The pile-on to Coles and Woolworths as protagonists in the ‘cost of living crisis’ and accusations of gouging, is somewhat akin to the ‘burning of witches’ in Salem in 1692. (in fact, most of the 16 executed were hanged, but never let a good story get in the way of a fact). The population just needs a victim to blame for their poor fortune, anyone will do, never mind their lack of guilt.
If there was any guilt involved in the lead up to the current ‘crisis’ it would have been allayed by a factual examination of the supply chains in use by retailers, and the drivers of those chains.
It is true that Coles and Woolworths are amongst the most financially successful retailers in the world. This is a position evolved from a long history of take-overs and mergers in the supermarket industry, endorsed by those with the power to stop them. Coles and Woolworths have by this process, as well as their own efforts to attract and keep consumers, have accumulated the scale that enables them to deliver superior returns their shareholders, a group that includes every Australian with superannuation. Had they not performed in this way, the boards of these businesses would have relieved be MD’s of their role. On occasions over the last 40 years I have been watching, there have been a number of MD’s so sent on gardening duty.
So, where should the blame be laid, if there is to be any laid?
None of the various reports have laid bare the mechanics of the supply chains at work. At best they refer to them in passing. However, the antidote to the unreasonable exercising of power back through a supply chain, which is the hypothesis of all the proponents of the gouging story, is transparency.
It is true that Coles and Woolworths can be brutal with their suppliers. Not every supplier is treated equally, and dumb, insensitive, and even discriminatory choices are made, but that situation exists in every walk of life. You do not address these shortcomings by regulation, you address them with transparency.
I used the two dimensional scale in the header to score Coles and Woolworths based on my experiences over 45 years. Despite the current voluntary code of conduct, seemingly about to be made mandatory, the transparency scores for both retailers are concentrated on the bottom left of the scale.
The first three ‘transparency milestones’ get a tick, as 1 or 2 out of five. They are present but only to ensure some level of quality and to protect the retailers from litigation.
The ‘supply chain scope’ measures for both give solid scores in the internal operations, a pass for direct suppliers, but nothing beyond a passing interest in the final two.
Divestiture will not change any of that. It would simply add cost to the supply chains previously wrung out by scale.
A break-up requires a party willing and able to stump up the capital to complete a transaction. To generate a return on that investment it would be necessary to rise prices to accommodate the increased costs. It is unlikely any domestic group would be a buyer, which just leaves an international chain being handed a stepping stone, which is equally unlikely to reduce process in any way.
If the authorities were really interested in adjusting the profitability of the retailers in favour of their suppliers, who have been scrambling for scale for as long as the retailers have, they need to throw the divestiture story into the bin marked ‘stupid idea’ and consider mechanisms that address the core of the problem: measures that favour those with capital at the expense of those who do not.
Divestiture makes a good headline in populist press, but like many good headlines, has absolutely no substance.
Header: courtesy of HBR ‘How transparent is your supply chain ‘ August 2019 Bateman & Bonanni
