Politically-charged supermarkets probe fizzes out

Australian supermarket sector is rational, although imperfect sector. Picture: NCA NewsWire / Nikki Short

In the competition regulator’s own words, there’s no silver bullet to getting more competition into supermarkets. It’s an admission that after a year-long investigation there’s no smoking gun.

The ACCC’s supermarket inquiry was always a quick political solution to a cost-of-living crisis that the Albanese government had been woefully slow to recognise.

And Coles and Woolworths were a convenient target at a time when inflation had a 5 in front of it. Underlying inflation is still hot but is on the way to falling below the 3 per cent mark in coming months. Even the supermarkets have started to talk about price deflation on fresh food and meat again.

Instead, the ACCC’s 441-page report found the Australian supermarket sector is what most long-time watchers suspected: a rational, albeit imperfect, market. If there was any hard evidence of price gouging, the ACCC wasn’t able to uncover it in this deep dive. Nor was there enough to support harsher intervention, including a break-up of their operations. Shares in both Coles and Woolworths staged the biggest rally in more than a year early Friday, on relief the measures will have virtually no impact on profit.

The sector is dominated by two big players and the barriers to entry include building up a reliable supplier network, which needs a huge investment. The chances of a new full-service operator making in-roads into Australia are slim.

Indeed, the third-biggest player, Aldi, has spent as much as $7bn over two decades to carve out a 9 per cent slice of the market. This is still a long way from Coles on 29 per cent and Woolies’ 38 per cent. Even so, Aldi’s established presence offers a powerful incentive for other players, including Coles and Woolies, to keep their prices in check.

The oligopolistic situation means there is potential for the supermarkets to use their muscle against suppliers big and small. However, even the ACCC concedes this is mostly in favour of consumers. The bargaining power of the supermarkets can also promote a more efficient supply chain, also of benefit to shoppers, the regulator says.

The ACCC’s 441-page report found the Australian supermarket sector is a rational, albeit imperfect, market.

The ACCC found Australian supermarkets are the most profitable in the world on some measures. However, on others, including return on invested capital and profit margin, they fall back to the middle of the pack, based on Bloomberg numbers. It’s a worthy reminder that no two international markets are the same when it comes to running big supermarkets.

The ACCC made 20 recommendations, nearly all based around improved pricing transparency, including the online publication of all in-store prices for easy comparison.

Treasurer Jim Chalmers has agreed in principle with all the recommendations. He’s also kicked in an additional $30m for the ACCC to monitor supermarkets for misleading price tactics. Some of this will no doubt go to fund the Federal Court case.

There’s another $50m promised to subsidise the cost of delivering some essentials to very remote stores.

The inquiry was a backward look and missed the opportunity to consider other ways to bring down prices, including supply chain resilience or where technology can bring benefits.

Bizarrely, the regulator denied Amazon was a series competitive rival to the big supermarkets, despite the tech giant spending more than $5bn building out its logistic network here in recent years.

Treasurer Jim Chalmers has agreed in principle with all of the ACCC’s recommendations.

Both Coles and Woolworths told the ACCC’s public hearings they closely watched Amazon’s pricing and innovations across its delivery and warehousing efforts. This week, brokerage Citi estimated that responses to Amazon like offering click and collect could represent an annual cost of as much as $1.5bn or Coles and Woolies in coming years, without the potential for recovery in pricing. Others like Bunnings, Chemist Warehouse and Kmart are offering price constraint across key categories.

Supermarkets had feared the worst. Given the political heat, there was concern the report could have been used as a platform to bolster the regulator’s powers to separate their supply chains from retailing or even curb their geographical reach. Thankfully, the regulator didn’t go down this path. The supermarkets themselves had strongly argued this would only drive up prices, given it removes some of the scale benefits.

The ACCC’s own numbers supported the supermarkets’ assertion. Between 2000 and 2023 when inflation was at its worst, prices were rising fastest in the two smaller operators: Metcash’s IGA network and Aldi, given they had less scale benefits coming their way.

Outside of break-up powers, the real risk had been a potential crackdown on loyalty schemes, the new battleground for supermarkets given the goldmine of consumer data they represent. However, they escaped any changes. Likewise, the practice of land banking, with the big two currently sitting on 150 unused sites. Smaller operators say this locks them out of retail opportunities. This is more of a planning issue and outside the ACCC’s remit.

Following the report, Bunnings-owner Wesfarmers will be feeling slightly easier about a Senate inquiry into “big box” retailing, which is due to deliver its final report in May.

Still, Coles and Woolies are not fully in the clear. The ACCC has its Federal Court case under way, claiming the supermarkets were running “fake discounting” programs. Both supermarkets intend to defend the claims.

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