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Woolworths and Coles $1 bread might be a loaf from the past

The recent announcement by food manufacturer and baker Goodman Fielder (ASX: GFF) that it had secured a “private bread contract” was light on details, however, market watchers are speculating that the contract was with Coles supermarkets, which are owned by Wesfarmers (ASX: WES), and that the terms of the contract were favourable to Goodman Fielder.

If it is the case that the baker has managed to negotiate a reasonable deal for itself then this may make it difficult for Coles to sell bread for $1 a loaf, which means a price rise could be in the cards. Woolworths (ASX: WOW) could be expected to follow suit to help it claw back what is likely a “loss leader” for the supermarket. A rise in bread prices would also help Retail Food Group (ASX: RFG), which owns the Brumby’s Bakeries chain and has no doubt suffered some loss of customers to the supermarkets.

$1 bread and $1 milk have made for lean times for manufacturers such as Goodman Fielder, Bega Cheese (ASX: BGA) and Warrnambool Cheese & Butter Factory (ASX: WCB). However the low prices have worked as intended and encouraged customers to the supermarket duopoly, helping them capture market share from independents.

Foolish takeaway

The market strategies implemented by Woolworths and Coles have received a lot of vocal criticism from some parts of the community. For shareholders the strategies appear to have been clever and well executed with earnings and dividends growing.

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Motley Fool contributor Tim McArthur owns a share in Goodman Fielder.

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