Believe it or not, supermarket ‘price gouging’ is not to blame for your high grocery bill

The big two only account for 65 percent of the grocery market between them. The other 35 percent consists of Aldi, who generally beats them on price, Metcash, which is the franchisor of the IGA chain and trades more on convenience, and other smaller chains and private operators.

So they have a large market share, but still, one in every three grocery dollars is spent somewhere else. They also compete pretty keenly against each other.

It's been tried, tested, and failed

I wonder how the government thinks it might control grocery prices.

The reason the Grocery Choice website failed was because it aspired to have the price of every product for every supermarket on the web in a format where you could comparison shop before actually going out to buy.

The task proved too complex because prices vary from store to store. If supermarkets do "price gouge," it is in the richer areas where prices are generally higher.

You might call this "redistributive retailing" because these higher prices are cross-subsidising tighter margins in poorer suburbs.

While Coles and Woolworths aren't franchises, individual store managers have a lot of discretion in what they stock. You should see the range of coffees I can get in the Coles in cosmopolitan Woolloongabba near Brisbane CBD, compared to what is stocked in the affluent Racecourse Road, Ascot, for example.

So each individual store is in a competitive situation, significantly different to every other store, which leads to considerable variation, and does not make the whole amenable to centralised price setting.

How supermarkets work

Grocery retailing is a complex business with wafer-thin margins and fast stock turnovers (Woollies appears to turn its stock over completely at least 17 times every year).

Retailers have three large factors that they can control, and nothing else really matters. Those factors are rents, wages, and cost of goods.

The rent is determined maybe once every 10 or 20 years when a store enters into a new lease. Once signed, the rental increases are based on formulas that relate back to the market as a whole, which will reflect what your competitor is paying. So rents will be pretty similar over time.

Rents also have to reflect economic reality for the developers, and there is a level below which they will not fall.