As a kid Mum used to make a Christmas pudding and claim that the fairies had magically stuck in a bunch of threepences and sixpences into it. (yes, I am that old)
The possibility of finding a couple of weeks pocket money in the pudding created intense sibling rivalry around who could sneak the biggest piece, and thus have a greater chance of finding some magic.
Coles and Woolies in their most recent results announced in the last fortnight have delivered the Australian community a magic pudding.
Times are tough, there is a cost of living crisis happening around us, yet their recently released year end results hide magic for shareholders. (to be fair, most of us are now shareholders via superannuation)
The domination of these two chains is fuelling inflation.
This is a perspective not covered in any of the commentary I have seen so far.
The logic is as follows:
Margin expansion.
Coles and Woolworths have been able to preserve, and in Coles’ case expand, healthy margins over the past year. Together, they control roughly 60–65% of the supermarket sector, with Aldi and various independents supplied by wholesalers (usually Metcash) making up most of the rest. This means that for most packaged food and grocery suppliers, the path to survival runs through the trading terms imposed by just two buyers.
The latest financials show that Coles has widened its supermarket margins from 26.6 % to 27.4% and its EBIT margin edged up from 5.0% to 5.3%. Woolworths’ Australian Food division reported a gross margin of 28.6% and EBIT margin 5.4% in FY25, only slightly down from the previous year after a period of “price investment”. In other words, the duopoly has not absorbed the inflation shock through lower profits; it has kept margins high and, in Coles’ case, increased them.
The cost of living crisis has not dampened the margins of Colesworth during the tough times.
Retail real estate.
Coles and Woolies dominate shelf space and therefore set the ‘reference prices’ that other retailers follow. As a result they influence price inflation far beyond their own stores.
Woolworths and Coles use their buyer power to squeeze suppliers via terms demands, rebates, expensive promotional deals, and all the other tricks they have in their magic pudding. The power suppliers are able to exert in these pricing negotiations is extremely limited. This applies even for major key suppliers in major categories for whom supermarket volumes are essential to covering operating overheads. Colesworth are then able to set shelf prices with no reference to any competitor beyond the other gorilla. Suppliers must accept lower margins and/or push up prices in other channels just to survive.
Smaller independents, convenience outlets, foodservice and export customers then face higher input costs, which in turn pushes their retail prices closer to and usually way above the duopoly’s. They rely on ‘convenience’ and stores in population centres below the cut-off for the gorillas to invest in outlets.
The more the big two protect or expand their margins under the cover of “inflation”, the more this cost‑shifting machine drives price rises right across the grocery market.
‘Colesworth’ market share sets prices and terms across two thirds of Australia’s FMCG market.
Scale delivers price immunity to Colesworth
Oligopoly economics.
This is an oligopoly at work. They are taking advantage of a general inflationary environment to widen or protect margins, and establishing a sticky price level that will persist when inflationary pressures ease. That will be a nice windfall!
In a genuinely competitive market, we would expect that at least some of the pain of higher energy, labour and logistics costs shows up in thinner supermarket margins.
In Australia’s hyper‑concentrated grocery sector, the evidence points the other way. Without Aldi as an anchor, we would be in real trouble at the checkout.
Increasing costs are not impacting on Colesworth margins. Their scale enables them to push EBIT above 5% by pushing price up faster than the cost increases.
Medicine unavailable.
Unfortunately, I see no short-term measures that will reverse the concentration it has taken the 45 years I have been observing, to evolve. Politicians can have all the enquiries, reports, and ‘band-aid’ measures they can dream up, but none will get at the core problem other than breaking up the oligopoly. Forced divestiture.
I have written elsewhere that this is a really stupid idea. A legislated breakup would only increase costs significantly in the supply chain that would be felt at the checkout. It is therefore only a brainfart of those who will never see government, but which persists as a policy option.
The horse has not just bolted, it is over the hill. It will take another 20 years for changes in the retail environment to deliver a more genuinely competitive sector.
Header: My thanks to Scott Adams. The single Dilbert panel says it all.
