Behind the Aisles: ACCC's Report reveals supermarket dominance and legal challenges

The Australian Competition and Consumer Commission (ACCC) recently published its final report on the supermarkets inquiry. This comprehensive report confirms what most of us already knew – that Coles and Woolworths dominate the Australian grocery sector, this lack of competition provides limited incentive for Coles and Woolworths to compete on pricing, resulting in a negative impact on consumers and suppliers, and increased profit margin for Coles and Woolworths. The report also provides 20 recommendations for legislative and policy reforms to address market issues and improve competition.

Interestingly, the recommendations do not include a breaking up or divestment of businesses held by each of Coles and Woolworths – which is something that many commentators believe is the only way to counter the dominance held by Coles and Woolworths.  

This article sets out a summary of some of the key findings of the report and the 20 recommendations.

Key Findings:

1. Market concentration and competition: Coles and Woolworths dominate the Australian grocery sector, holding 29% and 38% of national supermarket grocery sales respectively.

This oligopolistic market structure presents significant barriers to entry and expansion, limiting vigorous price competition. ALDI provides a crucial lower-priced alternative but does not compete head-to-head with Coles and Woolworths on all aspects.

2. Grocery prices and margins: Over the last five financial years, grocery prices have increased rapidly, with a 24% rise in the Consumer Price Index (CPI) for food and non-alcoholic beverages. While this is less than the increase in other OECD countries it is still significant.

During the same time, Coles and Woolworths have increased their product and EBIT margins, resulting in additional profits. Admittedly the EBIT increases haven’t been each year – there have been years of EBIT reduction, and Coles and Woolworths have implemented cost saving initiatives to off-set higher supply costs, but the overall increase in EBIT over this period is not a good look when Australia has been suffering a ‘cost of living’ crisis.  

Some people might expect that when costs increase in a supply chain due to inflation, that participants all along the supply chain absorb some of the pain by reduced margins – not for the retailers to increase their EBIT.

3. Promotional and loyalty programs: The report also indicates that Coles and Woolworths run sophisticated promotional activities and loyalty programs which complicate consumers' ability to judge deals and make informed decisions. Ultimately many consumers are left to make a judgement of whether they are getting a good deal based on impressions or perceptions, rather than clear and useful information. 

4. Supply chain dynamics: Coles and Woolworths have a strong bargaining position with suppliers, often resisting wholesale price increases or requiring investment in their inhouse media businesses.

They exercise monopsony power, particularly with fresh produce suppliers, affecting market prices and leading to undersupply and reduced investment over time. Monopsony power exists when one buyer faces little competition from other buyers for labour or goods, so they are able to set wages or prices for the labour or goods they are buying at a level lower than would be the case in a competitive market.

This power imbalance can result in higher prices and reduced choice or quality for consumers in the long run.

5. Regional and remote areas: In regional and remote areas, ALDI, Coles, and Woolworths have limited presence, with independent supermarkets playing a crucial role. Consumers in these areas face much higher prices, partly due to higher freight costs and lack of competition. The absence of local competition may result in reduced range, store amenity, opening hours, and service quality.

Recommendations:

The report sets out 20 recommendations to bolster competition, support consumers to make informed decisions and to improve grocery supply chain efficiency.

Retail competition: The report recommends several measures to improve price transparency, support community-owned stores, and address planning and zoning issues to enhance competition in the Australian grocery sector; including:

• Recommendation 1 – governments should support community-owned stores in areas with limited choice, particularly in remote regions, to promote competition and expand consumer choice.

• Recommendation 2 – all supermarkets should publish prices on all products in-store, with large chains also publishing prices online and providing APIs for dynamic price information. The inquiry found that some supermarkets, in particular certain remote community stores, do not currently display prices in-store on some or all items.

• Recommendation 3 – the ACCC recommends simplifying, streamlining, and harmonising planning and zoning laws across jurisdictions to reduce barriers to entry and expansion for all competitors.

Consumer experience: The report includes several key recommendations to enhance transparency and fairness in the grocery sector, including:

• Recommendation 4 – supermarkets should provide minimum information for discount price promotions and maintain relevant records.

• Recommendation 5 – public consultation on changes to the Unit Pricing Code to improve legibility and consistency.

• Recommendation 6 – supermarkets should be required to notify consumers of adverse package size changes, ensuring transparency around shrinkflation.

• Recommendation 7 – Coles and Woolworths should provide periodic loyalty program information summaries to members.

• Recommendation 8 – dedicated review of Coles' and Woolworths' loyalty programs in three years to assess their impact.

• Recommendation 9 – strengthening of complaints handling mechanisms in remote locations, including mandatory signage and support for fair trading bodies.

These measures aim to improve consumer understanding, transparency, and fairness in the supermarket sector.

Grocery supply chain: The report includes one recommendation to address the current ineffectiveness of the Food and Grocery Code:

• Recommendation 10 – supermarkets should not be able to negotiate out of key minimum protections in the Food and Grocery Code. This would be a welcome change for suppliers as the Food and Grocery Code is of no assistance to them when Coles and Woolworths regularly utilise the exemptions available in respect of clauses 20, 22, 24, 25, 26, 27 and 28 of the Food and Grocery Code.  

Trading arrangements: The report includes nine recommendations to improve supplier relationships and market practices. 

• Recommendation 11 – ALDI, Coles and Woolworths should consider ways to harmonise accreditation and auditing requirements for suppliers.

• Recommendations 12 and 13 – ALDI, Coles and Woolworths should provide fresh produce suppliers detailed supply forecasts and greater transparency around competing bids in weekly tendering processes.

• Recommendation 14 – ALDI, Coles and Woolworths should provide an independent central body weekly data about prices they have paid fresh produce suppliers, so that weighted average pricing can be published – to improve transparency about supermarket wholesale fresh produce prices.

• Recommendation 15 – ALDI, Coles and Woolworths should not unilaterally reduce agreed prices or volumes with fresh produce suppliers.

• Recommendation 16 – the Horticulture Code should be amended to require detailed sales information and to prohibit merchants from setting the price they pay for horticulture produce as an amount calculated by a method or formula.

• Recommendation 17 – suppliers of fresh produce should receive order confirmations for supermarket branded fresh produce no later than 14 days before delivery.

• Recommendation 18 – suppliers of fresh produce should not be prohibited from applying their own branding to fresh produce.

• Recommendation 19 – large supermarkets and wholesalers should provide suppliers with an itemised account of all payments and deductions off invoices at the end of each financial year, with details explaining the purpose of each and how it has been calculated.

• Recommendation 20 – Coles and Woolworths should provide suppliers with an itemised account of how their contributions to in-house retail media services (Coles 360 and Cartology) are used. This includes details of funds used for promotions not specific to the supplier's brand, ensuring transparency and accountability in the use of supplier funds.

It will be interesting to see how the report is received by the industry, and whether the government takes steps to adopt any of the recommendations. Most industry participants we have spoken to are underwhelmed with the report and feel the recommendations don’t go far enough. We have been through several supermarket inquiries before, with little impact. Hopefully, things are different this time round and the government will find a way to make positive change to enhance competition in the grocery sector.

Author: Michael Cossetto