Who pays for the Coles and Woolworths price war?

Terry McCrann
September 01, 2013
Sunday Herald Sun

THE great and totally unprecedented war of the aisles unleashed by the arrival Down Under of the aggressive but softly spoken Scot Ian McLeod has been great for shoppers.

It has delivered sustained cuts to prices, right across the supermarket. The signature one, was of course $1-a-litre milk. But that has long since been supplanted by ruthless price-cutting in every category.

And then there’s also the big discounts the supermarket duo, Coles and Woolworths, have rolled out on their petrol shopper-dockets. Up to 30c a litre and even the occasional, quite extraordinary, 45c a litre.

These price cuts on basic food and petrol staples could not have come at a better time for the average consumer being whacked by big price rises on other staples – most notably electricity, gas, health and health insurance.

But there’s also been a dark side. Somebody has had to pay for those lower prices, and it has been the suppliers.

Coles and Woolies have been ruthless with them. Forcing them to cut their prices, to switch to supplying house-brands, and so even cheaper products – milk is the standout example; and making it hard for their branded products to get shelf space.

You’ve got to know it’s hurting when even the big guys – the very big guys, like Coca-Cola – are feeling the pinch.

Small suppliers, or those without major branded products, just have to cop whatever the big two demand.

Coles and Woolies claim to build strong relationships with some specialised suppliers. While that’s undoubtedly true, it’s simply undeniable that overall, they’ve been ruthlessly squeezing their suppliers.

And squeezing their competitors. Not just across the supermarket space. But also in liquor and petrol.

All this raises major and complex issues for whichever side is in government after Saturday and for the ACCC.

It would be a courageous politician or regulator who tried to aggressively reduce the dominance or the price-cutting practices of the big two. But they are coming under pressure to act from local suppliers, smaller competing supermarkets and other petrol retailers.

Would consumers continue to benefit if we ended up with Coles and Woolies being even more dominant in both supermarkets and petrol?

But it simply cannot be denied, that the consumer HAS benefited big time, from the war over the past three years.

Prices in Woolies supermarkets are now on average about 11 per cent lower than they were three years ago. That’s taking into account, the continuous price cuts on specials and promotions.

This means the consumer who spends $100 in a Woolies supermarket today is walking out with around 11 per cent more goods than they did when they spent $100 three years ago.

Over the three years, the total average price cut at Coles has been 6 per cent. But McLeod launched his campaign four years ago. Woolies initially resisted cutting prices and subsequently has been playing catch-up by out-cutting Coles.

McLeod was happy to back off a bit; to switch his strategy to building Coles profit margin, which had badly lagged Woolies.

Indeed the two strategies have evolved into a highly complementary mix – strengthening the big two against everyone else.

Both have been able to record solid increase in dollar sales. Over the three years Coles increased its dollar revenue by 16.4 per cent, and Woolies by 13 per cent.

And despite the fact that has meant they have had to supply even bigger increases in volumes, because of their price cuts; their profits have increased at an even faster pace. By 24 per cent for Woolies, by 40 per cent for Coles.

The bottom line is that Woolies has actually increased its profit margin from 7.2c in the sales dollar three years ago, to 7.65c.

While Coles is up from 3.7c in the sales dollar to 4.9c, with an acceleration in the last year as it backed off its price-cutting.

Starting from well behind, the strategy of Coles under McLeod was to pump more volume through its existing stores.

It increased supermarket numbers by just 14 over the last three years. It added just 5 per cent to its total food and liquor floor-space.

In contrast Woolies maintained a very aggressive program of new stores. Starting with already more supermarkets than Coles, it added 74 new ones in the three years, and increased it total food and liquor floor space by 13.5 per cent.

That is to say Woolies entire sales growth over the last three years came just from added floor space. Whereas Coles got 16 per cent more sales from only 5 per cent more floor space.

But it worked for both of them. The added volume was crucial to both in their operating dynamics – outward to customers and inward to suppliers.

For Woolies, it enabled it to sustain its already high margins. For Coles, it allowed it to start the long haul of chasing them up towards the Woolies levels.

While delivering real benefits to shoppers. While also delivering to shareholders. It leads to the question: what happens next?