The Australian Competition & Consumer Commission (ACCC) has delivered a sobering report on the country’s supermarket sector, revealing that giants Coles and Woolworths, which together command nearly 67% of national supermarket grocery sales, have little incentive to aggressively cut prices. Instead, both chains have been steadily increasing their earnings margins over recent years—with a more pronounced rise at Woolworths. Despite concerns over potential price gouging during the pandemic, the ACCC stopped short of declaring the market a duopoly, instead noting that the sector is distinctly oligopolistic with very few major competitors.
Stagnant Competition: A Lack of Price Wars
According to the ACCC’s analysis, the two major players are not competing vigorously on price. “Coles and Woolworths have limited incentive to compete vigorously with each other on price,” the report stated, adding that there has been little evidence of the companies substantially discounting prices below each other in aggregate. This lack of robust price competition suggests that both retailers are capitalizing on their dominant market positions rather than passing on savings to consumers.
Margins on the Rise Despite Cost Pressures
The report highlights that while operational and input costs have surged, both Coles and Woolworths have maintained or even increased their product margins. The ACCC’s analysis, based on pricing data supplied by the supermarkets, indicates that the lift in margins has been more marked on branded products compared to home brands. Branded items, which are sold across multiple retailers, have seen higher average margins over the last five financial years. This trend not only boosts the retailers’ earnings before interest and tax (EBIT) but also suggests that consumers are not reaping the full benefits of any cost-saving measures implemented by the supermarkets.
The Supplier Squeeze: Monopsony Power in Action
The report also casts a critical light on the trading relationships between the two retail giants and their suppliers. The ACCC found that Coles and Woolworths exercise significant monopsony power in the supply chains, particularly affecting suppliers of fresh produce. This market concentration leaves suppliers with little bargaining power, often forcing them into blanket contracts that lack detailed terms on price or quantity. Consequently, many suppliers face additional costs—such as freight, promotional charges, and enforced discounts—further straining their businesses. “All else being equal, the more highly perishable the produce is, the weaker the supplier bargaining position is likely to be,” the ACCC noted.
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Confusing Loyalty Programs and Pricing Data
Adding to the complexity, the ACCC criticized the supermarkets’ loyalty programs and pricing labels as “ambiguous and confusing.” These unclear pricing strategies, combined with the opaque nature of rebates that suppliers are forced to pay, have contributed to an environment where the true cost of grocery products remains murky. The ACCC has recommended that pricing data be made public, discounting claims receive more rigorous scrutiny, and loyalty programs be reviewed in three years’ time to ensure they truly benefit consumers.
Land Banking and Competitive Concerns
There have also been longstanding allegations that Coles and Woolworths are engaging in land banking—hoarding parcels of land to keep competitors at bay. While the ACCC’s report did not find conclusive evidence to support these claims, it acknowledged that the investigation into state planning laws and land acquisitions is ongoing. The regulator expects to soon receive stronger powers to scrutinize mergers and acquisitions in the sector, which could shed further light on whether such practices are indeed limiting competition.
The Role of Discount Retailers
The report does, however, acknowledge that some competition exists. German supermarket Aldi, described by the ACCC as a “hard discounter” and a “crucial lower-priced alternative,” provides some relief for price-sensitive consumers. Aldi almost exclusively sells home brand products and is seen as a vital competitor to the duopoly of Coles and Woolworths. Meanwhile, Metcash, which supplies independent IGA stores, has not seen the same rise in margins, highlighting its relatively minor impact on the broader market dynamics.
Government Response and Future Recommendations
In response to the report, the federal government welcomed its findings in principle but stopped short of committing to any major reforms, stating that the recommendations would be considered as part of existing work. The government has already allocated an extra $30 million over 3.5 years to bolster the ACCC’s ability to enforce market competition in the retail sector. Additionally, as part of the effort to support suppliers, the Labor government has announced a commitment of $2.9 million over the next three years to help suppliers stand up to the pricing pressures imposed by the big supermarkets.
The ACCC made 20 recommendations aimed at improving transparency, oversight, and competition within the sector. These include making pricing data publicly available, scrutinizing discount claims more closely, and providing greater oversight of the rebates that suppliers pay. The regulator also urged for enhanced support for community supermarkets, such as co-operatives, as an alternative to the current concentrated market structure.
Implications for Consumers
For everyday shoppers, the report paints a picture of rising grocery costs that are not being adequately offset by competition. As Coles and Woolworths continue to leverage their market dominance, consumers are left with fewer incentives to benefit from lower prices. This scenario, coupled with the rising costs of living, places an increasing burden on household budgets. With significant portions of grocery spending potentially hidden in higher margins and opaque pricing practices, the true cost of food remains a challenge for many Australians.
Conclusion: A Call for Enhanced Oversight
The ACCC’s latest report underscores the limited incentive for Coles and Woolworths to engage in vigorous price competition, a situation that has allowed them to increase their product margins over recent years. While discount retailers like Aldi provide some competition, the overall structure of the Australian supermarket sector remains highly concentrated, to the detriment of both consumers and suppliers.
As the government and regulatory bodies consider the ACCC’s 20 recommendations, there is hope that enhanced transparency and stronger competitive oversight will help alleviate some of the pressures facing Australian households. Ultimately, ensuring fair pricing and robust competition in the supermarket sector is crucial for protecting consumers and supporting a more equitable retail market.
