Australia is widely considered as one of the most protected economies with limited competition in many aspects. These have been the major issue causing rise in consumer costs, but for companies that have monopoly position, they are able to make good profit year after year, so why not investing in these monopoly companies and offset the rising living cost?
The Supermarket duo
We don’t need to go into details about the supermarket duo – Woolworths and Coles. The duopoly situation is so bad that it has been reported in the financial news worldwide, and countries have been using Australia as a “bad example” how monopoly can cause problems in rising grocery cost.
The government is not doing enough to encourage newcomers, while Aldi, IGA and now Costco has created some new competition, more than 80% of the market share are still controlled by the 2 groups: Woolworths and Coles (which is owned by Wesfarmers).
The Hardware Sector
If you think the grocery sector is bad enough, look at the hardware sector. Wesfarmers, the owner of Coles also owns Bunngings. Years ago, there were 3 major players: BBC, Mitre10 and Bunnings – this is now tightly controlled by the Bunnings. Mitre10 is now majority owned by another listed company, MetCash, which has been successfully in helping the company to expand in certain regions.
This has been a factor causing rise in building costs as supplies have been controlled by just 2 parties with little competition elsewhere.
From investors’ perspective, however, we are seeing profit margin incurred by hardware stores in Australia maintained at very high level, especially compared to international markets where margin is often below 10%, in Australia’s case, the margins can be as high as 50% to 80% if not more.
Another company to look into is Alesco – which has firm control over the windows and doors market, and sell them to the retailers, this has also made Alesco one of the monopoly companies in Australia, but very few investors actually know about this company.
The Building Materials Sector
The building materials sector is another classical case of monopoly. There are several companies to consider in this sector: In the overall construction sector, Boral and James Hardie still have the dominant market share. In the “colorbond” (the metal sheet for roof) is all controlled by BHP Steel which is owned by BHP. In the paint industry, the supply is controlled by 2 companies.
This kind of control means there is little competition allowed in Australia’s building materials industry, new players have tried to set up presence in Australia but have not been successful so far.
Apart from the big 4 banks which control 90% of Australia’s mortgage market, many financial sectors in Australia are controlled by just 1 or 2 players. Here are some good examples:
- Australian Securities Exchange (ASX) controls the entire trading market for Australian equities, options, derivatives and pretty much everything including share price quotation and news feeds. This is very unusual, and in fact, not allowed in North America or Europe. The takeover of Sydney Futures Exchange was the beginning of the monopoly dominance of ASX in Australia.
- Computershare – which processes shareholder documents, data management and keep updated record of shareholders in Australia. Computershare has well over 70% marketshare in this segment, there are 2 more smaller players in Australia; but they are facing a lot of competition from Computershare.
- Cabcharge which controls the transaction business for taxis, it also controls payment systems for ferries and buses in certain cities. This has been one factor why transaction fees in Australia have been the highest in the world because Cabcharge owns the terminals and the transaction system.
- Insurance sector: There are really just 3 major insurance companies remained in Australia: QBE Insurance, Insurance Australia Group and Suncorp Metway (which owns Suncorp and AAMI). There is a likelihood that there could be another consolidation which will leave just 2 major players in Australia. Foreign companies have entered the Australian insurance market with some success such as Allianz and Zurich; but their success has been more evidenced in the commercial insurance market.
If you are looking for an oil refinery company to invest, Caltex is pretty much the only one. Such monopoly position has been highly criticized by consumers as Caltex has been making strong profits year-after-year because of this control. Other refineries in Australia are owned by foreign oil companies, but their capacity and output are much smaller than Caltex.
The transportation industry underwent a series of consolidation in the 1990s. I was busy investing in these companies at the time. In the 1990s, the market was far more fragmented, you had different choices to choose your trucking company, petro tankers or even pet transfers. Nowadays, this is almost exclusively controlled by Toll Holdings.
We made enquiry about transportation our dog to another city once, we had received 6 quotations, and at the end, they are all just reselling Toll Holdings’ services.
Since early 2000, less and less competition has been noted in Australia’s transportation industry, and Toll Holdings’ position is likely to remain for a very long time.
Heavy Equipment Industry
A few years ago, National Hire launched a hostile bid on Coates Hire. It was a surprise as National Hire was a much smaller company at the time. Since the takeover, National Hire is Australia’s largest heavy equipment suppliers, particularly for the mining and construction industries. There are smaller franchises found in certain cities, but none of which has the same size as National Hire.
Other Retail Sectors
Apart from the supermarkets, many of Australia’s retail sectors are also controlled by 1 or 2 companies. Corporate Express, for example controls Australia’s office supply market with rival from Coles’ Officeworks.
In the electronics sector, it is a duopoly situation between Harvey Norman and JB Hi-Fi, with Dick Smith coming 3rd which is owned by Woolworths.
In the distributor sector, this is even worse in some cases. Funtastics, a toy & children products distributor has dominant marketshare in distributing children products around Australia.
Another good examples is the automotives industry where the auto parts are controlled by 2 companies: Automotive Holdings and SuperCheap Autos.
Should you invest in monopoly companies?
The answer is not always clear-cut, consumers hate monopoly companies and will always challenge the Government or protest by buying products elsewhere even they are much smaller or maybe they have travel far away.
Consumers will always support for the new players, one only needs to see how many people switch to Optus when it started offering services, or how many passengers switched to Virgin Blue when it launched its service.
Consumer boycotting is a real threat to Australian companies these days. In the recent months, we had seen consumers exiting local retailers and choose to buy products online, they would rather let foreign companies to make money than the local companies; such shift has caused profit downgrades for all Australian retailers, whether they have monopoly position or not.
Although Australian Government has been very slow in breaking monopoly situation in many industries, it has been making significant progress.
Consumers are pressuring the Government more than ever due to sharp rise in the living cost. Its success in deregulating the telecommunications industry has been widely heralded by consumers as Australia’s telecommunications charges had dropped by more than 50% since then. The airline industry is another good example.
The policy is very clear that Government does support opening up the market as that is the best way to lower the living cost. Whenever a new company enters into competition, you could expect the incumbent’s share price to slide significantly.