The effect of supermarket competition on the supply chain

The supermarket and grocery sector in Australia is increasingly competitive, not just between the “big two”, Woolworths and Coles, but with Aldi continuing to grow and new offshore market entrants looking to enter.

Competition is a good outcome, particularly for consumers – it creates choice, quality improvement and puts pressure on costs. However, where two large players dominate the market place and strive to compete primarily on price in order to attract customers, that price has to be paid somewhere else along the supply chain.

We have seen already in the dairy sector where artificially capped milk prices for several years have put pressure on all parts of the supply chain from farm to supermarket shelf. The buying power of Woolworths and Coles in particular means that they can force what seems at times to be unfair and unrealistic price expectations on the growers, manufacturers, transporters, packagers and distributors of retail grocery products.

Woolworths & Coles have enormous magnitude and buying power.

Further, private label strategies where the big supermarkets are actively looking to have as much as 40% of the shelf stock own-branded, create even further price pressure and purchasing power over suppliers.

The implications of this are that consumers are unwittingly paying less for goods than what they can be produced for profitably. The grocery retailers are profitable which means that the pressure is pushed back along the supply chain to those that are least capable of arguing for a fair price and less capable of dealing with the profitability effects.

However, some suppliers are saying enough is enough and putting pressure on the supermarkets where it hurts – by not supplying. Recently mars Petcare, which owns 55 pet food brands, refused to supply the two largest supermarkets because of pricing disputes. Similarly, Nestle stopped supplying Uncle Toby’s breakfast cereals to Woolworths. Customer reaction online was swift and unaccepting. Consumers have an expectation that their local grocery store will have in stock the products they intend to purchase
Nestle ceased supply of the popular breakfast cereal to Woolworths.

There is no doubt that competition is good. However, when competition drives predatory pricing behaviour which negatively impacts those further along the supply chain, that is a poor outcome. Most groceries come from agricultural commodities for which margins are slim and adverse environmental conditions can mean that the profit position can quickly turn sour. It is only reasonable to expect that everyone pays the right price for products so that the whole supply chain can prosper.