It's official: supermarkets are overcharging. So change the subject

Why does a government release a highly critical report on the conduct of Woolworths and Coles on the Friday before a budget that will lead straight into an election campaign? Short answer: not for any worthy reason.

One worthy reason could have been to show Anthony Albanese and Treasurer Jim Chalmers really wanted to do something about fixing the cost of living, by making the question of what we should do about our overcharging grocery oligopoly a major issue for discussion in the campaign.

Since the remedies proposed by the Australian Competition and Consumer Commission in its report seem so inadequate, should the two grocery giants be broken up? As, indeed, Opposition Leader Peter Dutton says he would do if elected.

As the business press so indelicately put it, the competition watchdog’s mild-mannered recommendations despite all its evidence of what the punters see as “price gouging” meant the supermarket giants had “dodged a bullet”. But should they have? Let’s discuss it.

Sorry, I’ve been observing the behaviour of politicians for too long to believe Labor’s motives for releasing the report at such a time could possibly be so pure. It’s more likely the reverse: Labor wants to close the issue down.

What Labor did last week looks suspiciously like what’s known in the trade as “taking out the trash”. When you’ve got an embarrassing report you hope won’t get much notice from the media, you release it on a Friday, when the media’s busy packing up for the weekend. The reporters ought to return to the topic on Monday, but they don’t because of their obsession with newness. Spin doctors 1; press gallery 0.

Or governments can achieve the same result by releasing an embarrassing report at a time when everyone’s attention is turned to a much bigger issue – say, a budget, or an election campaign.

But why didn’t Labor just keep the report to itself until after the election? Because, I suspect, it wanted to show it had been on the job, investigating complaints about supermarket overcharging.

And it probably wanted to arm itself to reply to Dutton’s promise to break up the two giants. “We had the competition watchdog investigate the matter, and it explicitly declined to recommend divestment. But it did make 20 recommendations, and we’ve accepted them all.”

(The last time I heard that one was before the 2019 federal election, when the Morrison government released the report of the royal commission into misconduct in banking and said it had accepted all its recommendations. After the election it dropped many of them.)

But if even Labor isn’t game to touch the thought of breaking up Coles and Woolies, why are the Liberals promising to do it? Because they wouldn’t really.

Why does the notion of divestment frighten Labor? Because it doesn’t want to get offside with business. However, in the case of the two supermarket giants, their interests are defended inside Labor’s corridors of power by their union, “the shoppies”, aka the Shop, Distributive and Allied Employees Association.

Trouble is, the report’s findings show there’s a lot to try sweeping under the carpet. The two chains account for two-thirds of all supermarket sales, and their market share has increased since 2008 despite the advent of Aldi. Their profitability is among the highest in the world and their profit margins have increased over the past five financial years.

“Grocery prices in Australia have been increasing rapidly over the last five financial years,” the report says. “Most of the increases are attributable to increases in the cost of doing business across the economy, including particularly production costs for suppliers, which has increased supermarkets’ input costs.

“However, Aldi, Coles and Woolworths have increased their product [margins] and earnings-before-interest-and-tax margins during this time, meaning that at least some of the grocery price increases have resulted in additional profits.”

So if the Libs don’t seize on the report’s findings to step up their claim to want to do something real and lasting about the cost of living, it will be a sign they’re not genuine in their professed desire to break up the grocery oligopoly. A sign both sides of politics want the report and its disturbing findings buried ASAP.

But it’s not just the political duopoly that doesn’t want to know about the pricing power of the grocery market’s big two. Most of the nation’s economics profession don’t want to think about it either. Why not? Because it’s empirical evidence that laughs at their conventional model – whether mental or mathematical – of how the economy works.

There’s a host of contradictions in their model, and the profession long ago decided that the easiest way to leave its beliefs unchallenged and unchanged was to avoid thinking about them. (And for all those economists snorting with derision as they read yet more of Gittins’ nonsense, I have five words: “theory of the second best”. Those words strike terror into the heart of every conventional economist.)

Economists divide their discipline into micro (the study of how individual markets work) and macro (study of how the whole market economy works), but they’ve given up trying to make the two approaches fit together. This groceries report is a classic example of how the two lines of thinking don’t fit.

Every microeconomist studying “imperfect competition” (aka “industrial organisation”) knows oligopoly brings market power and allows firms to avoid competition on price. But every macroeconomist assumes – explicitly or implicitly – that market power isn’t a relevant problem.

As we saw with the conventional wisdom on the domestic causes of the recent inflation surge, the Reserve Bank assumed it was caused by excessive monetary and budgetary stimulus. That is, it was caused by “demand-pull” not “cost-push” inflation pressure.

The fact that, through our own neglect, we have one of the most oligopolised economies in the developed world, is assumed away. We’ve allowed our economy to become inflation-prone, while economists in general, and the supposedly inflation-obsessed Reserve Bank, have said not a word.

But not to worry. We’ll compensate for our negligence by punishing people with home loans all the harder.

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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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