Retail outlook: big retailers feel the pressure of new challengers

It’s reporting season, and over the past few weeks some of Australia’s biggest companies have been releasing information on how they’re travelling. These reports reflect key themes of how things are going in key sectors of the economy. Over coming days we’re going to report on the results a handful of major companies in key sectors, transport, construction, retail, mining, insurance and banking. Today we look at the retail sector.

 

Dominant retail giants Wesfarmers – owner of Coles supermarkets – and Woolworths hold a 70% of market share of Australia’s fresh food grocery market, but have had contrasting fortunes over the past few years. Half-year results for Wesfarmers and Woolworths for 2016 show very different outlooks.

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Meanwhile, the major retail players are continuing to feel the disruptive impact of smaller players such as Aldi and highly competitive market conditions; both will have employ new strategies away from the tried and true defensiveness that has worked in the past.

Wesfarmers reported a net profit after tax of $1.4 billion, up 1.2% since the same time last year, while Woolworths reported a net loss of $973 million after a profit of $1.3 billion. Over the last few years Coles has seen stronger sales growth and comparatively better market share.

By contrast, Woolworth’s strategy problems with its home improvement business, Masters, has been widely ventilated. The company attributed $1.8 billion loss to the costs related to its exit from Masters.

Woolworths' underlying profit was $925 million, still down 33% on prior year. Woolworths would hope that its exit from the ultimately costly Masters endeavour will serve as a boost to investor confidence.

Woolworths has also struggled with branding and has seen advertising agency changes over the last few years the most recent being the dropping of Leo Burnett and a return to M&C Saatachi.

Perhaps more revealing to the outlook of the industry are some of the underlying similarities in strategy. Both Woolworths and Wesfarmers emphasised price deflation, cost reduction and further price cutting, as key strategies.

The companies expect highly competitive market conditions and consumers to remain price sensitive, and will largely focus on improving supply chain productivity, through cost reduction. Woolworths is reducing its spending on activities such as marketing, property acquisition and rent as part of $500 million in cost savings during the 2016 financial year (July 2015 to July 2016).

Likewise, Wesfarmers has highlighted similar measures, with cost cutting objectives, the company hopes will allow them to lower their prices in the supermarket even further.

In an industry where profit margins are already low, such intense competition would carry significant risk. If sales don’t meet expectations, the retailers have little room to lower prices when margins are low. As a consequence, covering fixed costs like maintenance and rent of stores becomes increasingly difficult and the likelihood of making a loss is higher.

To some extent these price wars reflect the two retail giants directly competing against each other, but another factor is the disruption caused by new entrant Aldi. The supermarket chain has gained 11% of the market since it came onto the scene in 2002, using its streamlined, low cost supply chain to undercut Woolworths and Wesfarmers on price.

Aldi is a unique player in this space. In the past Coles and Woolworths could exercise their market share and size to squeeze out small producers; but Aldi is a different beast, a global company with a presence in both Europe and the USA.

Aldi may not even be the biggest problem facing the locals, if reports that European retailers such as German retailer LIDL are sizing up the Australian market prove true. LIDL is the fourth biggest retailer in the world, with $128 billion in annual sales. Whatever hold true for Aldi is doubly true for LIDL. Other hypotheticals floated around Danish discounter Netto and UK grovery giant, Tesco.

The traditional defensive strategy against competitors employed by the Aussie giants relies on economies of scale, being larger than your rival and being able leverage this efficiency to deliver a cheaper end product or more controversially to loss lead and force your opponent out of business maintain your market share and eventually maximise your profit.

Woolworths and Coles are falling back on their old ways to try and beat Aldi, the companies' corporate strategy for the most part is focused on a doubling down on the traditional squeeze out all newcomers approach. However Aldi brings global resources to the table that Woolworths and Coles don’t have access to.

In the retail sector Aldi will continue to steal market share from Wesfarmers and Woolworths more so if the companies continue with old strategies and don’t think of a way to innovate the retail space.

 

Shumi Akhtar is a Senior Lecturer at University of Sydney.

Farida Akhtar is a Lecturer at Curtin Business School, Curtin University.

 

This article first appeared in the Conversation. You can Read the original here.

 

Woolworths to offer high protein ice cream

FroPro, a 99 per cent sugar free, high protein ice cream will now be available to purchase from selected Woolworths supermarkets.

FroPro, an independent Australian business, was created by professional athlete and former rugby union star Ed O'Donoghue, as a healthy challenger to the sugar filled, high fat frozen dessert incumbents.

O'Donoghue first invested in the products’ commercial distribution nearly three years ago. To this point, the brand has grown rapidly with a loyal, health focused customer base in the independent grocery and health food chain market.

O’Donoghue said the introduction of FroPro to Woolworths is a game changer for Australians.

 “It’s a real watershed moment. By backing a product like FroPro in the ice cream aisle, Woolworths is leading the way in promoting better eating habits by giving Australians a healthier ice cream option. FroPro is the first 99% sugar free ice cream ever ranged in an Australian supermarket,” said O’Donoghue. 

Powerful supermarkets push the cost of food waste onto suppliers, charities

At a time when one billion people globally experience hunger, as much as 50% of all food produced – up to two billion metric tonnes – is thrown away every year. In Australia alone, as much as 44 million tonnes of food is wasted annually.

Last year, French supermarket chain Intermarché launched a highly successful campaign encouraging consumers to purchase “ugly” food. This year, France became the first country in the world to implement laws cracking down on food waste, with new legislation banning supermarkets from throwing away or destroying unsold food. Under this new legislation, supermarkets are required to donate any unsold food to charities or for animal feed.

While there is no law in Australia requiring supermarkets to donate any unsold food, both Coles and Woolworths have aligned with food rescue organisations to donate unsold or “surplus” food.

This surplus food is distributed amongst those experiencing poverty and food insecurity and is done voluntarily by the supermarkets under the banner of corporate social responsibility.

But our research into the issue of corporate social responsibility and wastage of fresh fruit and vegetables has identified a number of tensions and contradictions, despite leading Australian supermarkets’ zero food waste targets.

First, the strict “quality” standards required by the Coles and Woolworths duopoly means that a large volume of food does not reach the supermarket shelves. This is produce that does not meet size, shape and appearance specifications – such as bananas that are too small, or apples that are too red. If producers do not agree to meet these standards, they will lose access to approximately 70-80% of the fresh food market in Australia.

Second, the two major food retailers do not take ownership of produce until it passes inspection at the distribution centres. It is here where suppliers, such as farmers and growers, are “invited” – under the supermarket’s corporate social responsibility initiatives – to donate rejected food to rescue organisations at their own cost, or otherwise pay for further transportation or dump fees.

Thirdly, in an effort to reduce the high levels of food wasted at the farm gate, Australian supermarkets have followed France’s lead by marketing “ugly” food, (or what Intermarché termed “Inglorious Food”) – food that does not meet strict cosmetic standards, but is still perfectly edible.

While a step in the right direction, this “apartheid” between beautiful and ugly food was criticised in this study for reinforcing values that perfection comes at premium and ugly food, which is often the way nature intended, should be price discounted. Growers are also concerned about the lower prices that “ugly food” attracts, and the flow-on effects to them in reduced profits.

A final tension regarding food waste is “who is to blame”? Supermarkets attribute their high quality standards to consumer demands – however, consumers can only buy what is available at the supermarket. Supermarkets have also been criticised for marketing tactics that encourage household food waste, such as “buy one, get one free” campaigns.

Despite the lack of transparency regarding food waste in the supply chain, supermarkets – with their powerful market position at the end of the supply chain – are in a good position to transfer the problem of waste elsewhere.

They do this by setting cosmetic standards in the procurement of food which results in high level of wastage, not taking ownership of produce that does not meet their own interpretation of the standard, claiming corporate social responsibility kudos for donating to food rescue organisations (while at the same time saving on dumping fees) and differentiating between “beautiful” and “ugly” foods – reinforcing difficult-to-attain standards of perfection.

Much of the food wastage and transfer of blame for food wastage can be attributed to the market power of the duopoly. Most significant, are the proprietor-driven private standardswhich require produce to be perfect.

Although donating to food rescue organisations may be positive for people in need, it does not address the structural problems of the supply chain. This raises the question of state-led regulation, as with the case in France, to restrict food wastage at the retailer level. However, more is needed. Food waste is one symptom of excessive market power, something that needs to be addressed to steer mass food retail in a more sustainable direction in Australia.

 

Carol Richards is Vice Chancellor's Senior Research Fellow, Queensland University of Technology.

Bree Devin is a lecturer in Public Relations, Queensland University of Technology.

Disclosure statement

Carol Richards receives funding from the Australian Research Council and the Norwegian Research Council.

Bree Devin does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.

 

This article first appeared on The Conversation. Read the original here.

Woolworths announces $972.7m loss, appoints new CEO

Woolworths has posted a net first-half loss of $972.7m and appointed Brad Banducci as CEO and Managing Director.

The company said in a statement that the result followed a massive $3.25 billion loss from its Masters home renovations business.

In January, Woolworths decided to close the Masters chain which had failed to compete with Bunnings.

The appointment of Banducci takes effect immediately. He will also continue in his previous role as Managing Director of Woolworths Food Group until a replacement is decided upon.

“We undertook a rigorous international search process to find the best person to rebuild the Woolworths business and return it to sustainable growth. While there were several strong candidates, the Board was unanimous that Brad was the strongest of the field,” said Woolworths Chairman Gordon Cairns.

“Brad has had 25 years in retail, including 15 years consulting to some of the world’s leading retailers, as well as private equity experience in retail. He has had five years with Woolworths , including his role in leading the growth of Woolworths Liquor Group. During this time he was instrumental in the development of Dan Murphy’s, one of Australia’s great retailers.”

Banducci said he was honoured to lead Woolworths and its 200,000 employees.

 “I am an entrepreneur at heart, and a retailer by discipline, and I want us to take our company back to its best levels of performance. My goal as CEO will be to recapture the spirit of innovation and customer focus right across the business, and to grow a culture where our people once again feel a strong ownership of the business.

Asian consumers angry at Woolworths for blocking baby formula orders

Woolworths has been accused of racially profiling customers after Woolworths cancelled three online baby formula orders and suspending their accounts.

Within the past month, Sydney parents Adrian Cheng, Reginald Dong and Sarah Kong had their online orders for tins of baby formula cancelled –something they blame on their Asian surnames.

Australian parents have become increasingly concerned about a baby formula shortage of preferred brands, such as A2 Platinum and Bellamy’s Organic, calling for Woolworths and Coles to enforce purchase limits and clamp down on bulk buying.

According to Korean-Australian mother Sarah Kong, her account was suspended after she ordered four tins of formula on New Year’s Eve and received a confirmation email and the expected time of arrival.

“At every point in this process you have failed in customer service. At worst it is fraud to have accepted the order, taken the money, imply that I contacted you for a refund and then block my account,” Kong said in a complaint to Woolworths.

Following consumer pressure late last year, Woolworths lowered its baby formula purchase limit to four per transaction, while Coles lowered it to two.

A Woolworths spokesman said the chain was trying to manage its supplies of formula for its online customers in a period of high demand.

“In some cases we suspend accounts pending a confirmation that the order fits within our terms and conditions. In any case where a customer has had a poor experience, Woolworths apologises for this,” the spokesman said.

Erin Chew, spokeswoman for the Asian Australian Alliance, said following the widespread media coverage of the baby formula shortfall late last year, a "xenophobic spotlight" had unfairly focused on the Chinese.

"We need a change in how Australians view those of Chinese ancestry. The really unfair aspect is that families like Cheng and Dong are well integrated Chinese Australian families," she said.

Chinese demand for Western baby formula rocketed after a string of food scares, including the 2008 melamine contamination that killed six babies and made 300,000 seriously ill.
 

Measurement authority weighs in on supermarket giants

The National Measurement Institute has found thousands of products to be under the stated weight that was promised on packaging sold by Coles and Woolworths. 

Over the 2014-15 period, 3,962 non-compliance notices were issued to traders, up 13 per cent on the previous year’s figure.

Woolworths was found guilty and fines $3,000 for selling birthday mock cream sponge cakes, with shortfalls of up to 41 per cent. Coles was also hit with a $3,000 fine for using a weighing instrument not at zero that led to shortfalls of up to 9.4 per cent in prepacked lamb chops.

According to consumer advocate Christopher Zinn, a third of the complaints to the institute about prepacked articles were found to be justified, along with 40 per cent related to meat and 14 per cent related to fruit and vegetables.

“You can’t tell at the shops if something is 5 per cent underweight. While that might seem like a trivial amount, which makes no difference to the producer producing a million pounds of something –it might make a very significant difference in terms of their bottom line,” Zinn said.

A Coles spokesman said the case involved one product in one store.

“The issue, which resulted from a piece of fresh meat sticking to an automatic cutting and weighing machine between slices, was quickly corrected and no wrongly labelled items were sold to customers,” he said.

“Coles takes its trade measurement responsibilities very seriously and has robust operational and compliance systems in place in every one of its stores right around Australia.”

Will Coles crack under pressure to freeze their eggs?

Pressure is mounting for Coles to move eggs into refrigerated aisles in a move to protect consumers from salmonella, a practice currently rolling out at Woolworths.

Woolworths has pledged to keep eggs in refrigerated cabinets as it continues a nation-wide revamp of its stores.

In order to prevent the spread of the harmful salmonella bacteria, fresh eggs are now being chilled in new cabinets installed at dozens of Woolworths outlets in the past year.

Coles has come under some criticism across social media platforms as it would not disclose if any of its stores would keep eggs refrigerated in response to cases where egg-related incidents lead to hundreds of hospital admissions each year.

According to infectious diseases expert at Australian National University medical school, Professor Peter Collignon, eggs must be treated just like raw meat and kept in a refrigerator at all times.

“I’m always surprised by the lack of anxiety about this. We ought to make the product safer, and we do that by refrigerating it, even at the supermarket,” Collignon said.

Collignon stressed that poor practices at farms, where "dirty eggs" are graded and used when they shouldn't be, combined with poor food-handling practices, particularly in catering or at restaurants, have been the main culprits behind large outbreaks of the food-borne illness.

The salmonella bacteria is spread by birds, usually through faeces, with food safety laws requiring eggs to be washed, inspected for cracks, graded and then kept at cool temperatures at farms and during transport.

But there is no legal requirement to keep eggs in a cool environment at the retail level, and there is no scientific consensus about the need to do so.

ACCC slams Woolies for ‘unconscionable conduct’ towards suppliers

The Australian Competition and Consumer Commission (ACCC) has instituted proceedings in the Federal Court against Woolworths Limited, alleging the supermarket giant engaged in unconscionable conduct in dealings with a large number of its supermarket suppliers, in contravention of the Australian Consumer Law.

The ACCC alleges that in December 2014, Woolworths developed a strategy, approved by senior management, to urgently reduce Woolworths’ expected significant half-year gross profit shortfall by 31 December 2014.

It is alleged that one of the ways Woolworths sought to reduce its expected profit shortfall was to design a scheme, referred to as “Mind the Gap”. It is alleged that under the scheme, Woolworths systematically sought to obtain payments from a group of 821 “Tier B” suppliers to its supermarket business.

The ACCC alleges that, in accordance with the Mind the Gap scheme, Woolworths’ category managers and buyers contacted a large number of the Tier B suppliers and asked for Mind the Gap payments from those suppliers for amounts which included payments that ranged from $4,291 to $1.4 million, to “support” Woolworths. Not agreeing to a payment would be seen as not “supporting” Woolworths.

The ACCC also alleges that these requests were made in circumstances where Woolworths was in a substantially stronger bargaining position than the suppliers, did not have a pre-existing contractual entitlement to seek the payments, and either knew it did not have or was indifferent to whether it had a legitimate basis for requesting a Mind the Gap payment from every targeted Tier B supplier.  

The ACCC alleges that Woolworths sought approximately $60.2 million in Mind the Gap payments from the Tier B suppliers, expecting that while many suppliers would refuse to make a payment, some suppliers would agree. It is alleged that Woolworths ultimately captured approximately $18.1 million from these suppliers.

“The ACCC alleges that Woolworths’ conduct in requesting the Mind the Gap payments was unconscionable in all the circumstances,” ACCC Chairman Rod Sims said.

“A common concern raised by suppliers relates to arbitrary claims for payments outside of trading terms by major supermarket retailers. It is difficult for suppliers to plan and budget for the operation of their businesses if they are subject to such ad hoc requests.”

“The alleged conduct by Woolworths came to the ACCC’s attention around the time when there was considerable publicity about the impending resolution of the ACCC’s Federal Court proceedings against Coles Supermarkets for engaging in unconscionable conduct against its suppliers,” Sims said.

The ACCC is seeking injunctions, including an order requiring the full refund of the amounts paid by suppliers under the Mind the Gap scheme, a pecuniary penalty, a declaration, and costs.

These proceedings follow broader investigations by the ACCC into allegations that supermarket suppliers were being treated inappropriately by the major supermarket chains.

Costco driving change in Australia’s FMCG sector

Collectively, Australia’s supermarket and grocery stores and fuel retailing industries will generate an estimated $ AUD125.1 billion in 2015-16. Business information analysts at IBISWorld forecast that this figure will reach $AUD134.5 billion by 2020-21. 

The traditional supermarket giants Coles and Woolworths currently account for more than 70 per cent of the supermarkets and grocery stores industry in Australia, and over 40 per cent of the fuel retailing industry.

Competitor Costco’s continued expansion has seen the bulk-buying retailer grow its share of supermarket revenue. According to IBISWorld industry analyst Brooke Tonkin, “the company already claims 1.2 per cent of this $ AUD88.1 billion dollar industry, with only seven stores.” Costco’s ongoing diversification into the fuel retailing industry is expected to increase competition, with the company’s low-price strategy attracting motorists, as customers have little brand loyalty in terms of fuel.

“The trading landscape for supermarkets and fuel retailing has changed considerably over the past three decades, with new entrants increasing competition, and changing consumer preferences creating new challenges and opportunities,” said industry analyst Brooke Tonkin.

Price competition

Supermarkets and grocery stores once operated alongside specialist food retailers, but now compete fiercely with specialist retailers on price and product range in a bid to attract shoppers. Industry retailers like Coles have recognised the importance of price competition by implementing substantial price cuts across their stores. Consumers have become increasingly price-conscious, and want to be assured that they are purchasing value-for-money goods.

Sales volumes generally remain relatively static for supermarkets, as shoppers tend to buy similar goods from week to week. As a result, price cuts have a significant effect on profit margins. To combat price competition and maintain profit margins, Woolworths has been forced to reduce costs.

“While supermarkets continue to compete on the basis of price, other factors such as convenience, product variety and quality have emerged as driving forces in securing customer loyalty. This helps explain the growth of Costco, which has steadily gained market share over the past five years,” Ms Tonkin added.

The Costco model

Convenience has become a major factor in attracting customers, with major supermarket players attempting to broaden their ranges to include basic necessities as well as specialist gourmet products. Meanwhile, Costco is attempting to increase its market share through the opening of new stores, and the sale of a diverse range of products in bulk. The expansion of new stores has been a major driver of ALDI’s growth, and similar success is expected for Costco, as the number of stores is a key competitive factor.

Costco offers a much wider range of products than the current supermarket duopoly at its seven Australian stores, including clothing, televisions and other appliances. Costco’s bulk-buying power allows it to offer very low prices. The wholesaler is able to offer such large discounts on its products and remain profitable due to its annual membership fee of $AUD60.

The majority of the company’s profitability comes from this fixed source of revenue, allowing it to pursue aggressive price competition. Costco’s earnings before interest and tax have only shown positive results once in Australia since 2009, indicating that the company is primarily focused on gaining market share in Australia. The membership fee also helps foster customer loyalty.

Store location is also important, and Coles and Woolworths have attempted to broaden their reach by expanding fuel station grocery offerings into mini supermarkets. “Costco’s expansion into fuel retailing is in line with this trend, as the wholesaler plans to become a convenient one-stop-shop where customers can buy all their groceries and fill up on petrol in the one location,” Ms Tonkin explained.

Fuel retailing

The fuel retailing industry faces a high level of competition, as price and location largely determine where motorists buy petrol. “Most consumers see petrol as an undifferentiated product and therefore purchase on price – there is effectively no brand loyalty,” Ms Tonkin said.

The Costco fuel retailing strategy offers customers convenience and consistently lower prices, in line with the company’s grocery strategy. Costco’s establishment of a Moorabbin store with fuel pumps is a first in Victoria. 

The first Australian Costco fuel station was established in Liverpool, NSW, in November 2013. The introduction of a fuel station at the Brisbane North Lakes store in May 2014 prompted a flurry of price cutting in the surrounding area, as other fuel retailers scrambled to compete with Costco’s low prices.

However, Costco’s fuel prices remained lower than other retailers in the city, with customers saving up to 15 cents per litre. In the months following its opening, competition from Costco has continued to force down prices among other petrol stations in the area.

The way forward

As ALDI and Costco continue to expand in the supermarkets and grocery stores industry, the well-established major players are expected to look for new ways to remain competitive and boost market share. Woolworths announced in September 2015 that it would invest $AUD65 million in store improvements and increasing staff hours. Meanwhile, Coles has already begun upgrading some of its larger stores to a new market-style format.

“These strategies are designed to keep shoppers instore for longer by presenting stores as foodie destinations, and attract greater sales through premium offerings such as ready-made meals and delicatessen products,” said Ms Tonkin. 

These new stores also offer patisserie goods, artisanal breads and even sushi bars. However, major competitor ALDI is also transitioning its stores to a market-fresh approach, with more fresh food, branded groceries, and ready-to-go and organic food. This is expected to further increase supermarket competition.

ACCC concerned over implementation of Food and Grocery code

The Australian Competition and Consumer Commission is investigating reports about the approach supermarket retailers are taking to implement the Food and Grocery Code of Conduct (Code).

ACCC Chairman Rod Sims said, “The aim of the Code is to redress the imbalance in bargaining power that can exist between suppliers and large grocery retailers by prohibiting certain types of unfair conduct”.

“The Code imposes a duty to deal with suppliers in good faith and we are concerned by reports we have received from suppliers that suggest that some retailers have not got off to a good start when it comes to implementing the Code,” Mr Sims said.

“The ACCC has concerns as to the manner in which some retailers, in particular Woolworths and Aldi, are presenting new Grocery Supply Agreements (GSAs), which might give the impression that the supplier is not able to negotiate the terms of the GSA.”

“The ACCC is also concerned about the low level of detail provided in some GSAs about the circumstances in which certain payments may arise.”

The Code sets out a number of prohibitions on, for example, requiring a payment for wastage that occurs at the premises of the retailer. While it is possible for retailers and suppliers to opt out of such prohibitions, this can only occur if the opt outs are agreed, if the agreement sets out the circumstances in which the opt out applies and if the payment is reasonable in the circumstances.

“One of the purposes of the Code is to provide certainty to suppliers, who are often in a much weaker bargaining position when dealing with retailers. In order to provide that certainty, the ACCC expects retailers to set out the circumstances in which they will seek payments from suppliers,” Mr Sims said.

The Code requires that retailers offer code-compliant GSAs. Suppliers should not feel compelled to sign these agreements and should seek advice before signing them. In particular, the Code will confer protections on suppliers 12 months after a retailer has signed up to the Code, regardless of whether a supplier has accepted a code-compliant GSA.

The ACCC said it has written to retailers about the manner in which they purport to be giving effect to the Code. The retailers have responded providing their new GSAs and the correspondence they have sent to suppliers offering the new GSAs. 

The said ACCC said it will continue to monitor compliance with the code.

Woolworths’ poor results hide long-term success

As Wesfarmers and Woolworths continue to battle for leadership across different retail categories in Australia, Julia Illera from Euromonitor International assesses how successful they’ve been in their attempts to gain market share – as well as the hearts and minds of Australian consumers.

 “Although competition has been almost head-to-head in most of retail categories in recent years, including grocery retailing (supermarket, forecourt retailing, food/drink/tobacco specialist) and mass merchandisers (discount department stores), Wesfarmers has managed to step ahead in the competition thanks to its position in mass merchandisers and home improvement and gardening stores with its Kmart, Target and Bunnings brands,” said Ms Illera.

“Furthermore,” she noted, “Wesfarmers also has a strong presence in stationers/office supply stores with the Officeworks brand, a category in which Woolworths Ltd does not have a presence”

“Despite Woolworths’ poor FY15 results, out of these two competitors Woolworths seems to have a better strategy for the long term, with its online channel better prioritised and experiencing stronger growth. For FY14, the group reported a 50% increase in its online sales, exceeding $AUD1.2 billion. In FY15, it reported a 15.6% increase in online sales to $AUD1.42 billion.”
 
“Up until now the battle has been limited to the physical world, but it seems we will soon see the fight move increasingly online,” Illera concluded.

Thomas Foods set to pack on the beef

South Australian meat processor, Thomas Foods International says it will boost its beef processing capacity by up to 25 per cent with a new beef boning facility.

Thomas Foods has an annual revenue in excess of $AUD1billion and is Australia’s largest family-owned meat-processing company.

It currently supplies a range of retail outlets including Coles, Woolworth’s, Costco and also Aldi.

According to the company, this $AUD25 million upgrade of its Murray Bridge abattoir will boost the company's beef processing capacity by a quarter and will see the creation of an additional 200 jobs.

“The new facility will use the latest technology for refrigeration, conveying, sortation, cryovac packing and hygiene,” Thomas Foods CEO David McKay said.

"It will be one of our company's biggest investments," he said.

Australia lagging behind online grocery shopping

Just 12% of Australian consumers use e-commerce services to order groceries online and have it delivered to their home – 13 percentage points lower than the global average of 25%, and well behind the Asia Pacific average of 37%, according to the latest Nielsen Global E-commerce and New Retail Report. Despite this, more than half (55%) of Australian consumers say online order and delivery is a service they are willing to use.

 
An even smaller number of consumers are using the “Click & Collect” services that retailers like Coles and Woolworths readily offer for grocery purchases. Just 5% of Australian consumers say they order groceries online and pick them up using a drive-thru service. However, more than half (53%) are willing to use this option in the future.
 
“The Australian landscape and lifestyle is more complex to other markets, with many consumers living a reasonable distance from retail stores and many not being at home to accept grocery deliveries,” said Megan Treston, a Director in Nielsen’s Retail Industry Group. 

“Advances in technology are providing greater flexibility for shoppers, and offers like click and collect and, more recently, bundles to overcome individual delivery fees are introducing new ways to overcome barriers for online grocery shopping. The delivery fee bundling offer is very exciting and we’re watching this space closely.”
 
Nielsen’s Homescan Shopper Panel data shows that online represented 1.9% of all grocery sales in Australia for the year ending 13 June 2015, and growth is substantial; up by 29.3% for the year.  
 
There is a similar trend to growth in online grocery shopping when looking at dollar growth by key department (see below); signaling that online is vital to boosting growth in a relatively stagnant grocery market. The exception to this is Health and Beauty, which is a high involvement category and also faces intense competition from the likes of department stores, pharmacies and other online beauty retailers.
 
Treston says: “The retailers who will win the most of this prize are those that will leverage technology to enhance the existing shopping experience and meet consumers’ evolving desires with a trustworthy service and by offering real convenience. Consumers are ready for it, so retailers should meet that openness to technology.
 
 “As smartphone ownership and usage reaches saturation point in Australia, mobile commerce opportunities will also thrive and contribute to strong growth of digital grocery sales. We recently predicted the online channel will be responsible for over $1 billion of sales growth the industry is likely to see over the next five years, and this research shows an existing appetite that is waiting to be nurtured if consumer needs are accurately met, “said Treston.
 
“Retailers and manufacturers can add value by providing digital tools to help consumers take control of their shopping experience while also increasing sales potential. Mobile in particular can tip the scales in favour of increased shopper control, empowering them to shape the shopping experience more than ever before. Introducing digital strategies into the in-store experience is not just a nice-to-have—these options can increase dwell time, engagement levels, basket size and shopper satisfaction,” she said.
 

Woolworths’ CEO resigns

After less than four years at the helm, Woolworths’ Chief Executive Officer and Managing Director, Grant O’Brien, will retire from the company.

The news comes weeks after a plan was revealed to reinvest $500 million in “cost savings” across FY16 and FY16 into lower prices, service and an “enhanced offer for customers.”

O’Brien said; “at the recent Investor Day we set out clear strategies to grow our businesses over the next three years and we have been working hard to execute these plans. However, the recent performance has been disappointing and below expectations. I believe it is in the best interests of the Company for new leadership to see these plans to fruition.

“I approached the Chairman and expressed to him that I am committed to a smooth transition to a new CEO and wanted to give the Board sufficient time to consider its options.”

A global executive search process including external and internal candidates will be conducted by the Woolworths Board to appoint a new CEO. O’Brien will continue to serve as CEO and Managing Director during this period.

Q3’15 has been tough for Woolworths, with the Australian Food and Liquor sales performance in April “disappointing.” There has been no improvement in May and June to date, with Australian Food and Liquor recording a decline in Easter adjusted comparable sales of approximately 0.7 per cent for Q4’15 to date.

The supermarket ran into issues with the introduction of a new merchandising system, which occurred during Q4’15. The launch of the new system created stock availability issues, which then impacted sales. As a result, General Merchandise Easter adjusted comparable sales for Q4’15 to date declined by approximately 12.1 per cent. The merchandising system implementation issues are in the process of being resolved.

Home Improvement Easter adjusted sales increased by approximately 19.8 per cent for Q4’15 to date with Home Timber and Hardware reporting growth of 21.9 per cent and Masters reporting growth of 17.7 per cent.

Woolworths now anticipates a total reduction of approximately 1,200 roles across support functions, supply chain and non-customer facing store positions (including those relating to the new distribution centre and meat processing facility announced last week). This is including plans to reduce 400 support roles announced at the Investor Day in May.

Trading performance for our other divisions is broadly in line with Woolworths’ expectations.

“We have been very transparent about the key challenges and opportunities for growth for each of our businesses, including setting out detailed plans at our recent Investor Day to win back sales momentum within our Australian Food business,” O’Brien said.

“Australian Food is on a three year journey to get customers to put us first consistently and our sales results will be volatile in the short term. It will take time for the improvements we have made to convert into sales momentum,” he said.

Woolworths Director of Group Retail Services, Penny Winn, will also depart the company to pursue a career as a Non-Executive Director.  Winn will remain with Woolworths until November 2015. It is expected that her position will be taken up by an internal candidate. 

 

Move over Aldi, Lidl may be next for Australian market

If speculation that German discount supermarket, Lidl, is preparing to launch into the Australian market is correct, it will be the biggest shake up in the grocery sector since Aldi’s arrival in 2001.

With potentially five viable combatants in the mix, the way we shop and how supermarkets and suppliers compete, will fundamentally change.

It’s not a matter if, but when

While Lidl has stated it has “no current plans”, it recently trademarked 500 brand names in Australia, including its own, and there have been media reports of it investigating logistics and distribution options.

It has just confirmed its long vaunted expansion into the United States.

Woolworths’ chief executive Grant O’Brien has sought to allay investor concerns about the impact of Lidl by pointing out it would take time for another grocer to gain traction and scale in the market – but with Aldi having laid down the foundations, market penetration and expansion will happen a lot quicker.

But it’s important not to understate the enthusiasm Australian shoppers have shown for the discounter model and more importantly, private label products. It is likely that private label product manufacturers would enthusiastically want to work with Lidl. Where once the option was to deal with either the big two or Metcash’s IGA stores, suppliers now have opportunities with Aldi and potentially Lidl. Lidl’s entry could provide a fundamental shift in power from the big supermarkets to suppliers.

Should the supermarkets be a Lidl worried?

The Schwarz Group, owners of Lidl, are the fourth largest retailer in the world, operating across more than 26 counties and generating more than US$100 billion in sales every year – substantially more than Australia’s Coles and Woolworths put together.

With more than 60% of revenues coming from its international operations, Lidl has both scale and foreign market entry know-how on its side. Lidl’s stores are larger than an Aldi site and while predominantly carrying private label products, they offer a fixed ranged of appliances, general merchandise, apparel and brand name products. All at very low prices.

Across Europe and the United Kingdom, discounters like Aldi, Lidl and Netto have carved out a strong market position and attained shopper loyalty. In Britain, the Lidl brand was considered more likable than Twitter, by young people, aged 18 to 24 years. We should expect to see the same market shift here in Australia.

If the experience of UK brands such as Sainsbury’s and Tesco are a guide, Coles and Woolworths should expect to lose market share. But it is independent grocers that would be would the worst hit. As the grocery market polarises, with full-line supermarkets at one end and discounters at the other, being stuck in the middle is not the place you want to be.

It appears that Metcash’s IGAs are already experiencing this shift.

What might this mean for shoppers?

Shoppers are visiting supermarkets more frequently than ever before, with most seeking “good value” and “low prices”. In any given week, customers shop across several brands and are no longer loyal to one.

With grocery prices in decline since the “supermarket wars” began, it goes without saying that shoppers will be winners.

Strategically, it is not uncommon for global firms to keep their market expansion and entry plans to themselves, rather than letting the incumbents know their planned locations and who their proposed suppliers may be, as global food retailers greatly rely on local supply and third party logistics providers.

The current leaks surrounding trademarking activity and alleged discussions with suppliers and logistic providers would not be sitting well with Lidl, and this may hasten their entry plans, before competitors can lock up key locations and suppliers.

Aldi raised such concerns against both supermarkets in its submission to the 2008 ACCC inquiry into the competitiveness of retail prices for standard groceries.

In a move possibly indicating the big supermarkets want to lock in supply before Lidl arrives, Woolworths has been attempting to negotiate to extend supplier contracts from 18 months to between three to five years.

The future

While it will be tempting to compete on price, trying to beat these global discounters at the own game is fraught with danger. Such at strategy hasn’t worked elsewhere. In the UK and (specifically Holland), the impact of a prolonged price war has lead to eroded margins, and led to loss of market share and closures.

Woolworths and Coles should focus on what the discounters don’t offer, rather than compete on what they do best. IGAs appear the most exposed with the current business model not allowing operators to compete on range or price; accordingly we should expect to see structural change here.

With Aldi’s expansion into Western Australia and South Australia, and potentially Lidl’s entry, shoppers and suppliers will be the winners at the end of the day. As the market, once concentrated around the “big two” starts to distribute proportionately across all five players, shoppers will see lower prices, and suppliers, a greater choice of trading partners.

The Conversation

Gary Mortimer is Senior Lecturer, QUT Business School at Queensland University of Technology.

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

Grocery Code prompts a new kind of supermarket war

ALDI has become the first to sign the Grocery Code, less than a week after Woolworths claimed it would be the first to put pen to paper.

ALDI says it will transition existing suppliers to the new terms of the Grocery Code by 3 August 2015 and new suppliers will agree to the new terms from 15 June 2015.

A spokesperson from Woolworths says the supermarket “has recently written to both Minister Billson and ACCC Chair Rod Simms indicating that, assuming the Code clears the Senate, we will sign the Code on July 1.”

According to the Grocery Code, after a wholesaler signs the Code, it has 18 months to offer its suppliers in writing to vary their agreement so that it conforms to the requirements of the Code.

If the supplier concerned accepts the offer, the wholesaler then has six months to vary the agreement.

So ALDI’s suppliers will see the changes by 3 August at the latest, the Code allows Woolworths up to two years to vary its supplier’s agreements.

In today’s announcement, an ALDI spokesperson said “We have always supported the concept of a strong and sustainable Australian grocery industry for retailers and suppliers. ALDI’s commitment to opt in to and implement the Code before any other major supermarket is testament to our business values and dedication to quality supplier relationships.”

ALDI said the spirit of the Code reflects its current practice with suppliers: forging long term, sustainable relationships and working in partnership to provide Australian shoppers with high-quality products at permanently low prices.

The voluntary code prohibits specific types of unfair conduct by retailers and wholesalers in their dealings with suppliers and provides a clearer framework for these dealings.

Currently, The Code has been tabled in Parliament as a regulation under the Competition and Consumer Act 2010.

 

Woolworths to put pen to paper on Grocery Code

Woolworths will be the first major supermarket chain to sign the Food and Grocery Industry Code of Conduct.

The voluntary code prohibits specific types of unfair conduct by retailers and wholesalers in their dealings with suppliers and provides a clearer framework for these dealings. It complements existing protections for suppliers under the Competition and Consumer Act 2010, including the unconscionable conduct provisions.

The Australian Food and Grocery Council (AFGC) said the move is another step towards establishing greater transparency and certainty for food and grocery suppliers in their transactions with supermarkets.

AFGC CEO Gary Dawson congratulated Woolworths for agreeing to the Code.

“Woolworths has been instrumental in establishing this Code with the AFGC.  It was the willingness of Coles and Woolworths to come to the table and develop a meaningful Code that has made it possible,” Dawson said.

“Signing onto the Code marks Woolworths commitment to fair dealing and to improving the operation of one of the most dynamic and competitive sectors of the economy – the fast moving consumer goods sector.

“The Food and Grocery Code establishes a clear set of principles relating to key aspects of trading relationships between retailers and suppliers and will provide greater certainty and clarity about dealings in the industry without adding unnecessary complexity or cost.

The Code has been tabled in Parliament as a regulation under the Competition and Consumer Act 2010.

Key aspects of the Code include:

  • Tough restrictions on retrospective and unilateral variations to grocery supply agreements;
  • Greater transparency on the basis of shelf allocation for branded and private label products;
  • Recognition of the importance of intellectual property rights and confidentiality in driving innovation and investment in new products; and
  • A low cost and fast track dispute resolution mechanism.

 

Woolworths recalls pies that may contain glass

Woolworths is conducting a national recall of its Select Chicken & Vegetable Pies 4pk from Woolworths and Safeway stores nationally, due to the presence of foreign matter (glass).

The recall applies to products sold in Woolworths and Safeway stores nationally from 14 April 2015, with a Best Before date of 9 October 2016 to 10 October 2016 inclusive.

No other products are affected by this recall.

The product can be returned to Woolworths or Safeway Supermarkets for a full refund.

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

 

Woolworths moves towards zero food waste

The man who forced French supermarkets to donate unwanted food wants to take the law global, but it may not be necessary in Australia.

France’s “zero-tolerance” law banning supermarkets from destroying unsold food and forcing them to donate it to charity has ignited the food-waste discussion in Australia.

“We need to look at what has occurred in France to try to address this inequity and waste,” said RMIT’s Dianne McGrath.

McGrath is conducting Australia’s first national survey Watch My Waste to measure food waste in the hospitality sector and says the average Australian household throws out about 20 per cent of the food they buy from supermarkets, greengrocers and other stores.

“[This] is equivalent to one in every five bags of groceries or $1,036 per household annually,” McGrath said.

“While a number of supermarkets donate small amounts of still consumable food to food rescue organisations such as FareShare, Foodbank, OzHarvest, and SecondBite to help feed the hungry, too much perfectly good food is thrown in supermarket dumpsters every day.”

But Woolworths and ALDI are already working to reduce food wastage.

Woolworths has a policy of moving to zero food waste to landfill by the end of this year.

“We work with various food charities around Australia (including Foodbank, Ozharvest) to provide food to those in need,” a Woolworths spokesperson said.

“Where food cannot be used by those charities, we have a number of options including use as fertilizer and as animal feed including partnerships with some zoos. We have other smaller scale projects including electricity production.

“We also try to ensure our purchasing from farms does not create excess waste. We buy just enough to ensure we have stock for our customers while having the minimum possible left over. We are working with farmers to use more of their crop through our "Odd Bunch" produce lines. These are fruit and vegetables that might not be perfect looking but are still great to eat. We offer these at a substantial discount to our customers.”

Similarly, ALDI Australia said it’s committed to minimising food wastage.

“We have a number of processes and policies in place to ensure that very little food sold on our shelves ends up as waste,” an ALDI spokesperson said.

“On a national level, ALDI donates food no longer suitable for sale but within its use-by date to Foodbank and OzHarvest, helping to provide quality meals for people in need. In 2014 we donated 990,688 kilograms of food to OzHarvest, which equates to 2,972,064 meals. Donated food includes, fresh fruit, vegetables, dairy, raw meat, drinks, desserts, pastries and dry goods.

“Over the past five years, we have donated 369,177 kilograms of food to Foodbank, the equivalent of 492,236 meals.

“As well as our national partnerships, we also donate to local community groups where an ALDI is present.”

 

New rights for food and grocery suppliers

The Food and Grocery Industry Code of Conduct has been tabled in Parliament, in a move the AFGC has called “a step towards levelling the playing field.”

The voluntary code prohibits specific types of unfair conduct by retailers and wholesalers in their dealings with suppliers and provides a clearer framework for these dealings. It complements existing protections for suppliers under the Competition and Consumer Act 2010, including the unconscionable conduct provisions.

“Businesses that supply groceries to major retailers and wholesalers will have extra protections under the new industry code,” ACCC Chairman Rod Sims said.

“The code also provides new powers for the ACCC. Once retailers and wholesalers sign up to the code, we will be able to enforce it and take court action for breaches. We will also be able to audit retailers and wholesalers to check that they are complying with the code.”

“Coles, Woolworths and the Australian Food and Grocery Council worked closely to develop the code. We expect these retailers will sign up to it shortly,” Sims said.

The Australian Food and Grocery Council (AFGC) said the tabling in Parliament is a step towards levelling the playing field for food and grocery suppliers in their transactions with the major supermarkets.

AFGC CEO Gary Dawson welcomed the announcement by the Minister for Small business Bruce Billson as integral to achieving a meaningful and enforceable Code that will drive behavioural change to encourage fair and effective competition in the long term interests of consumers.

“We congratulate the Government for progressing the Code as an industry-led solution to problems impacting on suppliers and consumers,” Dawson said. “The Code was developed initially through negotiations with Coles and Woolworths, and it was their willingness to come to the table and develop a meaningful Code that made it possible.

“Signing onto the Code will be a mark of the retailers commitment to fair dealing and to improving the operation of one of the most dynamic and competitive sectors of the economy – the fast moving consumer goods sector.

 “The Code will now be tabled in Parliament as a regulation under the Competition and Consumer Act 2010 to give it real teeth,” Dawson said.

Key aspects of the Code:

  • The requirement for retailers and wholesalers to act in good faith
  • The requirements of agreements between retailers or wholesalers and suppliers, including that they be in writing
  • Tough restrictions on retrospective and unilateral variations to grocery supply agreements and the requirement for any variation and the reason to be in writing,
  • Greater transparency on the basis of shelf allocation for branded and private label products;
  • Recognition of the importance of intellectual property rights and confidentiality in driving innovation and investment in new products; and
  • A low cost and fast track dispute resolution mechanism. 

ALDI Australia has announced it will be signing up to the Code as a party.

A spokesperson for ALDI Australia said "ALDI Australia has always supported the principle of a strong and sustainable Australian grocery industry for both suppliers and retailers, with an emphasis on fairness throughout all business dealings.

"The provisions of the Code reflect ALDI’s current practice with suppliers: forging long term, stable, sustainable relationships and working closely in partnership to provide Australian shoppers with high quality products at permanently low prices."

 

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