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Australian Supermarket Turns The Screw On Tuna Supplier

In an effort to extract an extra $500 million from suppliers, the Coles supermarket chain is threatening to remove some products if suppliers – among them their canned tuna supplier - refuse to pay higher rebates.
Buyers from Coles have been contacting suppliers to tell them of a 4 per cent increase in trading terms, the percentage of the cost of each item the supplier must pay back to the retailer. For many suppliers, this figure was in the mid-teens but it is being pushed closer to 20 per cent.

In the past, higher trading terms brought benefits to suppliers such as promotional activity, better shelf position or swifter settlement of invoices, but none of these appear to be on offer in this round of negotiations.

BusinessDay has spoken to many frustrated suppliers of dry groceries and packaged goods who are usually told of the new arrangements at meetings at the chain's headquarters. At the meeting, suppliers are strongly encouraged to accept the new terms or risk having some of their product lines excluded.

All the suppliers who spoke to BusinessDay declined to have their names or brands identified for fear of retribution, but all said they were being asked to increase the trading terms they offered Coles, with little or nothing in return.

Already one major supplier of packaged goods has had 11 of its lines removed because it refused to participate, while another food supplier has had a significant number of lines removed. There are claims that brands such as Vittoria Coffee and Safcol tuna have had their range cut while Arnott’s is rumored to have shifted its promotional spending to Woolworths. The companies refused to confirm the claims.

The reduction comes amid a trial of stores with a smaller number of product lines. The problem for suppliers is further exacerbated by Coles' push towards private-label brands, which represent 12 per cent of sales, and are expected to grow further.

One supplier said that Coles’ message to his company was: “We will look at that investment and we will compare that with your competitors, and when we make decisions in the future, we will have to take that into account.”

“The message is very clear,” the supplier said.

Coles is seeking to refurbish its stores, which it hopes to continue during the year. BusinessDay believes that the effort to extract $500 million from suppliers is being driven by Coles' merchandising boss, John Durkan, on advice received from Boston Consulting Group.

While refusing to confirm the detail of the changed arrangement, a Coles spokesman said savings would be passed on to consumers.

“We are in continual discussions with our supplier partners about pricing and quality. We want our customers to get the best possible value in our stores, and we expect our suppliers to share that goal,” the spokesman said.

He said the company had allowed suppliers to pass on increased prices, such as during the commodity price boom. But as input prices fall, the company is seeking to extract savings.

Coles was bought by Perth-based conglomerate Wesfarmers in November 2007, and the new head of Coles supermarkets, Ian McLeod, has been in place since May. McLeod cut his teeth in the more competitive world of British supermarkets: one veteran supplier said it appeared he was using similar techniques to those at his former employer, Asda.

McLeod talked about the changes when he spoke at Wesfarmers' half-year result presentation last month.

“We’ll have discussions across a broad range of aspects with suppliers,” he said.

Smaller suppliers are particularly vulnerable to Coles' new strategy. For some the issue can be fundamental to their survival, putting at risk jobs and local production.

“If we’re giving our margin to allow them to make more, that obviously cuts our internal margin,” said one supplier from a consumer goods brand for which Coles represents 30 per cent of its sales. “It’s getting to the point where … if we go any further, we'll be selling at a loss.”

Many suppliers can’t afford to lose Coles or Woolworths as stockists because of their near duopoly. “If I lose the business to one of those guys, I expect that I will be busy preparing redundancy notices to everybody who works here,” said one supplier for a boutique food brand with several dozen staff.

He said he would try to negotiate over the new terms, but was not hopeful of success.

“Normally, there’s something in it for other people. In this particular case … it is all for the benefit of Coles. It will not generate any additional sales for us … it will not give the consumers the product at a lower price.”

During the first half of this financial year, Coles contributed $431 million to Wesfarmers’ earning before interest and tax, and while a comparison with a year earlier is difficult because of the change of ownership, sluggish sales growth suggests this figure did not rise dramatically. But crucially for Wesfarmers management, during the 2008 calendar year Coles had just 5.1 per cent return on capital, the lowest of any division in the company.

Freeing up cash is crucial if the company is to keep up with the $1 billion-plus a year in capital expenditure it aims to spend on the Coles Group businesses as part of a five-year turnaround strategy. Already costs have been cut in other parts of the business -about 1000 staff left the company's Tooronga headquarters in the first half of last year- but now the pressure is being shifted to suppliers.

Last year’s grocery price inquiry gave little comfort to suppliers who believed they were being bullied by the major supermarket chains.

“The inquiry was provided with little evidence to substantiate anecdotal allegations of buyer power being exercised in an anti-competitive or unconscionable manner rather than simply to drive a bargain that was harder than the supplier would have preferred,” the Australian Competition and Consumer Commission report found.

But it did back up the claim that the major supermarkets were hoarding the savings they extracted from suppliers: “Competition is not sufficiently strong at the retail level to ensure that consumers always benefit from buyer power in the form of lower retail prices.”

Ultimately, most suppliers have little choice but to go along with the new arrangement and be forced to cut costs in their own production process. Not all are prepared to lay down and accept it: some suppliers are teaming up to share intelligence on the new supply arrangements, but the might of the retailer will make their task a challenging one.