Joanna Wells explores why price justification is becoming a competitive advantage as Australia’s new supermarket pricing laws reshape buyer expectations. She explains why businesses must be ready to defend their prices, not just set them.
This episode explores how price justification is changing supplier negotiations and range reviews. It examines why defending a price differs from cost-plus pricing and why stronger buyer scrutiny will extend beyond supermarkets. Finally, it explains how effective price justification protects margins and strengthens commercial relationships.
TIME-STAMPED NOTES:
[00:00] Price Justification as a New Competitive Advantage
[02:23] Price Justification and the Shift in Supplier Negotiations
[05:13] Price Justification vs Cost-Plus Pricing
[07:49] Price Justification Beyond Supermarkets
[10:53] Conclusion: Why Every Price Needs a Reason
Price Justification as a New Competitive Advantage
[00:00] There is one consequence of the new supermarket pricing laws that I don’t think enough Australian businesses are preparing for from the 1st of July. Coles and Woolworths are legally required to justify their prices, not their promotional prices, that actual prices, what they charge at the shelf. The new law part of the mandatory food and grocery code of conduct requires both retailers to prove their prices are reasonable.
[00:29] The standard is specific cost of supply, plus a reasonable margin. If the ACC investigates and fines, the price cannot be justified against the standard. The penalty is $10 million or 10% of annual turnover, whichever is larger. Now, most of the coverage has focused on what this means for consumers, whether it bring grocery prices down, whether it changes what you pay at the checkout.
[00:58] This is not what I’m going to talk about today because the most important consequence of this law will not happen at the checkout. It will happen in a room, you know? Well, it will happen in your next range review, and I want to tell you exactly what is going to be different about that conversation.
[01:21] The law itself applies to Coles and Woolworths, not to their suppliers, but I want to explain what happens commercially when a retailer such as Coles and Woolworths has a legal obligation to demonstrate that their prices are reasonable to regulators.
[01:40] So to demonstrate that a shelf price is reasonable, Coles and Woolworths will inevitably examine the costs and margins that sit behind it. That is not a legal requirement on suppliers. It is a commercial logic that is very hard to avoid.
[02:00] If the cost of a product on the shelf needs to be defensible to a regulator, then the cost of that product coming in the back door becomes a natural part of the conversation, not because the law requires it, because demonstrating reasonableness at the shelf becomes much harder if you cannot demonstrate reasonableness in the supply chain.
Price Justification and the Shift in Supplier Negotiations
[02:23] I want to be specific about what this looks like in practise. It does not look like a formal audit; it does not look like a legal letter. It looks like a buyer who asks better questions, more specific questions about cost structure, more detailed questions about promotional funding, more careful questions about the relationship between the price on the invoice and the total cost of supply.
[02:53] The questions were always there. What has changed now is how much the buyer needs the right answers, and I want to tell you what happens in the room when those questions arrive and a supplier is not ready for them. I want to tell you something about range reviews that most people in the industry do not say out loud.
[03:17] The conversation you’ve been having with the buyer has always been uncomfortable. They want a better price, more promotional support, a lower cost in. They want you to fund the gap between what the consumer will pay and what they need to make. That conversation has not changed. What has changed is what is sitting behind it.
[03:43] Before the 1st of July, the buyer was asking for a better price because they wanted to protect their margin. The pressure was commercial real and significant, but it was a negotiation. Now, after the 1st of July, the buyer is asking for a better price because they may need to be able to justify the shelf price to a regulator.
[04:07] The ask sounds the same, but the weight behind it is different. I’ve been in those range review meetings. When a commercial team is under external pressure, the questions become more specific, the data requests more detailed. The conversations about cost structure that used to happen occasionally, now happen every time, and here is what I see happens to suppliers who have not prepared for it.
[04:37] They come in with a price. They do not come in with a reason. Then the buyer asks them to justify it. They offer a discount. Instead, they discount gets accepted. The margin problem deepens, and the supplier has set a precedent that will be used against them at every subsequent review. A discount is not a justification. It is an admission that the original price could not be defended. So what is the question your price list actually cannot answer?
Price Justification vs Cost-Plus Pricing
[05:13] Here is the question that is now sitting in the room with you at every range review. Can you justify your price against cost of supply plus a reasonable margin? Not “Is your price competitive?” Not “What discount can you offer on volume?” Can you justify your prices?
[05:36] I want to be very precise about what that question is asking. This standard is not asking you to set your prices using cost plus pricing methods. Not at all. This standard is asking you how you defend your prices. Do you understand the gap between what it costs you to supply your product and what you are charging for it? And can you explain why that gap is reasonable?
[06:06] Value earns margin category, role earns margin, service level, earns margin range architecture earns margin. None of that disappears under the standard. What disappears is the ability to charge a margin. You cannot explain. And here is what I see when I sit down with FMCG suppliers and open their actual pricing data.
[06:34] Most of them cannot answer that question, not because their prices are too high, not because they are pricing the wrong way, because they’ve never had to explain their prices in those terms.
[06:46] Most supplier pricing starts at the top list, price, customer discount, promotional funding, rebates, range review outcomes from prior years. What lands is the result of years of negotiation? Not a number that connects to a cost and a value story. That is not a reason. That is a history. And when the buyer asks you to justify your price against cost of supply plus a reasonable margin, a history is not enough.
[07:22] But before you think this only matters if you sell into Coles and Woolworths, I want to tell you something. If you are not an FMCG supplier, if Coles and Woolworths are not your customer, if this law has nothing to do with your sector, I still want to tell you something because the most significant thing this law does commercially is not create a legal obligation for two retailers.
Price Justification Beyond Supermarkets
[07:49] It creates a question that will travel. When Australia’s two largest retailers have to demonstrate their prices are reasonable. That question does not stay in grocery. Do not be surprised if buyers outside grocery begin asking the same question.
[08:09] The procurement director at a mining company, the commercial manager at a construction business, the category lead at a major industrial distributor, they will read about this law. They will understand what it means, and some will arrive at your next pricing conversation with exactly that framing. Why is this price what it is? Ask your sales team.
[08:35] What happens when a major customer asks them that? Today, you will get one of three answers. That is what the market will bear. That is what we’ve always charged. And that is what the competitor charges minus 10%. None of those are justifications. They are the lack of one. The difference between a business that can answer that question and one that cannot, that is what I want to leave you with.
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Conclusion: Why Every Price Needs a Reason
[09:05] The businesses that will navigate this are not the ones with the lowest prices. They are not the ones with the biggest promotional budgets. They are the ones with the clearest reason. Cost of supply plus a reasonable margin is not a threat to a business that already knows its numbers.
[09:24] And knowing your numbers does not mean pricing from costs up. It means knowing exactly what it costs you to make, deliver, promote and support each product for each customer. It means being able to articulate the value, deliver above that cost, the category role, the service level, the reason a customer pays what they pay and stays. And it means being able to explain without hesitating why. The margin between those two things is the margin you have earned.
[09:56] If you have that, this law is not your problem. It is the moment your competitor who’s been winning on relationship runs out of road. I’ve been in those rooms. I have sat with suppliers who walked in with a price and a discount, and I’ve sat with suppliers who walked in with a number, a reason, and a cost structure that could withstand any question the buyer asked.
[10:24] Those two conversations end very differently. The supplier with the discount leaves with a less margin and a precedent they cannot undo. The supplier with the reason leaves with a commercial relationship, that is harder to displace. Because when a retailer has to justify their prices to a regulator, the supplier that wants to be on their shelf is the one who makes their justification easier, not harder.
[10:53] A price without a reason becomes a discount waiting to happen.
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