Woolworths and Coles are emphasising the threat of Aldi — is it really a competitive force to be reckoned with?

Admittedly, the ACCC's supermarket inquiry has lacked the drama of this year's Senate probe —which saw then-Woolworths boss Brad Banducci threatened with jail time.

And there were certainly no walkouts.

But under the gaze of legal counsel Naomi Sharp SC, the consumer watchdog did conduct a step-by-step dissection of the big two supermarkets' business models.

The ACCC is ultimately trying to find out if Australia's supermarket sector is competitive enough, to the point where retailers have to give shoppers the cheapest possible prices and not steamroll their suppliers.

In response, top supermarket bosses have had a careful strategy on display.

And it involves Aldi.

Who's afraid of Aldi?

The German supermarket has come a long way since it opened its first store in Australia in 2001.

It now has almost 600 stores here, all of them located in capital and regional cities.

And, with clever youth-targeted marketing during "cozzie livs", Aldi's shaken off the knock-off products vibe to emerge as a real option for Australian households.

Just ask the chief executive of Coles, who gave a surprisingly glowing endorsement of the supermarket's rival at the ACCC's hearings this week.

"We consider (Aldi) a significant and credible competitor to us," Leah Weckert told the inquiry.

"They do position themselves as the lowest price in the market.

"And they have lots of interesting things in their stores too, which attract customers in. They have the special buys down the centre aisle.

Ms Weckert then went onto note that some of their own customers have ditched the ASX-listed company as their primary shop, choosing instead to go to Aldi first and then do "top up" shops at Coles.

(Aldi, for its part, recently told Australians in a cheeky ad campaign that it doesn't mind if people "see other supermarkets", as long as the ethical non-monogamists keep Aldi as their first stop.)

So is Aldi actually a big threat to ColesWorth?

Aldi is undoubtedly having an impact on the market.

Retail expert Gary Mortimer told me this week that Coles and Woolies have been responding with vast quantities of private-label products, while franchises under Metcash's IGA model have had a hard time competing.

Aldi will especially be a threat to IGA if it starts to enter less populated regional locations, although its distribution model makes this difficult — and has so far seen it rule out Tasmania and the Northern Territory.

But clearly, Aldi is growing and it intends to keep doing this.

It now only has about 250 fewer supermarkets than Coles, and the German retailer's own local heads told the inquiry it intends to continue its slow and steady growth strategy.

"Aldi would be set to overtake Coles on store numbers," Gary Mortimer adds.

On market share, however, Coles and its shareholders are still doing fine.

According to the ACCC's interim report for its inquiry, Aldi still has less than 10 per cent of take-home food and grocery sales, while the far bigger format supermarket Coles has close to 25 per cent.

Woolworths, an even bigger giant, has more than 32 per cent market share and 1,112 supermarkets.

Yet its former boss also told the inquiry how much of an existential threat the German retailer has become, and that Woolworths actually sets its prices based on competition with Aldi.

"You want to be competitive against everyone," said Banducci, who left Woolworths in recent months.

"But in truth, you do start with Aldi and making sure you have competitive prices against them, given how important they are in the marketplace.

Supermarket oligopoly or fierce competition?

As well as Aldi, the ColesWorth bosses also said they're facing growing competition from US giants Amazon and Costco, and even noted Bunnings, Chemist Warehouse and The Reject Shop sell similar items.

And, in case anybody was left wondering about the state of competition in Australia's grocery sector, it was all distilled into this exchange between the ACCC's legal counsel and Woolworths' new chief executive.

Naomi Sharp SC: "Is there a state of fierce competition in the grocery market?"

Amanda Bardwell: "Yes."

Naomi Sharp SC: "It's dominated by Woolworths and Coles isn't it?"

Amanda Bardwell: "We are a substantial part of the market overall that is dramatically changing."

Ultimately, it'll be up to the ACCC to decide if ColesWorth is right on this or if this is just spin to shut down allegations in some quarters that the two supermarkets have a duopoly.

The federal government spurred this inquiry as consumers raged about allegations of price gouging, and the ACCC's interim report already noted Coles and Woolworths have 67 per cent of all supermarket sales.

"In an oligopoly, we expect market participants to maximise their profits based on expectations of how other market participants are likely to react.

"If dominant market participants believe that a reduction in prices will provoke an equal reduction by other dominant market participants, resulting in a lower profit margin without a change in market shares, this will tend to reduce the incentive to compete vigorously on price."

It also noted it was focusing on barriers to entry in the sector, after observing Aldi had taken 20 years to build up its share of the market.

So what is the German supermarket's take?

Aldi was also compelled to front the inquiry's hearings, giving some rare insight into the workings of the usually tight-lipped private company.

As well as explaining just how it manages to deliver that French cheese and $7 prosecco so cheaply, Aldi's Jordan Lack was asked about the state of competition in Australia.

The ACCC says it'll put out its final report in February.

While the hearings might not have been high energy, the watchdog's final assessment could make for interesting reading.

Its last look into the supermarket sector was back in 2008.

This one lands in an election year, and any recommendations it makes for change, if any, will ultimately come down to political will.