Predicting the last brand standing in the supermarket price wars

On January 26, 2011, grocery retailer Coles fired the first salvo in what would soon be dubbed the “supermarket price wars” by reducing the price of its own-brand milk to A$1 per litre. Woolworths immediately responded.

In the three years since, grocery prices have been tumbling, with 85 cent bread being the latest “sacrificial lamb”. This period of intense competition has brought about not just lower grocery prices, but a senate enquiry, and increasing media and analyst interest.

Price wars represent one of the most severe forms of competitive interplay in the market place, often leading to great losses. Retailers suffer losses in terms of margins, consumer loyalty and an inability to pull out of the downward cycle. This downward pressure on prices drives other competitors to follow the initial move, as Woolworths did with its home brand milk on the same day Coles cut prices; and Coles has done more recently with bread.

UK parallels – a perfect storm

The ultimate cost of price wars on retailers is currently being played out in the UK, a retail market which shares many commonalities with Australia’s.

Britain’s largest supermarket, Tesco, has been the worst performer of all British grocers this year, dropping to 28.8% market share in September, from 30.2% in 2013. A 20-year run of uninterrupted earnings growth began to unravel as Tesco started losing market share to German discounters Aldi and Lidl, as well as upmarket rivals Waitrose and Marks & Spencer. This should concern both Woolworths and Coles.

In Australia, the entry of Aldi in 2001 fundamentally shifted the playing field for supermarkets. Aldi has significantly changed consumers’ perceptions toward private label grocery products. The Aldi effect is present in Australia. In response, both Coles and Woolworths have moved to replicate an Asda/Tesco product ranging strategy – reducing range, improving supply chain efficiencies, while improving the quality and quantity of private label products. This has however encouraged shoppers to trial and become loyal to non-branded products.

Although food prices are going down, many Australian families are still struggling to make ends meet. Price increases in fuel, utilities, insurance premiums, rates and vehicle registrations are clearly having an impact on overall consumer confidence and retail growth.

Australian retail turnover rose only 0.1% in August 2014 following a rise of 0.4% in July 2014. Similar declining consumer confidence is mirrored in the UK. As such, shoppers are becoming more aware of saving on weekly food expenditures. But this continued focus on price will embed unrealistic consumer “reference pricing” (memory of price) for brands and products. As a result, consumers are likely become unwilling to pay higher prices later.

A splintering market

Our growing acceptance of private labels has led to a grocery market “splintering” into “low price discounters” and “differentiated quality” offerings.

In Britain, Aldi and Lidl have clearly positioned themselves as low cost operators, capturing increasing market share at the expense of traditional supermarkets. Lidl has also given a nod to the Australian market.

In contrast to these low cost food retailers, we have seen the substantial growth in farmers markets in Australia. Shoppers are now seeking more than just low prices and are actively seeking out range, quality, local food and provenance, leaving potentially our two big supermarkets in the middle exposed.

The likely losers

So, what might this mean for local Coles and Woolworths competitors, such as Metcash’s IGA supermarkets?

A Dutch study examined the market impact when the leading Dutch grocery chain Albert Heijn slashed its prices in response to Aldi and Lidl, finding that there was an 8.2% reduction in food prices. This cost Dutch supermarkets €900 million in one year alone and more than 30,000 employees lost their jobs.

In Australia, small independently owned grocers will struggle to survive under intense and protracted price discounting. Dutch grocer Edah closed after two and a half years of sustained price wars.

Australian medium and high service grocers will lose long term market share. We are seeing this to some extent with Metcash (IGA) and this is requiring it to review the structure of its business.

In nearly all western markets, grocery discounters have captured market share away from traditional supermarket retailers. Global food retailers like Aldi, Lidl, Walmart and Costco are changing the face of supermarket retailing. If a price war is inevitable, it helps to be the first to strike to gain the first-mover advantage. But high service, convenience grocers should be cautious about using price as competitive weapon and concentrate on other appeals of consumer value, convenience, local foods and community.

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Gary Mortimer does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published on The Conversation. Read the original article.


Premium private label beverages on the rise

A new report from Canadean has found that premium private label beverage products are continuing to gain momentum across Western Europe.

The report states that private label soft drinks and beverages are seeing notable success in the Western European premium market, with ready-to-drink iced coffee drinks forecast to grow by eight percent in 2014.

“Ready-to-drink coffees were traditionally considered to be premium and therefore private labels used to struggle to achieve the same sales numbers as branded products. This is largely due to the image that private label products are of lower quality which made it difficult to attract consumers who would be willing to try the drinks,” says Micheal Wiggins, analyst at Canadean.

To address these negative consumer perceptions, Wiggins says that up-scaled product offerings together with higher pricing has proven to be a successful strategy.

"Consumers expect private label drinks ranges to be lower in quality because of the low price point. However, once the price and packaging of private label ranges are up-scaled, consumers feel that the quality gap between branded and private label products decreases. The appeal of entering the premium market to retailers is undeniable, given the higher profit opportunities these products offer,” he says.

Over the longer term, Wiggins says that it will be interesting to see the effects of these trends on private labels as a whole.

“On the one hand this will allow private label producers to gain a larger price advantage, but, on the other hand, it may be harder to achieve that initial push in convincing consumers of the product’s quality.”


Woolworths recalls cheese after consumer bites into safety pin

Woolworths has recalled 500g blocks of its Homebrand tasty cheese after a consumer bit into a safety pin buried in the product.

According to SMH, NSW resident Patrick McMullen found a safety pin in a piece of cheese he was chewing on on Wednesday 30 July.

"It felt like my tooth had broken. I spat it out and it was a safety pin. I could easily have swallowed it, but I didn’t,” he said.

McMullen immediately contacted Woolworths and the product has since been withdrawn from sale across the country.

"We immediately withdrew the product from sale and instigated an investigation into the incident including with our supplier. The investigation is ongoing and we continue to speak with the customer,” a Woolworths spokesperson said.

A Lidl bit of grocery competition could cause a Coles rethink

Australian shoppers have inadvertently invited global discount grocers to our shores by demonstrating their readiness to adopt private labels. In 2001, German discounter Aldi opened its first store in Sydney. The impact this business format would have on the Australian grocery sector was underestimated.

Initially, Aldi was dismissed as a small “no-frills” food store that provided a small range of non-branded products. Thirteen years later Aldi has over 340 stores, is the third-largest food retailer in Australia and continues to grow at a staggering rate, with plans to expand operations into SA and WA.

Aldi’s success has not gone unnoticed by other foreign-owned discount grocers, with reports German-owned Lidl is scouting for sites and Danish discounter Netto also considered a candidate.

Lidl has already established an office in Australia and its brand name is registered with the Australian Securities and Investment Commission.

What is Lidl?

Owned by German-based Schwartz Group, Lidl’s history dates back to the 1930s, when it opened as a food wholesaler. The first retail stores were opened in 1973 throughout Germany.

During the 1990s Lidl began its global expansion. By 2011, it had expanded its sites to 26 countries across Europe and Britain, generating a staggering US$88 billion in annual sales. Nearly 60% of this revenue came from international operations.

Currently the 8th largest food retailer in the world (Woolworths rates 17th, followed by Wesfarmers (Coles) in 18th position), the sales of Lidl continue to surpass the total sales of both Coles and Woolworths together. Operating from small footprints of between 750sqm to 1,750sqm, Lidl sells a small range of private label products, consumer electronics, apparel and general merchandise.

Similar to Aldi, Lidl has adopted the “no-frills” supermarket approach. Shoppers select products direct from open cartons, off pallets and deep freezers. Coin-released trolleys force shoppers to return them and remove the need for trolley collection contractors.

Staffing is minimal, there are no loyalty schemes and you pay for carry bags. Unlike Aldi, Lidl offers a small range of “branded products”, at very low prices. Although it imports many low-priced gourmet foods from Europe, it also sources many local products from the country where the store is located.

Keeping operational costs low, global buying power, a smattering of brands mixed with quality imported European private label products, and small stores that fit into localities large supermarkets cannot get into: that seems to be Lidl’s model for success.

But the simple duplication of the Aldi model is a risky strategy as Aldi already has already established itself as a household name in Australia. Lidl will need to clearly differentiate though range, service, price or location.

Although Lidl and Aldi co-exist in many countries, our dispersion and size of population will present a challenge. Finding suitable store locations also remains a challenge, despite Woolworths' decision to wind back the practice of buying land for future developments.

What does this mean for Australian players?

Price pressure from Lidl is likely to lead to further discounting and a continued growth of private label groceries. We can also expect to see Aldi agressively push ahead more quickly with its plans for expansion into SA and WA, before Lidl gets a foothold.

Smart shoppers are questioning the price they are paying for groceries and are abandoning full-line, traditional supermarkets for low-cost food operators. Internationally, we have seen shoppers desert traditional full-line supermarkets and move to low-cost grocers like Lidl, Aldi and Netto.

In Britain, the market share of the traditional full-line supermarkets, Tesco, Asda, Sainsbury’s and Morrisons, fell. In contrast, Lidl’s sales grew by 13.8% year-on-year. Aldi’s market share in the UK also increased to 4.8% (up from 3.7%), while the UK’s largest supermarket, Tesco, dropped from 30.3% to 28.9%.

Although Lidl will compete directly with Aldi, Coles and Woolworths should not be quick to dismiss this potential new entrant. Concerned by customers shifting to low-cost, discount retailers, UK supermarket Sainsbury’s this year announced plans for a joint venture with Danish discount grocer Netto, enabling it once again to enter the UK market.

Quite possibly Coles’ dumping of its “no-frills” Bi-Lo brand may have been a little premature. Logically, it is not unreasonable to think Coles may do the same here in Australia to combat these international discounters.

A win for private labels

Private label products have come a long way. Both Coles and Woolworths have implemented a good, better and best private label strategy. As such, shoppers now feel confident in purchasing these products. The proportion of private label in Australian supermarkets is estimated to be about 20% dollar share, which is a long way behind the UK at 46% and 32% in Germany, suggesting we still have a way to go.

With the majority of Aldi’s range being private label, it suggests shoppers are shifting to these generic brands. Australian shoppers also appear keen to trial novel and unknown brands.

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Gary Mortimer does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published on The Conversation. Read the original article.


Supermarket wars – a tale of the Australian duopoly

Consumers do not automatically consider the Australian grocery duopoly as an industry at all. Its stores play a part in most Australians’ everyday lives, whether it’s dropping into the local supermarket on the way home from work, or being exposed to blasts of push media in the form of fresh promises or revised jingles on TV, radio and billboards.

Australia is the most concentrated grocery market in the developed world: our top two retailers hold 78 percent of total grocery market share collectively, according to the Australian Food and Grocery Council (AFGC). This compares to 48 percent in the UK, 44 percent in France and only 24 percent combined market share of the top two grocery retailers in the USA. As an industry, the Australian grocery scene reads like a twisted schoolyard rivalry. It’s a high school scene with a fierce tension between ‘cool groups’. There’s never room for two. Let me explain.

Regarding industry leadership, the helm of Australian grocery was largely uncontested until 2007 when Wesfarmers bought Coles for $20 billion. This acquisition saw a brand new managerial board from the “Tesco school of grocery leadership” reshape the frumpy bridesmaid of grocery retail into a real threat for Woolworths. They initiated a flurry of revised consumer marketing, celebrity chef endorsements, Tesco-inspired business strategy, fierce price discounting and an emergent pride and equity associated with private label products.

The complacent Woolworths had been around forever, with a strong heritage (‘Safeway’ street cred) and a relative trend setting reputation on their side. They were the first to ‘liven up’ the consumer experience by draping their staff in green shirts and installing self-service checkouts.

To the tune of promotional renditions of Status Quo’s greatest hits played on big-red-hand guitars, Coles continued to challenge for leadership. The red they’d always worn was brighter (and damn, that’s a food colour), their jingles catchier and their pricing promotions more memorable. The mothership from the UK had been flying under the radar whilst gathering information about the local turf. Before 2008, 70-80 percent of Coles’ staff were employed on a casual basis. They instantly transferred as many employees as they could onto permanent part-time basis’ to gather camaraderie and champion the shopper’s in-store experience in their quest for a supermarket shake up.

Despite all of this action, the Australian Food and Grocery Council reported a 2.2 percent Compound Annual Growth Rate (CAGR) food and grocery industry decline in 2009-2011. Of course other school yard factions made moves, but none have made any real threat to the throne. Metcash, whose primary grocery channel is IGA, is trying to cling to its second tier status while playing a strong ‘locals’ card and capitalising on its ability to customise stores as needed. A recent Roy Morgan report identified Metcash had officially been knocked off its third place perch by German retailer Aldi, which now accounts for over 10 percent grocery sales. 

As the country’s largest manufacturing sector, Australian food and beverage manufacturing employs a quarter of a million people. Grant Thornton’s survey of industry CEOs revealed that manufacturers are feeling the impact of private label competition and anticipate further negative impact on profits.

From primary producers to suppliers, everyone is now fighting for their share of scarce profits and competitive advantage. The implications of this rivalry reach far and wide into the Australian economy. Supermarket shelves are the culmination of Australia’s  $110 billion food and grocery manufacturing industry’s supply chain.

Manufacturers face constraints on shelf space and therefore opportunities to reach their consumers. Their products are often sacrificed to make way for competitive copy-cat private label offers, trade margins and the ‘cost of doing business’, as well as retailer demands for deep promotional pricing (either fully or partly funded by the manufacturer). This is additional to the external, non-grocery factors impacting Australian food manufacturing’s business such as the high Australian dollar, ever changing regulatory compliance initiatives, commodity pricing and increasing costs of energy and labour.

In order to increase competition, the Australian government should appoint a supermarket ombudsman responsible for assessing the trade margin implications of both Coles and Woolworths on the greater supply chain. The ombudsman should also hold responsibility for monitoring private label market share across all categories. As per the AFGC’s 2011 recommendation, such an ombudsman should ensure that branded products continue to have access to supermarket shelf space on a fair and equitable basis. Without such an authority, the anti-competitiveness of the industry will continue to rise, and both the industry and consumers will suffer.

Alexandra Wall is a student at RMIT University and was a Global Voices Delegate to the OECD Forum in May this year.

Major dairy manufacturers losing ground to private label lines

According to Dairy Australia’s Dairy Situation and Outlook Report, Australians are increasing their spend on gourmet yoghurt, cheeses and dairy spreads, and supermarket private label lines are increasing their market share at the expense of major dairy manufacturers.

The report states that private label brands now hold a 35.9 percent share of the chilled cheese market – up 1.9 percent from the previous period.

 “Major manufacturers have lost share of chilled cheese (branded product) over the latest 12 months while private label sale volume has grown strongly at 7.5 percent: accounting for a little more than the branded volume lost by two of the top three major manufacturers,” the report reads.

The report, which was released yesterday, also highlighted that consumer trends towards higher protein content and ‘indulgent’ products have opened up opportunities for new product developments which are commanding high prices.

"New yoghurt product releases in the latest quarter have capitalised on a combination of wider trends including renewed interest in protein (as opposed to fat levels), natural ingredients and indulgence," the report stated.

The report also found that gourmet deli cheese have increased in popularity with an increase of 5.7 percent, while sales of dairy snacks have dipped slightly.

International demand for dairy is also keeping Australia’s farm gate prices up with a 25 percent increase on last season.

“Global dairy demand remains on a steady footing despite pricing at near record levels and production shortfalls in China and Russia have boosted import demand in those markets,” the report reads. “Southeast Asia is showing steady growth despite localised challenges, and exports to South Korea should benefit from the yet to be ratified Korea-Australia Free Trade Agreement.”

Despite an increase farm gate prices and high demand from international markets, Commercial and Research Analysis Manager at Dairy Australia, Norman Repacholi said that Australian dairy farmers are still facing challenges.

“Producers focussed on Australia’s domestic market have not seen the same, if any jump in milk price as those experienced by dairy producers in export focussed regions. They are also still facing cost pressures as a result of unfavourable weather or tight regional hay and grain supplies,” said Repacholi.


Aldi should sign code of conduct too, says Woolworths

Supermarket giant Woolworths is arguing that Aldi should sign the grocery code of conduct, claiming its private label products may infringe on the intellectual property of other leading brands.

Last month, Woolworths, Coles and the Australian Food and Grocery Council signed the voluntary code, which codifies the relationship between retailers and suppliers and outlines that suppliers must respect intellectual property rights including brand names, packaging and advertising.

According to the AFR, Tjeerd Jegen, Woolworths’ managing director of supermarkets, said some of Aldi’s private label brands are very similar to that of other national brands, using Bundaberg ginger beer, General Mills’ Old El Paso and Kellogg’s Special K as examples.

"One of our major competitors has 96 percent of their range that is own-brand," he said. "If you don't look carefully, you'd think it came from suppliers' brands."

Coles’ managing director Ian McLeod and Wesfarmers chief executive Richard Goyder have voiced similar concerns.

Metcash has said it’s reluctant to sign the voluntary code because it was not involved in the negotiation process and as a wholesaler, the code is irrelevant to its business model.

While Aldi hasn’t responded on Jegen’s comments, managing director Tom Daunt has said in the past that he supports any code that “levels the playing field.”

"In order to get a level playing field, I can't understand why every retailer is not signing up to the code," Jegen said. "Everyone is asking for a level playing field and we're providing it now."


New Coles deal could save 200 Simplot jobs

More than 200 jobs at Simplot’s Devonport factory could be secured following a new five year contract with supermarket giant Coles.

The deal which is expected to be announced today, is set to increase Coles-branded frozen vegetable and potato volume by over 12 percent – making Coles’ smart Buy frozen vegetable and potato products 100 percent Australian grown by next year, The Mercury Reports.

Earlier in the year, the food processor advised employees that two of its plants – Bathurst, NSW and Devonport, Tasmania – were under threat of closure due to an intensely competitive industry and unsustainably high costs.

"When the potential closures were indicated by Simplot, Coles offered its support because they are a very important and valued supplier for us," Coles spokeswoman Anna Kelly said.

The deal echoes the recent decision by rival supermarket chain Woolworths, who announced a $7m contract with SPC Ardmona last month which will see the supermarket replacing imported fruit with Australian grown from the Goulburn Valley region for its private label branded products.

“Woolworths has signed a contract with SPC Ardmona worth $7 million to source 13 lines of canned fruit from their growers in the Goulburn Valley. We are also sourcing three canned pineapple products from Queensland.  These products replace Select canned fruit lines that were previously imported from South Africa and Thailand," said Woolworths managing director of supermarkets and petrol, Tjeerd Jegen.


Fruit growers pressure Coles to follow Woolies lead

Orchardists in Victoria’s troubled Goulburn Valley region are calling upon supermarket giant Coles to follow Woolworths’ lead by committing to source only Australian fruit for its private label products.

Woolworths’ $7 million deal with SPC Ardmona is expected to save up to 50,000 fruit trees in the region which is still a far cry from the 750,000 trees that were expected to be destroyed.

President of the Victorian Farmers Federation, Peter Tuohey has called upon both of the supermarket giants to replace all of its imported fruit with Australian produce, the Weekly Times Now reports.

"Just imagine how many more trees and livelihoods could be saved if all supermarkets committed to using local produce," VFF president Peter Tuohey said.

"I'm glad to see supermarkets are listening to farmers, the wider community and VFF."

John Wilson, chief executive of Fruit Growers Victoria said that Woolworths decision to source local fruit will serve as a strong marketing advantage over rival Coles, and hopes that Coles will soon commit to a similar deal.

"We expect it means about an extra 3000 tonnes of peaches and pears, so that's an incredible boost in the circumstances," said Wilson

"Obviously for growers who have lost their contracts it's not going to affect them, but we're really hoping Coles can follow suit.

"We see it as a major marketing advantage to Woolworths now that they've taken this public stance to support the growers and if Coles would follow that it would make a huge difference to the community."

Local communication manager for Coles, Julia Balderstone said that the supermarket has a strong track record of supporting SPC Ardmona’s products, including Goulburn Valley fruit.

"Approximately 80 per cent of Coles brand tinned fruit including peaches, pears, and apricots comes from the Goulburn Valley," she said.

"We will continue to work with SPC Ardmona to drive product sales and explore new opportunities for Goulburn Valley fruit."


Consumers increasingly dissatisfied with what’s on the shelf

Aldi is at the back of the pack when it comes to which supermarkets are stocking the brands consumers want, with just 29 percent of the chain's customers satisfied with what's available.

According to Roy Morgan Research, Woolworths is leading the way, with 56 percent of its customers saying the supermarket giant stocks the brands they want, although this figure is seven percent below the store's peak in October 2011.

Following closely behind is Coles, with 52 percent of its customers content with what's on the shelves, down nine percent since June 2011.

Next is IGA at 48 percent, and Aldi comes in at last with 29 percent (see graph below).

Geoffrey Smith, general manager – consumer products, Roy Morgan Research, said the rise of private label products has played a hand in these findings.

"Over the last few years, an increasing number of well-known brands have been replaced on supermarket shelves with store’s own home brands—and it appears shoppers are noticing the absence of the brands they want in Coles, Woolworths and IGA," he said.

"ALDI stores carry products that are mostly home brands with a sprinkling of market leading brands in selected categories. Their shoppers have always been more likely to seek out their favourite brands in addition to their ALDI purchases. The surprise is that Coles, Woolworths and IGA stores, with their much larger product range, are not perceived by more of their customers as having the brands they want."

Despite today's consumers becoming increasingly dissatisfied with supermarkets' product range, another round of research conducted by Roy Morgan recently found that Coles and Woolworths are leading the way in milk sales, with their private label milk products the most popular amongst consumers.


Woolworths launches its own price cutting campaign

In light of the success of Coles' Down Down campaign, fellow supermarket giant Woolworths has announced that hundreds of its best selling products will have their prices cut by up to 33 percent.

On average, Woolworths customers will find between 40 and 50 Every Day Value prices in every supermarket aisle, with discounted products including MSA Australian Beef, sliced and shaved ham, Tip Top bread, Western Star butter, Arnott's Multipacks and International Roast Coffee.

"While we know that Woolworths is consistently cheaper than Coles on a comparable basket across the store, we are constantly looking for new ways to offer our customers ways to save," said Tjeerd Jegen, managing director of Woolworths supermarkets.

"The hundreds of Every Day Value price cuts that we are launching are just the beginning of our commitment to delivering more savings every day on essential family items. These prices will stay down for at least six months, and we have even more great savings in store for our customers – every day."

The new campaign is very similar to that of supermarket rival, Coles, which added 40 new products to its Down Down range last month, including iconic brands like Vegemite, Cornflakes and Milo.

Woolworths insists it's not playing copy-cat, with a spokesperson telling Mumbrella, "We play our own game."

A statement issued by Woolworths says the campaign was prompted by consumer feedback which found that extra savings at the checkout are a top priority.

"Our customers have told us that finding savings in their family budget is more important than ever. It’s our job to make life easier for our customers, every day, by making sure they are saving on the essential items that they buy most often," Jegen said.

Only time will tell if Woolworths cops the same bad press that Coles has for its price-cutting efforts.

While consumers might enjoy cheaper shopping bills, food producers and the Australian Food and Grocery Council have criticised Coles for favouring its own private-label products over its suppliers and not supporting Australian farmers.

But according to The Land, Woolworths will be absorbing 100 percent of the price reductions for meat and produce, but discounts for packaged groceries will be funded by the suppliers, who wil enjoy more shelf space in anticipation of greater volumes of their products being sold.


Are we allowing our fruit industry to wither?

The sight of Victorian citrus farmers bulldozing surplus trees due to the loss of supply contracts is a dramatic way to illustrate the quandary facing both Australian industry and growers.

In April Victorian fruit processor SPC Ardmona, owned by Coca-Cola Amatil, announced it was dramatically cutting its requirements for locally-grown fruit.

More than half of the 150 current peach and pear suppliers were told none of their crop will be required in 2014. Growers are now looking for Federal Government assistance to bulldoze 750,000 surplus trees, while SPC Ardmona has called on the government to impose emergency tariffs on imports to protect the local industry.

SPC Ardmona partially blames a high Australian dollar which has hit rural markets hard.

But also says it cannot compete against the supermarkets' overseas-sourced “private label” products. “We are competing against products from countries that have considerably lower labour and production costs and arguably lower quality standards than we have in Australia,“ Managing Director Peter Kelly said.

There has been increasing recognition that supermarkets have become the most powerful actors in the global food trade.

Jane Dixon and Bronwyn Isaac’s research explores in detail the problematic and paradoxical role of supermarkets in the Goulburn Valley’s food economy.

While the use of imported produce in supermarkets' home brand products benefits consumers through lower prices, they destabilise the regional agricultural economy and undermine a sense of community by displacing locally owned grocers and butchers.

Part of the issue facing Goulburn Valley growers is historical. Simply, an industry that formerly blossomed under protectionist and interventionist agricultural policies is now facing the realities of global free trade and competition.

The first fruit growers association was formed in the Goulburn Valley in 1891, with the Shepparton Fruit Preserving Company (SPC) established in 1917. In 2002 it merged with the Ardmona Fruit Products Co-Op Ltd to become SPC Ardmona and was acquired by Coca-Cola Amatil in 2005.

Up until the 1980s, the industry was cushioned by protectionist policies; but slowly, Goulburn Valley growers have been put under increasing pressure by international markets.

But the market forces argument ignores several factors.

There is the problem of what happens to the families and communities whose livelihoods have been underpinned by this industry for a century or so.

Johanna’s current PhD research with Victorian orchardists identifies a widespread sense of pessimism and frustration in a system that is dominated by supermarkets and in which growers are constantly under pressure to adhere to stringent quality assurance guidelines over which they have little control.

City of Greater Shepparton Mayor Jenny Houlihan said at a recent community rally “SPC Ardmona is vitally important to our local economy, and it is also part of our identity”.

In our view the growers are there as a result of previous public policy decisions, and so the public, via the apparatus of Government, is to some extent accountable for what happens to them.

Also, we are regularly told we are moving into an era of global food scarcity, with Australia well-placed to benefit by supplying high-quality food to our neighbours. Perhaps the Goulburn Valley situation lends weight to the argument that we are actually poorly prepared to become Asia’s food bowl.

It seems curious that we would allow this industry to wither. The existing complex system of skills, knowledge, infrastructure and supply chain relationships will be much harder to recreate in the future if they are permitted to unravel now.

The challenge is to navigate a path forward whereby the assets of the Goulburn Valley orchard industry are protected, and deployed into an economically viable future. So who should be doing what, if this is to be achieved?

Johanna’s current research indicates growers fare better when they produce multiple products, including a range of both different crops and different varieties, and when they supply multiple buyers and markets, including beyond the dominant retail supply chain. That is a strategy that warrants further investigation from growers and their industry bodies.

SPCA has been vigorously pursuing an innovation and diversification strategy to try to find profitable products and markets, as documented by Libby Hattersley and colleagues, and this needs to continue. This has included developing world-first new packaging technology such as single-serve plastic cups, and resealable plastic jars, as innovations on traditional canning technology. They have also established partnership agreements with overseas companies in order to gain access to new sources of supply and new markets.

There is a good case for Victorian Government involvement given its aim to double Victoria’s agricultural production, and the priority strategies identified in the Goulburn Valley Subregional Plan, part of Regional Development Victoria’s Hume Strategy for Sustainable Communities.

There is also a case for Federal Government involvement, in particular on moderating the power of the supermarkets. We watch keenly the current negotiations between the supermarkets and the Australian Food and Grocery Council.

Growers, communities, industry and government all have a role to play in charting a way forward for this industry. Let’s get on with it.

Jane Dixon's research was funded by the ARC.

Johanna Christensen and Michael Santhanam-Martin do not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. They also have no relevant affiliations.

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Margarine slides, private labels rise, study finds

Recent Roy Morgan research has found that less Australians are buying margarine, compared to 2008, but it's still the most popular table spread.

Thirty-nine percent of Australians aged 14 and over bought margarine in an average four week periodw, down from 42 percent in 2008.

Norman Morris, Industry Communications director, Roy Morgan Research, said "Over the last five years there has been a small decline in the proportion of Australians purchasing margarine in an average four-week period. It is still the top category of table spread … and most of the popular brands have maintained their market share. Supermarket-branded margarine has even seen an increase."

Butter is the second most popular spread, bought by 33 percent of Australians in an average four-week period in the year to 2012, up from 32 percent in 2008.

In regards to margarine brands, Flora margarines were bought by 12 percent of Australians aged 14 and over – the same as in 2008 – while eight percent opted for Meadow Lea, also unchanged from 2008.

Supermarket brands were the third most popular, growing in popularity from five percent in 2008 to seven percent in 2012.

Queenslanders in particular favour supermarket branded margarine, with nine percent buying them in an average four week period, compared to seven percent of the total population.

Darwin and Alice Springs residents are also slightly more likely to purchase Nuttelex, a vegan-friendly spread which ranked fifth across the country, up from sixth in 2008.

"Manufacturers need to understand not just the state differences but also the detailed profiles of their customers and competitors if they are to maintain their market share in the future," said Morris.


Dollar’s slide must continue, says food manufacturers

Food manufacturers across the country breathed a collective sigh of relief on Friday when, for the first time in almost a year, the dollar fell below parity against the greenback.

But that doesn't mean the troubles are behind manufacturers, who are arguing that the dollar needs to fall much further to fight off the wave of cheap imports threatening homegrown brands.

According to the Australian, Gary Dawson, chief executive at the Australian Food and Grocery Council (AFGC), said the dollar needs to fall closer to US76c.

"There's no doubt the high dollar has a significantly negative effect on the competitiveness of food manufacturing in Australia, so the recent falls are welcome. But it would need to move lower for longer to start having some impact," he said.

A spokesperson from Ferrier Hodgson, the administrators for Rosella, which collapsed late last year, said the high Aussie dollar had caused supermarkets to look towards imported private label products, but said even if the dollar had dropped by 10 percent it probably wouldn't have been enough to save the brand.

Coca-Cola Amatil also entered into the debate, claiming cheap imported tinned fruits contributed to the recent struggles of its SPC Ardmona brand, which has suffered a nine percent drop in first-half earnings.

However, managing director Terry Davis said the dollar's slide will make some imported goods more expensive.

"The softening of the Australian dollar against the euro is better news as this will help inflate the prices of the very cheap imported fruit and tomatoes coming in from European markets which have been flooding our domestic markets," he said.


Coles adds iconic brands to Down Down range

Vegemite, Cornflakes and Milo are among more than 40 new products added to Coles' discounted Down Down range.

The supermarket chain's growing focus on its Down Down range is supported by Coles customer research which found that three out of four Australians purchase big brands when they're discounted.

Coles merchandise director, John Durkan said "Australian customers want lower prices, but do not want to sacrifice their favourite big brands. It has been fantastic to work with these great suppliers, who like us are looking to deliver even more value to Australian customers every day."

Additions to the range include:

  • Kraft Vegemite (600g) was $7.99 now $7.00 – down 13 percent
  • Old El Paso Taco Kit (290-405gm) was $6.25 now $5.50- down 12 percent
  • Nestle Milo (1.25kg) was $13.85 now $12.00 – down 14 percent
  • Kellogg’s Cornflakes (725g) was $5.25 now $4.00 – down 24 percent

While consumers might welcome the discounts at the checkout, the supermarket giant has copped criticism for its heavy discounting, especially after its last round of product discounts was announced.

In January, Coles added more than 100 private-label products to the range, prompting the Australian Food and Grocery Council to accuse the chain of looking after itself rather than its suppliers.

The AFGC's arguments was strengthened by research released by Coles which found that its product range dropped 11 percent from 62,000 products to 55,000 from mid-2010 to mid-2012.

"These figures confirm what shoppers report anecdotally – that they often can’t find their favourite products on the shelves any more when they go to the major supermarkets," said AFGC's chief, Gary Dawson.

"The latest aggressive campaign by Coles to promote their private label products is a sign that this trend will continue."

Coles quickly responded however, arguing the AFGC was only telling half the story.

A statement issued by Coles read "Unfortunately, the AFGC have ignored the detailed Deloitte analysis about why and what has happened in Coles’ supermarkets and the Deloitte conclusion because it does not suit their story. The Deloitte report concludes: '…effective choice in the store is still high and consumers may be better off overall'".

Coles went on to add that branded products make up 75 percent of all products sold in its stores.


Coke hits back at Coles : “Do we want to pay our workers $1.50 per hour?”

Coca-Cola Amatil has come back to Coles on why a bottle of Coke costs up to 54 percent more in Australia than Indonesia, sighting major differences in labour costs as the core reason.

Indonesian labour costs range between $1.50 and $2.50 per hour for the company, compared to a much higher base rate in Australia, as reported by SMH.

Managing director of CCA, Terry Davis, said while costs such as aluminium and sugar are similar globally, not every cost is geographically equitable.

Davis said that CCA in Australia pays 15 to 20 times more per hour for labour and significantly more for rent than Indonesia, a similar situation for Coles as they pay more for rent in Westfield complexes.

He also mentioned that CCA pays a significant amount more to have a social security backdrop which isn’t present in many of the other countries where CCA operates.

“Do we actually want to pay our workers $1.50 and $2.50 an hour? Of course they are cheaper in Indonesia,” he said.

“Yes I can bring in cans from Indonesia cheaper than I could produce them in Australia. That is absolutely right, but I am not going to do that because I am fervently a believer that we have to have a manufacturing industry in this country, because if we don’t we do it at our peril.”

Davis said that CCA has done everything in its power to reduce costs, “And if that’s not good enough, well I’m not sure what happens to the rest of the Australian industry because it’s a very dour outlook if that’s the case,” he said.

Coles managing director, Ian Mcleod, has been accused of using deflection tactics by pointing the finger at CCA and other multinational suppliers claiming that they are enjoying excessive profits at the expense of Aussie retailers in an attempt to divert attention away from current investigations by the ACCC for allegations of misuse of power.

CCA’s packaged fruit business, SPC Ardmona had recently lost half of its local market share to imports sold by both Coles and Woolworths under their private label brands.


Robern Menz urges SA shoppers to buy local

Confectioner Robern Menz has launched a new campaign encouraging consumers to swap one supermarket food item with its South Australian produced counterpart.

The 'Shop and Swap' campaign includes social media  marketing and hopes to engage South Australians to support the state's food industry.

Robern Menz partnered up with Food SA to kick off the campaign, which follows the success of its 'SA brand word-cloud' graphic (see below), which had almost 2,000 shares on social media.

The graphic features well-known South Australian brands and products including Spring Gully, Beerenberg, Vili's, Bickford's, Balfours and Golden North.

Robern Menz CEO, Philip Sims, said "With the recent news of Spring Gully's challenges and through consumer feedback via our FruChocs Facebook page, it is very clear that South Australian’s generally have a real lack of understanding of what is actually produced here in our state. The sentiment of locals wanting to support locals is huge and this is evidenced by the tremendous response to Spring Gully’s plight."

After going into voluntary administration earlier this month, SA brand the 65-year-old South Australian pickles and sauce food company, Spring Gully, got a boost when three weeks worth of sales happened in three days, reviving its hope of a brighter future.

"The campaign we have proposed is simple and realistic, we are not expecting people to solely buy locally, although that would be great. We acknowledge people have brand loyalty, are price conscious and often unaware of what is actually made here in SA. Thus, we have designed a campaign that is attainable, easy to communicate and easy to ‘share’," Sims said.

"We believe this has a good chance of making a positive impact on the South Australian food industry and the economy in which we live. All we are asking is that shoppers swap just one item for a locally made item each time they fill their trolleys."

The campaign is intended to help people recognise locally-owned brands so consumers can make informed purchasing decisions that support locally-owned businesses.

Catherine Barnett, CEO of Food SA, endorses the Robern Menz initiative. "It is critical that people understand what they are buying. We would like consumers to think about buying and consuming South Australian made and owned high quality products," she said.


Coles’ milk deal gives supermarket suppliers a reason to be sour


Earlier this month, Coles and Murray Goulburn announced a ten-year deal that is likely to have significant consequences for the dairy industry, as well as Australia’s grocery sector more broadly.

Starting next year, Murray Goulburn will supply Coles’ private label milk. At the same time, its Devondale brand will be reinvigorated, with its cheeses returning to Coles’ shelves and – at least initially – Coles becoming the exclusive supplier of Devondale fresh milk.

A deal of this length carries with it considerable risk for both parties. Should market dynamics develop unexpectedly over the next decade, Murray Goulburn or Coles may well suffer. Coles might be locked into buying at prices which are no longer competitive, leaving it exposed on an extremely important product; conversely, Murray Goulburn might have committed itself to cost structures that it can’t sustain long-term.

Of course, the contract is likely to include mechanisms for price adjustments to account for such uncertainties. But as many lawyers will tell you, such clauses can often have unexpected shortcomings when reviewed years later. Try to imagine the world in specific commercial detail from now until July 2024 – that’s what the parties and their respective advisors have had to do.

At least Coles and Murray Goulburn have accepted these risks with their eyes wide open. By far, the parties most exposed by this deal are the other major dairy producers, such as Lion and Parmalat. Close behind them is the already over-worked supermarkets team at the Australian Competition and Consumer Commission.

On April 19, the ACCC granted approval to New South Wales farmers to collectively negotiate with Woolworths. This again makes life hard for the likes of Lion which, until Murray Goulburn came along, was Coles’ supplier.

From the ACCC’s perspective, that might just be competition at work. Indeed, superficially, there’s nothing to suggest the Coles-Murray Goulburn deal would raise competition concerns. Right now, Murray Goulburn doesn’t supply fresh milk at all, so how could it?

But the deal’s duration means that potential competitors are locked out of a significant portion of the grocery market. Depending on what else they can do with their milk (obviously Murray Goulburn has managed just fine not supplying fresh milk), this may reduce competition in the dairy sector.

The co-operative structure of Murray Goulburn also provides an interesting twist. Arguably, it’s the absence of a profit-making middleman that provides the foundation for this win-win arrangement. It also means that more dairy farmers will inevitably join the Victorian-based co-operative, particularly given its announced foray into New South Wales.

But the move of dairy farmers to Murray Goulburn will also affect the other major producers. Not only is their access to customers restricted, but they may also have to pay more for their inputs as their supplier base decreases. Over time this may reduce their economies of scale, making them less effective competitors.

The deal may also have broader ramifications. A logical consequence of a duopoly is a reduction in competition in all “upstream” markets. That is, over time, we would expect to see fewer suppliers to the supermarkets. This can create a vicious circle: the more that related markets become concentrated, the harder it is for effective competition to emerge in supermarkets. Smaller players can’t access the large-scale efficient producers, who are locked up by the major chains, and there are fewer “left-over” suppliers to deal with.

The parties haven’t sought authorisation from the ACCC for the deal. As such, they are confident that it doesn’t give rise to a substantial lessening of competition. If it did, the ACCC could bring court action, seeking an end to the arrangement as well as substantial penalties.

If the ACCC is concerned, at least it has time to make its assessment. Technically, it’s got another 17 years or so. But the market will adjust to this deal and, as they say, it’s hard to unscramble an egg. If the ACCC is worried, it needs to act sooner rather than later.

Regardless of ACCC action, it’s hard to see the milk wars continuing. In announcing the deal, Murray Goulburn said that the shelf price of milk will not affect returns to its farmers. This suggests prices are locked in — if so, Coles is hardly likely to take a hit on milk for the next decade. While consumers loved the savings (estimated to be $70 million a day), $1 a litre was widely considered to be unsustainable. At least dairy farmers can breathe more easily now.

A couple of years ago, milk was at the vanguard of the relaunch of private labels by the major supermarket chains. Now, it might be surfing the wave of the next big change. First, we had fewer supermarkets; next, will we have fewer suppliers?

Alexandra Merrett was previously a senior enforcement lawyer at the ACCC.

The Conversation







This article was originally published at The Conversation. Read the original article.

Dairy producers unconvinced on Coles’ milk deal

Dairy producers remain cynical on Coles’ new milk deal with dairy co-operatives.

The supermarket giant signed long-term deals worth $2.6 billion with Devondale and Norco on Wednesday.

Nobby dairy farm owner John Saville said farmers will only gain from the deal if Coles replaces its $1 per litre milk with a higher-priced alternative.

“If Coles are going to pay a premium on the milk, and it’s not going to go a dollar a litre, as long as that nonsense stops, it’ll help the suppliers.

“If this private labelled milk goes in as cheap milk, it’ll have the same effect,” he told The Chronicle.

Coles and Woolworths have attracted extra shoppers by heavily discounting perishable items such as milk, as people need to shop for it frequently. This has taken shoppers away from convenience stores and brought them to supermarkets.

Saville said the Coles deal looks like a measure to boost public relations.

“Being cynical I’d say they’ve picked the cooperatives for the PR exercise.”

On an episode of ABC’s The Checkout, Chris Reucassel said the deal could mean the supermarket giants would reduce processors’ margins and distribute those gains with the farmers’ collective, making lower milk prices more sustainable.

This is different from the Woolworths model, which only provides a premium farmer-made brand.

Lion and Parmalat control 90 per cent of the market for processing fresh milk. While Lion processes Pura and Dairy Farmers, and Parmalat processes Paul’s milk, they also process private label milk for Coles and Woolworths.

Reucassel also said processors pay farmers the same price for milk, regardless of the label. While it might be too early to know the long term consequences of the Coles milk deal will be for farmers or consumers, they concluded that this will negatively affect processors.

AFGC says choice being eroded by private labels

Manufacturers’ representative the Australian Food and Grocery Council has expressed renewed concern about the spread of private label brands throughout supermarkets.

The Australian Financial Review reports that the AFGC, a long-time critic of the increasing penetration of privately labelled products in supermarkets, has claimed that these products are being pushed onto shoppers, rather than sought out.

“We know that choice is being restricted and therefore competition is also being restricted under the private label strategies,” the organisation’s CEO Gary Dawson told the AFR.

“Clearly consumers have to choose from what’s in front of them, and there’s no lack of complaints about what’s happened to their choice.”

Recent research from Deloitte Access Economics has found that Coles’s product range has reduced by 11 per cent from mid-2010 to mid-2012, and the AFR reported earlier in the week that Woolworths’ home brand sales are growing at double digit percentages.

Coles has disputed the AFGC’s claim that 7000 branded units have been removed from shelves in the last two years, saying that these have made way for new items, and what has been removed has included both in-house and branded products.

It has been estimated that roughly a quarter of goods in Australian supermarkets are privately-labelled, compared to over a half of products in German and UK stores.

Earlier this week, Peter Brooks of Tru-Blu Beverages said that manufacturers should recognise the changing supermarket environment and adapt accordingly.

“It's a fact of life and that's where the future is heading for some categories,” he offered, explaining that supermarkets had the right to stock what they wanted.

“As long as you have the right structure and the ability to manufacture products at a competitive price you should be able to be reasonably competitive in the private label business,” he said.

The ACCC is currently investigating suppliers’ complaints regarding the supermarket duopoly’s practices.