Sam Hawley: Hi, I'm Sam Hawley, coming to you from Gadigal Land. This is ABC News Daily. In the last few days we've found out Coles and Woolworths have returned bumper profits of $1.1 and $1.62 billion respectively for the full financial year. So as shoppers, are we getting a fair deal during a cost of living crisis? Today Prashan Karunaratne from Macquarie Business School on who's watching over the big players and why it might be worth avoiding them altogether. Prashan, at the moment I think every Australian is really noticing a big surge in the cost of everything when we do our weekly shop. It's pretty stark, isn't it?
Prashan Karunaratne: Yes, your grocery bill, your petrol, your rent, cost of living is increasing in all aspects of life.
Shopper: I've just bought $90 worth of stuff and it fits in one basket.
Shopper: More expensive. Everything's more expensive.
Shopper: We used to buy, oh, a kilo of bananas, but now they charge you $0.83 for one banana.
Sam Hawley: Coles says in the last quarter of the financial year, they were seeing inflation moderate a bit and some products are actually reducing in cost. That's things like cucumbers, broccoli, capsicum. So there's a bit of good news, but still things are really expensive.
News report: The cost of many essential foods has risen sharply again over the past year. New data shows some items are 40% more expensive.
Sam Hawley: Let's look now at Coles and Woolworths and the profit that they're making,
News report: ...But not everyone's feeling the pinch. Today, Coles posted a profit of more than $1 billion... Woolworths says food sales has boosted its bottom line. The supermarket chain has posted an annual net profit of $1.6 billion, which is up 4.6% on the previous year.
Sam Hawley: None of us Prashan expected them to make a loss, of course, but given times are pretty tough right now, how are they making such big profits?
Prashan Karunaratne: So this is a tricky one because Coles and Woolworths predominantly sell groceries and pre-pandemic, before cost of living began to increase like this, we could typically have substitutes, we could eat out, we could go to restaurants, we could have takeaway. And now that cost of living is increasing you'd make a substitution effect and think, well, that's actually now quite expensive for me to eat out and go to restaurants. So the next best alternative is to buy my own food and prepare it myself. So you'd expect a shift towards the grocery stores. So that would be one element of the profit margins and the profit in absolute terms increasing because consumers, because of the cost of living crisis, are actually swapping to buy more groceries compared to before, at least in relative terms.
Sam Hawley: So the cost of living crisis is actually helping the supermarkets.
Prashan Karunaratne: Because they're selling your basic needs.
Sam Hawley: Of course, Coles and Woollies, they think this profit is actually pretty modest.
News report: On to finance now. And Coles shares slumped today after its annual result disappointed investors.
Prashan Karunaratne: Yes, the share prices did go down for Coles upon the announcement because investors were expecting a higher profit margin.
Alan Kohler, Finance presenter: Coles and Woolworths have both underperformed the market since Covid and today Coles dropped to a three year low. It was down more than 7%, Woolworths fell 3% in sympathy.
Sam Hawley: So Woolworths shares, they did rebound after its profit was revealed and Prashan there is an argument that having a good profitable supermarket sector is a good thing.
Prashan Karunaratne: Well we have a free market economy in Australia, so if companies are navigating challenges such as the pandemic and making profit, it is a sign that the economy is performing well. And consumers do have the opportunity to shop around. Coles and Woolworths are a significant duopoly. They control roughly two thirds of the market. But consumers do have choices with your Aldi, with your Costco, with your local grocery stores and IGAs. So there are options for consumers for them to shop around and look for cheaper alternatives.
Sam Hawley: The Coles CEO, Leah Weckert, thinks households are being really savvy in the way they're shopping and they're looking out for the best deals.
Leah Weckert, Coles Group CEO: Unsurprisingly, they are looking for more specials, cheaper brands and cheaper cuts of meat. Many of them are meal planning, stretching out the time between purchases of less urgent items such as cleaning and household items. And they are looking to catalogues, loyalty programs and in-store markdowns to make their budgets go further.
Sam Hawley: Really interesting. The supermarkets have noted they're taking a big hit at the moment because of organised retail crime and theft that apparently is up across the world because of this cost of living crisis.
Leah Weckert, Coles Group CEO: As we said in the release, we have seen an increase of about 20% year on year and that is driven by the organised crime. So we're certainly seeing a lot more reports coming through from the stores. There is theft from customers as well.
Sam Hawley: Yeah, okay. But there's still a duopoly. Yes.
Prashan Karunaratne: So this is definitely unique to Australia and New Zealand. When you compare to other comparable Western markets, UK, the rest of Europe, USA, Canada, where Australia, New Zealand have very concentrated market structures in the grocery space, with roughly two thirds in both Australia and New Zealand, where two main players control such a large market share. So there is less competition compared to comparable Western counterparts and that does tend to drive up prices because of that less competition.
Sam Hawley: Prashan, I want to touch on how Coles and Woolworths and the profits that they're making compare to the situation overseas. What does that look like? It's an interesting comparison to make?
Prashan Karunaratne: Yes, so when you compare it on the global stage where Coles and Woolworths are making these profit margins are much higher compared to comparable grocery stores, Let's say in the UK, for example, causes EBIT margin or operating margin is about 5.3% and Woolworths is 5.9%. But then if you compare Tesco and Sainsbury's in the UK, it's around the 3 to 3.8% mark. So their margins are much higher than their counterparts in more competitive markets.
Sam Hawley: What does it mean? Does it mean that Australian supermarkets are putting their prices up well above inflation to make a bigger profit than perhaps the Sainsbury's in the UK?
Prashan Karunaratne: I think when you actually look at the rate of inflation versus Coles and Woolworths price increases, it's not that much of a difference. But we're comparing now Australian players compared to overseas players. If you look at the Deloitte report, which is the global powers of retailing and you look at the top 40 firms, Woolworths is number 24 and Coles is number 39. And you look at all the companies listed there, they're based in the US, Germany, China, UK, France, Spain, all which have significantly larger populations. So it would make sense. Woolworths and Coles being in the top 40 is quite stark. So that does hint at the fact that there is less competition helping them drive up prices and drive up their profit margins significantly higher than the comparable counterparts overseas. When there's only two in the market. There's a game theory happening here where they both realise if I reduce my price, so will the other. And so they don't start a price war. Whereas that's more likely in overseas markets where there's more competitors.
Sam Hawley: And it really does seem like we only have two of everything in Australia. The Australian Council of Trade Unions' Joseph Mitchell says it's legitimate to ask whether the two big supermarkets are using inflation as a smokescreen to push up prices.
Joseph Mitchell, ACTU Assistant Secretary: We see a lot more concentration in Australian supermarket sector than we do overseas. Coles and Woolworths control nearly two thirds of the supermarket sector compared to UK or the US, which has a much lower level of concentration.
Prashan Karunaratne: It is a legitimate question the ACCC should be looking at asking the stores, the two main players to start releasing their contract deals and their costings so that they can see the gap between wholesale and retail prices and make sure that the other players can enter the market and compete with the two main players. So I don't think we have that data released to the regulators in Australia. That's the source of the problem.
Joseph Mitchell, ACTU Assistant Secretary: You can say this power that supermarkets have over their supply chains, over their customers and over their workers, which mean that they are able to extract a higher rate of profit.
Prashan Karunaratne: In New Zealand. They've established, if I'm correct, a specific grocery commission to look at this issue. So not just increasing the powers of the Commission, but establishing a standalone one for groceries. And given the oligopolistic nature, given the fact that this has happened historically, not just with this cost of living crisis, but other cycles as well, we do need a monitoring mechanism to monitor what Coles and Woolworths are doing with their wholesale contracts and making sure that others have equitable access to their chains so that more players can enter the market. The government can look at longer term mechanisms of incentives to encourage other players to enter our market and start creating some more competition. It would be good for the government to start investing and thinking about this so that these cycles don't keep repeating per economic crisis.
Sam Hawley: Yeah, exactly. I can see also that parliamentary members and unions are running inquiries designed to scrutinise the sector's pricing decisions amid this cost of living crisis. So that's underway as well. And for what it's worth, the Woolworths CEO, Brad Banducci, he thinks we'll start noticing lower prices by the end of the year.
Brad Banducci, Woolworths CEO: We remain optimistic whether it's before Christmas or just after Christmas, that you'll start seeing some improved underlying value. But the cost of products is going down and prices will start to moderate. We're trying to balance delivering value.
Sam Hawley: I guess as consumers, what we really want to know is are the supermarkets doing the right thing by us? What do you think? Are they?
Prashan Karunaratne: This is a very tricky question. You can have fairness and equity of outcomes and fairness and equity of opportunity. We can all agree that the outcome doesn't seem to be fair, because if you're a low and low income earner, you're going to suffer at a greater extent than middle and high income earners. Having said that, Coles and Woolworths are not monopolising milk and bread. There are other options for us to go to. My wife also likes to take us to, let's say the local Iranian store or the local Indian store, and the prices in some of these stores haven't increased as much, if not at all. Fairness of opportunity still exists in Australia for us to go to other outlets. So I would rather think of a slightly more balanced view and comparing fairness of outcome and fairness of opportunity.
Sam Hawley: Prashan Karunaratne is a teacher of economics and business analytics at Macquarie University. This episode was produced by Veronica Apap, Sam Dunn and Anna John, who also did the mix. Our supervising producer is David Coady. I'm Sam Hawley. ABC News Daily will be back again tomorrow. To get in touch with the team please email us on ABCNewsDaily@abc.net.au. Thanks for listening
Australia’s dominant supermarkets Coles and Woolworths have returned bumper profits of $1.1 billion and $1.62 billion respectively for the full financial year.
So, are shoppers getting a fair deal during a cost of living crisis?
Today, Prashan Karunaratne from Macquarie Business School on the market power of the big players and why it might be worth avoiding them altogether.
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Prashan Karunaratne, Bachelor of Commerce course director at Macquarie University
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