Magic Pudding Economics at the Supermarket

After concluding his review of the relationship between Coles and Woolworths and their suppliers, Craig Emerson explained that if Coles and Woolworths were to pay their suppliers more, such suppliers would introduce efficiencies which would allow them to supply their goods more cheaply. Hence consumers would benefit. To wit:

Smaller suppliers might be earning insufficient returns to warrant new investment in innovation and equipment that would enable them to offer better-quality products at lower prices.

Hmm? So, the more supermarkets pay to put goods on their shelves, the cheaper they will be. Magic Pudding economics is indeed alive and well. This whole business about supermarkets is a beat-up, a political distraction. The ACCC have been instructed by the government to inquire into the matter. Good luck.

Let me make it clear, Coles and Woolworths in competition with each other, and with Aldi and IGA, to attract customers from a relatively small national customer base are in no position to extract “excess profits.” The return on invested capital (ROIC) of the supermarket giants is not excessive. Ergo, the landscape is competitive.

The Coles Group ROIC in 2022-2023 for example, as reported here, was 9.7 per cent, against non-financial corporate bond yields of close to 6 per cent. Sales revenue from its continuing operations was $40,483 million. Net profit after tax was $1,042 million – 2.6 per cent of sales revenue. So let’s halve Coles’ profits by reducing supermarket prices. Instead of paying $100 for a basket of goods consumers would pay $98.70 (big deal). And Coles, now earning less than the corporate bond rate would go out of business. Thereupon, less competition, less choice, higher prices. Lose-lose-lose.

Accordingly, the ACCC can save its time and focus on misconceived meddling in mergers and acquisitions (e.g., ANZ and Suncorp). Nothing more need be done on supermarket prices. There is no issue to investigate.

And how about that perverse thought bubble from know-nothing politicians: the supermarket giants are paying farmers too little. While, apparently, at the same time, a lack of effective competition allows them to charge customers too much.

Let’s say another giant (Tesco and/or Walmart for example) were to enter the market. More competition. I guess prices at the checkout might fall a little. Though the reduction of scale might work in the opposite direction. However, suppose prices did fall, even if by a hard to spot magnitude. Why? Well, here’s one reason. When you’re scrambling to lower prices to attract market share in a relatively small market you might tend to squeeze suppliers even more.

My goodness! That’s not in the script that the National Party luminaries have in mind. Best to say it slowly. The more competition for consumers’ dollars, the more suppliers might be pressured to lower their prices.

There is an abject failure among politicians seeking cheap popularity — nearly all of them these days — to understand the dual role of prices in rationing demand and guiding the disposition of resources. They are not products of a capitalist plot designed to plague ordinary people struggling to put food on the table. They can’t be made the playthings of politicians. Politicians feverishly imagine otherwise. Thus the misconceived hoo-ha about supermarket prices.

“We are prepared to take action,” Mr Albanese said. The action his government might profitably take is to cut its spending to take pressure off inflation and interest rates. And, most critically, to rein in Chris Bowen’s climate cultism and bring down power prices for consumers and businesses. But why tackle issues in the too-hard basket when you can spin a distracting line about supermarket prices – about which he and his government can do didley squat; so as you’d notice anyway.

Free-market capitalism, which accounts for all of our prosperity, is guided by the profit motive. Bogus alternatives variously called inclusive capitalism, conscious capitalism, cooperative capitalism, stakeholder capitalism (courtesy of Klaus Schwab’s World Economic Forum), values-based capitalism (courtesy of Jim Chalmers) are all delusional inventions of commies in drag. I covered them here.

Capitalism and the profit motive are inseparable. Capitalism works because overwhelmingly businesses, and that includes supermarket companies, strive to maximise their profits. That way resources are properly rewarded and properly used for the purposes for which they add most value.

Then how are companies prevented from so-called price gouging? By governments outlawing price collusion and seeing to it that there are no regulatory obstacles to new entrants. That’s about all they have to do and it is all that they should do. Let business get on with business. Governments can help by staying out of the way, by not imposing restrictive regulations, and by not picking winners. Clearly the Albanese government is failing miserably on all counts. And the price we will pay is a lot more than 5 cents more or less on a loaf of bread.