In the past three years, consumer prices have risen 16.1 per cent while wages growth has lagged, rising just 10 per cent over the same time frame.
The cost-of-living crunch this sharp fall in purchasing power has delivered has prompted consumers, politicians and some in the media to look for scapegoats to explain this clear financial pain.
One of the high-profile scapegoats for these cost-of-living issues has been the supermarkets – Coles and Woolworths, in particular - who have been accused of price gouging and unfairly profiteering. Brad Banducci stood down days after walking out of an interview while talking about it.
Coles and Woolworths have been accused of ripping off vulnerable Aussies, but then why are the share prices almost the same as before the pandemic? ·Supplied
We all see the price of bread, lettuce, pasta, washing powder, and a whole raft of items rising - sometimes sharply - when we do our weekly shop. In a high-inflation climate, the price of many of our day-to-day purchases have indeed increased sharply.
It’s true that Australia's supermarket industry is dominated by Coles and Woolworths, who account for around two-thirds of grocery spending, unlike the US, UK and some other countries, where there are many retailers competing for customers and market share.
Price gouging is broadly defined as the practice of increasing the prices of goods and services to a level that is much higher than is considered reasonable or fair. It can be driven by the abuse of market power when there are few competitors.
Price gouging is a difficult thing to prove but there are a range of indicators, comparisons and areas of analysis that cast serious doubt over the claim that Australian supermarkets are screwing their customers with unjustifiably high prices.
The share price is one way to test this.
What share prices say about supermarket rip-off allegations
Both Coles and Woolworths are listed on the ASX and many tens of millions of dollars worth of their shares are traded every day. The financial positions of both companies - being in the top 30 ASX companies by market capitalisation - are scrutinised by dozens of stock market analysts who come up with recommendations to buy, sell or hold the stock based on current performance and expectations for future profits.
The share price is driven by the weight of this analysis and the performance of each company.
Taking late 2019 through to very early 2020 as a price benchmark (the months before COVID), the share price of Woolworths hovered around $32-$35. For Coles, the share price was in a broad $15-$17 range.
At the time of writing, Woolworth was trading at $35.75 – a tiny increase from more than four years ago - while Coles was trading at $16.00 - which is flat to down from the pre-COVID price.
If profits were being boosted for any reason, including through price gouging, the share prices would be materially higher. Investors would love to buy into a company making quick and easy windfall profits.
In the past few years of high inflation, it is noteworthy that the inflation rate in countries where there is less supermarket concentration and more competition than Australia, the inflation rate has been higher. The US, UK and Canada, for example, had a sharper lift in consumer price inflation even with super-competitive supermarkets.
While many factors feed into inflation, grocery prices are important and the lower inflation pressure in Australia is probably noteworthy.
What’s more, if it was the case that unfair and unusually large profits were being made in Australia, new competitors would be lining up to get their share of this easy money.
While Aldi, Costco and IGA supermarkets have been establishing something of a foothold in the Australian market, no other mega supermarkets or domestic firms have entered what is perceived to be a market that is open to price gouging. This is odd and points to an absence of easy profits.
Where are the super profits if Australia so ripe for picking?
There is some discussion that one of the reasons for the limited number of new competitors is the difficulty of buying land in the ‘right’ areas. It is claimed Coles and Woolworths buy the desirable land to freeze out possible competitors. A few things to note – the land could have been purchased by anyone, including by firms wanting to get a foothold into the lucrative Australian grocery market. They simply haven’t.
The barriers to entry into supermarkets are few and, like all serious capital expenditure, the establishment costs would be recouped relatively quickly if there were super profits to be made. If there are no super profits to be made, don’t bother.
One final and vital point. In the decade prior to the pandemic, inflation was low, averaging 1.75 per cent - below the RBA’s 2-3 per cent target range. This was a time when supermarket concentration and the ability to price gouge was about the same as it is now, given the market concentration and competitive pressures at play.
Why didn’t supermarkets price gouge a decade ago and force inflation higher? Or was it a case in the pre-pandemic decade that input costs were low, there were few supply-side constraints, wages growth was moribund and reasonable profits were made as a result of this mix of factors?
In that low-inflation decade, Woolworths’ share price rose from around $22-$23 in 2010 to $32-$35 in late 2019 to early 2020. This is a great share price increase with no evidence of price gouging and with extended low inflation.
Everyone likes a scapegoat for their financial ills. In the current inflation burst, it is supermarkets copping accusations of price gouging. But what is happening is the cost of the items they are buying is rising, as are labour costs and an array of other costs.
They are passing on these cost pressures and having small increases in profits, which creates an impression of price gouging.
Interestingly, in the past year, inflation has fallen from 8.4 per cent to 3.4 per cent as the prices of items such as meat and seafood, fruit and vegetables and clothing have fallen. It looks like the supermarkets are passing on the lower prices for these items and not unfairly building their margins.
Has inflation been a problem? Yes. Is supermarket price gouging part of this problem? No.
