As the government launches another review of supermarkets’ conduct, the corporate watchdog is expected to announce its first full-scale supermarkets inquiry in 16 years. By Rick Morton.

Exclusive: Coles and Woolworths to face full ACCC inquiry

The dairy aisle of a supermarket.
Coles and Woolworths have led the way in growing revenue and profit margins while Australians have struggled to afford basic items.
Credit: Amer Ghazzal / Alamy

The Albanese government is finalising plans to launch the first full-scale price-setting review of Australian supermarkets in almost two decades, conducted by the consumer watchdog with compulsory information-gathering powers and backed by ministerial decree.

While it is being coy on the timing – Treasurer Jim Chalmers has indicated he has been in discussions with the Australian Competition and Consumer Commission chair Gina Cass-Gottlieb – political concerns and public opprobrium have all but guaranteed 2024 to be an annus horribilis in a sector already buffeted by a changing climate, inflation shocks and assorted supply chain crises.

Still, Coles and Woolworths have managed to lead the way in growing revenue and profit margins while Australians struggle to afford basic items at the check-out. Just how much of that increased price is attributable to increased costs and how much is what the National Party leader, David Littleproud, calls “price gouging” remains uncertain.

This year, parliamentary inquiries, a likely ACCC investigation, multiple wage theft court decisions and the scheduled review of the voluntary Food and Grocery Code of Conduct, led by former competition minister Craig Emerson, will seek to answer key questions on behaviour and price setting in the sector.

Emerson’s review, announced this month, is due to report by June but will be limited by the scope of the code itself. The code was introduced in 2015 in response to two high-profile court cases against Coles Supermarkets Australia, in which the retailer was shown to have bullied and tricked its own smaller suppliers into paying “rebates” and additional fees outside existing contracts. The two lawsuits, which Coles conceded early, avoiding the most severe penalties, still cost the company $10 million in damages plus more in legal fees.

Assistant Minister for Competition Andrew Leigh tells The Saturday Paper the government is “always open to new ideas” on competition but wants to wait for Emerson’s code of conduct review before “initiating additional processes” aimed at supermarket reform. Events may overtake any orderly sequence, however.

“The criticism that’s made is that it’s a voluntary code without penalties attached to it. And there have been people for years advocating a mandatory code approach,” Leigh says.

“Smart firms recognise that they need to look after their consumers and their workers at the same time. Woolies and Coles are two of the biggest private sector employers in Australia. They are firms that Australians interact with and so their reputations matter enormously.

“So they’ll have a lot riding on this and I hope they will engage robustly and in a detailed way, in a data-rich way, with the work that Craig Emerson is doing.”

It is a subtle hint, perhaps, but Leigh is warning supermarket chains times have changed and that economists have previously uncollected microdata to figure out if companies are being truthful about operating conditions.

“Duopolies can do one of two things: they can squeeze the consumers or squeeze their suppliers. And I think a read of the economic consensus over the last 20 years would have been that there was more squeeze being placed on suppliers than consumers,” Leigh says.

“But right now the anger seems to be quite hot in both directions: a concern from farmers that they’re not getting as much for their produce as they feel is fair and concerns from consumers that they’re paying more than they should.

“We’ve had stable inflation for a couple of decades, and then the Ukraine crisis came along and has pushed up prices in a whole lot of contexts, including the supermarket. And that has crystallised a sense of frustration with many Australians on the market structure, which is significantly more concentrated here than these other advanced countries.”

We already have proof, Leigh says, that supermarkets have room to move on price when it suits them.

“Certainly, we saw the entry of Aldi lead to lower prices at Coles and Woolworths and that’s an indication that those supermarkets were enjoying higher-than-usual returns,” he says.

“Now, right across the economy, we’ve been concerned that Australia is too much the land of the duopoly … that there’s only a couple of choices in Australian markets.

“This was largely anecdotal until a decade ago when the advent of good microdata has allowed us to really crunch down hard on what’s going on. That analysis, led out of Treasury, shows that market concentration on average has increased in Australia and mark-ups, the gap between cost and price, has increased.”

Woolworths, however, says its group margins were lower in the past financial year than they were 10 years ago in 2014. Data can tell different stories depending on the angle of approach.

Earnings before interest and tax hit $3.1 billion in 2023, up 16 per cent on 2022, while net profit after tax was up 13.7 per cent to $1.7 billion. At the first quarter 2023-24 results in October last year, Woolworths announced its group sales were up 5.3 per cent.

There was a “moderation in inflation”, it said, and shoppers were putting more things in their basket as a result.

In New Zealand, however, growth was just 2.8 per cent “with a slowing trend throughout the quarter, due to lower inflation and item declines driven by a very challenging economic environment and competitive landscape”.

That small detail tells much of the story about Australian supermarket prices. Responding to analysts’ concerns about the “performance” in New Zealand, Woolworths chief Brad Banducci said it was because there was more competition than in Australia.

“Specifically on New Zealand, what is very clear is it is a competitive market and more so than even Australia. And actually, most of the volume challenges in the first quarter … it wasn’t even PAK’nSAVE, which is a very formidable value large box player, it’s indeed The Warehouse looking for growth … into these everyday food needs and non-food needs,” he said on October 25 last year.

“The Costco launch, as best we can tell in Auckland, has gone disproportionately well and would have to be one of the best performing Costcos in terms of the numbers as we try and solve them from the back of the envelope.

“So the rest of the market – there’s a lot of competitive fruit and vegetable market places as well in New Zealand – you’d be aware of has been very competitive and then we’ve of course got PAK’nSAVE. So it’s been a challenging market.”

There is little such competition here, which is a significant factor in the success of Coles and Woolworths and a feature in the prices they charge.

Rod Sims, who served as chair of the ACCC from 2011 to 2022, tells The Saturday Paper there is value in a price-setting inquiry from the competition regulator, particularly because it has the power to compel information.

“I think as far as transparency goes it is always good, so just trying to get facts on the table helps,” he says.

“Sometimes it alters company behaviour because if they’re doing things that they really can’t publicly justify, and they know that that will get shown up or does get shown up, then you can adjust their behaviour.

“It’s always an issue about how to use the scarce ACCC resources. If what you want to find out is how prices paid to consumers react to prices paid to farmers or suppliers, then probably the only way to find that out is with an ACCC inquiry.”

The last such inquiry into supermarkets was conducted just months after Kevin Rudd came to power – findings were released in 2008 – and its analysis has been described as “piss-weak” by a competition expert who preferred not to be named.

“It was fucking piss-weak by any standard,” the source said. “Look, it was extremely excusing of the two big ones – extraordinarily so – and in addition it had this ridiculous diatribe against, you wouldn’t believe it, the IGA Metcash business.

“I mean, seriously, if you’re running a thing on competition, wouldn’t you focus on the big two?”

Nevertheless, that report found “Australian consumers would significantly benefit if Coles and Woolworths faced more competitive threats that encouraged more aggressive pricing strategies”.

As far back as the 2000s, Woolworths was “investing in price … to improve our competitiveness and deliver lower prices and better value to the New Zealand consumer” and an analysis of margins between the two countries showed a clear trend: Australian margins were growing, NZ margins were low and shrinking in the two-and-a-half years to 2007-08.

“The ACCC considers that there is evidence that Woolworths has had to adopt a different competitive strategy in New Zealand,” the report said. “Woolworths does not appear to have had the same freedom to increase margins as in Australia.”

The report also noted that where the two big chains, Coles and Woolies, did compete on price it was typically during “promotions”, and when these ended consumers saw “average sell prices increasing”.

It is precisely this strategy of “was/now” pricing over which the current ACCC chair, Gina Cass-Gottlieb, has indicated the regulator could sue.

The trick is simple: hike prices immediately before a promotion so the promotion price is actually not much of a saving, or any real saving at all, but looks generous compared with the “was” sticker price. Cass-Gottlieb told The Australian Financial Review the commission was “carefully looking” at litigation, which could be ready within the next 12 months.

The court action, if it happens, could target some or all of the supermarket chains in Australia, especially Coles, Woolworths, IGA and Aldi. Some are already embroiled in significant legal action.

Coles Supermarkets Australia faces a stolen wages claim of at least $115 million by the Fair Work Ombudsman (FWO). Likewise, Woolworths faces Federal Court action for unpaid wages of $1.1 million. Both supermarket chains are also subject to class action suits run by Adero Law, and all four matters are bound up before the same Federal Court of Australia justice, Nye Perram, who is expected to deliver a judgement in the FWO proceedings within weeks.

Coles originally made a “remediation” payment of $13 million to affected salaried team members in 2022, but bumped this up to a provision of $37 million last year “following further consideration of the issues as they evolved”.

Despite this additional provision and so-called investment in value – price promotions – Coles increased its gross margin by 26.4 per cent and its supermarket earnings before interest and taxes by $1.76 billion, or 2.9 per cent. Net profit after tax increased by $50 million to $1.1 billion.

David Littleproud told The Saturday Paper he had been urging Andrew Leigh to bring forward the code review and make it mandatory. Late last year, the Nationals leader says, he also began pushing for the Albanese government to trigger a price-monitoring review.

“And that’s where we said, in October-November, that a price-monitoring inquiry is important to have because what it does is it investigates evidence and the evidence was becoming very clear,” he said.

“When you looked at meat prices in particular, you saw a 60 to 70 per cent reduction in sheep and cattle prices at that farm gate, but only 8 per cent at the check-out.

“So there was evidence that there were problems and the reason the ACCC should do it [investigate] rather than, you know, a Senate inquiry or anyone else, is because they have the power to compel evidence and to collate and collect documentary evidence and then enforce penalties.

“So this is where there have been missed opportunities. We’ve used the wrong mechanism. The government said it wasn’t urgent, let’s just do the code of conduct review.”

Littleproud said an ACCC investigation would give the regulator real evidence to take the supermarkets to court on pricing, if that was what it intended to do.

For his part, Leigh doesn’t take the opposition seriously in its criticism.

“He was part of the government who did nothing on competition reform for a decade,” he says.

On Tuesday, Prime Minister Anthony Albanese said his government would be open to giving the ACCC more powers if it asked for them. “But the ACCC have some existing powers there,” he told reporters. “I note the comments of the head of the ACCC today saying that she would be prepared to exercise those powers.”

Labor has made some important strides, including with its two-year rolling Competition Review, which Leigh says will spit out policy reform ideas “like a Catherine wheel”, but there is one proposal under consultation that Rod Sims says is a no-brainer.

Current boss Cass-Gottlieb thinks so, too: strengthening Australia’s merger laws. Treasury closed consultation on its merger reform policy paper on Friday but there has been no clear signal the government has the appetite for change.

In December, Cass-Gottlieb said the regulator “does not have the tools it needs to see and prevent all anti-competitive mergers, and it means that harmful mergers may be taking place under the radar”. Without urgent change, she says, consumers and other businesses will end up paying more.

Sims is even more enthusiastic.

“So you’ve got two of the best competition lawyers in the country at the ACCC [Cass-Gottlieb and commissioner Liza Carver], and if they, with all their private-sector experience, have looked at merger reform and come to a view, then I think that’s a view that deserves a hell of a lot of respect,” he says.

“I think people would be surprised how quickly a change in merger laws would be effective. You know, if I just think back over the last couple of years I was at the ACCC, there were cases around the east coast rail freight market going from two to one, we had cases where the telecommunications market went from four to three, we had merging law cases where the retail electricity market became much more concentrated.

“So we’re only talking a couple of cases a year that might change but they’re really, really important. With the supermarkets, they’re continually looking to expand their reach. And that, of course, gives them more power in the marketplace, which, all else equal, can give them more pricing power.

“To me, the single most important thing the government could do, if it’s interested in competition generally and competition in relation to supermarkets, is accept the merger law changes being proposed by the ACCC.”

In the meantime, Sims says, a full-blown watchdog inquiry into supermarket prices and behaviour could examine open questions about whether there have been deals done between the big chains and shopping centre owners to keep other players out; whether the duopoly is “land-banking” by sitting on vacant or prime development land to keep it from business rivals; and whether they are doing a similar thing with “exclusive” supplier arrangements to prevent product access to opponents.

“Some of these issues were examined in 2008. Have those behaviours crept back now? I’m not saying they’re real problems but if you want to look at competition, you need to see whether there’s ways in which competition is being damaged,” he said. “There might be tons of others.”

Politics, rightly or wrongly, often responds to mood. There is no doubt supermarkets have earned the ire of consumers. Perhaps not always for what they have done – inflation really has been a significant contributor to price rises, although not the only one – but for what they did not do: invest more of those trumpeted corporate margins in softening the blow to consumers at the check-out.

Even investors are getting restless. In the 12 months before its annual general meeting in October last year, two employees at Woolworths died while they were at work. Executives responded with a “two-stage process” by cutting managers’ bonuses, which contained a safety component, by 10 per cent while it awaited the findings of investigations to “establish the root causes”.

For the first time in its history, more than 25 per cent of shareholders voted against the remuneration report as a result, giving the supermarket giant a first strike under corporate law.

A second strike at this year’s AGM would spill the board.

The message is clear: do better.

This article was first published in the print edition of The Saturday Paper on January 20, 2024 as "Exclusive: Coles and Woolworths to face full ACCC inquiry".

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