Supermarket Monsters: Seven insights into how Coles and Woolworths came to dominate Australian groceries
Monday, September 14, 2015/
Every man, woman and child in Australia spends on average $100 a week at Coles and Woolworths or one of their related retail businesses.
That’s the startling fact that author and journalist Malcolm Knox uses to demonstrate the sheer dominance of Australia’s two market leading supermarket chains in his book, Supermarket Monsters.
There are other equally staggering statistics that Knox uses to set the scene for his exploration of how Coles (or its parent company Wesfarmers) and Woolworths have come to rule over Australia’s retail sector.
The companies each operate nearly 1000 supermarkets, as well as hundreds of petrol stations and other retail outlets, and more than 70 cents of every dollar spent in Australian supermarkets goes to Coles and Woolworths.
The supermarket chains are among the country’s largest employers: they employ a combined 400,000 people and according to Knox, only the state governments offer more work than the two corporations. Eighty-seven people start working for Woolworths every day of the year.
So knowing someone that has worked for Coles or Woolworths, or their brands in the hardware, petrol, general merchandise or liquor markets, is often an unavoidable fact of Australian life.
But in his 150-page book, Knox argues there has been a shift in the community’s perception of Coles and Woolworths in recent years.
This was initially fuelled by the milk price wars that may have brought more shoppers through the doors of the supermarkets but put incredible pressure on Australia’s dairy farmers.
In more recent years there has been the practice of requesting rebates and marketing contributions from suppliers for the right to sell their wares to the chains and misleading statements about where bread is baked.
It’s somewhat of a feat to condense the varied histories of these two companies into such a short piece of work but in just five chapters, Knox presents a compelling argument that the dominance of these two companies comes at a price – for other businesses, for consumers and for the Australian economy overall.
He paints a picture of ruthless court battles fought by Woolworths and Coles against competitors and the councils who have the power to approve or deny new supermarket developments.
Knox documents the lengths that both companies have gone to minimise liability for actions against employees or injuries sustained by customers; he details the retailers’ pitiless treatment of suppliers that even Coles admitted “crossed a line” when it settled the legal case bought against it by the Australian Competition and Consumer Commission in December 2014.
However, Knox doesn’t attempt to reach a final conclusion as whether Woolworths and Coles are good or evil; for him that debate is, while “appealing”, “not only subjective but beside the point”.
“It is not a matter of whether Woolworths or Coles intend to act as they do, but whether, given their size, they could act in any other way,” Knox writes.
It’s a timely consideration as the federal government appears to have put a proposal to introduce an effects test into Australian competition law on ice.
Proponents of the proposed effects test point to the actions of Coles and Woolworths to argue for the reform and others, including independent Nick Xenophon, suggest Australian courts should have the power to break up powerful corporations.
But those on the other side of the fence, including the supermarkets themselves, point to increasing popularity of international chains such as Aldi as proof there is still room for healthy competition in the quest for shoppers’ dollars.
Knox is not so sure. But he is equally unsure that much can be done to counter the dominance of these two corporations, which at the end of the day, is drawn from the way we as a country have chosen to shop.
“If we can’t go into a mall without being hauled in by the duopoly – apples form Woolies, cereal from Coles, beer from Liquorland, wine from Dan Murphy’s, a hammer from Bunnings, shoes from Kmart, ink from Officeworks, a toy from Target, a pillow from Big W, petrol from Coles Express – then that shows the power we have given these two companies,” he says.
Here are seven insights from Knox’s book:
1. Coles and Woolworths started out as small businesses
If Coles and Woolworths have anything in common with SmartCompany readers, it is how the companies were founded – as small, family-owned general merchandise stores.
The Coles family started out as general storekeepers who sold supplies to gold prospectors during the Victorian gold rushes. After studying the idea of ‘one-stop shopping’, George J. Coles opened the first Coles stores on Smith Street in the Melbourne suburb of Collingwood in 1914. Within a decade, there were nine Coles stores in Melbourne.
Woolworths was born in Sydney as Woolworths Stupendous Bargain Basement, a store located in an arcade between Pitt and George streets in the CBD. The Woolworths name came from the US retailer F.W. Woolworths.
2. The two giants have grown into increasingly similar businesses
When one of the chains does something, the other isn’t far behind, according to Knox.
This was the case when Coles and Woolworths first started selling food – Woolworths was first in 1955, followed closely by Coles in 1956 – and more recently, the two companies have pursued similar marketing strategies, Coles with its “Down, Down” low-prices campaign and Woolworths with “Cheap, Cheap”.
In January 2014, it was only a matter of days between the announcements that celebrity chef Jamie Oliver would be the culinary face of Woolworths, while fellow British TV star Heston Blumenthal would represent Coles.
3. There used to be an annual Coles and Woolworths footy battle
It sounds unusual but one of the more quirky aspects of the Coles and Woolworths story is the decade between 1956 and 1966 during which the two competitors staged an annual Australian Rules match.
“It was discontinued after excessive violence, the picnic days degenerating into a bloodbath, with players punching and kneeing, each other as payback for suspected dirty retail tricks,” Knox writes.
4. They will stop at nothing to pursue their interests
Much of Knox’s book is dedicated to the lengths to which Woolworths and Coles have gone to achieve their goals.
This ruthlessness appears to play out just about every facet of business: with competitors, with suppliers, with employees and with customers.
Knox gives the example of former Mitre 10 franchisee Dominic White, who closed his store in 2014 after Wesfarmers-owned Bunnings sucked up all the hardware trade from his location on Sydney’s northern beaches.
Before Bunnings arrived in the area, there were 15 hardware stores. Now there is one independent and three Bunnings big-box stores.
“General trading conditions had worsened since the first Bunnings,” White told Knox.
“But when the second Bunnings came, that was it. Coles and Woolworths want to own everything. People might think they’re supermarkets, but they’re the petrol stations, the convenience stores, the bottle shops, the hardware stores, and everybody else is going out of business.”
Knox interviewed several independent grocers that are still holding their ground, just.
In Hobart, the Hill Street Grocers is a mini-chain of three bustling supermarkets that Knox describes as “outpost of independence amid the highest density of Woolworths and Coles supermarkets in Australia”.
But while the stores’ tills are always ringing, owners Marco and Nick Nektarious told Knox “we win battles but we’re losing the war” as the produce preferences of the large retailers has slowly whittled down the variety of products that local farmers can viably grow.
“The supermarkets have exact specifications for the fruit and vegetables they want, and if they don’t want them, the growers won’t grow them,” Marco Nektarious said.
5. Coles and Woolworths have followed the lead of their UK and US counterparts
A number of the practices adopted by Coles and Woolworths in recent years – including some that have landed the retailers in hot water – are straight out of the playbook of US and UK supermarkets, including Tesco, writes Knox.
The practices of asking grocery suppliers for “rebates” for access to shelf space was pioneered in the UK and the US grocery sectors, as was the cost strategy that underpinned the heavy discounting of the milk price wars that saw Coles and Woolworths both sell cartons of milk for just $1.
Knox explains the strategy: “Strengthen the market share of own-brand milk though heavy discounting. Bring prices of branded milk down by demanding more cost-cutting and rebates from suppliers.”
“Force suppliers, through the combined effect of discounting and beefing up own-brand presence, to accept reduced terms. Bring more customers into supermarkets for milk, and encourage them to fill their baskets with other items. And it worked.”
6. The battle for tomorrow’s customer will be won by using data
Knox characterises the most recent part of Coles and Woolworths’ history as being about generating growth by extracting as much value from suppliers as possible.
But he says the supermarket giants are beginning to recognise – thanks to oversight from regulators like the ACCC – “they can only crunch the suppliers so far before they begin got damage themselves”.
So what’s the next step? Using data to analyse consumer behaviour or “surveillance of what we buy and when”.
“For both supermarkets, the next holy grail requires moving the focus away from suppliers and back onto customers: they want to find ways not only of attracting our dollar, but of trapping and keeping it,” Knox says.
7. Aldi could be the circuit breaker
For many, German discount chain Aldi is considered the most dangerous opponent to the entrenched dominance of Woolworths and Coles.
Knox explains in his book, part of Aldi’s strength comes from an even higher level of vertical integration than the local chains.
“Aldi’s products are 95% home-brand, owned by the parent and mostly imported,” Knox writes.
“Aldi has expanded quickly into Australia by appealing to the same lowest-price, bargain-hunting instinct that has served Coles and Woolworths so well; but Aldi has taken that appeal further. In a sense, Aldi is a product and beneficiary of the ‘Down, Down culture.”
Entrepreneur Dick Smith gave this prediction to Knox: Aldi will send Coles and Woolworths “broke” in 15 years.
“If you think Coles and Woolies are ruthless, you wait. [Aldi] are the smartest retailers in the world,” Smith said.
“[Australia] will make Aldi boom because we’re just interested in the cheapest price, but there’s no doubt in my mind once they’ve got large market share, everything will come from China.”