Getting warm and Woolie on local supply

Canberra’s war against big supermarkets jars with the chains’ lowered food costs, but Woolworths’ SPC deal will win favour with politicians and regulators.

Given the increasingly hostile political environment in which the two major supermarket groups are operating, Woolworths’ decision to source all of its home brand canned deciduous fruit requirements from SPC Ardmona is an astute move.

The Coca-Cola Amatil-owned processor has been struggling as supermarkets have switched to cheaper offshore sourcing of fruit, which has been made even more competitive by (until recently) the strength of the Australian dollar.

The Rudd government recently pledged $25 million, conditional on matched funding from the Victorian government, to keep SPC’s Shepparton plant operating. Meanwhile, the group itself has launched anti-dumping actions to try to halt the tide of imported fruit.

The Woolworths contract adds $3 million to an earlier $7 million contract with SPC, which displaced products previously imported from South Africa.

Offshore sourcing by the supermarket chains has been one of the flashpoints among a series of issues that have caused politicians from across the full spectrum of politics to criticise and threaten them.

The chains’ relationships with suppliers and growers; parts of Woolworths’ network expansion strategy, which includes acquisitions of independent supermarkets; and their shopper docket petrol discount schemes are other controversial areas.

The Coalition has pledged a wholesale review of competition laws if it wins on Saturday, with the two chains clearly a major focus of the review. Kevin Rudd last week promised to gain better guarantees for “proper competitive conduct” to protect farmers if he were returned to government. Meanwhile, in order to head off the prospect of a mandatory code, the chains

are still embroiled in difficult negotiations over a voluntary code of conduct for dealing with their suppliers.

With this backdrop in mind, it becomes useful for Woolworths and Coles to be able to point to examples of their support for local growers and suppliers.

Despite fierce criticism of its $1-a-litre offer, Coles signed a 10-year contract with the giant dairy co-operative Murray Goulburn earlier this year, under which the co-op will supply milk for Coles’ home brand. Coles, for a limited period, also agreed to stock Murray Goulburn’s re-launched Devondale milk brand on its shelves. Woolworths has also been talking to groups of dairy farmers and both chains have been working with their meat suppliers.

The odd thing about the apparent consensus among politicians that ‘something must be done’ about the chains’ dominance, $1-a-litre milk and shopper docket schemes is that the intense competition between a resurgent Coles and Woolworths has been driving enormous consumer benefit via lower supermarket and petrol prices.

Since Coles was acquired by Wesfarmers and reinvigorated, there has been consistent food price deflation in supermarkets. But it would appear the politicians now want to hobble the chains’ ability to compete and expand, despite the adverse impacts that would have on household budgets.

If they want to help themselves and protect their customers, shareholders and employees from competition-inhibiting ‘reforms’ in the new parliament, both Woolworths and Coles need to shift the tone of the discussion away from the perception that they are damaging local suppliers and growers.

A few more highly visible deals like the one Woolworths has agreed to in the politically-sensitive case of SPC may not turn the tide of political opinion, but could provide some tangible evidence for arguments that the big chains’ interests and behaviours aren’t quite as inimical to the rest of the community (their customers excluded) as they are so frequently portrayed.

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