Freedom Foods (ASX: FNP), maker of soy, almond and milk products has seen its products suddenly dropped from 500 Woolworths Limited's (ASX: WOW) stores.
"Despite selling really well, and growing at over 15%, Woolworths have decided to reduce the distribution of Australia's Own Organic range of soy, rice and almond milks to less than 280 stores", said Michael Bracka, managing director of Freedom.
He says that he was never told the reason, but believes it may be because the giant supermarket wants to sell more of its own private label products.
Freedom is not the first to be squeezed out of the supermarket chains, and appears unlikely to be the last. Gourmet Food Group, the maker of iconic Rosella tomato sauce, was placed into receivership last year. Coles – owned by Wesfarmers Limited (ASX: WES) stopped selling Mainland cheeses produced by New Zealand dairy giant Fonterra (ASX: FSF), last year.
A spokesperson for Woolworths said the Freedom decision was taken after the company decided to only stock products in stores where customers show a high degree of loyalty to the Freedom range.
Both Coles and Woolworths are trying to increase the number of home brand products on their shelves, as they attempt to increase their margins. Private label products have higher margins, because the supermarkets have greater control over producer's and supplier's prices.
According to the Australian Food and Grocery Council, which represents suppliers, private labels were 25% of supermarket sales in 2010. Should Australia follow the trend in Europe, which has up to 50% of total sales in private labels. That could decimate Australian manufacturers.
Exports are also out of the question, because of the high Australian dollar, leaving manufacturers stuck between a rock and a hard place.
Foolish takeaway
Australia's food manufacturing industry will be hoping that the Australian consumer and Competition Commission (ACCC) takes strong action against the supermarket giants. The ACCC is conducting an investigation into their practices after receiving a number of complaints from suppliers.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Woolworths.
