Wesfarmers: Coles suppliers be warned

As competition in the industry heats up, suppliers are feeling the pressure.

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Despite announcing a 6.4% increase in sales – driven by sales volumes – for the March quarter compared to the previous corresponding period, Wesfarmers Limited (ASX: WES) has issued a fresh warning to Coles suppliers to further drop their prices or risk being taken off the shelf by the supermarket giant.

As competition in the grocery industry continues to beckon, Wesfarmers aims to continue improving the value it delivers to customers through aggressive product discounting. Quoted in The Australian, Wesfarmers’ chief executive Richard Goyter stated that “suppliers who are inefficient and have outdated technology and have just reaped cash out of their business over time may not have a future role supplying us”.

Price discounting has caused major headaches for suppliers in the industry. Whilst suppliers rely heavily upon sales to Wesfarmers and Woolworths Limited (ASX: WOW) – who, together, hold an enormous percentage of market share in Australia – it has been speculated that the big grocers use their market share to limit supplier profits in order to reap the benefits themselves.

As such, the ACCC is currently investigating these corporations for anticompetitive behaviour, following backlash from companies such as Coca-Cola Amatil (ASX: CCL) and various dairy farmers who insist that they are demanding products at unsustainable prices.

Whilst sales increased for Coles for the period, liquor sales were an area that dampened the optimism. Coles’ liquor division sipped 0.6 percentage points off the sales growth as Woolworth’s Dan Murphy’s brand continued to dominate the liquor industry. To improve profitability in this section and ramp up competition with Woolworths, it is likely that alcohol and wine suppliers such as Treasury Wine Estates (ASX: TWE) and Australian Vintage Ltd (ASX: AVG) will be pressured to drop their prices to continue having their products featured on Coles’ shelves.

Foolish takeaway

Consumers are currently seen as the beneficiaries as the supermarket giants continue to put immense pressure on suppliers to drop prices. However, as these prices continue to reach even more unsustainable levels, it is likely that we will see a number of suppliers exit the industry. Furthermore, as Coles and Woolworths attract larger market shares, competitors such as Metcash Limited’s (ASX: MTS) IGA stores or Aldi may also retract in size.

Should this become reality, it is the consumer who will be ultimately disadvantaged, with fewer products available for selection.

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