Saturday, April 22, 2006

Paul McIntyre: Woolworths turns pricing screw

Some of the biggest packaged goods companies in Australia are locked in a feral stoush with Woolworths as the supermarket chain seeks to force them into accepting single-market pricing and trading terms across the Tasman.

It's taken a while for Australian suppliers to fire up after Woolworths' A$2.5 billion ($2.94 billion) acquisition last year of Progressive Enterprises but the tension is now tangible.

None of Woolworths' trading partners are prepared to speak publicly about the giant retailer's aggressive supplier squeeze but they're not at all happy with its tactics to force them into transtasman trading terms and pricing based on the country which currently is generating the best margins for the retailer.

The only public comment so far on the issue is from the peak Australian packaged goods industry body, but it too is treading lightly.

"This is pretty sensitive stuff," says Harris Boulton, deputy chief executive of the Australian Food & Grocery Council. "We're certainly aware that the negotiations are taking place and that a number of members have got concerns ... We understand the concerns are, as you might expect, about price. Exchange rates is an obvious factor."

Although angst has been intensifying among New Zealand suppliers for some time over the implications of Woolworths' takeover of Progressive, some of the retailer's biggest Australian-based suppliers are being dragged into the fray, mostly because of the grocery chain's push to harmonise Australasian pricing, listing fees and other trading terms.

"It's a burning issue for a lot of companies," said one large Australian Woolworths supplier. "If you look at the top companies, they've all got different brands in different positions in both markets. Suppliers are not treating Australia and New Zealand in a generic way."

Woolworths has told its Australian and New Zealand trade partners it wants to rework its trading terms based on which country is currently providing the lowest price for goods and has threatened to ship in the same or a similar product from either side of the Tasman if a local market operation refuses to meet its demands.

The German-owned discount retailer Aldi and Nestle in Australia have just been through a similar scrap where Aldi raised the ire of the packaged goods giant for importing cheaper Nescafe-branded coffee from Brazil and Indonesia without sufficiently disclosing its origins. Nestle's local formulation differs from those two countries.

"Inter-country trading is a nightmare," said another Woolworths supplier facing transtasman deals with Woolworths.

The growing supplier dissension comes as Woolworths this week announced its best quarterly growth in three years and a warning from retiring chief executive Roger Corbett that New Zealand growth could slow as the retailer started to cut into the cost base and roll out system changes.

"New Zealand has a long way to go," Corbett told the Australian Financial Review. "We might well see over the period some short-term reduction in sales and reduction in the rate of growth in sales as a result of what we're going to be doing." Merger benefits would start to flow in the next six to 18 months, he said.

Corbett will retire in September and analysts expect him to produce some flash figures before he goes. They were certainly happy with the March quarter in which sales jumped 22.7 per cent to A$9.7 billion. Sales for the supermarkets division rose 23.5 per cent in the March quarter to A$8.5 billion, which included contributions from the 150 New Zealand and 20 Australian supermarkets acquired last November from Foodland.

With that sort of momentum building it is going to be hard for suppliers to resist the grocery chain's push for harmonised trading terms for Australia and New Zealand.

Certainly, a UK and Australian consumer goods retail marketing adviser believes that Australasian manufacturers have ignored warnings about transtasman retail consolidation for too long.

"They should have known this was going to happen and they've got themselves to blame," says John Eustace, chairman of the UK-based Eustace Towle. "My experience of this happening in the UK is there's very little manufacturers can do but roll over. It's standard operating procedure for retailers. The first thing they do is look at the price book of the company they've acquired and drive down price. When Wal-Mart took over ASDA in the UK, the instructions were to do exactly that."

Eustace says he is "sympathetic to the plight of small manufacturers" but predicts many will disappear as Woolworths marches through Progressive.

* Paul McIntyre is a Sydney journalist

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