A Level Playing Field !

The Federal Court just handed the entire Australian food manufacturing industry a reason to fear for their future when it handed down a verdict that Woolworths did not behave "unconscionably " by demanding as much as sixty million dollars from suppliers - to plug a profit shortfall.

Woolworths had tried to match Coles, its main competitor by establishing a chain of specialist hardware stores to compete with Bunnings.  For reasons that are unclear this failed dismally, to the point that the entire Woolworths empire suffered a trading loss.

It seems that Woolworths demanded varying amounts of cash from those supplying its supermarket chain with groceries on the basis that failure to comply would reflect to their disadvantage in future dealings.  They simply had no choice.  The Coles/Woolworths duopoly controls about eighty percent of the grocery market,  Their buying power is supreme.

The relationship between manufacturers and the stores buying group have become more strained in recent years.   The old days of popular products gaining automatic place on grocery shelves are over. Price offered is everything and that dictates whether it will be displayed at eye level and whether the product will be listed on that weeks "specials " to attract sales volume.   Every product has a sales volume quota it must achieve - and failure will see it disappear from the shelves.

Even popular national brands are not immune to this pressure.  The duopoly have their own in house labels and will try to duplicate their suppliers product.  Often the packaging is similar and the house brand will sometimes come into direct sales competition with the national brand by way of prominent shelf space supported by a massive advertising blitz and a price reduction.  That can be the outcome should the manufacturer refuse the buyers demands.

The food industry reports that it has become difficult to negotiate long term supply contracts. The buyers today are more interested in doing special "deals " which involved a one off quantity purchase at a very low price.   Unfortunately, this runs against the needs of manufacturing plants to plan a predictable production run to gain both economy of scale and the orderly flow of ingredients.  Sometimes orders are deliberately withheld for a time - to sharpen the price negotiation.

This Federal Court ruling came as a shock to the industry.  That demand for cash seemed so outrageous that there was the expectation that it would be struck down.  This finding seems to open the door to that same method finding form across the industry spectrum, to the extent that whenever a supply price is negotiated that may not be the end of the matter.    The buyer may come back for a second bite at the cherry.

It will be interesting to see how this ruling fits in with the recently negotiated Food and Grocery Code of Conduct which sets minimum standards for how retailers and wholesalers deal with each other. The food industry is dominated by world brands and it is evident that the expansion of food processing will be necessary to feed a world population that is expected to reach ten billion by mid century.

Whether Australia gets its fair share of food manufacturing plants will depend on whether we achieve a level playing field for food distribution.