If you want to understand the competitive issues in Australia’s corporate sector, take a look at Woolworths’ annual results.
Woolworths is best known as the operator of the country’s largest supermarket chain, but also owns the discount department store Big W. The results of these two companies could not be more different.
Faced with unstoppable increases in household costs, consumers are making necessary – and sometimes even urgent – adjustments to their spending.
This has led to a decline in profits and margins for companies that sell consumer goods, especially those operating in a highly competitive market with numerous competitors from brick-and-mortar stores and online shopping.
To continue to attract customers, these stores must either offer lower prices or accept that customers are unlikely to purchase higher-priced products, resulting in lower profit margins.
As a discount department store chain, Big W is more immune to the decline in consumer spending than other retailers. But last year, sales fell 3.9 percent while profit margins fell from 3 percent to 0.3 percent.
Big W attributed the result to continued customer caution, “leading to a reduction in discretionary spending.”
Against this backdrop, customers would be expected to look for the best deals on essential goods such as food, electricity, credit and insurance, which in turn would force retailers in these sectors to cut prices.
But supermarkets, energy suppliers, banks and insurance companies – almost without exception – reported good figures for the past financial year, underlined by rising profit margins at the supermarket chains Woolworths and Coles.
In some cases, these profit margins have now reached record levels, well above pre-pandemic levels, even as customers face increasing cost-of-living pressures.
As shown by various parliamentary inquiries and reports, there is a lack of competition in these sectors. Two large supermarkets, three large energy suppliers and a handful of major banks and insurers offer customers few alternatives.
These companies also operate in sectors that have contributed to rising household costs and inflation in recent years.
On Wednesday, Woolworths reported improved earnings and higher profit margins in its Australian grocery business, a trend that has largely continued since the start of the pandemic.
Outgoing CEO Brad Banducci attributed much of the supermarket business’s profit growth to efficiency gains in online sales channels and “adjacent” businesses such as media retail.
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On Tuesday, Coles CEO Leah Weckert said thefts at the company’s stores had fallen significantly – a cost reduction that ultimately has a positive impact on profits.
But the supermarket chains did not have to sacrifice any of these margins because they offered suppliers better prices or offered end consumers cheaper prices. In stark contrast to the success of Big W.
Why? A lack of competitive forces.
Former competition watchdog Allan Fels said: “While there are concerns that major retailers are exerting unfair pressure on their suppliers, there has not been a price war between the major supermarkets for a number of years.”
The same applies to electricity bills and insurance premiums.
Supermarket profit margins remained robust even at a time when Australians were cutting back on consumption, which would normally prompt retailers to compete more.
The major supermarkets argue that there is healthy competition, pointing to Aldi, Costco, Chemist Warehouse’s in-store offerings and the rise of e-commerce.
However, this fails to recognize what real competition is: a real competitor must offer the buyer a real alternative for their weekly shopping in order to create price pressure.
Meanwhile, Woolworths and Coles continue to charge almost identical prices, increase their profit margins in lockstep and enjoy record share prices even as customers struggle with a cost-of-living crisis.
