If a bit of competition is healthy, then what sort of shape is Australia’s consumable retail industry in?
If a bit of competition is healthy, then what sort of shape is Australia’s consumable retail industry in?
IT’S not easy to get people along Australia’s food supply chains to talk about the current relationship between supermarkets and their suppliers.
Recent aggressive price-cutting by the two dominant supermarkets – Coles and Woolworths – has highlighted the tensions between suppliers and retailers and raised questions as to whether the market consolidation that has created two large-scale retailers is a good thing.
Coles and Woolworths entered into a ‘milk price war’ last year, slashing the price of milk to $1 litre; and while the dairy industry claimed it was being backed into a corner by the anti-competitive structure of the supermarket segment, inquiries by the Australian Competition and Consumer Commission found the price cuts provided a good outcome for consumers.
More recently, the major supermarkets reduced fruit and vegetable prices, prompting claims by farmers and growers the duopoly’s pulling power resulted in farm-gate prices being forced down.
The supermarkets say they are reducing their margins internally to allow for significant price drops.
Yet while industry lobby groups continue to push for fair prices for farmers, it remains difficult to get suppliers to speak about their dealings with Coles and Woolworths.
Australian Farming Institute managing director Mick Keogh said the ACCC did not have an anonymity policy in place for suppliers coming forward to the commission with evidence of supermarket misconduct. He said this made aggrieved suppliers hesitant to speak publically about problematic relations between supermarkets and suppliers, given the supermarkets dominate market share.
After all, why would a supplier want to cut themself out of supply contracts by publicly complaining about their retail relationships?
“Even this week I notice the chairman of the commission, Rod Sims, has modified that stance and said that, in fact from now on, they will give confidentiality to people coming forward. Up until now whenever someone came forward the first thing the commission did was refer the complaint to the other party involved,” Mr Keogh told WA Business News.
He said the pricing and market information relevant to the milk pricing inquiry was held by major supermarket players and was not made available to the inquiry; that lack of transparency created a flaw in the ACCC’s conclusions, according to Mr Keogh.
“Until we have better access to information, you can’t really be definitive about whether there is or isn’t an uncompetitive market operating,” he said.
“I really do think the ACCC is muddling around in the dark a bit on this, I don’t think they understand the nature of the business transactions that occur between producers and the supply chain and some of the limitations around that and the lack of information that applies to it.”
The arguments between suppliers and supermarket giants continue to simmer underneath the cheap price tags and associated shopper benefits.
It’s claimed the dominance of the supermarket chains also leads to higher volumes of imported fruit and vegetables on the shelves, and an imbalance in bargaining power when it comes to in-store brand positioning.
Paying the price
Former Horticultural Society president and ex-Carnarvon grower Bob Carne supplied fruit and vegetables to Woolworths and Coles for 20 years and said he didn’t believe the behaviour of the supermarket giants had changed since he first started dealing with them.
“I don’t think it has ever changed, farmers always reckon they are getting screwed,” Mr Carne said.
As a long-time grower and still a keen observer of the industry, Mr Carne said common tactics of the major supermarkets included initiating contracts at a reasonably high price, which encouraged the grower to produce more, but then lowering the prices for subsequent contracts.
“Once they have got you in they just screw you blind,” he said.
“The biggest thing growers complain about is that they (supermarkets) just don’t care about what it costs to produce, they say ‘like it or lump it’. It is this attitude as much as anything that they really object to.”
Supermarkets say the recent price cuts to fruit and vegetables won’t affect prices paid to growers. Rather, they say, the discounts were introduced to lift sales and move the excess supply of fruit and vegetables from a bumper season.
But Mr Carne isn’t convinced.
“To me they are using it as a way to cut down the price of fruit and veges. You can guarantee they won’t be cutting their margin, it will come off the grower not anything else,” he said.
Mr Carne and his wife, Di, started pure fruit icy pole company Bare Crush several years ago and now avoid supplying large supermarkets in favour of independent supermarket chain IGA and small independent gourmet grocery stores.
They have recently opened a store in Subiaco’s Station Street markets and are looking to build on the brand by licensing the name to a producer in the eastern states, continuing to grow through independent retailers.
Industry body Fruit West represents 800 growers across the state. Chairman Ben Darbyshire is more focused on the challenges facing growers in the form of high labour costs, and escalating fuel and electricity costs than the dispute with Coles and Woolworths.
Mr Darbyshire, who grows apples and stone fruit in the South West, said the dealings between growers, Coles and Woolworths and supply chain links in between were standard business practice.
“The agents are acting on behalf of their bottom line,’’ he said.
‘‘That is clearly the most important thing, as with any business. We don’t do each other favours.”
Mr Darbyshire said the market structure had a healthy level of competition despite market dominance by the two major players,
“The dynamics of the market is that we grow fruit and a large proportion of it ends up on Coles’ and Woolworths’ shelves,” he said.
The bigger picture
As supermarket behemoths and dominators of liquor and hardware markets, Coles and Woolworths can court controversy, but in their own right they are success stories.
Between them they have used aggressive market strategies to grow into superpowers in the general retail, liquor, hardware and grocery markets, with interests in office supplies and electronics.
Big brands such as Dan Murphy’s, BWS, Dick Smith and Big W are under the Woolworths umbrella, along with 295 licensed venues and pubs under its ALH business. Coles owns liquor retailers Liquorland, Vintage Cellars and 1st Choice, while parent company Wesfarmers owns Bunnings, Target, Kmart, Kmart Tyres & Auto and Officeworks.
ASX-listed Metcash is focused on wholesale distribution to independent retailers in the same market segments and claims to be the national independent marketing and distribution company fighting for independent supermarkets, which form under alliance brand IGA.
The company owns a number of distribution businesses including IGA Fresh and Campbells Wholesale, which supply independently owned retailers including SupaIGA, IGA, Lucky7 and Cellarbrations. Metcash recently bought 51 per cent of independent hardware retailer Mitre 10 (see page 12).
Gaining market share has more recently been about developing private label home brands, with Woolworths planning to double sales of its private labels Select, Homebrand and Macro in the next five years by developing more products and reducing prices.
Homebrand was developed in the 1980s and sales for its 850 products have increased by 180 per cent since 2000, while sales of its organic and gluten-free private label Macro have increased by 43 per cent in the last 12 months.
A spokesperson for Woolworths told WA Business News the private label development was a “great business opportunity for small and medium sized manufacturers who make up the majority of our private label supply base.”
Private label deals can be lucrative for producers such as Harvey Fresh, which won a three-year contract with Coles last year to supply a large but undisclosed amount of milk for Coles’ private label milk products.
“It provides volume and certainty for Harvey Fresh and dairy farmer suppliers, and provides a platform to pursue new market opportunities,” Harvey Fresh marketing and sales director Kevin Sorgiovanni said.
The development of private label brands under Coles and Woolworths can cause pain for branded food producer companies like listed Goodman Fielder, which owns brand names Wonder White, Helga’s, White Wings and Praise.
The effects of the rise in private label market share was clear in Goodman Fielder’s annual report, released last year.
“Fierce retailer competition in Australia resulted in substantial private label product price reductions, generating significant growth in lower margin private label after several years of gradual decline in this segment,” it said.
“Despite the increase in private label bread, the company’s bread brands still represent 36.4 per cent of the Australian fresh loaf category at year end.”
In a letter to shareholders last year, chairman Max Ould said recovering the costs associated with commodity cost pressures and significant price volatility was made more difficult “given the extreme level of competition and price discounting that is presently occurring in the retail sector”.
