Christopher Niesche: Supermarket competition - is the grass really greener across the Tasman?

Australian Prime Minister Anthony Albanese (right) and Coles then CEO Steven Cain during the launch of the new Automated Distribution Centre at Coles Redbank in Brisbane last April. Photo / Getty Images

OPINION

Australian supermarkets have become politicians’ and consumers’ favourite whipping boy, in the face of rising living costs.

Fairly or not, supermarkets are accused of price gouging and not passing on lower costs to consumers.

Airwaves in Australia have been awash with stories of farmers selling lambs for as little as $2 a head as they destock ahead of a dry season. Yet lamb prices remain high in supermarkets.

For many years banks topped the list of big business Australians loved to hate, facing ongoing accusations of being slow to pass on interest rate cuts and of ripping off their customers with unreasonably high transaction fees.

The mantle has now passed to Coles and Woolworths which, like banks, operate in a highly concentrated sector.

The government last week announced an inquiry into the Food and Grocery Code of Conduct, which governs the conduct of retailers and wholesalers to suppliers. Prime Minister Anthony Albanese warned all options were “on the table” – including federal government intervention.

“We have been clear — if the price for meat and fruit and vegetables is going down at the farm gate then families should be seeing cheaper prices on supermarket shelves too,” Albanese said.

“Supermarkets have a duty to make sure they’re providing affordable options for all Australians, especially when they’re making savings on their own costs.”

The supermarkets are also facing a Senate inquiry into grocery prices. There is nothing politicians like more than calling business leaders to parliament and accusing them of ripping off consumers. There will be stiff competition among participating senators to make the TV news by being the toughest on supermarket CEOs.

The Albanese government has been under pressure to address the first cost of living squeeze in a generation since it was elected in 2022. Threatening the supermarkets is an easy win, although whether it will actually lead to significantly lower prices is doubtful.

And regardless of the merits of the claims, supermarkets will need to respond.

On the day the inquiry was announced, Coles cut the prices on beef steaks and lamb chops by more than 20 per cent and promised lower prices on more than 300 products for the next three months.

The cost of goods isn’t the only cost that goes into grocery prices. There is labour and transport, rent and electricity, and the elevated cost of building new supermarkets. But the problem for supermarkets is that they are the consumer-facing part of the supply chain, and so attract all the blame for higher prices.

And the supermarkets didn’t pass on the full rise in the cost of red meat during pandemic lockdowns, when a lack of staff at abattoirs caused a meat shortage and price spike.

But consumers won’t have much sympathy for supermarkets when they look at Coles’ A$1.1 billion profit and Woolworth’s A$1.7 billion profit in the 2023 financial year.

The numbers suggest both major supermarket groups are doing well out of high food prices. The profit margin, or proportion of revenue retained as profit, in Woolies’ supermarket division hit 6 per cent last year, the highest level for at least a decade. Coles delivered a margin of 4.8 per cent, close to the high of 5 per cent reported in 2021 and 2022.

The review into the Grocery Code of Conduct will be led by Craig Emerson, a former Labor minister with a track record of showing he isn’t averse to taking on the supermarkets. As competition minister more than a decade ago, he forced shopping malls to make space for challenger supermarket chains such as Aldi. He also toughened up the Consumer Act to stop supermarkets from engaging in conduct that “substantially lessens competition in any market”.

Whether any of this leads to lower prices for consumers and lower profits for supermarkets is far from certain. But there is no doubt life is about to become more difficult for the two major chains and their every decision will come under closer scrutiny.

Inflation falls

Ironically, as the government was announcing its inquiry into grocery prices, we got news that inflation fell to its lowest level in almost two years in November, thanks to falls in the prices of clothes, appliances, and lamb and beef.

Annual inflation fell to 4.3 per cent in November from 4.9 per cent in October.

The drop should be enough to ensure the Reserve Bank of Australia doesn’t kick the year off with a February rate rise, but certainly won’t have the central bank cutting interest rates any time soon.

Inflation remains well above the RBA’s 2 to 3 per cent target and will remain tough to beat. The price of many goods has fallen, but inflation is proving sticky in the services sector, particularly takeaway food and hairdressing.

And large tax cuts are coming in July that will put a lot more cash in the hands of high-earning Australians.

This extra spending money could reignite inflation if consumers are feeling confident enough to spend it instead of saving.

Christopher Niesche is an Australia-based financial journalist with 25 years’ experience on Australia’s major newspapers, most recently as deputy editor of the Australian Financial Review.