How supermarkets get away with raising their prices

 By Millie Muroi, Economics Writer, October 4,2024 

If Coles and Woolies wanted to get away with higher prices, they just had to tell us.

Alright, it’s not that simple. But there is a getaway car for any business wanting to keep customers coming – even after pumping up their prices. False discounting? No. Read on.

The high-inflation environment has sucked for a lot of us: growing grocery bills, surging insurance premiums and higher housing costs, to name a few. But the way we’ve perceived price increases – and the way we’ve responded to them – tell us (and businesses) a lot about how and when they can push prices up without getting customers cross.

Behavioural science consultancy Dectech took a look at the most recent spurt of inflation in the UK and how consumers saw – and changed their behaviour in response to – large price rises. They did their own testing, too, to see whether different justifications given for those pesky price hikes could change the way customers responded.

Now, you might expect customers to behave consistently to a price rise, regardless of the justification given for it. After all, an $8 packet of chips is still sucking more money out of your bank account than a $5 packet, regardless of the reason given for it.

But the thing about behavioural economics is that it often pokes holes in the neat economic models and theories we have in place to explain how we act. The law of demand, for example, states that as prices rise, customers buy less. Most economic models wouldn’t account for the fact that this depends on how companies explain those price hikes.

But the effect of the reasoning given for inflation can be more influential than the inflation itself, according to Dectech. An unexplained price rise, or a price rise for a “bad reason” can have a similar effect on customer behaviour as a 16 percentage point higher price rise for a “good reason”.

So, what’s the difference between “good” and “bad” reasons? Basically, it comes down to whether the price increase seems fair. Of course, this all comes down to perception. But one thing which helps to increase customers’ perceived “price fairness” is understanding how the price for a product was determined.

Despite the law of demand, pointing to increased demand for a price rise is a “bad” reason: it has the biggest negative effect on customer satisfaction and eagerness to buy a product. This is especially the case for a sector like telecommunications where the retailer doesn’t really have significant supply constraints.

By contrast, the best way to fend off angry customers is to either blame it on cost increases which “have to” be passed on, or to say the price increase covers extra costs needed for product development. Essentially, it has to be either something out of a business’s control, or aimed at improving the customer’s experience.

The worst thing a business can do is give no reason at all and hope no one notices (or, as Coles and Woolies have allegedly done, hide those price rises beneath false discounts, eroding customers’ trust). A 20 per cent price rise with the explanation that you’re investing in the product has the same effect on sales as a 4 per cent price rise with no explanation.

Even something as vague as “due to recent circumstances” is better than nothing. Did the dog eat your conveyor belt? Or is it because of a global supply shock? Who knows – but it works because at least the business is showing the decency to own the price increase. Openness and honesty count for something.

Time-poor and lazy

It also depends on the sector. Dectech’s study found raising prices “to invest in the product” worked especially well for the grocery and airline sectors – at least in the UK. Why? “People want to see better ready-made meals and new aeroplanes,” the authors said.

We also know humans aren’t big fans of change. We’re creatures of habit, often preferring to stick to routine or with what we know. Independent Australian economic research institute e61’s economist Matt Elias took a peek into consumer bank transactions linked to store locations and found there was a “persistent degree of inertia” when it comes to our supermarket choices.

Chances are, even if you have multiple options, you stick with one of the big two: Coles or Woolworths. It’s hard to pinpoint why, but Elias says it could reflect the fact that comparing prices between supermarkets can be tricky: there are so many items which are changing in price from week to week.

Consumers are also time-poor and – let’s face it – lazy. How often do you pull up the websites or catalogues of the major supermarkets to optimise your shopping? Probably not as much as you should or could.

Fluffy handcuffs

Brand loyalty can trap consumers, and unfortunately, it can reduce competition, handing more market power to big companies such as Coles and Woolworths. Why? Because when customers refuse to shop around, there’s less pressure on businesses to offer the best prices.

One way to combat this, Elias says, is to set up a government-supported digital price comparison platform, similar to the websites and apps we have to compare fuel prices. When these systems have been set up overseas, they’ve resulted in lower prices.

Loyalty cards or reward apps can worsen customers’ inertia, acting like fluffy handcuffs. They lock in consumers who would otherwise be more inclined to shop around for the best deal by offering enticing rewards for being faithful. Why cut prices when your customers are busy spending at your store to rack up points?

While economists like to assume people are perfect bargain-hunters, helping to keep companies on their toes and prices in check, the reality is blurrier. From inertia to justifications and loyalty cards, our behaviour is shaped by more than price. Being aware of some of what makes us tick (or sit back) can help businesses make money – but it can also help us save it.

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Get this into your head: we are now short of workers, not jobs

Last week, something strange happened without anyone noticing. We got the best monthly report on the jobs market we’ve ever had, and it was greeted with dismay. The message we’ve yet to get is that, when it comes to the need for jobs, our world has been turned on its head.

Every month, the Australian Bureau of Statistics gives us the latest figures for what’s happening to employment and unemployment, based on a huge sample survey of Australia’s 10.5 million households. The figures we got last week, for September, showed that the number of Australians with jobs increased by more than 64,000 during the month, to 14.5 million. The number of people unemployed – wanting a job, but unable to find one – fell by 9000 to a bit under 620,000.

Why was this the best jobs report we’ve had? Because the proportion of the working-age population with a job reached an all-time high of 64.4 per cent. During September, the number of full-time jobs grew by 51,000, to reach 10 million for the first time. So, more than 80 per cent of the extra jobs were full-time.

If the economy was booming, this strong growth in employment wouldn’t be so surprising. But the Reserve Bank has been applying the interest-rate brakes since May 2022, and the economy’s growth has been very weak for the past year or more.

The only thing that’s been growing strongly is the population – which makes the limited worsening in unemployment all the more surprising.

The new Minister for Employment, Murray Watt, boasted that more than a million extra jobs had been created since the Albanese government came to office in May 2022. “This is the most jobs ever created in a single parliamentary term by any Australian government,” he said immodestly.

So why was last week’s good news greeted with dismay? Because it was taken to mean the Reserve Bank will be in no hurry to start cutting interest rates. You know the media: always look on the dark side of life.

Rates will come down in due course, of course. And with the jobs market holding up as well as it has, it gets ever harder to fear the economy will drop into recession. Silly people judge recession by whether the economy’s production of goods and services – gross domestic product – starts going backwards.

But what makes recessions something to be feared is not what happens to production, but what happens to employers’ demand for workers. To the rate of unemployment, in other words. It’s when people can’t find work that they feel pain even greater than the pain people with big mortgages are feeling at present.

When the pandemic lockdowns ended and people were finally able to get out and spend the money they’d earned, businesses started hiring more workers and unemployment fell sharply. By the end of 2022, the rate of unemployment got down to 3.5 per cent – the lowest it had been in about 50 years.

But here’s the surprise: despite the big rise in interest rates designed to slow the economy and stop prices rising so fast – despite consumer spending becoming so weak – 28 months after the brakes were first applied the rate of unemployment has risen only to 4.1 per cent.

That’s still much lower than we’ve seen during most of the past five decades. After the recessions of the early 1980s and early 1990s, unemployment got up to about 10 per cent. In the 2000s, we got used to a rate that started with a 5.

For about the first 30 years after World War II, our problem was finding enough workers to do all the work needing to be done. Since the mid-1970s, however, we’ve learnt to live with the opposite: not enough jobs for all the people – including married women – wanting to work.

By now it’s become deeply ingrained in our thinking that there can never been enough jobs. Every politician and businessperson knows that, if you want to get your way, you promise to create more jobs.

But here’s the surprising news: the unusually low rates of unemployment we’ve experienced this decade aren’t the temporary product of the ups and downs of the pandemic and its inflationary aftermath. They’re here to stay. That’s why the jobs figures are holding up so well.

The half century in which jobs were always scarce has ended, and we’re back to the opposite problem: not enough workers to do all the work that needs doing.

Why? In five words: the ageing of the population. Because the proportion of people too old to work is growing, while families are having fewer children. Old people don’t stop consuming. They need more spending on services such as healthcare and aged care, which requires more workers.

For years we’ve made up for our low fertility rate by allowing high rates of immigration. And we’ll keep seeking from abroad the many doctors and nurses and aged-care workers we need.

Trouble is, all the rich countries have the same population-ageing problem we do. For different reasons, even China has a big ageing problem. So, the world competition for young skilled workers is likely to get a lot more intense.

But isn’t that a problem off into the future sometime, like climate change? Don’t be so sure – like climate change.

With the high cost of home ownership and a shortage of rental housing, right now we ought to be building a lot more additional housing than we are. What’s the problem? A shortage of skilled workers, with many people who could be building homes off working on the state governments’ big infrastructure projects.

And now that the Albanese government has approved the expansion of many coal mines, this will further reduce the number of skilled workers available to build homes.

A shortage of jobs is no longer our problem. It’s a shortage of workers.

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Let's all be more positive towards nature. But how?

Have you heard about Nature Positive? It’s a global movement to stop all the damage we’re doing to the natural environment – to forests, rivers, plants and animals – and start reversing that damage. It’s an idea whose time has come. And it’s coming to Australia next week.

Tuesday week will see the world’s first global Nature Positive Summit in Sydney, hosted by federal Minister for the Environment and Water Tanya Plibersek and NSW Minister for the Environment Penny Sharpe.

The summit will be “the next step towards turbocharging private sector investment in nature repair”. It will bring together ministers, experts, environmental groups, businesses, First Nations people, community leaders and scientists.

It will “bring together global leaders to discuss next steps for a nature-positive future, so that our kids and grandkids will be able to enjoy the wild places we love today”, Plibersek says.

Sharpe says that “getting nature on the path to recovery is as important as tackling climate change. Nature positive, and investing in nature, are newish concepts, and they are key to turning around destruction and pollution of land, waterways and air, and stopping biodiversity loss”.

The summit’s sessions and site visits will cover driving sustainable ocean economies and “blue finance”, developing nature reporting frameworks, business leadership on sustainability, boosting First Nations leadership in nature repair, and showcasing nature repair in practice, across landscapes, seascapes and borders.

Well, that’s great. At this late stage, you’d have to be pretty boneheaded not to agree with all that. The question is, what should we do to stop the continued destruction and start repairing the damage we’ve already done?

Well, the answer’s obvious – obvious to economists anyway. Surely, what we should do is create the incentives necessary to discourage destructive behaviour and encourage helpful behaviour.

We need to set up something similar to the present “safeguard mechanism”, which requires businesses in industries with major carbon emissions to limit and then reduce their emissions.

Where this is impractical, they must “offset” any excess emissions with “carbon credits” purchased from farmers and others who do things that reduce an equivalent amount of carbon emissions. These “Australian carbon credit units” are certified by a government agency to ensure they’re genuine.

Get it? Rather than just ordering companies to stop emitting greenhouse gases, the government uses an “economic instrument” that offers incentives to businesses to do the right thing. The government creates a new market where businesses unable to reduce their emissions can pay other businesses to reduce emissions for them.

The emissions are reduced by those businesses that can do so cheaply, rather than the firms for which doing so would be much more costly. The market thus allows the community to reduce climate damage at the lowest available cost.

Neat idea, eh? One small problem. We have to be sure the businesses being paid to reduce their emissions really do so to the extent they claim. But these carbon-credit schemes are notorious around the world for being dodgy or downright fraudulent.

One problem is ensuring the carbon isn’t locked up (“sequestrated”) for a few years and then let go. Another is being sure people aren’t getting paid to do something they fully intended to do anyway for other reasons.

Officialdom insists that our federal carbon-credit system is kosher. But various whistleblowers beg to differ – and that’s not hard to believe.

With nature first, the schemes you use to reduce carbon emissions can be adapted to preserving and repairing bushland and plant and animal habitat. With bushland, there’s a fair bit of overlap between the two problems.

The NSW government has been running a biodiversity offsets scheme since 2017. But in its own politely ponderous way, a performance audit by the NSW Auditor-General in 2022 tore it limb from limb.

It found that the government department responsible for the scheme had “not effectively designed core elements” of it. There were “key concerns around the scheme’s integrity, transparency and sustainability” creating “a risk that biodiversity gains made through the scheme will not be sufficient to offset losses resulting from the impacts of [economic] development, and that the department will not be able to assess the scheme’s overall effectiveness”.

The point is, by now we’ve had enough experience of attempts by governments to create “markets” out of thin air, just by passing laws and setting up regulatory bodies, to know this doesn’t leave us with markets that work the way real markets work – let alone the markets that exist in economics textbooks.

When it comes to the environment, the trouble with government-created “markets” is that governments are creating the demand for something – a carbon credit, or a biodiversity credit – and also determining the supply of that something, by deciding who’s done something that entitles them to sell a credit.

So the buyer has been ordered to buy things called credits, while the seller has been allowed to sell things called credits. See what real markets have that this market doesn’t? Customers.

A customer is someone who wants value for their money and, if they aren’t getting it, will either go somewhere else or decide to go without.

But in this so-called market without customers, buyers have to buy credits just to please the government, while sellers who’ve been granted a piece of paper called a credit have a guaranteed buyer.

So sellers can sell anything they’ve persuaded the government to class as a credit, while the buyers forced by the government to acquire officially designated credits, have no reason to care whether the credits they buy are good, bad or indifferent.

It’s hard to imagine a “market” where the risk of buying something that’s no good could be higher.

Now get this. As originally intended, the purpose of the Albanese government’s Nature Repair Act, passed late last year, was to establish a nature-repair market. But the Greens would pass the bill in the Senate only if it didn’t permit miners and other developers to harm nature. And if they did, the polluters would have to offset any damage by buying biodiversity credits.

So, in the end, the Act created only half a market. It gives the government power only to award farmers and others who do nature-enhancing things with “biodiversity certificates”, which they can sell.

Who’d want to buy such certificates? Only philanthropists, environmental groups, companies trying to enhance their environmental credentials, or governments coughing up taxpayers’ money.

You get the feeling the Greens don’t have much faith in creating artificial markets to fix the environment. They don’t seem to share most economists’ conviction that governments shouldn’t order people about – particularly businesspeople.

So how else can we pursue nature positive? Well, here’s a radical thought: governments could stop logging native forests, stop further land clearing, stop subsidising fossil fuels, stop permitting new mines and gas fields, and start spending a lot of money restoring land and habitat.

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