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.

37 thoughts on “Magic Pudding Economics at the Supermarket

  • Podargus says:

    It must be nice to be in the comfortable position where inflation, not only in groceries, doesn’t worry you. I would call a profit of over a billion dollars for a firm selling essentials, excessive, regardless of % return on turnover.
    Economics is known as the dismal science. Like the other social “sciences” it is not a science but merely an expression of opinion often backed up by spurious math and elaborate graphs.
    As we have seen throughout recent history, the outcome from the attentions of these “experts” is certainly dismal.

    • Bernie Masters says:

      If you dislike Coles and Woolworths because of their <3% profit margin, you must really hate Apple and a few of the genuinely wealthy corporates that have profit margins of 40% or more.

      • Podargus says:

        Hate is very powerful emotion and is most destructive to the hater and so to be avoided.
        The strongest I would feel is contempt – for all forms of price gouging, whether by big corporations down to little landlords. They are all driven by that basic human trait – greed.

  • Sindri says:

    If someone’s profit is excessive or not doesn’t depend on whether they are selling “essentials”. It’s a question of the size of the investment and the return on it. $1bn on 40bn sales revenue, let alone the value of the whole undertaking, is hardly a rapacious return. Which leads into the other point, that I suspect that the majority of shares in Coles are held not by fat men with cigars and shiny top hats but by institutional investors like super funds. I’m quite happy for Coles to make a profit, thanks.

  • RobyH says:

    Woolworths is worth $37 billion. As a shareholder you would hope for a 8 to 10% return – expecting the company to return $3 billion ++ from its operations. If you aren’t getting those returns – people sell and invest elsewhere and capital leaves that industry. Making money is essential to secure the allocation of capital.

  • Botswana O'Hooligan says:

    Both Coles and Woollies have an after tax profit of about 2.6-2.7% so they count on a huge sales volume to make a profit for we shareholders. The Soviets tried all the price fixing practices under the sun and look what happened there for I have a sunglasses case made in the Soviet Union and stamped with the maximum and minimum prices to be charged and am reminded of the likes of Albenese and assorted ratbags each time I look at that case. Labor et al want to have a think about manufacturing costs brought about by high labour and fuel costs before casting stones at the above companies.

    • Lawrie Ayres says:

      You are correct as usual. Australia is a very high cost country. Hourly wage rates are one thing but it is all the add-ons such as holiday loading, the plethora of days off for anything from being a father to worrying about the tiff you had last night. I had an interesting talk with a young lady at a Montana restaurant a few years back. She wanted to know how a person in her position could survive without tips. I ran through the wage system here and she asked if she could emigrate. Our wages are far too generous but are now so entrenched they are needed to just survive. I can only imagine the cost to keep all the refrigeration going with Black Out making it worse by the month. Now he wants to attack farmers and transport operators because they emit a harmless gas. Governments need to look at all the inputs which lead to high prices including their own policies and actions.

  • pmprociv says:

    Isn’t all this based on some notion of cheap food being one of our “fundamental human rights”? Like cheap electricity? Or housing? I wonder what our hard-working food producers might think of all this? In socialist societies, it was always the poor peasants who got squeezed first, and suffered the most from famines. Here, it would seem that even doubling what the farmers might earn would add little to the costs at our end, given all the “middle-men” involved, including packaging manufacturers, wholesalers and transport and shop workers (I’d guess Coles and Woolies would apply pressure at each point to minimise costs). The common citizens should be taught to be realistic by our politicians, and to put away such utopian expectations and demands. Food just doesn’t grow on trees, you know . . .

  • GrantB says:

    Don’t forget all the other costs applied before a retail price is determined: rent (to the Mall operator), now heavily wieghted by land tax; insurance (because everything is a liability); payroll tax; legal fees; marketing / advertising; wastage; & theft.
    And the aforementioned packaging, transport & labour costs. That 25 cent lemon at the farm gate is now $4.00 on the Woolies table.

  • Stephen Due says:

    What a pity we have to buy from Supermarkets at all. When I was small, my mother obtained our supplies from a small, local shopping centre. The shops included a baker, a newsagent, a milk bar, two butchers, a grocer, and a greengrocer. Each of these businesses was owned and run as a family enterprise. I vaguely recall the ominous mood that accompanied the arrival in a nearby suburb of the first supermarket. Now the family businesses – the core of the middle class – are gone, The corporate giants have taken over.
    No good can come of this. The problem is not supermarket profiteering or even legitimate supermarket profits. The problem is the dehumanisation of the basic commercial transactions of everyday life. Corporate power has muscled in, and now demands our cash, even our subservience to its values. The supermarket corporations control our access to vital, everyday necessities, but they do not know us by name, and do not care whether we live or die. The feeling of being at their mercy is decidedly unpleasant. What we have lost was much better,

    • robertjohnlane says:

      I was there, just a kid, but I remember when the supermarket opened on the Norwood Parade against “populist” opposition. “Don’t worry” the customers told Mr & Mrs Turner who ran our corner shop just two doors away from our house in Norwood, we won’t desert you the customers all assured them. My mum stuck with them until she discovered the toilet paper and soap she was buying from Turners came from the supermarket! I was there when mum confronted Mrs Turner. She told mum that she could buy cheaper from the supermarket that from her wholesaler! You are also ignoring the reality that what is now on the supermarket shelf is consumer driven. Consumers shopping baskets now are a far cry from the simple needs we had sixty years ago. Pining for the past is a dream not based in reality.

    • pgang says:

      Oh come on Stephen, I dislike going to a big super as much as any bloke, but you’ve got to admit that they have opened the market to an enormous variety of produce that we never had before. Besides, I still get personal service at the IGA, butcher, baker and chipo.

    • Brian Boru says:

      I remember going with mum to the grocers. They had a big oval galvanized washing trough like container which was full of sugar. They used hand scoops to fill brown paper bags with sugar which were individually weighed and then closed.
      Would be interesting to know how the price of a pound of sugar changed (if it did) with the advent of the pre-packaged product.

  • Podargus says:

    It’s a shame that the rentier class can’t see past the next dividend cheque.

    • lbloveday says:

      It’s a shame some of the Podargus class lump all rentiers together. What should a married couple of octogenarians who earn their income without working from capital they accumulated during many years of hard work “see past the next dividend cheque”?

    • john mac says:

      You have a chip on your shoulder the size of a railway sleeper. I am of the “rentier ” class to look after my retirement, which meant a lifelong mortgage on my always low wage, no holiday for 20 years , no new cars, shopping at Salvos for furniture and clothing , and doing as much maintenance as I can myself before paying a fortune to tradies and I’ve no complaints being self sufficient and no burden to the govt/taxpayer in my retirement. BTW. My tenants love me as I rarely raise the rent. Take your cheap Marxism elsewhere.

  • Michael Mundy says:

    Rarely mentioned is the fact that Coles and Woolworths contracts with farmers (mostly corporations) ensure a lift and standardisation of produce quality for the consumer and the ability of farmers to produce an agreed amount of produce that will be purchased rather than inefficiently over-producing fruit and vegetables to be dumped.

  • cel47143 says:

    I have shopped at the same IGA grocer is our small town for decades. This is the list I kept at Christmas 2005 and have adjusted them to 2022 values using the RBA inflation calculator.  
    Tomatoes $5.99 per kg : $9.19 per kg
    Onions $3.25 per kg: $4.99 per kg
    Broccoli $3.95 per kg; $6.06 per kg
    Iceburg lettuce: $1.99: $3.05
    4X 30 pack $31.95: $47.48
    Tooheys Draft: $31.95: $47.48
    Helgas bread $2.65: $4/07
    Dairy soft 375gm $1.99: $3.05
    Looking at last week’s shopping from same store, Lettuce were $3.50, Helgas bread $6.30, Broccoli $6.90.
    My question – what is the root cause for the campaign against supermarkets? Does some of the consumer angst have something to do with what they are buying, eg more processed food?
    Also hard to quantify changes in beer prices due to Govt. tax changes over the years.

    • Daffy says:

      Helga’s bread is about $4-50 at Woolies.

    • Libertarian says:

      To distract from the inevitable consequences of their dysfunctional policies. They’ll bring back ‘Grocery Watch’, employing another batch of activists. Victoria might reintroduce the ban on baking bread on Sundays, Melbourne will vote for it.

      “Under Capitalism, the bread waits for you,
      Under Communism, you wait for the bread.”

      Soon it will be electricity.

      • Emma Gyuris says:

        You are absolutely right. Having lived under communism till age 17 I can remember the waiting for almost everything. It was my grandfather who was the que holder and he sourced bread and mostly qued at the butcher. It was not uncommon that by the time it was his turn they run out. Another pithy joke going around at a time went:
        -Comrade, what are you queuing for?
        – No idea , but with many people wanting it, must be good!

  • Geoff Sherrington says:

    Supermarkets are on the path to “go woke, go broke”. TV advertising seems to have increased, with the woke characteristic that Aussie men are too often cast with asian women and aussie women with US black men. Also, the abundance of odd sex people as partners seems on the increase. Trad married couples like my wife and I (60th anniversary next week) seem not to feature much in commercials. Why? It was better when actors were chosen to represent the normal national demographic balances.
    Supermarket customers are mostly ordinary aussie females and males. Pitch towards them.
    Might be time to read up on Budweiser Light.
    Geoff S

    • Libertarian says:

      I haven’t walked into a Woolworths shop since they sacked their unvaccinated.

      • Rebekah Meredith says:

        7 May 2024
        I agree with the sentiment, but where do you go? Coles was much the same, as well as being a major sponsor of Sydney’s Mardi Gras Parade of Perversion. Aldi is a foreign corporation. IGA is limited in its stock and often more expensive than the big two. I want to boycott unworthy places such as Woolworths, but how do you do it?

  • Daffy says:

    I’m expecting Albalone and his mate BS Bowen to blame: men, climate change, coal, lack of local solar panels, men (again) for the rapacity of supermarkets…climate change…coal, and the high price of food. We can expect a campaign to educate small boys into not making food expensive ANY MORE, damn you!

    • pgang says:

      The AFL might join him. After last weekend’s round we can only conclude that all men are evil.

      • john mac says:

        Yes. pgang , it was disgraceful to witness the shameless pandering to a never satisfied feminist hobby horse. The whole beat up is male bashing (and white hetero at that) , puns accidental. Talk about a deliberate downer for what should be a haven from the uglier aspects of life. They may as well protest against the laws of gravity.

    • john mac says:

      Hee, hee ! And spot on , Daffy!

  • Doubting Thomas says:

    It is astounding to me that there are still people around who believe that profit making is evil, and who believe that governments, and their Public Service bureaucrats, consisting overwhelmingly of a class of people who have never held real jobs in their entire lives, can interfere to magically “fix” things. It has never happened without making things worse, and it never will.
    These people need to read Thomas Sowell’s very readable “Basic Economics” and then every other book or article that he has ever written.

  • whitelaughter says:

    Of course, if businesses weren’t paying a fortune in electricity prices, they would be in a position to cut prices. If consumer weren’t paying a fortune in electricity prices, we wouldn’t need them so much. If farmers weren’t paying a fortune in electricity prices…noticing a pattern here?

  • john mac says:

    I think you’ve wandered into the wrong site. Take a left turn at the next corner for The Guardian .

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