Supermarket Sweep

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-By John Boley

It would be wrong to describe the Australian Food & Grocery Council (AFGC) as a single-issue body. But it would be equally wrong to suggest the council has any other real priority than the big retailing dilemma – how to rein in the power of two giant supermarket chains.

For anyone who has been away visiting another planet for the past few years, the situation can be summed up simply. There are four levels to the food chain: growers, processors, retailers and consumers. In Australia, for complex reasons that need not concern us too deeply here, the retailers have a uniquely strong hold over the other three levels put together. In short, Coles and Woolworths control 80 per cent of the supermarket shelves of the Commonwealth, and that’s not in anyone’s interests except possibly Coles and Woolworths.

According to AFGC’s chief executive Kate Carnell, this is the overriding issue facing Australian food manufacturers and processors at the moment. Australia and New Zealand have the highest level of market concentration in the world, she points out – countries like the UK and Canada and some parts of Europe have significant issues with their levels of market concentration “but it is nothing like what we have here in Australia,” she told Business in Focus. “We now have a market failure situation where suppliers and manufacturers cannot afford to deal with Coles and Woolworths but at the same time they cannot afford not to. We are in a position where the level of market power imbalance is so dramatic that manufacturers are really price takers, rather than price setters for their own products, which is quite a bad situation.”

AFGC consists of around 150 companies, mainly reflecting the Australasian subsidiaries of global companies such as Colgate Palmolive or Coca-Cola, the national big boys and a few smaller regional or local producers. Together, the members represent 80 per cent of the gross dollar value of the sector, which totals some $108 billion. It is Australia’s largest manufacturing sector, employing more than 310,000 people (per AFGC figures).

But no matter how big they are, they have to accede to the demands of the two big retail chains. “If you want access to the customer in Australia you have to deal with them no matter how big or little you are,” as Ms Carnell puts it.

Such is the market dominance of Coles and Woolworths that the pair can control and distort the whole retailing picture in a way that benefits neither the producers nor the consumers. That’s the general allegation. But as Ms Carnell points out, the two chains are not, of themselves, operating unreasonably or in contravention of any laws of the land. “I think the problem is that the legislation in place is such that there are no impediments for them to utilise their market power in a way that impacts upon the profitability of Australian producers and manufacturers. They are doing exactly what you would expect them to do in the interest of their own shareholders, and that is what they are supposed to do by law. The problem we have is that our regulatory framework doesn’t put adequate controls on their capacity to put pressure on their suppliers. So it’s a regulation failure rather than a Coles or Woolworths failure.”

The two outlet chains have become able to totally dictate pricing, and are now beginning to affect consumer choice in a way that could have serious repercussions on food security in the future. Predatory pricing, the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors, is one issue (and the controversy in recent weeks over milk prices has highlighted the very significant nature of this problem for the continuing survival of dairy farming). The supermarkets (and one has to stress that Coles and Woolworths are not a cosy duopoly but out-and-out competitors) are now at such a stage of power that they are able to refuse to accept price rises caused directly by increased energy costs after the implementation of the Carbon Tax.

Limiting choice is quite another issue. In a number of categories, one or two brands of product have been ‘chosen’ to sit on those supermarket shelves alongside a ‘private label’ (i.e. Coles’ or Woolworths’ own-brand label, packed for them by other manufacturers and often identical, but bought in sufficient quantities to be offered at lower prices). These ‘chosen’ products are usually the market leaders. Their manufacturers are told by the chains what the price will be and given a basic ‘take-it-or-leave-it’ choice. For the consumer who likes a smaller, less established, newer or local brand – well, that’s tough. “If you are not market leader or number two, your capacity to get your product in front of the consumer in Australia is very small and will become smaller as time goes on, if you believe what the supermarkets are saying. However, there is nothing illegal about what they are doing.”

Doesn’t this work to the benefit of the big names? Ms Carnell disagrees. “In the interest of a solid and robust manufacturing sector in Australia, you actually need a range of suppliers. Just having the very big market leaders in every category is not really a robust market and I think it is always important to remember that even the bigger guys are subject to the problem. Because inevitably not all of their products are number one in a category and they are getting their products de-listed too.”

The problem just crept up on an unaware series of federal administrations. In 1975, Ms Carnell points out, Coles and Woolworths had 34 per cent of supermarket business but now it’s almost 80 per cent. In the meantime, all sorts of cost pressures have ramped up – not just the ubiquitous high dollar rate but also the cost of freight, water, power and wages that have increased at a higher rate than inflation – while Coles in particular changed ownership to “become aggressive in terms of market share.” Both they and Woolworths have become “more aggressive in their fight for market share and profitability,” leading to consumers losing confidence in the market and spending less. Someone has to lose, says Kate, and their dominance in the market means it won’t be Coles or Woolies.

So what can be done? “What we have said to the government is that there are two alternatives: first, let the market sort itself out, let the game run to its conclusion, and the free-marketeers suggest that is what you should always do.” But she is in no doubt the outcome of laissez-faire policies would be “more manufacturers moving offshore. It’s happening as we speak; we have seen some high profile announcements. This will impact significantly on jobs in Australia and also some would say it has an impact on food security in the long run. If the government is comfortable with that outcome then they should let the market dictate.” Ms Carnell believes this would not be good for Australia. “A large number of those jobs are in rural and regional areas.”

If letting the market sort itself out is not a good idea, then there must be intervention of some sort and “the government needs to put some boundaries around the operation of the supermarkets. We want them to establish a supermarket Ombudsman with a legislated code of fair trading and to limit the amount of shelf space that can be utilised for private label. In other words, guarantee a certain level of access to market for branded products. The supermarket Ombudsman and the legislated code are in the process of being introduced in the UK, she says, but the limitation on shelf space has never been done anywhere because nobody has the same level of market concentration that Australia has. “It’s a unique problem that needs a unique solution.”

This smacks of Big Government; is there any chance of Canberra liking the idea? “The more aggressive the supermarkets are, the more chance there is of it happening. A couple of years ago I would have thought the chances of getting even the supermarket Ombudsman and the fair trading code were limited, but now I think there is a very wide view in political circles that the problem has gone too far. Now we are really seeing job losses and businesses moving offshore, and there really is a possibility that the government might wake up and do something.”

Sure, there are other issues that the AFGC concerns itself with – obesity and health, for example, or sustainability (packaging and energy efficiency, etc). But it is clear that the dominance of the two big retailing names is overwhelmingly ‘the Big One’. Kate Carnell is moving on at the end of March but her successor will be singing from the same hymn-sheet. She is leaving “optimistic” of success for the campaign to reform retailing. “I don’t think there is a choice if Australia wants to have a strong and robust food manufacturing industry into the future.”

Making Sense of Management

Management is the art, or science, of getting things done through people. Sounds fairly straightforward – except for the fact that people are not robots waiting to do our bidding. People have their own minds, motivations, and goals. So how do managers keep operations – and the people behind them – running as planned?

December 16, 2018, 3:54 PM AEDT