Australia’s big supermarkets are far more profitable than their British peers Tesco and Sainsbury’s, and the gulf has widened during the pandemic, leaving shoppers with fast-escalating food bills in a cost-of-living crisis.
Exclusive Guardian Australia analysis of financial accounts shows Coles and Woolworths have consistently expanded profit margins for their food businesses at the same time as counterparts in Europe report falling or mixed profitability.
The difference is tied to Australia’s tightly held supermarket sector dominated by just two chains, sparking calls for reforms and exasperating those who have watched the dominant duopoly seize control.
“In Europe they have competition; Australia has very little,” said Vas Kolesnikoff, a former investment banker turned governance expert.
“It’s a huge concern. Coles and Woolworths are very strong and their margins are holding up.”
Australia’s two big chains have boosted profit margins throughout the pandemic and inflationary period. Their preferred gauge of profitability, known as Ebit margins or operating margins, has spiked to 5.3% at Coles and 5.9% at Woolworths, according to financial disclosures.
The equivalent profit margins at the grocery divisions of the major UK chains Tesco and Sainsbury’s are 3.8% and 3% respectively, after reporting up and down results over the pandemic.
A Guardian Essential poll found that almost all Australians surveyed had noticed increased prices in their weekly grocery shop, prompting many to go without some items.
According to the poll of 2,087 respondents, 72% are buying less in response to the higher costs, while 76% are opting for different products or brands. Just over half are now shopping at a different grocery store.
Evidence of falling demand for grocery items is a notable data point for economists because it shows supermarkets are increasing profit margins at the same time as demand is waning, which wouldn’t occur in a properly functioning market.
The ability of the big supermarkets to not just retain but fatten margins supercharges profits and is a likely inflation trigger.
A Wilson Asset Management equity analyst, Anna Milne, said there were modest pricing pressures on Australian supermarkets compared with those operating in bigger overseas markets.
“They’re all trying to keep the customers that they have, but without getting into any kind of price war,” Milne said. “In markets such as the UK, competition is a lot more fierce. It’s a lot less cosy.”
She said Australian supermarkets did have their own obstacles, with a jump in the minimum wage representing a significant cost increase.
“The staffing cost increases are really going to bite and that is a material headwind for Coles and Woolworths.”
The big two control two-thirds of the market. Aldi, which does not disclose its profit margins because it is not a listed company, has an 11% share, and is the only other sizeable competitor.
While there have also been supermarket pricing concerns raised in the UK, Tesco and Sainsbury’s compete with Asda, Aldi, Morrisons and Lidl, among others.
Coles said in a statement it was difficult to compare margins with overseas stores.
“The investment required to fund our network is higher than many of our global peers, in part due to the larger physical footprint that we cover in Australia,” it said.
It attributes improved margins to cost efficiencies, and said it had “never invested more in value for customers than what we are today”.
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Woolworths said it was not profiteering and that competition had never been greater with international operators including Aldi and Costco now in Australia, as well as a large number of independents.
“All of that, with the thousands of butchers, bakeries, delis and other food retailers means there is a huge amount of choice,” a Woolworths spokesperson said.
“It’s incumbent on us as Australia’s largest private sector employer and a major contributor to the nation’s economy that we operate our business effectively and balance the needs of all of our stakeholders.”
The Reserve Bank of Australia has noted it does not believe profiteering is a problem or that it is fuelling inflation. Its view is based on a disputed idea that companies can’t get away with price increases unless supported by increased demand.
This contrasts with the financial accounts of the supermarkets, which show that the inflationary period has arguably created cover to pass on higher-than-necessary costs to shoppers.
The issue is important because many households are under pressure from a series of interest rate hikes from the Reserve Bank to quash demand, when part of the inflationary problem is likely to be caused by companies overpricing their goods.
Andrew Leigh, assistant minister for competition, said while the government was not focusing on any one industry over allegations of profiteering, there was power in consumers looking around for a better deal.
“The high increase in inflation wasn’t primarily driven by competitive problems in the economy, but it’s certainly not helped by the fact that the Australian economy is highly concentrated,” he said.
“We need to make sure that we’ve got those rules around competition that are fit for purpose.
The government’s soft touch contrasts with the approach adopted by the UK, France, New Zealand and Canada where a combination of pricing probes, parliamentary scrutiny, and threats of price controls and sanctions are being used to pressure supermarkets and food manufacturers to lower prices.
While many sectors, including airlines and banks, have enjoyed increasing margins during the inflationary period, the profitability of supermarkets stands out.
Food is a necessity, a major household cost and significant contributor to inflation, second only to housing costs.
Kolesnikoff, head of Australia and New Zealand research at governance group Institutional Shareholder Services, said while there could be value in an inquiry into supermarket pricing, there was no easy solution given the dominance of the big chains.
“The train left the station a long time ago.”
