ESSA

ESSA

From little things big things grow


Elijah Lim

By

September 17th, 2013


Elijah Lim discusses the long history and transformation of Coles and Woolworths, from their humble beginnings to becoming Australia’s dominant supermarket giants.


The history of Coles and Woolworths in Australia has been an impressive one. Both being around with us since our nation’s infancy, they still remain with us today as the two major supermarkets in modern Australia. In many ways, they are a part of our national identity.

Yet their success has not been without controversy. Many have accused the two supermarket giants of exploiting their market dominance. Nonetheless, it is remarkable that two, small variety stores have grown into the two supermarket giants in Australia.

Coles and Woolworths both started off as small, independent variety stores in Melbourne and Sydney respectively.

The first Coles Variety store was opened in 1914 on Smith Street, Collingwood, Melbourne. From its early years, basically since the word go, Coles has promoted itself as providing great value for shoppers. From their famous “Nothing over 2/6” to their now infamous “Down, Down, Prices are Down”, whatever their catchphrase, it’s all got to do with how neat a deal can be scored when one shops at Coles. By 1960, Coles opened its first proper supermarket in Melbourne, and in 1973 it had supermarkets in all capital cities. Today, it employs more than 100 000 people, and service over 18 million customer transactions every week. Only this week was it announced that Coles and its parent company, Wesfarmers, has applied for a banking license. Amazing!

In December 1924, Woolworths Stupendous Bargain Basement opened in Sydney (it’s a shame Woolies didn’t keep this original name!) By 1927, it had already become a Chain, opening another store in Brisbane. The Woolworths brand had extended across New South Wales, Queensland, Western Australia and even to New Zealand by 1930. It wasn’t until the late fifties that Woolworths actually started out in the real food store business. From that variety basement store in Sydney’s Imperial Arcade in 1924, to 872 stores across the nation, Woolworths, like Coles, has had a remarkable history.

What on the face of things seems like an impressive and admirable business history, from small, humble variety stores to multimillion dollar supermarket chains which employ tens of thousands of people, Coles and Woolworths are today subject to intense criticism from consumers and regulators.

Figures have floated around that their collective market share is something close to 80%. This is an enormous number, and it is no wonder that consumers and regulators are a wee bit spooked. This figure has been rigorously questioned though. But regardless of whether it is exactly 80 per cent of not, Blind Freddy could tell you that Coles and Woolworths are the two dominant supermarket chains in Australia today (some estimate that the figure is more like 55-60 per cent[1].)

Yet the Coles and Woolworths duopoly has not always been so. It is worth keeping in mind that the history of both Coles and Woolworths has been a long and tumultuous journey. In 1975, Coles and Woolworths collectively had only about 34 per cent of the market share. Compare this to the 80 or so percent today, it is clear that both have been incredibly successful players in the grocery sector. What’s more is that their activities are now expanding to things such as insurance, and even possibly banking.

The ACCC has been on the two supermarkets’ cases over the past few years, and surely getting under the skin of both Coles CEO Ian Mcleod and his Woolworths counterpart, Grant O’Brien. Whether it be suspicions pertaining to petrol discounts or super cheap milk, the ACCC has aggressively been pursuing the market tactics employed Coles and Woolworths, trying to uncover any anti-competitive behaviour. Of course, as Australia’s “Competition regulator and national consumer law champion”[2], it is expected that the ACCC holds Coles and Woolworths to account when they see fit to do so.

Yet, I sometimes wonder whether all this bagging of Coles and Woolworths from consumers as well as regulators is merely temperamental. Much of the public opinion has probably been shaped by the media coverage of the duopoly, feeding people’s suspicions that they’re being ripped off.

Much to the contrary, however, the Coles and Woolworths price wars and aggressive business stand-offs might actually be good for consumers. A paper released by Deloitte last October suggested that across the entire Coles range (except cigarettes), prices had fallen 7.9 per cent, a benefit to consumers of roughly $1.1 billion in light of the supermarket’s “down, down, prices are down” campaign[3]. Coles is determined to gain market share by harking back to its lower prices mantra of the pre-war years all the while benefitting us, consumers with lower prices.

Despite our paranoia about market share and price wars, Coles and Woolworths might well be helping keeping the inflation genie in the bottle – at least it is certainly keeping prices down, down, down in the groceries sector.



[1] http://theconversation.com/factcheck-do-coles-and-woolies-control-80-of-the-market-15418

[2] http://www.accc.gov.au/

[3]http://www.coles.com.au/Portals/0/content/pdf/Shareholders/Grocery%20Industry%20Report.pdf

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Joey

    Hi Elijah,
    I’d just like to point out that it’s not particularly remarkable that two small businesses grew into two huge businesses. The market for food distribution exists – it’s no surprise that someone sought to fill it. Also, the ACCC and the public are not primarily concerned with consumers being ripped off. The concerns are that Coles and Woolworths have sufficient market power to utilise predatory pricing tactics against smaller competitors, and to exploit monopsony power against suppliers.
    Cheers,
    Joey

    • Elijah

      Joey,

      Your first point about the unremarkable nature of Cole’s and Woolworths’ success is extremely petty.
      You’ve totally not given thought to the fact that out of the thousands of small independent businesses that have come and gone over the past hundred years or so, two happen to have gradually worked their way to being the two major supermarket chains. If your point is really trying to say that all big companies have to start small, well hello… Perhaps give yourself a better sense of scale and context with ascension of Coles and Woolworths. It makes for uninteresting discussion when one makes a point of their prejudices against big businesses; looking at things for what they are is far better.

      Your point about the role of the ACCC is fair. But I get the sense that you’ve overlooked the fact that any serious firm is going to to do what it can to dominate a market. Whether it is Woolworths or your local corner store, it is in a firm’s DNA to do what it can to grow itself and smash competitors. This is the very nature of free enterprise.
      Of course, a firm might cross the line, and this is where the ACCC is important.

      But just a bit of food for thought; perhaps cutting red tape would be effective in making this market more competitive; give smaller businesses a better chance. It is astonishing that so much energy and effort is put into coming up with ways to curb a firm’s market power (by imposing restrictions on the market) in the name of protecting smaller businesses, when not much is said of what’s reinforced the dominance of a couple of firms and crippled smaller ones.

      Elijah

      • Joey

        Elijah,

        I don’t think it’s fair to call me petty and prejudiced. It’s clear that you have a very romantic admiration for big business. I’m not prejudiced against big business, I’m just more impressed with things like the work of NGO’s and science. We seem to have a different worldview on this point, so best to leave it be to save us talking past each other.

        Yes many small businesses fail, and a couple rise to the top. Someone has to survive and dominate, the fact that it came to be Coles and Woolworths is unremarkable. If it were another business under another name, no doubt you would be repeating their slogans in your articles instead.

        I haven’t overlooked that a firms natural inclination is market domination. I understand this very well, and I’m saying that this sometimes leads to undesireable social outcomes. In other words, market power is a market failure in need of external correction. A food distribution business that has such market power that it can squash smaller competition with predatory pricing and strong-arm suppliers into unfair contracts, needs to be corrected, not worshiped.

        Lastly, could you give me an example of red tape that is assisting Coles and Woolworths gain and retain an excessive level of market power? This is the implication from your last point. It’s actually a flawed argument. Your suggestion is that less red tape means more small business, which means less market power for the duopoly. Coles and Woolworths have been using their market power to predatory price consumers away from small business, whether there is red tape or not is irrelevant. What’s really crippling small food distribution businesses is their inability to price below average cost.

        Joey

  • Dave Sharpe

    Elijah,

    I am with Joey on this one: you seem more than a bit in awe of these companies. Yes to grow as they have done is a rare achievement and no doubt reflective of well through out and executed market strategy. However I do challenge you to look at the overall impact of this duopoly on suppliers: they are getting crushed! In the long term consumers may not be better served by the circa 8% price drop as this drop is not sacrificed out of the profits of Coles or Woolies, but it is squeezed from the profits of suppliers. Particularly in the dairy and agricultural industries this squeeze is telling and dramatic. While such changes in market forces can provide welcome (or sometimes unwelcome!) imperatives for improvements in productivity and profitability of suppliers, if pushed too hard it can damage domestic economy and increase reliance on foreign food imports (and thereby provide threats to food security among other unintended consequences). To be sure Elijah “down, down prices are down”, but much of our primary industry is down and out! You wont see any cheezy jingles from that sector. A more thoughtful analysis of the impact of this duopoly thanks! Dave

  • Monika

    80 per cent from 34 per cent in the 70s is no small achievement. As Elijah points out there are many chains that have come and gone. When I was a kid Tucker Bag and Franklin’s seemed just as embedded in the supermarket landscape.

  • Halei

    I totally agree with Joey and Dave. I dont think you understand the impact it can have on our economy when HUGE businesses that not only own supermarkets but huge hardware stores, petrol stations, liquor stores and more use their market power to purposely to run smaller competition into the ground as Joey said “they use predatory pricing tactics and put strong-arm suppliers into unfair contracts. Everyone deserves a chance to have their own business and contribute to their community and country with out these massive businesses getting greedy and wanting everything for themselves. What about our suppliers and farmers, they are getting squashed off the shelf and going broke due to the coles and woolworths brands and the fact they they will go to the supplier with the best deal so again the small business suppliers lose out, very selfish tactics. View the link for a few more points you should take into considersation. And remember just because you wrote this article doesn’t mean you know all the facts and clearly need to look at the bigger picture for everyone in this country not just the unaware customers that benefit in the short term, its about everyone having a fair go and keeping our economy healthy. Think about why they dont franchise????? Because they dont want to be fair and help others to own a small business keeping a friendly community atmosphere, even other small businesses help each other out by referring customers to each other if they cant help, Nooooo Coles and Woolworths are not caring about anything but making more and more money so they have all the control and power over this country. OPEN YOUR EYES AND SEE WHAT IS HAPPENING!!!!!!

    http://www.smh.com.au/business/suppliers-count-the-cost-as-woolies-and-coles-shoot-it-out-over-prices-20120420-1xcfl.html

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