‘Bullying’ returns to food sector as supermarkets offset rising prices

Desperate times may call for desperate measures, but no one in the sector wants to see a return to the dark days, when the major chains abused their market power.

Seven years after the Food and Grocery Code of Conduct came into effect, tactics used by major supermarket chains to pressure suppliers are making an unwelcome return amid an unprecedented surge in food prices.

Industry players have accused Coles and Woolworths of demanding confidential information and threatening adverse consequences from range reviews – practices banned by the Code of Conduct – when suppliers request significant price rises to claw back soaring transport, energy and commodity costs.

Woolworths and, to a lesser extent, Coles are also taking advantage of rising prices to fatten their gross margins – for example, lifting shelf prices by 10 per cent when wholesale prices rise 8 per cent – to offset pressure on their own cost of doing business.

While some margin recovery by the major chains is to be expected after two years of extraordinary costs and disruption, retailers’ attempts to boost their gross margins (which are about 30 per cent) by as much as 2 to 3 percentage points threaten to come at the expense of suppliers and households grappling with the rapidly rising cost of living.

“The margin grab is absolutely happening,” says one industry source. “A supplier might get a 3 or 5 per cent (price) increase, but there’s a bigger increase going through to the shelf price.”

The margin grab is not in breach of the Code of Conduct, but if sales and volumes start to suffer, suppliers fear retailers will demand additional marketing support, which will inevitably come at a cost to suppliers’ margin.

Desperate times may call for desperate measures, but no one in the sector wants to see a return to the dark days, when the major chains abused their market power in their trading relationships with suppliers.

“We’ve seen a recent change in retailer behaviour,” says ChessMate Consulting CEO Jean-Yves Heude, a former Kellogg and Mars executive who helps small and medium-sized family companies negotiate with major retailers.

‘We’re back to the bullying’

“They are under pressure because of inflation and like any organisation under pressure some bad behaviours can come back.”

Heude says the Code of Conduct, which was introduced in 2015 to address harmful practices and behaviours in the grocery sector and minimise disputes between retailers and suppliers, has made a difference.

“But suddenly, they are under so much pressure we’re back to the bullying tactics,” he says.

Retailers are demanding manufacturers provide information such as invoices from their own suppliers, and detailed lists of ingredients and their weight, or face audits by independent third parties to justify price increases.

Coles says its templated form for price increase requests clearly states that confidential information is not required. However, the nature of the information supplied exposes manufacturers to the risk of retailers using it to source identical private label goods.

“Under the revised Code of Conduct, manufacturers don’t have to provide that information, but if you are small and scared to death you might end up showing these invoices, which puts you at risk,” says Heude.

Buyers are also hinting that suppliers requesting hefty price increases could face consequences when their next range review occurs, or face out-of-cycle range reviews, with the risk of losing shelf space or having their products deleted altogether.

Retailers were willing to pass through price rises of 4 to 6 per cent earlier this year, recognising rising costs for commodities and inputs such as transport, logistics, energy and labour.

But as many suppliers seek their second and third price increases, or increases of 10, 15 and even 20 per cent, retailers are starting to play hardball, refusing to pass on price increases in full, or demanding extra “co-operation” or marketing and discounting support from suppliers, further squeezing their margins.

Coles and Woolworths say the number of requests for price increases has risen five-fold in recent months. Both retailers say they’ve tried to fairly balance the interests of suppliers by passing through “legitimate” price increases and provide value for customers.

Australian Food & Grocery Council CEO Tanya Barden says suppliers are working hard to mitigate cost increases by cutting costs, rejigging formulations, and looking at alternate sources of supply.

“But they can’t absorb it all, and they do need to pass some of it through,” Barden says.

“Looking forward, we just need to make sure negotiations remain constructive and mutually beneficial in order that we retain a strong manufacturing presence in Australia,” she says. “We don’t want to go back to the dark days where suppliers are under significant pressure from retailers.”

Woolworths and Coles say they take compliance with the Code of Conduct extremely seriously, their buyers and commercial teams undergo rigorous compliance training and are expected to meet the highest standards of behaviour. If they are aware of issues, they investigate immediately.

Woolworths and Coles also have bi-monthly or annual supplier surveys to gather confidential feedback and better understand what they are doing well and where they can improve.

When things go wrong, suppliers can raise issues directly with senior management, file a confidential complaint to the retailers’ Code Arbiters, or make anonymous reports through whistleblower services, they say.

Only three complaints in 2020-21

However, even after a review of the Code of Conduct last year, and despite assurances of confidentiality, suppliers have been reluctant to make formal complaints to code arbiters, mainly out of fear of retribution from the retailers.

According to the Independent Code Reviewer’s annual report, Woolworths reported only one complaint from a supplier and Coles reported only three complaints in 2020-21, while Metcash and Aldi reported no complaints.

Either the retailers have become model citizens or suppliers are too scared of the ramifications of raising complaints.

“Suppliers are saying to me the code is working and is dramatically improving the relationship between suppliers and supermarkets, with one exception,” said Independent Reviewer, Chris Leptos.

“The complaints process is too clunky, it’s just not fit for purpose.”

In a major breakthrough this week, all four retailer signatories to the code – Woolworths, Coles, Metcash and Aldi – have voluntarily agreed to vary the terms of Code Arbiters so they can take informal complaints from suppliers and report concerns on a de-identified and disaggregated basis.

“We now have this alternative path where a supplier can go to an arbiter and say ‘here’s what your buyers are doing, and I don’t think it’s in good faith’,” Leptos says.

The change means retail leaders will have more opportunity to jump on bad behaviour – by, for example, improving code training and tweaking buyers’ key performance metrics – before it becomes entrenched.

While the new complaints mechanism will be welcome news to suppliers, the fact remains that costs continue to soar and achieving full pass-through will be a struggle.

Industry players expect food price inflation in Australia to reach similar levels to that overseas (European food prices rose more than 11 per cent in the March quarter compared with 5.3 per cent in Australia) as the full impact of recent gas, electricity and commodity price increases flow through.

That poses a dilemma for retailers and suppliers, raising the risk that consumers will start to cut back on consumption or trade down to cheaper brands.

However, cost price rises will have to flow through to shelf prices to ensure smaller suppliers remain viable and major suppliers do not shift more manufacturing offshore.


Extracted from AFR


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