Coles and Woolworths – Super Market Power

I liked Coles and Woolworths. They seemed like convenient places to buy the things I eat. But sadly, sometimes you can’t trust the market to make sure convenient is fair.

I used to live right near an independent grocery store called Piedimonte’s. It was enormous, but every time you walked out, you had the strong feeling you’d paid too much. The word expensive just keeps popping up in its online reviews. I moved away and the ambiguous feeling of shopping there evaporated.

supermarket continental

This little place near me survives, somehow…

These days I get my groceries delivered mostly, and Coles is the go-to service. Spending 10 minutes making an order online takes half as long as going through the aisles, and it saves checkout, parking and travel time too. The delivery man will carry the items all the way in to the kitchen bench.

Coles and Woolworth also seemed good because they stock a lot of home brands. My enthusiasm for home brands should not be under-estimated. I love to be frugal and I hate compensating some crappy company for all their marketing.

This taste for the lower-price, equivalent quality good was only strengthened by some TERRIFIC recent research from NBER. It showed experts buy home brand: Chefs are more likely to buy generic flour, while pharmacists are far more likely to buy generic aspirin.

fresh bread

The local Foodworks, dubbed “expensiveworks”. Model is a curly-coated retriever named Susie.

Coles and Woolworths are supposed to be a duopoly. You’d expect them to sneakily raise prices and treat customers with disdain. Instead milk recently fell to $1 a litre. Competition reigns! So imagines the happy economist as he grabs bargains.

But The Big Two are wily. They don’t hurt the voting public, the shoppers. Instead, behind the scenes, where they think they can get away with it, the duopoly are flexing their muscles.

This terrific long article in the Monthly (unlocked and free at time of writing, although I recommend subscribing) was the first time I really engaged with the issue.

It turns out a major case is running in the Federal Court with the ACCC doggedly pursuing Coles.

I knew Coles and Woolworths were tough on their suppliers. But I didn’t realise how much they had in common with Don Fanucci at the start of the Godfather II.

In 2011, Coles demanded from its suppliers a “rebate” for “efficiency improvements”. The Monthly says they were very significant, at up to 1 per cent of total sales.

“At a meeting with Red Bull on 19 August 2011, Coles managers Simon Gillies and Philip Armstrong claimed that they had cut $400,000 from the energy drink company’s supply cost. In return, they sought a $200,000 rebate.

Red Bull’s representatives asked how Coles had arrived at those figures. Gillies and Armstrong did not provide substantiation. Red Bull refused to pay the rebate, having calculated that Red Bull’s total costs in serving Coles did not even come to $400,000.”

The weaker the company’s bargaining position, the bigger the rebate.

“[Coles] refined the supplier designation into three tiers. Tier 3 included 220 smaller suppliers for whom Coles constituted a “very significant” part – at least 30% – of their business. These had the weakest bargaining position. From them, Coles sought an across-the-board 1% rebate, to raise $16 million.

Category managers were trained in “ask” scripts. There would be no negotiation on the rebate amount. The suppliers would be asked to consent within days. There would be no substantiation of the nature of the savings Coles was claiming. Successful category managers would become eligible for “prizes”. If suppliers did not pay, the category managers were authorised to “escalate” the matter to their “business category manager”, who was likewise authorised to escalate it to the general managers Dymond and Pearson, even to Durkan himself. The scripts included “commercial consequences”: an end to supply contracts, a “range review” of current products, an end to data-sharing agreements, or all of the above.”

Here’s a quote from the man who runs the ACCC, Rod Sims.

“These were seriously large demands, put on these companies with threats. If these allegations are proven true, that is not the sort of behaviour you want in Australian business. It’s corrosive, we believe, of the effective working of a market economy.”

So what can you do? Shop at Aldi? They stock even fewer brands and their prices are even lower. I’m not exactly sure that will help.

Aussie Farmers Direct is probably the best choice if you care about suppliers – it seems to have good relationships with farmers. I used to get things delivered from them and the quality was pretty good – I stopped because at the time they only did fresh food.

Another option is to support the MPs who supported this Reducing Supermarket Dominance Bill [Wilkie, Xenophon, Katter]. Demanding the big supermarkets sell half their stores is an ambit claim, but perhaps something can be done. On this issue it should be possible to unite the Nationals in the Coalition and the Cross-benches, you’d hope.

I also learned from the Monthly that at their liquor outlets (Coles: Liquorland, Vintage Cellars and First Choice; Woolworths: Dan Murphy’s and BWS) the big two own a vast number of the brands on sale. Basically, they are fancied-up home brands! You can see the list here: http://whomakesmywine.com.au/thelist.html.

Confession: Just remembered. I own shares in Woolworths. Seems I may be arguing against my own financial interests here!

Face Age: the Economics of Employment in the Robot Revolution

Accountants are looking over their shoulders. We see their faces contort with fear, they lengthen their stride, break into a run. They drop what they are carrying, wave their arms, panic.

But it’s no good. They are not fast enough. It it not long before they are caught and consumed. The sound of their shrieking is horrible, horrible!

Robots are picking them off.

“New technologies are “encroaching into human skills in a way that is completely unprecedented,” McAfee says, and many middle-class jobs are right in the bull’s-eye; even relatively high-skill work in education, medicine, and law is affected. ” MIT Technology Review.

Some are calling this a new robot age. But to be honest, robots have been chewing up professions and pooping out their bones for centuries now.

First, the man with a mortar and pestle was ground out by a miller with a water wheel.

Then a farmer with his hoe was trampled by an oxen pulling a plough. More recently, the chainsaw cut the lumberjack workforce in half, and the production line worker was outmuscled by a robot.

Robots have taken physical jobs. We are used to that. We actually like it and appreciate it. Who would want to work for Fedex delivering packages if they didn’t have trucks and planes?

We don’t even notice the amount of automation that already exists. In Japan, FANUC company turns off the lights at its factory for 30 days at a time. It runs without humans.

The difference now is robots are no longer simply mechanical. Inside each is a silicon chip and the power to run a whole lot of equations. They can make decisions, and that means they are coming for cognitive work.

The era since the 1950s might be known as the White Collar Age. An era in which cognitive work was done by humans, and they were well-rewarded for it. Accountants kept books, engineers designed buildings, economists ran models, coders wrote code, journalists wrote stories, call-centre workers took calls.

But repetitive cognitive jobs are suited in some cases to be done by robots. Here’s a business story written by robots. It’s perfect.

History shows us that the march of the robots crushes professions. But it need not crush the people that work in them, and it need not crush the economy. The mechanical robot age was followed by a period of very low unemployment.

Unemployment

Source: Bank of England

The socially inept might not like it, but the coming economic era is going to see humans flushed out of dimly lit rooms where they have been doing repetitive mental tasks.

All that practice, all that expertise will be wasted when the robots come. We nerds will come blinking into the light, resume in hand.

What jobs will be available?

The answer is that they will be human-facing jobs. Jobs where cognitive or physical work is mixed with emotional work.

The next era will be a “Face Age”. Where humans add value to services by being present in their delivery, face-to-face. Where we add value by exercising social skills. This could be intermediated by communications technology, but a human touch will be part of the bargain.

We can already see the leading edge of this trend in the first part of the economy to try to fully automate: call-centres. The boast that you will “talk to a real person” is now a powerful marketing message.

The waiter is a much maligned profession. A vending machine and a conveyor belt can do their job (and in parts of Japan, in cheaper restaurants, they do). But the continued existence of the waiter signals something.

1) Customers attach value to human interaction.

2) Complex problems pop up in tasks that seemingly should be routine.

I was at a pub last night and there was a guy trying to order “a bowl of plain rice or a boiled potato”. The young lady taking orders may have rolled her eyes, but she also went and checked with the kitchen and came back with an alternative. That’s something a robot couldn’t or wouldn’t do.

I also suspect supermarkets will ease up on automated check-outs. There’s only so often they will let people put through Quinces as Granny Smith apples before they realise human operators add real value. (In this case it may simply be the gaze of a human reminding us of our moral obligations).

From a consumer perspective, dealing with a human is currently quotidian. It seems like all service jobs will always be low-pay jobs.

But this is not always going to be the case. Think about this: Who has a personal banker? Who has a butler? Who has a driver?

Machines are cheap and nasty. The only person in the organisation who can get away with not understanding email is the CEO. Meanwhile you see the wealthy roll with an entourage. Personal assistants, managers, bodyguards and nannies.

Madonna

I pinched this photo from the Daily Mail. That’s Madonna and her entourage.

In short, human interaction is on its way to be desirable and luxurious.  Personal services are a superior good and will likely occupy the role in our economy that consumption of physical goods has in the last 60 years.

This era will be one where while robots produce our basics we’re working in human-facing jobs to purchase yet more services delivered by people. That will be tough for people without much interest in social interaction.

It could indeed be a tough time to have Asperger syndrome. The era where nerds could triumph may be waning, and the cool kids might regain the ascendancy. But it was always odd – is there another point in history where a Gates and a Zuckerberg could have become richer than Kings?

A human-facing services economy will operate much like our current one. Humans are already able to get food and clothing very cheaply. (source: ABS)

the basics

That percentage could continue to fall as automation makes production of basic goods cheaper and cheaper. Certainly a smaller and smaller share of people will work in those sectors. What do people do instead? They will work to meet humans’ higher-order needs. There will lots of different kinds of such jobs. High-skill human-facing jobs, like financial planners, medium skill ones like personal chefs, and lower level jobs like hairdressers.

Is this dignified? It’s an important question. You can find online the argument “we can’t all just hold doors open for each other” – that an economy built on the interchange of services is somehow debased.

But thatt depends on an outdated idea – that human only really value the basics. This has been untrue for as long as humans have had more food than they needed. The moment the first cavemen had a surplus, they turned to story-telling, cave painting and ceremony. The Greeks focused on citizenship and later civilisations have added yet more layers of non-basic occupations to idolise, such as professional footballers.

Growing wheat or apples is a perfectly fine occupation, but I’ve argued before that higher-order services are more than merely dignified. Services are where the heroes and myth-making comes from, and complex interaction defines us as a species.

It would be folly to underestimate the ability of people to come up with new demands to occupy labour that might otherwise turn surplus: exhibit A: we now have nail artists

Rapid changes in technology can cause localised unemployment, but the lesson of history is that demand grows, and humans will filter into the jobs that they do best.

There’s nothing to fear in the robot revolution … but it might be time to practice your smile and your small talk.

When did it become compulsory to wear technical leggings to go for a jog?

I can barely remember the last time I saw a jogger’s legs. Just about anyone who goes jogging has fancy leggings made of “technical material.”

runners

They can cost as much as a flight to Sydney:

Skins

People are prepared to pay a giant amount for goods and services related to sports. Willingness to pay for compression leggings is enormous – never mind that the marathoners at the Olympics don’t wear them, and neither do the 100 metre runners.

The business model of companies like Skins (or Lululemon, Nike, Lorna Jane) is to align yourself with something that is or could be cheap, but which people find highly enjoyable or important.

People can run in cheap clothes, but they love running so much that if expensive and specific clothes seem to be required, the expense is minor compared to the overall enjoyment.

Hanging out with your friends can also be cheap or free. But if a cultural expectation develops that it’s only appropriate to hang out in a bar or a restaurant – not in a park or on a street corner – then people don’t blink to pay.

Businesses that sell expensive bicycles profit because they leverage both these trends. If you want to do that exercise properly, and hang out with your cycling friends, you need to have a bike that won’t embarrass you or leave you lagging behind the bunch. Or so they say.

The business model is this. Find something people love to do. Something that offers them a strong benefit at a relatively low price, and great “consumer surplus.”

cs

Then position your product as an indispensable tool to doing that. It doesn’t matter if your product is truly important – you can capture some of that consumer surplus if you can convince people it is. It might be as simple as making the stitching on your leggings high-contrast to create the impression of science.

This will work best if the activity is undertaken in public. When it comes to public consumption goods like shoes and cars, we tend to be driven by what others are doing, while we may make our own judgments about buying goods consumed privately like electricity providers and detergent. (This terrific paper ranks goods by their conspicuousness, which runs from cigarettes and clothing, down to home insurance and underwear.)

My last example for the post is popcorn. If I was to watch a movie sitting on my own couch, I would not plan to eat popcorn. But if I am invited to someone’s home to watch a film, the odds of me buying popcorn rise dramatically. Why do popcorn and movies go together?  It’s a social construct – and  a way to capture my willingness to pay. (1)

Are there other examples that grate on you? Leave a comment below!

How frugal can you be? And is it worth it?

What is harder – making money or saving money? Judging by the amount of time my facebook friends seem to spend relaxing in exotic locations, the latter is substantially more tricky.

How much could a person save, if they wanted to live a normal life in a decent part of the city, showing up for work dressed appropriately, heating their house, eating nourishing food?

Let’s assume a budget of $180 a week for rent, which gets you a flat near trams and trains, 10km from the city. Assume a full-fare yearly Myki for $1430 and a diet short on smoked salmon.

Holidays? No. Dinner out? No. A car? No. Soy flat white to take away? Uh-uh.

Expenses

Total annual expenses would run to $21,948. Would it be worth it?

Savings curve

Before I made this graph, if you told me it was mathematically possible to save $20,000 a year on a pre-tax income of $50,000 I would have called you crazy. The graph above does not account for any government transfers or the low income tax offset (worth $230/year at income of $50k), either. 

GOODBYE LUXURIES?

Savings advice seems to always centre around giving up takeaway coffee (1, 2, 3). I don’t drink a huge amount of take-away coffee, but when I do, I really enjoy it. And really, five cups a week at $4 each is only $20 a week.

The pie chart above shows there’s more to be gained by trimming down the big recurring expenses. Finding a place that rents out for $20 a week less locks in the saving of $20 a week, without constantly exercising self-control over caffeine urges. Self-control is like a muscle – it tires as you use it. So if you avoid buying coffee in the morning, you are more likely to splurge on pizza on the way home. Any saving plan should rely on locking in low recurrent expenses.

Behavioural economics suggests that humans have “present biases” that prevent them from meeting their own stated preferences about saving. That’s why we have compulsory superannuation. But there are tricks that make people respect their own preferences.

“Soman & Cheema (2011) evaluate an interesting variant of a commitment savings technology in a field experiment targeted at unbanked construction laborers in rural India who are paid cash wages. Individuals earmarked a certain amount of their weekly wages as savings that was then set aside in either one (nonpartitioned) or two (partitioned) sealed envelopes. Realized savings was 39–216% higher for workers whose savings were partitioned into two envelopes rather than put all into one envelope. The authors hypothesize that opening a savings envelope, or violating the partition, induces guilt. Having multiple accounts, or partitions, increases the psychological cost of spending money set aside for a specific purpose and consequently increased the amount saved.” 

Even if they could, most people would not live like monks just to save up pennies in their bank account. But the structure of our tax system mean they will do it to pay for a home.

If you take out the rent expense of over $9000, pre-tax income of $50,000 leaves $28,000 spare a year. That’s enough to pay off a $400,000 mortgage.

max mortgage

I hesitated to even publish this graph, because it makes my non-house purchasing ways seem immoderate and wasteful. But there it is, in all its horrible glory. You can – if you set your mind to it -base a life of grim abstinence in a house of grand proportions.

Saving a bit is important to make you happy.

“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.” – Micawber, Dickens.

The kind of lifestyle I graphed above would be easy to maintain for a fortnight, possible to maintain for six months and hard to do for two years. After five years it’d be hard to do anything else, because your social life would have withered and died. Dickens, remember, also wrote about Ebenezer Scrooge. Like all things, saving is best in moderation.

Behavioural economics “nudges” and policy in Australia

In a comprehensive new paper disseminated by the US National Bureau of Economics Research, Harvard professor Brigitte Madrian discusses the latest thinking on using behavioural economics to optimise policy design.

There are a few items in there with direct relevance to Australia that are worth a bit of attention:

1. Orwellian language works. Madrian praises the re-branding of the UK’s dole as a “job-seeker allowance” and criticises the use of the term”work for the dole” in Australia. The evidence for the power of framing in the allocation of transfer payments is more significant than I had realised.

“Kooreman (2000) finds that the marginal propensity to consume children’s clothing is 10 times larger out of income designated as a “child benefit” than out of other income sources; in contrast, the marginal propensity to consume adult clothing is highly significant for other income sources but is negligible for income from designated child benefits. The labeling of income as a “child benefit” apparently creates in parents a moral obligation to actually spend that money on their children. Similarly, Benhassine et al. (2013) evaluate the impact on school enrollment of a labeled cash transfer program in Morocco that designated the funds for children’s education, although the funds could be used for other purposes. They find a sizeable increase in elementary school attendance by children in families who received the labeled cash transfer relative to children in control households who received nothing. They also find that a labeled cash transfer is as effective, indeed for some measures is more effective, at promoting school attendance than is a conditional cash transfer in which payments are made only if a child does in fact attend school (and is significantly less expensive to administer than a conditional cash transfer program).”

2. There’s a reason the ATO prefers to over-collect tax and deliver tax refunds each year, and it has to do with both loss aversion, and the way human minds frame problems with reference to arbitrary points.

“A natural reference point for taxpayers at the time of tax filing is whether they owe additional tax (relative to what has already been collected) or expect a refund. Engström et al. (2013) find that in Sweden, taxpayers are more aggressive about claiming deductions when they owe additional tax at the time of filing than when they expect a refund, consistent with the predictions of prospect theory. An obvious policy implication is that a tax collection strategy that relies on overwithholding followed by refunds at the time of tax filing may increase tax compliance and total taxes paid.”

3. Madrian is an economist, so she’s au fait with the merits of financial incentives. But the paper emphasises that public finances are in short supply, so it is important to look for policy tweaks that would work as well as a financial incentive.

“Levitt et al. (2012) examine the effectiveness of several different incentive schemes to motivate student performance on standardized exams. They find that giving students a trophy for meeting performance targets, at a cost of about $3 per student, has roughly the same impact on test scores as a direct financial incentive of either $10 or $20, and in some cases is more effective.”

Thinking about whether there is a behavioural economics solution that would substitute for a subsidy may also provide insight to the real reasons for a policy. For example, the government’s proposed Paid Parental Leave scheme – a subsidy for staying at home and looking after a child.

The PPL scheme is expensive, offering up to $50,000 dollars in wage matching over six months. What behavioural tweaks could make it cheaper?

The question is actually hard to answer. Is PPL designed to lift the birthrate? To keep women at home in the first 6 months of life? To return women to the workforce thereafter? To reduce demand for childcare? To support incomes? The fact that whatever the policy problem is can only be solved by this expensive PPL hints that it is in fact a policy in search of a solution.

 

Why beautiful Dutch Ladies Bikes should come with a health warning

A bicycle is an experience good. A lot like a bottle of wine or a book, it’s hard to determine the quality of it before you consume it, so you can easily fall into the trap of buying the wrong one.

It is an easy mistake to make for anyone, but I’d like to focus on women tempted into buying “Dutch bikes.”

I’ve ridden the men’s version of the above, and it was a pig of a thing. 0/10, would not ride again.

People buy Dutch bikes because in the shop, the sitting position seems very important – you seem to be choosing between “hunched over the handlebars” or “sitting up comfortably,” between “sporty” and “relaxed.” 

I once went with my mum to buy a bike. She bought a heavy, upright bike and it is almost never used. She still rides though – it is just more likely to be on an old mountain bike.

In the real world, the discomfort of bicycling is – for a healthy person – much less about your body position, and far more about the effort expended. 

This is extra relevant if you imagine doing some cycling for transport, not just leisure.

If you are sitting up comfortably on a 20kg bike, you will be going more slowly in almost all circumstances. If riding to work will take 5 minutes longer than the train, it’s unlikely to be your go-to choice when you are stressed in the morning.

You are also exerting yourself for longer. You will be exposed to a higher chance of getting caught in the rain, more tired and more likely to be drenched in sweat when you arrive.

Exertion and time are the real costs of cycling and the real reason bikes get left in the shed while their owners drive. Yet people who imagine themselves as “not sporty” are the most likely to buy heavy, hard-to-ride bikes!

Dutch bikes are slower because of extra weight (this “lifestyle transport bike for ladies” weighs 21.4kg), and the upright sitting position.

The unfit will be likely to be in the steep and tricky part of this graph at moderate power wattages

The unfit could be in the steep and tricky part of this graph at quite moderate wattages

Extra weight becomes important on an uphill. Up a 7 per cent gradient, an extra 2.5kg will mean travelling about 2.5 per cent slower. Alternatively, trying to keep up requires more power output, and power output becomes exponentially harder to maintain (see graph).

The effect of sitting up straight is to create drag. Drag increases with speed, so a more aerodynamic position is more important when you would like to go fast. Not so important when idling along the shops or a busy off-road bikepath, but relevant on a long straight road, or when other cyclists are going fast.

Melbourne is not Amsterdam. It is undulating, in places downright hilly, and the other cyclists are not meandering along. If you find yourself pushing your bike uphill and getting overtaken, of course you will give up riding it.

I know women who cycle a lot for transport, and they have this in common – no Dutch bikes. Even this enthusiast sold hers after complaining about the weight.

If we observe actual women cycling, in the wild, we see what kind of bikes actually get used

DSC_0094 actual women cycling

What we (mainly) see is this: flat bars, baskets and aluminium tubing. Bikes that weigh perhaps 12kg, not 20kg. Bikes that won’t make it into a shop’s window display but should be celebrated and promoted.

Other experience goods often have independent quality ratings that provide some sort of indication of what you’re getting. You might look for a Booker Prize shortlisted book, or a wine that has won a lot of medals.

So I’d like to contribute an endorsement for light and practical women’s bikes. What Dutch bikes need is an equal but opposite thing. A big red sticker on them that says: “Warning. Will gather dust.”

How small is too small for an apartment?

A law against little homes? 

The Victorian Government is considering a new rule that would mean apartments have to be bigger than 37 square metres, or bigger than 50 square metres if they have a separate bedroom.

Why would we do it, especially when tiny homes are in huge demand?

I went to look at this little flat in East Melbourne a while ago. A bedsit in a nice location, in a beautiful building, with about 35 square metres of floorspace.

east melbourne flat

It turned out to be mouldy and squalid, and then sold for $370,00. But I would have happily lived in that much space if properly appointed (although not at that price!).

Is there inherently anything undignified about having one room that operates as bedroom, kitchen and lounge room? It is doubtless less comfortable, but I suspect that it is also true of driving a Barina rather than a Range Rover.

In fact, housing should probably be less regulated than cars. You can’t crash a house into someone else. 

These brand new places in Fitzroy look like they clock in very small indeed, and they’re apparently selling, starting at around $300k.

fontaine

The fact of the matter is that small homes may suit many people best, for any number of reasons.

People might feel cosier and more secure in a small house. People physically unable or mentally indisposed to do housework may love them. Environmentalists may choose them because they require less energy to light and heat. 

Certainly the single-person household is on the rise in a major way – up to 24 per cent of households from less than 20 per cent 15 years ago. So why would we regulate against small homes?

Part of the reason might be the psychology of decision makers.

People who make laws tend to live in large and charming detached houses. They wouldn’t want to live in a tiny little home. So they imagine they are helping the unfortunate by making sure homes are not small.

Politicians do not tend to live in the following: caravans, boarding houses, cars or under bridges. Lawmakers may struggle to empathise with those people, for whom a real home is a lifelong ambition they may never achieve because it is too expensive.

Very small studio apartments help make housing more affordable in two ways.

Not only do they cost less than a one bedroom house – which could be significant on its own – but they also allow for developers to put more homes on the same space, which increases the potential housing supply.

The worst thing you can say about a “too small” apartment is that they will be hard to sell. That the market for them will be small. That is equally true of a 20 bedroom mansion, and the same logic will apply – drop the price. 

If in ten years they prove unpopular, that will actually provide relatively cheap homes near the city, for a small group of people who would otherwise be shut out. I could only support such a policy.