I liked Coles and Woolworths. They seemed like convenient places to buy the things I eat. But sadly, sometimes you can’t trust the market to make sure convenient is fair.
I used to live right near an independent grocery store called Piedimonte’s. It was enormous, but every time you walked out, you had the strong feeling you’d paid too much. The word expensive just keeps popping up in its online reviews. I moved away and the ambiguous feeling of shopping there evaporated.
These days I get my groceries delivered mostly, and Coles is the go-to service. Spending 10 minutes making an order online takes half as long as going through the aisles, and it saves checkout, parking and travel time too. The delivery man will carry the items all the way in to the kitchen bench.
Coles and Woolworth also seemed good because they stock a lot of home brands. My enthusiasm for home brands should not be under-estimated. I love to be frugal and I hate compensating some crappy company for all their marketing.
This taste for the lower-price, equivalent quality good was only strengthened by some TERRIFIC recent research from NBER. It showed experts buy home brand: Chefs are more likely to buy generic flour, while pharmacists are far more likely to buy generic aspirin.
Coles and Woolworths are supposed to be a duopoly. You’d expect them to sneakily raise prices and treat customers with disdain. Instead milk recently fell to $1 a litre. Competition reigns! So imagines the happy economist as he grabs bargains.
But The Big Two are wily. They don’t hurt the voting public, the shoppers. Instead, behind the scenes, where they think they can get away with it, the duopoly are flexing their muscles.
This terrific long article in the Monthly (unlocked and free at time of writing, although I recommend subscribing) was the first time I really engaged with the issue.
It turns out a major case is running in the Federal Court with the ACCC doggedly pursuing Coles.
I knew Coles and Woolworths were tough on their suppliers. But I didn’t realise how much they had in common with Don Fanucci at the start of the Godfather II.
In 2011, Coles demanded from its suppliers a “rebate” for “efficiency improvements”. The Monthly says they were very significant, at up to 1 per cent of total sales.
“At a meeting with Red Bull on 19 August 2011, Coles managers Simon Gillies and Philip Armstrong claimed that they had cut $400,000 from the energy drink company’s supply cost. In return, they sought a $200,000 rebate.
Red Bull’s representatives asked how Coles had arrived at those figures. Gillies and Armstrong did not provide substantiation. Red Bull refused to pay the rebate, having calculated that Red Bull’s total costs in serving Coles did not even come to $400,000.”
The weaker the company’s bargaining position, the bigger the rebate.
“[Coles] refined the supplier designation into three tiers. Tier 3 included 220 smaller suppliers for whom Coles constituted a “very significant” part – at least 30% – of their business. These had the weakest bargaining position. From them, Coles sought an across-the-board 1% rebate, to raise $16 million.
Category managers were trained in “ask” scripts. There would be no negotiation on the rebate amount. The suppliers would be asked to consent within days. There would be no substantiation of the nature of the savings Coles was claiming. Successful category managers would become eligible for “prizes”. If suppliers did not pay, the category managers were authorised to “escalate” the matter to their “business category manager”, who was likewise authorised to escalate it to the general managers Dymond and Pearson, even to Durkan himself. The scripts included “commercial consequences”: an end to supply contracts, a “range review” of current products, an end to data-sharing agreements, or all of the above.”
Here’s a quote from the man who runs the ACCC, Rod Sims.
“These were seriously large demands, put on these companies with threats. If these allegations are proven true, that is not the sort of behaviour you want in Australian business. It’s corrosive, we believe, of the effective working of a market economy.”
So what can you do? Shop at Aldi? They stock even fewer brands and their prices are even lower. I’m not exactly sure that will help.
Aussie Farmers Direct is probably the best choice if you care about suppliers – it seems to have good relationships with farmers. I used to get things delivered from them and the quality was pretty good – I stopped because at the time they only did fresh food.
Another option is to support the MPs who supported this Reducing Supermarket Dominance Bill [Wilkie, Xenophon, Katter]. Demanding the big supermarkets sell half their stores is an ambit claim, but perhaps something can be done. On this issue it should be possible to unite the Nationals in the Coalition and the Cross-benches, you’d hope.
I also learned from the Monthly that at their liquor outlets (Coles: Liquorland, Vintage Cellars and First Choice; Woolworths: Dan Murphy’s and BWS) the big two own a vast number of the brands on sale. Basically, they are fancied-up home brands! You can see the list here: http://whomakesmywine.com.au/thelist.html.
Confession: Just remembered. I own shares in Woolworths. Seems I may be arguing against my own financial interests here!