Grocery chains put heat on suppliers
It is a question one of CCA's main customers, Coles, asked at the weekend, as the supermarket chains get to the pointy end of negotiations with the Australian Food and Grocery Council (AFGC) to develop a voluntary code of conduct to curb the power of the supermarkets.
It echoes questions from Woolworths last week about global suppliers, who, they argue, earn fat profits by charging Australian retailers higher wholesale prices than they charge retailers in other countries.
The questions demand answers, particularly given CCA lost millions of dollars in revenue in 2011 when some of its key brands were taken "off promotion" at Woolworths for five months in a dispute over new trading terms with the chain. At the time some analysts estimated that the dispute translated into a loss in sales of 5 million cases.
Earlier in 2011 Foster's was forced to pull tens of thousands of cartons of VB, Carlton Draught and Pure Blonde from Coles and Woolworths after learning of a blitz promotion to sell beer at $28 a carton, at what they argued was well below cost.
At the time, a spokesman for Foster's said the company withheld supply to protect equity in its brands. "We take loss leading of our brands very seriously," he said. "We will consider our options when it comes to individual cases of loss leading."
Since the $1 milk wars, followed by bread wars, beer wars and other wars, the supermarket chains have come under heavy scrutiny, resulting in the competition watchdog launching an investigation into allegations of misuse of market power.
The chains vigorously deny the allegations but in February this year when Davis called for a national debate on "aggressive supermarket practices", including selling popular products below cost as "loss leaders", it put the debate back on the political agenda. The reason? Suppliers rarely openly criticise the chains for fear of retribution.
It is against this backdrop - and as code discussions reach a finale - that Coles and Woolworths have cleverly shifted the debate from themselves to the big multinationals and the prices they charge in Australia compared with other countries.
It is seen in some quarters as a cynical attempt to pressure the AFGC to agree to a voluntary code that doesn't deal with the growing vertical integration of the chains. The supermarkets want a code but they don't want it to be too onerous when it comes to mechanisms to deal with vertical integration.
Options being canvassed include structural separation of the supermarkets' private-label-development marketing teams from their branded buying arm so that the buyers don't share information. Under such a model, retailers would be required to bid for shelf space for private labels in the same way as branded suppliers.
The clock is ticking. If a voluntary code can't be agreed, then a mandatory code could be forced before the federal election - or an even worse fate if the Coalition is elected.
Woolworths met the AFGC on Monday and, according to a spokeswoman from Woolworths, it was "very productive". She said Woolworths agreed on the broad principles and would continue to work towards a voluntary code.
It will now compile a written submission that will form the basis of the next round of discussions.
For its part Coles is putting the finishing touches to a more thorough price comparison on various countries and products with a view to putting its findings to the AFGC as part of its negotiations on the voluntary code.
It is an issue that Coles boss Ian McLeod first raised in the media in 2009 but stopped short of naming the main offenders.
Coles conducted a price comparison late last year of a few products sold in Thailand and Australia and found big discrepancies. For instance a two-litre bottle of Coca-Cola cost 54 per cent more in Australia than Indonesia in November 2012. It found CCA's Powerade sports drink was 87 per cent more expensive in Australia and its Vitamin Water was 83 per cent more expensive.
The price comparison recorded showed a similar pattern. This included some products from Proctor &Gamble, Nestle and Unilever products.
Proctor & Gamble's Oral B All Rounder Toothbrush one-pack was 38 per cent more expensive in Australia than Thailand and its Pantene shampoo was almost 50 per cent more expensive.
But when it comes to numbers, nothing is ever straightforward.
A report by Macquarie Equities in November, 2012, suggests the biggest contributor to profit growth for Coles and Woolworths over the past five years is the transfer of profits from suppliers to the retailers.
"A popular positioning is that Australian suppliers over-earn relative to overseas peers or parent companies. There seems little evidence of this with local suppliers' gross profit margins declining around 600 basis points over the last five years."
Over to Terry Davis and others for an explanation.
Frequently Asked Questions about this Article…
The article explains supermarkets such as Coles and Woolworths are pressing big suppliers over pricing and trading terms as talks with the Australian Food and Grocery Council (AFGC) progress on a voluntary code of conduct. Investors should care because these disputes can affect supplier revenues, retailer margins and brand equity — for example, past conflicts led to millions in lost sales for Coca‑Cola Amatil and forced Foster's to withdraw products from shelves.
Coles compiled comparisons showing many multinational brands cost materially more in Australia than in some Asian countries. Examples in the article include a two‑litre Coca‑Cola costing 54% more in Australia than Indonesia (Nov 2012), CCA's Powerade 87% more expensive, and Vitamin Water 83% more expensive. Similar patterns were reported for some Proctor & Gamble, Nestle and Unilever items.
The article notes CCA lost millions of dollars in revenue in 2011 when key brands were taken off promotion at Woolworths for five months amid a trading‑terms dispute, with analysts estimating a loss of about 5 million cases. Foster's pulled tens of thousands of cartons of VB, Carlton Draught and Pure Blonde after retailers planned a blitz promotion selling beer at prices the brewer said were below cost.
The AFGC talks aim to create a voluntary code to curb supermarket market power and set clearer trading rules between retailers and suppliers. Supermarkets say they want a code but seek one that isn't overly burdensome, while some critics worry a voluntary approach may not address issues like vertical integration or unfair buyer practices.
Vertical integration refers to supermarkets combining their private‑label development and marketing teams with their buying arms, which can give them information and competitive advantages over branded suppliers. One option discussed in the article is structural separation — forcing retailers to separate private‑label teams from buying groups so private labels must bid for shelf space like branded suppliers.
Yes. The article warns that if a voluntary code can't be agreed, a mandatory code could be forced before the federal election. It also notes political risk if the Coalition is elected — described in the article as an 'even worse fate' — so investors should watch negotiations, the AFGC process and approaching election timing.
According to the article, the competition watchdog launched an investigation into allegations of misuse of market power by the supermarket chains, reflecting heavy scrutiny after a series of high‑profile pricing 'wars' (milk, bread, beer) and supplier complaints.
A November 2012 report by Macquarie Equities cited in the article suggests the biggest contributor to profit growth for Coles and Woolworths over the past five years was the transfer of profits from suppliers to the retailers. The report also notes local suppliers' gross profit margins declined around 600 basis points over that period.
Call 1300 880 160
Start a chat
Schedule a call
