When it comes to size and market clout, supermarket chains Woolworths and Coles have it all sewn up. But when it comes to leadership, their relationship with suppliers, strategies for success and innovation, smaller rival Aldi blitzes them, according to a confidential survey.
The Nielsen Retail Barometer 2013, a full copy of which is closely guarded by the retailers and suppliers, makes some bombshell findings, particularly as the debate rages over the power of the two rivals as they slog it out with price discounts, petrol discounts and other incentives.
It comes as the competition watchdog the ACCC continues its investigation of allegations that the supermarkets bully suppliers and the federal government prepares a root-and-branch review of competition next year, with the supermarkets in the spotlight.
The Nielsen report, which interviews shoppers, retailers and suppliers, says that only 1 per cent of shoppers believe trade promotions (the money paid by suppliers to the supermarkets for special pricing, display fixtures, rebates, demonstrations, gifts and bonuses) added value. To put it another way, 99 per cent of shoppers think trade promotions or trade spend is a waste of time and money.
This is a startling revelation given suppliers increased "trade spend" by $430 million in the past year.
Interestingly, last month Australian Food and Grocery Council boss Gary Dawson warned that total "trade spend" now averages more than suppliers' operating costs, which he estimates total more than $4 billion a year. "It's the reason for a significant shift in profit from suppliers to retailers," he said. "It's a key reason why retailer margins have improved despite retail price deflation and aggressive discounting."
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," the report says.
It is a view deeply debated. Woolworths vigorously disagrees that promotions, including price discounts, don't add value. "We completely disagree with the statement that low prices aren't important to customers," a spokeswoman said. "The 2008 ACCC inquiry found that consumers are likely to change supermarket for as little as a 5 per cent price change. That is why we are so focused on ensuring we are Australia's lowest-price full-range supermarket, and to that end our prices are 1 to 1.5 per cent lower than Coles over 10,000 products. Anyone who suggests price isn't important is out of touch with Australian shoppers."
Nevertheless, there is growing concern by suppliers that they are caught in the crossfire as Coles and Woolworths slug it out in the battle for market share and profit.
According to Nielsen, 53 per cent of suppliers surveyed believe conditions have deteriorated in the past year. They say their biggest concern is pressure on trading terms, an inability to pass on price increases and the increasing cost of serving major retailers. Forty-two per cent of suppliers say volume has grown but only 34 per cent saw profit growth and 22 per cent had profits fall.
But it is Nielsen's retailer scorecard, which asks suppliers to rate the supermarkets, that makes for the most interesting reading.
Asked who they would choose as their retailer of the year, 64 per cent picked Aldi, 21 per cent Coles and Woolworths only managed to get 7 per cent.
Woolworths also got a low score when it came to suppliers rating their relationship with retailers. Aldi received a net rating of 73 per cent, Coles 57 per cent and Woolworths 9 per cent.
When it came to rating the performance of specific attributes, including fairness of negotiations, supportive of supplier innovation, Woolworths was a laggard relative to Coles and Aldi.
Business conducted professionally attracted a rating of 36 per cent for Woolworths, 56 per cent for Coles and 86 per cent for Aldi.
For fairness of negotiations, suppliers gave Aldi a 37 per cent rating, Coles 26 per cent and Woolworths 24 per cent, while Coles led the pack on supporting supplier innovation, with 45 per cent (34 per cent for Woolworths, 29 per cent for Aldi).
Aldi also topped the list in terms of strength of management team, an 86 per cent ranking (77 per cent Coles, 37 per cent Woolworths). Aldi rated 94 per cent for "strategies for success", with Coles 87 per cent and Woolworths 37 per cent.
On innovation, Woolworths took another blow with a rating of 17 per cent, in contrast to Coles at 69 per cent and Aldi at 57 per cent.
Nielsen was unavailable to comment on the survey and Woolworths disagreed with much of its findings.
"Woolworths has excellent relationships with its small and large suppliers," their spokeswoman said.
It is a complex debate. Politicians will be reluctant to mess with lower prices for consumers yet the spectre of fewer suppliers and less choice will encourage them to help the likes of Aldi flourish.