Senate Select Committee on Supermarket Prices

Submission 138

29 April 2024

Select Committee on Supermarket Prices

PO Box 6100
Parliament House
Canberra ACT 2600

Submissions
To inquire into and report on the price-setting practices and market power of major
supermarkets.
The effect of market concentration and the exercise of corporate power on the price of
food and groceries
The Australian grocery retail industry is characterised by a high level of concentration and a
lack of effective regulation, resulting in significant concerns about anti-competitive behaviour
and its detrimental impact on local producers and ultimately consumers.

Market Concentration

Australia's supermarket industry ranks among the most highly concentrated globally.
According to a 2023 report by IBISWorld on the Australian Supermarkets and Grocery Stores
industry, it is described as "highly concentrated". This high level of concentration carries
significant consequences for both suppliers and consumers.
The Australian grocery retail sector is dominated by two major supermarket chains: Coles and
Woolworths Group.
In 2023, Woolworths Group commanded 37.1% of the Australian grocery market in FY2022,
with Coles grabbing a 27.9% share. The German-owned arch-rival, Aldi, had a 9.5% stake,
while the Metcash Ltd (ASX: MTS) supplied IGA chain held a 6.9% market share. The
remaining 18.6% came from other, smaller grocery retailers.
Woolworths Group and Coles, collectively hold a substantial market share, estimated to be
over 82%, making them a duopoly that significantly influences the industry 1.

SUPERMARKETSHARE2023 Corporate power is particularly

strong within the Woolworths
Group, as evidenced by their
recent acquisition of a 65%
equity interest in PFD Food
Metcash, 6.90% Services, alongside their
ownership of BIG W and their
A ldi, 9.50% dedicated logistics network.

This means that suppliers are

likely to direct additional
financial and human resources

1
Statista https://www.statista.com/statistics/994601/grocery-retailer-market-share-australia/
 Senate Select Committee on Supermarket Prices
Submission 138

Name Withheld
Submission to Select Committee on Supermarket Prices
toward the Woolworths Group's Profit and Loss (P&L) statements. It is widely recognized that
PFD will further collaborate with the Woolworths Food Co private label team, seeking to
leverage substantial buying power across both the corporate grocery sector and now the food
service industry.
This development will exert immense pressure on suppliers, as consumers and end-user
customers will gain increased access to lower-cost, own-brand product alternatives in key
categories, many of which will be imported. Consequently, this explicitly weakens the position
of Australian-based suppliers, particularly those heavily reliant on the grocery channel.

Effects of Market Concentration on Suppliers

The high level of dominant market concentration exerts immense power and control over the
supply chain, including farmers, local producers, and suppliers. Further, the dominant
position of Coles and Woolworths in the Australian market allows them to exert substantial
bargaining power over local food manufacturers, particularly small to medium-sized
enterprises (SMEs). According to Richard Forbes, CEO of Independent Food Distributors
Australia, the sheer size of Coles and Woolworths enables them to push rising costs back
down the supply chain to other industry players, which often include local manufacturers.

SMEs often lack the negotiating leverage to resist demands for price reductions, promotional
contributions, and other concessions made by major supermarket chains. Consequently, they
are compelled to accept lower prices and reduced margins, solely to inflate retailer margins,
which are among the highest in the food retail world when benchmarked.
Effect of Market Concentration on price of food and groceries

As an SME, we have encountered specific instances where retailers have requested

additional promotional funding for an 'Every Day Value' (EDV) campaign. This was to enable
the running of promotional price points that are either equal to or lower than the same
promoted price points from the previous 12 months in the market.

During discussions with a senior commercial team member at the retailer, it was explicitly
stated that their CEO has mandated an emphasis on all promotional price points, in response
to media pressure.

Since Q2 F24, retailers have actively sought to address the cost-of-living crisis by seeking
additional promotional investment support from suppliers. There has been pressure to provide
additional spend to generate goodwill for activations such as out-of-aisle locations during
promotional periods. In these conversations, retailers will reference their gross margin
percentage at the promoted price point as a critical KPI to be supported. At no point have
retailers displayed behavior that suggests they are investing in addressing the cost-of-living
crisis from their own P&L. The lack of competition allows them to consistently display such
behaviour and continue to extract margins significantly higher than international best practice
benchmarks.

The pattern of price setting between the two major supermarket chains
A simple supermarket visit, or online search will confirm that all Private Label prices on
comparable goods are set at exactly the same price across both major retailers (see
examples below). In the instance of one retailer changing price, the other retailer will follow.
In the ‘Orange Juice’ examples, Woolworths is disguising their 2L offer as a promotional ‘Low
Price’ when it is line priced to the Coles offer. This is a deceptive behaviour aimed at driving
market share and sales.

29 April 202429 April 2024Page 2 of 11

 Senate Select Committee on Supermarket Prices
Submission 138

Name Withheld
Submission to Select Committee on Supermarket Prices
< ....
Coles Juice Orange I 2l

[I] Wootworths Orange Juice 2l

$3.35

s3 35
Ill \!I Addtatroll,ey

Coles Simply Pasta Penn• I 500g

$0.90
[sser,tlats Posto Penoe 500g

SQ 90

£ Cheo::t::ltodtlnOl.l'SIOIH >

Gl.

It is common practice for a major retailer to contact a supplier on a Wednesday, which marks
day 1 of any promoted week, pressuring them into 'price match' activities if competing
retailers are offering lower price points on the same product or product family. This extends to
state-based independent retailers such as Drakes and Ritchies IGA. For example, if a supplier
runs a short-term discount with a state-based independent banner and this conflicts with a
major retailer's promoted price point, which is higher, the retailer will drop their price and
demand increased trade investment support from the supplier. If a supplier declines, the retail
commercial team will continue to apply pressure, which can lead to doubts about the future
viability of the trading relationship. The onus is on the supplier to document such behavior
with reference to the Food & Grocery Code of Conduct.

Throughout the CPI negotiations dating back to 2020, Coles has stated that they will only
follow the market with cost price and subsequent RRP increases, rather than setting the new
benchmark price. This approach appears to contradict free market forces. Woolworths, on the
other hand, has been more inclined to lead under the premise that a commercial benefit was
delivered to their P&L in the negotiations.

Rising supermarket profits and the large increase in price of essential items

The profits of major supermarket chains like Coles and Woolworths have been rising, while
farm profits have been declining. With a combined market share of over 80% in the Australian
grocery market, Coles and Woolworths wield significant power over their suppliers, including
farmers.

At the start of the pandemic, when suppliers began facing cost pressures, it was widely
understood among suppliers that Woolworths tasked its commercial buying teams with
recovering an additional 200 basis points of 5th margin from any CPI negotiations. Many
suppliers were struggling under COVID-related cost pressures but needed to maintain trading
relationships, ultimately accepting new margin levels for which the consumer ultimately must

29 April 202429 April 2024Page 3 of 11

 Senate Select Committee on Supermarket Prices
Submission 138

Name Withheld
Submission to Select Committee on Supermarket Prices
foot the bill. This new norm has fundamentally shifted the power balance more in favor of the
retailers and reset all future negotiations to a new base.

There is evidence, through CPI negotiations, of retailers engaging in 'margin grabbing' by

raising recommended retail prices (RRP) beyond the CPI requirements from suppliers.

Excessive percentage margins are being extracted by Australian retailers : Between

2018 and 2021, the profits of major supermarket chains in Australia increased by an average
of 9%, while farm profits saw a decline of 6% during the same period. 2

The Australian grocery industry witnessed consistent profits and a high level of concentration
among major players throughout the period from 2019 to 2023. However, consumer buying
power faced challenges due to inflation and rising prices, impacting the affordability of
groceries. These economic pressures contributed to an increase in bankruptcies within the
food and Agri industry, especially among smaller businesses.

The relationship between grocery industry profits, real household disposable income and
inflation, underscores the complex dynamics of the Australian food sector during this period.

-
Real household disposable income Consumer sentiment Index
Pett:entage

........

2
ACCC, 2022

29 April 202429 April 2024Page 4 of 11

 Senate Select Committee on Supermarket Prices
Submission 138

Name Withheld
Submission to Select Committee on Supermarket Prices
100.00% 3.5
90.00% - - 3
80.00%
70.00% - - - 2.5
60.00% 2
50.00%
40.00% 1.5
30.00% 1
20.00%
0.5
10.00%
0.00% 0

-
2019 2020 2021

Supermarket profit $Billions

Global benchmark Gross Margin % comparables -

2022 2023

CPI Inflation
3

source AFS
30

25

20

15

10

0
Tesco Kroger Walmart Woolworths Coles

According to CSIMarket data, Gross profit margins in the food processing industry (i.e.
manufacturers) in 2019 was 22.05% with an EBITDA margin of 9.56% (a measure of company
efficiency)

At a retail gross profit % level, Walmart Globally realises 23.5% (Source: Walmart AFS FY
2023), The Kroger Company GM% is 22.2 % (Source : Kroger AFS 2023), and Tesco Plc a
GM% of 6.76% (Source :Tesco AFS 2023). It is worth noting.

that both major Australian retail chains GM% viz Woolworths and Coles are both substantially
higher than global best practice benchmarks, and with substantially less scale to enable. To
the extent that both WOW and to somewhat of

3
Source for inflation: https://www.macrotrends.net/countries/AUS/australia/inflation-rate-
cpi#:~:text=Australia%20inflation%20rate%20for%202022,a%200.3%25%20decline%20from%202018.

Source for Coles Profits :https://finbox.com/ASX:COL/explorer/ni/

Source for WoW profits: https://www.statista.com/statistics/1116200/australia-net-profit-after-tax-woolworths-group/

29 April 202429 April 2024Page 5 of 11

 Senate Select Committee on Supermarket Prices
Submission 138

Name Withheld
Submission to Select Committee on Supermarket Prices
a lesser extent Coles, claim that their significantly superior returns are due to efficiencies, the
question that is perhaps not being asked is around the possible abuse of dominance in being
able to set higher gross margins than comparable

International benchmarks, and comparable to companies that who enjoy scale many multiples
higher than WOW and COL combined. E.g. a senior WOW category buyer has gone on record
stating that he will not accept a GM% of less than 40% in his core pantry division.

Suppliers are therefore obliged to fund this GM% requirement, and also guarantee WOW
GM% margins during price promotions i.e. WOW will not fund any temporary price reduction
from their own pocket, must be funded fully by the supplier.

Global enchmark Ebitda Margin % comparables -

source AFS
10
9
8
7
6
5

11111 I
4
3
2
1
0

Further to the above comparative global best practice benchmarks, it is easy to conclude that
the dominance and bullying behaviour taken against suppliers, enables Woolworths and Coles
to realise significantly higher returns than their international peers. In the case of Woolworths
and Coles, there is a strong argument to support the contention that indeed their significantly
higher than benchmark EBITDA margins are a consequence of their ability to positive
influence their own gross margins through supplier funded price, terms and rebates , rather
than their own efficiencies as they so claim in the public space.

29 April 202429 April 2024Page 6 of 11

 Senate Select Committee on Supermarket Prices
Submission 138

Year Inflation CPI Name Withheld

Consumer Buying Power Australian Grocery Industry
Submission to Select Committee on Supermarket Prices
The grocery retail sector in
Australia witnessed robust
Inflation remained within profits for major supermarket
manageable levels, Consumer buying power was chains, Coles and Woolworths.
2019 exerting minimal pressure relatively stable in 2019. While These two dominant players saw
on grocery prices. there were some fluctuations, significant growth in their
Consumers could overall, it allowed consumers to revenues, driven by higher sales
purchase goods without make their grocery purchases volumes and strong market
significant price increases without significant constraints. positions
Despite the challenges posed by
the COVID-19 pandemic, the
The pandemic led to The COVID-19 pandemic grocery industry remained
some price fluctuations, caused fluctuations in consumer resilient. Coles and Woolworths
2020
primarily due to supply buying power. Panic buying led reported increased profits as
chain disruptions. to increased grocery spending, consumers stockpiled goods
However, overall inflation impacting the purchasing power and spent more on groceries
remained moderate of consumers during lockdowns
Grocery industry profits
Consumer buying power continued to rise. Coles and
Inflation started to rise, fluctuated as the economy Woolworths leveraged their
2021 impacting grocery prices. recovered from the pandemic. dominant market share,
Consumers began to feel Inflation started to affect prices, maintaining their positions as
the pinch as their influencing the affordability of industry leaders. Profits saw a
purchasing power eroded groceries. steady upward trajectory
Consumer buying power faced
The number of challenges due to rising prices Coles and Woolworths' profits
bankruptcies in the food and inflation. The increasing increased by 8-10% during this
2022 and Agri industry costs of essential goods year. Their combined market
remained elevated, impacted the affordability of share exceeded 80%, reflecting
affecting local producers groceries for some segments of their stronghold on the grocery
and small businesses the population market.
Bankruptcies in the food Consumer buying power
and Agri industry continued to face pressures as
continued to impact local inflation and rising costs affected The dominance of Coles and
2023 producers and smaller household budgets. Some Woolworths continued. The
businesses, reflecting consumers had to make choices duopoly's market share
ongoing economic about their grocery purchases remained strong, and their
challenges based on affordability profits sustained growth

The prevalence of opportunistic pricing, price mark-ups and discounts that are not discounts;

The practice of running promotional events such as EDV at higher price points than historic RRPs has
been publicized in the media. Coles recently admitted pricing errors within its proprietary tomato
brand, as evidenced below:

29 April 202429 April 2024Page 7 of 11

 Senate Select Committee on Supermarket Prices
Submission 138

Name Withheld
Submission to Select Committee on Supermarket Prices
As referenced above in price setting, Woolworths
continues to use its Low Price activation lever to
present items as value-priced, which are, in fact,
line-priced with its competitive set in the market.

[I] Woolworths Diced Italian

Tomatoes 400g

s110 $028/100G

usfomer
Notice * "''ill

S.veto llst
1:11-11·1111:
£ Oleck stock In our stores >
<a

""'

$ 20
© V El
Coles Italian Diced Tomatoes I 400g

$1.10
$2U pe,r ll:f

Ill \u AddtotJollcy

The contribution of home brand

products to the concentration of
corporate power.
Coles and Woolworths hold a
significant share in private label
brands, which can create conflicts of
interest as they compete with their
own suppliers by selling their own branded products. Woolworths Food Company (WFC)
operates as a separate entity, seemingly initiated so Woolworths could argue that the code of
conduct only applies to their commercial buying team and behaviors. To this day, the WFC
team and Woolworths' commercial teams remain separate to allow both parties to extract
incremental margin and exert separate pressures on suppliers.
In a recent example, our business was placed at the mercy of WFC through the threat of
offshoring our existing private label contracts to the Chinese market. The size of our business
was substantial, with an estimated sales decline of 20% if the threat were realized. During this
process, WFC swiftly transitioned from collaborative discussions to threats of full de-listing,
citing accusations of reduced transparency on our part. The discussions escalated to involve
senior members of both Woolworths and our business, with the potential for a formal
complaint to be lodged against the retailer. After the proposed formal complaint was raised,
we observed a shift back to behavior that could be deemed collaborative. However, the
impact on sales was still felt, resulting in both lost volume and profit.

Improvements to the regulatory framework to deliver lower prices for food and
groceries;
Suppliers should not be compelled to adhere to any retailer-set timeframes to influence the
pricing of goods. The arbitrary 13-week period seems to be designed to prolong negotiations
and allow the retailer to pressure suppliers, especially in the final few days, to provide more
benefits to the retailer. These demands often come in the form of additional trade investment,
increased promotional frequency, off-invoice discounts, etc., which pose a risk to the recovery
of costs by suppliers.
It is exceedingly challenging for suppliers to independently set prices for their goods that
offset cost pressures and deliver sustainable commercial outcomes, crucial for driving
ongoing investment in innovation, business growth, and future success.

29 April 202429 April 2024Page 8 of 11

 Senate Select Committee on Supermarket Prices
Submission 138

Name Withheld
Submission to Select Committee on Supermarket Prices
Frameworks to protect suppliers when interacting with the major supermarkets;
Suppliers, when documenting all interactions in writing and having a solid understanding of
the code of conduct, can utilize the existing code to limit punitive behaviors. However, in
extreme cases, the burden is placed on the supplier to file a formal complaint. The fact that
not a single supplier has ever lodged a formal complaint in this concentrated market speaks
volumes. It is clear that the fear of retribution and reliance on both Woolworths and Coles in
Australia is a factor suppliers cannot overlook. Given the ongoing fear of retribution, this
hesitance to initiate a formal complaint is unlikely to change even in the event of a voluntary
code of conduct being made mandatory by all parties.

The role of multinational food companies in price inflation;

From our experience, multinational corporations tend to use CPI as a margin enhancement
tool in Revenue Growth Management (RGM) practices. This approach stems from global
markets being more receptive to CPI activity, especially in the absence of a grocery duopoly.
In Australia, since the pandemic, retailers have become adept at leveraging these CPI
negotiations to drive their own margin improvements. The net result seems to have led to
price inflation over the past 3-4 years, impacting the cost of living.

Any other related matters

Exercise of Corporate Power and Market Domination

Dominance in Private Label Brands

Coles and Woolworths have a significant share in private label brands, which can create
conflicts of interest as they compete with their own suppliers by selling their own branded
products.

Pressure on Margins

Supermarkets have been accused of pressuring suppliers to reduce their margins, leading to
questions about the profitability and sustainability of local food manufacturers.

Excessive Demands on Promotions

Major retailers can require suppliers to contribute to promotional costs, and these demands
can be seen as excessive.

The two major Australian retailers exercise strong negotiation power in trade investment
discussions with a clear willingness to pressure suppliers into incrementally supporting their
own priorities and in particular, ensuring that suppliers fully fund price specials or price
promotions.

Bullying and Unfair Practices

Reports have emerged of major supermarkets using their market power to engage in bullying
tactics. This includes pressuring suppliers to offer additional discounts, reducing payment
terms, or threatening to remove products from their shelves if suppliers do not comply.

Major supermarket chains like Coles and Woolworths have also been accused of engaging in
price discrimination. This occurs when they negotiate lower prices with larger suppliers but

29 April 202429 April 2024Page 9 of 11

 Senate Select Committee on Supermarket Prices
Submission 138

Name Withheld
Submission to Select Committee on Supermarket Prices
impose higher prices on smaller suppliers. Such practices can place small and medium-sized
suppliers at a significant disadvantage.

Supplier Contracts

Major retailers often impose stringent contract terms and conditions on suppliers, which can
be onerous and one-sided. Suppliers may have little room to negotiate terms and are often
required to accept standardised contracts.

Coles and Woolworths engage in offering only short-term contracts to manufacturers, which
hinders the manufacturers' capacity to invest in long-term improvements related to
technology, quality, and efficiency. A more favourable approach for supermarkets would be to
consider providing stable, long-term contracts, encouraging and sustaining investment in local
manufacturing.

De-listing Threats

There have been allegations that major supermarkets threaten to de-list products or delist
suppliers if they don't meet certain demands, such as price reductions or promotional
contributions.

Unilateral Changes

Supermarkets have been criticized for making unilateral changes to supplier agreements
without adequate consultation. These changes can include shifts in payment terms or
increases in promotional contributions.

Late Payments

Reports have emerged of major retailers delaying payments to suppliers, placing financial
strain on these suppliers, especially smaller ones.

Using suppliers IP for their commercial advantage

Major retailers ask all local manufacturers to present them with new IP in the form initially in
the idea stage and then in sample or prototype. Often the retailer will take the idea and
procure the development of similar or identical product and/or packing from overseas and
launch ahead of or at the same time as the manufacturer practically deeming the new
development to failure.

29 April 202429 April 2024Page 10 of 11

 Senate Select Committee on Supermarket Prices
Submission 138

Name Withheld
Submission to Select Committee on Supermarket Prices
References
• Australian Competition and Consumer Commission (ACCC), 2022.
• Australian Food and Grocery Council. (2023). Sustaining Australia: Food and Grocery
Manufacturing 2030. Retrieved from https://www.afgc.org.au/industry-
resources/sustaining-australia-food-andgrocery-manufacturing-2030
• Evans, S. (2023, June 22). Food producers meet ACCC to keep lid on Coles, Woolies clout.
Australian Financial Review. Retrieved from https://www.afr.com/companies/retail/food-
producers-meet-accc-to-keeplid-on-coles-woolies-clout-20220622-p5avo8
• Grattan Institute (2017). The Power of the Big Two: Concentration in the Australian
Supermarket Industry. Grattan Institute, Melbourne
• IBISWorld (2023). Supermarkets and Grocery Stores in Australia - Industry
• Market Research Report. Canberra: IBISWorld
• Merrett, A. and Smith, R.L. (2023), 'The Power of Coles and Woolworths', Melbourne Law
School, University of Melbourne, Melbourne.
• Salardini, A. (2019, August). Who’s eating Australian farmers’ profits? NSW Farmers.
Retrieved from
https://www.nswfarmers.org.au/NSWFA/Posts/The_Farmer/Trade/Who_is_ea16ting_Austra
lian_farmers_profits.aspx#:~:text=AUSTRALIA%20has%20the%20most%20concentrated,thes
e%20powerful%20supermarkets%20and%20processors
• Know the chain, 2020 Food & Beverage Investor Brief

29 April 202429 April 2024Page 11 of 11