Supermarkets facing heat from politicians as well as shareholders

Woolworths CEO Brad Banducci. Illustration: Sturt Krysgman

Faced with his renewed tag as a political football, Woolworths boss Brad Banducci must also confront increasingly angry shareholders who have seen zero increases in return on funds despite higher profit margins.

This week’s long forecast ACCC inquiry is, as previously noted, a classic response from politicians wanting to be seen to be doing something and an unwelcome diversion of resources within the regulator, but also offers a welcome increase in transparency.

The ACCC has flagged its own potential enforcement action against the supermarkets for ­alleged false and misleading claims on product discounts.

The year-long inquiry importantly doesn’t mean such litigation won’t happen at the same time and such action is the ACCC’s ­actual day job.

If Jim Chalmers’ new-found zeal for competition policy materialised into tougher merger laws, at least some credibility would be restored.

Tougher merger laws are of course being opposed by big business and the competition law mafia as unnecessary.

This government in December responded 18 months after receiving ACCC recommendations for tighter controls on digital platforms such as Google, Facebook and Apple by announcing a further 12 months of consultation.

Former ACCC boss and co-lead on the Treasurer’s competition review, Rod Sims, slammed the action as “insipid”.

The government’s track record on competition law and policy is at best weak.

The ACCC report will be handed down this time next year, just as election fever warms up.

The question then is, assuming some heinous market power is found, what magical remedy will be found and enforced.

The best regulator is competition and, while the big two supermarket groups Coles and Woolies control 65 per cent of the market, Aldi with 10 per cent is now a ­national force, Metcash at 7 per cent is improving and Costco, Amazon and others are players.

Bunnings is also edging its way into the game selling pet foods and now household detergents.

Coles and Woolworths supply Viva and Ampol respectively, so have their fingers in the convenience end of the market.

Woolworths now sells 11 per cent of its product online so supply chains are also changing.

Banducci and to a lesser degree Leah Weckert at Coles are ironically under fire from shareholders complaining that, while earnings margins have increased from 4.7 per cent in 2019 to 6 per cent at Woolworths and from 3.8 per cent to 4.8 per cent at Coles, return on funds are flat. Adjusting for accounting changes for leases, they have increased from 14.1 per cent to 14.9 per cent at Woolworths over the same period, but on raw numbers have fallen from 24.2 per cent to 14.9 per cent.

Little wonder BAML’s David Errington slams Banducci for spending too much on stores, staff and consumers and not enough on actual shareholder returns.

The politicians claim margins are excessive and the shareholders say returns are dismal.

While the supermarket bosses juggle those sometime competing metrics, if consumer behaviour in New Zealand is any guide management will also have to work overtime to help staff handle increased consumer abuse.

Banducci has already reported increased abuse over his Australia Day statements but now the politicians are making self-serving noises about prices that just legitimises angry customers who want to lay the blame on front-facing staff for their bosses’ actions.

Juggling competing issues is of course why Banducci and Weckert get paid the big bucks, so no cause for sympathy here.

The most effective action ACCC chief Gina Cass-Gottlieb took last year was against Qantas for allegedly charging people for flights already cancelled.

No grandstanding public inquiry, just diligence from enforcement chief Liza Carver pending a final court outcome.

Carver’s former Ashurst partner Bill Reid is now Woolworths’ chief lawyer and former Allens partner David Brewster is head of safety and legal at Coles.

The skill the ACCC can bring to political focus is by drawing together teams from across its staff, with the merger team focused on retail market shares and potential abuse, price setting from regulated monopolies and other skills.

All of the above know the retail sector well so can focus on the right issues.

Trouble is its resources are finite and its role as an enforcement agency is not to do the bidding for self-serving politicians looking for easy short-term answers.

In 2008, when the ACCC last looked at supermarkets, it found “workable competition” but importantly broke some of the barriers by stopping the big two demanding a free run on new retail properties. If this inquiry produces a similar breakthrough it would be welcome.

In 2014 the ACCC was in court against Coles alleging unconscionable conduct in the treatment of suppliers, which the retailer settled and paid a $10m fine. Not exactly breaking the bank, but the message was sent.

Anthony Albanese’s nonsensical line about farm gate prices translating directly into retail ­prices is at best naive and at worst misleading.

The good news is the inquiry should strengthen the retailers’ resolve in dealing with suppliers because they can use it as a reason why prices can’t increase.

The danger with big suppliers getting more power is they have more leverage over the retailers and a walk down the supermarket aisles shows the full spectrum of supply power.

Long-life consumer goods are supplied by global giants like Procter & Gamble, Unilever, Henkel and Clorox, the drinks aisle is dominated by Coca-Cola and Pepsi, beef by JBS, Cargill and Teys and like lamb is an export-based industry.

Meat is acquired on long-term contracts, so a fall in the auction price today won’t be seen in the supermarket tomorrow.

There are long supply chains with myriad people having their finger in the mix, which tends to mitigate retail power on some categories.

That said, supermarket retailing is better than getting money for jam because the retailer gets the product, sells it, then pays the supplier so exercises some control.

It’s the smaller suppliers that are the bunnies for the big supermarkets and the retailers demonstrably exercise their power over the smaller players.

Once again the issues are different commodity by commodity, which inquiries dating back to at least the 1964 royal commission into Victorian wholesale food markets have tried to unpick.

It’s not just what price the farmer gets because in some commodities there are many fingers in the pie, and the overriding influence today is not what Weckert or Banducci are demanding but the impact of climate change on crops.

The retailers are extending their influence, sanctioned by the ACCC, to move into adjacencies such as pet supplies, milk processing, and jumping into bed with the likes of Qantas and combined loyalty programs. It’s a tangled web of market concentration.

It takes more than shining a light in the right areas to force change and just what is achieved will be Cass-Gottlieb’s challenge.