Beware the power of two

The collapse of the operating subsidiary of 60-year-old commercial refrigeration and air conditioning business Frigrite provides some interesting lessons about operating in the Australian market.

Relative to world markets, Australia is small and in many sectors, two or three major players dominate. Telecommunications, insurance, airlines and to a lesser extent utilities are all good examples.

But the best example is food retailing, where Coles and Woolworths have what many commentators (or should that be critics) say is a duopoly.

For Frigrite, the two grocery giants were naturally crucial to their continued success – back in the company’s 2009 report, Frigrite even states that Woolworths and Coles accounted for 75% of the sector’s capital expenditure.

Being so reliant on two giant customers is fine when they are giving you contracts, but when they dump you the problems start.

Frigite lost its Coles maintenance contract in 2008-09, then in December it was handed a Notice of Default by Woolworths. While Frigrite disputed the default notice, Woolworths had already decided to terminate its $16.3 million-a-year contract.

The company started talks with its major customers and potential investors in a last-ditch bid to find a white knight, but yesterday it handed its two operating subsidiaries to insolvency group Korda Mentha.

The lesson is this – in Australia, having a reliance on one or two companies is dangerous. In many sectors, the market is so small that the loss of even one of these major customers is hard to recover from.

It’s crucial to try and add as much diversification to your business as possible, whether that be through exporting or moving into other markets. No doubt Frigrite tried both, but it’s certainly not an easy strategy to pull off.

Secondly, the collapse could also highlight how what is happening in your customer’s business can flow through to your business. Coles and Woolworths have been engaged in a vicious battle to cut prices and win market share for years – suppliers routinely get caught up in this, particularly where they are providing services (in the case of Frigrite, it was maintenance) rather than branded products.

No doubt this cost cutting drive will claim more casualties in the future.