How Coles and Woolworths are revolutionising food processing

In a new twist, Coles and Woolworths are cutting margins to help Simplot Group modernise frozen vegetable processing rather than close plants. It's a rescue for local farmers and consumers will eat Australian vegetables.

Let me share with you a business event currently taking place that you will find unbelievable. But it is actually happening and its significance is so great that I will write a second piece of commentary on it.

Woolworths and Coles have each signed three-year deals with the US owned Simplot Group to buy Australian grown and processed frozen vegetables at prices above what Woolworths and Coles can buy overseas.

The condition is that Simplot must invest the additional cash to modernise some of its plants and/or make the required changes to its operation so that when the contracts expire in three years Australia can compete with New Zealand and China in frozen vegetables.

As I describe below, the changes required are revolutionary and include an approach to labour relations rare in Australia.

If Simplot does not, or cannot, make the changes then the likelihood is that in three years frozen vegetables will have to be imported and most of the plants closed. Australian vegetable farmers will then go out of business on a huge scale.

But this story has another twist. During the three years of Simplot change and investment, the competitors of Coles and Woolworths, including Cosco and Aldi, will almost certainly be importing frozen vegetables from New Zealand and/or China at the lower prices. Coles and Woolworths will therefore have to match the imported prices and take much lower margins.

Coles and Woolworths clearly believe Australians want Australian frozen food, provided it is priced at the same price as imported food. And, of course, this action will not harm the supermarket giant’s case in the current government inquiries.

So let’s look at what Simplot is planning do to with the Woolworths and Coles cash to make Australian frozen vegetable production competitive.

Simplot has a giant, old and inefficient plant at Bathurst, which has some of the worst work practices in Australia. A large proportion of the workforce can’t wait for redundancy (Simplot's death-by-redundancy fear a warning to business, July 17, 2012).

Simplot will use the Bathurst plant to concentrate on corn and Chiko rolls and transfer other frozen vegetables to Devonport and canned processing to Echuca.  

Those transfers will cause the Bathurst work force to be reduced from 170 to 60 but most of the redundancies will come from people who can’t wait for the payout. The 60 who will remain employed in the Bathurst plant will be organised so the plant only opens in ‘normal’ business hours. There will be no shift allowances or weekend penalties because workers will work only the standard hours, five days a week. This halves the hourly cost of labour at Bathurst.

In the enterprise bargaining negotiation, which is about to start, the bottom line will be that most of those 60 people must be entirely flexible, with no demarcations. There will be no pay reductions but there will be zero increases.

That may sound harsh but down the road from the Bathurst Simplot plant Electrolux and EDI are shutting their plants because they face the same problems as Simplot but are not being saved by Woolworths and Coles’ contracts. Nevertheless, when the changes take place the enormous Simplot Bathurst plant will look almost a like a ghost town. But at least it will remain open and corn farmers will not have to destroy their crops.

Down at Devonport the frozen vegetable processing transferred from Bathurst will boost output by about 25 per cent. But Simplot will invest close to $50 million, half of which will be invested quickly. This will substantially change the economics of the plant so that the while Devonport will not be as efficient as a greenfields site, it will go close.

There are 300 casuals currently working at Devonport. Union pressure over the years has made them more expensive than full-time workers. As a result, when the new automated plant is installed all will lose their jobs. At the same time there will be zero pay rises for the permanent employees. But the full-time people keep their jobs as a result of the plant being made more efficient once the capital is invested. The farming community will enjoy an increase in demand.

At Echuca there is spare capacity and the plant can handle the increased canned vegetables from Bathurst without substantial investment. Echuca is a modern plant. There is a slim two years before the Echuca enterprise agreement comes up for negotiation. Again, farmers are big winners.

It would have been so easy to shut down most of Australia's vegetable processing because the sector is plagued by under-investment and bad work practices. Coles and Woolworths have effectively given Simplot the cash to invest to be competitive. And Simplot will keep the plants open for three years.

And if the unions come to the party they will secure long-term jobs for many of their members, who will not face the long rural dole lines. However the unions will have played a role in enabling Australians to eat locally grown frozen vegetables at competitive prices.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles