A price discount, even when it’s more illusion than fact, can be irresistible to the average shopper, according to a large body of marketing research.
The common marketing strategy, was/now pricing, brings on a perception of extra value and is like a form of arousal, adding an impulsive element to a shopper already looking to purchase.
And Woolworths and Coles, with their grip on the Australian supermarket sector, have long played the game, with price war slogans, “Prices Dropped:” and “Down Down”.
The strategy brings results. The marketing department argues that any fall in revenue from the discount per item will be made up in the cash flow from the volume sold.
The issue the two supermarket chains, both of them in the top ten biggest advertising spenders list, now face is that they are accused of falsely dealing with consumers, that they lifted the price of products first, by around 15%, before magically dropping again to create an untrue impression of a discount.
Woolworths and Coles sold tens of millions of the affected products and derived significant revenue from those sales, according to estimates by competition watchdog the ACCC.
Now they face the Federal Court and the prospects of further loss of trust from their community of, often confused by pricing, shoppers.
Another issue is that if the supermarkets allow the case to be heard in court, then suppliers could be called to give evidence on how they are treated by Coles and Woolworths.
Coles and Woolworths between them control about 65% of Australia’s grocery market.
This puts them in a position of power when dealing with suppliers, who have long complained about their treatment by the big two.
And bodies representing consumers have long questioned the real value of discounts.
The range of language used to describe what appears to be a sale can make it tough to work out if a discount is actually on offer, according to consumer advocacy group CHOICE.
Survey data by CHOICE shows shoppers around Australia are confused and that this is down to either sloppy marketing or a case of deliberately confusing consumers.
The survey, showing many shoppers think they are getting something cheaper when they aren’t, predates the ACCC’s accusations against the big two supermarkets.
And this is not the first time the competition watchdog, the ACCC, has taken a retailer to court for false or misleading claims.
The Federal Court in 2020 ordered Kogan to pay a penalty of $350,000 for making false or misleading representations about a tax time sales promotion.
The court found that Kogan had misled consumers by advertising over a period of four days that they could use the code TAXTIME to reduce prices by 10% at checkout, when the Australian online retailer had increased the prices of 621 products immediately before the promotion.
Price gouging accusations have been levelled at the Coles and Woolworths before.
Former Woolworths CEO Brad Banducci got up and left an ABC Four Corners interview earlier this year after being questioned about price policy.
He was asked about comments by former ACCC chair Rod Sims that Australia had one of the most concentrated grocery markets in the world.
Then, Banducci said what Sims had said was "wasn't true" and that the former ACCC chair was "retired".
And trust in the supermarkets had been crumbling long before the ACCC made its move.
According to Roy Morgan’s latest quarterly Risk Monitor, the biggest loser in the June quarter was Woolworths, which slid 194 places to be the fifth most distrusted brand, almost matching the slide taken by rival Coles in the previous March quarter.
Coles is now the fourth most distrusted brand. A year ago both supermarkets were the two most trusted brands in the country.
“The rapid slide down the rankings for both major supermarkets – which have each slid more than 200 spots in the rankings this year – shows how quickly distrust can gain momentum and devalue a brand’s reputation,” said Roy Morgan CEO Michele Levine.
The brands named, as being falsely discounted, in the ACCC’s Federal Court action are well known and a major part of any grocery shelf. This is another risk point for the supermarkets if they allow the case to be heard in court. Brands won't want to be associated with a case generating negative publicity.
The brands:
Woolworths: Arnott’s Tim Tams biscuits, Dolmio sauces, Doritos salsa, Energizer batteries, Friskies cat food, Kellogg’s cereal, President butter, Listerine mouthwash, Moccona coffee capsules, Mother energy drinks, Mr Chen’s noodles, Nicorette patches, Ocean Blue smoked salmon, Oreo cookies, Palmolive dishwashing liquid, Raid insect spray, Sprite soft drink, Stayfree pads, Twisties, Uncle Tobys muesli bars, and Vicks VapoDrops.
Coles: Arnott’s Shapes biscuits, Band-Aids, Bega cheese, Cadbury chocolates, Coca Cola soft drink, Colgate toothpaste, Danone yoghurt, Dettol multi-purpose wipes, Fab laundry liquid, Karicare formula, Kellogg’s snack bars, Kleenex tissues, Libra tampons, Lurpak butter, Maggi two-minute noodles, Nature’s Gift dog food, Nescafe instant coffee, Palmolive shampoo, Rexona deodorant, Sakata rice crackers, Sanitarium Weet-Bix cereal, Strepsils lozenges, Sunrice rice, Tena pads, Viva paper towels, Whiskas cat food, and Zafarelli pasta.
The ACCC is seeking declarations, penalties and costs which could amount to tens, or even hundreds, of millions of dollars.
Woolworths and Coles also could face a community service order to each fund a registered charity to deliver meals to Australians in need.
The ACCC does not regulate supermarket prices. The legal actions, with each supermarket in separate proceedings, is under Australian Consumer Law, which provides that businesses must not make false or misleading statements about prices.
The maximum penalty for each breach of the Australian Consumer Law is the greater of $50 million or three times the value of the breach or 30%of adjusted turnover during the breach turnover period for the contravention.
So far, market analysts don’t see a substantial long term financial impact to either Coles of Woolworths from the the court action.
However, the impact of trust, of consumer perceptions, could be higher.
“We see risk from negative consumer sentiment towards the major supermarkets,” said analysts at investment bank Goldman Sachs.
Many analysts believe that the supermarket price increases being referred to by the ACCC were driven by significant underlying cost inflation at that time.
Cost and price inflation has moderated at the supermarkets. In the three months to June, Woolworths’ price inflation was -0.6% and that its typical weekly food trolley in June was 1% cheaper that at the same time last year.
And the part played by supermarket suppliers, who often bear the expenses of big discounts, needs to be determined.
“It is common to see increase promotional activity on a product immediately after a price rise given price elasticity (ie. higher price results in lower volume),’ said analysts at Evans and Partners.
“This is often effectively funded by the supplier to ensure an acceptable level of volumes is maintained post a price rise (ie. given manufacturing efficiencies back up the supply chain).
“The case will no doubt explore the appropriate length of time between a price rise (on shelf) and the retailer being able to refer to this as the ‘new’price. It will also explore whether the supplier price rise request had actually been passed through to the supplier (and wasn’t ‘front run’ by either COL or WOW).
“The inherent risk is that with so many price rises and products on promotion at a major supermarket chain – there is always the potential that an issue could have occurred that is deemed to be ‘false and misleading’.
Law firm Baker McKenzie says was/now pricing is a legitimate marketing strategy.
“However pricing claims risk being found to be misleading if the claimed savings are in fact illusory,” Baker McKenzie says in a client briefing.
“The ACCC claim against Coles and Woolworths will test the using of was/now pricing for long-term discount claims.
“The ACCC claim also highlights the potential significance of internal communications about pricing and other marketing strategies when the conduct of a retailer come under scrutiny.”
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