It’s easy to lay the blame of rising food prices at the feet of the large retailers and it also makes for a sexy, albeit misguided, headline. The easy target is often the large target, but if you strip the emotion out of this debate and look at the facts, its clear there isn’t much of a story in it at all.
It is true food costs more than it did 10 years ago. Like other products and services including education, healthcare, the cost of living increases over time, but so do wages. Australian private sector earnings have risen by nearly 51 per cent since 2000.
Australia’s real growth in wages is the second highest of 10 developed nations. But you won’t see critics talk about this when they talk about food prices. It ruins the hot headline.
The other pertinent fact that critics won’t mention is the amount of competition in grocery and fresh food retailing. There are 30,000 fresh food retailers in this country. Coles and Woolworths are the biggest supermarkets but they are fierce competitors. You need only open your daily newspaper to see how fiercely they compete for your grocery dollar.
Despite the hysteria, Coles and Woolworths do not have a stranglehold over the sector. The Australian Competition and Consumer Commission last year found we had a competitive market. Combined these two players have around 60 per cent of the market for packaged groceries. They account only half of all the fresh food sales including vegetables, fruit, meat and bread.
Associate Professor Frank Zumbo argues that the only way to lower prices is to tear down Coles and Woolworths. Any economist will tell you that the best way to increase competition is to reduce barriers to entry for new players, which is what the Government is doing. Competition Minister the Hon Craig Emerson MP has introduced a range of measures to help new players like Aldi and Costco set up shop in Australia.
German retailer Aldi plans to have 700 stores in Australia, putting it on par with Coles and Woolworths. Costco, the big box American retailer opened its doors to Melbourne shoppers in earlier this year, and plans to soon be serving shoppers in Sydney. The larger retailers welcome this new competition. Grocery retailing is a high turnover, low margin business, so earnings before interest and tax is pretty modest. The price you pay for a product on the shelf is a reflection of what the retailer has paid to source that product. So the best way supermarkets make their profits is through efficiencies and economies of scale. Their shareholders, including many Australian self funded retirees, wouldn’t expect anything less.
As Commsec Economist Craig James said this week, the number of large businesses that can compete in Australia is limited by the size of our dispersed population. “The small number of major companies in retailing, banking and airlines is a function of our relatively small population.”
What is often lost in this argument is the reasons why Coles and Woolworths are successful food retailing businesses. They give their shoppers what they want and they meet a need. Shoppers are smart. If they don’t think they’re getting a good deal, they’ll vote with their feet.
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