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THE SYDNEY GROCERY INDUSTRY, 1955-1965; a STUDY of COUNTERVAILING POWER Being a Thesis Submitted for Examination in Fulfillment

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THE SYDNEY GROCERY INDUSTRY, 1955-1965; a STUDY of COUNTERVAILING POWER Being a Thesis Submitted for Examination in Fulfillment THE SYDNEY GROCERY INDUSTRY, 1955-1965; A STUDY OF COUNTERVAILING POWER Being a thesis submitted for examination in fulfillment of requirements for admission to the degree of Master of Commerce in the University of New South Wales. John Jeffries Nightingale, B.Com.NSW. University of New South Wales, March, 1969. CERTIFICATION OF ORIGINALITY I hereby certify that this work has not been submitted for any degree in any other University or institution. J.J. NIGHTINGALE SUMMARY Chapter 1 defines the hypothesis to be investigated in terms of an extension of J.S. Bain's theory of industrial organisation and various theories about retailing. Chapter 2 describes the Sydney grocery industry as far as is relevant for the study. Chapter 3 sets out the behaviour of the Consumer Price Index in Sydney for selected times within the period. Chapter 4 analyses the industry as at 1955, positing initial conditions of an unstable equilibrium re­ sulting from the post war decade. Chapter 5 shows how the unstable equilibrium of price and outputs began to break down over the 1950-56 period. Chapter 6 sets out the technical possibilities open to various parts of the industry during the period of change, including some possibilities which have not been taken up. Chapter 7 follows the pricing revolution up to the entry of the countervailers, Woolworths and Coles, which destroyed the balance which had been emerging up to 1958. Chapter 8 shows how the entry of these two large firms affected the industry and how a new equilibrium began to emerge in the middle 1960s. Chapter 9 sets out the changes in summary, puts iii forward some predictions of future industry behaviour and notes the limitations of the study and its possible significance for studies of other parts of the economy. iv TABLE OF CONTENTS Page Summary............................................. iii List of Tables.................................... vi List of Figures..................................... vii Chapter 1 Introduction ........................ 1 2 Some Comments on the Industry... 24 3 Price Index Behaviour, 1955-1965. ... 34 4 Initial Conditions............... 41 5 The Causes and Progress of the Pricing Revolution .................. 57 6 The Technical Possibilities .......... 75 7 The Pricing Revolution Completed ... 90 8 Countervailance, 1958 onwards... 99 9 Conclusions .......................... 140 Bibliography ....................................... 155 v LIST OF TABLES Facing Page Table 1 Number of Largest Plants accounting for Eighty Per Cent of Employment in Selected Grocery Industries, 1948-9 and 1963-4 .................... 30 2 Percentage Change of Consumer Price Index for Sydney, 1955-6 to 1965-6, by groups. 34 3 Average Productivity Growth Rates, 1949-1959 .............. 37 4 Ten Largest Re-Sellers of Groceries, 1966 ................ 111 5 Some Co-operative Advertising Charges in N.S.W., December, 1962 ........................ 118 vi LIST OF FIGURES Facing Page Figure 1 A Three Level Industry .......... 4 2 Cost and Demand in Lewis' Model............... 10 3 Possible Cost Functions of Service and Self Service Shops........................... 76 4 Average Yearly Price Increase, 1955-6 - March 1963-1965-6 ... 148 vi i CHAPTER 1 INTRODUCTION During the decade 1955-65, the organisation and be­ haviour of the grocery trade in Australia and, in particular, in Sydney changed very considerably. It is my thesis that entry, motivation change and shift of consumer preferences caused changes in organisation and market power that resulted in a lower relative price level for groceries in Sydney. This thesis will be supported by the interpretation of events and opinions gained from analysis of behaviour of some parts of the Consumer Price Index over the period, a study of various trade journals, and interviews with a number of people. The interpretation will be in terms of a model in which vertical as well as horizontal market relationships are important deter­ minants of market behaviour. The model has been developed specifically for the present thesis from those used by a number of theorists. The direct background of the model consists of two distinct parts. First there is the analysis of the organisat­ ion of the industry and second, the analysis of the retail shop. Some of the writers to be cited below are concerned only with one or other aspect, while some are concerned with both. 1 J.S. Bain's Industrial Organisation develops a general ■^New York, Wiley, 1959. 1 2 model of market behaviour for industries, "competing groups 2 of firms’, in the nonfinancial sector of a capitalist economy. His model is built around his conception of the market, ”a 3 closely interrelated group of sellers and buyers". Each member of the group is either a seller or a buyer. Bain's thesis is that market structure and market 4 conduct determine market performance. Market structure refers...to the organisational characteristics of a market;... those character istics which determine the relations of sellers in the market to each other, of buyers in the market to each other, of the sellers to the buyers, and of sellers established in the market to other actual or potential suppliers of goods, including potential new firms which might enter the market.^ Specifically, he narrows the concept to include four measurable variables, namely: 1. the degree of seller concentration, 2. the degree of buyer concentration, 3. the degree of product differentiation, and 4. the condition of entry.^ Market conduct refers to the patterns of be­ haviour which enterprises follow in adapting or adjusting to the markets in which they sell (or buy).^ ^Ibid., p.vii. ^Ibid., p.7. ^Ibid., p.3. 5Ibid., p.7. ^Ibid., p.8. ^Ibid., p.9. 3 Market performance refers to the composite of end results in the dimensions of price, output, production cost, selling cost, product design, and so forth, which enterprises arrive at in any market as the consequence of pursuing whatever lines of conduct they espouse... (That is), the character of end adjustments to the effective demands for their outputs which are made by sellers (or adjustments made g by buyers to the effective supplies of outputs). Under Bain's definitions of industry and market the present study would be of a number of markets. A particular firm could be part of each market or part of only one. This is because some firms are processors of groceries, "original sellers", who sell to wholesalers, retailers and occasionally final consumers, some firms are wholesalers, "re-sellers" who buy from processors and sell to retailers and some final con­ sumers, and some firms are retailers, also "re-sellers", who buy from wholesalers and processors and sell to final con­ sumers. Some firms combine two or more of these roles. Figure 1 illustrates the situation. For this study "grocery industry" will refer to the group of processors, wholesalers and retailers, competing at each level, and between levels, in the production and distri­ bution of groceries. This industry sells in a market where final consumers buy from, mainly, retailers. Important characteristics of this market will be discussed below. Bain's concept "market structure" is useful in the present study in ^Ibid., p.11. FIGURE 1 A THREE LEVEL INDUSTRY RE-SELLERS 4 a form which takes account of the multi-level nature of the industry. Market structure in this study is defined as (a), the size distribution of firms at all levels (cf. in Figure 1, the sizes of blocks representing firms), size being defined in terms of volume of turnover in retail value terms, (b), the pattern and size distribution in retail value terms of flows of goods produced and distributed (cf. in Figure 1, if the lines joining the blocks were of widths proportionate to the values represented by the goods flows), (c), the degree of differentiation within and between the flows of goods, (d), the pattern of entry possibilities, and (e), the pattern of g retail shop ownership and location. It may be noted that this definition extends Bain’s in that first, a firm’s re­ lationships with both customers and suppliers are taken into account, and secondly, the peculiar characteristics of retail trade are taken into account. The list of five factors making up the concept of market structure are all measurable in principle. For the purpose of this study interest will lie in the observation of changes in structure, imperfectly observed without actual quantitative measurements, but observed none the less with a 9 It can be argued that (e) refers to the same organ­ isational characteristic as does (a) in part. However, a retail chain store with ten branches each selling $lm. of goods each year is not of the same significance as one with 100 branches, each selling $100,000 of goods each year. This will become clear in discussion below of theories about shops. 5 precision sufficient to support the limited objectives of the s tudy. Following Bain, the concept of market structure ex­ cludes considerations of technology and motivation or value patterns.^ These are certainly important to an explanation of market performance, but they can more clearly be seen both as influencing structure and conduct and as determinants of performance along with structure and conduct. As noted above, retail shops are distinctive economic units, and the selling of goods through retail shops, rather than in undefined markets where seller (producer) meets buyer (consumer), demands some special consideration. The following is a brief review of a number of theories about shops or studies involving shops. Shops sell a vast number of different products, and the value added by the shop to any product is generally a small proportion, often less than twenty per cent, of its price. Heflebower^ suggests that for explaining the distri­ bution of goods through shops the appropriate unit of analysis may be the market basket of goods purchased from the shop, in other words, money value units of turnover, while the price is ^Ibid., p.9.
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