The price war that has been raging between Australia’s two largest supermarkets, Woolworths Ltd and Coles, looks set to continue apace. However, as supplier discontent mounts, supermarkets’ bargain basement tactics are drawing increasing controversy in the market, Katy Humphries writes.
Heinz chairman and CEO Bill Johnson recently called Australia the “worst market” to do business in, insisting that the tit-for-tat price war between Woolworths Ltd and Coles will ultimately be to the detriment of the consumer.
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“There is no doubt that in terms of retail environment, the Australian market is the worst market, and the people will pay the price over there,” Johnson said. “Products will ultimately be devalued to address the price points that customers are asking us to be address. So the consumer is ultimately going to be the big loser in Australia.”
Johnson is not alone in his concerns. Australian dairy groups have repeatedly insisted that if the intense price competition does not abate it will drive suppliers out of business all together.
So, as Coles and Woolworths battle for market share by slashing prices, the question of who benefits from the situation seems to be becoming increasingly muddied.
While consumers gain the short-term advantage of lower prices, they could also be paying the long-term cost of decreased innovation and – ultimately – a destabilised supply base.
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By GlobalDataAdd to this concerns that companies will respond to the difficult market conditions by moving production overseas (as part of its global reorganisation, Heinz announced the closure of three Australian manufacturing sites, with the loss of 344 jobs) and the benefits to consumers – and the Australian economy as a whole – seem less clear-cut.
Not so, Coles director of merchandise John Durkan told the Australian Financial Review late last week.
Complaints from food companies over price competition and increased private-label penetration are being used as excuses for their own inefficiencies, Durkan suggested.
He reportedly dismissed claims that price pressure was responsible for driving companies out of business or offshore and stunting innovation, instead blaming profiteering, poor management and under-investment.
As the initiator of the price war, Coles has improved its price image and, coupled with the retailer’s rejuvenation scheme, perceptions of the quality and service on offer have also improved. This has resulted in higher store traffic and sales.
However, such success has come at the cost of increased price sensitivity and a strained relationship with suppliers, while the impact that pricing initiatives have had on basket size is unclear.
The fast competitive reaction from Woolworths has also meant that, in order to maintain its advantage, Coles has been motivated to continue to drop prices. The real test for Australia’s second-largest grocer will be whether it can retain the new customers it has attracted in the long-run.
