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April 4, 2012

Comment: Australia’s food retailers attract more heat

Australia's largest retailers, Woolworths and Coles, are once again facing criticism over their dealings with suppliers and, Michelle Russell suggests, the ongoing debate is likely to get more heated before manufacturers and retailers in the market are able to find a middle-ground.

Australia’s largest retailers, Woolworths and Coles, are once again facing criticism over their dealings with suppliers and, Michelle Russell suggests, the ongoing debate is likely to get more heated before manufacturers and retailers in the market are able to find a middle-ground. 

Debate in the cut-throat Australian retail scene heated up again this week after a report published by consumer group Choice claimed Coles and Woolworths are pushing their own-brand products while bumping established brands off their shelves.

In its Choice Supermarket Special report, which investigates the rise of private label at Coles and Woolworths, the watchdog claims the two dominant supermarkets are using “poorer shelf positioning” and “copycat packaging” to give their own brands an advantage over established ones.

The advocacy group says it has received feedback from shoppers that the generic brands are replacing other brands and its investigation shows consumers are noticing the change.

One reason for the shift towards store brands, the study claims, is the “race” to reduce prices and maintain profits. Coles, for example, has cut the cost of 6,000 products by an average of 10% each, it reveals.

A spokesperson for Coles, however, says it does not have a target for the growth of private label and insists that it does not delist branded products because it wants to replace them with its own products.

“Customer demand is what determines whether a product remains on our shelves, and this test is applied equally to both private label and branded products. About one in five products on our shelves are private label, so branded goods make up the vast majority of the products we sell.”

The retailer says its customers are “not captive” to Coles and therefore, if it doesn’t provide them with “quality, value and service” they will shop elsewhere.

Woolworths echoes a similar sentiment, branding the Choice research as containing “unsubstantiated and incorrect claims”, most notably on the scale of its private label sales and product numbers.

“Woolworths currently stocks around 2,500 own brand products out of around 35,000 individual products in the supermarket – under 10%. By sales volume, own brand makes up just over 10% – nothing like the 25% quoted by Choice.”

Woolworths adds that the products on its shelves reflect what the customers are buying.

“It is not in the best interests of our business to waste any shelf space on products that our customers do not want. We are a successful retailer because of our commitment to choice and ranging products our customers want and love.”

The report will come as little surprise to many industry watchers. The two retailers currently dominate around 80% of the Australian grocery market and have been under intense scrutiny for some time for competition reasons.

Domestic and international manufacturers operating in Australia have spent months complaining about the tough trading conditions in the country and there have even been calls for a watchdog to oversee the sector.

The country’s Competition Commission last year warned the supermarkets that it will keep an eye on the two retailer’s “significant market power” that stops smaller suppliers from negotiating supply arrangements.

Kate Carnell, the chief executive of the Australian Food and Grocery Council believes the competition authorities have “done nothing” to protect suppliers and have “allowed and supported Coles and Woolworths getting bigger”.

Early last month, Woolworths created a Speak Up hotline for suppliers to call if they have issues including anything from fraud and corruption to “bullying”. The retailer claims it was the “first major Australian retailer to adopt such a scheme”, but there are still calls from Australian food manufacturers for an ombudsman to be formed to oversee the dealings between suppliers and retailers.

This latest report may just cement that call from the industry for more protection for suppliers. And if, indeed, retailers are pushing their own-brand products at the expense of established brands then they may be putting themselves in the firing line, ultimately increasing the chance that they will become subject to the enforcement of stronger retail guidelines in order to promote fairer competitive behaviour.

But while Coles and Woolworths do clearly have a monopoly on the Australian retail scene, exactly how much of the power does lie with the retailer?

As Woolworths and Coles rightly highlight, they must give consumers what they want or people will vote with their feet and shop elsewhere. If consumers want brands, then retailers must ensure that they carry them. 

Indeed, Richard Goyder, the managing director of Wesfarmers, the Australian conglomerate that owns Coles, believes the call for an ombudsman comes from “people who haven’t invested enough in their own brands and haven’t invested enough in their own production capabilities to provide customers with what they want”.

Maybe it is up to manufacturers, both large and small, to become more innovative, invest more in brand building and quality if they are to stand a chance of competing seriously in this retail battle. After all, it is the smaller manufacturers who produce lower-tier brands that are most likely to be squeezed off the shelf to make way for private label and who have the least power in negotiations with retailers. 

Whatever happens next, there appears to be a strong need for a solution on how the Australian retail industry can strike the right balance of both having competition while also being fair. And, as manufacturers and retailers vie for position, the debate looks set to continue. 

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