SPC Ardmona: vindication factory

SPC Ardmona is not just a food manufacturer these days; it’s a vindication manufacturer too.

Its $70 million deal to supply fruit for Woolworths’ private label is a vindication of the Federal Government’s refusal to give the company cash and a vindication of the State Government’s $22m assistance package. It’s a vindication of social media people power, and a vindication of free market capitalism.

Yes, well, actually it’s a vindication of the benign dictatorship of Australia’s supermarket duopoly.

For food and grocery manufacturers, the big problem with Coles and Woolworths is not that they have a duopoly -- it’s that they compete ferociously with each other, driving down manufacturers’ margins. That competition is why the ACCC can’t touch them, but the manufacturers wish they were a bit cosier.

SPC Ardmona supplies Coles with its private label but three years ago refused to do a similar deal with Woolworths. Big mistake.

That was when the company closed its Mooroopna plant, let 150 workers go and took an $80.5m write-off, citing “a material increase in the share of the private label category which is being supplied primarily by imported products".

When Peter Kelly, the managing director, business services (commercialisation of projects and mergers and acquisitions) at Coca-Cola Amatil, was moved to being managing director of its subsidiary SPC Ardmona in April 2013, he immediately re-started negotiations with Woolworths and put the hat around the two governments for some succor. 

In September last year Kelly announced he had done a deal with Woolworths to supply its private label with fruit. Two days earlier the State Government had agreed to give the company $25m, conditional on the Federal Government matching it. Federal Cabinet agonised and argued and finally refused, citing the end of the age of entitlement etc. 

The Coalition then held its collective breath. Would the cash from the Victorian Coalition be enough? Would the Woolworths deal hold? Happily it was and it did. The factory stays open: vindication, and relief, all round.

If you’re a large-scale food manufacturer in Australia there are three customers: Coles, Woolworths and export. You need two out of three to make money and these days costs, and the dollar, are too high to export so you need both supermarkets. If you can also get a government grant to help rebuild the plant -- even better.

Private labels, or home brands, are now about 15 per cent of dry grocery sales. Category leaders like SPC Admona are always the biggest losers from the supermarkets’ push to increase their margins through private labels -- unless they have the brand strength of Coke or Kelloggs. 

They can lose up to 20 per cent share in a matter of months. Small suppliers, and imports, are the usually winners.

Australia’s supermarket duopoly will never be broken because they own all of the sites -- including ones they haven’t yet got stores on, but own simply to keep them away from Aldi.

Aldi will continue to do OK, but it will never build sufficient market share to truly challenge Coles and Woolworths unless the ACCC forces the big supermarkets to divest sites, which won’t happen.

It means manufacturers have no choice but to deal with them, which in turn means their margins, and profits, will always be capped -- because the two duopolists compete so hard with each other.

If the Australian dollar comes down, and/or Australia’s food manufacturers get their act together on costs so they can export successfully, then perhaps they will be able to dictate terms to the supermarkets.

But for the moment export is difficult, which means you need both supermarkets, not just one of them.