Opinion: Australian supermarket concentration on the verge of crisis
By Agriplacements Australia managing director Dr Ray Johnson
Is growing supermarket power an inevitable outcome of market developments or is it time to reassess the consequences? There is continuing concern evidenced by a number of governmental investigations in countries such as the U.K. and Australia as farmers and suppliers mount campaigns to highlight what they see as abuse of this market power.
On a global basis Australia is unique amongst developed nations in the concentration of its supermarkets. The two major chains, Coles and Woolworths, control about 70-80% of the packaged grocery sales and 50% of fresh produce sales, including meat, fruit and vegetables.
Their market share in these critical areas has effectively doubled since 1975. The supermarket channel accounts for about 67% of total food and liquor sales in Australia (AUD$130 billion in 2011-12), which is a similar proportion to that in other developed countries. What is unique about Australia is the concentration of this supermarket power.
Australia now has one of the highest concentrations in the developed world. For example, in the U.K. the three biggest supermarket chains have a 52% market share, and in the U.S. the top two have just 20% market share.
There is no doubt the rise of supermarkets in Australia has been good for consumers and Australian agricultural producers in general. The supermarkets have given farmers and food suppliers a route to market and quality systems that have been very safe and mutually beneficial.
But, in my opinion, it appears the situation has changed very rapidly over the last year or so, reaching crisis point. The first indication of this crisis was heralded by an aggressive price discount campaign which resulted in the supermarket chains targeting particular product categories with significantly reduced prices to drive customers into their stores. The first real evidence of this occurred in January 2011 when Coles launched a AUD$1.00/litre milk price campaign to attract customers, forcing the other supermarket chains to follow suit. While Coles maintain that this price reduction, which effectively takes the retail price of milk back 25 years, will not harm the dairy industry, Woolworths expressed concerns about the medium to long-term implications of the strategy in a recent Senate inquiry into milk pricing, stating: "These prices set a new benchmark, and can be expected to flow back to processors and farmers as new supply and pricing agreements are negotiated over the coming months and years."
This of course is a realistic appraisal and no amount of PR spin from Coles will convince those at the sharp end of the dairy industry. Because milk price contracts between milk supply companies and the supermarkets were in place when the price discounting commenced, it is only when these were re-negotiated that the real impact started to be apparent. Within six months of the drop in Coles generic milk to $1/litre, all branded products from Australian milk companies (except one, the A2 brand) suffered a decline in market share of 20-30%.Companies take an enormous amount of effort and money to position brands in the marketplace, and accordingly have a higher profit margin than the lower cost generic products. This in turn is used in part to drive new product innovation programs.
Price cuts hurt profits
The profits of companies who invest in brand development rely very heavily on these brands.There are already very significant flow-on effects on company profitability. In August 2011 Lion Natham (formerly National Foods) was quoted as saying that the "grocery war contributed to a 43% drop in first-half earnings before tax and borrowing costs". With farmers at the very start of the supply chain, they are price takers in the main and their milk prices will be under severe threat from these actions.
The implications of these changing dynamics on the profitability of dairy farmers, the structure of the Australian dairy industry, the viability of dairy companies and their ability to invest in new product development, will undoubtedly be very severe over the coming months. While this is a critical situation for Australian dairy farmers, it represents a harbinger of what could happen to other agricultural and food industry sectors.
The second recent development is the major expansion of supermarket generic and private label products, which have increased their market share from around 10% a decade ago to 25-30% currently. The most significant aspect of this increase has been the rise of private label products (rather than generics), and both Coles and Woolworths have stated their intention to continue the expansion of their own product lines. Although no targets have been announced, it is widely believed to be of the order of 45-50% market share, which is similar to the level of private label and generic products in the major UK supermarkets. The basic reason for this strategy is to increase profitability, as the margins on private label/generic products are often higher than on the branded products.
The propensity for uncompetitive practices as a result of the store owner also owning its own brands is quite apparent.
The impacts on farmers with the expansion of generic and private label brands and aggressive price discounting are likely to significantly increase over the coming months and years, particularly in industry sectors such as dairy, fruit and vegetables.There is already evidence that the downward price pressure that is being exerted by the supermarkets throughout the whole retail market chain has its severest impact on farmers.
A good example was the recent demise of Australia’s biggest tomato grower, Queensland-based SP Exports, which grows 30% of all fresh tomatoes eaten in Australia. This family-owned business, which employs 60 staff, went into administration in February, the direct cause of this, according to SP Exports, was due to the continued low prices by the Coles and Woolworths. While principals of this company felt they could work their way out of flood damage and industrial sabotage, they could not sustain their business with the prices demanded by the supermarket chains.
There may be trouble ahead
On balance there are danger signs on the horizon for Australian farmers and food suppliers of supermarkets in Australia. The question is whether there are ways to address these issues, as they are without a doubt complex. A number of solutions have been proposed including enhancement of the Retail Industry Code of Conduct, the establishment of a Fair Trading Authority, enhancement of the powers of the Australian Competition and Consumer Commission (ACCC) to prevent "creeping acquisitions that continue to increase the market share of the major supermarket chains", and finally a Food Ombudsmen to prevent the use of coercive market power. More recently some Federal Government members have proposed the breaking up of the Coles/Woolworths duopoly and a cap on future market share.
In my view the Coles/Woolworths duopoly represents a high risk to the supply of Australian food when they can exert such power as to seriously threaten the viability of whole sectors, for example with the current situation in the dairy industry. It is up to the Government to take decisive and meaningful action to prevent this occurring to a far greater extent than currently. There are minimal chances of this occurring because with lower prices consumers are happy, and will remain so into the short-medium term until the brands they know and love start to disappear and prices start to rise on generics/private label.
The fight back
Farmers and agribusinesses in particular lack the organisation and finances to mount any effective PR campaign to combat the massive PR spend of the major supermarket chains. Indeed farmers remain possibly the single biggest and most crucially important group in Australia not to have any substantial representation and PR/communication capability. This is an ongoing travesty given their national importance to the economy, both traditional and future carbon-centric, and to food security. Until farmers and agribusinesses come together to address this they will remain at the mercy of supermarket power, consumer attitudes and other competitive sectors such as mining.