The growth of Pinnacle Drinks, Endeavour Group’s private label supplier, has raised eyebrows in the brewing industry as retail shelves become crowded and more breweries enter the market.

Its own-brand alcohol supplier Pinnacle Drinks accounts for $1.3 billion of Endeavour Group’s YTD revenues, and the awards success of private label brands from Aldi and Coles Liquor have compounded the importance of these private label brands to major retailers.

While there is a strong culture of independent bottle shops, and other retailers such as Liquor Marketing Group’s Harry Brown are set to expand, Endeavour Group and Coles-owned liquor stores, such as BWS Dan Murphy’s and Liquorland, still have a stranglehold over the retail end of the market.

But whether they are a threat to brewers with retail ambitions themselves is difficult to determine. From the perspective of the Australian Consumer and Competition Commission (ACCC), private label entrants could be just another competitor in a duopoly-dominated market, according to associate professor Rob Nicholls at UNSW.

“If you have a substantial degree of market power, then it’s about whether what you do is likely to substantially lessen competition,” he explained.

Unlike other countries, Australia is not as stringent in its approach to limited numbers of competitors in a market, such as duopolies.

“The law is clear here [in Australia], that more than one business can have a substantial degree of market power in any one market. Why? Coles and Woolworths. That was the thinking behind the drafting.

“[But] the issue then starts to be when people pay significant amounts of money to be on the aisle of Coles and Woolies. They try to monetize shelf space as much as they can…end-of-aisle displays are a place where they can do that.”

Slotting fees – the concept of suppliers paying retailers to have their product placed on or in certain places on standard shelves – has been a point of contention in the US, which has also recently taken a look at competition in the retail, distribution and supply areas of its brewing industry.

“You can pay for slotting here as well, which means if you’re on the eyeline shelf it’s better value, [you have] better prospects. The eyeline slot is more valuable than being on the bottom shelf.”

Self preference and competition

The problem that could face brewers looking to have their products listed in major retailers who are now investing in their own brands is self-preference – if the retailer puts their own-brand products in premium spaces for less than it would cost external suppliers.

“[In supermarkets for instance] if they decide to have essentially an internal transfer price for end-of-aisle promotion, which is different from the price that it would charge a third party, that potentially becomes problematic. It could lead to a substantial lessening of competition,” explained Nicholls.

This is of course an issue that would be difficult to prove, and there would need to be a subsequent effect on market share, which would mean that the structure of the market has shifted in favour of the retailer and its private label products.

“The ACCC would also consider the role and reputation of the major brands in the market, whether it be Coles and Woolworths supermarkets or Endeavour as customers have a high degree of loyalty with one of them, and in shopping centres, there is often just one of those supermarkets or bottleshops. This brings in ACCC’s geographic considerations.

“But that’s the sort of thing that could lead to an abuse of market power as well.”

Vertical integration

A major point of contention and where retailers certainly have the upper hand is with deeper and more efficient vertical integration.

“So basically, by buying up the supply chain, you’re excluding competitors. Even if it’s not promotion in terms of desirable shelf space, but actually total shelf space,” said Nicholls.

“So let’s say I’ve got in a Dan Murphy’s, I’ve got craft beer for half an aisle. I suddenly moved from having that half an aisle completely filled up with independents, to suddenly two thirds filled with own-label products, then there’s still a potential for a lessening of competition there.

“Because what I’m doing is essentially saying, well, I would rather buy from my in-house supplier than I would buy from a third party.”

Again, though Nicholls explained that it would be difficult to prove this, as there could be a rational reason for that preference that doesn’t lead to a substantial lessening of competition.

“If I’m Endeavour, I’d say, ‘that’s what my customers want’. But if the idea is, well, I’m going to do that, for example, in order to be able to charge a premium for slotting or for end of aisle display, that could again be a lessening of competition that flows from the action.”

Vertical integration in other industries is usually dealt with on an ex ante basis, Nichols explained, meaning that it is dealt with based on forecasts and potential outcomes rather than ex post – after the events or issues have already occurred.

“In electricity, for example, you’ve got generators, transmission companies, distribution companies, and retailers,” he said.

“You could be a generator and a retailer, but you can’t be a generator and the transmission company or transmission company and distribution company, any of those three have to be separated.

“And if you’re a distributor or transmission company, you can’t be a retailer. Why? Because there’s only one wire coming into your home that delivers energy. So it’s got that natural monopoly characteristic.

“In areas where there’s a natural monopoly, vertical integration is almost always prohibited on an ex ante basis, or it’s regulated in some way – energy telecommunications, airports, private railways with ports and shipping ports [for example].

“We tend not to see it as in any other businesses, because of the protection that flows from abuse of market power provisions.

“If somebody is abusing their market power by exclusionary conduct in a vertical supply chain, saying, ‘I’m not going to buy anything from this brewery because I’m buying it only from myself’, this is the point where a body like the ACCC might consider whether this would be an abuse of market power.

“The players have to have a substantial degree of market power, and then they act in some way that lessens competition. And that lessening of competition is usually by way of some form of exclusion from a vertical.”

Innovation, competition and trade secrets

One of the major arguments with regards to private label brands is that they are benefitting from the hard work and innovation of independent brewers but also benefitting from the extensive resources – including consumer data and automatic access to national distribution – of a major retailer.

“The problem there is that well… that’s competition,” explained Nicholls.

“Competition arises from innovation, so you have the product development done by some innovative brewers.

“But actually, the next level of competition comes from production and logistics innovation, which is precisely what Endeavour has done.

“So it’s difficult because competition law is to protect competition, not competitors. So if what Endeavour has done is reduce prices for consumers, and improve product logistics and product pricing through innovations in production processes, that’s what’s supposed to happen.”

In other industries, it’s a very common occurrence, he explained.

“It’s a fairly normal problem that you start to see – the second wave and the third wave players end up being the ones that make the most.

“In the tech space, the innovators assume this. They’re always thinking ‘what’s my exit strategy?’ I’ll sell to the big buyer who wants to come in after me because I’ve actually got another new idea which I’m going to innovate later.”

Competition law does not exist to stifle innovation, Nicholls suggested. But protecting this innovation is decidedly more difficult in brewing than in the technology space.

“If you want to avoid your innovation from being gobbled up and exploited by others, then you need to protect it in some way. Which is a bit easier in the tech space, because you do it by using trade secrets rather than saying don’t get a patent for it because it takes too long and you disclose everything.

“What you do is lock up all your employees in nondisclosure agreements, so it becomes a trade secret. And as long as you can keep that secret, you’ll still be ahead of the game.

“Can you develop a fizzy drink that looks a bit like Coca Cola? Yes. Will it taste just like Coca Cola? Probably not.

“And therefore, you end up with Coca Cola and Pepsi being the major cola drinks based on trade secrets. It’s just a lot harder with brewing because water, hops, yeast and malt is not a secret.”