Coles and Woolies walk a fine line

Have the big two pushed suppliers too far?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Woolworths Limited (ASX: WOW) and Wesfarmers Limited (ASX: WES) – owner of Coles, both saw their share prices jump by over 3% yesterday. A report from market research firm, IBISWorld, has suggested that private label (for example, Woolworths Select, You'll Love Coles and Black & Gold) products will account for more than 33% of grocery sales within five years.

According to the report, consumers have doubled spending on private label groceries over the past few years, going from $10 billion in 2008 to $20 billion in 2012. Retailers' home brands now represent 24% of supermarket sales, and spending on private label brands is expected to reach $32 billion by 2018.

The big retailers make more profit on their private label products, which should increase their current margins as sales grow.

Sir Terry Leahy, former boss of UK retailer Tesco, has told The Sydney Morning Herald that there are limits to how much private label goods can dominate their shelves. For Tesco, that limit is around 40 to 45%.

According to The Sydney Morning Herald, Woolworths and Coles are believed to have a private label penetration of between 10 to 15% (which is lower than the IBISWorld report). US stores Kroger and Safeway have closer to 25% private label penetration, while Walmart and Britain's Sainsbury's have more than 40%.

Another issue for the big retailers is that they have to make sure that they pay the private label suppliers enough to ensure their products are safe, high quality and attractive. For Woolies and Coles to apply pressure to drop costs could see them suffer reputational damage, because the products now have their name on the label.

It's more bad news for Australian producers and manufacturers as their brands get squeezed off the shelves, coming on top of pressure from the supermarket giants to slash their prices. Manufacturers may need to choose between concentrating on their brands only or private label products.

Alternatives for suppliers

Some manufacturers have turned to online grocery retailers, such as GroceryRun.com.au, Supermarketdeals.com.au and OffYourTrolley.com.au. Heinz, most well-known for its baked beans, was forced to closed a factory late last year due to the withering competitive environment, and now sells some of its products through the online sites. SPC Ardmona, owned by Coca-Cola Amatil Limited (ASX: CCL), is likely to be facing the same pressures.

Stacey Carlon, founder of Off Your Trolley has also told The Sydney Morning Herald, that there is no shortage of manufacturers embracing online sales as a way of addressing some of the challenges they face as a result of Coles and Woolies' focus on private label products.

Another company that could benefit from the supermarket war is Metcash Limited (ASX: MTS). If Coles and Woolies push manufacturers too far, we could see suppliers divert their branded products to IGA supermarkets, which may draw customers away from Coles and Woolworths.

The Foolish bottom line

It's a fine line that the big two supermarket retailers are walking. Push too hard, and they could end up losing customers and sales – not enough and they could see their margins eroded. Who'd want to be a retailer?

If you're in the market for some high yielding ASX shares, look no further than our "Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Motley Fool writer/analyst Mike King owns shares in Woolworths. The Motley Fool's purpose is to help the world invest, better. Take Stock is 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. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »