John Durie: Retailers test how far they can push prices amid inflation before consumer behaviour changes

john durie inflation

Cost-of-living increases are a key election issue but the reality is many food manufacturers, and certainly retailers, like some inflation — but not too much in case consumer behaviour changes.

Small business suppliers are clearly under extraordinary price pressure so if they can get the retailer to pay a touch more that’s a relief, and it also helps the retailer who will gladly add a few more cents onto the price to boost profits.

The loser is, as always, is the consumer.

Still that is how the game works out to a point, until the consumer says enough and stops buying the product, either going downmarket or buying less. At that point, the behaviour of the retailer changes and suppliers lose.

This can also be due to factors outside the control of both retailers and suppliers due to external costs like petrol price hikes, staff shortages and other supply chain imposts which increase prices.

Figures due this week from the NAB monthly business survey may well show the big retailers have indeed been increasing prices above their costs.

To some that’s the way it should work, after all Coles and Woolworths are not charities.

It’s a question of degree.

Retailer costs are split between the cost of goods sold and the costs of doing business, and if retailers are getting away with prices in excess of cost hikes that is when inflation starts to emerge as a problem.

The big two supermarkets — Woolworths and Coles — control around 70% of dry grocery goods sold so they have some market power as they balance their stakeholder demands.

These include consumers, suppliers, staff and shareholders.

Woolworths’s Brad Banducci admitted last year he didn’t have the balance perfect so it seems he is now turning the dial to look after shareholders.

It seems consumers are left on the sidelines no matter which way the dial is turned.

It is also more complicated than presented by the politicians, but then those who want to keep the rorts running are ones making it complicated.

As a guide try to unbundle exactly what you are paying for your mobile phone bill, or compare what you would get on a rival private health membership.

Take the Labor policy to cut merchant payment service fees by, among other means, mandating least-cost routing (LCR) to cut small business costs.

Small retailers are hit with a levy if their customers use Visa or Mastercard credit cards but under LCR would choose the cheapest way to transact their sales.

Sometimes retailers hands are tied when customers pay with their mobile phone because the transaction is linked directly to whichever payment option the customer chooses.

This may or may not be the cheapest payments service.

Some surveys show savings through LCR are relatively small, and in any case small retailers can take a bundle option with one of the card suppliers which deliver slightly higher merchant service fees but other services they want.

Equally consumers may want to choose the option of higher fees because they get frequent flyer points or stand a chance to win a trip to Fiji.

The Labor policy sounds good in concept and hopefully the campaign will clear these issues.

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