You’re not imagining things: it’s getting much more costly to put a meal on the table. In Australia, food prices are increasing by an annual rate of about 8%, although some products, such as dairy, are rising at almost double that pace. So what is going on – and what can governments, consumers and retailers do about it?
The iceberg lettuce effect
In the last three years a number of factors have dramatically changed what we pay for essential items. There was the pandemic, cuts to supply chains, and floods and energy disruptions caused by the Russian invasion of Ukraine.
In a period like this, which is marked by sharp price rises, consumers lose their bearings on how much they should pay for things and start to accept they should pay more – for everything.
How much should iceberg lettuce cost? Suddenly, no one knew.
In the early pandemic years, many households with built-up savings accounts were not overly sensitive to price rises.
This meant that major companies were able to more-than-offset additional business costs they were incurring – from suppliers and general costs such as electricity – to expand profit margins, pushing prices of goods and services above what they needed to be.
Food is a necessity, a major household cost and it is mostly sold through a sector dominated by two companies, Coles and Woolworths.
Supermarkets have not only used the pandemic and recent inflationary period to sell more goods, but also profit more from each sale, expanding their margins.
But high profit margins are not only bad for consumers – they also push inflation higher.
This is known as profit-led inflation and it tends to concentrate at the end of supply chains, giving retail businesses the biggest bump in profits. The problem is exacerbated in sectors with muted competition, such as supermarkets, because they have fewer rivals ready to undercut them.
The rising shelf prices come despite wholesale global food prices dropping consistently over the past year, according to the UN. Food retailers point out that some of the stubbornly high food prices are linked to costs that come after produce leaves a farm, such as energy, processing and transportation expenses.
Are supermarkets ‘price gouging’?
When products and services rise in price by amounts outpacing any additional costs those businesses face, there’s a good chance that profiteering is happening.
This is especially concerning in uncompetitive sectors, such as supermarkets, where there is no increased demand for a particular product or service.
Rod Sims, the former head of the competition watchdog, said Australia’s big supermarkets have likely taken advantage of limited competition and used their market power to increase prices higher than necessary.
Coles and Woolworths deny they are profiteering, and say it’s actually improved productivity that has led to bigger profits. Specifically, Coles has cited cost savings such as faster checkouts and distribution centre improvements, while Woolworths has said it has improved the way it manages stock loss, referring to markdowns and items it can’t sell.
Profiteering isn’t illegal, although there are regulations designed to prevent companies misleading consumers about the reasons for price rises.
The Reserve Bank has noted on several occasions that it does not believe profiteering is widespread or fuelling inflation. Its view is based on a disputed idea that companies can’t get away with price increases unless supported by increased demand.
The RBA cites data that shows that, outside the mining and energy sectors, corporate profits in Australia have been unremarkable. Its research has been debated, and has fierce critics.
What could governments be doing about it?
The RBA debate is significant because it informs the approach that policymakers take to combat inflation. If the problem is that consumer demand is too strong, then rate hikes designed to quash it might be the answer.
But if part of the problem is profiteering, especially in uncompetitive sectors like supermarkets, then policymakers should be pressuring the industry to lower prices, rather than just heaping more pressure on households through rate rises.
Given there has been such little critique of supermarket pricing from the government or its agencies, they have a green light to retain their pricing policies.
Supermarkets are not the only ones expanding profit margins. Qantas has dramatically increased its air fares from pre-pandemic levels, citing rising costs such as jet fuel, after its revenue was curtailed during border closures.
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It has not significantly dropped prices even after jet fuel prices halved.
A key difference between airlines and supermarkets, however, is that companies such as Qantas could argue they are taking advantage of pent-up travel demand to maximise profit. When it comes to supermarkets, there is no surge in demand; it’s just that people need to eat.
The French government threatened to impose financial penalties, and to name and shame food companies making excess profits, unless they dropped their prices. A deal was soon reached with 75 manufacturers to start cutting prices.
In the UK, supermarket executives have been subjected to more parliamentary scrutiny than they have in Australia amid a nation-wide debate over food pricing. This, at the very least, puts those businesses on notice when making pricing decisions. This is despite UK supermarkets being subject to more competition and reporting narrower profit margins than their Australian counterparts.
In Australia, policymakers are largely silent.
The assistant minister for competition, Andrew Leigh, says the government is not focusing on any one industry over allegations of profiteering.
“What we’re trying to do right across the economy is to make sure that the competitive settings are right,” he said.
“It’s not about targeting a particular sector of the economy, it’s more about making sure that the rules of the game are appropriate.”
What can consumers do?
The London-based chief economist of UBS’ global wealth management, Paul Donovan, has been a strong voice telling consumers not to passively accept price increases, especially when it comes to supermarkets.
“Customers have a distorted view of what drives food prices and so are often persuaded to accept price increases in the mistaken belief that agricultural commodities, for example, determine the price that should be paid at a supermarket,” he said.
“If [a company has] a convincing story as to why price increases are taking place, a margin increase can be sneaked in without damaging the brand value.”
But food manufacturers and retailers are susceptible to public pressure on pricing, because so much value is in their brands.
Shop around. Don’t assume the big two supermarkets will offer the cheapest prices – as our recent data project shows, for fruit and vegetables they almost always do not.
Another thing consumers can do is call out instances of “shrinkflation”, the practice of decreasing the size of a product but retaining the old price tag. Some shrunken products are selling at Australian supermarkets with promotional, low cost tags, despite being more expensive than their former versions.
When living costs soared in the 1970s and 80s, workers didn’t just quietly put up with it – they protested, bargained and went on strike.
Half a century on, customers could do with a dose of platform shoe-era rage to push back against those profiting from a cost-of-living crisis.
Doing so might help avoid unnecessary rate hikes, subdue inflation and help alleviate some of the financial strains weighing heavily on Australian households, especially their food bills.
