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Economic surplus

Worried about Coles and Woolworths? Then look in the mirror!

There is a view that the major supermarket chains, Coles and Woolworths, can behave without restraint. Under this view the two retailers can act with impunity to sell whatever products they choose, regardless of the prices offered to suppliers or the desires of their customers.

Experience tells us that this view is clearly wrong. Like all other retailers, Coles and Woolworths answer to their customers. And this means that when we judge the behaviour and effects of the major supermarket chains we are judging ourselves.

An extreme example of the need to respond to customers was presented late last week. Woolworths supermarkets had decided to sell battery-powered sex toys. But, as the Sydney Morning Herald reports, faced with a public backlash and a potential boycott, Woolworths: “sent an email to all store managers of Friday afternoon advising then to withdraw the products immediately”.

By itself, this example represents an amusing case of a retail gorilla bowing down to outside pressure. But it is not an isolated incident.

For example, while Woolworths was dealing with sex toys last Friday, Coles was setting up a deal with Simplot to locally source its own-brand frozen vegetable products. For domestic farmers, Coles noted that: “It means something like two and a half million additional kilograms of Australian grown product [a year]”.

Earlier this year, Coles signed a ten-year deal with the dairy farmers cooperative, Murray-Goulburn, claiming that the deal was a major win for farmers. Meanwhile Woolworths has signed a deal with SPC-Ardmona to ensure its own-brand canned fruit is Australian grown. Woolworths now claims that “96% of our fruit and veg and 100% of our fresh meat comes from Australia”.

This change of heart by the retailers appears to be driven by customer reaction to bad publicity. This year, the major supermarkets have faced a wave of adverse stories.

The ACCC brought an action against Coles earlier this year for ‘misleading and deceptive conduct’ when selling ‘fresh baked bread’. The ACCC has also highlighted concerns over petrol discounting by Coles and Woolworths. As Rod Sims, the Chair of the ACCC noted:

“While large shopper docket discounts provide short term benefits to some consumers, the likely harm to other fuel retailers and therefore to competition and the competitive process for petrol retailing could well be substantial”.

However, the greatest public concern has been the treatment of Australian farmers, particularly since the introduction of ‘one dollar per litre’ milk. So we should not be surprised that the major supermarkets have moved to stock more local produce and to set up supply arrangements that clearly benefit local farmers.

When customers complain, even retail gorilla’s listen!

Coles and Woolworths behaviour, however, highlights the underlying source of their marketing and their market power. The customers.

The two supermarket giants reached their current positions because people choose to shop at them rather than the competitors. We may rail against the closure of a small retailer when Coles or Woolworths opens up nearby, but the real cause of the closure is, well, us! As consumers, we choose to buy from Coles and Woolworths rather than the retail alternatives. We may complain but the low prices, the product selection, the convenience or whatever else, draws us in to buy at the major supermarkets and, in so doing, we slowly but surely push the retail competitors out of the market.

This is not anti-competitive; it is the very nature of competition. Businesses who best serve customers win. But when we complain, we should look in the mirror. Because it is our choices as consumers that decide who wins and who loses in the retail wars.

Put simply, Coles and Woolworths have succeeded because they are so damn good at giving us what we want!

It is not like this in some other countries. On a recent visit to Spain I noticed that many of their supermarkets were small, poorly stocked and the quality of the merchandise was woeful by Australian standards. But there are a lot more small supermarkets. Why? Because regulations have historically restricted large supermarkets. This may benefit the ‘mum and dad’ grocers but the consumers end up paying higher prices for lower quality product.

And this is the problem with the potential political interventions in Australia. In the lead up to the last election, Bob Katter introduced the Reducing Supermarkets Dominance Bill into parliament. It was supported by Nick Xenophon and Andrew Wilkie. It would have required Coles and Woolworths to sell about half their stores or to break into smaller companies. It would have benefited small retailers by hurting competitors. It would have made us look like Spain.

The major supermarkets are no angels. But they do respond to customers’ demands. So if you want more small grocers, you have the answer. Shop at them. But do not call on the politicians to make that decision for you.

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