Title page 1

Contents 3

Executive Summary 4

Recommendations 27

1. Introduction 34

1.1. Scope of the inquiry 35

1.2. Our approach to conducting the inquiry 36

2. Grocery shopping in Australia 40

2.1. The cost of many inputs along grocery supply chains have risen substantially 42

2.2. Wages have not kept up with groceries inflation 47

2.3. The Australian supermarket industry is highly concentrated 51

2.4. Supermarkets use a range of practices to engage consumers 63

3. Retail competition 77

3.1. Competition in the supermarket industry matters 80

3.2. In particular, competition between full-service supermarkets is critical for consumers 81

3.3. Where competition is limited due to geographic factors, community-owned stores can benefit consumers 90

3.4. Prices are largely consistent at a state level within a supermarket chain's stores 92

3.5. Coles and Woolworths have limited incentive to compete vigorously on price 100

3.6. Price comparison assists competition 107

3.7. Non-price factors are key areas of competitive focus for supermarkets 117

3.8. Metcash has an important role to play in the competitiveness of independent supermarkets 127

3.9. We are unlikely to see significant entry or expansion by full-service supermarket chains in Australia 148

3.10. Securing suitable sites is challenging for all competitors, with Coles and Woolworths dominant 157

4. Consumer experiences and outcomes 175

4.1. Promotions are a key feature of supermarket pricing strategies 177

4.2. Promotions have a significant impact on consumer purchasing behaviour and sales 187

4.3. Promotional practices may make it difficult for consumers to assess prices and discounts 191

4.4. There is scope to improve unit pricing 203

4.5. Greater transparency is needed in relation to 'shrinkflation' 213

4.6. Supermarket loyalty programs are becoming increasingly important and sophisticated 218

4.7. Consumers on lower incomes are particularly vulnerable in the supermarket environment 248

4.8. Consumers in remote locations are paying higher prices for some groceries 254

5. Grocery supply chains in Australia 271

5.1. Grocery supply chain structures can vary significantly 273

5.2. The level of supermarket buyer power varies across grocery supply chains 287

5.3. Many suppliers say they fear retribution from raising concerns with supermarkets 290

5.4. Category managers have significant autonomy in how they deal with suppliers 291

6. Trading arrangements 295

6.1. Supermarkets classify different types of suppliers 297

6.2. Suppliers are required to comply with quality assurance and sourcing requirements 302

6.3. Some fresh produce trading terms are not transparent and increase risk for suppliers 307

6.4. Packaged grocery trading arrangements 334

6.5. Other trading terms 343

7. Supermarket margins and profitability 359

7.1. Profitability of Coles and Woolworths 361

7.2. ALDI's, Coles' and Woolworths' product margins have increased since 2019-20 375

Appendix A - Glossary and acronyms 402

Appendix B - Terms of Reference 410

Part 1. Preliminary 415

1. Name 415

2. Commencement 415

3. Authority 415

4. Definitions 415

Part 2. Price inquiry into groceries 417

5. Commission to hold an inquiry 417

6. Directions on matters to be taken into consideration in the inquiry 417

7. Directions as to holding of the inquiry 418

8. Period for completing the inquiry 418

Appendix C - Our analysis 419

Appendix D - Supermarkets inquiry summary 436

Appendix E - Behavioural Insights Team report 439

Tables 55

Table 2.1. The Australian supermarket industry is highly concentrated 55

Table 2.2. Coles and Woolworths account for a combined 57% share of take-home food and grocery sales 56

Table 3.1. Products that may not be priced on a national basis 94

Table 3.2. IGA stores skew more towards regional and remote than other supermarkets 133

Table 3.3. Number of undeveloped and unused sites intended for future supermarket use held by ALDI, Coles and Woolworths 165

Table 4.1/Table 4.29. Average spend per transaction in sampled stores 267

Table 5.1. Key responsibilities of category managers 292

Table 6.1. Woolworths' scorecard system is used to assign suppliers to either a bronze, silver, gold or platinum partnership tier 301

Table 6.2. Types of rebates and other payments that may be included in trading agreements 350

Table 7.1. Product categories and products for case studies 388

Table 7.2. Estimated percentage of promotional weeks where case study products sold at both Coles and Woolworths were on the same or different points in their price cycle 392

Table 7.3. Supplier payments to Coles and Woolworths for different types of activities 395

Table 7.4. Greater supplier funding results in greater margins for the supermarket compared with a scenario where there was no supplier funding 397

Figures 6

Figure 1.1. Wages have not kept up with grocery price inflation since late 2021 6

Figure 1.2. Prices increased at all supermarkets over the last 5 financial years, and significantly in 2022-23 7

Figure 1.3. ALDI's, Coles' and Woolworths' average product margins have increased since 2019-20, while Metcash banner stores' average product margin has been relatively flat 8

Figure 1.4. Over the last 5 financial years, Coles' average product margin has increased for its highest revenue products - branded packaged goods 9

Figure 1.5. Over the last 5 financial years, Woolworths' average product margin has increased for its highest revenue products - branded packaged goods 10

Figure 1.6. Supermarket EBIT margins suggest supermarkets were consistently profitable 11

Figure 1.7. Australian supermarkets appear profitable by comparison to their international peers 12

Figure 1.8. Store network overlap between Coles, Woolworths and competitors has increased since 2008 14

Figure 1.9. ALDI, Coles and Woolworths have grown their store networks since 2008 while IGA has contracted 17

Figure 1.10. IGA has increased its number of small stores, but decreased its number of medium and large stores 17

Figure 1.11. IGA stores skew more heavily towards regional and remote locations 18

Figure 1.12. Consumers in remote Australia often have no choice of supermarket 19

Figure 1.13. Examples of products that exhibited alternating high-low pricing cycles 22

Figure 2.1. Input prices for domestic food, beverage and tobacco manufacturing have risen significantly between 2021 and 2022, flowing through to higher output prices 44

Figure 2.2. Businesses' key operating costs have increased in the past 5 years 46

Figure 2.3. Primary producer input costs have increased post-COVID 47

Figure 2.4. Prices increased at all supermarkets over the last 5 financial years, and significantly in 2022-23 48

Figure 2.5. Grocery inflation in Australia was lower than many OECD countries 49

Figure 2.6. Wages have not kept up with grocery price inflation since late 2021 50

Figure 2.7. Australia's average annual real wage growth has been slower than many OECD countries 51

Figure 2.8. Supermarkets and non-supermarket grocery retailers 53

Figure 2.9. Coles and Woolworths account for a significant proportion of large format supermarkets nationally 57

Figure 2.10. ALDI, Coles and Woolworths have grown their store networks since 2008 while IGA has contracted 58

Figure 2.11. Store network overlap between Coles, Woolworths and competitors has increased since 2008 59

Figure 2.12. Many local markets are highly concentrated, in particular in regional and remote areas 61

Figure 2.13. Consumers in remote Australia often have no choice of supermarket 62

Figure 2.14. Overview of supermarket pricing and promotional strategies 64

Figure 2.15. Examples of everyday low pricing labels at Coles, IGA and Woolworths 65

Figure 2.16. Examples of specials labels at ALDI, Coles, IGA and Woolworths 67

Figure 2.17. Examples of markdown and clearance labels at Coles and Woolworths 68

Figure 2.18. Examples of longer-term discount promotion labels at Coles and Woolworths 69

Figure 2.19. Overview of promotions offered by ALDI, Coles, Metcash and Woolworths 72

Figure 3.1. Supermarkets and other non-supermarket grocery retailers, visualised by price and range 87

Figure 3.2. Differentiated offerings are apparent when we compare stores 88

Figure 3.3. Full-service supermarkets are each other's closest competitors 89

Figure 3.4. ACCC consumer survey respondents compared prices before shopping more in 2024 compared to 2008 108

Figure 3.5. The IGA network has contracted since 2008 128

Figure 3.6. IGA has increased its number of small stores, but decreased its number of medium and large stores 129

Figure 3.7. Metcash's share of industry revenue has contracted between 2008-09 and 2023-24 131

Figure 3.8. Metcash services a large, geographically dispersed retail network 144

Figure 3.9. Timeline of entry and expansion in Australia since 2008 150

Figure 3.10. Length of time ALDI, Coles and Woolworths have held undeveloped or unused freehold sites, which are intended for supermarket use 166

Figure 3.11. Length of time ALDI, Coles and Woolworths have held onto undeveloped or unused leasehold sites or sites subject to an agreement for lease,... 166

Figure 3.12. Map of Coles' vacant site in Maylands, WA 169

Figure 4.1. Percentage of products (SKUs) on promotion on average per promotional week in 2019 and 2023 at Coles and Woolworths 178

Figure 4.2. Percentage of sales revenue derived from promotions - Coles 179

Figure 4.3. Percentage of sales revenue derived from promotions - Woolworths 180

Figure 4.4. Percentage of sales revenue derived from promotions - Metcash banner stores 180

Figure 4.5. Percentage of sales revenue derived from promotions - ALDI 181

Figures 4.6. Examples of products that exhibited alternating high-low pricing cycles 184

Figures 4.7. Examples of products that did not exhibit alternating high-low pricing cycles 186

Figure 4.8. Percentage of units sold on promotion in 2023 188

Figure 4.9. Distribution of number of product (SKUs) by percentage uplift - Coles 189

Figure 4.10. Distribution of number of product (SKUs) by percentage uplift - Woolworths 190

Figure 4.11. Example of an in-store ‘specials' ticket provided by Woolworths 201

Figure 4.12. Example of in-store inconsistent use of unit pricing 208

Figure 4.13. Example of online inconsistent use of unit pricing across different supermarkets 210

Figure 4.14. Tesco's online unit pricing 211

Figure 4.15. Loyalty membership is growing 219

Figure 4.16. Average spend per transaction in 2023 for all customers compared to loyalty program members only (where loyalty card is scanned) 223

Figure 4.17. Percentage of total sales revenue and number of transactions attributable to Coles' and Woolworths' loyalty program members by calendar year 223

Figure 4.18. Loyalty program members provide increasing value over time 224

Figure 4.19. Consumers become more valuable as they become more engaged with loyalty programs 225

Figure 4.20. Surveyed consumers on lower incomes spend the highest proportion of their income on food and non-alcoholic beverages 249

Figure 4.21. Grocery spend by household income 250

Figure 4.22. Woolworths' percentage of multi-buy sales by year and SEIFA status 252

Figure 4.23. Coles' percentage of multi-buy sales by year and SEIFA status 252

Figure 4.24. Distribution of effective prices paid by consumers for sweet biscuits in non-remote and remote stores over the reporting period 259

Figure 4.25. Distribution of effective prices paid by consumers for fresh unflavoured cow's milk in non-remote and remote stores over the reporting period 260

Figure 4.26. Distribution of effective prices paid by consumers for apples in non-remote and remote stores over the reporting period 261

Figure 4.27. Distribution of effective prices paid by consumers for beef mince in metropolitan, regional and remote Metcash banner stores over the reporting period 262

Figure 4.28. Distribution of effective prices paid by consumers for eggs in non-remote and remote stores over the reporting period 263

Figure 5.1. Grocery supply chains can vary significantly 274

Figure 5.2. Fresh Produce Supply Chain 276

Figure 5.3. Packaged Groceries Supply Chain 280

Figure 6.1. Loose fresh produce is transported to the supermarket distribution centre in returnable plastic crates or single use cardboard boxes 328

Figure 6.2. Prepackaged fresh produce can be packaged in a variety of ways, depending on the produce type 329

Figure 6.3. An apple with a PLU sticker 332

Figure 6.4. Packaged produce is delivered to the supermarket distribution centre on a pallet 353

Figure 7.1. Profit and margin analysis sit at different accounting levels 362

Figure 7.2. Woolworths' EBIT and EBIT margin has been materially higher in the past 364

Figure 7.3. Supermarket EBIT margins suggest supermarkets have been consistently profitable 366

Figure 7.4. Coles' and Woolworths' NPAT margins have remained relatively stable over recent years 368

Figure 7.5. Coles' and Woolworths' gross margin increased from 2019-20 to 2023-24 369

Figure 7.6. Coles and Woolworths report higher EBIT margins than most of their international peers between 2018-19 and 2022-23 371

Figure 7.7. Coles Group and Woolworths Group NPAT margin is among the highest of their global peers between 2019-20 and 2022-23 372

Figure 7.8. Return on total capital for Coles Group and Woolworths Group is higher than most international peers identified by Woolworths in the 2022-23 financial year 373

Figure 7.9. Coles and Woolworths have achieved consistent revenue growth 375

Figure 7.10. ALDI's, Coles' and Woolworths' average product margins have increased since 2019-20 financial year, while Metcash banner stores' average product margin... 379

Figure 7.11. Growth in supermarkets' average product margins varies by Business Unit/Department 381

Figure 7.12. There are different types of private label products - supermarket-branded and pseudo brands 383

Figure 7.13. Proportion of branded and private label products on offer 384

Figure 7.14. Branded average product margins at ALDI, Coles and Woolworths increased since 2019-20 385

Figure 7.15. Over the last 5 financial years, Coles' average product margin increased for their highest sales revenue products - branded packaged goods 386

Figure 7.16. Similarly to Coles, over the last 5 financial years, Woolworths' average product margin increased for their highest sales revenue products - branded packaged goods 387

Figure 7.17. Average product margins for case study products varied considerably 390

Figure 7.18. Example of a dog food product where the price regularly alternated between Coles and Woolworths 392

Figure 7.19. Example of a milk product where the price predominantly remained at the standard price at both Coles and Woolworths 393

Figure 7.20. Example of a dishwashing tablet product where the price regularly alternated between Coles and Woolworths 394

Figure 7.21. Supplier funding increased between 2019-20 and 2023-24 and represents a significant amount of money to Coles and Woolworths 398

Boxes 69

Box 2.1. Longer-term discount promotions 69

Box 2.2. ACCC proceedings against Coles and Woolworths over alleged misleading discount pricing claims 71

Box 2.3. Loyalty programs and subscriptions offered by Coles and Woolworths 74

Box 3.1. Shopping missions 82

Box 3.2. Metro conversions may increase Woolworths' margins 99

Box 3.3. Coles and Woolworths monitor Amazon's pricing and may respond or consider responding on certain products (if not all overlapping products) 107

Box 3.4. Availability of historical pricing information 112

Box 3.5. Requiring retailers to publish prices online is unlikely to materially increase collusion risks 117

Box 3.6. IGAs use their independence to target their offerings to local areas 119

Box 3.7. Harris Farm has built its brand around fresh food quality and range 119

Box 3.8. Case study - Amazon's entry, slow expansion and recent share decline in the US grocery sector 123

Box 3.9. Case study - Drakes vertically integrates to procure its own supplies in South Australia 137

Box 3.10. Case study - Metcash may increase vertical integration in future 142

Box 3.11. Case study - Coles' competitive response to Kaufland's entry in Australia 149

Box 3.12. Case study - ALDI is unlikely to focus on growing its store numbers in Australia 151

Box 3.13. Case study - Amazon's likely competitive impact in supermarket competition in Australia remains unclear 152

Box 3.14. Case Study - Kaufland used Victoria's streamlined planning process 160

Box 3.15. Case study - Coles' vacant site in Maylands, WA 169

Box 4.1. There is mixed evidence regarding the impact of multi-buy promotions on consumer purchasing behaviour compared with other specials 191

Box 4.2. The role of heuristics in busy supermarket environments (online and offline) 194

Box 4.3. Recent changes to unit pricing in overseas jurisdictions 207

Box 4.4. Tesco's online unit pricing 211

Box 4.5. Coles' and Woolworths' use of loyalty data in other business units and subsidiaries 221

Box 4.6. Supermarket loyalty programs are increasingly using 'gamification' 226

Box 4.7. Bonus offers offered by Coles and Woolworths through their loyalty programs 229

Box 4.8. The prevalence and impact of member-only pricing in the UK and New Zealand 233

Box 7.1. Margin metrics at the product or category level 377

Box 7.2. Relationship between supermarkets' margins and payments received from suppliers 396