More mutual forbearance

Hot on the heels of Woolworth’s announced entrance into the Australian hardware retailing space, it would seem that fellow grocery player Metcash wants to follow suit.

Metcash, who run all the back-office (and sales and marketing) for the independent supermarkets group IGA has launched a bid for Mitre 10, a cooperative group of over 400 hardware stores.

This would mean the three largest supermarket brands, Coles, Woolworths and IGA would now be the dominant players in the Australian hardware market.

In a strategic sense, this opens a significant likelihood of an outcome referred to as mutual forbearance. This has been defined as

“tacit collusion as a consequence of firms competing in many markets and the resulting increase in their interdependence” (Jayachandran, Gimeno & Varadarajan, 1999: 51 as cited here)

Put simply, operating in to parallel competitive spaces means these firms may well realise the futility of excessive competition and seek some stable détente (a.k.a. a Mexican standoff).

It will be interesting to what the Australian Competition and Consumer Commission have to say about this one (although it is hard once the horse has bolted).

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Whose shout is it again?

Here is a handy summary of the manoeuvring in the Australian drinks markets in recent months. The current offers on the table are:

– NZ brewer Lion Nathan (46% owned by Japanese brewer Kirin) pitching for Coca Cola Amatil (who bottle and distribute soft drinks and beers and are roughly 30% owned by US firm Coca Cola Company) (discussed earlier here).

– Japanese brewer Asahi bidding for the Aussie Schweppes business (but potentially scuppered by Coca Cola Company) (discussed earlier here).

The Asahi offer throws up the possibility that the firm may either expand its relationship with Aussie brewer Fosters’ or go head to head with them. The firm claims to be biding its time until Fosters’ sorts out whether it wants to stay in the wine business.

Meanwhile, a raft of potential international bidders remain on the horizon for Fosters’ beer business if they can dump the less profitable (and less stable) wine arm, including Moors Colson, SAB Miller, presumably the aggressive Anheuser-Busch Inbev or even Coca Cola Amatil (if they can survive the Lion Nathan bid).

This is well and truly a game of chess in terms of the moves and countermoves we are likely to see over the next 6 months. The wild cards in the pack are (i) the competition regulator in Australia (the ACCC), who might deem any one of these current proposals (or any move by Coca Cola Amatil) unacceptable on the basis that rivalry will be reduced,and (ii) the Foreign Investment Review Board could deem an international acquisition of Australian assets to be outside the national interest. The latter is extremely unlikely given the current level of international involvement.

It still remains very unclear whether if there are clear and valuable synergies here.

Are there genuine economies of scope between the distribution of soft-drinks and beer?

Fosters’ experience seems to indicate that the wine and beer don’t mix well, despite sharing the same retail outlets.

Why would we expect the non-alcoholic and alcoholic product lines to gel any more effectively?

Or, in the end, is this just a simple grab for a currently very profitable, oligopolistic Aussie beer market?