. A compromise has been reached whereby trading has been extended across the state to all day Saturday, but Sunday and most week nights are still reserved for the small retailer, but I believe that it is inevitable the trading hours restrictions will be progressively relaxed on the basis of consumer demand and a constant lobbying by the corporate retail chains and interested parties such as BOMA shopping centre owners/proprietors."

Substitution between Davids and QIW
140. Both QIW and Davids offer incentives to independent retailers in an endeavour to have them change the wholesale source of supply. Incentives include contributions towards store paint-ups, changeover of all banner signage, staff uniforms, and changeover costs for internal computer labels.

In the period from June 1990 to June 1992, the QIW Rocklea warehouse gained 19 independent retailers from Davids and Davids gained 16 independent retailers from QIW.
There is clearly substitution by independent retailers between QIW and Davids as the source of supply.
So far as the chains are concerned, Coles has 76 retail stores in Queensland which are stocked from Coles Queensland distribution centres at Acacia Ridge and Coopers Plains in Brisbane. Coles New World Supermarkets have a full range of departments: dry grocery, dairy, chiller/frozen, meat, delicatessen, fruit and vegetables, variety and, in many stores, bakehouses. Coles is, according to Mr McClellan, becoming more price competitive with Franklins and is assuming a more aggressive approach towards the other retail chains.
In 1985 approximately, Coles Myer Limited purchased the Bi-Lo group and expanded its operation. There are presently 15 Bi-Lo stores in Queensland. Its image is as a retailer of cheap food, including perishables. Until the announcement in January this year that Coles Myer would, from approximately the end of April 1993, supply Bi-Lo stores internally, Davids had been the supplier of stock for Bi-Lo stores. Mr Deuchars said Bi-Lo represented 25% of Davids' Queensland volume.

Of greater merit is Dr Williams' first point that Davids currently acts as wholesale distributor to Bi-Lo and Big W. However, this would account for only a small proportion of the total trade of a merged QIW-Davids, and there is no prospect of wholesale supply services to the major chainstores being extended. This 'fringe activity' can therefore be said not to detract from the fact that the bulk of the wholesaling undertaken by a combined QIW-Davids would be for independent retailers.

Professor Hay
276. Professor Hay is a Professor of Law and Economics at Cornell University, New York. He, like Dr Williams, was of the opinion that the relevant product market is the market for distribution of groceries to retail stores (ie. there is a single wholesale market).

Like Dr Williams and Professor Parry, Professor Hay emphasised that the pricing discretion of a merged QIW-Davids would be constrained by the fact that the independent retailers are in competition with the integrated retail food chains. The essence of Professor Hay's view appears from this statement:

" ...if the merged Davids/QIW raises its prices to independent retailers and the retailers attempt to pass on the increase to their customers we can ask if those retailers will lose sales to the chains. If the retail sales of the chains increases, then it must follow that the amount of wholesaling services provided by the chains will increase by precisely the same amount. Thus, in this way, when the price of Davids/QIW wholesaling services increases, the amount of wholesaling services provided by the chains increases, indicating that they are substitutes and, if the effect is significant, they are in the same relevant market."

Professor Hay's conclusion is open to the same criticisms as that of Dr Williams.

Rhonda Smith
279. Rhonda Smith is a Senior Lecturer in Economics at the University of Melbourne. Ms Smith reaches a similar conclusion to Professor Parry: ie. the relevant market is that for the distribution of grocery products. She gives several reasons why it is artificial and not in accordance with commercial reality to separate the wholesaling and retailing functions:>

1. While it is true that small independent retailers and larger chainstores compete in different ways (eg. factors of convenience play a larger role with respect to the former), all retailers ultimately compete on the basis of price, and the competitive decisions of the major chainstores influence the decisions of the independent retailers.

2. All independent wholesalers except Davids are vertically integrated with respect to the supply of groceries via their ownership of retail outlets, and there is therefore a shared interest between wholesalers and retailers. Further, Davids also has an identity of interest with the retail stores it supplies: its operations (which include provision of marketing and other services to assist retailers) reflect the dependence of its business on the survival and growth of the retailers' business.

3. Because of the degree of vertical integration, and also because other sources of supply (eg. direct from manufacturer to retailer) exist which cut across the wholesale-retail functional division, there is no clear distinction between retail and wholesale operations.

Like Parry and Williams, Smith considers the relevant geographic market to be broader than Queensland.

Criticisms of Ms Smith's View
281. Although Ms Smith has explicitly acknowledged several of the competing considerations not addressed by Professor Parry (eg. that the success of small independent retailers also depends on convenience factors), her conclusion is open to the same criticism as that of Professor Parry and Dr Williams: by assuming that one entity's influence on another requires that both entities be the same market, critical inquiries as to the degree of influence exerted and the scope nevertheless remaining to exercise market power are ignored. Further, Ms Smith's statement that there is no clear distinction between wholesale and retail operations is too sweeping. Only a small percentage of grocery products are supplied to retailers direct from manufacturers, and only 11.6% of groceries supplied by QIW are to its own retail outlets.

Dr Fallon
282. Dr Fallon, who currently works as an economic consultant, claimed to be expert in the field of industry economics. He was asked to comment on the evidence given by Professor Parry, Dr Williams, Dr Hay and Ms Smith. Many of his criticisms coincide with those stated above. In particular, Dr Fallon explained that:

1. The mere fact that QIW undertakes both wholesaling and retailing activities does not necessarily mean these activities are part of the same market.

2. The fact that competitive decisions taken by the grocery chains influence the decisions made by independent retailers and vice versa is irrelevant unless:

(a) the decisions are in respect of some activity relevant to constraining monopoly power; and

(b) the degree of any influence and the extent to which that influence will effectively constrain the relevant activity is also ascertained.

3. The fact that Davids supplies wholesale services to Bi-Lo and Big W does not demonstrate that the chainstores can or would supply wholesale services to the independent retailers.

4. Dr Williams and Professor Parry, in equating the service provided by independent retailers and chainstore retail outlets, ignore the value and cost of supplying convenience.

In Dr Fallon's opinion, the relevant market was the market for the wholesale supply of a range of groceries to independent retailers. In his view, because the chainstores do not offer wholesaling services to independent retailers, they are not in wholesale competition with QIW and Davids. He believes the chainstores' activity would probably prevent a substantial price increase by the independent retailers but not a small increase. For this reason, there would probably be a margin within which a merged QIW-Davids would be able to exploit its position to substantially increase its profits. This is particularly so given that the wholesaling industry operates on high turnovers and low margins: a small decrease in costs or increase in prices for the wholesaler may produce substantial extra profits.
This position is, according to Dr Fallon, further reinforced by the reluctance of small independent retailers, who are often influenced by life-style factors and high transaction costs involved in changing from one business to another, to switch their capital investment in response to small declines in profitability.

Professor Kolsen
285. Professor Kolsen is Professor Emeritus at the University of Queensland and currently works as a consultant and economic adviser. He has had extensive experience teaching in microeconomics at a number of universities.

Professor Kolsen also made some criticisms of the evidence given by Professor Parry, Dr Williams, Professor Hay and Ms Smith:

1. In including potential entrants within the market, Professor Parry merely identified a threat of entry, and failed to ascertain whether the entry threat is sufficient to ensure competitive behaviour by the incumbents, an important and necessary qualification of degree.

2. There is no necessary or even usual connection between the levels of competition in retail, wholesale or manufacturing activities, and it is therefore incorrect to assume activities as a grocery supplier cannot be disentangled from the activities of the retailers supplied.

3. Davids and QIW should not be viewed as 'fully vertically integrated' suppliers and distributors: 'fully vertically integrated' means more than having just a small percentage of total turnover which relates to vertical integration. Rather, the absence of any other than a very small vertically integrated component in the independent retailers' market makes it clear that retailing and wholesaling are different markets.

4. It is unacceptable to conclude that the chainstores must be in the same market as QIW and Davids simply because the former influence the price and product policies of the latter. The relevant question is whether the influence is sufficient to so constrain the policies of QIW and Davids as to make them behave as they would in a highly competitive market.

In Professor Kolsen's opinion, the relevant market is the supply by independent wholesalers of a wide range of grocery items in large single deliveries to retail establishments in Queensland and northern New South Wales. Professor Kolsen said that QIW and Davids are in a market structure best described as a duopoly, and the fact that they could, and sometimes do, do other things (eg. supplying larger retailers) does not alter the structure of the market.
At the retail level, Professor Kolsen would identify different markets for the large chainstores, intermediate-size independent retailers and the corner stores, because each sells a different "bundle of characteristics" of which the physical properties of the items sold is just one. According to Professor Kolsen, the large price differences charged for the same item between these three types of retail outlets, which are not explicable solely by reference to transport costs, indicate three separate markets.

Richard Copp
289. Mr Copp is an economic consultant and lecturer in financial economics at the Queensland University of Technology. He concurred in Professor Kolsen's opinion and conclusions.

Mr Copp considered that a market can be characterised by a product selling at the same price (net of transport costs) in different locations at the same time. Thus, the fact that substantially different prices (net of transport costs) are charged by the vertically integrated retailers in supplying their own retail outlets than by QIW and Davids in supplying independent retailers is prima facie evidence that they operate in separate markets.
Like Dr Fallon and Professor Kolsen, Mr Copp also criticises the views of Professor Parry, Dr Williams, Professor Hay and Ms Smith. In particular, Mr Copp emphasises that the involvement of QIW and Davids in low levels of inter-market activity at the margin of the market does not require the dimensions of the market to be altered to encompass this activity. Thus Davids' and QIW's involvement in franchising, QIW's ownership of retail outlets, and Davids' supplying Bi-Lo and Big W can all be reconciled with a market limited to the supply of groceries by independent wholesalers to independent retailers.

Conclusions as to Market Definition
292. I agree with Dr Fallon, Professor Kolsen and Mr Copp that the relevant market for the purposes of this inquiry is the market for the supply of grocery products by independent wholesalers to independent retailers in Queensland and northern New South Wales.

Only within the market so defined is there an area of close competition between firms and significant cross-elasticity of demand and supply. Collectively, Davids and QIW possess a relatively small but nevertheless significant margin within which they may exercise monopoly power to substantially increase profits. This could be achieved not only by increasing prices, but also (as Dr Fallon points out) by not passing on all promotional advantages, increasing minimum quantities from warehouse and thus forcing demand to cash and carry, reducing levels of support facilities, imposing stricter trading terms, and varying service levels and conditions. As Dr Fallon explained, because wholesalers operate on a large turnover but small margin, small increases in prices or decreases in costs translate into substantial profit increases.
It is true that some restraints exist on the ability of Davids and QIW to exercise their market power. In particular, they could not act so as to erode the profitability of the independent retailers to such an extent that they would be forced out of business, as this would have a similarly disastrous impact on Davids and QIW. Indirectly, the retail pricing and product policies of the major chainstores, because they act as an ultimate constraint on the pricing policy of independent retailers, also act as a constraint on the prices Davids and QIW can charge independent retailers without threatening their continued viability. However, the relevant inquiry is whether the existence of these restraints acts as such a significant check on the power of Davids and QIW that it is correct to say that they are in close competition with the independent retailers and the chainstores' retail outlets. In my view, this is not the case. The restraints operating here are of an ultimate nature only, and in this sense restraints exist on the power of all monopolies.
No warrant for ignoring the distinction between wholesale and retail functional levels exists in the business structure of Davids or QIW. Unlike the major chainstores, neither Davids nor QIW is vertically integrated in any relevant sense. The involvement of both firms at the retail level is of a marginal character only. Davids' involvement is limited to the interest it holds as franchisor of the Clancy's stores, and QIW's sales to its wholly-owned retail outlets account for only 11.6% of its total wholesale turnover. 'Fringe activity' on this scale does not compel any alteration of the dimensions of the market. Nor does it reveal sufficiently strong and pervasive links between wholesale and retail levels to warrant this otherwise clear functional distinction being disregarded.
Similarly, Davids' provision of wholesale services to Bi-Lo and Big W should also be classified as 'fringe activity' which does not detract from the fact that the predominant concern of Davids and QIW is the wholesale supply of grocery products to independent retailers.
In the context of the supply of general wholesale distribution services to independent retailers, it is clear that the only actual and potential substitutability (both demand-side and supply-side) which currently exists lies between Davids and QIW. For obvious reasons of self-interest, the major chainstores would not be concerned to expand their wholesaling operations to encompass the supply of grocery items to independent retailers who compete, more or less directly, with their own retail outlets. Other entities more likely to be interested in taking on such a role (eg. interstate wholesalers such as IHL, Foodlands and Composite Buyers, specialist wholesalers and "banner groups" of independent retailers) would first have to make significant new investments in expanding or establishing their operations in the Queensland and northern New South Wales area. They are at best to be considered as potential entrants into the existing market, and any restraining influence they exert on Davids and QIW therefore falls to be considered as part of the issue of the potential for market 'dominance' by a merged QIW-Davids.
It is unnecessary for present purposes to decide whether there is only a single retail market for grocery products, or separate retail markets for independent retailers and the major chainstores. Even if the former view were correct, this would have no impact on the definition of the market in this case. As already indicated, accepting (as I think one must) that retail pricing and product policies of the chainstores have some degree of restraining influence on independent retailers, this competition 'downstream' at the retail level does not exert such significant competitive pressure 'upstream' at the wholesale level that Davids, QIW and the chainstores can be said to be in close competition at this level.
So far as the geographic dimensions of the market are concerned, once it is accepted that the market excludes interstate wholesalers because of the significant investment required for them to compete effectively in the same territory as QIW and Davids and the significance of transport costs on economic supply, it is clear that the relevant market is limited to Queensland and northern New South Wales. This is the area of common operation of Davids Queensland and QIW.
As to market definition, I accept the evidence of Professor Kolsen. I accept that the chains exert a constraining influence on independent retailers but the influence is by no means strong and, as the evidence shows, is not particularly price sensitive. The conduct of a chain has an effect at the extremities of pricing policies by independent retailers. I do not accept the basic Davids' submission that the independent retailers compete generally speaking with the chain stores on price.
In my opinion, there is a substantial market in Queensland and in northern New South Wales for the supply by wholesale of a range of groceries to independent retailers. There is no doubt that QIW and Davids compete with each other for the supply of a range of groceries by wholesale in that market. The question for the purposes of s. 50 is whether the merged QIW/Davids entity would, or would be likely to be, in a position to dominate that market.
After the takeover, Davids would control the only competitors in the market and if there were a merger as proposed, Davids would control the only firm in the market.
I do not accept it as practicable that independent retailers might acquire their source of supply from interstate. The evidence of all the relevant witnesses recognises the importance of transport costs and the state by state distribution network of the independent retailers and of the national chains preclude interstate supply.
As to the possibility of new entrants, the evidence of Mr Window is to be preferred concerning the cost of the minimum requirements to establish a warehouse facility in Brisbane. Such an establishment would incur high capital costs and I think it unlikely that the other major wholesalers, F.A.L., I.H.L. and CBL. would seek to enter Queensland. The evidence of Mr John Patten, the Managing Director of Independent Holdings Ltd, is important. On the question of capacity to dominate and on the capacity of barriers to entry, I.H.L., at the invitation of a number of independent retailers in Western Australia, is moving to establish a warehousing facility in that state and to compete with F.A.L. Mr Patton said that in the short term neither I.H.L. nor composite buyers would enter Queensland. What he refers to as the short term is 3 to 5 years and he said:

" Our corporate plan does not involve anything around Queensland over that time frame. "

The suggestion that Brambles might be able to perform a wholesaling function in competition with the merged entity at the invitation of a sufficiently large number of disgruntled retailers, is, in my opinion, not realistic. The suggestion is now some years old. The margin seems non-competitive. The range of products able to be handled, it seems, is insufficient and, more fundamentally, the prospect suffers from the absence of a generic brand range.
I think it is essential that any new entrant have the capacity to supply a generic range of products which confines the potential entrants to the members of AAW.
I have earlier indicated my view that the annual sales volume would have to be in excess of $150m. to be viable. Without sufficient market share it would be disadvantaged in relation to quantity by discounts, rebates and promotional funding. Such market share would not come easily and the merged entity would have long pockets for a retaliatory price war.
In my opinion, the merged entity would, or would be likely to, dominate the market. The major chains do not participate in the market and are not likely to do so. The differences in supply by the national chains to their supermarkets and the supply by independent wholesalers to independent retailers has been earlier summarised. The differences in many respects are fundamental. The chains' warehouse procedures are quite different from those of the independent wholesalers who handle non-standardised and much smaller order sizes. The evidence suggests that the national chains have no intention of wholesaling groceries to independent retailers. Different generic and home brands is but one factor. The accounting and distribution systems of the chains are not suited to selling products which wholesaling to independent retailers involves.

Notwithstanding the volatility in relation to independent wholesalers in the various state markets, there has been no suggestion of a desire or capacity in the national chains to enter the market for wholesaling to independent retailers.
The final aspect of the matter is whether a merged QIW/Davids entity in the market for the supply of a range of grocery to independent retailers in Queensland and northern New South Wales would be likely to act uncompetitively.
The suggestion by Davids is that the constraining effect of the chains is such that a single merged entity supplying a range of groceries to independent retailers would not be able to act uncompetitively in that market.
I disagree.
What actually occurred when Davids entered into Australia in 1986 is instructive. The effect of that entry was to significantly lower prices. In an industry where the margins are generally very small, the lowering of prices was in the order of 2 to 3% - a dramatic reduction. This experience on the evidence is mirrored in the position in Western Australia and I think it right to conclude that the margin charged by F.A.L. has resulted in the invitation by some independent retailers to IHL to enter that market.
The merged entity would be the only source of supply to independent retailers: they would have nowhere else to turn.
It is accepted that there would be considerable economies of scale that are the result of any merger. Davids Part A statement estimates savings due to rationalisation as a result of the merger would be within $3m and $5m dollars. There would be further economies of scale in my opinion including increased supplier rebates and promotional funding, more favourable supplier trading terms and the potential to reduce inventory levels. In my view there would be substantial and effective barriers to entry to anyone wishing to set up business in competition with a merged QIW/Davids entity as a wholesaler of grocery products to independent retailers in Queensland and northern New South Wales.
That is not to say that should the position be, as it seems to be the case in Western Australia, that a single supplier to independent retailers has sought to extract a pressing margin from them, a sufficient number of retailers might provide a springboard of sufficient sales volume to persuade one of the members of AAW to enter the Queensland and northern New South Wales wholesale grocery market to independent retailers.
Economists on the question of dominance speak of an ability to give less and charge more as being indicative of market power. There are, of course, other variants: give less and charge the same, or to give less and charge less provided the reduction in what is given exceeds the reduction in what it is charged. In my opinion, if a competitive market would have indicated a different result, that is, it is the absence of competition that has enabled the supplier to act in the way he has; the supplier is in a dominant position. In my view there would be no need to pass on the considerable gains by economies of scale and the merged QIW/Davids would have the power to increase its profits without necessarily altering the wholesale supply price.
I accept that the extent of the merged entity's market power, whilst not absolute or significantly or totally unconstrained, would be such that the merged firm would be dominant. For the independent retailers there would be no alternative. In the absence of effective competition, the merged entity would be in a position to have "a commanding influence on its retail customers". The object of s. 50, in my view, was to prevent such a situation from occurring.
For the reasons which I have outlined, I make a declaration in terms of paragraph 1 of the application of QIW in Proceedings No. QG 3012 of 1992. Davids is to pay the costs of QIW in these proceedings and in Proceedings No. NG 575 of 1992.
In Proceedings No. NG 575 of 1992 the injunction claimed by the Attorney-General is too wide. I will hear the parties as to the terms of the injunction I should grant. Davids is to pay the costs of the applicant in Proceedings No. NG 575 of 1992.

[1993] FCA 288

30 APRIL 1993