Cheap food comes at a price

Melissa Fyfe and Royce Millar
May 28, 2012
The Age

SUPERMARKET giants Coles and Woolworths are relying on cheap labour in countries such as South Africa and Thailand to deliver their burgeoning house-brand lines at the lowest prices.

An Age investigation has found Coles and Woolworths issue global tenders to produce their house-brand products such as frozen berries, pasta sauces, canned spaghetti and tinned tuna, fruit and vegetables. One in every four grocery items now sold in Australia is a supermarket-brand product.

The contracts are often filled by large overseas processors specialising in providing private-label goods for supermarkets across Europe and North America. This means the same can of diced peaches can be found on supermarket shelves in New York, London and Melbourne, just with a different label.

In yet-to-be-published research, the Australian National University followed the supply chain of the supermarkets’ house-brand or private-label business and ended up in South Africa’s fruit processing factories and Thailand’s canned pineapple industry.

“One of the canneries made private-label products for over 100 supermarkets,” said researcher Libby Hattersley, who inspected the South African businesses. “They just slap the retailers’ label on it and send it out to them.”

Coles and Woolworths say their preference is to source private-label products from Australia. But in the supermarkets’ middle aisles, processed food is increasingly sourced from all around the world.

In interviews with The Age, the supermarkets said they came to rely more heavily on imports when local crops, such as tomatoes and pineapples, failed during the drought and floods. Added to this, the strong Australian dollar and cheap labour delivered what Woolworths recently described as ”significantly greater” premiums. Despite the end of the drought and floods, many of these contracts are still in place.

The two supermarket chains are not alone in this practice. Australian food manufacturers, most owned by multinational companies, have increasingly sourced fruit and vegetables from overseas or moved production to more efficient
offshore plants. One in two of the Woolworths Select brand is now imported, while the supermarket’s premium brand, Macro, carries 85 per cent Australian products. Coles says 90 per cent of its house-brand sales come from Australian-made products, but this is a figure skewed by sales of house-brand local milk, eggs and bread.

Coles refuses to release a figure on the percentage of actual house-brand lines that are sourced overseas. An industry source familiar with the Coles business told The Age the company imported roughly a third of its own brand offering.

The supermarket importing is putting cheap products in direct competition with Australian-made processed food – such as the Victorian-based fruit processor SPC Ardmona – but some in the local food industry admit they simply cannot provide the supply required.

Pineapple grower Les Williams said producing pineapples for canning was in decline and the floods were a big setback. ”We’re not happy,” he said. “But the supermarkets are in business … It’s hard to throw rocks at them because we haven’t been able to supply them.”

Woolworths head of own brand Gordon Duncan said: “You’d be surprised how many times we get no one responding in Australia to our invitations to supply.”

Coles recently struck a deal with Simplot, the only Australian-based processor of frozen vegetables left, to supply its house-brand vegetables.

Mr Duncan said this deal meant there were now not enough locally grown vegetables to supply both supermarkets (the peak vegetable group Ausveg dismisses this as ”nonsense”).

Independent retail consultant Michael Baker said it was a good thing supermarkets could source cheap overseas imports: ”Sorry,” he said, ”but that’s just an economic reality.”

Woolworths wants to double private-label sales, and research company Nielsen predicted own brands would make up 40 per cent of grocery items within five years. Coles has no target, but the influence of British supermarkets is unmistakable since new owner Wesfarmers appointed Ian McLeod from Britain as managing director in 2008. Almost 50 per cent of products in British supermarkets are private label.

But it seems some consumers are lamenting the disappearance of favourite brands from the shelves. A recent Choice report on private labels sparked what the consumer body said was an overwhelming response, with shoppers calling for a ”revolt”.

The Age spoke to many people in the food industry about private labels but most declined to speak publicly, fearing reprisal from the big two supermarkets. Senators running the current food-processing inquiry said they had the same problem.

Coles house brand general manager Tina Jeary said that private-label products ”often” came from the same factory as the branded product, but the Coles recipes were unique.

The Senate inquiry has heard evidence that small-to-medium Australian firms are losing shelf space to cheap private-label products backed by the power of the big two supermarkets. It has also been hearing anecdotal allegations about supermarkets taking over the intellectual property of brands. The supermarkets deny this.

In a recent report on Australia’s food and vegetable processing sector, analysts IBISWorld said the industry’s decline was exacerbated by “the strength of Australia’s two major supermarkets as they sourced cheaper processed fruit and vegetable products from abroad and encouraged their own private-label sales in order to boost margins”.

Some retail experts, such as retail and food consultant David McKinna, believe the private-label push will mean the “end of brands” and less consumer choice as brand profit margins are squeezed and the money available for innovation dries up.

He said the supermarket shelves would have room for only two brand leaders and a private label, with the supermarket making a healthy margin on the house brand because it has no marketing costs.

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