Coles and Woolworths are two of the most powerful and profitable supermarkets in the world but should not be split up, the competition watchdog has found in a major review of the sector.
The Australian Competition and Consumer Commission released its final report into supermarkets on Friday, finding major chains had little incentive to be competitive on pricing due to their large market share.
The commission said Coles, Woolworths and Aldi faced little competition and had increased average product margins over the past five years, but stopped short of accusing them of price gouging.
Treasurer Jim Chalmers said the government accepted all 20 recommendations from the report, in principle, and was already taking substantial steps in most areas.
Others would take long lead times and require consultation, meaning it may be a while before consumers notice the changes in their daily shop.
As part of the government's initial response, Tuesday's budget will include $2.9 million over three years to help educate suppliers on how to stand up to the supermarkets.
"Cracking down on the supermarkets is all about getting a fair go for families at the checkout and farmers at the farm gate," Dr Chalmers told reporters on Friday.
"Even with the progress that we've been making on inflation, we know that people are still under the pump, and we know that the weekly trip to the supermarket can be a source of that pressure."
The ACCC, in its 441-page report, said there was no "silver bullet", delivering a suite of recommendations to address issues including barriers for new entrants, supermarkets' power imbalance over suppliers and lack of choice in remote locations.
It recommended increased transparency, such as mandated publication of price and package size information, to help clamp down on shrinkflation and dodgy discounting.
The watchdog did not, however, back a coalition proposal to break up major supermarkets.
Dr Chalmers said the risk of divesting supermarket chains outweighed the benefits.
"If you make one of the big chains sell in the community, there's a risk that it's just snapped up by the other big player in the supermarket sector and that would be counterproductive," he told ABC TV.
Nationals senator Bridget McKenzie said the report was a "flaccid" response from the government to address cost-of-living concerns.
"I didn't hear any tough measures that are actually going to put a very strong incentive for our supermarkets to behave better," she told Sky News.
"They haven't actually taken a big stick to it."
The large scale of Australian supermarket chains has resulted in a relatively efficient food supply system, benefiting consumers, the commission acknowledged.
"In particular, ALDI, Coles, Metcash and Woolworths have a scale and scope that provides convenience to many Australians and benefits them through efficiencies in their procurement, logistics and other business functions," the report said.
Coles and Woolworths have vigorously rejected claims of price gouging, arguing their preferred profitability metrics showed their margins are comparable to their peers in countries like Canada, the UK and the US.
"Coles believes Australia’s grocery sector is highly competitive, is evolving rapidly, and offers consumers greater choice than ever before," the supermarket giant said.
Coles also warned against measures that will "increase red tape and drive up costs".
Woolworths CEO Amanda Bardwell welcomed recommendations that improved transparency for customers, "where they don’t have unintended consequences".
Bran Black, chief executive of the Business Council of Australia, said it was a good thing the supermarkets are profitable because they support jobs, pay taxes and their shares are included in superannuation accounts.
