Death of The Local Food Industry?

Reg Clairs, CEO of Woolies from 1993 to 1998, is reported as having concerns about the survival of Australia’s food manufacturing industry.

He says there is now a greater emphasis on the retailer taking charge of the supply chain. Many smaller suppliers have been squeezed out and if this trend continues, local food manufacturers will disappear in 10 to 15 years.

“Globally we are seeing the growth of the majors and unless we are able to build a food manufacturing business in Australia that is sustainable, then ultimately the global manufacturers will take the power base,”
he says.

Suppliers Absorbing Supermarket Discounts

The Four Corners’ The Price We Pay program, 1 September 2008, reports the situation where a local icecream manufacturer is buying supermarket milk as it’s cheaper than buying wholesale. It seems suppliers today have to absorb the supermarkets’ discounts and in this case the milk wholesaler is clawing back his profit margin by charging wholesale customers more than he charges the supermarket!

Interview With ACCC’s Graeme Samuels

From a background interview to the Four Corners’ program you learn that supermarkets’ growth in earnings this decade has been massive – the highest growth in profit margins of any supermarket in the world.

It seems this reflects the lack of strong competition plus:

“some extraordinary efficiencies and processes that have been introduced by Woolworths in terms of the way that it manages its own business.”

In almost 60 per cent of cases Woolworths and Coles are taking longer to pay their suppliers – does this mean they too much power? Graeme Samuels replies that this will always occur, that a major operator has significant power in dealing with suppliers, especially in an economy the size of Australia’s. He adds that there are increasingly tougher dealings going on as far as Woolworths and Coles are concerned, and also Metcash, in dealing with their suppliers.

“Q. Doesn’t that say they’ve got too much power?

A. Ah I think what it says is that we are a major operator and in any industry you have a significant power in dealing with suppliers. That is inevitable. That will always occur. Ah it’s going to occur in an economy the size of Australia with 21 million people.

Q. But how can it be workably competitive if they’re squeezing those bigger rebates and discounts from suppliers and the gains aren’t being passed onto consumers?

A. We need to keep in mind there’s a difference between the vertical supply chain and the tough dealings that occur at retailer level and dealing with their suppliers. And the horizontal process, that is the horizontal competition between the independent sector, the Aldis, the Franklins in New South Wales, Coles and Woolworths. That’s where the workable competition is occurring. But let’s be the first to state that it is not as vigorous a horizontal competition between those retail players as we would otherwise like to see.

Q. When you say it’s tough dealing, you had confidential information from small suppliers saying that they would be de-listed, they were threatened with being de-listed, unless they accepted longer terms of settlement or paid a bigger rebate to the major supermarket chains. Isn’t that bullying?

A. Ah no what it is is you’re simply tough dealing. Look we have this in every industry where we have parties that have got strong market power and let’s not just separate the major supermarket chains in this area. Metcash itself has strong market power in dealing with it’s suppliers as the almost monopoly supplier to the independent operators. Ah what we have is…

Q. … Pay us more money or wait one, two, maybe three months to get paid, or we’ll push your products off the shelf. That’s just tough dealing, that’s not bullying?

A. That’s tough dealing ah in this sense that what they’re really saying is we have alternative suppliers that are prepared to supply us. Whether it is extending the terms or it’s increasing the rebates or it’s getting a lower price, what they’re saying is we have alternative suppliers that will supply us, now you meet those competitive terms, in terms of the supply line, otherwise we’ll go to those alternative suppliers now.”

Where to from here – for government and for industry?