Three years ago, Heinz chief executive William Johnson vocally lamented Australia was "the worst market" of the 200-odd locations the 142-year-old baked beans manufacturer operates.
But the ACCC’s David-and-Goliath moment in forcing Coles to admit to unconscionable practices will surely have suppliers like Heinz fist-pumping behind closed doors.
After confident declarations Coles would be vindicated in the latest court action by the regulator, Coles’ backflip on Monday with an agreement to fines and potential refunds to suppliers was a surprise. Wesfarmers-owned Coles, which admitted it had "crossed the line,” faces up to $10 million in penalties, but more precious for the ACCC is the moral high ground after earlier defeats.
The fact remains that Australia is the world's second-most concentrated retail market after New Zealand. The $87 billion sector represents more supermarkets per capita than the US and UK, with around 74 per cent controlled by Coles and Woolworths.
Suppliers will still have to maintain their public gameface and hone their negotiation skills. While the 2001 entry of competitor Aldi into Australia's supermarket near-duopoly has lowered prices for consumers, farmers (notably dairies) have taken most of the squeeze -- not Coles and Woolworths with their almighty distribution channels.
Newest kid on the block Aldi -- and such a popular kid it is with 340 stores and counting -- has only encouraged tougher tactics as Woolworths and Coles do whatever it takes to compete on staples such as milk and bread.
This classic use of perishables as 'loss leaders', where the retailer sells below cost on basic items as a trade off for custom on more profitable items, has left milk suppliers irate that bottled water is sold at more per litre.
There could be tougher times ahead for both incumbents and suppliers alike after Germany’s Lidl set up an office in Australia and registered its brand name, and expectations grow Danish discounter Netto will follow suit.
A report last month from Ferrier Hodgson says the era of high margins is “most likely over,” and Coles and Woolworths would do well to take note of the valuable lessons from the UK market, where the German discounters are changing the 'perceived value matrix' of consumers.
The majors, particularly Woolworths, are ploughing into home brand (private label) products, which secure a higher profit margin than other brands. This is Aldi’s forte.
The biggest loser on the retailing side appears to be Metcash, which competes with discounters Aldi and Costco at one end, and Coles and Woolworths at the other. Shares in the IGA owner fell to their lowest in over a decade after earnings at its core food and grocery business fell 18 per cent in the half year.
The ACCC has spent years investigating claims supermarkets have ended contracts early, charged unfairly for warehousing, transportation and stock handling, and auctioned shelf space or used shelf space to get better contract terms.
Rod Sims’ successful action claimed there was no legitimate reason for Coles to demand hundreds of thousands of dollars from five food and grocery suppliers, including payments for purported profit gaps, waste and markdowns, and late and short deliveries going back to 2011.
It is a rare win for a Competition and Consumer Act that poorly defines what ‘unconscionable conduct’ is. Instead, it is left to the courts to make a moral judgement in the circumstances of each case.
It also follows an admission from Wesfarmers chairman Bob Every that there was “no doubt” Coles had made mistakes.
Back when Coles was acting unconscionably, a report by the Australian Food and Grocery Council found Coles and Woolworths had significant control over access to the consumer. The industry was firmly on a trajectory to be significantly less competitive in 2020, it warned.
Manufacturers remain in a tough bargaining position as they jostle for acceptable product shelf positioning and financial terms. Nick Xenophon was so incensed he likened dairy farmers to medieval serfs dealing with a feudal landlord.
Arguably all Australians have a vested interest in seeing suppliers thrive. Food and agribusiness has potential to drive jobs, growth and investment as the mining boom tapers off. The food and grocery processing sector is the largest manufacturing sector in the Australian economy and employs 300,000 Australians.
With private label goods expected to grow to 30 per cent market share in Australia by 2016 -- still well below the 53 per cent seen in Europe -- manufacturers such as Heinz are turning to higher-margin products such as baby food, which is more likely to secure a premium price and is therefore resistant to home-brand offerings.
But Coles and Woolworths won’t be resting on their laurels as Aldi continues to charge up the rear, gaining market share with its low price offerings, and Lidl and Netto seemingly waiting in the wings.
The latest prizes at the Sydney International Wine Competition this month will also be no comfort to the supermarkets or multinational brands.
Of 2000 varieties submitted, six bottles from Aldi were judged as among the best, with a $6.99 cabernet sauvignon in its top 100 and Aldi’s $4.99 Spanish tempranillo snagging the equivalent of a silver medal.