Checkout pain: Australia’s supermarkets among most profitable in the world

Australia’s major supermarket chains are among the most profitable in the world, a damning report into the sector has declared, as the competition watchdog warns they have failed to pass on the full benefit of cost savings during the cost-of-living crisis.

The report from the Australian Competition and Consumer Commission, to be released on Friday, shows without more substantial rivals, the stranglehold enjoyed by Coles and Woolworths over the nation’s shoppers will intensify, delivering them higher profit margins.

Australia’s chains are among the most profitable supermarkets in the world.Credit: Oscar Colman, Louie Douvis

Commissioned last year by the federal government after increasingly angry complaints from shoppers about high prices on the nation’s supermarkets shelves, the ACCC examined the power of Woolworths, which accounts for 38 per cent of all grocery sales, Coles (29 per cent), Aldi (9 per cent) and Metcash, which supplies most independent outlets.

It found a lack of competition, and particularly the dominance of Coles and Woolworths, had left Australian shoppers paying more for everyday essentials while the supermarkets enjoyed high profits.

“Aldi, Coles and Woolworths appear to be among the most profitable supermarket businesses globally,” it found.

“Coles’ and Woolworths’ market shares are increasing and they face no rivals of comparable scope and scale. In an oligopolistic market structure such as this, they have little incentive to beat each other on price.”

Woolworths, Aldi and Coles’ profit margins are on the upper end when compared to global peers, the report found. Only Canadian franchise supermarkets retailer Loblaw is more profitable, while British supermarket chains Sainsbury’s and Tesco have profit margins of less than half of Woolworths’.

The ACCC found that over recent years, even as Coles, Woolworths and Aldi tried to moderate any increases in costs, they had enjoyed stable or increasing earnings margins as they had “not passed on to consumers the full benefit of savings from those initiatives”.

While the report found said there wasn’t necessarily any breach of competition laws, it noted high profits relative to their international peers might indicate there was room for more competition in the supermarket industry.

“If the market shares and associated market power of Coles and Woolworths continue to increase in the future, their margins as a percentage of grocery prices can also be expected to continue to grow,” it found.

ACCC deputy chair Mick Keogh said the evidence that Woolworths, Coles, Aldi and Metcash’s profitability had either been maintained or increased over the past five years indicated competition wasn’t working well in the sector.

“It’s not in [the supermarkets’] interest to compete fiercely on price, and they have significant market power in relation to their suppliers and in relation to consumers,” he said.

The watchdog’s recommendations were focused on increasing competition and making supplier arrangements fairer and more transparent.

No recommendation has been made around divestiture of stores, which the Nationals and the Greens parties have pushed for. Keogh said it was a “very complex question”.

ACCC deputy chair Mick Keogh.Credit: Peter Rae

“When you think through the practicalities of it, you really do need to think through exactly what that would mean if it were a policy,” he said.

The ACCC’s inquiry also found that the supermarket majors had made 260 acquisitions but only informed the watchdog of 14 of those. Incoming merger reform laws would address this loophole by making it mandatory to disclose acquisitions.

“We’ll have a much better chance of actually scrutinising and looking at the impact on competition of those transactions and potentially restricting those occurring where we think the impact on competition will be negative,” Keogh said.

The grocery giants have argued they face stiff competition from different retailers in various categories, such as Chemist Warehouse in skincare, beauty, and healthcare products, Bunnings for cleaning or pet products, Costco for bulk-buy goods or Amazon for some household and pantry essentials.

But the watchdog pointed out that the two dominant players did not face meaningful rivals that sold the full range of supermarket goods.

“While consumers may purchase some of their groceries from these retailers, none provide the convenience of being able to complete all (or the vast majority) of their grocery shopping in one visit. They therefore do not impose a close competitive constraint on supermarkets,” the report stated.

The ACCC made 20 recommendations, including requiring supermarkets to notify customers, on their websites and near price tickets on shelves, of any changes in package sizes.

It also recommended requiring the supermarkets to be more transparent with suppliers about how they negotiate prices, and reviewing Coles and Woolworths’ loyalty programs in three years to assess their impacts on competition and consumers.

Apart from the recommendations, both Woolworths and Coles are facing the ACCC in the federal court for allegedly misleading consumers through discount pricing claims on hundreds of common supermarket products.

The government agreed in principle with all the ACCC’s recommendations, but its initial response is to provide $2.9 million in next week’s federal budget to help fresh produce industry associations deliver education programs to their members so they can enforce their rights under the Food and Grocery Code.

Treasurer Jim Chalmers said the report proved there was no single bullet to deal with issues across the supermarket sector, arguing a broad range of responses – from informing people about shrinkflation to giving financial incentives to state governments to overhaul planning laws – was needed.

“This is about ensuring Australians aren’t treated like mugs by the supermarkets. Our ongoing supermarket crackdown means more competition, better prices and better deals for Australians,” he said.

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