Case study · Market structure
Woolworths and Coles: how two chains became the market
They were founded six years and one state apart, by men who had separately concluded that selling groceries at fixed, low prices in volume was a better business than selling them at negotiated prices at a margin. A century later, the two chains account for the majority of Australian grocery sales — an outcome that regulators have examined repeatedly and never unwound.
This is company history and market structure analysis drawn from published records. It is not financial product advice, it is not a recommendation about either company, and it contains no forecast. Nothing here is a view on whether any security is worth owning.
Two starts, one idea
G. J. Coles opened its first store in 1914, in the Melbourne suburb of St James. Its founder, George Coles, had worked in his father's grocery business and had travelled overseas, where he encountered retailing models built on volume and rapid stock turnover rather than on negotiation with each customer.
Woolworths opened its first store a decade later, in 1924, in the Imperial Arcade in Sydney. Its founders, Percy Christmas and Stanley Chatterton, took the name from the American chain F. W. Woolworth — a business built on the same principle of high volume at low fixed prices. The Australian Woolworths was and remains an entirely separate company from the American one that lent it the name, a distinction worth keeping clear.
The two businesses were therefore not copies of each other. They were parallel conclusions, reached independently, from the same observation: that a shop which publishes its prices and sells at a thin margin can turn its stock fast enough to make more money than a shop that haggles.
The fixed-price innovation
The idea that made both businesses is now so ordinary that it is hard to see as an innovation at all: a price marked on the goods, the same for every customer, and no bargaining.
In the 1910s and 1920s this was not the norm in Australian retail. Customers dealt with a shopkeeper who set prices individually, extended informal credit, and adjusted terms according to who was asking. Fixed pricing changed the economics of the shop in three ways at once. It removed the labour cost of negotiation. It allowed a shop to advertise a specific price, which built traffic. And it made stock turnover calculable, because prices were known and margins were consistent — which in turn made it possible to order in larger quantities and buy at lower cost.
Coles is particularly associated with the phrase "nothing over 2/6" — a promise that no item in the store would cost more than two shillings and sixpence. The detail of the slogan has been retold many times and the precise date it began is a matter for the company's own historians; what is documented is the strategy, which was to publish a maximum price and let volume do the work. The premise is worth pausing on, because it is the same premise that governs discount retailing today.
Expansion, and the move into food
Both chains expanded through the middle of the twentieth century by opening stores, then by moving into food, then by acquiring competitor chains and smaller regional grocers. The sequence matters, because it explains how the market came to be concentrated so heavily.
Grocery retailing has an economic property that pushes towards concentration: scale reduces the cost of goods sold. A chain that buys in larger volumes pays less per unit, and can therefore sell at a lower price while keeping the same margin. Lower prices attract more customers, which justifies buying in still larger volumes. The cycle is self-reinforcing, and it operates in only one direction — towards fewer, larger buyers. Independent grocers cannot break into it, because they cannot buy at the same cost.
By the 1980s both chains had become large diversified retailers with food, liquor, apparel, department stores and consumer electronics under one corporate roof. The next twenty years were spent separating those businesses again.
The Myer merger and the Coles Myer years
In 1985, Coles merged with Myer, the department store chain founded by Sidney Myer. The combined group, Coles Myer, became one of the largest retailers in the country, spanning discount department stores, apparel, footwear, liquor and supermarkets.
The merged group's subsequent history is largely a story of divestment — of selling the parts in order to concentrate on food and liquor. Myer was demerged and returned to the exchange as a separate listed company in 2006. Other businesses were sold. By the time the group renamed itself Coles Group in 2003, food and liquor had become the core.
The reason for the unwinding is instructive. A retailer's operating model depends on its cost structure, its store format, and the speed at which stock moves. Those factors differ fundamentally between a supermarket and a department store. Combining them under one board meant that capital was allocated across businesses with different economics, and the group's reporting aggregated results in a way that made the performance of the food business difficult to see clearly on its own. That is a general problem with conglomerates, and it is why the segment note in a financial report is one of the most valuable pages for a reader trying to understand a diversified company.
How a duopoly forms
An outcome where two businesses hold the majority of a market is not necessarily the result of collusion. It can be the settled equilibrium of an industry with particular characteristics. Australian grocery retail has several of them.
| Feature | Effect |
|---|---|
| Thin supplier base relative to chain size | A small number of large chains can each negotiate lower input costs than any independent operator, and the advantage compounds with volume. |
| High fixed cost of distribution | Distribution centres, cold chain and logistics require capital that is only economic at scale, and they function as a barrier to entry. |
| Geography | A population concentrated in a handful of coastal cities makes national coverage achievable with far fewer stores than in more dispersed markets. |
| Site scarcity | Once the suitable sites in a suburb are occupied by two chains, a third entrant faces materially higher property costs or cannot find a site at all. |
| Consumer habit | Grocery shopping is frequent and low-involvement, so price comparison is limited and store loyalty is strong once established. |
The combination produces a market where two incumbents compete intensely with each other on price and promotion, while the structure itself resists the arrival of a third national competitor. That is a genuinely different situation from a market where one firm has no rival, and the distinction is why the competition regulator has consistently treated the sector as competitive on price between the two, while examining how the two behave towards suppliers and towards potential entrants.
What regulators examined, and what changed
The grocery sector has been the subject of repeated public examination in Australia, and the resulting documents are among the most useful sources available to a reader interested in how the market actually functions.
- The Australian Competition and Consumer Commission's grocery inquiry examined pricing, competition between the chains, and the treatment of suppliers. Its findings informed later regulatory changes.
- The Food and Grocery Code of Conduct, introduced in the 2010s, established rules on how large retailers deal with their suppliers — covering matters such as payment terms, retrospective charges and the process for delisting a product. It responded to evidence that bargaining power was being exercised in ways that smaller suppliers could not resist.
- Subsequent forced divestitures have occurred where the regulator concluded that an acquisition would substantially lessen competition in a local market, with the Federal Court ordering the sale of individual supermarkets in specific cases.
- Parliamentary and independent reviews have examined the sector at intervals, producing public submissions from the chains, from suppliers, and from the regulator — three perspectives on the same market that rarely agree on much.
The pattern here is common to concentrated markets everywhere: the structure is not prohibited, because it is not the product of an agreement. What the law addresses is conduct within the structure — how the powerful parties treat the weak ones, and whether the structure is being entrenched by acquisitions that remove the remaining competitive pressure.
Reading the two companies today
For a reader who wants to understand these businesses from their own disclosures rather than from commentary, three features of their reporting are worth knowing about before opening the accounts.
Sales figures are not comparable without care. Both companies report sales, but the composition of those sales changes as stores are opened, closed, franchised or converted. Comparisons across years depend on whether the figures include fuel, liquor, and wholesale supply to other retailers. Both publish the underlying measures used, and reading the definition before reading the number is essential.
Margin is the number that moves. Given the scale and the thinness of grocery margins, small changes in gross margin have a disproportionate effect on profit. The notes explaining what is included in cost of sales are where the composition of the margin becomes visible.
Property arrangements matter. Both chains carry significant lease commitments. The lease note — the maturity table and the total undiscounted commitments — is one of the most consequential pages in each annual report, and it is frequently overlooked because it sits deep in the notes.
What the archive takes from this
The Woolworths and Coles story is a reminder that market structure is not a matter of opinion. It is the accumulated result of decisions made over a century: which format to build, which competitor to buy, which site to lease, when to merge and when to separate.
It also makes a useful point about what the disclosures do and do not tell a reader. Both companies publish detailed accounts, disclose their segment results, and discuss competition in their own commentary. What no disclosure contains is a view on whether the arrangement ought to exist — that is a question for the parliament, the courts and the regulator, and the documents those bodies produce are equally public.
Related in the archive
- The collapse of HIH Insurance: what happens when a company's own reporting conceals a solvency problem.
- What ASX-listed companies must disclose: the rules that require the segment and lease notes discussed here.
Sources
- Australian Competition and Consumer Commission, inquiry reports and public submissions concerning the Australian grocery sector.
- Woolworths Group Limited and Coles Group Limited, annual reports and financial statements, various years, lodged with the Australian Securities Exchange and published in each company's investor centre.
- Competition and Consumer Act 2010 (Cth), including the provisions governing misuse of market power and anticompetitive acquisitions.
- Food and Grocery Code of Conduct, as prescribed under the Competition and Consumer Act 2010 (Cth).
- Company histories and archival material published by Woolworths Group and Coles Group, used as records of what each company states about its own origins.