STEPHEN LONG: In Australia, in the food business, two retail giants dominate the supply chain. It's among the highest concentrations of retail power in the developed world.

Last month the competition watchdog delivered its report on grocery prices. It says the market is working.

GRAEME SAMUEL, ACCC CHAIRMAN: We characterise it as workably competitive.

STEPHEN LONG: But there's another story that hasn't been told. It's about buyers, sellers and power and how Coles and Woolworths are squeezing more and more concessions from suppliers.

DAVID KERR, REDLICH SMALLGOODS: It's extremely hard for a small supplier to do business with Coles or Woolworths. It's just almost impossible.

STEPHEN LONG: Is it driving efficiency or threatening the food bowl?

REG CLAIRS, WOOLWORTHS CEO 1993-98: I am immensely worried about the ultimate destiny of a lot of food manufacturers in this country.

EMILIO GOTTANI, GROWER: We're just a dying breed. Our use-by date's gone, you know. We're just finished.

STEPHEN LONG: Tonight, "Four Corners" shines a light on the retail duopoly and asks: What's the price we pay?

Australia is awash with supermarkets - more supermarkets per capita than America, nearly three times as many as Britain, and Coles and Woolworths own most of them. Together they control at least 70 per cent of the dry groceries; 60 per cent of the dairy market; and about half the fresh food.

GEOFF CUTLER, RETAIL CONSULTANT: I think it is generally agreed that this is the most severe concentration of power in the world.

STEPHEN LONG: It's not just supermarkets. The two retail giants touch us when we eat, when we drink and when we drive. They've got close to half the retail liquor market; more than 1100 petrol stations, hardware, variety stores, pubs and pokies.

Coles used to be the biggest. Now it's Woolworths.

MICHAEL LUSCOMBE, WOOLWORTHS CEO: It's the number 24 retailer in the world but it hasn't happened by accident. We've worked long and hard over many decades to reach the position that we're in at the moment.

GEOFF CUTLER, RETAIL CONSULTANT: I think they are an absolutely superb example of retailers. I think they are world class in the offering that they actually have and as a shareholder I have been very pleased with the performance, particularly of Woolworths, and I'm optimistic that Coles will come back.

But the key issue I think really for everybody is: are they too big and what is the effect of them being as big as they are?

STEPHEN LONG: Noel Hall has been farming at Murtanee in North Queensland for 30 years. He's hauling in the pumpkins but he says it's hardly worth it.

NOEL HALL, PUMPKIN GROWER: I think when I see it, I question who is making all the money because I know that I don't make an awful lot.

STEPHEN LONG: Noel Hall says he gets paid 10 to 25 cents a kilo - about the same price that they were fetching two decades ago. But his costs have soared.

STEPHEN LONG (to Noel Hall): What do you pay for?

NOEL HALL, PUMPKIN GROWER: Pay for fertiliser, the rates on the land, insurance, regulation, food safety, transport, cartons, freight. That's what we pay for - everything. And I look at the prices I see in the supermarkets and I look at the farm gate price that we get and I say to myself, I just can't understand it.

STEPHEN LONG: The ACCC says he's wrong, that there's no evidence of a growing gap between prices at the farm gate and the checkout. Like many farmers, Noel Hall can't believe it.

Lending a hand is a neighbour, Emilio Gottani. He's been growing pumpkins for 10 years and he too can't understand the prices or the ACCC's finding.

STEPHEN LONG (to Emilio Gottani): How do you feel about the situation when you look at the prices that you were getting for the pumpkins and what you see them selling for in the supermarkets?

EMILIO GOTTANI, GROWER: Oh it's atrocious, very bad, not equal at all. You know, it's not, how would you put it, you know we're getting, I averaged over the last 10 years I probably averaged 25 cents a kilo which is $250 a tonne and over the last 10 years the price in the supermarket has been at least $2,500 or $2,800 a tonne.

NOEL HALL, PUMPKIN GROWER: Somewhere in between that farm gate price and the retail price there's got to be a point where the farmer can make more and keep on going and making young farmers want to stay on the land.

In that price structure there, there's an awful lot of movement and I think it's somewhere between 200 and 600 per cent. Everybody says that.

STEPHEN LONG: So we decided to follow the pumpkin and try and find out where the mark-ups come in, from Noel Hall's farm in North Queensland to the Brisbane markets.

John Jurrs has been working in the markets for 30 years, first as a fruiterer then as a wholesaler and providore. He buys pumpkin every week.

JOHN JURRS, WHOLESALER: Well I'm paying for Jap pumpkin at the moment, good quality, 35 to 40 cents a kilo and I'm not a big buyer so I would imagine that the chain stores aren't paying any more than me or if they are...

STEPHEN LONG (to John Jurrs) Or the supermarkets would be getting even less?

JOHN JURRS, WHOLESALER: If they are paying more than me they shouldn't be, they'd better have a look at their buyers.

STEPHEN LONG: We took John Jurrs to a Woolworths store not far from the Brisbane markets where, to his trained eye, he found similar quality pumpkin.

(To John Jurrs): So how much did that you set back? What's it selling for?

JOHN JURRS, WHOLESALER: Well that little piece cost me $1.50. The price per kilo is $2.42.

STEPHEN LONG (to John Jurrs): $Two-dollars-forty-two a kilogram. What do you think of that?

JOHN JURRS, WHOLESALER: Well it's a big difference from the 35 to 40 cents that I normally pay.

STEPHEN LONG (to John Jurrs): So who's making the money? Where's it going?

JOHN JURRS, WHOLESALER: Well someone is obviously getting a lot of it. Whether it's a price gouge or whether it's a fairly inefficient distribution system I don't know but the money is going somewhere.

STEPHEN LONG (to John Jurrs): It's cut and wrapped. Would that account for the difference?

JOHN JURRS, WHOLESALER: I wouldn't think it would be worth that amount of money.

MICHAEL LUSCOMBE, WOOLWORTHS CEO: Well it's all to do with that supply chain between the farm gate and our shelf, so there are many costs.

And more and more these days products like pumpkins are cut up into consumer sized portions; they're probably rewashed again; they're wrapped.

They're weighed and pre-priced and then put into black crates and then brought to the supermarket distribution centre and then from the distribution centre through to our stores.

GRAEME SAMUEL, ACCC CHAIRMAN: I'm sure you can give me an anecdote that that will dispel the nature of all the statistical evidence that's produced by the Australian Bureau of Statistics and others but we have to operate on the basis not just of anecdotes of particular pumpkin growers in a particular location and what might otherwise appear on the shelf.

STEPHEN LONG: Woolworths and Coles largely bypass the wholesale markets and buy most of their produce directly from growers.

Paul Ziebarth is a fifth generation farmer and a former head of the Queensland growers' association. He was one of those direct supermarket suppliers.

PAUL ZIEBARTH: As a direct supplier, growers are able to negotiate on a season basis, if not year to year, the volume of product that they're going to supply. They know exactly the specifications, size, shape, colour, weight, all that sort of stuff. They are able to consciously participate in a price setting mechanism. They can agree on what the price is or agree not, or agree not to supply. And the terms of trade are very, very clear.

STEPHEN LONG: But, he says, there's a downside.

PAUL ZIEBARTH: If a supermarket decides to put a line on special as a loss leader, that discounted price is passed back to the grower which may be 20 per cent below market price.

STEPHEN LONG (to Paul Ziebarth): So they'll come to the grower and say, we want you to supply to us at this price, 20 per cent below market price?

PAUL ZIEBARTH: Yep. The growers basically underwrite the special.

STEPHEN LONG (to Paul Ziebarth): And if you didn't do that what happened?

PAUL ZIEBARTH: Oh sometimes we noticed that our orders over the next couple of weeks were a little bit light.

STEPHEN LONG (to Paul Ziebarth): They put you on a holiday, in the industry jargon.

PAUL ZIEBARTH: Yeah, essentially.

GEOFF CUTLER, RETAIL CONSULTANT: Australia is the only country in the world where when we go on promotion and we drop the price, the retailer does not drop his profit margin in terms of the cents of profit that he would make.

So, take a little example. Let's say he was making 40 cents being sold at the normal shelf price, price drops dramatically - he still wants to make 40 cents of profit for every unit that he sells.

STEPHEN LONG: Geoff Cutler spent more than 20 years advising suppliers who were dealing with Woolworths and Coles. His clients were in the main food manufacturers. And over the years he saw the power shift from the producers to the giant retailers.

GEOFF CUTLER, RETAIL CONSULTANT: They're enormously powerful, absolutely, you could call it almost crippling. I mean they are in the situation now where maybe they need to sit back and say, can I afford to put this guy out of business? Is it going to be in my interest long term?

STEPHEN LONG: The giant retailers are using that power to extract better deals from their suppliers. They're known in the industry as rebates and in effect the supplier is discounting the price to the retailer.

Normally they're trade secrets but confidential documents subpoenaed by the ACCC show that most of the fees, rebates and discounts demanded by Coles and Woolworths have been rising.

And that's been noticed by Etiene Theart who grows avocados near Cairns.

ETIENE THEART, GROWER: The farmer pays everything. We pay the transport to get it from the river down to the markets. We pay the ripening costs; we pay the rent of the black crate that the fruit comes in; the rebates; the advertising costs; the merchandising cost. Everything gets passed on to the farmer.

STEPHEN LONG (to Etiene Theart): And you've even got to pay a rebate I understand to get paid on time?

ETIENE THEART, GROWER: That's the thing, rebate to get paid (laughs).

STEPHEN LONG: As the big retailers get better deals it can make things tough for their smaller rivals.

Philip Connolly runs two liquor stores at Rose Bay in Sydney's eastern suburbs.

PHILIP CONNOLLY, MERRETTS LIQUOR STORE: We carry more than 3,000 varieties of wine, the great, great majority of which are small wineries. We've been in this shop for 36 years and our other shop in Rose Bay for 32 years and there's three generations of my family in these two shops.

STEPHEN LONG: But they might not be for much longer because up the road, Dan Murphy's is moving in.

PHILIP CONNOLLY, MERRETTS LIQUOR STORE: It'll be complete devastation. I think their modus of operation is to move in, drive the local businesses out. There's around about seven shops in this area and it would mean devastation for all of us.

STEPHEN LONG: In the booze business Dan Murphy's is the category killer. It was an independent with five stores in Victoria. Woolworths took it over 10 years ago and now it's expanded around the country.

At Dan Murphy's the range is big, the prices extremely cheap - so cheap that Philip Connolly says he'd often be better off buying beer and wine for his store at Dan Murphy's.

So we put it to the test.

PHILIP CONNOLLY, MERRETTS LIQUOR STORE: I'm charged $38 dollars for a slab of Tooheys. For me to buy Rawson's Retreat from the wholesaler it costs me around about $9 including GST. The price that I'm charged for a bottle of Piper-Heidsieck is over $40 a bottle.

STEPHEN LONG: And sure enough.

(To Philip Connolly): So how do these prices compare to wholesale?

PHILIP CONNOLLY, MERRETTS LIQUOR STORE: Well that product there, that's $6 cheaper than I can buy it. This one here, Rawson's Retreat, that's over $2 cheaper than I can buy it. And that one last week was cheaper than I could buy it from the wholesaler anyway.

I've got to say that in the 36 years that we've been in our two shops I've had 12 armed hold-ups, 11 with a gun, one with a machete, but the biggest predator that I face is this company here.

STEPHEN LONG: Across the road from this Dan Murphy's in Sydney's Kensington, a small liquor store is living what Philip Connolly feared.

Steve Casimatis bought the business a year ago. He paid a third of what it would have been worth before Dan Murphy's arrived but he's still struggling.

STEVE CASIMATIS, LIQUOR ON PARADE: Well we're keeping our head above water but obviously we'd like to be able to do better and in this market, well, it's just impossible to do so.

STEPHEN LONG: He can't compete with the massive buying power of the chain owned by Woolworths.

STEVE CASIMATIS, LIQUOR ON PARADE: They're able to force massive rebates from the various suppliers and these rebates apply to a broad range of products across the board and Dan Murphy's are able to channel all these rebates into just a few products and have them as loss leaders now at prices we just can't compete at.

STEPHEN LONG: Steve Casimatis shows me what he pays for the beer selling for $31.90 across the road.

STEVE CASIMATIS, LIQUOR ON PARADE: We buy the product at $38.25. Now we try to avoid buying it at that price because from time to time they do promos; they offer us a discount. Now that discount normally is around the $2.41 mark and with GST included it brings down our price to $34.84.

STEPHEN LONG (to Steve Casimatis): Including freight?

STEVE CASIMATIS, LIQUOR ON PARADE: Freight and GST.

STEPHEN LONG (to Steve Casimatis): And what are you selling that for in the shop?

STEVE CASIMATIS, LIQUOR ON PARADE: Thirty-five-ninety-nine.

STEPHEN LONG (to Steve Casimatis): So you're making less than $1.50?

STEVE CASIMATIS, LIQUOR ON PARADE: Correct.

STEPHEN LONG: Consumers are clearly benefiting from the low prices at Woolworths' Dan Murphy's stores but the pricing power of giant retail chains is at the heart of a global debate about market power.

There's talk of a waterbed effect where their power to push down the wholesale prices forces up the price for competitors.

STEPHEN LONG (to Philip Connolly): They do deliver very cheap prices.

PHILIP CONNOLLY, MERRETTS LIQUOR STORE: They do deliver cheap prices. They do deliver cheap prices on a number of products and they deliver those cheap prices by having the supplier of those prices screw the other people - screw all the other independent retailers, all the independent liquor store owners by charging me $38 for a case of Tooheys and then Woolworths are able to sell it for $31. They pool all that extra money that we have no power to bargain with them and they deliver that as a little bonus to Woolworths to drive the price of that product down.

STEPHEN LONG (to Graeme Samuel): We've talked to liquor retailers who cannot buy wholesale at the prices Dan Murphy's sells for retail.

GRAEME SAMUEL, ACCC CHAIRMAN: And that's not surprising. In any market place, volume will produce better terms of trade. It will produce discounts; it'll produce better rebates. What does the small operator do? The small operator offers a niche service, often in terms of service or in terms of the specialised nature of the goods being sold.

STEPHEN LONG (to Michael Luscombe): People say that Dan Murphy's on its own could force a major rationalisation in the Australian wine industry because of the incredibly low prices it's selling for .

MICHAEL LUSCOMBE, WOOLWORTHS CEO: Oh look I don't think that's the case, you know. What we have been able to do with Dan Murphy is actually introduce many people to the wonders of wine.

STEPHEN LONG: Tim White is a wine writer, a former wine retailer and a fan of Dan Murphy's but he worries about the impact of heavy discounting on the wine industry.

TIM WHITE, "AUSTRALIAN FINANCIAL REVIEW" WINE WRITER: The potential damage to a brand when you basically drop your trousers and supply it as low as you possibly can is that that wine is then promoted with your brand name attached to it and heavily discounted and that then makes future sales of that particular wine harder to achieve at a reasonable margin.

STEPHEN LONG: David Kerr knows how hard it can be to make a decent profit margin. Here at Moorabbin in Melbourne's south, his company Redlich Smallgoods makes all kinds of sausages. Until last December the company had a contract to supply Coles.

DAVID KERR, REDLICH SMALLGOODS: Saying that you had a contract with Coles, it was always good to tell people you supplied Coles. It was consistent work and we had, you know, enough employees to keep us busy.

STEPHEN LONG: The Coles contract was one of the attractions when he bought the business, but in the end the price was too high.

STEPHEN LONG (to David Kerr): So what sort of profit margin was Coles looking to make on your produce?

DAVID KERR, REDLICH SMALLGOODS: In the mid forties.

STEPHEN LONG (to David Kerr): Forty per cent?

DAVID KERR, REDLICH SMALLGOODS: Yes.

STEPHEN LONG (to David Kerr): Plus?

DAVID KERR, REDLICH SMALLGOODS: Yes.

STEPHEN LONG (to David Kerr): And how did you feel about that?

DAVID KERR, REDLICH SMALLGOODS: Well it would be nice if I could make the same margin. Unfortunately we couldn't make a quarter of that margin.

STEPHEN LONG (to David Kerr): How do you feel about a buyer asking you for a 40 per cent plus profit margin on your produce?

DAVID KERR, REDLICH SMALLGOODS: Disgusted. It's just unfair I guess in one instance because we just can't get anywhere near a margin like that ourselves. My idea with doing business is so that both people could be happy and go forward but to me that's just one person's advantage.

STEPHEN LONG: And then there were the rebates. David Kerr says they cut about another 7.5 per cent off his profit margin.

DAVID KERR, REDLICH SMALLGOODS: There was a rebate given for being paid within a certain time frame and then there was also a rebate for promotions and there was also a rebate for having the opportunity to supply Coles or Woolworths.

STEPHEN LONG: The Redlich sausages weren't selling in the volume Coles wanted so to stay on the shelves, the smallgoods company had to supply the sausages to Coles at a cheaper price and David Kerr says there was only one way to do it.

DAVID KERR, REDLICH SMALLGOODS: We got close to the profit margins they required and the only way we could do that was by using lesser quality meat product in the sausage itself and adding soy proteins and what some people might call fillings to extend the product.

STEPHEN LONG (to David Kerr): So you had to produce an inferior quality product to deliver the profit margin that the major supermarket chain demanded?

DAVID KERR, REDLICH SMALLGOODS: That's correct, yeah.

STEPHEN LONG (to Graeme Samuel): This man had to lower the quality of his product to meet the profit margins that the major supermarket demanded. That's not a healthy situation is it?

GRAEME SAMUEL, ACCC CHAIRMAN: Well of course not healthy, but on the other hand the consumer ultimately determines the quality they want and the price they're prepared to pay for it.

DAVID KERR, REDLICH SMALLGOODS: We actually wouldn't eat the product. We didn't particularly like the product and I'd say consumers were probably thinking the same.

STEPHEN LONG: Coles and Redlich agreed to part ways and Redlich is doing well now as a small niche player.

But for others it's a different story.

GEOFF CUTLER, RETAIL CONSULTANT: Certainly what we have seen amongst local manufacturers is there's not as many small manufacturers as there used to be. There's been a great consolidation. And that has to happen because the only people who can deal on an even basis or an equal footing with the likes of Coles or Woolworths are the really big multinationals.

STEPHEN LONG: During the past decade Woolworths has enjoyed the highest growth in profit margins of any supermarket chain in the world.

It's invested billions to improve its business, including new, hi-tech distribution centres. They've allowed Woolworths to cut its costs and move goods more efficiently.

MICHAEL LUSCOMBE, WOOLWORTHS CEO: It's about getting a product and making sure that it moves. Every time something stops you have costs in storing it but you also have costs in getting it moving again.

TRUCK DRIVERS (chanting): You can't bully us, Woolies! You can't bully us, Woolies!

STEPHEN LONG: Truckers would like to see the goods move a lot faster - off their vehicles. They say the supermarket chains are cutting warehousing costs by storing goods on the back of their trucks.

TRUCK DRIVERS (chanting): You can't bully us, Woolies! You can't bully us, Woolies! Woolies are bullies! Woolies are bullies!

STEPHEN LONG: The Transport Workers Union says some drivers are waiting 20 hours a week or more, unpaid, to deliver goods.

And Australia's peak transport body is also concerned. It criticises the supermarket chains for not doing enough to let drivers sleep while waiting to unload - potentially putting public safety at risk.

TIM EATON, NATIONAL TRANSPORT COMMISSION: We went out on the road and collectively spoke to thousands of truckies about this in preparing the fatigue reform.

It's an issue they're absolutely passionate about and they want it fixed because many of them aren't getting paid to sit in those queues and many of them are having trouble managing their fatigue because they don't know when they're going to be called to the front of the queue.

It's not fair that they're unable to take rest while they're waiting for hours in a queue.

MICHAEL LUSCOMBE, WOOLWORTHS CEO: Well there is no doubt that in some distribution centres in the past at Woolworths that people had to wait too long. I believe that we've improved it and we will continue to improve it. We haven't finished it yet.

STEPHEN LONG: Woolworths' headquarters in Sydney's north-west. It's vast, almost the size of a university campus, and a symbol of the company's success.

Woolworths learned some of the lessons that made it so big and successful from the giant US retailer Wal-mart and Wal-mart and Woolworths still enjoy a close relationship today.

MICHAEL LUSCOMBE, WOOLWORTHS CEO: Jack Shoemaker who was president of Wal-Mart is a consultant to Woolworths, has been for nearly 20 years. In fact this very week he's here this morning, I actually picked him up from Sydney airport, so he's with us for the next 10 days or so.

STEPHEN LONG: Wal-mart is a highly efficient retailer. In its quest for low prices it's been credited with lifting America's rate of productivity and reducing the rate of inflation.

But it's also renowned for squeezing the profit margins of its suppliers.

GEOFF CUTLER, RETAIL CONSULTANT: Well Wal-Mart are a very tough retailer to deal with but as I understand they're only 15 per cent of the US market and I think an awful lot of Australian manufacturers would be quite happy to deal with a big retailer who only had 15 per cent of their market.

STEPHEN LONG (to Geoff Cutler): So you think it's tougher dealing with Woolworths or Coles than Wal-Mart?

GEOFF CUTLER, RETAIL CONSULTANT: Absolutely, absolutely.

STEPHEN LONG: Hundreds of suppliers and would-be suppliers make the journey out here to Woolworths' headquarters each week. These are the rooms where they meet to deal with the Woolworths buyers.

MICHAEL LUSCOMBE, WOOLWORTHS CEO: Well you know all of them would say that we are good negotiators. We're negotiating on behalf of our customers so they expect us to do our very best in determining a good price so that we can pass on that price on the shelf.

But we recognise that we actually have to have profitable suppliers. There's no point us negotiating to the point where they can't run their business profitably.

STEPHEN LONG (to Michael Luscombe): Even with your market share, you have significant power vis a vis your suppliers in packaged groceries.

MICHAEL LUSCOMBE, WOOLWORTHS CEO: Yes and we act responsibly in using that.

STEPHEN LONG: Now Coles and Woolworths can point to plenty of happy suppliers but "Four Corners" decided to independently contact more than 30 suppliers, big and small, and ask them about their relationship with the big retailers.

Few would talk, none publicly. Some told us they were too scared. But privately, those who were prepared to talk said that they had serious concerns about the market power of Woolworths and Coles. Here's a sample of what they said.

VOICEOVER 1: Why would you invest in new plant and equipment if you don't know when your products could be delisted?

VOICEOVER 2: Companies put a lot of their money and innovation into their product. The retailers have the scale to copy products and they do it.

VOICEOVER 3: It's abuse of market power, pure and simple. An elephant taking on an ant.

VOICEOVER 4: Suppliers have nowhere else to go.

STEPHEN LONG: The ACCC dismisses these concerns.

GRAEME SAMUEL, ACCC CHAIRMAN: What we indicate is that there is buyer power that exists. But is it buyer power that is so outrageous, that's so unconscionable in the conduct of the major supermarket chains in dealing with suppliers as to be illegal? The answer to that is no, not on any of the evidence presented to us during the inquiry.

STEPHEN LONG: The competition watchdog says the only problem with the market power of Coles and Woolworths is that suppliers don't get paid as much as they want.

But its report concedes that some suppliers "appeared to be genuinely concerned about retribution if details were provided to the ACCC and investigated".

ALLAN FELS, ACCC CHAIR 1995-2003: The food manufacturing industry is really scared about this situation and the great power of Woolies and to some extent Coles.

STEPHEN LONG: Allan Fels ran the ACCC before Graeme Samuel. He's less convinced that there's no problem in the way Woolworths and Coles use their power over suppliers.

ALLAN FELS, ACCC CHAIR 1995-2003: There are two interpretations of the relative silence of suppliers. One is that they haven't got genuine complaints. The other is that they're too scared to talk even confidentially.

STEPHEN LONG (to Allan Fels): Well the ACCC in its report seemed to take the view that they didn't have genuine complaints.

ALLAN FELS, ACCC CHAIR 1995-2003: I would be a little surprised if there weren't some genuine complaints.

GRAEME SAMUEL, ACCC CHAIRMAN: No, no, let me emphasise to you that they spoke out to us in private session, in confidential private session. And the reflection of what they said to us in private confidential session is shown in our report. But the report does not indicate any evidence given to us in private session, confidential session, of exploitation or unconscionable conduct. What it does give is evidence of tough dealings.

STEPHEN LONG: The problem for the suppliers is with Coles and Woolworths controlling most the market, where do they go?

And now the supermarkets are replacing suppliers' brands with their own lines. It used to be called home brand, now it's known as private label and it's pushing manufacturers' own labels off the shelf.

REG CLAIRS, WOOLWORTHS CEO 1993-98: There is a place for private labels, globally that's been proven, but it does put the brand names in some peril and there's got to be the correct balance in there.

STEPHEN LONG: Reg Clairs was the CEO of Woolworths from 1993 to 1998.

REG CLAIRS, WOOLWORTHS CEO 1993-98 (archival footage): There are about seven-million Australian Woolworths customers. We have something in the order of 11-million transactions per week...

STEPHEN LONG: He was the man who made Woolworths "the fresh food people". And when he ran the company he had a different view about what the grocery business is about.

REG CLAIRS, WOOLWORTHS CEO 1993-98: We had a philosophical view that the market was driven by the Kelloggs, the Cadburys, the Nestles and the major producers of the world, and they'd created the market. They innovated, they brought new product to the market, they created demand.

And we, that is my management team and the team prior to me under the leadership of Harry Watts, believed that the retailer was the last link in the chain before the product reached the consumer.

STEPHEN LONG: Reg Clairs says Woolworths is now a vastly improved company but he worries about the long term impact of some of the changes in retailing.

STEPHEN LONG (to Reg Clairs): How's it changed now?

REG CLAIRS, WOOLWORTHS CEO 1993-98: Oh I sense that there's been a greater emphasis on the retailer taking charge of the supply chain.

STEPHEN LONG (to Reg Clairs): And what's the consequence of that?

REG CLAIRS, WOOLWORTHS CEO 1993-98: My reading on that is that there's been many of the smaller suppliers have probably been squeezed out of the industry and that leads me to a concern over the next 10 or 15 years in that it's a cycle that comes and goes. And in, who knows, in 10 or 15 years' time there may be a handful of global manufacturers that win back that power base. And that's a frightening thought, that if that occurs in 10 years from now.

STEPHEN LONG: For now though the power is with the giant retailers. Once they control the product, supermarkets can tender out the work to the lowest bidder.

GEOFF CUTLER, RETAIL CONSULTANT: With the home brand business growing, the brand is owned by the retailer so all you're doing is contract manufacturing and that contract manufacturing could be supplied from anywhere around the world.

STEPHEN LONG: Of course there's an upside for consumers, though not necessarily for other retailers or manufacturers.

Just look at the price of milk.

Scott Dixon makes ice-cream and sorbet at a factory farm on the Atherton Tablelands near Cairns in Queensland and a couple of times a week he drives nine kilometres to Coles to get the milk.

STEPHEN LONG (to Scott Dixon): Why don't you buy it wholesale?

SCOTT DIXON: We do try, we did try to buy it wholesale. We spoke to Dairy Farmers but the cost of the wholesale price from Dairy Farmers is far in excess of what we can purchase it from Coles for.

They told me that they did a two-year contract with the major supermarkets and that to win those contracts they had to obviously slice their price fairly dramatically and that they then had to make up that loss through other users like myself.

STEPHEN LONG: To some it shows how the buying power of Woolworths and Coles works to the good; to others, how that power distorts the market.

Just like wine merchants who can buy cheaper at Dan Murphy's than through a wholesaler, Scott Dixon goes to Coles for his supply.

STEPHEN LONG (to Scott Dixon): So how much has this set you back?

SCOTT DIXON: Ninety-five-dollars-odd.

STEPHEN LONG (to Scott Dixon): And how much would you have had to pay wholesale?

SCOTT DIXON: Another $45-$50?

STEPHEN LONG (to Scott Dixon): Some people might say Coles is doing you a good turn.

SCOTT DIXON: They are (laughs). I don't agree with it but yes.

STEPHEN LONG (to Scott Dixon): What would you say to people who said Coles and Woolworths are delivering exceptionally low prices on milk so the consumer benefits?

SCOTT DIXON: The consumer is benefiting but it's at our expense, the people that are using this. We use this to manufacture with and it's at our expense. We are having to pay a premium to support low price milk.

STEPHEN LONG: Milk companies charging other customers more because the supermarkets are squeezing their profit margins on private label? The ACCC reckons that doesn't happen.

In the past few years there's been a new player in the game: the German supermarket chain Aldi. Fewer lines help keep Aldi's prices down and according to consumer group Choice, they're consistently cheaper than Coles and Woolworths.

ELISE DAVIDSON, CHOICE: This is what is a staple basket of goods which we compile for our supermarket surveys that we do. There's basic things in there like bread, cheese, milk, cereal, coffee. Even things like personal care items like deodorant, toothpaste, toothbrushes.

STEPHEN LONG (to Elise Davidson): And how do the prices compare?

ELISE DAVIDSON, CHOICE: Well in our last survey which was done in 2007, a basket of goods comparable to a basket of Coles or Woolies, at Aldi was $55, at Coles and Woolies was just over $100, so it's almost half the price.

STEPHEN LONG (to Elise Davidson): And what about now?

ELISE DAVIDSON, CHOICE: Fifty-dollars I payed today.

STEPHEN LONG (to Elise Davidson): So how much price pressure does it put on Woolworths and Coles if an Aldi moves in nearby?

ELISE DAVIDSON, CHOICE: Well what we see is when an Aldi moves into a market, Coles tend to drop their prices by just over five per cent, Woolworths by almost two per cent. So even if you're not actually shopping at Aldi in your area you benefit from having one nearby because Coles and Woolworths are going to be a little bit cheaper.

STEPHEN LONG: Aldi has nearly 200 stores and it wants to expand but at times it's found it difficult. It complained to the ACCC that it had been blocked from moving into some shopping centres because the major supermarket chains had leases designed to stop competition.

ALLAN FELS, ACCC CHAIR 1995-2003: The restrictive clauses in the deals between big retailers and shopping centres that make it very difficult for competitors to enter into those shopping centres are harmful to competition generally and for the most part can't be justified.

STEPHEN LONG: "Four Corners" has obtained copies of leases that show these restrictive clauses.

World Square in Sydney's CBD - Coles has exclusive rights to operate here without competition from another chain for 15 years. It also has first right of refusal on any other site developed by the landlord within 100 metres.

The Oasis Shopping Centre at Broadbeach on the Queensland Gold Coast - if a competing supermarket moves in here, Woolworths has its rent slashed by more than half, to one per cent of its turnover.

MICHAEL LUSCOMBE, WOOLWORTHS CEO: All it does is give us a mechanism to renegotiate a lease should the landlord decide to change what he first proposed to us, which was a shopping centre with us in it by ourselves, no other, you know, competing business. It gives us the opportunity to actually renegotiate should someone come in but we...

STEPHEN LONG (to Michael Luscombe): We've seen clauses that say that a competitor cannot operate for 10 years, 15 years once you've set up. How's that fair?

MICHAEL LUSCOMBE, WOOLWORTHS CEO: Those clauses, once again, I don't believe have ever been enacted.

GRAEME SAMUEL, ACCC CHAIRMAN: We don't like those clauses. There are something like 650 of those types of clauses existing in shopping mall, in shopping centre leases around the country. We've expressed the strong view that we're concerned about the existence of these clauses and we'll be examining them very carefully.

STEPHEN LONG: Simon Fonteyn's company has a database of 22,000 retail leases. "Four Corners" asked him to look at a sample of Coles and Woolworths leases - about one in three had restrictive clauses.

SIMON FONTEYN, LEASING INFORMATION SERVICES: What's unique about these clauses for major supermarkets is their precise nature of extracting damages from the landlord for introducing competition. The smaller retailers cannot extract such clauses. They're virtually unheard of and it's purely related to the market dominance of the major supermarkets in Australia.

STEPHEN LONG: Mullumbimby - a small town on the north coast of New South Wales. It's one of 15 communities that have been fighting the expansion of Woolworths or Coles. Woolworths wants to put a big box store outside the town centre. These residents are resisting.

CROWD (chanting): No Woolies! No Woolies! No Woolies!

GARY SCOTT, MULLUMBIMBY ACTION GROUP: The objection is the way Woolworths operates and in this particular situation in Mullumbimby the position that they're choosing to operate.

They would dearly like to operate separate from the CBD of this town. Their strategy is they want to separate this town. They don't want to be part of the CBD. They want to be, locate themselves in sleepy little Station Street away from the main part of town where people will drive and park and not go to the trouble to go back to the town.

STEPHEN LONG: Locals worry that the convenience of a one-stop shop will draw people away from the town centre.

At Edens Landing fruit shop in Mullumbimby, Paul Medeiros says he buys as much produce as he can locally.

PAUL MEDEIROS, EDENS LANDING FRUIT AND VEGETABLES: At the moment we've got about 50 per cent of our produce is coming in from the local growers.

STEPHEN LONG: He estimates that if he loses 20 per cent of his business to Woolworths, he may have to close down.

PAUL MEDEIROS, EDENS LANDING FRUIT AND VEGETABLES: What will happen is if Woolworths are successful in coming to town and successful in rallying people to buy there, the farmers' markets will close down, I will be closed down and inevitably the local farming community will close down. So there won't be any growers operating in the Mullumbimby area or having said that, possibly the Byron Shire area because all the food for the area will be sourced from outside of the shire.

STEPHEN LONG: In the end, consumers will decide the fate of Paul Medeiros' shop and the farmers' markets.

But a more pressing concern is the future of food manufacturing in this country, according to Reg Clairs.

REG CLAIRS, WOOLWORTHS CEO 1993-98: I am immensely worried about the ultimate destiny of a lot of food manufacturers in this country. Globally we are seeing the growth of the majors and unless we are able to build a food manufacturing business in Australia that is sustainable then ultimately the global manufacturers will take the power base.

GEOFF CUTLER, RETAIL CONSULTANT: Australia is a country with great resources in terms of growing fresh produce as you know and a lot of this really needs to be either sold locally or processed and exported.

Now if you're having difficulty making money in your home market, you don't have much chance of exporting. Ultimately the farmers must suffer

STEPHEN LONG: Back up at Mutarnee, the farmers are giving up. Three generations of the Gottani family have lived on this farm.

EMILIO GOTTANI, GROWER: Well I've given up. This year I decided, that's it, I'm not going further into debt. I've gone well into debt over this because we're not getting what we should be getting for our produce and that's the reason I've given it up. It's just eating my farm away.

There's no future. We're just a dying breed. Our use-by date's gone, you know. We're just finished.

STEPHEN LONG: After six months of inquiry the ACCC decided there's no fundamental problem with how the retail grocery market works.

But concerns about the concentration of retail power linger and in the farms and the factories, there's still a view that something's wrong.

(End of transcript)