The Nikitaras brothers’ corner store has a hallucinatory shine, like a set from a period movie. Staff in navy blue uniforms and white net caps smile from behind jars of preserved clementines and glacé peaches, pineapples and cherries. Glass cases present dioramas of stuffed olives, mushrooms and peppers; above them hang fragrant salami; the shelves are packed with Tasmanian wine and crusty loaves. In the fresh vegetables section, greens glisten and truss tomatoes blush. Yet Hill Street Grocer is not some niche big-city organic haven; the shoppers in the aisles are also filling their baskets with canned tuna, washing powder and packets of nappies. This is a West Hobart neighbourhood supermarket, a family grocer the way they used to be.

Marco, Nick and Nektarios Nikitaras are simultaneously the throwbacks and the cheeky upstarts of the Tasmanian grocery business. They grew up behind the counters of their Greek immigrant parents’ shops, and Marco and Nick took over this one from Marco’s in-laws. Now a mini-chain, with a second store in Lauderdale (run by Nektarios) and a third in New Town (run by Nick), Hill Street Grocer has its own petrol-voucher discounts and loyalty schemes. It is an island in the highest density of Woolworths and Coles supermarkets in Australia. Look closely, and something has gone amiss with the laws of scale: the checkouts are busier here than at the desperate-feeling Woolworths a few hundred metres away. The fruit is better and cheaper. There is no way this place should exist. Where did it all go so right?

And yet, as if they are magicians and not retailers, in their upstairs office Marco and Nick admit that it’s an illusion. “We win battles,” Marco says, “but we’re losing the war.” They win through the quality of their produce and service, but they are losing behind the scenes, in the farms and the fields, where their supermarket rivals are cutting down their supply options and changing the way Australian food is produced.

A decade ago their region had 12 lettuce growers; it now has two. Across all food production, those who supply supermarkets have enlarged and consolidated, while the others have gone, along with food varieties. “There’s no broccoli, field tomatoes, Roma tomatoes,” Marco says. “There are only two substantial cherry growers. The raspberry growers have consolidated and gone to Woolworths. French beans, runner beans, lots of beans used to be grown, but not anymore. The supermarkets have exact specifications for the fruit and vegetables they want, and if they don’t want them, the growers won’t grow them.”

Woolworths owns the only grocery distributor in Tasmania, which means that Coles imports its produce from the mainland and a small competitor like Marco Nikitaras flies, several times a month, from the food bowl of Tasmania to Melbourne, where he compares prices and seeks better deals. “The situation here is contracting every day. You can’t just go to a wholesaler in Tasmania. They choose you, or not, depending on their existing supply relations with Woolworths.”

Meanwhile, size creates its own inefficiencies and food destruction takes place on a large scale. Steve, a Woolworths-contracted lettuce grower who does not want to be identified, is destroying more produce than he used to farm. The supermarket’s orders vary in volume, but Steve has to be ready to fill the largest one possible. He has duly increased the size of his farm. “I have to grow for the maximum size of an order, or else I lose the contract. So I grow on that scale even though the order is usually a lot less. Everything I don’t sell, I have to destroy.” While Steve’s contract with Woolworths gives him security, his margins are tiny and increasingly squeezed by rebates and marketing “kick-ins”. In June, he was one of the Woolworths suppliers asked for a “voluntary” contribution of 40 cents a crate – on top of a standard marketing payment of 2.5% of sales – to pay for a Jamie Oliver advertising campaign. “I didn’t like it, but I can’t afford to risk not paying,” Steve says.

The Oliver rebate attracted nationwide condemnation of Woolworths. Even conservative politicians commented, with Agriculture Minister Barnaby Joyce describing the payment as “a bit rich”. Oliver himself drew ridicule by saying he was only an “employee” of Woolworths, even though he trades on the idea that he can sway retailers’ ethics. Coincidentally but symbolically, the next week Woolworths had to recall thousands of defective Oliver-branded vegetable-shaped toys.

The Oliver story was part of a blizzard of adverse publicity for the supermarket giants. In June, Coles lost a court case exposing its claims to be selling “fresh-baked” bread when the dough was imported from Ireland. In July, the Australian Medical Association and the Pharmacy Guild of Australia criticised Woolworths about using unqualified pharmacy students and nurses to offer “health checks” to shoppers. Late last year, the Australian Consumer and Competition Commission (ACCC) prosecuted Woolworths in a price-fixing case involving Colgate-Palmolive and Unilever. Coles, whose outgoing chief executive Ian McLeod took home $19 million last year, entered a dispute with unions over a 5% wage claim. Both supermarkets agreed, after an investigation by the ACCC, that they would not subsidise their “shopper docket” fuel discounts out of their non-fuel businesses – and the minister for small business, Bruce Billson, floated the possibility of banning the practice through legislation. Woolworths was found, in reports by two banks, to have allowed substantial “price creep” in 2014. Coles had been fined for misleading consumers over “Made in Australia” labelling, and in 2010 the Woolworths-owned Big W had given $400,000 to children’s causes after being found to have breached burn-free standards on infants’ pyjamas. Meanwhile the big daddy of controversies was brewing: in May, the ACCC commenced legal action against Coles for “unconscionable conduct” in its dealings with suppliers, after a long-running investigation and allegations of sharp practice going to the very top, namely McLeod’s successor as managing director, and former chief operating offer, John Durkan.

Coles and Woolworths are the 19th and 15th biggest-selling retailers in the world, but their size generates more unease than national pride. Four crossbench federal parliamentarians, Nick Xenophon, John Madigan, Andrew Wilkie and Bob Katter, have designed a bill that would allow courts to order the break-up of companies that misuse their market power. It is directed squarely at Coles and Woolworths. “No other country in the world has as large a percentage of its dry groceries market controlled by two chains,” says Xenophon. “We have been mugs to allow that to happen.”

When Dominic White talks of the hardware stores that have closed around Sydney’s northern beaches, he sounds like a zoologist listing extinct species. “There was Hurstwaites at Balgowlah; that was going since the 1940s. Harders at Harbord, McIlwraiths in Manly, plus another two in Manly. There was Fairlight Hardware, Seaforth Hardware, North Balgowlah Hardware, two in Brookvale, Collaroy Hardware, Narrabeen Hardware, Wheeler Heights had one, and there was Hayman and Ellis in North Manly.”

What was an ecosystem of 15 hardware stores is now down to three Bunnings, owned, like Coles, by the West Australian conglomerate Wesfarmers, and one Hardware & General. The Bunnings at nearby Brookvale, which obliterated most of the competition, has in its turn been bombed by a new super-Bunnings that opened in December 2012 just 1 kilometre away.

White’s Mitre 10 franchise in North Manly was the last independent to go, closing 15 months after the super-Bunnings opened. “General trading conditions had worsened since the first Bunnings, but when the second Bunnings came, that was it. Coles and Woolworths want to own everything. People might think they’re supermarkets, but they’re the petrol stations, the convenience stores, the bottle shops, the hardware stores, and everybody else is going.”

Since 2000, White’s store had been a crossover hardware hub for tradies and the public. The 25 staff knew customers’ names and were available to find products and load up cars. When Bunnings came, it signed exclusive agreements that stopped suppliers from selling to Mitre 10. “The suppliers were sinking everything into Bunnings,” White says, “which was what they wanted at first, but then Bunnings screwed them down so they couldn’t make a buck, and they couldn’t make it competitive by selling to anyone else either.”

White’s store suffocated in a Bunnings sandwich. “The second one has really hurt the first one, but they don’t mind that if they put everyone else out of business.” This path, known as “brand bombing”, has been well trodden in the US, as Naomi Klein documented in her 2000 book No Logo. Big-box retailers, she wrote, “spread like molasses: slow and thick”. They saturate areas – think of how Starbucks saturated urban American locales – to save on distribution costs and obviate the need for advertising. “Category killers” such as Bunnings cluster and cannibalise everything, often including themselves. Eventually what is left is one giant that can dictate the terms.

It is effective business. Coles and Woolworths have been masters of eliminating competition since they were founded 100 and 90 years ago, respectively. Both began as general merchandise stores. When they expanded, they eliminated their competitors by buying them out. Their scale then gave them such buying power that they could use discounting to strengthen their positions further. In the hard times after World War Two, both companies pounced on distressed property-heavy chains. Between 1949 and 1958, Coles purchased Neway Cash and Carry, Hoskins Stores, Selfridges, Gilray Stores, F&G, Mantons, Penneys, Brisbane Cash and Carry, and Dickins. Woolworths went on a similar binge. Both started stocking food within months of each other in the mid 1950s. In 1960, Coles and Woolworths competed to buy the 255-store Matthews Thompson grocery chain; Coles won, and rebranded most of them Coles Food Markets. Woolworths responded by opening its first modern supermarket, in Warrawong, south of Sydney. Two years later, in Frankston, Melbourne, the first Coles New World supermarket opened, with 20,000 square feet of food and merchandise.

Coles and Woolworths are spiritual enemies. In the 1950s and ’60s, the companies played each other in an annual game of Australian Rules. What was meant to be a picnic day soon degenerated into a bloodbath. Due to its violence, the game was discontinued.

The companies may compete with each other, but differentiation has not followed. Dozens of interview subjects for this story spoke of the supermarkets as “Coles and Woolies”. Indeed, there is a derisive term – “Colesworths” – to bundle them together. After both companies steadily ate up their competition, with Woolworths buying the rival Safeway chain in 1985 and Coles the Bi-Lo supermarkets in 1987, they turned to diversification, but in the same way.

When Coles bought department-store behemoth Myer in the 1980s, a rival bidder was Woolworths. Coles moved into liquor in the 1980s, buying the Claude Fay’s and Liquorland cellar chains. When Woolworths got ahead through its BWS and Dan Murphy’s large-format liquor stores, Coles tried to keep pace with Vintage Cellars and First Choice.

After liquor came petrol. Woolworths entered the petrol and convenience-store business in 1996, Coles in 1997. They now take a combined 48% of Australian petrol sales – 24% each.

Then came hardware. The takeover of Coles by Wesfarmers in 2007 brought the Bunnings chain into the circle. Woolworths in turn started up its Masters hardware brand to go with its Home Timber & Hardware chain.

“It’s hard to see how they have differentiated themselves,” says Monash University’s Professor Stephen King, a former ACCC commissioner. “Woolworths was behind Coles in the 1980s, but then branded itself the ‘Fresh Food People’, took on the apple logo, and overtook Coles. What Coles then did was copy the strategy. More recently, Coles’s ‘Down Down’ campaign on lower prices was successful, and Woolies was soon doing exactly the same. If one does something that works, the other says, ‘We’re not going to let you do anything different.’”

Last October, Woolworths announced Oliver as the face of its latest marketing campaign within days of Coles unveiling Heston Blumenthal to front its own campaign. One British celebrity chef for another: that’s differentiation.

Mimicry had worked: through the decades, copycat tactics engorged the duopoly. Woolworths’ and Coles’s combined drygoods market share hovered around 40% in the 1970s, rose past 50% in the mid 1980s, and steepled to its current mid 70s (up to 90% in regional areas) in the late 1990s, when the deregulation of trading hours, bipartisan political enthusiasm for a National Competition Policy following the Hilmer Report, and the shrivelling of the third-biggest supermarket chain, Franklins, turned every week, for Coles and Woolworths, into Christmas week.

Today, the major supermarkets’ size is mind-boggling. On average, every Australian man, woman and child spends $100 a week on food, merchandise, liquor, hardware or petrol at Wesfarmers/Coles or Woolworths outlets. But as they have grown, they have converged. Statistically, they are almost mirror images: Wesfarmers/Coles has 756 supermarkets, Woolworths 897; Coles has 636 petrol stations, Woolworths 613; Coles has 810 bottle shops and 92 hotels, Woolworths 1355 and 323 (making it the country’s biggest poker machine operator); Coles has 498 variety stores and 313 hardware stores, Woolworths 181 variety stores and two-thirds ownership of 231 hardware stores. All up, Wesfarmers/Coles has 3518 retail outlets generating $53 billion in revenue, while Woolworths has 3660 generating $58.5 billion. The sharemarket values Wesfarmers at $47 billion, Woolworths at $44 billion.

“They both head towards the middle of the market,” King says. “The intensity of their competition in the middle has made it very hard for anyone else to get in there.”

What this domination says about Australia is not new. We might like to see ourselves as local, but we behave big and corporate. Andrew Robb, now the federal minister for trade, said last August, “We are an oligopoly community. We shouldn’t fight it.” In Australia’s history, even as painters were portraying gold panners in creeks with their tents, wives and babies in the background, our mining industry had been taken over by capital-hungry corporations. Coles, first opened by the third-generation storeman GJ Coles in Melbourne’s Collingwood, was within a decade a national chain worth a million pounds. We like to romanticise our relationship with our produce, but our actions betray us as a nation that rewards size and doesn’t choose so much as follow. If we can’t go to a shopping centre without being hauled in by the duopoly – apples from Woolies, cereal from Coles, beer from Liquorland, wine from Dan Murphy’s, a hammer from Bunnings, shoes from Kmart, ink from Officeworks, a toy from Target, a pillow from Big W, petrol from Coles Express – then that is the power we have given these two companies.

Gary Dawson is the chief executive of the Australian Food and Grocery Council (AFGC), which represents suppliers and manufacturers that are in an ongoing conflict with Coles and Woolworths. “Concentration is what it is, and it’s not going to change in a hurry,” he says. “We have got to make that work in as reasonable a fashion as we can.” The debate is less about how much power Woolworths and Coles have than about how they are choosing to use it.

Orbiting a mega-retailer are three planets: competitors, suppliers and customers. By the mid 2000s, Coles and Woolworths had disposed of most competitors. This gave rise to the fear that they would turn their sights on customers. “Normally,” says Stephen King, “you would expect two big players to be cosy on price.” But a 2008 ACCC inquiry found that grocery prices were not rising unreasonably, if at all. Part of this was due to global food price deflation after the global financial crisis. But there was also a strategic reason: the supermarkets were using their power to squeeze not the customer but those who make and distribute the goods.

The squeeze goes back to the mid 2000s, when Coles was lagging, with a turnover of $22 billion compared with Woolworths’ $37 billion. Led by Paul Simons, Reg Clairs and later Roger Corbett, Woolworths had surged under its “Fresh Food People” banner. Coles, often described as being in “chronic catch-up mode”, had suffered turbulence under Brian Quinn, the CEO who was jailed for using $4.5 million of company money to renovate his house in Melbourne, and Solomon Lew’s disruptive and ultimately unsuccessful fight for control, before lacklustre years under former Brambles boss John Fletcher. When Wesfarmers bought Coles for $18 billion in 2007, business analysts questioned the price.

Ever since BHP imported the Dutchman Guillaume Delprat in 1898, a model of Australian business success has been to bring in expert managers from overseas. Wesfarmers hired as CEO Ian McLeod, a Scottish executive who had worked at the UK supermarket chain Asda. McLeod assembled a clique of British retail managers, among them John Durkan, formerly of Safeway and Carphone Warehouse, who recounted, in Coles’s official history, his initial impressions:

The lack of investment was greater than I’d imagined, the availability of product wasn’t good enough, cleanliness was an issue and things like broken slicers and malfunctioning ovens hampered team members trying to serve customers well. The first thing was to fix the basics; to renew and rejuvenate the stores and make Coles a place you’d want to go to shop. That took 12 to 18 months to get under control.

The story of Coles as a rundown chain that once lagged behind Woolworths is now part of the Wesfarmers narrative. But Durkan’s next words were more telling:

We also needed to get back to being customer facing; the company had drifted away from the core retailing principle of making sure the items customers wanted were there for them to buy, rather than just offering them what suppliers had available. In the first few weeks we held hundreds of meetings with suppliers to get feedback, and whilst they clearly wanted a resurgent, successful Coles, they had to also accept that they would have to supply what the customers wanted rather than what suited them to supply.

This was a turning point in Australian retail history. What is known as the “Tesco playbook” (it might as aptly be called the Asda playbook) had arrived. McLeod and his team had a genius for increasing sales and profitability at a time prices were falling – “Down, Down”. In 2011, they lowered prices by an average of 10%, and Coles’s sales took off.

If global food price deflation was good luck, the strategy was calculated, if not entirely new. Back in 1999, a House of Representatives inquiry into the retail trading sector, chaired by the Liberal MP Bruce Baird, described the market as “heavily concentrated and oligopolistic in nature” and expressed concern about predatory pricing and unconscionable market conduct. Of the 332 submissions to that inquiry, 285 were opposed to the increasing power of the two supermarkets. One area of creeping concern was supplier rebates, where the chains would charge their suppliers for shelf space and other advantages.

Rebates had been pioneered in the US, refined in the UK and imported into Australia. David Jones and Myer had been criticised for sending suppliers to the wall by ramping up rebates in the 1990s. Coles and Woolworths were to take the practice, as ever, to an industrial scale.

Consumer psychologists had found that most shoppers circled supermarkets, ducking into aisles while passing by. Therefore, the ends of aisles were a prized position. Likewise, shoppers had been found to spend more time looking at items on certain shelves. Retailers would then charge suppliers extra for these spaces, or make them bid against one another for shelf real estate; the loser was pushed out, or over the “cliff”, in a practice known as “cliffing”.

Suppliers were also asked to pay “voluntary” marketing kick-ins. If they did not comply, they were faced with periodic “range reviews” in which the retailers would establish if suppliers met “hurdle rates” of sales. If they didn’t, they were often displaced by the supermarkets’ private labels (also known as “home brands” or “own brands”), of which McLeod was a champion. In his time, private-label sales grew rapidly. Coles vertically integrated retail with production, and the packaging of private-label goods increasingly resembled that of independent brands.

Woolworths was on the same trail with its “Woolworths Select” brands. In 2011, its board appointed a new CEO, Grant O’Brien, with a specific brief to counter Coles’s revival. To carve out customer loyalty and defeat the “Colesworths” impression – a weakness of the copycat history was that 84% of customers weren’t exclusively loyal to either Coles or Woolies – O’Brien directed a strategy to mine customer data and strengthen a loyalty program with Qantas. It was touted as a rare breakaway from Coles, even if it too was following what Tesco had done in the UK.

Under McLeod’s five-year plan, meanwhile, Coles supermarkets were overtaking Woolies. Having established the “customer-facing” outlook that Wesfarmers wanted, McLeod intensified the attack on what Coles still saw as a too-costly supply chain. Having become the “customer’s friend” by driving down prices, Coles now turned to the customer’s number-one staple: milk. But it was a risk. “Improving efficiencies in the supply chain” sounds impersonal, and if suppliers are big multinationals, most consumers will think, Better them than us. But when the suppliers are Australian farmers with dirt under their nails, farmers who say that food production in this country is being compromised, then customers wonder whether “they”, the suppliers, are, in fact, us.

After 15 years as a dairy farmer, Mike Blacklock is getting out next January. His farm of 200 milking cows at Moorland, on the lush paddocks around the Manning River delta on the mid-north coast of New South Wales, produces 1.3 million litres a year. Blacklock survived the deregulation of the dairy industry in 2001 only to find a new kind of regulation taking its place. “The constraints on our income are absolute,” he says. “There is market domination by the supermarkets. They control the show.”

When Blacklock started farming in 1999, Coles and Woolworths were buying 25% of Australia’s fresh milk. After deregulation in 2001, when regional supply arrangements and prices were unlocked, the supermarkets’ share doubled. Initially, Blacklock supplied to the Gerringong and Dairy Farmers co-operatives before switching, in 2009, to Norco, which has the contract to supply Coles’s private-label milk in the northern half of New South Wales.

Nick Xenophon says farmers such as Blacklock are “collateral damage from the milk price war between the supermarkets”. On Australia Day 2011, Coles launched its $1 home brand milk campaign, the leading edge of its “Down Down” marketing push. “It reduced the amount sold at a premium price, so more was sold at home brand price by Norco,” Blacklock says. “It constrained what Norco could pay us.” Woolworths soon followed the strategy to attract foot traffic: consumers would pick up other items as they went to and from the dairy section.

The pressure rippled outwards. Processors of branded milk, such as the multinationals Lion and Parmalat, found that their biggest customer was now their toughest competitor. Dairy farmers who were not selling to a Coles- or Woolworths-aligned processor feared a wipe-out. Non-supermarket retailers that relied on selling milk saw their custom fall. “The $1 milk campaign capped the whole market,” says an executive from one of the leading dairy processors. “Small shops would go and buy their milk at Coles or Woolies and then stock it themselves.”

Coles and Woolworths intended the processors to take the heat of cost-cutting, but the processors, already making small margins on own-brand milk that needed expensive refrigeration, transport and quality control, shared the pain with the dairy farmers. “The processors skim their margins as hard as they can,” Blacklock says. “Eventually, that’s us farmers paying. We are at the bottom of the chain.”

Milk hits a nerve. Most people need it and would prefer to pay less for it, but few wanted to hurt the honest dairy farmer. In July 2011, Coles survived an ACCC investigation for predatory pricing on milk; later the ACCC forced Coles to stop distributing via social media a misleading animation that showed farmers receiving higher farm-gate prices after the milk wars had started. In 2010, the Senate had held an inquiry, titled ‘Milking it for all it’s worth’, that recommended stronger measures to protect suppliers from supermarket domination. But the attack on the supply chain continued. Supermarkets continued to place “an artificial ceiling on price”, says Mike Logan, CEO of Dairy Connect, the body representing dairy farmers in NSW. “Milk is not worth a dollar a litre, but that was a decision made by supermarket executives. The ACCC told them they couldn’t lose money on milk, so to keep those discounts going they could only pass their costs on to suppliers.”

Some farmers, from their subordinate position as price-takers, saw an opportunity to win more control. The so-called “Woolworths Seven” in northern NSW approached Woolworths directly. In 2013, they contracted to supply milk to the supermarket rather than to the processor, Parmalat, which became their service provider rather than their buyer. “When the Woolworths Seven approached them with this plan to get more money for their milk,” Logan says, “Parmalat said, ‘You have no idea how hard it is to deal with Woolworths.’ The farmers said, ‘Let’s find out.’” The Woolworths Seven began producing “value-added” milk, leaving the big processors to fight out the low-margin private brand business. The beverage giant Lion, at odds with Coles after the milk wars, pulled out of the processing business; Coles went into partnership with the Victorian co-op Murray Goulburn to produce its private-label milk from 1 July 2014.

What this meant for the industry, according to one of the Woolworths Seven, was that there was “some improvement on price, but the average dairy farmer’s costs have gone up, so we’re getting squeezed again”. Prices were better than they had been a year ago, but costs were outstripping them. “We prefer not to see supermarkets having price wars on our product.”

That battle pushed Mike Blacklock into retirement. “The Woolies Seven move was good for those farmers but bad for the industry,” he says. “Divide and conquer is the supermarkets’ game. Woolies could look like they’re looking after the farmers, but they’re only looking after a few, not the industry, which has taken a battering and can’t fight another fight. The supermarkets are pretty clever. They don’t want to destroy the industry, but they want to push prices down to that point just above where they destroy it.”

The ultimate impact, he says, is a decline in farm investment and quality. “What do we do? We don’t buy new equipment. We downgrade the quality of our business through cutting costs on fertiliser and feed. We employ fewer people. We reduce repairs and maintenance. That’s what is happening on most farms.”

Blacklock belongs to a long-term trend of declining milk farms in Australia. Thirty years ago, Australia had 30,000 milk farms, of which 75% were family-owned, employing 60,000 people. Now it has 7500 farms, the majority owned by foreign companies, employing 21,000. Australian annual milk production has fallen from 12 to 9 billion litres in the past decade, while New Zealand’s has risen from 9 to 20 billion litres. “How do small businesses operate in a world where two big businesses have so much power and are gouging each other’s eyes out?” Logan asks. “It’s offensive when your product is chucked in the bargain bin. It’s emotional, a slap in the face.”

Logan’s hope is that farmers will be saved by international demand and rising exports. “I think $1 milk will naturally die. Farmers want to define the market, but we are not smart enough to beat Coles and Woolworths in the ACCC. Our solution is not to go to the ACCC but to find other markets which will make Coles and Woolworths supply-constrained.”

Coles’s official history says John Durkan “refutes those claims with ease”. He is quoted as saying:

It’s an honour that people want to try and pick apart what we have been doing, but what we’re doing is not that complicated. We ask suppliers to give us what we can sell to customers, and if they do that, customers will buy more of it and everybody wins. Australian milk consumption hadn’t gone anywhere in ten years and now it has, which means greater production for more farmers. We started making commitments to growers so that they could invest in innovation that would improve their output and profitability. These steps are important for food sustainability in Australia, not just for suppliers.

The supermarkets’ current strategy is to increase their vertical integration by entering long-term contracts for own-brand milk with supplier-processors, such as Coles’s with Murray Goulburn. Coles boasts about “up to ten-year tenure” in those contracts, but as the case of CRF shows, those ten years could have a sting in their tail.

In 2001, CRF, a meatworks based in Colac, south-west of Melbourne, became the national supplier of Coles’s own-brand lamb. CRF would provide and package the meat in portions suitable to Coles’s Australia-wide orders.

For nearly a decade, the partnership was fruitful. It was worth $40 million to CRF, which employed 400 people and became a mainstay of life in Colac. But towards the end of the ten-year contract, Coles began pressuring CRF to change its terms of supply, forego profit and increase rebates, without the compensating offer of a contract extension.

In 2011, the company was put up for sale, attracting several interested parties. Coles was one, seeing an opportunity to vertically integrate. According to one source close to the deal, Coles was “successful with some pretty aggressive tactics making them the last man standing”. Coles allegedly let it be known to other bidders that if anyone else won the bid, Coles would withdraw its lamb contract from CRF. Under the threat that the plant could lose its main source of business, bidders dropped out.

Coles agreed to buy CRF for $10 million, with a three-month due diligence period. During that period, Coles raised complaints and issues for renegotiation. Knowing there were no other bidders, Coles talked the price down to just $3 million. But Coles had gone too far. Feeling they had nothing to lose, some of CRF’s shareholders scrabbled together a deal with a private equity company and fended off Coles.

Coles duly made good on its threat and took away its lamb contract. CRF’s owners approached Woolworths, who declined, telling directors, “Supermarkets can be vindictive.” The plant eventually survived by redirecting its products to the Asian export market. Coles took its business to the largest food processor in the world, JBS Swift, a Brazilian company with a plant in Melbourne.

A senior executive with an east-coast meat processor has observed the same disinvestment as there has been in milk. “When a business’s margins are being squeezed, they cut capital expenditure … If you don’t continue to invest, the results will be catastrophic. Importing product is the next step unless there’s some regulatory or consumer backlash. It’s a bleak outlook for Australian food production.”

The merits of agricultural rationalisation can be debated. But the point of deregulation and the National Competition Policy was to increase productivity through competitiveness in markets. Instead, the outcome has been a battle between Coles and Woolworths that has had the contradictory effect of decreasing competition. In milk, Mike Logan says, “there is essentially just this one fresh milk channel”.

Dee Margetts, a former Greens senator from Western Australia, has written a PhD thesis on the failures of the National Competition Policy with reference to dairy and retail. She submitted evidence to the federal government’s Harper Review on productivity, instituted in 2013, that the only winners in the milk wars were the two supermarkets, and that market-wide competition was reduced. “By the major supermarket chains reducing the gap between farm-gate and retail prices for their home-brand milk products, instead of competing against each other, they could use their combined market power to secure even greater market dominance and destroy more of their smaller and independent retail competitors,” she concluded. The supermarkets’ standard response is that farm-gate milk prices are geared to global demand via the export milk price, not by their discounting action.

In the milk wars, Coles and Woolworths were importing a US–UK template for supermarket profit growth: bring prices down by demanding more cost-cutting and rebates from suppliers. The milk wars laid a path for what would be the supermarkets’ most audacious assault on their supply chain.

The 1999 Baird Report from the House of Representatives inquiry into the retail trading sector cautiously recommended an increase in ACCC powers to regulate “unconscionable conduct”. It would be 12 years before the commission found what it believed was a smoking gun.

In March 2011, Coles retained the Boston Consulting Group. Within one month, Coles and BCG gave supermarket managers PowerPoint presentations on how to get more out of suppliers. It was called the ARC (Active Retail Collaboration) Program.

Initially, the ARC divided suppliers into a top 50 and a “tail suppliers” group that would be asked to pay Coles a rebate for efficiency improvements Coles said it was making. In this version of the ARC, Coles aimed to raise $30 million. A script threatening “commercial consequences” was devised to persuade suppliers to comply.

A trial was undertaken on three of the top 50 suppliers: General Mills, Procter & Gamble and Nestlé. Coles could only negotiate a rebate worth 0.45% of sales from Procter & Gamble and 0.6% from General Mills. Nestlé refused to pay anything.

Tail suppliers were to be hit harder. 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.

Although the trials had been mismanaged, Coles pressed ahead under its clique of British key divisional managers: George Dymond, head of Grocery and Food, who had served with Durkan at Carphone Warehouse, and Richard Pearson, a former first-class cricketer and Asda executive who now headed Grocery and Frozen. Dymond and Pearson reported to Durkan. Pearson is still at Coles, while Dymond has returned to the UK where he works at Tesco. Durkan has been promoted to the top job at Coles.

This hierarchical tree at Coles was essential to what the ACCC alleges was the unconscionable bullying of suppliers.

From July through to October 2011, Coles ran an “ARC Supply Chain Boot-camp” for its category managers, with the subtitle: “Good to GREAT end to end”. It 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.

Coles category managers started making the calls on 17 October, and the mayhem was immediate. Within four days, three suppliers – ED Oates, Scalzo and Stuart Alexander – were escalated. A week later, at least 25 suppliers, including Dulux, Mirabella and Yakult, joined them. Within five weeks, at least 62 suppliers had been escalated.

Coles’s response was brutal, according to the ACCC’s statement of claim in the Federal Court. The supermarket threatened to cut orders to Austech, an automotive toolmaker, within two days. For Stuart Alexander, which imports brands such as Tabasco sauce, Guylian chocolates and Mentos lollies, they cancelled planning and promotion and would not discuss whether they would order from them again. To Oates, which makes cleaning products, Coles said it would conduct a range review without consultation. A storm of emails between Coles and its suppliers ensued; these emails would fall into the ACCC’s hands.

As the ACCC investigated the ARC scheme over the next two years, it hit a wall. Suppliers were so scared of retribution that they did not volunteer information; the commission used its coercive powers to obtain evidence. When the matter arrived in Melbourne’s Federal Court in June 2014, Coles said it would “vigorously defend” its actions and that the ARC program was voluntary and did not cut off suppliers, even the 32 who ultimately refused to pay. Coles claimed that it did substantiate how its data-sharing and “economic ordering” systems would save money. It denied issuing threats, although it admitted supplying the scripts that contained threats of “escalation”. It made 98 admissions, however, such as proposing not to discuss new product development with Stuart Alexander, not sharing data with Austech, and limiting future sales orders unless the suppliers paid. While it said the ARC program was “at all times voluntary”, Coles also admitted to rejecting Stuart Alexander’s offer to pay a levy of 0.42%.

Two tier-3 victims were the Gourmet Food group, suppliers of the Rosella and Waterwheel brands, and Unibic, makers of Anzac biscuits. Both companies fell into receivership after the ARC push. Ferrier Hodgson, Gourmet Food’s receiver, stated that the company’s collapse stemmed from trade spend demanded by the supermarkets and the competition from own-brands.

The tactics came as no surprise to Tony Lutfi, a food manufacturer whose Greenwheat Freekeh grain product was deleted from Coles’s shelves after he supplied it to other retailers in the mid 2000s. Lutfi had grown frustrated because Coles had frozen the price it paid him eight years earlier, and because the product was shelved in places his customers could not find it. “We told Coles and Woolworths to take a hike,” he says. “If you can help it, they should not be the focus of any business. I don’t blame them for acting in self-interest, though. It’s the Australian people and their governments that have allowed them to gain that overwhelming power.”

When the ACCC launched its case in May, it was sending a signal of resistance to that power. Its chairman, Rod Sims, said: “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.”

The case is expected to take months, perhaps longer, in the courts, but the exposure of even the admitted behaviour has damaged Coles’s reputation. “It’s a critical case,” says Gary Dawson of the AFGC. “You can’t overstate its importance. It could redefine what unconscionable conduct is in our sector. Even by being brought to the court it has had a positive effect.”

“Trade spend”, as rebates and other kick-ins are known, is not an isolated example, but has been central to both supermarket companies’ strategies. According to a recent AFGC/KPMG report, trade spend now accounts for 25.6% of grocery suppliers’ sales – for large suppliers it is as high as 75.6% – and is “the major driver of the decline” in their business. While supermarket profits have risen at a rate of about 4% a year for a decade, suppliers’ profits have flatlined. In 2012–13, both Coles and Woolworths increased their margins through rebates, transferring about $1.5 billion to their profits. The less suppliers deal with Coles and Woolworths, the lower their trade spend. The exposure of the trade spend Woolworths was seeking from fruit and vegetable growers for its Jamie Oliver campaign shone further light on the supermarkets’ tactics.

Coles and Woolworths argue that a code of conduct they agreed to in November 2013 has shown their willingness to play fair. In proscribing certain actions, the code also revealed their existence. The supermarkets promised not to charge suppliers for “shrinkage” and “wastage” of products once they were in the supermarkets’ possession; for additional shelf space and prominent positioning; for listing products in their advertising; and for most of the cost of marketing campaigns. They also undertook not to vary supply agreements unilaterally and retrospectively; not to de-list products without consultation; and not to over-order products at a “promotional” price before selling them at full price, pocketing the difference. On the issue of own brands, the supermarkets would not copy brands’ packaging for own-brand products; would not appropriate brands’ confidential information on product development to develop their own-brand products; and would not replace branded products with own-brand products in the best shelf space without notice or consultation.

As a code of conduct, it was a damning document. But it was also voluntary. While Dawson is confident that “a breach of the code is a breach of the [Competition and Consumer] Act”, a more sceptical ACCC has voiced concerns that the supermarkets can use their market power to bind suppliers to contracts that sidestep or override the code. Nick Xenophon says the code “has little effect because it is not mandatory; it does not have the power to break the companies up”. The supermarkets refused any mandatory code.

The ACCC says it is monitoring Woolworths in the way it did Coles, which in turn will be closely watched as it moves on to its next frontier, its insufficiently profitable liquor business. At a Wesfarmers strategy meeting in May, Durkan implied that Coles would be employing the same tactics in liquor that had worked so successfully in supermarkets. Approximately 77% of wine sales now go through Coles or Woolworths outlets, according to a study by the Winemakers’ Federation of Australia. Brad Wehr, a West Australian vigneron with 25 years’ experience, says he was subjected to harsh tactics by the Woolworths-owned Dan Murphy’s chain after he won an award at a 2009 wine show.

“Part of the award was that they would buy a certain volume from you,” Wehr says. “It was a painful paperwork process but I went along with it. I felt that you needed to embrace these groups if you wanted to sell a lot of wine, because they dominate retail.”

The agreed amount was 100 cases. A Woolworths buyer told Wehr the chain would buy a trial supply of five cases of the prize-winning Wine By Brad, but sell it at a 15–20% discount.

“I said I had to protect my price points because my other customers wouldn’t be happy if they saw my wine cheaper elsewhere. Woolies said that that’s none of my business. The gist was ‘We’ll do what we like’. If they saw it cheaper anywhere else, they would bargain-bin it or advertise it at $9.99. It shows the arrogance that comes with that much power.”

In the end, Wehr says, “we agreed that we didn’t really want to do business with each other”.

Woolworths’ and Coles’s liquor chains have driven their own-brand wines as hard as groceries, and subtly disguised private-label wines occupy prime shelf space in Dan Murphy’s and Vintage Cellars. Sarah Collingwood, a Canberra winemaker, was at an industry event in Adelaide in 2010 when, she says, “it kept coming up that the supermarkets had a lot of power in the industry on the back of the labels like Cow Bombie that you can’t tell have been made by them”.

Collingwood developed a website, whomakesmywine.com.au, that lists the supermarkets’ own-brand wines. “I was really surprised by how many brands they have. There are geographic themes, geological themes, cute critter themes and so on. I’ve never seen a Black and Gold chardonnay!”

Small producers, Collingwood says, are dismayed by “the prospect of more and more Dan Murphy’s and First Choice shelves being filled by private brands. We just want people to be able to make an informed choice.”

The consequences are clear. Collingwood’s vineyard, Four Winds, does not sell to the supermarkets and, she says, probably never will. “We’ve shot ourselves in the foot if we want to go into the retail chains. I don’t think they’d forgive us.”

Durkan has written of the process of attacking supply-chain costs: “There were speed bumps along that road, but we just kept coming back to the same mantra: do what is right for the customer.” In the ACCC case, the speed bumps, small and large, are to get their day in court.

Supermarkets are not evil. Nick Xenophon, as a passionate opponent of poker machines, took two women whose lives had been destroyed by gambling to meet Woolworths’ CEO, Grant O’Brien, and the then chairman, the late James Strong, in their capacity as leaders of what is Australia’s biggest poker machine operator. “They were very decent,” says Xenophon, who also praises Coles and Woolworths for responding to his appeal to help the broke Spring Gully company. “They’re not bad people. However, their ultimate attitude is that they have a responsibility to their shareholders. What you see is a function of their market power.”

The history of Coles and Woolworths shows not a moral flaw but the consequences of success. The modern corporation is programmed for creative destruction, and the strongest can no sooner be diverted than the Terminator. As the University of British Columbia law professor Joel Bakan put it in his 2005 book The Corporation: The pathological pursuit of profit and power, “The corporation’s legally defined mandate is to pursue, relentlessly and without exception, its own self-interest, regardless of the often harmful consequences it might cause to others.” Milton Friedman famously said that a corporation’s only responsibilities are to its shareholders and its customers, and its only driving force is to maximise profit.

Trying to counter the wave of negative publicity in mid 2014, Woolworths introduced an advertising campaign that played to the warm emotions around teenagers getting their first jobs. It was a potent image: hundreds of thousands of Australian families have been there.

Woolworths and Coles employ nearly 400,000 Australians. Only the state governments employ more. Both companies emphasise the value they place on their workers. Wesfarmers provides “a rewarding and satisfying environment for our 200,000-plus employees”, wrote Bob Every, the chairman, in the most recent annual report, with “a moral obligation to ensure our employees go home safely at the end of their working day”. According to the managing director, Richard Goyder, “very good people” are “our only true competitive advantage”. Woolworths makes the same claim. Its board has a “People Policy Committee”, which oversees programs to increase employment diversity and opportunities for workers with disabilities, though the numbers are not overly flattering. Of Woolworths’ 197,000 employees, 1.5% have a declared disability and 1.25% are indigenous. Women make up more than half of the Woolies workforce, or 53.3%, but only 30.3% of executive positions. Coles’s workforce is even more female-heavy, with 57%, but only 28% in management. Four years ago, it employed 65 indigenous full-time staff, though this rose to 1000 after a recruitment drive.

Disquiet about the supermarkets has not, in any significant way, pervaded Canberra. Occasional Nationals pipe up on behalf of growers. The minister for small business, Bruce Billson, has spoken in favour of the code of conduct’s potential to chip away at the excesses of supermarket power. Only the crossbenchers speak openly about giving courts the power to break up Coles and Woolworths.

The Australian Retailers Association has lobbied successfully in Canberra for the supermarkets. It has influenced public policy on specific issues such as trading hours, plastic bags, unit pricing and the Rudd government’s ill-fated Grocery Watch monitoring initiative, as well as more broadly on tax reform, the minimum wage, the carbon tax and consumer law. As donors to political parties, Wesfarmers is invisible while Woolworths has given $186,000 over the past two years, split approximately 65:35 to the Coalition and Labor. Yet the supermarkets’ role in the political money cycle is not to be ignored. According to the Australian Electoral Commission, affiliates of both major parties have significant shareholdings in Coles and Woolworths. The Liberal Party, through its Melbourne-based Cormack Foundation, received $1.1 million in dividends from Wesfarmers and Woolworths in the past two years. Labor reaps considerably more: on its members’ behalf, the retail employees’ union, the SDA, rakes in more than $8 million a year in investment income from Wesfarmers and Woolworths. The supermarkets play a role not so much in giving money to the political parties as in making money for them, a role that embeds them all the deeper in the political establishment. Xenophon says, “They don’t have to be big donors. They are all-pervasive, and that gives them the influence they need.”

The crossbenchers’ bill to allow courts to order divestiture is unlikely to win support from any of the major parties. “I’m hopeful but not optimistic,” Xenophon allows. But the market itself may turn out to be the reformers’ friend. The supermarkets’ popularity with politicians has rested in large part on their suppression of grocery prices. Xenophon says the supermarkets have “overstated” their role in price deflation. Certainly the global deflation of food prices after the global financial crisis was helpful. But in 2014, the turnaround appears to have come. Woolworths boasted price deflation of around 2.9% in 2012–13, and Coles 1.7%, but this year a Citigroup study found Woolworths raised prices by between 1.3% and 8.7% in May and June. Deutsche Bank’s supermarket price index calculated rises of 3.3%, 4.8% and 5.4% in the last three quarters of 2013–14. These rises had not been pushed by passing on suppliers’ costs, but had gone to gross margins – they were decisions made by the supermarkets. Meanwhile, the supermarkets are looking to expand their businesses in telephony, insurance and banking to make up for the looming stagnation of profit growth in food and liquor. In mid July, Coles announced it was teaming up with GE Capital to issue personal loans from 2015. The story of Woolworths and Coles as crusading price-cutters may be coming to an end.

Yet their legacy on food production is permanent, says Xenophon. “The end game is that they are pushing Australian farmers off the land. Farmers who have contracts with them become like medieval serfs. They stop investing in their businesses. More and more imported produce comes in, and eventually prices go up.”

Xenophon’s concerns link back to communities such as the one that coalesces around the Nikitaras brothers’ store in West Hobart. There it is obvious that food production, supply and retailing is more than just an industry. It is the beating heart of what Coles and Woolworths would like to be: a hub of fresh food people.

The supermarkets argue the system is not a duopoly. There is room for everyone, and consumers, by choosing an independent grocer, can keep small players alive. Coles’s John Durkan has written:

The tensions brought about through the pressure placed on suppliers to be more customer-facing helped to create an environment for innovation and have also prompted our competitors to lift their game as well. That’s just fine from our perspective, because increased competition keeps us on our toes and keeps the whole industry jostling for the customer’s spend – and that must be good for the customer. Plus, there are 30,000 independent grocers and food retailers in Australia, which means customers can always vote with their feet.

But Hill Street Grocer’s Nikitaras brothers say they are the exception that proves the rule. For fresh produce, theirs is a DIY supply chain. Marco and Nick drive out to farms and truck in their produce themselves. They cut deals with “micro-growers” – farmers who can operate at small volumes while, says Nick, “they also have jobs as builders or millers or carpenters”. Meanwhile, since Woolworths owns the only drygoods distributor in Tasmania, the Nikitarases have to pay it a service fee to import packaged goods, while their competitor, Woolworths, does not. “Yeah, we are subsidising Woolworths!” Marco says.

And Woolworths is circling. To escape the supermarkets’ stranglehold – there are 15 Woolworths and Coles stores on the western shore of the Derwent River, servicing a population of around 100,000 – the Nikitarases opened a store in tiny Lauderdale, a town of 2500 people south-west of Hobart, six years ago. “There was no land zoned for big commercial uses,” Nick says. Lauderdale, on a narrow neck of land between the Derwent and Frederick Henry Bay, had been deemed too flood-prone for large buildings. “We thought, That’s a desert where we can create an oasis. We’ve built a popular community store. For five years, Woolworths has been after a site there. We’ve been through one expensive court process after another. They plan a 3500–square metre supermarket 150 metres from us. If they open, we’ll have to close. They will be unprofitable. They have no chance of profit for eight to ten years, but it’s worth it to them to blow us up. At the moment we’re quietly hopeful that they’ll forget about it. But one day we’ll arrive and there will be a huge excavator.”

Throughout Australia, Woolworths and Coles have spent millions persuading courts to overturn local council decisions against their development proposals. Indeed, pursuing their legal rights has been an area in which the supermarkets have been anything but cheap. Whether it is “slip-fall” cases involving customers, workers’ compensation matters, disputes with unions over public holiday rates or complaints about unfair dismissals, Coles and Woolworths have been willing to go to the highest courts. The recent litigation of both companies tells a tough story about daily life in our supermarkets, and is worth another investigation in itself.

The survival of Hill Street Grocer, which could only happen in a small city like Hobart, doesn’t show that the Australian system is working, but rather highlights its failures.

“What happens when you allow a duopoly?” Nick asks. “Arnott’s biscuits is a good example. They have slashed their cost of production so low that their biscuits are all the same and taste of nothing. That’s the effect. It’s all to do with food production, whether primary or secondary. It gets reduced to the lowest common denominator. We have an American future: walk into the supermarket and see banks and banks of orange cheese.”

The brothers, like every player in a story about commerce, have a vested interest, yet their concern encompasses the very nature of food and food security in Australia.

“Consumers make decisions based on price, and that’s understandable,” Nick Nikitaras says.

“But I’d ask them to come to Tasmania and see where it ends up. Product lines and choice are reduced. There’s more consolidation of growers, more importation, and eventually higher prices. It’s insane from a food security perspective. Tasmania has incredible soil, unlimited water, a great temperate climate … and yet we’re importing food.

“When people go into Woolworths and get milk for a dollar, they should also be asking, ‘What’s the cost of this cheaper thing to the greater economy and its sustainability?’ What are they really paying, behind that one dollar? That is a very expensive cheap product.”