The decision yesterday by the federal Court to allow Metcash to purchase Franklins from Pick n Pay, then onsell, presumably with tied supply agreements is another nail in the coffin of competition in the retail trade, despite the interpretation of the law by the courts.
Now you have Coles, Woolworths and Metcash with a share above 90% of the supermarket trade, limited choice for consumers, a nightmare for suppliers, particularly the decimated local suppliers who have struggled against the increasing power of the retailers for 30 years, and have largely failed.
Several things will emerge that will accelerate change in the supply landscape.
- Scale should dominate the strategic thinking of suppliers. You need to be a gorilla to play with gorillas, so get big or get out. The only alternative is to back off and be a small specialty producer, concentrating on the small share of retail trade not controlled by the 3 gorillas.
- It will be increasingly difficult at the smaller end of the size scale. The businesses left that turn over between a couple of million, and 50 million, many of them regional, with extreme pressure on their finances at a time when banks are not being helpful despite their advertising, will struggle. There are only a few left, and many of those will go to the wall.
- Competition between supply chains, from growers through to retailers will increase. Soon, if you supply Coles, you will not be able to supply Woolies, without risking your position with Coles. Suppliers will need to make choices, and gear up to integrate themselves into a supply chain system, losing their independence, and closing off options. This may not be a bad thing, but it is a substantial change from the current practice and way of thinking, and it limits the scope of customer base available through which to reach consumers with your product.
- The move to housebrands will accelerate, further enabling global sourcing by retailers, squeezing local suppliers. The $A has punched this process along over the last couple of years, adding more pressure to local suppliers who, having lost shelf space for their brands, were relying on contract packing to stay afloat
- Retailers are lousy marketers, good at sales, but lousy marketers. With housebrands coming to dominate categories on price, attractive to consumers in tough times, where will the innovation come from? Where is the incentive for local suppliers to risk their limited capital in doing something different?.
The ACCC, governments at all levels and the courts implicitly decided years ago that the SME end of the food industry was fair game, the survival of the fittest, and all that, and from an economic perspective, it may be the right thing to have done, but at what cost in human terms. The old question I have used in many seminars to make the point about retailer power:
Question. “Where does the 400kg gorilla sleep?”
Answer. “Anywhere he bloody likes”