Until recently, my flatmate and I almost exclusively shopped at the big supermarkets, mostly Coles and Woolworths because of their proximity, and occasionally Aldi.
On Sunday, sick of our surging grocery bills, we ventured out to a market near Sydney Olympic Park with a mission: to conduct our own inquiry into grocery pricing.
Millie Muroi and her flatmate Talica Gummery, holding a tray of more eggs than they know what to do with.
We may not have the probing powers of the Australian Competition and Consumer Commission (ACCC), which is set to report its findings on supermarket pricing by February next year, but we had the urgency.
While inflation has slowed in recent months, food and non-alcoholic beverage prices still rose 4.5 per cent in the year to December, and wage growth is only just starting to catch up at 4.2 per cent.
Supermarket giants would like you to believe their prices are down, down, and staying down because they’re competing with each other to attract customers. But the reality is that competition is pretty limited.
That’s because the Australian supermarket scene is dominated by two main characters: Coles and Woolworths, which have a combined market share of about 65 per cent. It’s illegal for them to reach agreements on how much they’ll each charge, but Coles and Woolworths undoubtedly know the win-win situation is for neither of them to go too hard on the discounting. They even reportedly buy up land to keep rivals off their turf.
Supermarket giants Woolworths and Coles face a range of inquiries into their pricing structure.Credit: Kirsten Burghard
That would be much harder for them to pull off if there were more heavyweight competitors in the supermarket space, like there are in the UK and the US, where no single supermarket chain has more than 30 per cent of the market.
Making the two-hour return trip on public transport to Paddy’s Markets in Sydney’s west, it was clear why for many people, especially those without the privilege of a car, a weekly trip to buy cheaper groceries just isn’t realistic.
Everything was cheaper. A punnet of strawberries was $2 (or four for $5) at the markets, compared with $3.50 and $3 a punnet at Coles and Woolworths, raw tiger prawns were $20 a kilogram compared with $29 a kilogram at Coles and Woolworths, and 36 free-range eggs, which we guarded intensely at every lurch on the train home, set us back $11, compared to $18.60 at Coles and $16.80 at Woolworths.
Buying the eggs in bulk explains some of the price difference, but not all. And flipping the script, given the scale of Coles and Woolworths’ operations, there should be significant cost savings the two supermarket giants can pass through to customers.
As much as Coles and Woolworths say supplier costs have increased, their size gives them considerable bargaining power. In their submissions to the Senate supermarket inquiry, the supermarket giants partly blamed the increased costs they were having to pay suppliers, which amounted to $32.3 billion for Coles and roughly $62.3 billion to suppliers and employees for Woolworths. Yet, Coles was paying only 0.6 per cent less, or $32.1 billion, to suppliers in 2019, and Woolworths was paying more, $65.1 billion, to suppliers and employees.
Meanwhile, Coles has increased its profit margin from 3.8 per cent to 4.8 per cent in the three years to 2023, and Woolworths has increased its profit margin from 4.7 per cent to 6 per cent over the same time period. Their biggest costs seem to have barely budged, while their share of profits have increased.
Coupled with farmers’ claims that they are not getting fair prices from the supermarket giants, the odds seem tipped towards Coles and Woolworths charging more to customers, just because they can.
By comparison, the UK’s largest supermarket chain, Tesco, saw profit margins increase by a more modest 0.35 percentage points to 3.8 per cent from 2019 to 2023, and its closest competitor, Sainsbury’s, saw its profit margins fall by 0.46 percentage points to 2.99 per cent over the same period.
Profits are an important incentive for businesses to stay in the game, but when customers are feeling the squeeze, it seems unfair for the supermarket giants to be widening their profit margins.
In a perfectly competitive market, customers would, all other things equal, shift to the grocery stores with the cheapest prices, therefore forcing supermarkets to offer more competitive prices. But the reality is that the choice is limited, and it’s hard enough to compare prices at Coles and Woolworths.
Direct price comparisons online are time-consuming and often difficult because of subtle differences in products, and while one supermarket might advertise their prices in “per kilogram” terms, the other might price the same thing in “per unit” terms.
Customers are time poor. Between longer working hours to cover inflation and negotiating housing costs such as rent, there’s little time to be going line-by-line through their grocery list in search of the best deal. And cheaper competitors to the big two are often out of the way.
While our grocery trip this week came in cheaper than usual, even including transport costs, it’s not something we can keep doing. The supermarket giants probably know that, and unless there’s more competition, prices will be up, up, and staying up.
We will probably finish our 36 eggs before a verdict is reached by the ACCC, but it’s clearly time to crack the whip because the prices Coles and Woolworths are offering need to be beaten.
Millie Muroi is a business reporter at The Sydney Morning Herald and The Age.
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