Coles and Woolworths are officially ripping us off. What can we do?

So, now we know: Coles and Woolworths have been profiteering at our expense. It’s there in black and white in the Australian Competition and Consumer Commission’s (ACCC) long-awaited supermarkets inquiry report:

Grocery prices in Australia have been increasing rapidly over the last 5 financial years. Most of those increases are attributable to increases in the cost of doing business across the economy, including particularly production costs for suppliers, which has increased supermarkets’ input costs. However, ALDI, Coles and Woolworths have increased their product and EBIT margins during this time, meaning that at least some of the grocery price increases have resulted in additional profits for ALDI, Coles and Woolworths.

People like Michael Stutchbury, under whom the Financial Review ran a campaign insisting there was no price-gouging going on and anyone who claimed otherwise was demonising business, can try to pretend otherwise. But it’s clear now from the ACCC that every household in the country paid more for groceries over the past three years than they needed to not just prop up but inflate the margins of the big supermarket players.

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And remember, this is separate to the court action currently underway against Coles and Woolworths for fake discounting claims across hundreds of products.

Why would anyone suggest there was no price-gouging going on? It’s what oligopolists do. The less competition a firm faces, the greater its power to inflate mark-ups in prices. And Australia is a highly concentrated economy, with major industries like retailing, aviation, banking, energy and communications controlled by a small number of firms. Concentration has been growing significantly in Australia since the 2000s (one possible reason why our long-term productivity performance began declining around then). The ACCC report shows the market share of Coles and Woolworths in grocery retailing also increased in that time.

Chicago School economic theory says concentration doesn’t matter — inflated profits will merely draw in new market players. But that doesn’t apply if there are high barriers to entry, or if incumbents are able to leverage their power and wealth into convincing governments to protect them.

Getting governments to protect them is a national sport for Australian business — especially for one of Australia’s most oligopolistic industries, the media. But it’s the barriers to entry that are the problem for retailing. Local, small-scale entry is possible, but good luck establishing a national retail chain that would offer genuine competition to the duopoly. As the ACCC notes:

Competitively-effective entry or expansion by a supermarket chain requires: building a supplier network; economies of scale at the wholesale level; capital; and access to suitable retail sites … Achieving large-scale new entry is not likely in the short to medium-term, as demonstrated by the time taken (more than 20 years) for ALDI to achieve its current market position.

Supplier networks can be built up — and there are certainly plenty of aggrieved producers who would love to supply a party other than the duopoly. Capital can be accessed for a price. But the ACCC homes in on Coles and Woolworths’ practice of buying and holding land. Are the supermarkets engaged in trying to lift the barriers to entry in retailing via “land banking”? The ACCC isn’t sure. “There are a number of reasons that a supermarket chain may hold a site for a lengthy period without developing it. Determining whether an acquisition of a retail site is anticompetitive is a complex assessment requiring detailed analysis on a case by case basis…”

It suggests the ACCC begin scrutinising every land transaction by the duopoly, who have reported fewer than 14 of their 260 acquisitions to the competition regulator since 2019. It’s a small example of how our competition laws have failed us in Australia, allowing the steady concentration of key industries over the past two decades.

This market power helps ensure that Australia’s major supermarket chains are some of the world’s most profitable, as the ACCC shows across a range of profitability measures:

Australia is a relatively small market incapable of sustaining strong competition in many industries (one study noted that competition tends to be stronger in export-oriented sectors where there are bigger markets available). But our competition laws — by allowing creeping acquisitions, acquisition of emerging competitors, the overturning of the ACCC’s pro-competitive decisions by clueless judges, and failing to require acquisitions to be flagged with the ACCC (60-70% of mergers are never reported to the regulator) — have enabled further concentration of a kind that we’re all paying for via our grocery bills, our airline tickets, our interest rates and our energy prices.

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The Albanese government undertook a significant, and welcome, overhaul of competition law, including requiring transactions to be notified to the ACCC and new guidance that expands the “substantial lessening of competition” test, notionally expanding the regulator’s ability to reject mergers. But it will depend heavily on how judges, many of whom have no expertise in competition law, interpret the law when ACCC decisions are appealed by powerful corporations.

But for all the additional transparency the regulator recommends and its call for greater scrutiny of the duopoly, the simple fact is that Coles and Woolworths have successfully entrenched their anti-competitive position in retailing and have been happily exploiting it at our expense. It’s a failure decades in the making under a broken competition law. And nothing will change it short of breaking them up.

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