Supermarkets on their way to becoming political football

The sharemarket believes the competing Coalition and Greens cost of living and supermarket Senate inquires will be a walk in the park for Woolworths and Coles.

My political advisers say when there are two competing committees looking at the biggest political issue in the land, the supermarkets better change their strategies, or they will become a political weapon.

Although the situations are totally different, Australians watched the Brittany Higgins-Bruce Lehrmann saga being mobilised as a political weapon and were taught there are no rules in Canberra’s political games.

After January 26, an experienced Coalition politician confided Woolworths, by taking foolish political decisions in the referendum and Australia Day, is going to be used as a political weapon, albeit not as lethal as the Higgins-Lehrmann saga.

The likely Woolworths (and Coles) verbal mauling over supermarkets’ contributions to the cost of living crisis and their alleged price gouging will not be a pleasant experience, but it may only be the start because harsh actions will potentially be on the table.

Outgoing Woolworths chief executive Brad Banducci will need to perform a lot better than he did under interrogation by the ABC.

Cole boss Leah Weckert can handle interrogation, and in the company’s latest interim report she made perfectly logical and truthful statements from a shareholders’ and a Coles view.

Coles CEO Leah Weckert has the tools for interrogation, but she still needs to get it right in front of an inquiry. Picture: Martin Keep

But, as I will explain below, simple margin calculations will be trashed because my old friend John Dahlsen, a former chairman of Woolworths, has revealed to both committees those simple margin calculations can be very misleading. If she repeats them before either Senate inquiry, she will be minced.

The long Dahlsen submission also sets out the complexity of the supermarket game and the dangers for any Senate committee which makes unilateral decisions to reduce prices.

But, he also gives the Senate committees a hint as to how they can achieve their objective of lowering supermarket prices without making Woolworths and Coles political weapons.

Before we look at ways to cut prices permanently, here are a few extracts from the former Woolworths chairman’s submission to the Senate committees:

“One of the traps (in supermarket analysis) is the tyranny and danger of percentages, which can mislead. A rising percentage margin or gross profit does not of itself make the retailer more profitable,” he says.

“Profitability comes from measuring the gross profit dollars from a combination of volume and margin percentage. You can have high margin products that deliver low returns because of a lack of volume, and conversely you can compensate low margins with high volume which generate more gross profit dollars.

“In other words, you cannot look at margin percentage alone, but need to consider the volume of sales and stock involved to achieve the profit.”

Coles and Woolworths have vast databases, and AI has exploded the power and value of this data. The databases provide information which has become very insightful on consumer behaviour, including: consumers’ attitude to prices on individual products; what products are more likely to be sold than another product; where product should be placed on the shelves and what products will respond to volume marketing and pricing.

Dahlsen also adds the government’s industrial relations reforms will drive down supermarket productivity and lift costs.

In addition, government support for significant pay increases at the Fair Work Commission — albeit substantially justified — but without any corresponding productivity gains will also boost costs.

“Through Minister Burke (a one-time Union Delegate) there has been one-sided reform without productivity gains. This translates into increased prices and a lower standard of living.

“Unlike the Hawke years, there has been no exchange of employee benefits for productivity gains,” he says.

It’s possible the senators will ask one of the CEOs how supermarket staff could be organised flexibly to provide substantial cost reductions, which would all be passed onto consumers via prices.

Theoretically, the Greens and/or the Coalition could agree, after an election, those changes will be legislated on the firm commitment they will be translated into lower prices. It’s a very long shot, but it is the way Bob Hawke curbed inflation.

But, there is a second way. One or both of the Senate committees can potentially force substantial supermarket cost reductions, which can be passed on to prices without damaging the fabric of the supermarket operations.

The former Woolworths chairman tells the committees: “Retailers are required to value their stock at the lower of cost or net realisable value. So, if a short life product (days) does not sell, the retailer has to devalue this stock immediately.

“This is critical with fresh meat and seafood, where the life of the product is measured in days or even hours. So, if a short life product fails to sell quickly, it will mean heavy discounting or writing-off the product. Sometimes products are marked up to cover the markdowns so that reasonable dollars are earned.”

What if the Senate demanded supermarkets invest in the modern technologies now available overseas to safely lengthen the life of fresh products, substantially cutting waste and slashing costs. The Senate would require all these costs to be passed on after allowing for the cost of the capital investment.

I suspect if either of the above two strategic alternatives, or others which might be raised, are cast aside by the supermarkets then Draconian measures could be imposed which will reduce prices but slash profitability in the process.

Such legislative actions would be very dangerous for the nation. But, that’s what can happen in a democracy if a major company becomes a political weapon through foolish board decisions.