Only the supermarkets (and maybe the mafia) act this way
People want to do business with others they like and trust.
Warren Buffett once said: “We look for three things when we hire people. We look for intelligence, we look for initiative and we look for integrity. And if they don’t have the latter, the first two will kill you.”
There’s a veritable mountain of research advocating the value to relationships and humanity itself when we operate with integrity. If the Australian Competition & Consumer Commission’s (ACCC) accusations and evidence are to be taken as fact, Australia’s supermarkets have demonstrated they are bereft of integrity and honesty, have frequently abused their monopoly power, and despite the facade, treat consumers as fools.
So why do we conduct business with them? Why do we shop with them?
The answer is that there is nobody else we can turn to. They are monopolies, and they act like monopolists, defending their monopoly. Sure, it’s technically a duopoly, but you get the point.
I have just met with a supplier to one of the big supermarkets, and the stories he tells me about the way suppliers are treated is appalling.
Where else in the world can a business tell its supplier that it expected to make $1 million from selling the supplier’s product, but because it only made $800,000, it has missed its budget and needs to reduce the previously agreed payment to the supplier by $200,000 (when it eventually pays in 90 or 120 days)?
Only the supermarkets (and maybe the mafia) act this way.
And while the behaviour may yet be determined to be illegal, the evidence is mounting that these companies are prioritising short-term profits at the expense of long-term brand value. Like Qantas, shareholders are already discovering the cost of management’s error.
For too long, Coles (ASX:COL) and Woolworths (ASX:WOW) have abused their monopoly power with impunity. That will change.
Fortunately, our calls for more women on Australia’s corporate boards and heading our listed companies have been answered; capable and fearless women now head both supermarkets. The question one should then ask, however, is whether we are seeing a different response to the recent ACCC accusations from those we might typically have expected from the CEOs that preceded them.
Let’s call the price a supermarket product has long sold for “Price 1”. We’ll call an egregiously higher subsequent price “Price 2”. Finally, we’ll call a new discounted price (from the egregiously higher price) “Price 3”. Keep in mind that Price 3 is consistently higher than Price 1.
The ACCC will seek to demonstrate that because Price 3 is higher than Price 1, Price 3 is not a discounted price at all. Presumably, it will have evidence that the supermarkets only ever intended to raise the price of said product from Price 1 to Price 3, and that the process of introducing both Price 2 and the subsequent discount, was merely a tactic to make the price rise (from Price 1 to Price 3) palatable, while also providing the benefit of tricking consumers into thinking there’s a saving to be had.
That the supermarkets engage in this practice does not appear up for debate – it has already been demonstrated in the public domain. The supermarkets may instead argue that keeping a product at Price 2 for four weeks is a complying amount of time and no laws or codes have been broken.
The case will likely hinge on whether a four-week period is long enough for a product to have been sold at the higher price point before a subsequent (albeit small) discount can be truly considered a promotable discount.
But my question is, why are the supermarkets – under new, capable, and fearless management – even fighting the ACCC? Why do they think defending such a machiavellian, unscrupulous and rotten practice, whether legal or not, is consistent with doing right by their customers? Whether it’s acceptable to acknowledge or not, it’s primarily women, including many single-income mums, shopping in supermarkets for their families.
I am surprised that the CEOs appear to be defending their practices against the ACCC’s evidence.
The supermarkets’ reputations – and, by extension, their long-term brand value, which is owned by the shareholders – hinge on what the CEOs of Coles and Woolworths do next.
On March 24, 1989, the oil tanker Exxon Valdez hit a reef and spilt 11 million gallons (250,000 barrels) of oil into Alaska’s Prince William Sound. The company and its interests were damaged for much longer than shareholders might have otherwise had to endure because Exxon Corp violated the cardinal rules of crisis management.
The hundreds of millions of dollars that Exxon Corp spent cleaning up the colossal oil spill and settling related lawsuits and class actions had little impact on the financials of the oil giant. In 1988, its revenues were US$88.6 billion; today, they are US$344.5 billion. The real damage from the spill, however, impacted Exxon in more intangible ways, including its reputation, delays to approvals and the increased challenges faced by the industry in trying to win permission for further oil drilling in the Arctic and offshore.
Indeed, some of the lawsuits could have been avoided had better crisis management been employed.
Exxon’s mistakes in crisis management are now folklore throughout the marketing and brand courses at business schools worldwide. What all agree on is that Exxon’s biggest mistake was that its then chairman, Lawrence G. Rawl, did not immediately go to the site of the spill himself and take control in any visible way. This told the world the crisis was unimportant to management and spoke of a rotten culture.
The other big mistake is that the company’s public statements often contradicted the information reported by those on the ground.
I see parallels with the supermarkets’ initial responses to the ACCC’s accusations. Fronting up and taking responsibility seems not to have occurred, and the legal department-approved motherhood statements about helping consumers save do not align with what consumers are reporting on the ground.
Coles’ early statements that it will defend itself against the ACCC signal it wants to continue fooling consumers because it is legal.
Woolworths has taken a more measured approach, giving itself room to do three simple things: First, acknowledge past practices are wrong, and thanks to new management at the top, will cease; two, apologise; and third, promise to change. It could even lay out a new approach to pricing, such as informing customers that prices will soon need to rise, and to stock up now.
Lessons from Qantas and Exxon need to be learned. The supermarket CEO who does this first will gain the support of the community and the media and win market share. And they will continue to win market share for a long time because people like to deal with those they like and trust.
Meanwhile, shareholders will applaud the enhancement of long-term brand value and profitability and its prioritisation over the defence of short-term profits.
This article was originally published in The Australian on 4 October 2024.
The Montgomery Fund and the Montgomery [Private] Fund owns shares in Woolworths. This article was prepared 15 October 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Woolworths, you should seek financial advice.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
nathan stromer
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Hi Roger,
The defense suggested by recent former ACCC head Samuels is quite different. There is no suggestion that the supermarkets intended to achive Price 3 out the outset. Rather the suggested defence is that price 2 was a supply led price hike – think the big CPG palyers being the ‘staples’ cited. While Price 3 was the result of pushback on that hike achieved through subsequent negotiation. In fact, if this defence is sucessful, Sammels notes this is an instance where Supermarket market structure has produced consumer benefit.
Roger Montgomery
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Thanks Nathan. We will all be watching with extreme interest what the ‘discovery’ process has revealed when the evidence is presented!