Woolies and Coles have ‘limited incentive’ to compete hard on price, ACCC finds
Coles and Woolworths have so much power that they don’t need to compete hard on price, an inquiry into the supermarket sector has concluded.
The Australian Competition & Consumer Commission (ACCC) found both supermarket giants have increased their earnings margins in recent years, with a more significant increase at Woolworths.
But the regulator stopped short of concluding that grocery prices were “excessive”, and did not declare that the two major players in the sector have a duopoly.
The federal government directed the ACCC to investigate the supermarket sector, amid allegations of price gouging during the pandemic.
Woolworths, Coles, IGA-supplier Metcash and Aldi appeared before hearings last year, alongside some of their suppliers.
Despite not declaring Australia’s market a duopoly, the ACCC reiterated concerns that there is far less competition here than overseas, with very few major players, making the sector oligopolistic.
“Coles and Woolworths have limited incentive to compete vigorously with each other on price,” the report found.
“We have not observed Coles and Woolworths seeking to substantially discount prices below each other in aggregate.”
Woolworths and Coles were found to have enough power to affect the market price of products from some suppliers.
Claims from both supermarkets, that they are facing a lot of competition from retailers as diverse as Bunnings and Amazon don’t stack up, the ACCC found.
German supermarket Aldi is providing a bit of extra competition, the watchdog found, but Metcash’s impact is limited.
Metcash sells groceries wholesale to independent supermarkets like IGA.
It is the only one of the four companies that hasn’t been increasing margins, according to the ACCC’s analysis of pricing data supplied by these companies for its inquiry.
Margins have risen on branded products, ACCC finds
The watchdog scrutinised margins on items from pet food and bananas.
Average product margins, concluded by the ACCC (Supplied: ACCC)
Margins on products are different to final profits, the ACCC noted, and there has been substantial cost pressures on these companies’ business models too.
Despite that, the supermarkets remain winners.
“While input and operational costs have increased over this time, Coles and Woolworths have maintained or increased their product margins,” the report found.
The ACCC calculated the earnings margins of the supermarkets by dividing the companies’ earnings before interest and tax (EBIT) by the revenue they generate.
Even when the supermarkets acted to reduce their costs, “they have not passed on to consumers the full benefit of savings from those initiatives,” the ACCC concluded.
“Increasing product margins appear to have contributed to the increasing EBIT margins.”
The lift in margins was more stark on branded products that could be stocked across multiple retailers, compared to home brand goods.
“Coles and Woolworths earned higher average product margins on branded products than private label products over the last five financial years.
“Branded products’ margins also increased over this period for both supermarkets, particularly for packaged goods.“
About a quarter of what Coles and Woolworths sell is now home brand, according to the report, while at Metcash-affiliated stores, it is much lower.
Aldi almost exclusively sells home brands.
The regulator described Aldi as a “hard discounter” and a “crucial lower-priced alternative” to the two major supermarkets. (ABC News: Sarah Maunder)
Woolworths is making higher margins at its smaller-format metro stores, the ACCC found. It didn’t find this about Coles smaller city format, however.
Shoppers are also confused by the supermarkets’ loyalty programs and pricing labels, with the ACCC dubbing them “ambiguous and confusing”.
The ACCC is separately taking ColesWorth to court for allegedly promoting fake discounts on goods but the legal action could not be mentioned at the inquiry.
What’s the impact on suppliers?
Suppliers are under the two major supermarkets’ thumb, especially those supplying fresh produce like fruit and vegetables, the watchdog found.
It raised concerns that suppliers face a ‘monopsony’, where there is effectively only one buyer for their products.
“Coles and Woolworths are able to exercise monopsony power in their trading relationships with many suppliers in these supply chains,” the ACCC found.
“All else being equal, the more highly perishable the produce is, the weaker the supplier bargaining position is likely to be.“
The ACCC says fresh produce suppliers are particularly affected by market concentration. (Gary Rivett: ABC News)
Last year’s inquiry heard that some suppliers have been offered blanket contracts, that don’t include terms such as price or quantity.
Suppliers can also face costs such as freight and promotional charges, as well as “rebates” or enforced discounts on their bills when retailers make orders.
“Many suppliers say they fear retribution from raising concerns with supermarkets,” the ACCC notes.
The ACCC made 20 recommendations for change.
These include making pricing data public, more scrutiny of discounting claims, and a review of Coles and Woolworths’ loyalty programs in three years time.
It also wants greater oversight of the rebates that suppliers are paying, and more support of community supermarkets, such as co-operatives.
The ACCC said it had been unable to stack up claims that the big two were sitting on parcels of land to keep out competition, known as landbanking.
Yet it noted stronger powers that it will soon receive to scrutinise acquisitions, known as merger powers.
The federal government welcomed the report but did not commit to actioning the recommendations, saying it “agreed in principle” and they “will be considered as part of our existing work”.
The government previously granted the ACCC an extra $30 million over 3.5 years to investigate and take enforcement action on the supermarket and retail sector.
As it released this final report on Thursday, the Labor government said it would commit $2.9 million over three years in next week’s budget to help suppliers.
This would be cash “to help suppliers stand up to the big supermarkets”, the government said.
The government said the ACCC’s report did not support breaking up the big supermarkets, known as divestiture powers.
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