A year-long probe into supermarkets has reinforced what we already knew

To an outside operator, the Australian food retail sector looks easy prey and just ripe for the picking.

Dominated by two behemoths, earning the type of margins most global supermarket giants could only ever dream of, with a history of delivering record profits even during periods of intense household financial stress.

And yet, despite what would appear to be obvious attractions, most global chains have shied away from these shores and those that have tried have failed to crack the market.

After 20 years of heavy investment, Aldi has secured just 9 per cent of the grocery market. And Costco? Despite all the hype around its arrival in 2009, it’s snared just 1 per cent.

What does this tell us?

Largely, that Woolworths and Coles have an almost unassailable dominance of the Australian grocery sector, creating impossibly high barriers to any would be intruder.

Between them, they have a stranglehold on the food and grocery market with a combined share of just shy of 80 per cent.

But are they abusing that position? Given, over the years, there have been seven parliamentary inquiries and an ACTU probe, there’s clearly an overwhelming community sense that our grocery chains are pulling our chain.

Is there evidence of price gouging?

After a year of investigations from the Australian Competition and Consumer Commission (ACCC), 100 public submissions, 20,000 more from consumers, the answer was that, at least from a strictly legal standpoint, no.

The main findings merely reinforced what we already knew.

Our two big food retailers, it seems, merely have limited incentive to compete on price as they reap the benefits of their enormous market concentration and the power that bestows upon them.

But there was no evidence of price collusion.

No smoking guns and, as a result, “no silver bullets”.

Of the 20 recommendations handed down by the consumer watchdog, only three related to price competition. Even then, the recommendations involve forcing the chains to provide more pricing information and transparency around their loyalty programs.

The vast bulk of findings related to the way the two giants deal with their suppliers, giving an indication of where the power imbalance is put to maximum use. And, given the regulator has given it such prominence, it could become the Achilles heel for the pair.

For those hoping to break up the pair, the report will come as a bitter disappointment. But, as Treasurer Jim Chalmers noted, such a strategy involves serious risks.

“The risks outweigh the benefits,” he told ABC News Breakfast.

“If you make one of the big chains sell in the community, there’s a risk that it’s just snapped up by the other big player in the supermarket sector and that would be counterproductive.

“Or if it chases supermarket options out of town in regional communities, it’s got hairs all over it, frankly.”

His view was backed by former ACCC chair and now Monash University academic Graeme Samuel, who said he was “always dismayed” when such powers are suggested.

“It has the potential to create even greater problems,” he told ABC News Radio.

“It’s trying to reconstruct a market.”

For years, critics have accused the retailers of creating a vast land bank, snapping up available sites and sitting on them to deny potential competitors any opportunities to compete.

Even that couldn’t be stacked up the ACCC. Most of the problems relating to sites, it found, were created by local councils.

Winning by a wide margin

The two supermarket giants attempted, and largely succeeded, to cultivate community favour during the pandemic when shortages of essential household goods created havoc among consumers.

But any goodwill they generated during this period was quickly flushed away in the aftermath as the first real bout of inflation took hold.

The price of food soared as a series of punishing interest rate hikes ripped a hole in household budgets.

Then, as economists fretted that wage rises would spark an inflationary spiral, both Woolworths and Coles reported record earnings and an improvement in their margins, indicating they were raising prices beyond that caused by inflation.

While Woolworths overall 2023 profit rose 4.6 per cent, less than the prevailing inflation rate, earnings from its Australian supermarkets soared 20 per cent, sparking a community uproar and claims that inflation was being driven by profits rather than wages.

The simmering anger within the community turned to white hot rage when the chiefs of both Woolworths and Coles appeared unrepentant during a Four Corners investigation.

So incensed was then-Woolies boss Brad Banducci at the line of questioning, he stormed out of the interview. Then newly appointed Coles boss Leah Weckert simply floundered.

Since then, both chains have found themselves the subject of court action from the ACCC over their price specials, some of which appear to be discounted shortly after massive hikes.

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Why is our grocery market so concentrated?

It’s not just groceries.

Think of industry, and if it’s a mature one, you’ll discover there’s just a handful of very big players. Often, there will be two dominant companies.

Everything from airlines, to banking, insurance, telecommunications, mining and even gambling is concentrated in the hands of a couple of very power players.

That’s because companies wishing to grow often find it easier to swallow up the competition or join forces.

It’s also a product of our geography and demographics. Australia is a vast land mass with a relatively small population.

Companies getting larger should involve creating what’s known as “economies of scale”. Their costs per unit of production should fall which, theoretically at least, should benefit us all. But only if they pass on the savings.

The problem is that allowing industry to become so concentrated in the first place overturns one of the primary foundations of free market economics. There is supposed to be many buyers and many sellers, not just a handful of sellers.

Both Woolworths and Coles argue that more regulation will push up costs. But, as investors celebrated the ACCC findings by pushing up the share prices of both companies on Friday, it’s a small price to pay.

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