Woolies in fresh food fight

BLAIR SPEEDY
The Australian
June 15, 2013

SUPERMARKET giant Woolworths plans to build factories to produce ready-to-eat meals, putting it in direct competition with suppliers and potentially opening up another front in its battle with the competition watchdog.

While Woolworths has had a 25 per cent stake in West Australian brewer Gage Roads since 2009, the decision to build new food production facilities will mark its first foray into full-scale manufacturing since it closed its clothing factories in the late 1980s.

Woolies chief executive Grant O’Brien said it would build several manufacturing plants to produce so-called ready meals after failing to find an external supplier.

“It might be in a couple of locations, but it will be a sizeable manufacturing facility,” he said.

“Capability is the biggest obstacle, being able to create the meals and have a supply chain that can deal with the short shelf-life” that meant the products could not be imported and had to be made close to their point of sale.

“The customer only wants them if they’re fresh. We could get ready-made meals, but they wouldn’t be consistent and wouldn’t fit our supply chain,” Mr O’Brien said.

Woolworths already services consumer desire for labour-saving fresh food options with such items as pre-cut vegetables and sushi made in-store. Coles has also gone after the convenience market with a range of pre-made curries.

But Mr O’Brien said this was merely a stepping-stone towards fully prepared packaged meals, which would offer much higher revenue and earnings potential than unprepared fresh food.

“We’re working pretty hard on this. It’s growing pretty fast in stores already, but it can go to the next level, which would entail us getting the capability to get to the endgame,” he said.

“At the moment we’re dealing with it in-store and investing in local suppliers, but ultimately we will need much larger capability, and that will be the game-changer in terms of convenience meals in the Australian market.”

Mr O’Brien said inner-city living was growing rapidly in Sydney, Melbourne and Brisbane, and the opportunity to put large-format stores on the ground was “pretty rare”.

The company has opened one small-format supermarket in Melbourne’s Southern Cross railway station and is set to open more in east Sydney and Erskineville in Sydney’s inner west.

Mr O’Brien said the company’s nine gourmet Thomas Dux grocery stores could also be rebranded as Woolworths as the company expanded its portfolio of smaller stores.

He declined to specify a timeframe for the establishment of the new plants. But the decision to build them opens a new front in the battle between the big supermarkets and suppliers, which have complained they are being squeezed for unsustainably low prices to fuel a price war that has cut the prices of a litre of milk and a loaf of bread to just $1 each.

The Australian Competition & Consumer Commission has repeatedly expressed concern about vertical integration by the major retailers and is likely to examine the Woolworths plan closely for signs that it may allow the company to exert pressure on the suppliers with which it will compete.

News of the plan comes as Woolies and Coles continue to negotiate with supplier representative body the Australian Foods and Grocery Council over the final terms of a code of conduct to govern their interactions.

While voluntary, the code will be enforceable by the ACCC.