Ex-Woolworths CEO concerned about future of the food industry

Posted by Daniel Palmer on 2nd September 2008

Woolworths Chief Executive through the mid-nineties, Reg Clairs, has outlined concerns about the future of food production in Australia due to the trend toward retailers taking greater control within the supply chain.

“I am immensely worried about the ultimate destiny of a lot of food manufacturers in this country,” Mr Clairs told ABC-TV’s Four Corners program last night. “Globally, we are seeing the growth of the majors and, unless we are able to build a food manufacturing business in Australia that is sustainable, then, ultimately, the global manufacturers will take the power base.”

The issue of private label and the power it provided the major retailers with was a concern to Mr Clairs, who believes there is a place for private label but it should not put national brands in peril. When he worked at Woolworths they were simply the end of the chain, but he senses a shift has occurred. “We had a philosophical view that the market was driven by the Kelloggs, the Cadburys, the Nestlés, and the major producers of the world,” he commented. “They created the market, they innovated, they brought new products to the market, they created demand, and we, that is my management team and the team prior to me under the leadership of Harry Watts, believed that the retailer was the last link in the chain before the product reached the consumer.”

“I sense there has been a greater emphasis on the retailer taking charge of the supply chain,” Mr Clairs added.

Michael Luscombe, CEO of Woolworths, did not deny that the retailer now had stronger power within the market but refuted claims they abuse it. “Yes, and we act responsibly with that,” he suggested.

Some suppliers, however, voiced concerns over the gap between their prices and the price their products sold for at the supermarket. “I think it’s somewhere between 200 and 600 per cent,” Noel Hall, a north Queensland pumpkin grower, told Four Corners. “Everybody says that.”

Geoff Cutler, a retail analyst, believes that Coles and Woolworths are both world class retailers but queried whether their power was now too great. “I think they’re absolutely superb examples of retailers. I think they’re world class in the offering that they actually have,” he said. “…the key issue I think really for everybody is: are they too big and what is the affect of them being as big as they are?”

The two supermarket giants, which together combine for 70 per cent of the packaged grocery sales in Australia, were under the spotlight earlier this year as the ACCC carried out there Grocery Price Inquiry. The inquiry, which established the grocery industry as “workably competitive”, largely attributed price increases over recent years to external forces.

The growth in profit margins at Woolworths was largely due to the improvement in supply chain efficiency, according to both the Inquiry report and Mr Luscombe. “It’s the number 24 retailer in the world but it hasn’t happened by accident,” he advised. “We’ve worked long and hard over many decades to reach the position that we are in at the moment.”

Since the Inquiry, a grocery price website has been set-up and other changes are to be implemented. Unit pricing is set to be introduced, creeping acquisition legislation enacted, barriers to entry reduced, changes to the Horticulture Code made and Graeme Samuel, Chair of the ACCC, has also hinted at modifications to planning and zoning laws.

On Four Corners last night Mr Samuel highlighted his worries about restrictive retail leases, which might prevent competitors from entering a shopping centre where a supermarket is already operating for a specified number of years. “We don’t like those clauses … and we’ll be examining them very carefully,” he advised.

In contrast to Mr Clairs, the ACCC Chairman is bullish about the future of Australian food retail and manufacturing. “I think we’ll have five or six major retailers, if I was just to look at the foreseeable future: Coles; Woolworths; the independents supplied by Metcash; an expansion of the Franklin’s group and a significant expansion of the Aldi group,” he told Four Corners.

And what about food manufacturers and growers? “The continued development of manufacturing, the way that we’ve seen it occur at the moment, with a number of farmers supplying at the Farm Gate level but potentially continued restructuring occurring there as a result of a whole range of factors, including international factors, Australian factors relating to the drought and costs of transport and the like,” Mr Samuel added. “We’ll see some other movements as we see new manufacturers develop new niche products and other manufacturers being swallowed up by larger manufacturers.”

The video and transcripts of the Four Corners story can be found at: www.abc.net.au/4corners/content/2008/20080901_woolies/interviews.htm.