Australian grocery suppliers’ profits falling: Research reveals

Grocery suppliers’ profits have slumped, while costs have risen to more than $4 billion in the past four years, new research reveals.

A new report, conducted by KPMG and commissioned by the Australian Food and Grocery Council into the competitiveness and sustainable growth of the Australian food and grocery sector, found suppliers have been hit with steep increases by the number of discounts and rebates demanded by retailers.

The research found suppliers paid $4.19 billion in rebates, discounts, promotions and shelf fees last year, an increase of 20.4% since 2009, with this having a bigger impact on suppliers than the costs of goods and labour.

The findings are in contradiction to claims by the big supermarkets that suppliers’ profit margins are greater than those of their counterparts overseas.

“Profitability of Australian food and grocery manufacturers is now significantly lower than international comparators,” the report says.

“Comparison of EBIT as a percentage of net sales shows the gap between Australia and international comparators widening unfavourably from 1% in FY10 to 3% in FY12,” it says.

Local suppliers operating profits was 8.9% of sales in 2012, compared with 11.9% overseas. In 2010, the operating profit on sales was 11.2%, indicating pressure on suppliers has increased significantly over the last three years.

Trade spend of the suppliers increased from 19.5% of gross sales to 23.4% and has had the largest impact on profitability, as it has failed to increase sales.

Net sales have declined by 1.4% a year for three years, while trade spending has been on the up, rising 6.4% per year in the same time frame.

The chief executive of the Australian Food and Grocery Council, Gary Dawson, says in a statement the report represents a “watershed” in the debate about the impact of the Coles and Woolworths prices wars and the viability of the food manufacturing sector.

“Previously, we had plenty of anecdotal evidence of how tough the market conditions have become for food and grocery suppliers. This report provides the hard data to assess market trends and chart a way forward for this critical industry.

“It presents real data from companies operating in Australia as well as providing comparisons with international benchmarks,” he says.

The report found the profitability of Australian food and grocery suppliers had declined by 28% between 2010 and 2012, while supermarket retailers had recorded steady growth.

Dawson says suppliers have to adjust rapidly to the shift in market conditions by investing in improvements to manufacturing systems to boost productivity and reduce labour and energy costs and to fund retail price promotions.

“Looking forward, the ability of the Australian food and grocery manufacturing industry to increase its competitiveness and win export opportunities will require a continued focus on cost containment and capacity rationalisation, greater collaboration with retailers to drive growth and share the benefits of supply chain efficiencies and a rebalancing of trade spend to boost brand building and innovation,” Dawson says.

Coles, Woolworths and the AFGC have been working on establishing a voluntary code of conduct for supermarkets, which was said to be near completion last week.

The next step in the code’s development will involve a roundtable, which will include a range of key suppliers and stakeholders as well as the supermarkets.

The AFGC claimed last year Woolworths had been threatening suppliers and forcing them to find cost savings or have their products removed from sale, however the supermarket giant denied this.

SmartCompany contacted Woolworths, but no comment was received prior to publication.

Small businesses have long been opposed to the duopoly of the major supermarkets, with one Australian business breaking the mould.

Aussie Farmers Direct supplies groceries straight to the home, rather than going through the supermarkets, and it has experienced a surge in growth since it started in 2005 and now has a revenue of $170 million.

AFD’s chief executive Braeden Lord told Leading Company last year farmers are looking for alternatives to the big supermarkets.

“A lot of that farming and manufacturing community are looking for a way to de-risk their reliance on the major supermarkets.

“It is just prudent business practice. We have really been recognised as an alternative and we enjoy the opportunity to talk with manufacturers, some of whom were reluctant to talk to us initially for fear of retribution. It has moved from fear to saying we need to have a solid business model so let’s support other retail formats,” he said.