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Grocery wars: Suppliers hit out at supermarkets

Grocery suppliers have hit out at the big supermarket retailers, claiming they want to invest more in marketing and new products to drive sales.

The two major supermarkets, Woolworths Limited (ASX:WOW) and Coles – owned by Wesfarmers Limited (ASX:WES) don’t just buy products from suppliers at a set price. Using their market power, they also demand discounted prices, rebates and fees from suppliers.

A report commissioned by the Australian Food and Grocery Council (AFGC) has found that the supermarket sector grew at 4.5%, but the food and grocery manufacturing industry fell by 2.2% between 2009 and 2011. Additionally, margins are being squeezed, with profits as a percentage of gross sales falling from 6.9% in 2009 to 5.7% in 2012 while the spend on research and development has declined to just 3.8%.

Many food and grocery manufacturers have increased their focus on selling through other channels (such as food services and direct-to-consumer), to reduce the significant exposure to the big retailers, but have met with mixed success.

Woolies and Coles have been engaged in a price war for some time now, most famously selling milk for $1 a litre and $1 bread as well as increasing sales of their private label brands, while reducing the numbers of brand name labels, all of which has impacted on food and grocery suppliers. As Coca-Cola Amatil (ASX:CCL) boss Terry Davis remarked recently, unless you (suppliers) are number 1 or 2 in their market, they may as well sell up their business.

Suppliers are also being hit by input costs, and Australia is now ranked only behind Japan on the cost index for manufacturing. The key driver has been wage levels, but energy costs and soft commodity prices like wheat and sugar have also risen. The high Australian dollar has made our exports less competitive, with the trade balance in the food and Grocery sector declining steadily since 2005. Australia has become a net importer since 2009.

Foolish takeaway

In a rare sign of wins for suppliers, Goodman Fielder (ASX:GFF) recently signed a new deal with Coles to supply private label bread, and managed to secure price hikes for its products. Suppliers will be hoping this is a trend that continues.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Coca-Cola Amatil.

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