Do Coles and Woolies really give their suppliers a fair go?

Competition is driving down supermarket prices, and putting suppliers under pressure, the chief executive of Woolies, Grant O’Brien, has told business leaders in Brisbane, according to The Australian Financial Review.

O’Brien blamed the entry of global supermarket competitor, Aldi, for changing consumers’ attitudes to prices and forcing Coles and Woolies to pressure their suppliers to lower their prices.

It’s a debate that has been firing along all week. Earlier, Richard Goyder, the CEO of Wesfarmers, which owns Coles, reportedly dismissed calls for greater regulation of the grocery sector.

Meanwhile, the chairman of the Australian Competition and Consumer Commission, Rod Sims, has been welcoming a steady trickle of suppliers into his offices to talk about the pressure they say they are under.

Sims is not going public with many examples of unfair tactics, but they are believed to include demanding payments above those agreed to by suppliers for in-store promotions.

Professor Christine Parker, from Monash University’s School of Law, says the situation is the inevitable result of the market power of the grocery giants. “They are in the situation of being bullies,” she tells LeadingCompany. “It is not about specific instances, it is about two supermarkets that have 80% of grocery business and so, by definition, they are going to behave that way.”

The chiefs of both Coles and Woolies deny that they use anything other than fair tactics to keep suppliers’ prices down. O’Brien pointed out that Woolies has a supplier complaint hotline, but there have been few calls.

Parker says the end to the supermarkets dominance can only be achieved by connecting people with food suppliers in new ways, such as farmers markets, food exchanges or community hubs.

Aussie Farmers Direct is one grocery supplier working in a new way. Started in 2005, the company home-delivers Australian produce – fruit, vegetables, meat, and dairy products – receiving and managing its customers’ orders online. The company grew very fast, and now has more than 300,000 customers and revenue of $170 million.

AFD’s CEO Braeden Lord told LeadingCompany he was amused by the supermarkets’ comments on the debate. “I read with interest Woolworths’ response. They’re almost trying to pin lower prices on Aldi, someone with 3% or 4% of the marketplace, and saying that gives you a license to squeeze manufacturers or farmers.”

Lord says it was initially hard to sign up suppliers because they were worried about losing business from the supermarkets in retribution. Now, however, Lord says his company is inundated with farmers and manufacturers vying for an alternative to the majors. “A lot of that farming and manufacturing community are looking for a way to de-risk their reliance on the major supermarkets,” Lord says. “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.”

Suppliers tell Lord that their relationship with the major supermarkets is “tenuous”. Farmers as well as producers of meals and delicatessen lines are increasingly being threatened by the introduction of the supermarkets’ home brands that undercut and replace their position on the shelf.

If suppliers are actually being threatened with retribution by the supermarkets, this would certainly be a breach, says Doug Dowe, associate professor, business strategy at Melbourne Business School. “If the majors had refused to stock the suppliers’ products [as a result of supplying Aussie Farmers Direct] that would be a good example of abusing market power,” Dowe says.

Unfortunately, however, it is almost impossible to prove if such threats did occur, unless there is paper or email trail of evidence. Supermarkets have many reasons to stop stocking products, or change their position on shelving.

“It becomes very ambiguous as to what point you are crossing the line,” Dowe says. “The best-known example is Microsoft, which was prosecuted in the United States. The prosecutors said what they were doing was going to all the hardware manufacturers and saying you shall carry our web browser or we won’t let you have Microsoft Office. That was a clear example, and even they got off. They were found guilty in Europe and got off in the US.”

However, duopolies do not always last. The once-powerful duopoly held by department stores Myer and David Jones has been eroded by the unanticipated forces of online competition from retailers around the world, and new business models adopted by global competitors.

The problem for competitors is that the prices have reached such a low, Lord says. “We are now approaching eight years young, but I was recently lamenting to our shareholder, imagine if we were trying to start this business today. We had enough difficultly getting going in the first place. So where does the innovative businesses that have the guts and deep pockets come from?

“Or do we end up with homogenous range of supermarkets that are differentiated only by their private labels? I grew up with the high street, with a diversity of food offerings, but if the strongest become stronger, there is less opportunity for innovation and beautiful, differentiated fresh food to come through.”

This article first appeared on LeadingCompany.