The messy demise of the Franklins supermarket chain in Australia came to an end today but is unlikely to significantly improve conditions for consumers or suppliers. David Robertson reports on the outcome of the battle for Franklins, and its impact on the Australian retail sector.
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Hong-Kong based Dairy Farm International decided to ditch Franklins’ 287 stores across Australia at the start of the year after a string of heavy operating losses including A$140m racked up last year. Dairy Farm has 1,871 outlets across Asia with sales of US$6.6bn in 1998 but the Bermuda-registered and London-listed company could not make Franklins work. According to analysts Dairy Farm hopes that the sell-down of Franklins will generate about A$600m. But closure and restructuring costs will put a severe dent in the total and analysts suggest Dairy Farm will be lucky to escape with A$300m – not much given Franklins’ A$500m in outstanding debt.
Initially Dairy Farm had hoped to carve up its stores between Woolworths and Coles Myer, the two biggest supermarket chains. But the Australian Competition and Consumer Commission (ACCC) stepped in early to prevent a convenient break up benefiting two companies which already control 65% of the market.
Franklins with a one-time 15% market share had provided suppliers and consumers with a viable alternative to the big two. The ACCC has been worried throughout the sell-down process that the departure of Franklins would strengthen the position of the two big retail giants leading to increased prices for consumers and more pressure on suppliers to cut their prices.
A series of revised plans have been put to the ACCC, all of which have reduced Dairy Farm’s net take-home on the deal. The shenanigans are expected to reduce the total sale price by around A$100m.
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By GlobalDataACC rejected plans
Its first plan was offered at the end of January by advisers JP Morgan who had hoped to sell 135 stores to Woollies and 135 to independents with the remainder being closed. This was rejected so a new plan offered by Franklins had Woolworths taking on 80 of the larger stores for about A$300m. This up-front payment would have allowed the rest of Franklins to be sold off piece by piece to independents and smaller chains safeguarding the group’s 27,000 jobs.
Franklins argued a big chain was needed for the bigger stores (25 Big Fresh and 55 Franklins Fresh) because only they could muster the financial clout to manage and arrange distribution. Also, these stores are typically found in shopping malls where the owners are unlikely to want small independents taking on the lease.
But again the ACCC was unhappy. It was due to rule last week but came back with an in-principle agreement today. Under these new proposals Woolworths gets 67 stores – and not necessarily the large and profitable ones.
South African retail giant Pick’n Pay is backing the independent Fresco supermarkets to buy between 51 and 60 stores, Aldi and David Jones may still get a handful and Foodland will buy 35 in Queensland leaving only 112 for independents.
The independents are backed by South African company Metcash – the archrival to Pick’n Pay in its domestic market but supplier to Pick’n Pay’s Aussie vehicle Fresco. Metcash was originally brought in by Franklins to arrange the sale of stores to independents after the big ones had gone to Woolworths.
It now appears that a truce between the two South Africans will allow Metcash to supply Pick’n Pay in a mutually beneficial arrangement that gives both access to the Australian market.
Franklins’ chief executive Ian Cornell had warned that Dairy Farm could just go for receivership if it is blocked from a lucrative tie up with Woolworths. With a general election this year the ACCC’s political minders may have prevailed to prevent the massive redundancies that receivership would cause.
As a compromise Woolworths may not get all the big and profitable stores – the 80 earmarked for it account for half of Franklins’ turnover. But this type of compromise worries the independents who argue that they will be left with the dud stores. In some cases they are likely to be left with stores sandwiched between a Woolworths and a Coles Myer in retail centres. When they can’t compete the big two can then step in and finish a job that the ACCC is currently interrupting.
The ACCC announced its decision claiming it was a victory for small independents. The arrangement provides a major boost to the market share of independent grocery retailers in Australia and provides a strong third force in the supermarket industry sufficient to counter concerns expressed over the strength of the major chains” commissioner Ross Jones said.
Tesco-style revolution needed?
But the ACCC’s decision is unlikely to improve the situation for consumers or suppliers. Consumers in particular are unlikely to benefit from the departure of Franklins, as the strengthening of a few smaller chains does nothing to stop the dominance of the big two. With the elimination of a viable third party there is nothing to force Woolworths and Coles Myer to raise their game. While this continues consumers will have to put up with dirty, ugly and low quality stores until someone is brave enough to initiate a Tesco-style revolution.
By David Robertson, just-food.com correspondent
