The news has been dominated by accusations of supermarket price gouging. Politicians have responded by proposing to break up the major supermarket chains and implementing price controls on staple grocery items. The Albanese Government has asked the Australian Competition and Consumer Commission to investigate the grocery sector. Last month, the competition watchdog launched court action against Coles and Woolworths for allegedly misleading shoppers about prices.
But there’s an important missing element in the public discussion: buyer behaviour. Understanding how consumers engage with different supermarket brands may be the key to creating a more competitive sector.
Consumer behaviour is an important driver of competitive outcomes. If consumers repeatedly shop at the same store, perhaps due to a lack of knowledge about, or an unwillingness to seek out, cheaper alternatives, then this delivers market power to firms. This allows firms to charge higher prices.
What’s really happening?
In new research published by e61, I shed light on how shoppers behave by using a new source of data: consumer bank transactions linked to the stores where spending occurred.
When it comes to groceries, Australian consumers are creatures of habit. In my analysis, 81% of consumers concentrated more than half of their total spending at a single brand, typically at a Coles or Woolworths. Woolworths and Coles are likewise the most common brand for consumers’ ‘primary shops’, that is, their largest-valued shop each week.
How likely are consumers to revisit the same brand for their primary shops?
As it turns out, very likely. For Coles and Woolworths customers, 67% continue to shop with the same brand from one month to the next. For Aldi customers, the equivalent figure was 47% of customers. This shows that consumers, particularly Coles and Woolworths customers, exhibit considerable inertia.
How persistent is this inertia?
To assess the degree of loyalty, I use a longer time horizon. Among Woolworths customers observed in one month, 60% were also shopping at Woolworths five months later. For Coles, that share sits at 55%, and for Aldi it’s 37%.
This is much higher than we’d expect by random chance. Many customers continued to shop at the same brand in every month. Even if consumers switched to a different brand in one month, they were very likely to return, particularly to Coles or Woolworths stores. This suggests that there is a subset of some Coles, Woolworths and Aldi customers that are very brand loyal and possess a long-term connection towards a particular brand over time.
Why would that be the case?
This inertia could reflect various underlying causes, some benign but others perhaps malign. It could be that consumers have intrinsic preferences towards certain brands. Some people just love Coles’ flatbread. However, it is also likely that consumers are unaware about where to find the best prices for their grocery purchases. Price comparison can be tedious and time consuming, particularly for a long shopping list of items, which results in customers revisiting where they have shopped in the past.
Consumers may also face costs to switching that lock them into a particular store. An alternative store might be too far away. Having to learn where to find your favourite products in a new store layout can be a psychological burden. The rewards from loyalty programs, such as Flybuys and Everyday Rewards, may also contribute to habit formation.
Regardless of the underlying cause, consumer inertia has important implications for Australia’s competition policy settings.
What can policymakers do to create a more competitive and dynamic grocery market?
Reforms to facilitate the supply side may have a role to play. If inertia reflects that consumers choose the stores that are most convenient to commute to, then location matters a lot. That’s exactly what I find. If an Aldi is located near a Coles or Woolworths, the smaller competitor is very effective at poaching their customers. If there are supply side barriers that prevent co-location, such as through the planning system, this can put a damper on the level of competition.
Yet there are other options to improve how the demand side of the market operates. As has been proven in the retail markets for petrol and electricity, price comparison platforms can help inform consumers about where to find the best deal.
Picture this: an app where consumers can save their weekly shopping list and the app returns the cheapest store in their local area. This could be facilitated by the government collecting data via mandatory price disclosure.
Sounds impossible? Well, such a platform already exists, and is operating in Israeli supermarkets. Israel’s price transparency platform has improved competitive outcomes with variation in prices across stores declining, and average prices falling driven by supermarkets that were previously ‘high-priced’ stores.
As our policymakers seek to respond to consumer concerns about grocery prices, it’s important they first understand how consumers behave. Our analysis reveals technology can help shoppers find the best deal.
