Australia has a highly concentrated supermarket sector. Our two big players, Coles and Woolworths, control over 70% of the market. CHOICE has been reporting on the fact that relationships between the supermarkets and their suppliers and manufacturers are strained for some time now.
After our series of investigations into the tactics behind the supermarket price wars, and an ACCC call out for suppliers to speak out about bullying behaviour, there have been new horror stories appearing on a regular basis.
In this report:
Coles and Woolworths are enormous corporations, and they’re growing bigger, stronger, and more profitable. It’s no surprise, given Australians spend about $1.04 billion each week in the big two’s supermarkets which have a huge 71% combined share of the grocery market.
The duo recently engaged in a much publicised price war. Coles claims to have reduced prices on 6000 products, including milk, bread and fresh produce, by an average of 10%. Woolworths also claims to have deflated prices over the past financial year.
Yet despite this race to the bottom, the big two both posted healthy profit growth in the same period. So how can shelf prices of thousands of products be coming down while supermarket profits go up?
Squeezed off the shelves
Pretty much everything I used to buy is getting less shelf space, only to be replaced with the three varieties of shop brand.
- Jaynie Edwards, CHOICE member
A large share of the Australian grocery market is now held by private labels, which accounts for about 25% of annual supermarket sales.
IBISWorld predicts that by 2016, about one in three products on the supermarket shelves will bear a private label. Coles and Woolworths now both have a multi-tiered private label offering – bargain basement staples, medium-priced fare and premium/specialist products.
Private label goods can be big profit drivers. Marketing them is cheap since, as John Durkan, Coles merchandise director, points out: “We only have to advertise Coles”.
Manufacturing is also streamlined. “We set up individual research and development areas, where we can work with suppliers who supply many people, to fractionalise cost,” says Durkan.
But supermarket shelves aren’t flexible – there’s little room for growth beyond the initial supermarket floor plan. A supermarket’s own brand needn’t worry about a shelf space squeeze. Where two brands compete for the same shelf, and one brand’s parent owns that shelf, it’s not hard to tell who the winner will be.
“At the end of the day, the retailer owns the store and can do whatever they want,” says Tim Morris, managing director of NZ strategic management consulting and market research firm Coriolis Research.
“They can put rival products on the bottom or top shelf, and their own products at eye level. They can manipulate the price. The only controls are competition and the consumer.”
When we asked CHOICE members to tell us if one of their favourite brands had disappeared from their local supermarket shelf, the response was overwhelming.
“More and more I find I have to drive around town to get the products I’m looking for,” said Sarah Weir.
Fiona McPhee agreed: “I’m sick of having to chase my favourite products down.”
Jaynie Edwards wrote: “Pretty much everything I used to buy is getting less shelf space, only to be replaced with the three varieties of shop brand.”
Missing in action
The collapse of a number of large-scale manufacturers this year has shone a spotlight on the difficulties faced by those trying to make a living out of supplying groceries in Australia, which usually means supplying Coles and Woolworths.
We spoke with several manufacturers and suppliers whose product lines have been deleted by the big two. Many claim this was as a result of supermarket exerted pressure, including private label expansion. All but one refused to be identified, citing fear of retribution from the supermarkets.
Kevin* is the managing director of one such company. “We were deleted to make room for their own brands. They’re reducing the third-, fourth- and fifth-most popular products in product areas.”
Woolworths and Coles argue that introducing and expanding private labels has stimulated innovation and competition in many areas of the market.
Coles claims only under-performing products are cut. “Where we don’t see innovation from branded manufacturers, we’ll use the Coles brand to innovate,” says Durkan.
“We don’t have elastic shelves and we have to keep stock for customers, not products that are not working.”
However, many small suppliers – and even large ones such as Heinz and Coca Cola – are concerned about the pressure they face in the fight for this finite shelf space.
Kevin argues his product was cut not because he wasn’t innovating, but because Coles set him up to fail. “Coles told us it’s because our sales weren’t achieving targets. But that’s because they wouldn’t put us in catalogues, we got no shelf space, we were hidden behind a column and they refused to let us have promotions, and that made it impossible for us to compete with the big boys.
“We suspect what they were really doing was targeting the products they wanted to delete so that it would be easier to justify in six to eight months’ time.”
Over at Woolworths, brands are also being cut. Mark* had his organic product deleted directly after Woolworths acquired the Macro label. Following steady sales for three years, Woolworths’ category buyer told him there was only room for one organic label – Macro, its own. This decision saw his yearly sales halved.
For more information about Supermarkets, see Food and drink.