When a representative of Australia’s biggest supermarket chain answered questions at a parliamentary committee about profits, the response created an impression that margins were modest and, if anything, falling.
The assertion appears to rub against data that shows Woolworths and Coles have greatly increased profits derived from grocery items during the inflationary period and related cost-of-living crisis.
Is there an explanation?
When most people think about Woolworths and Coles, their mind naturally turns to the Australian supermarkets they operate.
But Woolworths also owns discount chain Big W, sells stationery to businesses and operates in New Zealand.
The business has also changed significantly. Woolworths used to own petrol stations and, importantly, a liquor and hotel portfolio that contained Dan Murphy’s and BWS, along with hundreds of licensed venues with thousands of poker machines.
Those assets have since been sold or spun out of the business through the separate listing of Endeavour Group, which started trading in 2021.
Against that backdrop, Woolworths told the inquiry into promoting economic dynamism on 25 July that operating margins had dropped over a 10 and five-year period, referencing margins for the entire business, not just the supermarket component.
But 10 and five-year comparisons of the overall business are problematic, because Woolworths formerly enjoyed the returns of its liquor retailing and pokies portfolio which generate much higher margins than groceries.
The current margins look low in comparison.
But when you compare profits solely derived from groceries, it’s clear that Woolworths and Coles have enjoyed a leap in margins during the cost-of-living crisis.
Economists, investment professionals and a former regulatory boss have cited a lack of competition in Australia for the ability of the major supermarkets to more than offset any additional business costs they have incurred via prices charged to shoppers.
This has left customers paying arguably more than they should for necessities, with rising food prices also acting as an inflation trigger.
The supermarkets have consistently denied they price gouge and cite productivity improvements as part of the reason for their recent healthy returns.
The committee did ask for margins for Woolworths Group, when it arguably should have chosen its words more carefully to focus on the supermarket component, which is the real issue for households.
“We assisted the committee with the information we were asked to provide on the day,” a Woolworths spokesperson said.
“We look forward to providing further information in response to the questions on notice the committee has indicated it will be seeking from all participants.”
A Coles representative was asked similar questions by the committee, and is providing margin comparisons at a later date.
Another important piece of context is that Woolworths was asked for margins generated over the past five years. In response, the most recent margin data it provided the committee was the 12-month period to June 2022.
That period cuts off before most of the inflationary period and related cost-of-living crisis, given the string of rate rises, and increased borrowing costs, did not start until May 2022.
Woolworths is scheduled to publish margins for the subsequent 12-month period later this month. It has, however, already published its profit margins for the last six months of calendar 2022 when inflation was rocketing.
Those results show a dramatic spike in operating margins, which account for costs, to 5.9%, from 5.1% a year earlier, for its Australian groceries business.
Australia’s big two supermarkets, which control two-thirds of the market, are now much more profitable than their overseas peers which have reported mixed profitability during the inflationary period.
So far, Australian supermarkets have avoided the type of scrutiny being applied by policymakers overseas, with the UK, France, New Zealand and Canada, using a combination of pricing probes, and threats of price controls, sanctions and divestments to put pressure on grocery prices.
