Coles tightens the screws on food suppliers

BLAIR SPEEDY
April 01, 2013
The Australian

SUPERMARKET giant Coles has demanded health-food manufacturers pay for their own products to be removed from its shelves as the retailer prepares to launch a range of gluten-free groceries under its in-house brand.

An email sent to suppliers by Victor Simonovich, Coles merchandise category manager for health foods, details a range of strict conditions manufacturers must abide by if they want to keep Coles as a customer and provide products to be sold as part of the new range, to be launched in June, dubbed Simply Gluten Free.

The move is set to inflame tensions with suppliers, with the competition watchdog already investigating Coles and Woolworths’ treatment of them amid claims the two companies have misused their market power to demand unsustainably low prices.

In the email, Coles demands rebates of 7.5 per cent on all new products for the first 13 weeks of sales and for suppliers to nominate a number of their own products to be removed from shelves to make way for the new Coles-branded goods.

“We will not accept any lines without proposed deletes,” Mr Simonovich wrote.

The conditions also require suppliers to pay Coles an amount equivalent to what the retailer would have received if the deleted items had all been sold at full price. “All regrades need to be supported with 100 per cent funding to clear from stores they are ranged in before any new lines can be confirmed,” the email, sent last week, reads.

A key complaint of suppliers to the Australian Competition & Consumer Commission investigation is that the supermarkets have demanded additional discounts and rebates after a supply contract has been signed — something the Coles email appears to request by demanding suppliers fund the cost of deleting products the retailer had already agreed to buy. Coles, which led the supermarket price war by being the first to introduce lines such as dollar milk and dollar bread in 2011, has also demanded that health-food suppliers commit not to increase prices on any new product lines for two years.

In addition, suppliers who fail to deliver their products to all of Coles’s distribution centres across the country by May 17 will automatically have their products removed from sale and charged an “administration fee” of $9650 per product line for each distribution centre.

Coles has also led the charge on the introduction of private-label products, which now make up 25 per cent of its sales, compared with 11 per cent at Woolworths.

The ACCC is examining the impact of private-label groceries on competition in the supermarket sector, particularly the potential for supermarkets to threaten suppliers with having their goods replaced with in-house brands unless they cut prices.

Private-label products generally allow supermarkets to sell for lower prices while maintaining or even increasing margins, as suppliers are unable to charge a premium for the value of their brand. Under the terms set out by Mr Simonovich, the Simply Gluten Free range would have a minimum sales margin of 46 per cent — almost double analysts’ estimates of Coles’ overall gross margin.

A Coles spokeswoman described health food as an “important and growing category”. “It provides a significant opportunity for Coles to work with suppliers to evolve the existing offer and introduce new and innovative products to Australian customers,” she said.

“Coles is committed to ensuring that the right range of products are on the shelf and this process requires us to regularly review and assess the range.

“We have recently invited a number of suppliers in this category to a series of meetings and reviews, with the intent to open discussion and develop ongoing arrangements tailored to each supplier’s individual circumstance.”