Coles heightens pressure on suppliers: report

Posted by Daniel Palmer on 3rd March 2009

Coles, Australia’s second largest supermarket operator, has been criticised for allegedly threatening suppliers with the removal of product lines if they decline a 4 per cent increase in trading rebates.

Coles store design

The Age reported that they had spoken to many disillusioned suppliers of grocery goods, upset at higher trading terms with no reported benefits other than maintaining shelf space. The change in trading terms could provide as much as a $500m boost to Coles, although the chain has advised that savings will be passed onto customers.

There were unconfirmed reports that Vittoria Coffee and Safcol had seen their ranges cut, while Arnott’s has reportedly moved all promotional spending to rival chain Woolworths.

A major battle between manufacturers and retailers has been brewing as retailers look to introduce more private label goods and reduce prices to attract more price-conscious customers.

A recent spat between Unilever and Belgian chain Delhaize is symbolic of the bubbling tensions around the world.

Delhaize withdrew around 300 Unilever products from their supermarkets last month after a breakdown in negotiations due to price and product lines. The decision has appeared to negatively impact both companies, with Unilever losing sales from Belgium’s second largest supermarket operator and Delhaize seeing some customers shift allegiance to other chains due to loyalty to Unilever brands.

And the Delhaize example is not the only one, with Tesco last year criticised for changing their trading terms. It was alleged that they offered alcohol suppliers ‘take it or leave it’ terms as they sought to reduce costs, as well as increasing, by 30 days, the time of payment to non-food suppliers.

“Competitive pricing for its customers can be achieved without resorting to the crippling squeeze tactics on suppliers which are yet again rearing their ugly head,” Peter Kendall, President of the UK’s National Farmers Union, said in November. “We are receiving all too many complaints from suppliers, frightened of taking up their issues direct, who have had unilateral price cuts and demands for back payments and over-riders. Frankly, some of these can only be described as outrageous, bully-boy tactics, and they must not continue as we head into recession.”

The UK’s largest retailer has reacted to research, which has suggested that price is now more important to customers than ever before and their boss, Sir Terry Leahy, has indicated they may place greater pressure on suppliers.

“Commodity prices are down over 50 per cent from their peak, and the price of a barrel of oil is down by about a hundred dollars from the giddy height it reached last year. These lower prices need to be fed into the supply chain, and passed on to consumers who are under growing financial pressure,” he said in January.

“We want to ensure that all our suppliers understand this, which is why we are going to great lengths to talk to them about the new pressures that consumers are under. This adjustment affects our entire industry. It will be difficult for some, but it is critical if consumers are to be given what they want. Think of the alternative: keeping prices as they are, and hoping against hope that consumers on tight incomes will buy our goods.”

The Age reported that a Coles spokesman had said that the company had tolerated price increases from suppliers during the ‘commodity boom’ but were now seeking savings as many commodity prices fall.

Mother shopping with child

“We are in continual discussions with our supplier partners about pricing and quality. We want our customers to get the best possible value in our stores, and we expect our suppliers to share that goal,” the spokesman said.

The move is eerily similar to that of UK supermarkets, with most of the majors placing greater pressure on suppliers in a battle for market share. Asda last week reported a cut in the prices of 7500 products after earlier in the year reducing the prices of 5000 products. Tesco has been similarly cutting prices along with other majors – Morrisons and Sainsbury’s – as they look to counter the discount threat. Asda also said they would reduce some product ranges by up to 30 per cent.

With Coles now having such an influence from Asda, the decision by the chain is not unexpected. Ian McLeod, the head of Coles supermarkets, is just one of a number of former Asda employees that have joined the Coles management team in the past year since former Asda boss Archie Norman assumed the role of advisor to Wesfarmers in their quest to execute a five-year turnaround program successfully.

The change in trading terms comes after Coles last week reported that new store layouts, which could be rolled-out throughout the year, had been well-received by customers along with their private label goods – which reaped year-on-year sales growth of about 12%.

One of the trial concepts involves a reduction of the product range, although they refuted claims from media outlets last year that the plan was to reduce the range by 30%.

“Contrary to media reports, Coles does not have a plan to reduce product range in its stores by 30%,” they advised in a statement. “As part of the work to turn around the business, Coles is trialling a number of retailing concepts and experiments in selected stores. One store is trialling a change to the product range dynamics, reducing the range in some product categories and expanding the range in others.”

With all supermarkets seemingly keen to push private label, while also cutting prices and reducing ranges, tensions can only be expected to rise further. But how fierce will the battle become?

A deepening global recession would no doubt exacerbate the friction, but even a recovery may not soften the growing conflict in the supply chain; as the rise of private label is something supermarkets would love to see continue in the years and decades ahead.