Supermarket competition in short supply: Metcash

Posted by Daniel Palmer on 3rd June 2008

The ACCC Grocery Price Inquiry held it’s last planned public hearing in Melbourne yesterday, with Metcash the final company to be put under the spotlight.

Metcash, Australia’s largest wholesaler, was questioned on a range of issues, which have already been highlighted throughout the preceding months.

The ACCC was particularly interested in the strength of price competition provided by independent grocers to the major supermarkets. ACCC Chairman, Graeme Samuel, questioned Metcash CEO, Andrew Reitzer, about this issue following revelations earlier in the inquiry that IGA and Woolworths store managers are merely instructed to match prices of the competition. “Woolworths push up their price then your customers, your retailers, will lift their price accordingly and that will increase the margin. If they drop the price then obviously they have to drop accordingly. So this is a matching game, isn’t it? It’s not a truly competitive game. This is matching the price rather than trying to drive the competition or drive the price down?” Mr Samuel asked.

Mr Reitzer agreed with Mr Samuel’s assertions before adding that the impetus for competition was provided by promotions. “That’s correct,” he said. “Especially, Commissioner, on every day prices. Not so much on the promotions, because there there’s a bit of cutting and going 10 cents and roll back, and two for one and everything like that, but on every day prices that’s correct.”

Mr Reitzer also agreed that the standard IGA supermarket is not a price leader and is, “at best”, a follower.

Metcash was also grilled on claims that they undermine the potential of independents to be price competitive with the major chains. Franklins Managing Director, Aubrey Zelinski, told the inquiry in April that they were forced to end their relationship with Metcash for this reason. “The arrangement with Metcash at the time did not leave us with sufficient margin to compete equally with Coles and Woolworths,” he said. Currently Franklins are undertaking legal proceedings against Metcash.

Additionally, the head of the National Association of Retail Grocers of Australia (NARGA), John Cummings, had also told the inquiry that independents were either losing money or breaking even on dry packaged goods supplied by Metcash.

Metcash, however, strongly refuted the claims and indicated that dry goods are lower margin products in all supermarkets but are in stock to ensure a supermarket caters to the needs of consumers. “If that was true across all my retailers, we wouldn’t be sitting here today. I wouldn’t have a job, Metcash wouldn’t exist, and none of them would exist,” Mr Reitzer claimed. “Our retailers make gross margins similar to what the chains make on the goods they buy from us. We know we benchmark the gross profit reports against the chains. The one valid point he (Mr Cummings) makes that, in retail today, if you don’t have a good fresh mix in your supermarket you don’t have as profitable a supermarket as one that only sells dry groceries. So if you’re only going to focus on dry groceries where the margin is lower and the chains make a lower margins, yes, you’ll have a hard time making a profit.”

The nature of competition for Metcash in the wholesale sector was also discussed, with Mr Reitzer conceding that an independent supermarket in Australia has little choice other than to deal with Metcash.

The final report from the ACCC is due on July 31.