Suppliers squeezed by retailers, rising costs: report

Eli Greenblat
June 10, 2014
The Age
The nation’s $111 billion food and grocery sector is being pincered between rising manufacturing costs and the unstoppable dominance of the biggest retailers to erode the financial health of suppliers stuck in the middle, a report commissioned by the Australian Food and Grocery Council has found.
Mounting labour, energy and regulatory costs were also chipping away at balance sheets while the growing weight of rebates paid by suppliers back to retailers has escalated to the extent where one dollar in every four earned by suppliers is finding its way back to retailers to fund discounts and promotions to shoppers.
Touted as the most detailed financial health check of the sector, the competitiveness and sustainable growth report conducted by KPMG on behalf of the peak suppliers group, has tracked the cost pressures for the sector over 2010-2013.
The suppliers claims of being squeezed by retailers comes as the competition regulator has taken court action against the nation’s No.2 supermarket chain Coles over its alleged mistreatment of 200 suppliers by using commercial threats to demand rebates.
Coles has denied the allegations, but suppliers have complained for years about the behaviour of both Coles and Woolworths over trading terms, rebates, discounting and supply deals.
AFGC chief executive Gary Dawson said the new report found Australia now has the highest manufacturing costs in the world, and that retailers are extracting even greater payments from suppliers to fund discounts and promotions.
“This report demonstrates how tough the market conditions have become for food and grocery suppliers, squeezed between the unstoppable force of dominant retailers and the immovable object of high labour, utility and regulatory costs.
“A key finding is that one dollar in every four earned by suppliers is being returned to retailers to fund discounts, rebates and promotions.”
Mr Dawson said the rapid growth in payments extracted by retailers represents a direct profit shift from suppliers to retailers and reflects the dominant position of the two major supermarket chains.
“The two major retailers extract an additional 5 per cent more from suppliers than other retailers, reflecting their market power.
”This ‘trade spend’ has been growing at four per cent per annum, while volume has been flat and profitability declining sharply.”
Late last year the AFGC, Coles and Woolworths signed up to a code of conduct with a draft code awaiting regulatory approval from the Federal government.
A ‘root and branch’ review of competition policy was also an opportunity to examine and address the imbalances between suppliers and retailers, Mr Dawson said.
Other findings of the KPMG report was that profitability of Australian suppliers was now well below international peers, and falling further behind, raising questions about the willingness of major companies to make major investments to upgrade Australian facilities.
The report said capital investment was growing, which was a positive sign for the future, although much of this investment has been focused on ‘staying in business’.