Supermarket price war (who is it good for?): Kohler

Today’s interview with Andrew Reitzer of Metcash provides a remarkable insight into what’s going on in grocery retailing at the moment.

First, supermarkets are into their second year of price deflation – 1.9% last year; 1% this year.

But second, and more shocking, is that farmers and manufacturers are entirely funding the current marketing war between Coles and Woolworths. Reitzer says he knows this because they are giving IGA stores the same deals to ensure that independents remain competitive.

“All the promotions are funded by manufacturers and the only reason I can say that is because we get the deal, and why would they give a twenty per cent market share player the deal and not give it to the other seventy-four per cent players?”

Reitzer reveals that the promotional discounts being given by (or rather, forced on) farmers and manufacturers to the supermarkets, calculated on a store-wide basis, have gone up by half.

Reitzer explains that “promotional allowances”, as they call them, used to run at 7% of store-wide sales, and they have now gone up to 11% of sales – that is, they have gone up almost 50%.

Considering that total grocery sales in Australia are about $80 billion a year, that’s nearly $9 billion coming out of the pockets of farmers and manufacturers.

“No one’s losing money on milk at a dollar a litre. That much I can absolutely guarantee you. No one lost money when they did the bread, which wasn’t really a great promotion, but they did something similar on bread, because they adjusted the margin across the range. And we copied them. We see that’s what’s happening and we copy them.

“So you know they might well turn around and say … we’ve spent $30 million bringing down the price of milk or bringing down the price of bread or a particular (grocery line), but it’s not their $30 million.

“I’m sure many of your listeners are business entrepreneurs and when two of your customers have seventy-four per cent, all you say is ‘yes, sir’. I mean there is nothing you can do.”

The Reitzer interview also clearly shows why the ACCC was so misguided in its attempt to block Metcash’s acquisition of Franklins, and why it so comprehensively lost the case.

It remains subject to appeal, but the Federal Court has denied the ACCC an injunction pending the appeal, so Metcash completed the acquisition a week ago and is now integrating the business and selling off the 80 stores that Franklins owns to its own IGA licensees.

The ACCC took the view that the market in question is grocery wholesaling in NSW, which Metcash will now utterly dominate, as it does in every other state.

Metcash successfully argued that there is one big national grocery business that is dominated by Coles and Woolworths, with 74-75% of the market.

The other factor, revealed by Reitzer in the interview, is that Franklins would not have survived on its own. It was known that the South African chain was struggling, but according to Andrew Reitzer: “if we’d had to wait another three or four months, there would just be nothing left.”

“Their sales are down about seven per cent. Manufacturers are taking away promotional monies and discounts, allowances. They’re not investing. They weren’t investing in the Franklins promotions. Staff were very despondent. The major chains had stolen any good manager… who was there.”

Even though it will almost certainly not be able to unwind the sale, the ACCC will go ahead with the appeal because it is desperate to challenge a legal precedent contained in the original ruling around the level of proof required in a merger about whether there is an alternative buyer. It hopes the Court of Appeal will give a favourable ruling on this while allowing the Franklins takeover to go ahead.

Metcash is now in the process of selling the 80 stores that Franklins owns, almost all of them in Sydney, to IGA storeowners scattered around Australia. That won’t be completed before the appeal is heard in two weeks, but Reitzer says he has received 200 expressions of interest from IGA licensees looking to expand.

Apart from anything else, this shows that although times are tough, independent grocery retailing remains an attractive business and the operators remain optimistic about the future, and specifically their ability to defend against Coles and Woolworths.

This article first appeared on Business Spectator.