Australia’s big supermarket chains persistently increased their margins on their food businesses throughout the pandemic and cost-of-living crisis, with critics arguing the pricing decisions are evidence of inflationary profiteering.
Guardian Australia analysis of Coles and Woolworths financial accounts over a five-year period show the dominant supermarkets were able to use the pandemic to not just sell more goods, but also increase the amount they profited from sales.
The highly lucrative period coincided with a devastating pandemic and subsequent cost-of-living crisis and contrasts with the slowing performance and subdued outlook for the supermarket giants shortly before the outbreak of Covid-19.
Coles said the increased margins were thanks to savings in other areas, while Woolworths said the higher wholesale prices it pays to suppliers drives inflation.
But the increasing profit margins of the supermarket sector shows that it is charging shoppers more than enough to cover any additional costs it pays to suppliers and to account for other rising business expenses, such as energy bills.
George Boubouras, the executive director and head of research at K2 Asset Management, said that there was a strong argument to establish an inquiry “with teeth” to improve transparency.
Some sector were approaching “oligopolistic pricing power”, he said, referring to when a few companies exert control over a market and provide uncompetitive prices.
“To address high inflation, we need to get prices to start falling again.”
What’s behind rising prices
Gross margins at Coles’ supermarket division increased from 24.7% shortly before the pandemic to 26.5% at its most recent disclosure. Margins at Woolworths’ Australian food division increased from 29.1% heading into the pandemic to 30.7%.
Boubouras said it was particularly important to monitor prices for flood-affected items, such as fruit and vegetables, to ensure they drop accordingly after supplies return rather than stay at elevated prices.
In 2019, sales growth was slowing at Coles, while analysts were preparing for lower margins at Woolworths, according to an investment note by Morningstar at the time.
While panic buying in 2020 led to an understandable surge in sales, the supermarkets were also able to start increasing margins in a trend that continued, and sometimes accelerated, as inflation started to bite.
Coles and Woolworths dominate Australia’s supermarket sector, with a combined control of two-thirds of the market. Aldi, which does not disclose its profit margins because it is not a listed company, has an 11% share.
A Coles spokesperson said a four-year program designed to save costs that includes faster checkouts and stock ordering and distribution centre changes was driving margin improvements.
“Gross margin expansion has largely been driven by our smarter selling program, strategic sourcing initiatives and reduced Covid-related costs,” the spokesperson said.
A Woolworths spokesperson said many factors besides costs paid by customers influenced margins, including the way the business manages stock loss – meaning markdowns and items it can’t sell.
“The higher wholesale prices we’re paying to suppliers is the primary driver of inflation,” the spokesperson said.
Woolworths has previously indicated at its financial results that overall price increases have been in line with rises in supplier costs.
Supermarket representatives who addressed a Senate committee into cost of living in recent months said the businesses were shielding shoppers from some of the increases charged by suppliers.
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Vittoria Bon, the government relations manager at Coles, told the committee the supermarket chain was facing direct cost increases through energy, fuel, packaging and labour costs. She said Coles often absorbed increased costs from suppliers rather than pass them through to customers.
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Woolworths’ chief commercial officer, Paul Harker, told the committee the chain had frozen prices on some essential items in response to rising food input costs.
Supermarket representatives also cited the war in Ukraine affecting canned goods, fertilisers and other inputs as well as ongoing pandemic disruptions to supply chains for high food prices.
Push for a supermarket probe
Australia’s competition regulator, and several competition experts contacted by Guardian Australia, declined to comment publicly on supermarket pricing decisions. One of those people contacted said any investigation would probably need to be initiated by the federal government.
The Greens would like the Australian Competition and Consumer Commission to be given additional powers proposed by the former competition chief Allan Fels.
“We’d like to see the ACCC be given divestment powers whereby they can make an application to a court for companies to be broken up when monopolistic behaviour is restricting competition and gouging customers,” said senator Nick McKim, the Greens’ competition policy spokesperson.
“It’s no surprise to have it revealed that the supermarkets have increased their profits in recent times and like so many other corporations, there is definitely profiteering going on.”
The cost of food is a major contributor to inflation, measured by the consumer prices index, which tracks changes in the price of a basket of goods and services that are typical expenses for a metropolitan household. Food is the second-biggest cost, accounting for more than 17% of the basket, after housing, at 22%, according to Australian Bureau of Statistics data.
Even as central banks hike rates at record speed to cool spending, inflation is proving stubborn. This has prompted a growing number of economists, which includes UBS’s London-based Paul Donovan, to apportion some blame to companies taking advantage of the tumultuous economic conditions to inflate margins, keeping prices high.
The UN’s food price index, which measures wholesale prices of agricultural goods, is lower than what it was a year ago; but that relief is not flowing through to shoppers. In Australia, food inflation has dropped slightly from the worst of last year’s flood disruptions, but prices were still rising at an annual 8% rate in the March quarter.
The Reserve Bank has dismissed any role that profiteering may play in driving inflation, attracting criticism from the Australia Institute, a progressive thinktank, that draws a direct link between high corporate profits and rising prices.
“When you see both Woolies and Coles increasing their profit margins, it really speaks to the complete lack of competition in Australia’s retail sector,” said Australia Institute’s Greg Jericho, who is also a columnist for Guardian Australia.
“What this feeds into as well is that wages have not risen anywhere near as fast as inflation. So one cost that hasn’t increased is the cost of labour and that’s also helping with their margins.”