Chapter 1Introduction: the Australian supermarket sector
1.1On 6 December 2023, the Senate resolved that the Select Committee on Supermarket Prices (the committee) be established to inquire into and report on the price setting practices and market power of major supermarkets, with particular reference to:
(a)the effect of market concentration and the exercise of corporate power on the price of food and groceries;
(b)the pattern of price setting between the two major supermarket chains;
(c)rising supermarket profits and the large increase in price of essential items;
(d)the prevalence of opportunistic pricing, price mark-ups and discounts that are not discounts;
(e)the contribution of home brand products to the concentration of corporate power;
(f)the use of technology and automation to extract cost-savings from consumers and employees;
(g)improvements to the regulatory framework to deliver lower prices for food and groceries;
(h)frameworks to protect suppliers when interacting with the major supermarkets;
(i)the role of multinational food companies in price inflation; and
(j)any other related matters.
1.2The committee was required to report by 7 May 2024.
1.3Details of the inquiry were made available on the committee's webpage and the committee invited organisations, key stakeholders and individuals to provide submissions.
1.4The committee received 155 public submissions, which are listed at Appendix1 of this report, and held the following public hearings:
7 March 2024, in Hobart
12 March 2024, in Orange
13 March 2024, in Melbourne
11 April 2024, in Canberra
15 April 2024, in Canberra
16 April 2024, in Canberra.
1.5A list of the organisations and individuals who attended as witnesses at these public hearings can be found in Appendix 2. The public submissions, additional information received by the committee and Hansard transcripts are available on the committee's website.
1.6In addition, on 27 March 2024, through amendments to the fourth report of the Selection of Bills Committee, the Senate referred the Competition and Consumer Amendment (Divestiture Powers) Bill 2024 (Divestiture Powers Bill) to the Select Committee on Supermarket Prices (committee) for inquiry and report by 7 May 2024. The committee's report on this bill can be found at Chapter 8.
Acknowledgement
1.7The committee thanks all those who have contributed to the inquiry by making submissions, providing additional information, and appearing at public hearings. The committee also acknowledges and thanks those who made submissions to the committee's inquiry into Divestiture Powers Bill.
1.8The committee especially thanks those current or former supermarket employees or suppliers who shared their stories with the committee. Yourevidence was of great assistance to the committee in better understanding supermarket operations, and the committee knows that it was not an easy decision to come forward—the committee appreciates that you did so.
Report structure
1.9The report is comprised of nine chapters:
Chapter 1—outline of the inquiry and introduction to the Australian supermarkets sector;
Chapter 2—recent reviews into supermarket prices and related matters;
Chapter 3—the impacts of supermarket prices, including on consumers and in conjunction with other cost of living pressures; market concentration and lack of choice for consumers, particularly in rural and regional areas; food insecurity and wastage; opportunistic pricing practices and misleading advertising; and the value of unit pricing;
Chapter 4—the relationship between suppliers and supermarkets, including feedback from suppliers in several specific sectors, including fruit and vegetables, meat and dairy, plant nurseries and goods suppliers;
Chapter 5—considers the experiences of supermarket employees, looking at their take home pay and unsafe working environments;
Chapter 6—investigates factors which create a competitive market, including mergers, land banking and independent retailers;
Chapter 7—examines the current regulatory regime and considers evidence to the inquiry on how the supermarket industry could be better regulated, including through improved regulatory settings; changes to the Food and Grocery Code of Conduct; price regulation and transparency;
Chapter 8—presents the committee’s report on the Competition and Consumer Amendment (Divestiture Powers) Bill 2024, and the evidence received by the committee both in favour and against the bill;
Chapter 9—outlines the committee's views on supermarket prices and other matters included in the inquiry terms of reference, and the committee's recommendations for change.
Notes on references
1.10References to the Committee Hansard may be references to a proof transcript. Page numbers may differ between proof and official transcripts.
The concentration of the Australian supermarket sector
1.11Australia's supermarket sector is one of the most concentrated in the world, with the largest four supermarkets holding a market share of over 80 per cent, asshown in Figure 1.1.
1.12As noted by the Australian Competition and Consumer Commission (ACCC):
The Australian retail grocery sector is today worth $135 billion with three main vertically integrated chains (Woolworths, Coles and ALDI), and what are commonly referred to as the independent supermarkets (such as Drakes, Harris Farms and IGA-branded independent retailers), most of which utilise Metcash for a significant portion of their wholesale supply. Since 2008, market dynamics have changed with the continued growth of Coles, Woolworths, Metcash and ALDI's expansions in Australia.
1.13The committee heard that the two major supermarket chains, Coles Group (Coles) and Woolworths Group (Woolworths) had combined sales of around $80 billion in the 2023 financial year and accounted for two‑thirds of the food and grocery sector.
Figure 1.1Australian food and grocery sector market share for financial year 2022–23
Source: The Treasury, Independent review of the Food and Grocery Code of Conduct 2023–24: consultation paper, February 2024, p. 6.
1.14The National Farmers Federation (NFF) observed that this 82 per cent 'market share of the top four firms is significantly higher in the food and grocery sector than most other sectors in Australia's economy'. The NFF continued:
In addition to their significant market share, supermarkets are one of the largest supply channels of perishable products to end customers.
In addition to this market concentration, Australia's major supermarkets also account for a significant majority of the sale of perishable agricultural goods to end consumers.
1.15Metcash also advised the committee that there were 'some localities in Australia where the combined market share of the two major chains is over 90%, leaving local shoppers with no competitive tension in those grocery markets'.
1.16As The Treasury has identified, this high concentration can provide key retailers with substantial market power over suppliers, who rely on the retailers to distribute their products, especially in an isolated market like Australia.
1.17Mr Jeremy Griffith, a member of the NFF Horticulture Council spoke plainly about the market share of Coles and Woolworths, saying:
There is nothing good about duopolies. It doesn't matter what economy you are in, they are bad for the economy. They slow economic growth, they reduce employment, and consumers will always pay more money. And they are extraordinarily difficult to regulate.
1.18Dr John Hawkins, a senior lecturer at the University of Canberra observed that the market share of Coles and Woolworths raised concerns about whether the level of competition was adequate, with the following possible adverse outcomes:
Predatory pricing may lead to further concentration in the market. Thethreat of aggressive price-cutting, or difficulties created in obtaining good sites, may also deter new entrants in the market. Suppliers, such as local farmers, may fear offending such large purchasers. There are legitimate concerns that the margins between prices charged to consumers and those paid to suppliers are wider than they would be if there were more competitors in the market.
1.19Per Capita, an independent think tank, similarly submitted that the larger the market share, the more likely that retailers could 'operate outside of the best interest of consumers', where:
… their share of sales is large enough to influence the price of goods or services sold – this is known as price setting. In such an environment, price setting firms can raise prices for reasons other than as a response to increased costs, or for other purposes such as expanding investment or for productivity improvements … The tendency over time is not toward greater competition but towards concentration.
1.20The NFF submitted that this market share allows the supermarkets to use its market power to create unfair relationships with its suppliers, which could be characterised as:
supermarkets holding significantly more bargaining power due to their concentration in the market;
suppliers committing a considerable amount of time and evidence to negotiate a wholesale price increase with supermarkets;
supermarkets extracting a disproportionate level of profits from products; and
supermarkets requiring suppliers to comply with onerous compliance standards.
1.21Conversely, the supermarkets and their representative body, the Australian Retailers Association, contended that recent new supermarket entrants, mainly Aldi and Costco, has boosted competition in the Australian supermarket sector.
1.22Woolworths similarly argued that 'Australia now has three of the largest and most efficient food and everyday needs retailers in the world competing to serve Australian consumers', in addition to Aldi, Costco and Amazon and their considerable global retail sales and increasing presence in Australia.
The supermarket regulatory framework in Australia
1.23The supermarket sector in Australia is governed by a mix of broad federal legislation, including the Competition and Consumer Act 2010 (Competition Act) which includes the Australian Consumer Law (Consumer Law), as well as sector‑specific regulations, such as industry codes including the Food and Grocery Code of Conduct and the Unit Pricing Code.
Legislation
1.24Australia's Competition Act, including the Consumer Law, applies equally to all businesses including the supermarket sector, and is enforced by the ACCC.
1.25As noted by the Treasury:
Competition law prohibits anti-competitive practices including cartels, misuse of market power, and anti-competitive mergers. If the ACCC does find evidence of anti-competitive behaviour they have a powerful toolkit to investigate and take action through the courts where appropriate.
1.26The Consumer Law is a national law enacted by each state and territory, which 'establishes principles that generally apply across circumstances and industries'. The Consumer Law also contains specific provisions which establish clear offences for defined behaviours. These provisions include prohibitions against:
unconscionable conduct,
misleading or deceptive conduct and unfair contract terms; and
specific discrete unfair practices such as bait advertising.
1.27The Treasury noted that while there is no specific prohibition on excessive pricing:
… if a business makes misleading claims about the reason for price increases, it may be breaching the standards-based provision against misleading or deceptive conduct. In some limited circumstances excessive pricing may be considered unconscionable where it is extreme and targets particularly vulnerable consumers.
1.28Under the Consumer Law, the ACCC has legislative powers to prosecute companies that have engaged in misleading, deceptive or unconscionable conduct. However, there is no defined legal definition of what this entails. Thisissue is discussed in greater detail in Chapter 7 on regulation.
Anti-competitive pricing
1.29Some forms of pricing are considered illegal under the Competition Act, forexample where businesses attempt to collude with other businesses, rather than undergoing competition. According to the ACCC, the three main forms of anti-competitive pricing methods are:
price fixing—businesses form cartels to fix the price of a certain product;
minimum resale prices—suppliers set a minimum resale price of their goods; and
predatory pricing—businesses deliberately set their selling price below the cost price to discourage competition and force other businesses out of the market.
Food and Grocery Code of Conduct
1.30The Food and Grocery Code of Conduct (Grocery Code) is a voluntary agreement that is central to the ACCC progressing improvements in business standards and behaviours in the food and grocery sector.
1.31The Grocery Code has been signed and accepted by major grocery and food market powers such as Coles, Woolworths, Aldi and Metcash.
1.32On 10 January 2024, Dr Craig Emerson was appointed by the Treasury to undertake a review of the Grocery Code to assess its effectiveness to 'improve the commercial relationship between retailers, wholesalers and suppliers in the grocery sector'. The review is ongoing but has released a substantial interim report calling for the Grocery Code to be made mandatory (the Code and its review are discussed in more detail later in this report).
Is regulation working?
1.33Supermarket prices and their broader impact on the Australian economy have been a focus of discussion and inquiry for many years, but with the increasing costs of living, this discussion has broadened to consider the impact of food and grocery pricing on people's everyday lives. As noted by the ACCC, 'grocery prices have become a major concern for the millions of Australians experiencing cost of living pressures'.
1.34In 2008, the ACCC conducted an inquiry on the competitiveness of retail prices for standard groceries and concluded that:
… grocery retailing in Australian was workably competitive, but that Coles, Woolworths and Metcash had significant buyer power in relation to many items, and there were a number of factors that limited the level of price competition'.
1.35At that time, the ACCC made a number of recommendations that were broadly supported by government.
1.36However, given the rates of food inflation, the increasing cost of living and continued focus on the impact of supermarket prices on all actors in the Australian economy, there are indications the current regulatory settings are not appropriate or fit for purpose.
1.37Per Capita suggested that based on 'sales, revenues, prices and profits for the past few years':
… Australian competition, consumer and industrial relations laws are not working as they ought to. Gaps and loopholes have been revealed … It is now clear that the unwavering trust that many governments, including those in Australia, have previously put in the market's capacity to self‑regulate and produce competitive and benevolent results has been misplaced.
Food inflation
1.38There is disagreement on the rates of food inflation in Australia—and where rates are agreed to—what the causes of inflation may be. Supermarkets argued to the committee that there is low food inflation in Australia, because of an appropriately competitive grocery market.
1.39For example, Woolworths argued that 'increased competitive intensity' has reduced grocery prices in real terms, submitting that 'economy-wide inflation (ABS CPI) has increased 4 percentage points faster than food inflation' since2008.
1.40However, as this report will highlight, many other submitters from a range of backgrounds argued there is high food inflation in Australia, and it is caused by high profit margins and opportunistic pricing by supermarkets, ultimately causing high prices to be paid by consumers.
1.41The Woolworths data, for example, does not hold up against other consumer price index data from the Australian Bureau of Statistics (ABS), which submitted that compared 'to the headline CPI (Consumer Price Index) increase of 17.1% over the last four years, the increase for Food and non-alcoholic beverages is higher at 18.8%'. TheABS further advised that in 2022 'inflation for both Food and non-alcoholic beverages and the CPI increased at their fastest rate in over 30 years'.
1.42The Australia Institute similarly submitted that in the past five years—despite a rapid increase in overall inflation (CPI increased by 19.3 per cent)—food and non‑alcoholic beverages increases were higher at 20.4 per cent.
1.43The Australia Institute made clear that 'food inflation is a particularly important pain point for Australia's most vulnerable households', because low-income households spend a bigger proportion of their income on food.
Drivers of inflation
1.44Woolworths submitted that food inflation was driven by 'cost increases from our supplier partners and cyclical impacts in fresh food markets'. It also suggested that not only was food inflation falling, but that food inflation in Australia was much lower than the OECD (Organisation for Economic Co‑operation and Development) average.
1.45Mr Brad Banducci, Chief Executive Officer of Woolworths noted that for fruit and vegetables 'we've had deflation in the last 12 months in Australia'. Woolworths further submitted that:
… it is important to note that suppliers are not obliged to provide cost information to justify their increased prices to retailers under the Food and Grocery Code of Conduct. This limits our ability to test and verify the basis for a cost increase request.
1.46Coles similarly argued that food inflation has been caused by external factors such as supply chain shocks, but that it remained lower than in other OECD nations and said, 'we do put that down to the fact that the market here in Australia is very competitive'.
1.47The ACCC agreed that '[s]ome key factors for higher grocery prices in Australia include global supply chain disruptions, higher global fuel and energy prices and various natural disasters and other significant weather events'.
1.48However, as outlined succinctly by a member of COTA Australia, while these arguments can be made for the cause of food inflation, supermarkets are still making massive profits, rendering this whole line of discussion moot:
The supermarket chiefs email us that they are not profiteering from food inflation but doing everything they can to absorb some of the higher costs. Iwas almost won over. Then we read in the '23 FY, the Woolworths Group in Australia made a net after tax net profit of $1.72 billion (Aus) – a whopping increase from the previous year. What can we do? We may be old, but we need to eat. Woolworths and Coles dominate the country's food market. That's a problem!
Profit margins
1.49NSW Farmers explained that high rates of food inflation 'can significantly increase grocers' profits even if their gross margins remain constant or increase only modestly', because while the margin remains the same, the gross profit increases. For example:
Consider a grocer selling a can of soup. If a grocer is paying $1 for that can, and selling it to you for $1.20, they are making a 20% margin. They earn $0.20 per can of soup sold. Now, what happens if the grocer's cost for that can of soup goes up to $1.10, and they apply that same 20% margin? The price of that can of soup now goes up to $1.32. The grocer still makes a 20% margin, but now they get $0.22 cents to put toward their profit.
1.50The Treasury advised that the level of profitability and margins, and any recent changes to those rates, provides an indication of the level of competition in the supermarket sector. The Treasury submitted that:
… in 2022-23 Woolworths obtained around 6 cents in every dollar spent as earnings before interest and tax (EBIT), while Coles obtained almost 5 cents. These figures have increased slightly over the past five years.
1.51Woolworths argued that 'grocery retail is a high-volume, low-margin sector and Australia has one of the most efficient and productive grocery sectors in the OECD' with Woolworths making 'around 3.6c in every $1 in our Australian Food Group'. Coles similarly presented the sector as 'a typical example of a high volume, low margin sector' and submitted that it makes a net profit after tax of around 2.5 cents for every dollar spent.
1.52The Australia Institute submitted that the 'oft-heard claim' that higher supermarket profits have simply kept up with the overall rise in costs and prices 'is not supported by industry-wide data'. The Institute provided the following data, suggesting it indicated 'a significant increase in profit margins in the last five years' in food retail:
Figure 1.2Profit margins in Australian food retail (% of total revenue)
Source: The Australia Institute, Submission 96.1, p. 6.
1.53The Australia Institute also noted:
… there is no sign that food retail margins are narrowing back to those historic norms, despite the downturn in global commodity prices ... other input costs (like energy), and the partial slowdown in food inflation over the past year.
1.54Associate Professor Andy Schmulow emphasised that low profit margins do not mean low profit for a high-volume business such as a supermarket:
The narrative is: 'Oh woe is us; our margins are so low. Have some sympathy for us'. But the fact that their margins are low doesn't mean there's something wrong with the business. The fact that their margins are low is because that's the business that they're in …
Under those environments and, typically, across their competitors across the globe, margins are low and volumes are high … So now we want to know how profitable that business is, because that's an indication to us as to whether your excessive market concentration is gouging consumers—which is the purpose of this inquiry. Of course they don't want to go there.
Price gouging
1.55Per Capita recognised that while there is no formal definition of price gouging, it 'colloquially refers to sudden increases in prices that people think are too high and without justification' and also 'connotes that firms are in a position in which they can raise prices in order to take profits without significant consequences'.
1.56The ACCC states that 'price gouging' or 'excessive pricing'—where the sale price of goods is set significantly above cost price due to a lack of competition—is not considered illegal.
1.57Similarly, 'surge pricing' is also not considered illegal, under the stipulation that a business must be clear about the price of the product. However, the ACCC states that it is illegal for businesses to distribute false and misleading claims about the reasons contributing to price increases.
1.58When the pricing of goods leads to outcomes considered by the public to be undesirable (but not illegal), governments will often attempt to implement policy mechanisms that increase competition and decrease concentrated market power.
1.59The issue of price gouging is one that is at the heart of this inquiry, which seeks to answer the question of whether supermarkets are using their market power to unfairly profiteer at the expense of competitors, suppliers and ultimately, customers. Chapter 3 examines the impact of supermarket pricing and profit-seeking behaviours on customers in more detail.
1.60The following chapter first outlines in more detail the various inquiries and reviews into supermarket pricing and the food and grocery sector.