Australia’s major supermarkets have faced intense scrutiny over their pricing practices, drawing criticism from all political parties before an election focused on cost-of-living pressures.
Despite this, most shoppers have not seen any price relief in their shopping basket. It raises the question: is it a case of the more things change, the more they stay the same?
Or will the various parliamentary inquiries, government-ordered reports and impending release of a regulatory pricing probe into the sector start to curtail supermarket profit-making and lead to cheaper prices?
Brand damage
Rosie Thomas, the director of campaigns at Choice, said the biggest change over the past 18 months is the community’s diminished view of the major chains.
This is borne out in data from the consumer advocacy group and various surveys, including a Roy Morgan poll which found the big retailer brands had dropped to among the least trusted companies.
Surveys show shoppers are paying close attention to profit announcements and allegations of price gouging as they grapple with relentless rises in living costs.
“The level of trust in the supermarkets has plummeted, and I think we can credit that to the scrutiny that’s been happening through the various reviews,” Thomas said.
“From an advocacy perspective, we certainly welcome the damage to the brands, because typically that will mean that the decision makers that we’re trying to work with and influence are more likely to preference the interests of consumers rather than big companies.”
A recent undercover shopping study by Choice found there was less than a $1 price difference in a basket of common grocery items from the dominant chains, raising questions over how hard the major chains compete.
It also found that shoppers are confused by supermarket specials, making it difficult to know if they are getting a genuine discount.
Pricing probes
The scrutiny over supermarket practices have mainly taken place via a Senate inquiry; a review of the food and grocery code of conduct that governs how supermarkets bargain with suppliers; and a pricing probe by the Australian Competition and Consumer Commission.
The ACCC has handed its interim report to the government but the results are yet to be made public.
Supermarket profit margins
There has also been a union-backed price gouging inquiry into multiple sectors.
The Senate committee put forward several recommendations aimed at tackling alleged price gouging, including a proposal to establish a commission to examine price setting behaviour. It has also pushed to give enhanced powers to the regulator.
The Greens are seeking reforms to give courts powers to break up a major corporation in the event of wrongdoing, while the Coalition has pledged to introduce sector-specific divestiture powers.
However, few of the recommendations have bipartisan support, and it’s unclear whether any would lead to short-term relief for households.
The biggest potential shake-up of the sector occurred several years ago when large German retailer Kaufland invested several hundred million dollars in Australia. It prompted analysts to warn of a potential hit to the profit margins of Coles and Woolworths amid expectations they would need to offer better prices.
Kaufland abruptly cancelled its plans in early 2020 due to difficulties setting up.
Profit margins
Food prices are on the rise, again.
Fruit and vegetables are up 7.5% over the past 12 months, according to the most recent inflation figures.
The price of bread and cereal products increased 4.4%, while the dairy category was flat.
George Boubouras, the managing director at K2 Asset Management, said the purpose of any reforms should be to “deliver a basket of goods to households at the lowest possible, efficient price”.
“Regulators must always ask the question of any healthy society if there are oligopolistic pricing powers in the sector,” he said.
Australia’s big two supermarkets control two-thirds of the sector, far more concentrated than most comparable economies, including the UK.
Australia’s big supermarkets are far more profitable than their British peers and the gap has widened during the pandemic and inflationary period.
Coles and Woolworths now enjoy margins in their food businesses well above pre-pandemic levels even though demand has been modest at points the past few years.
This compares to the more fiercely competitive UK sector, where margins for the grocery businesses of the top supermarkets are at or below 2020 levels.
Profit margins, known as operating or Ebit margins, are the sector’s chief gauge and are used to help determine executive salaries.
The chief executive of Coles, Leah Weckert, said in a statement accompanying its annual results the “financial pressures on households and families have been front of mind” and the company had endeavoured to deliver value.
The outgoing Woolworths chief executive, Brad Banducci, said the company had passed on lower grocery prices to customers.
The major Australian chains have credited some of their profit growth to improved practices, growth of supplementary businesses and measures taken to reduce theft. They have vigorously denied extracting more from suppliers or customers.
Such cost-saving initiatives, however, are hardly unique.
For example, Coles has a “simplify and save to invest” strategy while Tesco has an efficiency program called “save to invest”.
Supermarkets in more competitive markets tend to use those savings to compete vigorously for customers rather than rely on fattened margins to increase profits.
This is the approach taken by the British chain Sainsbury’s, which is trying to win more customers from rivals while profit margins remain compressed.
It said in its recent annual report that its strategy was to lower prices on the most popular products and “pass on less inflation than our competitors”.
This contrasts with the near identical pricing practices of Australia’s two big chains.
