Coles MD Ian McLeod has told suppliers into Australia’s grocery sector the retailer’s work to lower prices and invest in private label means the “status quo” in the industry is “changing”.

Domestic and international manufacturers including Goodman Fielder, Associated British Foods and Heinz have found the going tough in recent quarters as Coles and arch-rival Woolworths Ltd have engaged in fierce competition on price and expanded their own-label ranges.

Speaking to just-food on the sidelines of the World Retail Congress last week, McLeod acknowledged suppliers were facing cost pressures, particularly on wages, but insisted some had been slow in ensuring their operations were more efficient.

“The manufacturers in some respects have been facing challenges. Wage rates are much higher in Australia than in other countries and the gap is growing so they’ve got to manage their cost base effectively,” McLeod said. “What they have been lacking is driving efficiencies in their business and innovation.”

In the last 18 months, Heinz has closed a factory in Australia while Goodman Fielder has announced plans to close three plants.

Meanwhile, in recent years Coles has cut prices, particularly on household items like bread and milk and Woolworths has responded in kind. Both retailers, which account for around 80% of Australia’s grocery sector, have also invested in private label.

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There has been some criticism of both retailers’ private-label expansion from manufacturers and campaigners but, from Coles’ perspective, McLeod defended the investment.

“Now we’re working hard to give better value to customers, bringing in private label, the status quo is changing and some of them are finding it more difficult to respond to those changes than others. We’ve created 10,000 jobs in the last four years so we are confident we are doing the right thing for our customers and Australian manufacturing as well,” McLeod said.

He added: “The level of private-label penetration in Australia is significantly below what it might be in other countries. Our view is: don’t set yourself a target. Just lay down products that you believe with confidence are going to give the best quality and value… and the customer will decide. It’s about choice, it’s about competition.”

At the World Retail Congress in London, McLeod outlined how Coles had revitalised sales and boosted profits. Cutting prices and expanding private label have been central to the strategy and he pointed to deflation in Australia’s grocery market after over 30 years of prices rising by 6% a year.

However, there remains some pressure on global commodity prices after a fierce drought in the US and hot and dry weather in Russia hit yields. Corn and soybean prices increased this summer. There has also been upward pressure on sugar futures.

The continued pressure on commodity costs in 2012 followed a steep spike last year. Nevertheless, McLeod said suppliers would need to convince Coles that passing on costs was necessary.

“If suppliers have got legitimate reasons to see prices rise, we’ll certainly consider that with them but it needs to be demonstrated. Previously, suppliers would just come and say there’s a 5% price rise, or whatever it might be, but with no real justification for it. We don’t think that’s right,” he said. “You saw the chart up there – 6% food inflation on average for 35 years – and we want to change that. We’ve got to do that because customers do not trust supermarkets in Australia to deliver value for them. That’s why the Prime Minister only four or five years ago said ‘We want to make sure that Australian families aren’t getting ripped off.’ We’re trying to do our bit and that means things will need to change.”