The dynamic between the supermarket industry giants of Woolworths and Coles can be explained as a duopoly. This is a type of oligopoly where two firms dominate a market, producing the same or similar goods and services. In theory, this market tends to be more competitive than a monopoly, as duopoly firms tend to compete with each other on price or quantity, depending on the situation. The most famous international example would be Pepsi and Coca Cola, who often compete on price. However, the degree of competitiveness in any oligopoly is highly situational – it is common for collusion to occur and for cartels to form. A classic example of an oligopoly cartel is OPEC (Organization of the Petroleum Exporting Countries), wherein each country has a high market concentration ratio, resulting in high barriers to entry and anti-competitive behaviour. Together, they collude to agree on a price and quantity of petrol before exporting, which, when considering the immense supply within membership countries, grants huge influence over global petrol prices. The suspicion of a similar illegal cartel forming between Woolworths and Coles prompted an investigative inquiry by the ACCC (Australian Competition and Consumer Commission) into both duopoly members.
This is in part due to news of price gouging by both supermarkets as well as exploitative usage of bargaining power to squeeze suppliers. Such acts can not only have detrimental repercussions on smaller producers but also disadvantage consumers. These consumers include financially-strained International students and foreign income earners residing in Australia. As an appreciating Australian dollar weakens foreign currency purchasing power, increased food expenses only make their financial situation more strenuous. Furthermore, increased costs in organic foodstuffs may impose a change in lifestyle for many Australians who would be forced to choose cheaper non-organic alternatives.
The history of both these industry giants started with an intense rivalry. Coles and Woolworths had been competing for the top position in grocery retail since WWII. A major aspect of business they competed on was innovation. For many grocery stores, a major factor in becoming successful was optimising the experience of consumers. This played an important role in solidifying the brand image of firms, as well as in building a loyal customer base to foster long-term success. The ability to analyse market trends and respond with innovative solutions that optimised the customer experience was what set Woolworths and Coles apart from their competitors. Many seemingly mundane things nowadays: self-checkout, vast product diversity and having a built-in car park were all ideas that were pioneered by these retail giants. Alongside the rapid real-estate expansion and the buying out of rivals came the duopoly we see today.
Contrastingly, now the main objective of both firms seems to have shifted away from the sentiment of innovation for consumer satisfaction, and more towards a bottom-line focus. We can observe an indicator for this in Figure 1 below.
Figure 1: Woolworths, Coles and Industry Sales Growth (%) – Source: Intelligent Investor
Here, we observe that during the pandemic years in 2020, both firms achieved heightened sales growth, which further explains their booming profits. Following the end of the pandemic, subsequent periods such as the third and fourth quarter of 2022 also experienced growth in sales, with the duopoly riding the post-pandemic recovery of the economy.
However, recent news in the profitability of the two companies despite rising standard of living and decelerating inflation has signalled potential discrepancies for the increasingly high prices. This new focus has been reasonably profitable for both companies, with both firms raking in more than $1bn in annual profit this year alone. This has raised concerns for both supplier and consumer welfare in an ironic contrast to the customer experience-centric business model that the duopoly used to build their businesses.
The escalating food insecurity crisis in Australia has had a profound impact on consumers who find themselves increasingly burdened by the rising costs of living. The high market concentration of the duopoly suggests that consumers are unable to exercise choice or seek other options to address the increasing costs of groceries. The food system seems to be more precarious for people living in remote and regional areas, where residents pay, on average, 39% more for supermarket supplies than those in capital cities. It appears that the major supermarket chains are using their power to engage in opportunistic pricing strategies, ‘discount’ and ‘special’ claims, which are nearly impossible for consumers to verify, given imperfect information. Consumers often struggle to discern genuine discounts from those that do not offer value for their money. People have had to make major lifestyle changes to manage the increased costs of groceries and food. Reports found that over 2.5 million households in Australia were “severely food insecure”, as a lack of money to afford groceries forced them to reduce food intake, skip meals, or even go entire days without eating.
Many farmers reported increasing economic unsustainability as the downward pressure on prices caused by the supermarket duopoly has resulted in the inability to recover their growing costs from the sales of produce. About 37% of vegetable growers were considering leaving the agricultural sector next year. Poor retail pricing by supermarkets was quoted among the top factors in forming these considerations. This has significant implications for food security in Australia – rates of food production are threatened as farming becomes economically unfeasible. Supermarkets exercise their powers to force low prices upon farmers, threatening their livelihoods. This is particularly alarming for small, independent farmers who are often exploited by such power imbalances in negotiations. There is also considerable evidence that suggests a lack of transparency in price setting at the retail level, especially in the meat and dairy sector. An inquiry by the National Farmers Federation found that “…if [farmers] do not participate during the buying cycle, they will be punished. They’ll get lower orders going forward, and they cannot commercially afford to do that. At this stage, every grower in this country feels they have almost no choice but to accept the price that is put on the table”.
Farmers also fear retribution in the form of quality controls. Farmers often face rejection of their entire crop without payment if it fails to meet arbitrary standards set by supermarket buyers. This lack of transparency and independent verification leaves farmers uncertain about how to prevent future rejections and exacerbates their incurrence of financial losses. Additionally, the overcalculation of supply volumes and overly prescriptive size specifications result in crops being needlessly destroyed, with 14 million kilograms of fruit and vegetables being thrown away from rejected deliveries. Another prevalent practice creating an unfair playing field for farmers is “loss leading”, which involves supermarkets selling products below their cost of production to attract customers. While not illegal, it leads to situations where supermarkets maintain profitability by shifting the burden of price reductions onto farmers.
Practices like loss-leading create significant disadvantages for small-scale local producers and independent businesses. The impact can be better understood through The Australian Meat Industry Council’s explanation of the negative impact of losses leading on small local producers by using the example of local butchers. Supermarkets must clarify their retail price decisions, especially if recent meat discounts are a response to media and public pressure rather than market forces. This shift could significantly impact the business model of independent small businesses, highlighting the unintended consequences when markets and competition are not central to decision-making. It’s crucial to prevent butchers from becoming collateral damage due to supermarkets discounting their meat category as loss leaders.
Independent retailers play a crucial role in fostering a competitive grocery market, which ultimately benefits consumers. However, major retailers, including Coles and Woolworths, engage in practices like land banking and creeping acquisitions that hinder competition and prevent smaller, independent retailers from establishing themselves as sustainable competitors. This is furthered as Coles and Woolworths intend to open 103 metro stores and 21 local small format stores, respectively, in sites that would have been better suited for smaller independent stores.
The government’s response to the practices of the major retailers aims to address concerns raised by consumers, farmers, and small retailers alike. By supporting recommendations for significant penalties and a mandatory code of conduct, the Australian government sought to hold supermarket giants accountable for mistreating suppliers and engaging in anti-competitive behaviour. Treasurer Jim Chalmers emphasised the importance of making the code compulsory, imposing hefty penalties for wrongdoing, and ensuring effective dispute resolution mechanisms. This approach aims to protect both farmers and suppliers from unfair treatment, thereby safeguarding their livelihoods and fostering a more equitable marketplace. While the government has not yet endorsed break-up powers for supermarkets, it remains committed to improving competition in the sector through measures that promote transparency, accountability, and fair business practices. The government’s initiatives are designed to benefit consumers by promoting lower prices, addressing power imbalances faced by farmers, and assisting small retailers in establishing themselves as viable competitors in the market.
The Guardian conducted a test to assess the ability of three random people, each representing inner Melbourne, regional Victoria, and the Sydney suburbs, to shop for groceries without buying anything from the duopoly. While the shopper from regional Victoria found local grocers to be cheaper and more time-efficient, the shoppers from the inner city and suburbs state that the prices and convenience of Woolies and Coles are unmatched. This is exacerbated by the current cost-of-living crisis, with many trying to cut down on spending where possible.
Australia’s reluctant reliance on both supermarkets has led the federal government to distance itself from proposals to potentially break them up. On the one hand, senators Glenn Sterle and Louise Pratt state that breaking up the duopoly may disrupt supply chains, damaging the economies of regional communities. On the other hand, Greens senator Nick McKim has pushed for divestiture powers to be granted to the Australian Competition and Consumer Commission (ACCC) if a company is found to be engaging in price gouging, exploitation within supply chains, or other anti-competitive and exploitative practices.
Prime Minister Anthony Albanese has admitted that Australians have been feeling the pinch of high grocery prices compared to the rest of the world. He still refuses to wield the federal government’s divestiture powers, however, claiming that Australia is “not the old Soviet Union.” The Business Council of Australia (BCA) argues that the breakup of Woolies and Coles’ duopoly may result in higher prices for Australians.
Indeed, Australian policy does not focus on breaking up oligopolies, instead arguing that companies that currently hold a lot of market power “must be doing something right.” Rather, the legislation focuses on preventing anti-competitive mergers and prohibiting existing oligopolies from abusing their power.
To increase competition, a better solution than breaking up the duopoly may be to make it easier for other market players, such as IGA and Aldi, to compete. While Coles and Woolies still hold a significant 65% of the grocery retail market, this has been challenged in recent years by competitors such as Aldi, Costco, and Metcash.
The Australian government may adopt a response mirroring that of the US government in the case of IBM and Microsoft–a duopoly that once dominated the computer market. While the US government implemented antitrust laws, what sealed the fate of the duopoly was high levels of competition from other personal computer companies such as Apple and Linux. In this market, competitors gained a competitive advantage from differentiation. Apple, rather than marketing the Macintosh as a “better PC,” instead focusing on its portability. Linux’s operating software is open source, meaning that it is available for the public to tinker with and change.
A blunt approach to breaking up the duopoly may hurt efficiency, damage supply chains, and impede innovation, especially with the supermarket giants as entrenched as they are. By supporting competitors and enacting less heavy-handed policies such as preventing acquisitions and mergers, competition can be increased to the overall benefit of the grocery retail market’s numerous stakeholders.
In the midst of the ongoing cost of living crisis, the federal government faces many tough questions regarding the duopoly that Woolies and Coles hold over the Australian grocery retail market. It appears that efforts to dissolve the duopoly have been stalled in favour of a more passive prevention of exploitative market practices through ACCC regulations.
A market lacking competition is subject to many inefficiencies, potentially harming consumers and suppliers. Supermarket costs affect more than just Australians: an appreciating Australian Dollar implies greater cost burdens for international students and those earning foreign incomes in Australia. However, for those living in Australia, there is simply no easy and cheap alternative to the duelling giants for now.
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
