Consumers have noticed bags of chips, chocolates, and many other products have shrunk, but prices have not come down. This episode of Economics Explored features a detailed discussion on shrinkflation with Gene Tunny and Arturo Espinoza Bocangel. They analyze various examples of shrinkflation and its impact on the cost of living. The episode also considers the potential for regulatory and other measures to address this practice. For instance, a US Senator wants to outlaw shrinkflation, and a French supermarket chain puts a sticker on shelves identifying shrunken products. Gene and Arturo also consider the high degree of market concentration in the grocery sector, and what the FTC in the US and the ACCC in Australia can do about it.
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What’s covered in EP241
- Introduction to Shrinkflation (product shrinking in size while price remains the same). (0:00)
- Shrinkflation in the food industry, with examples of product size reductions and price increases. (5:04)
- Senator Casey’s proposal to stop corporations from deceiving consumers through shrinkflation. (10:05)
- Shrinkflation and its impact on consumer prices. (13:38)
- Shrinkflation as a business strategy. (19:10)
- Market power and concentration in the Australian supermarket industry. (25:25)
- Supermarket competition in Australia, with a focus on Coles and Woolworths. (30:12)
- Supermarket power and calls for regulation. (35:47)
- Coles and Woolworths’ market power and supplier squeeze. (40:41)
Takeaways
- Shrinkflation Explained: Shrinkflation occurs when manufacturers reduce the size of products while maintaining the same price, effectively increasing the unit price without consumers’ direct awareness.
- Impact on Consumers: This practice can be deceptive, as it often goes unnoticed by consumers who end up paying more for less, affecting their purchasing power and overall cost of living.
- Supermarket Power: Large supermarkets like Coles and Woolworths have significant market power, which they can use to negotiate lower prices from suppliers. There are allegations of unfair use of this market power and there are a couple of government inquiries investigating this among other market power issues.
- Regulatory Responses: There are ongoing discussions and legislative efforts, such as those led by Senator Bob Casey in the US, to classify shrinkflation as a deceptive practice and regulate it more strictly.
- Market Concentration: The high level of market concentration in the supermarket sector, particularly in Australia and to an extent in the US, means that major supermarkets can allegedly make it harder for new entrants like Aldi and Costco to compete effectively.
Links relevant to the conversation
Senator Casey’s Report on Shrinkflation: https://www.casey.senate.gov/imo/media/doc/shrinkflation_report.pdf
ABS on how shrinkflation is accounted for in CPI calculation:
https://www.abs.gov.au/articles/quality-change-australian-cpi
Carrefour’s Shrinkflation Warning:
https://www.bbc.com/news/business-66809188
Sanjoy Paul’s article on eight ways Woolworths and Coles squeezed their suppliers and customers:
Details on the exchange between the Woolworths CEO and an Australian Senator during an inquiry – “Greens senator threatens Woolworths CEO with six months in prison for contempt of Senate”:
Bloomberg report on Lina Khan and FTC:
Previous episodes discussing supermarkets and market power with Simon Cowan and Danielle Wood:
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Transcript: Unveiling Shrinkflation: How Companies Sneak in Price Hikes – EP241
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:03
Again, I mean, we don’t we don’t live in a Soviet style centrally planned economies. We don’t want to constrain the activities of visitors too much. But I guess that is an example of okay, these are, these are big players. And that’s an example of power. It is. Yeah, arguably, it is a domain. Do you need some regulation? There’s a question there. I suppose this is the type of thing that the a triple C will be looking at and thinking through. Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, before we get into it, I need to say that this episode is presented by Lumo coffee. So Lumo coffee is the coffee company set up by my occasional co host, Tim Hughes, who if you’re a regular listener, you’ll probably remember from his previous appearances on the show, Luna was a specialty grade organic coffee with triple the antioxidants of regular coffee. I drink it regularly and I can confirm it’s actually very good. So if you’re a coffee drinker, then please consider getting some Lumo coffee. Tim’s offering a 10% discount on Lumo coffee purchases until 30th of June 2024. Check out the show notes for the promo code and for details of where you can buy Lumo coffee. Seriously healthy organic coffee. Check it out. Hello, thanks for tuning into the show. This episode we’re talking about supermarkets and shrink flashin. And I’m joined by my adept economics colleague, Arturo Espinosa, Arturo, good to have you back on the programme.
Arturo Espinoza Bocangel 02:22
How you doing this? My pleasure to be here.
Gene Tunny 02:24
Excellent turbo. Now this, this topic of was inspired by a conversation that I had with my audio engineers, the lads who produce or do the post production on the show they’re over? Well, Josh is in Virginia, in the States, and Blake is somewhere in the States. And this idea came up that well, we should do a show on shrink inflation. And I thought, Well, why not? We haven’t really covered that we’ve talked about inflation, and shrink inflation is one of the ways in which inflation occurs. And so what we’ll do is we’ll talk about shrink inflation, the phenomenon, some examples, and then we will consider this, this big question of to what extent supermarket supermarkets to blame for the inflation that we’ve seen To what extent is there gouging by supermarkets? Which is a related question. So it’s part of this bigger issue of the cost of living? So I think this episode, we’re really going to talk a lot about the cost of living and shrink flirtations. One aspect of that, and then also what the supermarket’s are doing is another one. How does that sound? Arturo?
Arturo Espinoza Bocangel 03:47
Sounds interesting. Let’s start. Excellent.
Gene Tunny 03:50
Okay. So shrink inflation is a type of inflation whereby the price of a product isn’t adjusted, but the product shrinks in size. So the the suppliers or the manufacturers of it, they’re supplying a smaller product. And you know, it’s sold as smaller product and supermarket that the price doesn’t necessarily go up, but the quantity that you get falls. And so that’s a way that companies suppliers are able to adjust for increasing input costs so they can maintain their their profit margins, I suppose that’s one way of looking at it. And I asked Josh, well, what are some examples that you’ve seen of this shrink deflation occurring? And he said, Well, chips are a good example. So bags of chips. So we see that there are some examples of that. And then boxed cake mixes apparently. And one point Josh made was that, you know, that’s interesting because given baking is very precise and if you’re giving less ingredients But you’re not changing the the recipe, then you might get a different result. So I think that’s a really interesting point. And then Blake got into the conversation and mentioned pre packaged meat and cheese as some examples. He’s saying that there used to be, he must be talking about, maybe he’s talking about cheesy or the they used to pack closer to 16 ounces. Now it’s more common to see around 1010 ounces, but for the same price, peanut body butter, honey jelly, etc. Even the oatmeal, oat milk. So all sorts of things. And and there’s a funny line he’s got here. My hands haven’t got larger since middle school, but those chewy granola bars should have gotten smaller, which I think is great. Yeah, yeah. And then the point was raised, look, food prices are absolutely insane in the States right now. So a lot of people are struggling there. And I think in Australia, too, cost of livings way up compared with what what it was. And so, yeah, that’s why we thought this would be a good episode. And one of the other issues that got thrown into this is the consolidation of the supermarket sector, whereby you’ve got some really powerful players and, and your Josh found some statistics on that, which to the point, which told us all this was a Forbes article, the grocery industry is heavily consolidated among a handful of chains, the top five Walmart, Kroger, Albertsons, Costco, and I hold I don’t know what that one is a hold. Not sure what it is or not been in the states are close to 65% national market share. Right. Now, what’s interesting, and we’ll talk about this a bit later is Australia’s much worse than that, because we’ve basically got two companies Coles and Woolworths that account for around 70% of market share or something so
Arturo Espinoza Bocangel 07:04
260 5% Is it
Gene Tunny 07:07
just the two companies, right? Okay. So maybe it’s not as high as I imagined. Okay, so we’ll, we’ll chat about that a bit later. But first, we might look at some of the examples of the, the shrink flotation, because this is all you know, all very, you know, these are real examples, Doritos, Doritos, the packet of Doritos, a particular cheesy type of Doritos, they’ve got the image of here, and I’ll put these in the show notes, a 5%. decrease in size, by weight. So it’s good, the bags gone down from 9.7 ounces to 9.25 ounces. And there’s a useful report from Bob Casey, who’s a Democratic senator from Pennsylvania. He’s, he’s on a mission to stamp out this shrink inflation, which you’ve found out about tourists, we might talk about that in a minute. But he’s got this handy. Handy table in one of his reports, where He’s ranked the item categories with the highest shrink inflation by percent, January 2019, to October 2023. And what you see is that, so for example, it’s household paper products. They’ve had a unit price change percentage, this includes the shrink flotation of 34.9%. So the, the title, what’s this unit? price change has gone up by 34.9%. The unit price change, excluding Sri inflation is 31.2%. Okay, so he’s saying that we’ll get it went up by 31.2%. Anyway, and then there’s a small component of it, which is due to Sri inflation, if you took into account the fact that the household paper products, I guess, paper towels or toilet paper, they’re shrinking the package as well. So they’ve gone up in price, but there’s another What’s that? That’s nearly four percentage points. Is it? Another 3.7 percentage points? Yeah. On top of that, due to the shrink inflation, and then that translates into 10.3% of the price increase being due to shrink inflation. So I guess what he’s showing is that I mean, what we’ve seen is that the companies aren’t just exclusively using shrink flashing, we’ve seen a rise in the price of groceries and at the same time, they’ve, they’ve shrunk the product a bit to help try and maintain profit margins and and try to reduce the impact on consumers because they’re hoping consumers go We don’t mind if we get a little bit less. Maybe we can economise. And in some cases, we’ll you might be better off with the chips, for example, you know, I mean, Doritos or something. But maybe you’re better off with a smaller packet if
Arturo Espinoza Bocangel 10:16
those are high content. Sugar products. Well,
Gene Tunny 10:20
yeah. Yeah. So there’s a handy little, little table there. And he gives various examples of products that have had shrink flash and coffee and ice cream and related products. So I’ll put that in the I’ll put that in the show notes. And, Tara, you discovered that, that Senator? Senator Casey, isn’t it? Yeah, what’s what Senator Casey been doing? What’s he proposing?
Arturo Espinoza Bocangel 10:48
Currently, he’s working to stop Corporation from deceiving American families in pursuit of profits through his shin pension provision of 2024, which has been recently well, which has recently been introduced in the US Senate. Specifically, specifically, the attitude, okay, I’m gonna list what are the main objects, direct the Federal Trade Commission, or FTC, to establish inflation as an unfair or deceptive Act, or practice prohibiting manufacturer from engaging in shoe inflation, then, authorise the FTC to pursue civil actions against corporations who engage in deflation, and finally authorised state attorneys general to bring civil action against Corporation engaging inflation. So those are the basic action that he wants to promote.
Gene Tunny 11:41
And so he’s introduced this into the US Senate.
Arturo Espinoza Bocangel 11:45
In the preliminary stage, yeah.
Gene Tunny 11:48
Right. And I mean, my initial reaction to that, is that I mean, I like where he’s coming from. I mean, yeah, sure. Inflation is something that, arguably could be deceptive, particularly if, if they don’t make it clear, or it’s not obvious that it’s shrunk in size. And arguably, it could be considered a bit deceptive. But do we really want the government telling manufacturers how large their product should be? Or how big the product should be? I mean, I’m not sure we want to go down that, that path, it just, it just strikes me as highly, highly interventionist policies. That’s true. So you know, that that’s why I, I think I like where he’s coming from. But it just seems very interventionist to me. So I wouldn’t be a huge fan of of that measure. But I mean, good work, finding, finding out about it. And what we’ll do is we’ll keep an eye on that and see if anything, eventuate from it, it might be just one of these bills that gets introduced. I mean, various bills are proposed by different congressmen and women and or senators. And, and they don’t really go anywhere, because they’re just for show really, they’re just for it’s a performance. I, this shows that I care about free inflation, and I’m fighting for consumers. Right. Oh, so one thing we should point out is that shrink inflation is actually accounted for in the inflation data. It’s not as if inflation is not being measured properly. And I suppose that I suppose that the stats, yeah, the stats that Senator Casey has used in that report. They are from the BLS. So they’re from the Bureau of labour statistics in the US, so it collects the data on you know, what’s happening with the CPI, it also collects a wide range of labour market statistics. In fact, there’s a shout out to one of my colleagues, Tim one half who’s he’s currently in Denver, Colorado. He’s, he’s running a labour market statistics team in Colorado. So what the BLS does, is it actually gets state agencies to help them collect the labour market data. And Tim’s doing that Tim’s Tim used to be president of economic society here in Queensland. I like to see what they do for CPI, they probably I don’t know if they use Tim’s team or, but anyway, they’ve got resources to go out there and find out what you know what what’s been charged the problem, they’re probably getting data from the companies themselves, they might be using data from scanners. But anyway, they they do take into account shrink flexion in their calculation of CPI is not as if they’re ignoring it. The ABS has given us a good example and I’ll put a link in the show notes to a useful webpage from the Australian Bureau of Statistics. which would be adopting a very similar methodology to BLS. And it is explicitly states, it does take it on cancer inflation. And it gives an example, say you’ve got a 750 mil bottle of drink costing $3. They decrease that volume to 675 mils while the price remains $3. The ABS works that out as a 10%. Price Increase in 750 mils is 10% less than 750 mils and they use that 10% increase in their CPI calculation, so they calculate that basket of goods. So essentially, what they do is, is it all the spares index the CPI? Arturo, is that?
Arturo Espinoza Bocangel 15:51
Sure, I don’t remember.
Gene Tunny 15:52
That’s okay. I vaguely recall so that the idea with the CPI is you’re basically working out how much more the same basket of groceries cost, like how much more it costs now than it did last quarter. And so you’re what you’ve got to do, you’ve got to adjust for what you’ve got to take into account both price and quantity changes. I mean, if they shrink a product, it’s not the same product you measured last time. So you have to adjust for that. And that’s what they’re they’re trying to do. And the ABS knows that it uses detailed scanner data. So it’s going to be getting that from the supermarkets and retailers. And that gives them item level information. And that enables them to identify and adjust for quality changes, like shoe inflation as they note, so that’s good. So what do you think we’ve given enough examples of shrink deflation? I mean, have you seen shrink deflation in your life? How’s the translation affect you? willingboro
Arturo Espinoza Bocangel 16:54
Yeah, I remember that. For example, there is a popular chocolate called sublimate across the time, that suddenly me privately and the size of the chocolate piece has been reduced, and also some inputs change. So So I that was I remember that clear example about how the product has been reduced. And also the price increase raw that reductions over the site? That was the goal. How do you spell it? So will you make it s UBLI? M.
Gene Tunny 17:38
e. All right. So we’d say sublime, but sub Luma is in Spanish, Spanish. Very good. Okay. So I’ll put that in the show notes regarding that as an example of shrink deflation, right. Okay. Looks like it’s a is it a Nestle? It is an SLA product? So yeah, NetFlow had been accused of quite a bit of string inflation so yes, yes. Now one thing you dug out while we were while you’re researching this, Arturo is you found that there is one supermarket chain that actually warns consumers about shrink flashing Can you tell us about that, please?
Arturo Espinoza Bocangel 18:23
Friends, so well. The well known is French supermarket Carrefour, which is the most important retailer in Europe, and it’s the second largest retailer in the world.
Gene Tunny 18:34
After Walmart is all my years.
Arturo Espinoza Bocangel 18:38
They put a sticker on products the in order to warn consumers that that product contest has gotten smaller with a price reduction. For example, products like the Lindt chocolates or Lipton iced tea bolos. So basically, current curve careful indicated that they wanted to put pressure on the providers on those products has been affected by the reduction of the sides. Right.
Gene Tunny 19:09
Yeah. And what do you think they’re doing that? Is that because they don’t want to upset their own their own customers? What’s driving? What’s driving that?
Arturo Espinoza Bocangel 19:18
I mean, I imagine that they wanted to use that as a piece for negotiation prices.
Gene Tunny 19:27
Yes. Yeah. So because they recognise our Hey, hang on, you’re shipping us less product and you’re wanting to charge the same price for it. So yeah, we don’t we think we don’t want this with like, this is bad for us. And because it’s bad for the consumers, and they’re going to be they’re not going to be happy with this. And you know, we could get some pushback or we could sell this product. Because if consumers go Oh, hang on. We don’t we’re not happy about this. That the smaller sizes so. Yeah. And so it’s a tool and then it goes creation. So that’s really interesting.
Arturo Espinoza Bocangel 20:01
And that one wanted
Gene Tunny 20:05
you because I was wondering, is it is this something that you know, is this some French regulation because the French make regulations for all sorts of things. Okay. Yes,
Arturo Espinoza Bocangel 20:14
California. But it should be noted that karaf, California implemented that measure only for the French territory.
Gene Tunny 20:22
They did it wrong in France. No. Okay. Well, maybe it’s something that, yeah, maybe the French in particular got annoyed by string inflation. Maybe there was some could be some cultural issue, I don’t know. Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 21:13
Now back to the show.
Arturo Espinoza Bocangel 21:19
Also, I would like to mention that another expert, I don’t remember the name, that he mentioned that this kind of strategy could affect the relationship between the retailers and food firms or the food providers. Also, another important thing is the supermarket’s who they use the same shoe inflation tactic with their own label product. They do do that. I’m not sure you’ve cared for that kind of thing, right?
Gene Tunny 21:48
I mean, I guess I probably couldn’t. Yeah, I mean, that would be a bad look. But But what was this saying? What were you saying about how it affects it affects their relationship with their, their suppliers? Because
Arturo Espinoza Bocangel 22:01
they can be upset for that measure? Because they basically they are highlighting those products that has been reduced in size. For example, oh, I’m gonna we’re gonna put we’re gonna put an image of the sticker. So basically, the customer will see oh, the product from let’s say, let’s lay or Unilever Yeah. Is being pointed out, or is are being highlighted as Pro that are, has been have been reduced. Yeah. However, the price has
Gene Tunny 22:43
increased you Yeah, yeah. Okay. So it’s good. It’s good information for consumers. I think that’s great. I don’t have a problem with that. I have a problem. If we have the government saying, oh, you can’t change the size your product ever. I think that’s a bit that goes too far. I think. Yeah. supermarkets do this volunteer voluntarily. Yeah. That’s terrific. Good on them. Right. Oh, so that’s, that’s shrink inflation. Now, I thought it was interesting. Your mention of the FTC. So Casey, Bob Casey, the senator wants to get the Federal Trade Commission now the Federal Trade Commission’s but really come into the news in recent years because President Biden appointed Lena Khan, have you heard of Lena Khan? She’s an academic. She wrote. She’s, she’s young. She’s I think she’s roughly your age, really. So she’s mid 30s. And she’s, she was a student at Yale Law School, or maybe she was post grad or I forget the exact story, but she wrote a famous paper on Amazon and anti trust and how the FTC should really go harder after big tech than it has been. And I’ve done an episode with Australia’s current productivity Commissioner. She wasn’t the productivity Commissioner, then she was head of the Grattan Institute, Danielle wood, I’ll put a link in the show notes. So Danielle talks about how there’s this new hipster antitrust movement. And Lena Khan has been really prominent in that. And President Biden appointed her to head the FTC. And so she’s really going after a lot of companies. I’m not sure how much success she’s had. I think there’s some concern that look, they you know, they haven’t really been as successful as the Biden administration was hoping. But she’s really, she’s really out there and, you know, communicating the need for, you know, appropriate oversight of corporations potentially blocking some mergers. If they’re not in the public interest. If they were they’re going to result in monopoly or, or no, or heavy concentration. So maybe duopoly where you got two big suppliers. She’s really going after that, and she’s been on John Stewart and all of that. So I might, yeah, I can put some background info in but the point is she’s currently or FTC, under, under her leadership is looking at blocking a takeover from or a merger of Kroger and Albertsons. So Bloomberg reported that the FTC is Kroger, Albertsons merger suit is set for trial in August. So that’s a that’s a really big deal over there. So this issue that Josh raised, yeah, it’s an important one, there’s a bit of action, you know, there’s a lot of attention out in the States. And it looks like there’s going to be, you know, this important case later in the year. So without, without knowing, exactly, you know, what the structure of the US supermarket, you know, the supermarkets and grocery is over there in Kroger, I know is a big player. Albertson, I expect is a is a small applier. But together, you know, I mean, the problem is it results in greater concentration of the market, although it looks like Albertsons in the top five, so it can’t be too small a player. So, yes, anyway, that’s, that’s something to keep an eye on. And I mean, we’ve already as you pointed, or, as we pointed out, before, and you you sort of confirmed or maybe modified my statistic, slightly. We’ve got heavy concentration here in Australia. So we’ve had a range of takeovers of, of different smaller supermarkets by the big supermarkets, Coles and Woolworths, over the years. And so I mean, we must have one of the most concentrated supermarket sectors, I think
Arturo Espinoza Bocangel 26:41
that the most concentrated sector is in New Zealand, New Zealand is around 80%, I think,
Gene Tunny 26:48
Oh, well. So we’re much better than New Zealand. That’s good. So sorry, kiwis. Well, I’d love to do a show on New Zealand sometime. Yeah. So well, if we’ve if we’ve got all these issues here, they must be as bad or worse in New Zealand. So we’ll have to look at what’s happening. Over the ditch, over the Tasman Sea sometime. What’s happening here is that we’re having a range of inquiries into supermarkets into their market power, because last year, probably started 2022 When we had the big surge, and inflation, and you go to, you know, one day you go to the grocery store, the supermarkets and suddenly everything’s like 10% more expensive, or whatever. Some things are, like 20%, more expensive, like coffee really shot up. I mean, you know, some of these, some of these goods are going to have the there gotta be factors specific to those particular products and markets. But generally, we all noticed how much more expensive things were. Now, as we’ve talked about on the show, before, to a large extent that was due to all the stimulus in the economy, the additional money, the too much money chasing too few goods, so to speak, and their supply chain disruptions. There’s a whole range of factors. But one of the hypotheses that came out, is this great inflation ideal, it’s because there’s this abuse of market power by the big corporates and their gouging. And I’ve talked about this, this I think we talked about it, didn’t we, and then reflation and I had a chat with Simon Cowell and my colleague at the Centre for independent studies, I’ll put some links in the show notes to those, those episodes, so I’m sceptical of this as a hypothesis, but at the same time, I do acknowledge that, look, there is substantial market power potentially that these these big oligopolistic firms arguably have. I wouldn’t say it’s a duopoly because like some people say it’s a duopoly like Australia Institute, they’ll go it’s a duopoly. They’re abusing their market power. But there are competitors to these companies. The market is contestable, in a way I mean, you could have a new player come in and and threaten them. And Aldi has done that, and Costco to an extent. So it’s not as if we haven’t had new entrants. The challenge is that Woolworths and Coles are very entrenched in the market. So arguably, they could take advantage of that market power to an extent. This is one of those grey areas in economics where it’s, it’s not quite, it’s not it’s certainly not a perfectly competitive market. And it’s certainly not a monopoly or even a duopoly. It’s arguably an oligopoly. oligopoly, right? It’s all a gobbler yet let’s call it an oligopoly. But in an oligopoly situation is not always clear that there’ll be abuse of market power is there I mean, if the markets can tell estable so the contestability of the market can constrain the behaviour of the major players in a way this is the whole William bomo argument about contestable markets. If I remember correctly, we might cover that in a in a future episode.
Arturo Espinoza Bocangel 30:17
I remember something, something happened when Aldi started to operate here in Australia. They face some constraints. Yeah, yeah. So
Gene Tunny 30:28
Well, yeah. And this is one of the things we’re going to talk about because one of the one of the accusations is that the big supermarket chain so Coles and Woolworths have bought up all the potential sides, so not all of them. But you know, a lot of the the sites that would be suitable for a supermarket, because what, you know how hard it is, this is a, this is what we discovered. We did some work for the Real Estate Institute of Queensland here in Queensland state of Australia, we were in where we were looking at, well, what are the barriers to housing development? And well, there are all sorts of planning and zoning rules and and you have those for commercial property too. So if if Woolworths and Coles can buy up sites that are well situated with good transport, then you know, that’s going to constrain where Aldi and Costco can go. So, yeah, like Costco tends to go in, in new new developments out near airports and things like that doesn’t adore or Greenfield sites out in the in the outer suburbs. Yes, yeah, but LD I think LD is probably having a tough time. Yeah, they probably has a tough time finding places. Yeah,
Arturo Espinoza Bocangel 31:44
I remember that three years ago in Europa Indooroopilly shopping centre. You only you only found Gu Coulson. Goalies after the after, I know what happened at that time. Ali came to in rappelling and now you have more options to buy groceries. Do
Gene Tunny 32:05
you think it’s had any impact on the pricing? Well,
Arturo Espinoza Bocangel 32:08
I’m not sure. But probably there’s a higher competition there. Yeah,
Gene Tunny 32:14
I wonder. That’s something I should look into. Because I mean, I suppose to an extent their prices are going to be determined nationally, I imagine. Or maybe they’ve got state or national policies. That’s something research for this. I should have researched that for this episode that will look into that. I just just occurred to me
Arturo Espinoza Bocangel 32:33
a remember that some news mentioned about that there’s some price differentiation
Gene Tunny 32:40
in Australia, yeah, I guess that would make sense. And then they could take advantage of any local monopoly, so to speak that they have I know that those woollies Metro stores or the Kohl’s Metro store. So the smaller format stores, they’re often more expensive than the through the larger stores. Yes, yes. The ones that a strategically located next to train stations or whatever. Yeah. All right. This this issue of the location of the stores, we might we might look at that a little bit more because this is one of the criticisms of the major supermarkets. So Coles and Woollies. And this came up in a an inquiry that’s been done at the state government level. So we’ve got federal government inquiries. We had the former finance minister Craig Emerson, he’s done a his own inquiry. He did that on behalf of the current federal government here that Albanese government in Australia. And so he’s doing one, the a triple CL, our equivalent of the Federal Trade Commission in the States. So our Australian Competition and Consumer Commission, it’s now doing his own supermarket inquiry, to see if there are any abuses of market power. And the Queensland Parliament. Well, I mean, if everyone else is having an inquiry, why, let’s have an inquiry to and it gives them you know, maybe they think are there’s a political advantage that we can get the supermarket executives, anyone can give them a hard time for price gouging, charging consumers too much. So maybe they think there’s certain political merit in it. I mean, I’m not sure what, what the whole point of it is. But anyway, it actually has uncovered something useful. So I was I would have been initially sceptical of this inquiry. What’s the point of having a state government inquiries? We’ve got a federal one. But it has revealed, I think, some really interesting local cases. And there was a story that I found in the Guardian smaller grocery stores annihilated by major supermarkets tactics, Queensland inquiry told and I might just I’ll just quote for this for a moment that the company behind so the company behind IgA, so that’s met cash, it criticised the practice of resigning land to allow out for major supermarkets to establish themselves in an area so, so they’re arguing that there’s favourable treatment of Coles and Woollies by the council’s different councils. The Metcash Government Relations Manager Luke McKenzie cited an example in which Kohl’s bought an entire shopping centre in the inner Brisbane suburb of Milton. So that’s that’s the Verona Road shops if I’m, I mean, that’s gotta be Bruna road, he told the inquiry, the local IGA was forced to close and called on the Australian Competition and Consumer Commission to unwind the ridiculous acquisition. The community is outraged that they are losing the only independent retailer left in that market when Kohl’s is already present twice. He said. So I mean, that’s just an extraordinary story. I realised that I used to shop there quite a bit when I lived at orchid flower and too long. And yeah, so I mean, it is a it is a it was a great store. And they you know, they had interesting products that often have really good muesli there. So yeah, and they had a good deli delicatessen there for our members. So that is a real loss to that community. Now, again, I mean, we don’t we don’t live in a Soviet style centrally planned economies. We don’t want to constrain the activities of visitors too much. But I guess that is an example of okay, these are, these are big players. And
Arturo Espinoza Bocangel 36:29
that’s an example of power. It is. Yeah, arguably, it
Gene Tunny 36:32
is a domain. Yeah. I mean, do you need some regulation? There’s a question there. I suppose this is the type of thing that the atrium will see. We’ll be looking at and thinking through I mean, you’ve got to think about, yeah, well, I mean, how, from a policy point of view, is this a problem? How would you deal with it? I mean, certainly it raises eyebrows. Whether we need specific regulations to stop that sort of behaviour. That’s another question. Okay. One, before we start wrapping up, I should point out that look, the data do tend to suggest that supermarket profit margins have increased over the last decade or so. So, I mean, depends on how you look at it. I mean, maybe you don’t think it’s a huge deal. But I mean, applied to the huge turnover they have it ends up being a significant amount of money, of course. So their profit margin, according to IBISWorld data, if you look at their estimates, is gone up from about three and point one or 3.2%. In in 2011, maybe that’s about three and quarter, three and a quarter percent, and it’s gone up to in 2024 3.8%. So that’s their estimate of the profit margin for supermarkets and grocery stores in Australia. Anything Oh, okay. is half a percent? Is that a big deal? Well, if you apply to total turnover of 132 billion, probably is a big deal. So, yeah. So that posit, arguably, they have benefited from their privileged position in the market. And so this is something we really need the a triple C to shine a light on. And, you know, I’ll be interested in what they find and what their recommendations are. On the report, the other report I mentioned, so Craig Anderson, so he’s done an inquiry. And he’s issued an interim report. He’s talking in Brisbane in a couple of weeks. Well, he’s talking by video to the Economic Society of Australia Queensland branch, so I’ll be interested to watch that. He found that this, there’s this existing food and grocery code of conduct. That’s been ineffective. So they set up this, because this this, this issue came up, I don’t know 20 years ago, and they had an a triple C inquiry then and I’m not sure that much came of that if I remember. But what what eventually did get set up was this code of conduct, which wasn’t compulsory, which I don’t I don’t think it had really much force, but it was just telling supermarkets look, you should behave ethically you should behave. What’s the exact words here? Okay. Yeah, they should deal with their suppliers lawfully and in good faith. Okay. So I suppose, ethically, there’s minimum public obligations and behavioural standards that are set out in this code. Unfortunately, it’s not compulsory, and we know what happens with any of these sort of video these NGOs that aren’t compulsory or any form of self regulation. They’re they’re often ineffective because, you know, business will You know, if they if they think they could get away with something and as you know, many businesses this is this is the sad fact of life, they will try and get away with it or they sometimes they can justify it to themselves. I mean, we we like to think that the market will discipline businesses and keep them, keep them on the level. But I guess if they’ve got market power, then they can abuse that. And the incentive is strong to abuse it in some cases. And looks like that may well have happened. And so Craig Emerson has recommended that this code of conduct be made mandatory and you have penalties you have, you know, big financial fines and penalties if they breach it. That makes sense. Yeah. Yeah. And there have been some really extraordinary examples of, of how, like, the big issue I think one of the things you often hear about as he’s the poor farmers, like they’ve got to sell to Coles and Woollies. But, you know, they’re such major buyers, Coles and Woollies. They can really put the screws on or turn the screws on Oh, yeah. On these these suppliers and, and really beat down those farmgate prices or beat down the prices that the the farmers sell their produce to them too. And there’s a very useful article that notes this is by Sanjoy Paul from He’s an associate professor at the University of Technology Sydney business school. If I found this article early enough, I would have thought about getting him on the show, so I’ll have to try and get him on the show sometime. He’s written his great article eight ways Woolworths and Coles squeezed their suppliers and their customers. So this is on the conversation website. I’ll put a link in the show notes. And he knows that hundreds of farmers have little choice but to sell their crops to the big two. So Coles and Woolworths and little choice but to accept what’s offered and he gives us the example which I think is you know, this is illustrative of just how significant this this problem can be. One cherry farmer sent 15 tonnes of cherries to Coles and entire semi trailer load, and he hoped to receive $90,000 for that. Instead, he was told the fruit was not up to standard and was only he was only able to get $5,800 on the seconds market. He said when Coles is dealing with 1000s and 1000s of pieces of fruit, it can pick out 10 pieces and say the consignment is no good. So that is power that’s market power when you can simply reject something for no good reason. And then Sanjoy Paul, he goes on to suggest that the behaviour described might amount to misuse of market power under the Competition and Consumer Act 2010. So, I guess what’s possible there is that you know, if Coles and Woollies behave like that, I mean, are they sending? Are they sending a signal that, hey, if you don’t accept our terms, if you if you get too uppity, we can really make life difficult for you, we can reject, you know, or we can claim that your consignments lower quality, and we’re going to pay you a lot more for it a less a lot less for it. I mean, without knowing all the facts, it’s difficult to judge. But you do hear a lot of stories like that, and four corners had a good a good programme on it. So it is something that, you know, I know that there are a lot of farmers who are concerned about this. That’s just a really extraordinary story. I’ll put a link in the show notes, because there are other examples, which I think are equally as compelling. Right? Oh, one thing I should point out is that it looks like and I guess this is why there’s a greater focus on this. This is one of the reasons why. Yeah, we are talking about supermarkets, because it’s both the consumers who are complaining, or you know, rightly, I suppose, and the suppliers to the big supermarkets. So you say the supermarkets are in the middle there, you know, they got market power both ways that appears because they’re such, you know, major, you know, that they’re the major retailers, and they’re also the major buyers of the produce of many, many farmers out there in the community. What I found interesting from the IBIS World, one of the IBISWorld reports, so we subscribed IBISWorld which produces a lot of really good intelligence about different industries and different companies. And they noted that, you know, partly this is, one contributing factor could have been the fact that Aldi and Costco have come into the market so that they’ve written the successes of Aldi, Aldi and Costco are causing dominant players Coles and Woolworths to cut costs in other areas to compete on pricing. Automation data collection and more favourable supplier contracts have helped the Giants maintain their Profit margins. So they’ve been getting more favourable supplier contracts. And you can try it, you know that that could be because of what what Sanjoy Paul has has written about the fact that yeah, they’re they’re all these examples out there of how they’re squeezing their suppliers and customers. Now, for the for the lawyers, we’re not saying that Coles and Woolworths are doing anything illegal at this stage, we we want to see what the a triple C comes up with. And I expect they’ll say similar things to Craig Emerson, that there should be this compulsory code of conduct with some significant penalties for breaching it. Okay, so that’s a, that’s a bit of a review of what’s been happening with supermarkets. We talked about shrink inflation before. Anything else we should we should talk about before we we wrap up?
Arturo Espinoza Bocangel 45:57
Well, I think the only issue that we didn’t mention here is how Wallace and Cole are managing their brand reputation, because given these actions, of course, are affecting their lives, or their brand reputation across customers in Australia. So I think it’s a good point that they those supermarkets. Yeah.
Gene Tunny 46:29
I don’t think they’ve been doing that effectively. I mean, did you see didn’t the CEO of all these have to resign? He had this embarrassing interview on four corners where the ABC programme where he hopped up and walked out of the interview, mid interview, and then that he was finally convinced by his own media person to go back because that’s such a bad look. And I think he ended up standing down eventually. Brad Vander Luci. Like, because he couldn’t explain it. He had difficulty explaining or trying to convince the journalists that Oh, hang on, we’re actually not ripping off consumers. I mean, I’m not saying that they aren’t necessarily, but what I’m saying is that he had he struggled because the journalists was putting really hard questions to him. I mean, I forget, it might have been about the suppliers or you know, abusing your market power suppliers or with consumers. And he struggled. He struggled to answer those questions. And I think similarly, the CEO of Kohl’s she’s had a difficult time to add various inquiries. The problem is that this is a it’s like, if you’ve got the banks in front of you, if it’s an issue with the banks, I mean, the soup, the big supermarkets there, if you’re a politician, they’re a good juicy target to go after. And so you had that that incident of the Australian Senate where Nick McKim, who’s a green senator, they actually threatened the Woolworths CEO. I think it’s Brad Ben DeLucia. With with jail, he said, if you don’t provide this information, we’re off. We’re asking like, because he was getting deep into the detail on your what’s your actual profit margin or what’s what’s your return on equity? What’s your because I think, I think more words, the Woolworths CEO was was talking about their return on assets. So like a particular measure of their profitability, which, which didn’t look as well excessive as, as what may be the return on equity looks like so any wouldn’t give that too. I’ll put the link to the details in the show notes. So that ended up being an interesting exchange. And, yeah, basically, my take on it is that they’re not really doing that. Well. And it’s extraordinary, because 10 years ago, or 20 years ago, I think Woolworths and Coles, maybe Woolworths had a better reputation for that I think they had they had a much better reputation than they do today. I mean, partly it could have been I mean, this is this is another thing, maybe we have to have a deeper dive at this and and look at when the market concentration really occurred. I mean, because we’ve have had we had Aldi and Costco come in, in one was that there might have been in the 2000s. I’m trying to remember I can’t, I’ll have to I have to have a closer look at the timing. But anyway, whatever’s happened is I mean, maybe it is the the extra market power they’ve got since they took over. I think there used to be brands like Franklin’s and bylo, low and all of that Safeway, I think it was and, you know, since there’s been market concentration, maybe they’ve started behaving, you know, less, less ethically. But again, that’s just a hypothesis. And yeah, wait to see what the a triple C says about that. I mean, what’s your take on their, their brand management, Arturo? Well, no,
Arturo Espinoza Bocangel 49:55
they need to be aware of that because people will With all the information that we we have nowadays that you can, you can investigate and you can get from many sources. So, possibly that will affect how the costumer consumer will try to, for example, to buy groceries, perhaps they will try to substitute goods from those supermarkets and buy in other smaller supermarkets or markets or the other, for example, green alternative, or perhaps buy directly to farmers other kinds of things. Yeah,
Gene Tunny 50:38
one point I should make in closing is even though we’re bagged out, or I’ve, you know, I’ve been very critical of the big supermarkets over the last 40 minutes or so. I actually, like shopping at Woolworths actually. You know, I’d rather go to woollies than to well, marginally like woollies over coals for the range of products, I think they have better fresh food that used to be their one of their differentiation the way they differentiate themselves and say where the fresh food people and I’ve got the everyday rewards card which helps me accumulate points and then I can get discounts on shopping and I’ve got my insurance through Woolworths so get a 10% off a shop every every month. I think woollies is doing a lot of good things. And they’re gonna you know, I’m not gonna get IGA because IGA has a smaller range and I think their prices are higher. So I do. I do think woollies is, I think I do actually like shopping at those big woollies or Kohl’s. But I do recognise that yeah, maybe, maybe they are abusing their market power to an extent that we have to see what the a triple C says. And maybe I would benefit from a greater choice because if I want to go to a supermarket I’ve essentially got I can, you know, if I want to go to one that’s going to have everything I want. It’s either within walking distance or a reasonable driving distance is either Woolworths or Coles for me, based on where I live
Arturo Espinoza Bocangel 52:09
for me is the goals and goals I have those three have Yeah,
Gene Tunny 52:14
yeah. Which which is good. I mean, all the I know a lot of people really like Aldi, but some of the products are quirky. Is that right? Like can’t You can’t get everything you could have woollies or Kohl’s can Yeah.
Arturo Espinoza Bocangel 52:25
Yeah. Well, yeah, that’s right. So it’s like in my household. We try we buy a bunch of product from Aldi, and then another product from Kohl’s and also some product from wool. Like a combination of products that we supermarkets to maximise our satisfaction with consumptions and also minimise our budget. Very good.
Gene Tunny 52:56
You’re thinking like an economist. It’s a constrained optimization problem. I like it you guys, your family, your you do a lot of cooking, which is great.
Arturo Espinoza Bocangel 53:05
Also my wife, she’s economy, so yeah, very
Gene Tunny 53:09
good. Okay, Tara, I think we’ve had a good conversation on translation and supermarkets. Anything else to add? There? Very good. Well, thanks for your time. I really enjoyed our conversation. It’s given me a few things. I know that I should follow up on and do some research. It’s always the case for these conversations. You think you’ve, you’ve got all the information you need. And then while we’re talking, it helps, it helps you think of alternative hypotheses or, or alternative alternative ways of thinking about the issue. So it’s really good. Tara, thanks so much for your time. Really appreciate it. Thanks
Arturo Espinoza Bocangel 53:49
for having me again by
Gene Tunny 53:52
rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone who you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
54:39
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Credits
Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.
