Are supermarkets profiting from price gouging?

Article published 8 December 2023

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Food prices are up, households are struggling

Are supermarkets profiting from price gouging?

ACCORDING to the 2023 Foodbank Hunger Report, cost of living was ranked as the number one concern for Australians in the past 12 months.

There has been major pressure on State and Federal Governments to introduce measures to reduce inflation and ease the strain caused by higher living expenses.

In the past year, 36% of households experienced moderate to severe food insecurity. This means that they made sacrifices in variety, quality and quantity of food. 23% of households missed meals altogether.

Families are reporting that they are being forced to use credit products or ‘buy now, pay later’ schemes to put food on the table or in their kids’ lunchboxes. This leads to a cycle of debt that creates a situation where over time it’s even harder to make ends meet.

This year’s rise in food insecurity is caused by other pressures such as the cost of housing and utilities, but a major factor is an increase in prices at the checkout.

Coles and Woolworths have blamed supply chain issues and inflation for this – yet they have both recorded massive profits that have increased since last year. How can this be?


Shonky operators of the year

The big two supermarkets were both recipients of a 2023 Shonky Award from consumer advocacy group CHOICE. Between them they reported a massive $2.72 billion in profit.

It’s hard to fathom quite how much money that is. Keep in mind that this is net profit, the amount that is left once the cost of business is accounted for.

Whilst there’s no doubt that there has been an increase in costs for supermarkets, the figure to look at is the margin of profit. If price hikes reflected rising business costs, that margin would stay the same.

It has not.

In the last quarter Woolies enjoyed a very comfortable 6% margin. Overseas, where there are more grocery stores to choose from, similar chains tend to make about half that amount.

In their August profit announcement to shareholders, Woolworths stated they are doing their part to help customers save by promoting their store brand products, discounting products for customers who use their loyalty program and “encouraging customers to use up what they already have in the fridge or pantry at home”.

Very helpful indeed.


The game of duopoly

In a competitive market companies must go head-to-head for business, which tends to keep prices down as consumers have choice in where they spend their money.

Currently Woolworths has around 37% of the market and Coles is sitting at 28%. Aldi takes third place with just 9%, leaving other retailers to make do with the rest.

This is what is known as a duopoly. Two providers dominate the market and make it nearly impossible for others to get enough of a foothold to compete on prices.

This becomes even more of an issue when it comes to essential goods and services because there isn’t even an option to not shop at all. Most of us are forced to go to the closest grocery store and do our best with what’s on offer, particularly in regional areas.

This is the result of years of very deliberate and often mercenary tactics to price independent stores out of the market and push down wholesale prices, squeezing suppliers to offer lower prices in store.

Now that this has succeeded and the duopoly is well and truly established, where does this leave everyone else in the supply chain, including producers and consumers?

Price gouging – illegal or just unethical?

You may have heard by now that a Senate Inquiry has been called for early next year and Coles and Woolworths have both confirmed that their respective CEOs will attend to defend themselves against allegations of price gouging.

A range of organisations have come out in support of this, including the National Farmers Federation, who want the public to know that higher prices are not putting more dollars into the pockets of farmers.

The tricky thing is, price gouging is not technically illegal. The idea is that you can shop elsewhere – unfortunately, that really isn’t the case when it comes to basic items.

So what are they trying to figure out?

Essentially, businesses can charge what they like as long as they aren’t making false or misleading claims about prices, including the reason for changes in prices. They are also not allowed to engage in ‘anti-competitive pricing’. Unfortunately the Big Two have a long history of getting away with this, which is what got us into this mess.

Businesses are also not allowed to agree on pricing. This would be very difficult to prove without evidence.

The good news is that it’s very likely that the Big Two will be keeping an eye on prices between now and the time they will appear before the Senate to explain themselves.

It would be bad business not to, which is good news for the rest of us.


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