Maths show supermarkets not to blame for cost-of-living crisis

The Australian Consumer and Competition Commission is committing its considerable resources for a year to produce an answer, and other inquiries are under way.

But a much easier and quicker way to arrive at a broad-brush answer is to do a simple desk-top analysis of Woolworths’ and Coles’ financial results for the latest half-year, as announced in recent days.

The two putative villains generated earnings before interest and tax (EBIT) of $2.577 billion in the half-year – which sounds like a huge sum only until it is put into perspective. It came from sales of $45.677 billion, hence an average profit margin of 5.6 per cent.

Little benefit to customers

If Woolies and Coles were to turn themselves into not-for-profit charities and reduce prices to forgo all EBIT, the benefit to consumers would represent less than half a cent in the dollar of total household consumption expenditure in the period, and about 4¢ in the dollar of expenditure on food alone.

As the prime minister explained last week, we have a market economy in which businesses are expected to make a profit. So, eliminating all profit is out of the question; but how much of it represents the alleged “gouging”?

If it is half, then the benefit to consumers from stopping the gouging would be 2¢ in the dollar of food expenditure. If it is a quarter, the benefit is 1¢ in the dollar. Is this what the supermarkets’ critics have in mind?

These calculations are based on the total amount of EBIT. The increase over the two years since the corresponding period of 2021 was $464 million, which is a better indicator of the contribution to the increase in prices (inflation).

The increase in total household food expenditure over that period was around $7.5 billion, so supermarket EBIT contributed about 6¢ in the dollar.

As these calculations suggest, average EBIT margins did increase over those two years: from 5.1 per cent to 5.6 per cent. Thus, whereas in the second half of 2021 shoppers were contributing $5.10 in profit for every $100 spent, in 2023 this had risen to $5.60. The ACCC inquiry will shed light on the reasons for this modest increase.

But whichever way one looks at the arithmetic, there is no prima facie case that supermarket profits have been a major contributor to cost-of-living pressures.

That is not to deny that some products in supermarkets may be exceptionally profitable for the retailers. But if that is the case, then they must be offset by other products with exceptionally skinny margins for the average to be what it is.

It is also not to deny that suppliers to supermarkets may have increased their margins – not farmers, but suppliers with pricing power such as the long list of (mostly despised multinational) manufacturers whose packaged products fill supermarket shelves. If so, it is for them to explain.

Another possibility is that the supermarket industry is so uncompetitive that firms cannot be bothered reducing costs and passing at least some of the benefit on to consumers.

It is a populist romp designed to distract attention from the government’s own policy contributions to inflation.

However, this seems unlikely in view of sizeable cost-cutting investments over the years in distribution, inventory management and self-service.

The ferocity of the political campaign against the big two tells us more about politics than about nefarious supermarket pricing.

It is a populist romp designed to distract attention from the government’s own policy contributions to inflation.

The previous government was also complicit by excessively stoking aggregate demand for two years. Now in opposition, they are happy to join in the populist campaign – especially the Coalition’s rural and regional wing.

But it is the lot of oppositions to huff and puff. It is for governments to steady the ship and steer debate in a more rational direction; not fan the flames of populism.

It may be that the political circus soon moves on to something else and the supermarkets leave the ring unscathed.

But if the inquiries under way lead to a significant tightening of regulation, it will be another blow to the free market economy we all benefit from.