‘‘We don’t see any future gains by Coles coming at Woolworths’ expense,’’ the broker said, adding that the duo could capture up to 80 per cent of the market’s growth between them. ‘‘With Aldi and Costco growing also, this makes it hard for food specialties and Metcash independents.’’ When Kathmandu founder Jan Cameron pulled the plug last week on her discount chain operator, Retail Adventures, one of the factors she cited was the inability of the company’s Chickenfeed stores in Tasmania to compete on food in the wake of the milk and bread wars between Coles and Woolworths. ‘‘Tasmania as a whole has been very difficult, I think they have been more affected by the downturn, the GFC, and the retail landscape over the last three years has changed quite dramatically with the supermarket wars, it has become a very, very competitive scene,’’ she said. She said fresh food, milk and cheese and bread were a strong part of Chickenfeed’s convenience offer in Tasmania. When the supermarket milk war started, the major chains were ‘‘undercutting and loss-leading’’ to the extent that her Chickenfeed chain could not afford to stay in this market.

‘‘Milk for $1 a litre is crazy prices. I think that consumables business in Tasmania suffered more than other states,’’ she said. But the milk wars was merely a contributor to Retail Adventures’ demise, with Ms Cameron admitting that the business she acquired out of receivership in 2009 was flawed from the start. Around 630 employees will have lost their jobs by the end of this month from store closures but another 4000 staff remain in employment with the group. Milk for $1 a litre is crazy prices. In a letter to BusinessDay last month Coles chief Ian McLeod also refuted that the price wars were to blame for the demise of the corner shop. He pointed out out that they had instead been replaced by hundreds of convenience stores established in recent years by chains like 7-Eleven.

But the shop front has not provided the biggest gains for the supermarket operators in any case. Macquarie says the biggest contributor to profit growth is the transfer of profits from the companies that supply products to Coles and Woolworths. The broker estimates that the big two have crunched supplier profit margins by 6 per cent over the last five years in what it describes as ‘‘the ongoing profit transfer from suppliers to retailers’’. Rob Murray, the departing chief executive for food and beverage group Lion, said the milk portion of its dairy business was in a terrible state and not too dissimilar to the profitability profile of a charity. ‘‘We have a challenge which is the core of the business, the fresh milk business, which is a charity – in fact a lot of charities do better,’’ Mr Murray said.

He laid the blame for the sliding profits squarely at the feet of Coles and Woolworths, and their private label milk priced at $1 per litre, which undercut branded milk sold by Lion. ‘‘We don’t make any money [on milk],’’ Mr Murray said. ‘‘The simple truth of that is nobody is making money and you can’t make money if [consumers] buy milk at $1 a litre, it physically can’t be done.’’ He said Kirin, which owns Lion, had paid a ‘‘suicidal price’’ of more than $3.9 billion for the dairy business, which was now worth less than $2 billion. Neither supermarket operator has taken this criticism lying down.Both Woolworths and Coles have relied on one unassailable fact. ‘‘As consumers are paying less for their groceries now then they were a year ago, you would be hard-pressed to demonstrate that consumers are losing out,’’ says Mr McLeod.

He also points to the success of Aldi and Costco as proof of the competition in the supermarket sector, and low barriers to entry. The most surprising finding out of the Macquarie research is that despite Coles closing the gap with strong underlying sales growth in food and liquor, Woolworths larger scale has ensured that it has slightly increased its lead over the last five years in terms of sales and earnings before interest and tax. Macquarie estimates that Woolworths food and liquor sales was 36 per cent greater than Coles’ in 2007, but 44 per cent higher for the 2012 financial year. In terms of earnings before interest and tax, Woolworths was 131 per cent higher in 2007 and 133 per cent higher last year.