Comment

John Hewson
The dangers of the Coles and Woolworths duopoly

As in politics, truth – or a lack of it – in advertising has been a much-debated topic. It seems that the chasm between truth and marketing gimmickry has never been so wide. I’m speaking of our “fresh food people” and their co-conspirators. At a time when families are struggling so desperately with the cost of living, and realistically fearing that it will get much worse, truth matters more than ever.

Last week my wife and I darted out for a quick food shop – just a few essentials. We grabbed a small basket for eggs, butter, packaged cheese, pet food and fruit. No meat – meat eaters being now in the minority in our household. We were staggered to see that this modest haul came to $77. A family having to do that each day is surely in real trouble.

This is ColesWorths’ Australia.

I commented to my wife that it’s a sign of how competition policy has sadly failed in our country. Surely the Australian Competition and Consumer Commission (ACCC) has been asleep at the wheel or otherwise complicit in the concentration of market power in the hands of just two major players, Coles and Woolworths, which now control almost two-thirds of the supermarket sector. Australia’s is one of the most concentrated such markets in the world.

Not only have these two companies been able to maintain their dominance by effectively restricting new competition from the likes of Metcash, Aldi and others, they have also apparently been able to prevent other global players, such as Kaufland and its sister chain, Lidl, from entering the market at all. The German retailer pulled out of Australia in 2020, two years after buying its first site in the country, and before it had even opened its doors.

What is almost more difficult to understand is how Coles and Woolworths have been able to spread their business tentacles into alcohol, petrol, mobile phones, pharmacy goods, insurance and health cover. They are now even scratching worryingly around the banking sector.

The backdrop to this has been the two supermarket giants’ capacity to screw down deals with suppliers, intimidate producers to prevent them selling to potential competitors, and influence zoning decisions.

Both Coles and Woolworths have been almost obscenely profitable throughout the worst of the cost-of-living crisis so far. In their most recent profit announcements for the first half of the 2022–23 financial year, Woolworths announced a net profit of $907 million, up 14 per cent on the previous year, while Coles announced a profit of $643 million – a more than 17 per cent increase. Both have attributed much of the jump to a fall in Covid-related costs.

As if these raw numbers are not disturbing enough, the saturation advertisements claiming price reductions and decisions to freeze items at last year’s prices are little short of offensive. As was some of the hubris that accompanied their profit announcements. For example, the statement by Woolworths chief executive Brad Banducci that “cost-of-living pressures are being felt by our customers due to industry-wide inflation” and that “helping our customers get their ‘Woolies worth’ remains our number one priority”. The reality is Coles’ and Woolworths’ prices have risen by 9.6 per cent over the past year, outpacing inflation.

Coles noted its profit margins would have been higher but for, among other things, “stock loss as a result of increasing theft”.

The idea there is some sort of price war between these two market leaders is fantasy. There is no battleground, their average prices chart pretty much the same. There is no contest.

Of course, a lack of competition means a narrowing of choice and, by extension, of quality. Our kids think pears are crisp like apples and are only soft when they come in a tin.

But things have begun to get more interesting, with Aldi on the scene.

There is much to be learnt from Aldi’s appearance in the Australian supermarket landscape. This German discount chain has 9000 stores in 18 countries. Its success was initially due to lower prices and offering options that weren’t available in either Coles or Woolworths. Interestingly, its impact here has been bigger and faster than in Britain. It took almost 25 years to gain 10 per cent of the British market; here in Australia, it took only about 15 years.

The chain is now looking to expand through South Australia and Western Australia. Australians have clearly embraced this alternative and have enthusiastically taken up the European options Aldi stores have introduced, having tired of the somewhat limited fare at ColesWorths, which has been getting away with forcing consumption patterns. Clearly Australians are in the mood to enjoy more variety and try new products.

Another interesting player in the market, echoing these sentiments, has been the American discount giant Costco, which opened its first Australian store in Melbourne in 2009. Costco has barely 1 per cent market share but plans to expand. It works on a subscription model – a $65 annual fee – that accounts for most of its earnings. Part of its attraction has been undeniably cheaper bulk goods across many of the staples – rice, washing powder, toilet paper et cetera – but also its separateness from the usual suspects. It presented new and different products, with change being a constant.

It’s a shopping experience, and what’s not to like about ending the grocery trip with a $1.99 hot dog combo that includes a refillable cup of fizz? In the United States, the chain has offered that deal for $US1.50 since 1985, and executives have remained committed to it even as inflation soared.

 

The concentration of market power has not been confined to supermarkets but is also significant in a number of other sectors. Most notably, in communications and energy, with the surprise emergence of “gentailers” – generator/retailers that are able to gouge both the wholesale and retail markets.

In banking, the decision to license foreign banks in the mid-’80s was a very big deal and there were enormous expectations that the big global retail banks would challenge our domestic banks and generate real competition. This didn’t happen, as the foreign banks couldn’t break the stranglehold of the Big Four on retail transactions.

Another emotive example is petrol. We all grumble about the rip-offs by petrol stations that seem to have the uncanny knack of raising prices just as each holiday period begins. It’s hard to accept that the big two supermarkets have also been approved to have yet another go at the Australian public, and so it is not surprising that the petrol line at Costco can extend around the block. Fed-up people are prepared to wait, in quiet protest.

The ACCC has much to answer for, although I recognise that they have had some success in charging and penalising generally small-scale anti-competitive behaviour. Enforcement of genuinely competitive behaviour among the dominant retailers should be another important weapon in the anti-inflationary armoury.

So to truth in advertising. We would like to imagine that in these times, when the cost of living is such a challenge to most families, those with a duopoly in supplying our food and groceries would indeed recognise that they have some sort of social responsibility. Just claiming to freeze prices on essential items isn’t enough.

Sadly, and to no one’s surprise these days, it’s more likely to be fruit and vegetables, not prices, that shoppers find frozen at the big supermarkets.

This article was first published in the print edition of The Saturday Paper on July 1, 2023 as "The grocery grift".

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